Over-compensation in breach of warranty?

ETL Holdings (UK) Limited v. Munn & Munn [2026] EWHC 860

Introduction

This was a case in which Katherine Hallett acted for Mrs Munn, the Second Defendant, previously on a successful appeal ([2023] EWHC 2998 (Ch)) and here at the re-trial. The case considered whether the Claimant, ETL, would be over-compensated (in breach of the compensatory principle in damages) in the context of breach of warranty in a share purchase agreement.

The Facts

Mr and Mrs Munn had sold some of their shares in Carston Holdings Ltd (‘the Company’) to ETL. It had been held on summary judgment that the Munns had breached various warranties given to ETL in the share purchase agreement (‘the SPA’).

The (remaining relevant) breaches concerned non-disclosure of:

• An unlawful dividend declared in the Company’s favour by one of its subsidiaries.
• The so-called Dormco debt, which had arisen following various sales of goodwill between the Company and its subsidiaries. The end result was that the Company owed a debt to its subsidiary, Dormco.
• A claim for dilapidations made by the Company’s landlord.

After the SPA, Dormco went into liquidation and its liquidator issued a winding up petition against the Company in respect of the Dormco debt. ETL settled it (in a reduced sum).

Thereafter, the Company intimated a claim for breach of director’s duty against Mr Munn. (Mrs Munn was never a director). This had three elements:

• The unlawful dividend.
• The Dormco debt (in the settled sum).
• Legal fees incurred dealing with the Dormco debt.

The Company also wrote to both Munns, threatening to forfeit and sell their remaining shares in the Company pursuant to its Articles.

Mr Munn did not pay, so the Company forfeited the Munns’ remaining shares. It then sold those shares to ETL and an ETL-associated Company: the Company used the funds from those sales (provided by ETL’s German parent) to pay off the Dormco liquidator.

ETL subsequently brought a claim against the Munns in respect of breach of their warranties under the SPA. Summary judgment on liability was granted against them.

At the first trial, the Munns represented themselves, arguing (amongst other things) that ETL would be over-compensated, in breach of the compensatory principle, if damages were awarded in respect of the Munns’ breaches of warranty, because ETL had (via the share forfeiture) acquired the Munns’ remaining shares, and that those shares were worth more than ETL’s losses in respect of the breaches of warranty.

The Munns lost that first trial, but Mrs Munn successfully appealed (when Katherine first appeared). Mr Munn had by then gone bankrupt: his trustees took no part in proceedings.

The matter was remitted for a re-trial on this issue alone, and came before HHJ Paul Matthews, sitting as a Judge of the High Court.

Decision

Ultimately, the Judge rejected Mrs Munn’s argument, holding that there would be no over-compensation.

He traversed the authorities in this area, setting out the principles. The general rule is that damages for breach of a contract to sell and purchase an object of commerce are assessed as at the date of breach (paras.41-4).

There may be cases where it is appropriate in the assessment of damages in a case of breach of warranty to take into account events subsequent to the date of breach. The Judge therefore considered legal authorities on the use of hindsight in assessing damages for breach of contract. The review started with Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v. Pontypridd Waterworks Co [1903] AC 426, HL, moving through Phillips v. Brewin Dolphin Bell Lawrie [2001] 1WLR 143, HL, The Golden Victory [2007] 2 AC 353, HL, Bunge SA v. Nidera BV [2015] Bus LR 987, SC, Ageas (UK) Limited v. Kwik-Fit (GB) Ltd [2014] EWHC 2178, QB, The Hut Group Limited v. Nobahar-Cookson [2014] EWHC 3842, QB, Bir Holdings Limited v. Mehta [2014] EWHC 3903, Ch, OMV Petrom SA v. Glencore International AG [2017] 3 All ER 157, CA, Equitix EEEF Biomass 2 Ltd v. Fox [2021] EWHC 2531, TCC, and MDW Holdings Ltd v. Norvill [2023] 4 WLR 33, CA.

The Judge set out four “anchor points” (paras.90-2):

• The Dormco debt was in the sum of £3,106,158.11. ETL had bought 40% of the shares in the Company in 2015. The warranty in relation to company debts being breached, the prima facie measure of loss to ETL was 40% of £3,106,158.11, that is £1,242,463.24.
• The Company compromised the claim made by the Dormco liquidator in respect of the Dormco debt for the sum of £1,050,000.
• The claim made by the Company against Mr Munn in 2017 was in the total sum of £1,249,999.90. It was composed of three elements: (a) £169,999.90 in respect of the unlawful 2014 dividend, which had become an overdrawn director’s loan account; (b) the (compromised) sum of £1,050,000 in respect of Mr Munn’s breaches of duty regarding the Dormco debt; and (c) £30,000 of legal fees incurred in relation to the Dormco debt.
• The Company enforced its claim for £1,249,999.90 against Mr Munn by forfeiting the 42% of the shares in the Company still jointly held by the Munns, and immediately selling them to third parties for a total sale price of £958,211. That left a shortfall on the Company’s claim of £291,788.90. The purchasers of those shares were ETL and its associated company EK Williams Accountancy Ltd.

