Rare decision on breaches of environmental warranties in an SPA: MDW Holdings Ltd v Norvill & Ors [2021] EWHC (Ch) (4 May 2021)

In a recent decision of the High Court, the Court considered breaches of environmental warranties and misrepresentations made in connection with the acquisition of a waste management company.

Facts

In October 2015 MDW Holdings (the Buyer) purchased the entire share capital of G.D. Environmental Services (the Company) from James, Jane and Stephen Norvill (the Sellers) for £3,584,244.

The Company operated a waste management business that involved disposing of various types of waste (dry and wet). In order to dispose of its wet waste the Company collected waste, treated it and discharged it into the public sewers. In order to discharge waste into the public sewer it was required to meet certain requirements imposed by Dwr Cymru Welsh Water (DCWW) who regulated the public sewer. The consent to discharge into the sewer was reliant on various factors.

Between 2013 and October 2015, sampling carried out by both the Company and DCWW indicated that the level of certain contaminants in the discharged waste exceeded the limits prescribed by the consent. As a result, there was correspondence sent by DCWW to the Company to remedy this issue, which was initially ignored by the Company. Eventually the parties entered into negotiations about an increase to its discharge levels, however, this was never approved by DCWW.

As part of the transaction the Buyer’s solicitors submitted initial due diligence enquiries which requested all documentation concerning any investigation, enquiry, prosecution or other enforcement proceedings or process by any governmental, administrative, regulatory or other body or organisation in relation to, or affecting, the Company. Following the due diligence exercise the share purchase agreement was completed which included detailed warranties relating to the Company’s environmental permits and compliance record.

Following completion, DWCC escalated the matter and on 11 November 2015 wrote to the Company warning that consideration was being given about bringing a prosecution for breach of the conditions of the consent. It contained a list of breaches in respect of discharge levels dating back to February 2014.

As a result, the Buyer alleged that the Company had been systematically breaching environmental laws and unlawfully avoiding the costs of environmental compliance, thereby increasing its profits to levels that would not have been achieved if it had acted lawfully. As a consequence, the Buyer alleged that it paid substantially more for the shares in the Company than they were worth.

The Buyer sought damages on two grounds:

• Breach of the warranties in the SPA; and
• Pre-contractual misrepresentations.

Decision

The Court found the Sellers were liable for various breaches of warranties contained in the SPA. The Court also found that there were actionable misrepresentations however these covered the same grounds as the breaches of warranty. The Court awarded damages of £382,600 jointly and severally against the Sellers.

As is often the case with breach of warranty claims the Court held that the measure for damages was the difference between the value of the Company paid by the Buyer based on the warranties being true and the actual value of the Company given the warranties were false. The award was therefore determined on the difference between the two being £382,600 (about 11.5% of the purchase price). This award did not include liability for interest and costs which is to be determined at a later hearing.

Comment

Whilst the misrepresentations in this case covered the same ground as the breach of warranties (therefore not impacting on the damages awarded), it is a stark reminder to sellers to seek to include express provisions aimed at dealing with the following:

• A non-reliance statement acknowledging that the buyer has not relied on any representations in entering into the SPA.
• A no representation statement acknowledging that sellers have not made any representations in the run-up to entering into the SPA.
• An express exclusion of liability for misrepresentation in respect of both pre-contractual statements and any statements that are set out in the SPA.
• An express waiver of non-contractual remedies.

However, sellers should be mindful that the inclusion of such provisions are subject to negotiations and may not always be agreed with a buyer. Decisions such as this generally turn on the facts and therefore the importance of such provisions will depend on the circumstances at the time. Nevertheless, a proper exclusion of misrepresentation clause should be included rather than just relying on standard boilerplate provisions (as was the case here).

The Sellers could have taken contractual steps to reduce their potential liability. However, ultimately, the liability arose due to a failure to make effective discloses against the relevant warranties. Sellers should always carefully review the warranties being given, understand the scope and extent to which they are given and where necessary make a full and fair disclosure against any warranties that may be an issue.

To read the full judgment please click here.