This is the second and final instalment of our short series on warranty claims which looks at the recent decision of the English High Court in MDW Holdings Ltd v Norvill [2021] EWHC 1135 (Ch). In this case, the court considered breaches of environmental warranties and whether false due diligence responses amounted to fraudulent misrepresentation.
Warranty claims have been the subject of some recent Court decisions and the first instalment of our blog series covered a decision by the Court of Appeal that held a notice of claim under a share purchase agreement (SPA) invalid because it lacked reasonable detail.
The case - MDW Holdings Ltd v Norvill
In October 2015, MDW Holdings Ltd (MDW) acquired the entire issued share capital of G.D. Environmental Services Limited from its sellers.
The operations of GDE's business as a waste management company involved disposing of various types of dry and wet waste. In disposing of wet waste, GDE discharged this into public sewers that were regulated by Dwr Cymru Welsh Water (DCWW). DCWW's consent to discharge was subject to various conditions which, amongst others, included the level of contaminants permitted in the waste. DCWW also required GDE to retain detailed records of all waste discharged and the level of contaminants.
Between 2013 and 2015, sampling carried out by both GDE and DCWW highlighted that certain contaminants contained in the discharged waste exceeded the permitted limit prescribed in DCWW's consent. As a result, DCWW requested remedial action and made several requests for internal contaminant test results. Following this, a senior manager of GDE falsified contaminant figures and provided these to DCWW.
As the transaction between MDW and GDE progressed, MDW's representatives carried out initial due diligence and submitted a due diligence questionnaire to the seller's representatives. In carrying out environmental due diligence the questionnaire requested details of "any investigation, enquiry, prosecution or other enforcement proceedings or process by any governmental, administrative, regulatory or other body or organisation in relation to, or affecting, [GDE]". The information provided in response to the questionnaire did not contain details concerning the ongoing breaches of the discharge consent or the communication between GDE and DCWW.
Following completion of the transaction, DCWW contacted GDE to raise further breaches of the discharge consent and warned that they were considering prosecution for breaches dating back to February 2014.
MDW alleged that GDE had been systematically breaching environmental law and unlawfully avoiding the costs of environmental compliance, thereby increasing its profits to levels that would not have been achieved if it had acted lawfully; and that, in consequence, MDW paid substantially more for the shares in GDE than they were worth.
As a result, MDW sent the sellers of GDE written notice of its intention to claim for breach of the warranties in the SPA and sought damages on these grounds and on pre-contractual misrepresentations. The sellers argued, among other things, that (i) the notice did not contain sufficient detail, (ii) the notice did not summarise as far as was reasonably practicable, the amount claimed, and (iii) MDW did not provide notice of a claim within the two-year time period.
The Court's decision
The Court ruled in MDW's favour and held that:
• The sellers of GDE had breached environmental warranties due to the continuing breaches of the discharge consent and the falsified figures provided to DCWW;
• The seller (the CEO of GDE), who had known of the breaches and the falsified contaminant figures, was liable for fraudulent misrepresentation because his statements amounted to deceit. The other sellers, despite not acting dishonestly, were liable for fraudulent misrepresentation as they left the negotiation and handling of the sale to the CEO, who was acting as their agent;
• In relation to the written notice of claim, the SPA "sets a low threshold" and there was no requirement to set out the specific grounds of the claim or reasonable detail concerning the matters said to constitute a breach. The judge also held that "there is no requirement to explain how the amount claimed has been calculated or the manner in which it is causally related to the matters complained of"; and
• The judge concluded that a claim arising from the sellers' dishonesty should not be defeated by a contractual time bar.
Key takeaways
The decision in this case serves as an important reminder to sellers of the consequences that can result from inaccurate responses to pre-contractual enquiries and due diligence questionnaires. The action taken demonstrates that it is critical for sellers to have sight of and fully understand responses that are provided to the buyers on their behalf. As we have witnessed in this case, while most of the sellers were not involved in responding to due diligence enquiries, they were still found liable for the misrepresentations.
If you require further advice on any of the issues raised in this article, please get in touch with your usual Corporate contact at Brodies.
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