Oversea-Chinese Banking Corporation Ltd v ING Bank NV  EWHC 676 (Comm) saw a creative argument put forward in the High Court regarding the measure of damages for breach of warranty in a share purchase agreement, but the court reaffirmed the position under current law.
In 2010, the Oversea-Chinese Banking Corporation Ltd (OCBC) purchased shares in ING Asia Private Banking Limited (IAPBL) from ING Bank N.V., pursuant to a share purchase agreement (SPA). OCBC later brought a claim for breach of warranty after it emerged that IAPBL was exposed to Lehman Brothers Finance S.A. for an amount close to $14.5 million arising out of equity derivative transactions. OCBC asserted that ING Bank’s failure to disclose this exposure constituted a breach of a warranty contained in the SPA that stated the accounts of IABPL showed a “true and fair view” of its financial position. OCBC brought a claim against ING Bank for the full amount of the exposure, as though it had the benefit of an indemnity in relation to such exposure of its financial position.
High Court Decision
The usual measure of loss in a breach of warranty claim in relation to a share sale is the difference between the value of the shares as warranted by the seller (the “warranty true” value) and their true value in light of the breach (the “warranty false” value). In this case, the parties agreed that the breach had not caused a diminution in the value of the shares. However, OCBC argued that this measure of damages was only a prima facie measure of loss and could be departed from in certain instances.
The approach put forward by OCBC was that the measure of damages for the breach of the “true and fair” accounts warranty should be the amount recoverable under a hypothetical indemnity, which OCBC argued would have been negotiated into the SPA had the warranted accounts been correct, making OCBC aware of the exposure. OCBC claimed it lost its chance to negotiate and include such an indemnity in the SPA due to the breach itself.
While OCBC accepted that the Sale of Goods Act 1979 did not apply to the SPA, OCBC contended that the principles relating to damages could be applied by analogy. The High Court, however, considered that this argument did not support OCBC’s case for departing from the general rule described above, as the Sale of Goods Act concerned circumstances in which valuing goods at the time and place of delivery was not appropriate.
The High Court noted that the general rule for determining damages for breach of contract is that the claimant is entitled to be put in the position it would have been in, had the breach not been committed, as well as recovering damages for any loss of bargain. Effectively, the diminution in the value of shares would be the measure of loss.
The High Court held that there was no support for OCBC’s argument in case law or academic writing, so it was not able to claim damages on the basis of a hypothetical indemnity. The High Court did acknowledge, however, that in determining the loss of bargain, it might be appropriate to adjust the valuation approach, though on reviewing the relevant authorities, the court found that there was nothing to support an entirely different measure of damages.
The decision in this case reaffirms a number of decisions and confirms that damages will not be assessed on the basis of a hypothetical indemnity in instances of a breach of warranty, regardless of what would or could have been negotiated had the breach not occurred. The damages recoverable will depend on the usual test — the diminution in the value of the shares.
This approach seeks to put the claimant in the position it would have been in had the breach not occurred. In cases such as this, where there is a breach of a warranty of quality (in this case, relating to the quality of the shares being acquired), the claimant may struggle to show a diminution in the value of the shares of a private company resulting from the breach of warranty.
Going forward, it will be interesting to see whether purchasers attempt to introduce specific indemnities into SPAs to address such breaches and whether sellers will accept such provisions.