In Equitix EEEF Biomass 2 Ltd v Fox [2021] EWHC 2531 (TCC), the High Court found that the sellers of the shares in an energy company were liable for breach of various warranties in the share purchase agreement governing the transaction and awarded damages of £11 million based on the diminution in value of the acquired shares. The court also found that a clause in the SPA importing a duty for the buyer to mitigate its loss did not set a standard of conduct that was any higher than the threshold imposed under the common law doctrine of mitigation of loss.


Warranties in acquisition agreements. English law provides a buyer of shares in a private company with little statutory or common law protection regarding the nature and extent of the assets and liabilities it is thereby indirectly acquiring, hence the principle of caveat emptor (buyer beware) applies. To afford the buyer some protection against key undisclosed risks or understated liabilities, it will usually incorporate in the share purchase agreement (SPA) a package of express warranties to be given by the seller relating to various aspects of the target company and its business. Breach of these warranties exposes the seller to liability in damages. Most warranties as to a fact given in an SPA will be a warranty of quality. A warranty of this type is a promise that something is the case, rather than a promise to do or not do.
Damages for breach of warranties. Compensatory damages for breach of a warranty of quality in a share purchase agreement compare the actual position the claimant is in and the position it would have been in, but for the breach: here, the position the claimant would have been in had the warranty been true. The usual measure of damages is therefore the difference between the value of the shares as warranted (that is, had the warranty been true), and the actual value of the shares (that is, the value of the shares taking into account that the warranty was false)


The claimant (Buyer) purchased the entire share capital of Gaia Heat Limited (Target) from the defendants (Sellers) pursuant to the terms of a share purchase agreement (SPA) which completed on 5 August 2016 (Completion Date).

The price payable for the Target’s shares was £16.45 million, subject to adjustments to take account of circa £6 million owed to Lloyds Bank and other debts that would be refinanced by the Buyer at the Completion Date, and an element of deferred consideration depending on the amount, not yet known, payments to be received under the government’s Renewable Heat Incentive scheme.

Detailed warranties relating to the Target’s business and assets were set out in Schedule 4 to the SPA.

High Court Decision

The High Court (Kerr J) found that a number of the sellers’ warranties were false as at completion. The warranties that were found to have been breached included those relating to the Target’s compliance with its environmental permit, the condition of its plant and equipment, the status of its material contracts and the reasonableness at completion of the projections and forecasts in the Target’s financial model that had been provided to the buyer during the transaction negotiations.
The court rejected the sellers’ arguments that the buyer’s warranty claims were excluded because the matters giving rise to them had been disclosed, or were otherwise within the buyer’s actual knowledge and therefore precluded by a provision in the SPA under which the buyer confirmed that it was not actually aware of any fact or matter which constituted a breach of warranty as at the date of the SPA.
The court awarded damages of £11 million (the full amount of the liability cap under the SPA), assessed in accordance with the usual measure applicable to breaches of warranties of quality, by reference to the diminution in the value of the shares attributable to the falsity of the breached warranties.

The court rejected the sellers’ submissions that the buyer’s damages should be reduced due its failure to comply with a clause that obliged it to take “…all reasonable action to mitigate any loss suffered…”. The court found that the while the clause imported a duty to mitigate, it did not impose a standard of conduct any higher than the threshold under the common law rules on mitigation. The onus was on the sellers to show an unreasonable failure to mitigate: the threshold was low (because the criticism came from the party at fault) and it was not enough to show that the steps the sellers proposed would be reasonable. In their commercial context, the words “all reasonable action” meant action it would be unreasonable not to take, and did not extend to an obligation on the buyer to commence proceedings against a third party. On the evidence, the sellers had failed to establish any breach of the low threshold duty imposed by the mitigation provision.

Lessons to learn for your business

  1. Pay real and close attention to warranties – if you are a seller, ensure you’ve reviewed each one and each one is true – or disclose against it;
  2. Definitely do not make false warranties.
  3. When disclosing against a warranty, do so in as full a manner as possible. Overload is better than under providing information.
  4. A duty to mitigate loss is no more than what already exists and so don’t think any claim will be reduced because the buyer could do something else.
  5. Limitation clauses are very useful.

The SPA in this case was long, complex and was negotiated on both sides by very experienced corporate M&A lawyers. There was no allegation of fault on the sellers solicitor’s side, it was simply that the sellers hadn’t truly and properly disclosed serious issues.

Source: Practical Law