The Claimant (“OCBC”) entered into a SPA with the Defendant (“ING”) to purchase the target company (“ING Asia”). ING warranted that the 2008 accounts of ING Asia gave a true and fair view of the state of affairs of ING Asia as at 31 December 2008. Following the acquisition, ING Asia paid US$14.5 million to LBF to settle an ongoing dispute in relation to equity derivative transactions. OCBC claimed that they were entitled to damages of US$14.5 million, being the amount that was paid out to LBF in respect of this liability. ING argued that OCBC would only be entitled to recover the difference between the true value of the shares and the value of the shares as warranted in the event of a breach of warranty contained within a contract for the sale of shares.
The issues to be determined were whether:
- The claim is unsustainable in law; in particular whether the measure of damages sought can be recovered as a matter of law: OCBC acknowledged that the normal measure of damages for breach of warranty in a share sale is diminution of value of the shares, but argued that this was merely a prima facie rule, and that the court is permitted to consider other measures of damage in appropriate circumstances.
- That breach of warranty caused the Claimant to suffer loss and damage; in particular whether, if OCBC had been fully informed or aware of the exposure to LBF, the SPA would have contained a specific warranty and/or indemnity in OCBC’s favour in respect of the liability to LBF: OCBC argued that were it not for ING’s breach of warranty, it would have obtained an indemnity in respect of ING Asia’s liability to LBF and so would have been able to recover the amount paid out to LBF.
- There was a breach of warranty in the SPA that the 2008 accounts were properly drawn up so as to give a true and fair view of the state of affairs and results of ING Asia.
In relation to these issues, Mrs Justice Moulder held that:
- Neither the authorities nor commentary support the proposition that a hypothetical indemnity could be a recoverable measure of damages in a claim for a breach of warranty, nor was there support for any other measure of damages other than the diminution of value of the shares.
- OCBC had not shown on the evidence that had it been aware of this particular liability, it would have sought and obtained an indemnity. The scale of the liability was relatively modest when compared to the purchase price and the impact on the NAVs, and in any event OCBC were prepared to take a view on liabilities arising from structured notes for a similar size.
- OCBC did not establish that the 2008 accounts were not true and fair assessed by reference to relevant accounting principles. In particular OCBC had not established that the 2008 accounts contained the alleged material error in that in breach of FRS 37 the 2008 accounts failed to disclose as a contingent liability the potential liability to LBF.
OCBC did not claim any diminution in value of the shares, so the claim was unsuccessful.
Stephenson Harwood comment
This case affirmed that the courts will be reluctant to deviate from the standard measure of damages in the case of a share sale, being diminution in the value of the shares. In determining the “loss of a bargain”, it might be necessary to adjust the valuation methodology, but this does not justify an entirely different measure of damages other than diminution of value. This case therefore illustrates the limited protection afforded by a warranty as to quality in these circumstances.