High Court clarifies the application of the date of breach rule to warranty claims arising under a share purchase agreement

04/07/14

Ageas v Kwik-Fit and AIG

The High Court (Popplewell J, sitting in the Queen’s Bench Division) today handed down judgment in Ageas v Kwik-Fit and AIG, bringing to an end a long-running dispute in which Ageas sought to recover losses arising from its £215 million acquisition of Kwik-Fit’s insurance business in 2010.

Proceedings were initially pursued against Kwik-Fit, alleging breaches of warranty under the share purchase agreement (SPA) whereby the share capital in Kwik-Fit was transferred to Ageas.  Having initially denied that the target company’s accounts had been overstated, Kwik-Fit later conceded that they had. It then alleged that Ageas’s warranty claims had been served out of time, but this defence was rejected by the High Court (Green J).  Kwik-Fit subsequently capitulated and submitted to judgment for the full amount of the claim against it up to the liability cap of £5m under the  SPA (together with interest and costs).

Ageas had purchased warranty and indemnity cover from AIG in respect of losses arising from breaches of warranty by Kwik-Fit in excess of the SPA cap on liability. Ageas therefore claimed the sum of £12.6m under this policy.  AIG accepted in the course of the proceedings that Kwik-Fit’s underlying accounts had materially misstated certain costs of the Kwik-Fit business and that breaches of warranty had occurred. However, it disputed reliance, causation and quantum, based on the valuation of the target business using a discounted cash flow (DCF) model. AIG was eventually compelled to abandon its reliance/causation argument, and as the trial proceeded it abandoned most of its arguments in relation to quantum, leaving the issue of the correct approach to the assessment of damages.

The issue before the Court was whether, in assessing loss, the business in question was to be valued as at the date of breach; or whether the it was to be valued with the benefit of hindsight, i.e. having regard to its post-acquisition performance, regardless of the projections and assumptions that had been used in the pre-acquisition valuation exercise.

Having reviewed the Golden Victory and Bwllfa lines of authority, Popplewell J held that the prima facie rule was that damages were to be assessed as at the date of breach, and that any departure from this rule had to be justified.  He further held that, when assessing damages for breach of contract by reference to the value of a company or other property at the date of breach, whose value depends upon a future contingency, account could be taken of what was subsequently known about the outcome of the contingency as a result of events subsequent to the valuation date, if that was necessary in order to give effect to the compensatory principle.  In an appropriate case, the valuation could be made with the benefit of hindsight, taking account of what was known of the outcome of the contingency at the time that the assessment fell to be made by the court.  However, it was important to keep firmly in mind any contractual allocation of risk made by the parties, since party autonomy dictated that an award of damages should not confound the allocation of risk inherent in the parties’ bargain.  

The Judge noted that, in the present case, there was no provision in the SPA for any post-acquisition adjustment of the price based on subsequent trading performance, and that the expectation was that each party would have to determine an acceptable price based on forecasts reached prior to completion in what was a fast-moving, competitive and uncertain market.  Upon completion, the contract was fully executed, and if the business did better than the parties projected when calculating a price, that was for Ageas’ benefit.  Having regard to the allocation of risk by the parties to the SPA, it was therefore inappropriate to adopt an approach to the assessment of damages that involved the hindsight or post-acquisition analysis contended for by AIG.

Accordingly, Ageas was given judgment for the full amount of its claim against AIG (£12.6 million), together with interest and costs.  It therefore  recovered from Kwik-Fit and AIG in this action 100% of its loss on the acquisition, plus interest and costs.

The judgment is here.