Measure of Damages for Breach of Warranty - Diminution in Value Reaffirmed

The High Court has reaffirmed that the measure of contractual damages for breach of warranty is the diminution in value of the target company in Oversea-Chinese Banking Corporation Limited v ING Bank NV [2019] EWHC 676 (Comm)

This decision arises out of the purchase by Oversea-Chinese Banking Corporation Limited (the Purchaser) of ING Asia Private Banking Limited (the Target) from ING Bank NV (the Seller) for $1.466 billion in 2010. Following the purchase, it emerged that the Target had, at the time of sale, had a contingent exposure to Lehman losses, which later crystallised at $14.5m. The Purchaser sued the Seller for damages in that sum, alleging that the Seller’s failure to provide for the contingent Lehman exposure in the accounts constituted a breach of warranty.

In circumstances where the Purchaser accepted that any such breach had not affected the value of the company, the issue was whether the Purchaser was entitled to recover the $14.5m liability as damages.

In support of its claim, the Purchaser submitted that “diminution in value” (ie the difference between the value of the Target as warranted and the true value) was only a “prima facie” rule about the measure of damages from which the Courts could depart in appropriate circumstances. It argued that if it could show that, had the accounts contained provision for the contingent Lehman exposure, it would have obtained an indemnity in the SPA in the event that a liability should crystallise, then the Purchaser should obtain damages based upon that hypothetical indemnity.

The Judge, Moulder J, disagreed. She held that neither the authorities nor the textbooks supported the proposition advanced by the Purchaser, namely that in respect of a claim for breach of warranty of quality on a share sale, the measure of damages could be the amount which could have been claimed under a hypothetical indemnity. A claimant is entitled to be put in the position it would have been in had the contract been performed or, in other words, to recover damages for its “loss of bargain” as a result of the breach. In the event that the breach has had no impact upon the value of the target company, the purchaser has suffered no loss of bargain. Although it was not necessary in this case, Judge, Moulder J, contemplated that, when considering the “loss of bargain” it may be necessary to adjust the valuation methodology used to determine the value of the target, but that does not mean that an entirely different measure of damages for breach of warranty should apply. The result was that the Purchaser recovered nothing in respect of the $14.5m loss.

Commentary

The Court in the Oversea-Chinese Banking case did not cite the SPA. Therefore, it is not clear whether “loss” was defined in the SPA at all. We infer that, if it was, the definition was along the lines “damages/loss to which the Buyer is contractually entitled a result of the Sellers’ breach of warranty”. SPAs governed by English law often leave damages “at large” in this way; in other words, the contract leaves it to the common law to determine the measure of damages recoverable by the purchaser for a breach of warranty by the seller. The Oversea-Chinese Banking case confirms that such damages are restricted to diminution in value (ie even if it is recognised that a purchaser has suffered a loss as a result of the seller’s breach of warranty, as in the case of Oversea-Chinese Banking, in the event that that breach has had no negative impact on the value of the target company, such loss is not recoverable as part of the contractual measure of damages).

By contrast, it is standard US practice to include in the SPA a more expansive definition of “Loss”, perhaps along the lines “any and all damages, losses, actions, proceedings, causes of action, obligations, liabilities….” Such a definition would include not only damages for diminution in value caused by a breach of warranty, but also a host of consequential losses and liabilities which would not be recoverable as a matter of English common law. Had such a definition of “Loss” been included in the SPA in the Oversea-Chinese Banking case, it may be inferred that the $14.5m in dispute might have been recoverable by the Purchaser.