ETL Holdings (UK) Limited v Kenneth McGregor Munn & Anor

In assessing damages for breach of warranties on a share sale, the ordinary measure is the diminution in value of the shares at the date of breach. Subsequent events are generally irrelevant where the shares are an article of commerce and their value can be ascertained at that date. Hindsight may be used where necessary to give effect to the compensatory principle, but only consistently with any allocation of risk in the contract. Later compromise of an undisclosed company liability, or recovery by the company from a director, does not reduce the purchaser’s separate loss caused by paying too much for the shares. A purchaser’s later increase in value is not itself a windfall.

The claimant had bought 40% of a company from the defendants under a share purchase agreement containing warranties about the company’s liabilities and accounts. The defendants had failed to disclose a substantial debt owed to Dormco. The claimant obtained summary judgment on liability.

A first assessment of damages awarded compensation for the Dormco debt warranty, the nondisclosure of a dilapidations claim, and related legal costs. On appeal, Chief ICC Judge Briggs directed a rehearing concerning the Dormco debt assessment, principally because the first assessment had not adequately addressed the alleged single transaction and the value of retained shares.

The issue was whether later events, including the company’s compromise of the Dormco debt and forfeiture and sale of the defendants’ remaining shares, reduced the claimant’s contractual damages.

1. Measure of damages. The claimant’s loss accrued when the share purchase agreement was made in 2015. The prima facie measure was the difference between the value of the shares if the warranties had been true and their value with the Dormco debt present. The experts agreed that this was £1,242,463.23, representing 40% of the debt.
2. Hindsight. This was not an anticipatory breach. The shares were an article of commerce in themselves, and the arm’s-length price was normally evidence of market value. The mere fact that shares later increased in value did not establish a windfall. The contract ordinarily allocated pre-sale risk to the sellers and post-sale risk and benefit to the buyer. Hindsight could therefore be used only where necessary to avoid over-compensation and where consistent with the contractual allocation of risk.
3. Later company transactions. The possibility that the company might compromise the undisclosed debt, or forfeit shares for the first defendant’s liability, was not a contingency affecting the shares’ value in 2015. Those were subsequent actions of the company, distinct from the claimant’s contractual claim. The company’s recovery from the first defendant was also an asset realised by the company under a different cause of action. It did not diminish the claimant’s separate loss.
4. Other arguments. An alleged undervalue in the sale of the forfeited shares could not operate as a set-off. The company was not a party to the proceedings and the complaint had not been independently vindicated. Nor could the defendants obtain credit for the unlawful dividend asset, since the agreement contained no mechanism for increasing the purchase price if that asset later became known.
5. Order. The second defendant was liable for £1,242,463.23 for the Dormco debt warranty and £25,100 for related legal costs. The £66,608 award for the dilapidations warranty and associated interest remained undisturbed. Interest was payable under the statutory provisions identified in the order.

• High Court: Summary judgment on liability was given by Deputy Master Smith in 2021.
• High Court: Deputy Master Arkush assessed damages in 2023.
• High Court: Chief ICC Judge Briggs allowed the appeal in large part and directed a rehearing of the Dormco debt assessment. The present judgment conducted that rehearing and determined the damages.