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Damages under SPA capable of being more than purchase price

George Wilders

In 116 Cardamon v MacAlister, the court ordered the full purchase price be paid by way of damages for breach of accounting warranties in a share purchase agreement, having found that the value of a company “as warranted” was greater than the purchase price.

Cardamon, an investment company, purchased all the shares in Motorplus, an insurance company, from its founders, the MacAlisters, for approximately GBP 2.4m. The sale was quick and without due diligence, partly because a management buyout was feared. The share purchase agreement contained warranties by the MacAlisters as to the truth, fairness, accuracy and proper preparation of Motorplus’ statutory accounts. Warranty claims were capped at the purchase price and the first GBP 500,000 of any claim was irrecoverable under a de minimis provision.

When Cardamon discovered that Motorplus had been effectively insolvent at the time of purchase (contrary to the impression given by the accounts), it claimed for breach of the accounting warranties. The court agreed with Cardamon that, to a substantial degree, Motorplus’ liability to pay certain claims had been underprovided for in the statutory accounts.

In calculating damages, the court followed the general rule in the context of breach of warranty claims, seeking to put Cardamon in the position it would have been in had the information warranted been true. This required a comparison between the true value of Motorplus and its value “as warranted”.

Two interesting points arose in relation to the calculation of damages:

  • First, the court was clearly prepared to adopt a pragmatic and flexible approach. Here, the calculation of Cardamon’s loss (ie the extent of the underprovision in the statutory accounts) was complicated because the opening position in those accounts was likely also inaccurate. The evidence was inconclusive on this point, but this did not lead the court to dismiss Cardamon’s claim. Rather, the court (in line with the authorities) considered that it should assess the damages as best it could on the available evidence given that Cardamon had suffered substantial loss. Moreover, the court, rejecting other calculation methods for various reasons, was prepared to carry out the calculation itself.
  • Second, contrary to the MacAlisters’ position, the court did not consider that the value of Motorplus “as warranted” was equal to the purchase price. This was informed by the experts’ views and the fact that Motorplus had been sold at a discount. Both experts determined that the value “as warranted” was more than GBP 500,000 over the purchase price, so the court disregarded the de minimis provision and awarded damages equal to the contractual cap of the purchase price.