The question for the court was whether, in assessing the loss to ETL caused in 2015 by the Munns’ breach of warranty in respect of the Dormco debt, ETL could recover the prima facie measure of loss of £1,242,463.24, or only some lesser sum (or even nothing at all) by reason of the subsequent events in 2017. The Judge held (para.93) that, as the authorities made clear, the prima facie rule, from which departure must be justified, is that damages are to be assessed at the date of breach, and that only events which have occurred at that date can be taken into account. The Court could depart from that only where it is necessary to give effect to the overriding compensatory principle, and only where the parties have not by their contract already allocated the risk of subsequent events changing the value of the property sold and bought.

The Judge held that:

• ETL’s loss accrued in 2015, on the making of the SPA. The loss accrued because the Munns failed to disclose the Dormco debt. However, in 2017 the Company compromised the Dormco debt with the liquidator of Dormco in the sum of £1,050,000. It also forfeited Munns’ shares because of Mr Munn’s unpaid liability to the Company. Mrs Munn asked the Judge to see this possibility of compromise of the Dormco debt and the forfeiture of the Munns’ remaining shares in 2017 as a contingency or contingencies affecting the value in 2015 of the compensation otherwise due to ETL for breach of warranty. The Judge found that “unreal” (para.95). If it were true in this case, it would be true in the case of every SPA where a warranty were breached on the basis of non-undisclosed liabilities, and in every case where a company’s articles permitted shares to be forfeited for unpaid members’ liabilities to itself. The (subsequent) successful negotiation of a compromise of a debt claimed from the Company by a third party obviously increased the value of the Company, but that was an entirely separate matter from the amount of the loss caused to ETL by the breach of warranty in 2015. It was the Company’s action, not ETL’s. The possibility of compromise of an undisclosed debt of the target company that had been warranted not to exist, and the ability of a company under its articles to forfeit members’ shares for unpaid debts, were not a contingency or contingencies affecting the value of the shares sold in 2015.
• The Company had a claim against Mr Munn in respect of his various breaches of duty. That claim was an asset of the Company. Its value to the Company from time to time depended upon a number of factors. One of them was the availability of assets of the debtor to meet the claim. Another was the willingness of the Company to take legal action which might involve both expense to itself and potential liability to other parties. The Company embarked on legal procedures which realised nearly 77% of its claim against Mr Munn. By its efforts, therefore, the Company caused the claim as an asset of the Company to be worth a considerable amount of money. If the Company had instead owned land which it subsequently developed, so increasing the value of the Company itself, that increase in value would not go to reduce ETL’s loss on the breach of warranty claim. For the same reason, the successful exploitation by the Company of a claim against Mr Munn should not do so either.
• However, here, the asset concerned was a legal claim, four-fifths of which by value related to the same source of loss to the Company as to ETL, namely the Dormco debt. To the extent that the value of the claim is recovered, surely that should diminish the loss to ETL? One answer to this was that the parties were different. The claim of the Company against Mr Munn alone for breach of his fiduciary duty was the claim of the Company and not of ETL. Another was that the causes of action of the Company against Mr Munn and ETL against both Munns were different. Both causes of action related in some way to the Dormco debt, but the former related to the creation and confirmation of the debt, whereas the other related to not disclosing its existence. The losses that flowed were different, and impacted on different people.
• If ETL had known of the false warranty in 2015, it would have paid less for the shares. So, it paid too much. Its loss accrued at that stage. But the Company would still have had its claim against Mr Munn for his breach of fiduciary duty. Later recovery by the Company from the Munns, and the compromise of the Dormco debt at a reduced level, did not diminish the earlier loss of ETL, any more than ETL’s paying less for the shares at the outset would diminish the losses of the Company. The SPA clearly allocated the risk as between ETL and the Munns. Before the sale, the risk/reward was for the sellers. Afterwards, it was for the buyer.

Finally, the Judge dealt with Mrs Munn’s complaint that the forfeited shares were sold by the Company to ETL and EK Williams at an undervalue. He concluded (para.100) that was a complaint against the Company rather than against ETL. Mrs Munn had never taken any steps to vindicate that complaint (such as via an unfair prejudice petition). The Judge held that, whatever the merits of that complaint, which he could not decide, it could not amount in law to a set-off against any liability to ETL.