Ruth Munn & Anor v ETL Holdings (UK) Limited

The court allowed the appellants' challenge to the Deputy Master's assessment of damages for breach of warranty and remitted the matter for rehearing by a Master. The judgment restates the general principle that damages for breach of warranty in a share sale are assessed by reference to the company's value at the date of acquisition and that hindsight is generally excluded, subject to limited exceptions necessary to give effect to the compensatory principle or where contractual risk allocation requires it. The judge held that Deputy Master Arkush erred by failing to address whether enforcement of a company lien and forfeiture of retained shares (and related payments to liquidators) operated to compensate the purchaser, by failing to deal with the argument that the steps constituted a single transaction or common intention to compromise, and by not explaining departure from the experts' agreement on valuation. The appeal was therefore allowed and the matter remitted for a full rehearing.

The appeal concerned assessment of damages following summary judgment for ETL in respect of warranties in a share purchase agreement (SPA) dated 6 February 2015 by which ETL acquired 40% of Carston Holdings Limited for a purchase price stated as £2,880,000. The SPA warranties were said to have been breached by non-disclosure of an inter-company debt owed by Carston Holdings to Dormco Candco Ltd (the "Dormco debt") and of a dilapidations claim. Deputy Master Smith had granted summary judgment for ETL on liability. At first instance Deputy Master Arkush held hearings on quantum and awarded ETL substantial sums for diminution in share value and consequential losses. Permission to appeal was given.

The appellants (Mrs Munn primarily) challenged the quantum award on the grounds that ETL had been overcompensated because, after completion, the company enforced a lien over the vendors' retained shares, sold those shares, and applied proceeds (including a payment said to settle the Dormco debt and related claims). The appellants argued that the enforcement, forfeiture and associated payments meant that ETL (and associated companies) had in effect been compensated for the same loss for which ETL obtained damages, and that the events should be treated as part of a linked or single course of conduct or compromise. The respondents argued that the company's and ETL's claims were distinct and that the proper measure of ETL's loss was the difference in value at the acquisition date and that hindsight of later settlements should not be applied.

The court framed the issues as (i) the appropriate date and approach to assessment of damages for breach of warranty, (ii) whether subsequent events (forfeiture, lien enforcement, payments to liquidators and share transfers) could be relied on to reduce ETL's damages, and (iii) whether the various steps constituted a single transaction or demonstrated a common intention to compromise such that ETL had been compensated. The judge reviewed authorities cited below that explain the narrow circumstances in which hindsight may be used.

The judge concluded that Deputy Master Arkush had erred in not addressing the single transaction/common intention argument and in failing to confront the expert evidence and the valuation of the retained shares. Because the appeal bundle was condensed and material factual issues and correspondence were not fully before the court on appeal, the judge remitted the case to the Master of the Chancery Division for rehearing by a full-time Master, with recommendation for a fresh conduct of the hearing.

Appeal allowed. The Deputy Master erred by not addressing whether the lien enforcement, forfeiture of retained shares and associated payments operated to compensate ETL (including whether the steps formed a single transaction or common compromise) and by failing to explain departure from the experts' agreed valuation. The matter is remitted for rehearing by a Master to determine those factual and valuation issues.

Appeal from an order of Deputy Master Arkush made on 24 April 2023 following directions flowing from summary judgment given by Deputy Master Smith in April 2021. The present judgment is the High Court (Chancery Division, Companies Court) decision dated 27 November 2023, neutral citation [2023] EWHC 2998 (Ch).