In Equitix EEEF Biomass 2 Ltd v Fox  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.
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.
High Court Decision
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
- 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;
- Definitely do not make false warranties.
- When disclosing against a warranty, do so in as full a manner as possible. Overload is better than under providing information.
- 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.
- 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.