Whether court could use hindsight when assessing quantum under a warranty and indemnity insurance policy
The claimant entered into a share purchase agreement (“SPA”) with Kwik-Fit (GB) Ltd, which subsequently breached warranties in the SPA. The claimant had taken out a Warranty and Indemnity insurance policy with the defendant. The defendant admitted liability but disputed the quantum being claimed under the policy. It is an established principle that the measure of loss for breach of warranty in a share sale agreement is the difference between the value of the shares as warranted and the true value of the shares. The issue in this case, though, was whether the benefit of hindsight can be used. Here, figures given in the warranties in relation to bad debt were based on the position in 2010, but it has since become apparent that there was a historical peak for the debt in question in 2010 which subsequently fell back.
Popplewell J noted that it is uncontroversial that damages for a breach of contract are intended to put the innocent party in the same position as if the contract had been performed and damages will normally be assessed by reference to the position at the date of breach. However, a later date may be used for assessment if that would more accurately reflect the overriding compensatory principle. However, he went on to add that there is also “no conceptual difficulty in using subsequent events to inform an assessment of value at an earlier date in an appropriate case”. When assessing damages for breach of contract by reference to the value of a company, if that value depends on a future contingency, account can be taken of events subsequent to the valuation date if that is necessary to give effect to the compensatory principle.
However, there are two qualifications: (1) this approach can only be justified where it is necessary to give effect to the overriding compensatory principle; and (2) it is important to keep firmly in mind any contractual allocation of risk made by the parties.
Here, on the facts, it was not necessary to take into account subsequent events: it had not been shown that the claimant would receive a windfall and the SPA had allocated the risk of benefit or loss to the claimant.