Breach of warranties and effect of mitigation clause in share purchase agreement
In a claim for breach of warranties in a share purchase agreement (SPA) for the acquisition of an energy company, the High Court found that several of the sellers' warranties were false as at completion.
The court rejected the defence that the warranty claims were excluded because the matters giving rise to them had been disclosed, or were within the buyer's actual knowledge and therefore precluded by a provision in the SPA under which the buyer confirmed that it was not actually aware of any fact or matter which constituted a breach of warranty as at the date of the SPA.
The court awarded damages assessed in accordance with the usual measure applicable to breaches of warranties of quality, by reference to the diminution in the value of the shares attributable to the falsity of the breached warranties.
The court rejected the sellers' submissions that the buyer's damages should be reduced due its failure to comply with a clause that obliged it to take "…all reasonable action to mitigate any loss suffered…". The court found that the while the clause imported a duty to mitigate, it did not impose a standard of conduct any higher than the threshold under the common law rules on mitigation. The onus was on the sellers to show an unreasonable failure to mitigate: the threshold was low (because the criticism came from the party at fault) and it was not enough to show that the steps the sellers proposed would be reasonable. In their commercial context, the words "all reasonable action" meant action it would be unreasonable not to take and did not extend to an obligation on the buyer to commence proceedings against a third party. On the evidence, the sellers had failed to establish any breach of the low threshold duty imposed by the mitigation provision.