Commercial Court success in breach of warranty claim

11/05/23

On 13 February 2023, the Commercial Court (Bright J) has handed down judgment, finding in favour of the Claimant, Millbrook Healthcare Bidco Ltd (“Bidco”), in a substantial and hard-fought breach of warranty claim against the sellers of a business called MHCDC Ltd.

On 22 July 2019, Bidco acquired MHCDC from the Defendants, Paul, Colin and Mark Croll (the “Sellers”), for an Enterprise Value of £45m. The SPA contained a number of warranties, including common warranties that the accounts and management accounts were true and fair [13]-[14]. MHCDC owns a subsidiary called Millbrook Healthcare Ltd (“MHL”), which is in the business of providing wheelchairs to NHS trusts. Bidco claimed that the warranties in the SPA were false in relation to two contracts, named for the NHS CCGs with which they were concluded – the “East Sussex Contract” and the “Somerset Contract” [5].

In relation to the East Sussex Contract, it was common ground by the time of trial that MHL had entered into an undisclosed “Variation Agreement” with the East Sussex CCGs. MHL frequently provided more equipment to the East Sussex CCGs than it had a contractual entitlement to payment for – this was called “overspend” [45]. Bidco’s case was that, as a matter of construction, the Variation Agreement limited both its ability to be paid for the Overspend on Years 1-3 of the East Sussex Contract, and fixed the budget for Years 4-5. The Court agreed with Bidco’s case on the construction of the Variation Agreement [54]-[55].

In relation to the Somerset Contract, the debate at trial concerned whether had agreed to waive sums dues under an invoice called Invoice 16150 [93]-[96]. On the basis of emails between Mr Lock and the Somerset CCG, the Court find that Mr Lock had reached such an agreement [97]-[116].

In relation to quantum, the Court held that:

1. The so-called “Warranty True” value of MHCDC was the price MHL had actually paid, rejecting a number of arguments from the Sellers [145]-[150]. The main argument relied on was that this assessment of value made use of unwarranted information, but the Court held that any hypothetical reasonable buyer would have to form a view on the basis of the warranted figures as to likely future profitability [146(i)].
2. The “Warranty False” should be assessed on the basis that a hypothetical reasonable buyer would have applied the same multiple as Bidco to an EBITDA figure for FY2019 which was lower by £302,000 (being the EBITDA attributable to the East Sussex Contract in the Management Accounts) [165]. The Court rejected a number of contrary arguments concerning the nature of the East Sussex Contract [157]-[166].

This resulted in damages payable to Bidco of £1,709,000. The Court also awarded Bidco 90% of its costs of the action.

The judgment is here.