Warranty claim damages when a sub-sale takes place
What damages can a buyer recover for breach of warranty when it has sold off some of the shares purchased?
The purpose of warranty claim damages is to put the Buyer in the position it would have been in had the value of the shares purchased been as warranted by the Vendor. Subject to the factual complexity of any given case these damages are relatively easy to calculate. This is done by ascertaining the actual value of the shares and deducting that from the value of the shares as warranted (i.e. the price paid by the Buyer). An interesting situation does arise, however, where the Buyer, having bought the shares (with the benefit of the Vendor's warranties), sells on say, 30%, of those shares to a third party and in doing so (relying on Vendor's warranties to be accurate) gives the Sub-Buyer of the shares warranties identical to those the Vendor had provided to the Buyer.
In those circumstances and in the event that the Vendor's warranties proved to be untrue, what damages would the Buyer be entitled to? In particular, could it recover from the Vendor the money it became liable to pay the Sub-Buyer because (in consequence of the Vendor's breach of warranty) the Buyer was in breach of warranty to the Sub-Buyer.
Unfortunately (because these cases generally settle) there is little or nothing in the way of decided cases to provide an answer to this question. Applying basic principles, however, the key to answering the question would appear to be the date upon which warranty claim damages fall to be calculated. In that regard ordinarily warranty claim damages are calculated as at the date of the completion of the share purchase. Given as at that date the Buyer acquires 100% of the Vendor's shares the Buyer should therefore be entitled to recover 100% of the difference between the value of those shares as inaccurately warranted by the Vendor and their true value.
The Vendor would, undoubtedly, seek to argue that the Buyer's subsequent sale of 30% of the shares should be taken into account in quantifying the Buyer's damages. This, either on the grounds that the damages should be assessed at a date later than the completion date (i.e. as at the date upon which the Buyer sold on 30% of the shares to the Sub-Buyer) or on the grounds that by selling 30% of the shares the Buyer had mitigated the loss it would otherwise have suffered. Such an argument ignores, however, the fact that the Buyer will have become liable to pay the Sub-Buyer damages for breach of the warranties the Buyer gave to the Sub-Buyer as to the value of the shares that were sold on to it.
Simply put it would be wrong in principle for the Court to take into account the benefit obtained by the Buyer from the subsequent sale of part of the shares without also taking into account the damages the Buyer became liable to pay in consequence of making that subsequent sale.
Accordingly the most probable answer that the Court would give to the question raised is that notwithstanding the Buyer had sold on 30% of the shares it purchased from the Vendor, the Buyer would not be limited to damages equivalent to 70% of the difference between the value of the shares as warranted by the Vendor and their actual value and would be able to recover 100% of that difference. The situation may, of course, be different if notwithstanding the Buyer was in breach of warranty to the Sub-Buyer it, somehow, managed to avoid paying the Sub-Buyer any damages.
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.