The case of violation of guarantees of the contract of purchase and sale of corporate rights (GB) + contract template

In the contract of purchase and sale of corporate rights, the seller usually gives guarantees regarding the object of purchase, but there are cases when these guarantees are violated. Please note that often and whenever possible, the parties specify the law of England and Wales as the substantive law applicable to the provisions of the contract of sale of corporate rights. Let's consider the mechanism for calculating damages caused by breach of contract in the case below.

Oversea-Chinese Banking Corporation Ltd v. ING Bank NV [2019] EWHC 676 (Comm)

The facts

The main issue in this case was the possibility of compensation for the damage measured in the petition by the defendant as a matter of legality.

The plaintiff sued the defendant for breach of warranty under a share purchase agreement (SPA) in respect of shares in the target company (IAPBL). Pursuant to the sale agreement, the defendant warranted that IAPBL's accounts were properly maintained and reflected the true state of affairs as at the end of 2008. The plaintiff alleged a breach of warranty because the accounting did not show the liabilities to Lehman Brothers Finance SA (LBF) that were settled after the completion of the purchase of IAPBL. This resulted in a payment to LBF of US$14.5 million, which the plaintiff sought to recover in this case. Had the significant liability been disclosed, the plaintiff argued that the SPA would have contained a separate guarantee or indemnity in favor of the plaintiff in respect of the actual liability to LBF. Plaintiff argued that a claim for breach of warranty of quality in the sale of shares may be asserted as a hypothetical defense and the amount that could be claimed for such hypothetical indemnification. On the other hand, the defendant argued that such a measure of damages was not available, and the plaintiff could only recover the difference between the true value of the shares and their guaranteed value.

Decision

The court determined that the established measure of damages for breach of warranty in the sale of shares is the difference between the value of the shares that are guaranteed and their true value (decrease in value). It is a basic principle in the award of damages that the claimant is entitled to be in the same position as he would have been if the contract had not been breached. Therefore, the court rejected the plaintiff's argument that his damages were for the hypothetical recovery that he would have negotiated and received if the guaranteed accounts had been properly drawn up. He believed that such an indicator of damage, which was offered by the plaintiff, is impossible from the point of view of the law. The court confirmed that the indicator of loss for violation of the quality guarantee in the sale of shares is a decrease in the value of the company. Diminution in value is the only appropriate measure of damages, although it is possible to establish a proper valuation method to determine the amount of the diminution.

The significance of the decision

This decision underlines the certainty that English jurisprudence has shown. Diminution in value is a set measure of loss because it reflects the loss caused by a breach of warranty in the sale of shares. The rejection of hypothetical damages means that, in future cases, plaintiffs must formulate their claim for damages according to the existing principle of damages assessment. A court is unlikely to award damages based on an untested principle.

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Templates of documents that may interest you

• Agreement for the purchase and sale of corporate rights (shares in the authorized capital of the LLC) + deed (Ukraine, Ukrainian)
• Agreement on the purchase and sale of corporate rights (Ukraine, Ukrainian-English)
• Act of acceptance and transfer of a share in the authorized capital (Ukraine, Ukrainian)
• Act of acceptance and transfer of a share in the authorized capital (Ukraine, Ukrainian - Eng)
• Preliminary contract for the purchase and sale of corporate rights (shares in the authorized capital of the LLC) (Ukraine, Ukrainian)
• Preliminary contract for the purchase and sale of corporate rights (shares in the authorized capital of a foreign legal entity) (Ukraine, Ukrainian)
• Preliminary contract for the purchase and sale of corporate rights (shares in the authorized capital of a foreign legal entity) (Ukraine, Ukrainian-English)