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Stuart Sanders writes Damages in share sales: affirming the orthodox approach

In Oversea-Chinese Banking Corporation Limited v ING Bank NV [2019] EWHC 676 (Comm), Moulder J rejected a purchaser’s claim that their damages for breach of warranty should be calculated by reference to a hypothetical indemnity which they would have negotiated with the seller had the true position been disclosed prior to entering into the agreement.

Oversea-Chinese Banking Corporation purchased shares in an Asian Private Banking company within the ING group (“the Company”) from ING. As part of that sale, ING warranted that the 2008 accounts of the Company gave a true and fair picture. In fact, the Company had an exposure to Lehman Brothers, which had filed for bankruptcy in 2008. That exposure eventually crystallised at $14.5m under a settlement. The Claimant accepted that this had not adversely affected the overall value of the shares which it had purchased, however it sought to recover that sum from the seller on the basis that the warranty as to the 2008 accounts had been false, and if the true position had been disclosed, it would have negotiated an indemnity from ING to cover the eventual liability.

ING argued that this was a wholly novel and unsupported basis for the calculation of damages, and that damages should be determined on the ordinary basis, namely the difference between the value the shares would have had if the warranty was true and their actual value. Since there was no diminution in value of the shares here, there could be no loss.

Moulder J accepted ING’s arguments. Her judgment proceeded from the basis that the starting point was to assess a claimant’s loss of bargain, reaffirming the fundamental proposition that “the basic principle in contract is that the claimant is entitled to be put into the position he would have been in if the contract had never been broken” [34]. In her judgment, the authorities demonstrated that that figure was given by the difference in value measure of damages. Moulder J did acknowledge however that the question of the liability of a purchased company could be highly relevant, but held that “such actual liabilities go to the diminution of the value of the asset” [35]. Consequently, she held (at [39]):

in determining the “loss of bargain” it may be necessary to adjust the valuation methodology but neither the authorities nor the textbooks support an entirely different measure of damages for breach of a warranty as to quality on a share sale other than the diminution of the value of the asset.

This decision appears to be consistent with the recent trend in the courts to re-assert the orthodox approach to contractual damages and to focus on the compensatory principle as the “lodestar” of contractual damages (The Golden Victory [2007] 2 AC 353 at [36]). The rejection of this novel form of damages follows the Supreme Court’s confinement of Wrotham Park or ‘negotiating’ damages in Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20 last year. It therefore seems that Claimants will face an uphill battle if they see to measure their damages other than in an orthodox way.

There may however be some scope for careful pleading to overcome this issue in the share-sale context, since Moulder J left open the question of valuation methodology, and explicitly suggested that liabilities could factor into the analysis. Consequently, there may perhaps be scope to plead undisclosed liabilities as a proxy method for the calculation of the diminution in value. This would be based on an argument that, as a starting point, a liability of a fixed amount creates a coterminous diminution in value of the company, simply on a balance-sheet basis. It seems unlikely following Oversea-Chinese Banking v ING that a Claimant could avoid the need to provide expert evidence of value by relying on such an argument, but it might provide a route for the court when faced with a complex valuation exercise. Another route to achieving this result would be to ask the court to presume, absent contrary evidence, that the value of shares is diminished by at least the value of the undisclosed liability. This could shift the burden on to a defendant seller to rebut this, in a similar manner to the approach taken by the courts to pre-contractual reliance-based damages under the Anglia TV v Reed [1972] 1 QB 60 line of authorities. Therefore, while Moulder J emphatically rejected using undisclosed liabilities as a measure of damages, in my view the door is still open to arguments which seek to place evidential reliance on such liabilities in the calculation of quantum pursuant to an orthodox measure of damages.

Stuart Sanders (2017) is a junior tenant with a particular focus on commercial work. He has experience of a wide variety of commercial matters, including share sales, shareholder disputes, and several cases with a civil fraud aspect.

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