Summary

In this article, we consider the recent judgment of His Honour Judge Keyser QC in the matter of MDW Holdings Limited (“MDW”) v Norvill [1], which involved an examination of whether false responses given by the seller to a buyer’s due diligence enquiries constituted fraudulent misrepresentation, and whether such responses constituted a breach of environmental warranties set out in the sale and purchase agreement (“SPA”).

Background

The case concerned the purchase of G.D. Environmental Services Limited (“GDE”), a waste management business, from James Norvill, Stephen Norvill and Jane Norvill (the “Sellers”).

GDE carried out its business at its premises (the “Site”) at Felnex Industrial Estate, Newport. The Site was divided into two separate facilities (albeit on the same industrial estate), one of which dealt with dry waste (the “Dry Site”) and the other dealt with wet waste (the “Wet Site”).

GDE was heavily regulated under the Environmental Permitting (England and Wales) Regulations 2010. In particular, GDE required an environmental permit to operate and consent from the relevant water company to discharge trade effluent from the Site into Dwr Cymru Welsh Water’s (“DCWW”) public sewers. In compliance with the environmental permit, limits were placed on the permitted levels of specified substances present in the trade effluent (such as ammoniacal nitrogen and levels of copper, chromium, zinc, nickel and lead) and GDE was required to keep records of the volume, rate, nature and/or composition of the trade effluent discharged into the sewer for inspection by DCWW’s officers and send copies of such records to DCWW on demand.

Between 2013 and October 2015, sampling was carried out by both DCWW and GDE and, on numerous occasions, the levels of certain contaminants were found to be far higher than the permitted levels. DCWW and GDE subsequently agreed an improvement plan, but the effluent continued to include at least one contaminant above prescribed limits. DCWW thereafter wrote to GDE and, in response, GDE’s general manager provided falsified samples. GDE also requested that the permitted limit for ammonia be increased, but this request was dismissed by DCWW.

In 2015 the Sellers prepared to sell their shares in GDE to MDW. During the due diligence process, MDW asked a series of environmental questions, including in relation to whether there were any outstanding investigations, enquiries or enforcement actions. GDE failed to mention their ongoing breaches of the discharge consent and did not provide any details relating to the correspondence between DCWW and GDE.

In October 2015, MDW acquired GDE. The SPA included the following environmental warranties:

  • GDE had obtained and complied in all material respects with all permits;
  • GDE had at all material times and in all material respects operated in compliance with all laws in force and, so far as the Sellers were aware, there were no facts or circumstances at completion that would likely lead to any breach or liability under such laws; and
  • other than routine investigations and inspections in the ordinary course of business, there had been no claims, investigations, prosecutions or other proceedings threatened and so far as the Sellers were aware there were no facts or circumstances in existence at completion that are likely to lead to any such claims, investigations, prosecutions or other such proceedings.

The SPA also contained an entire agreement clause, which provided:

“This agreement constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter.”

The claims

Following the acquisition of GDE, DCWW wrote to GDE alerting it to further breaches of their environmental permit and warned that it was considering prosecution for historic breaches. MDW notified the Sellers of its intention to bring a claim against them for failing to disclose the historic and continuing environmental breaches.

On 17 January 2019, MDW issued a letter before claim and formal notification of the intention to commence legal proceedings against the Sellers, and the claim form was issued on 6 February 2019.

MDW claims were as follows:

  • Breach of contract: the Sellers had given inaccurate warranties in the SPA; and
  • Misrepresentation: the Sellers had made various pre-contractual statements as part of the due diligence process, which MDW relied upon when deciding to enter into the SPA, but which were inaccurate or false. Such pre-contractual statements amounted to misrepresentations, both fraudulent and negligent (The key difference between fraudulent and negligent misrepresentations is the level of damages that the court will award. Broadly, if a misrepresentation is fraudulent, the buyer can recover all losses arising from it. If, however, it is merely negligent, the buyer can recover only losses that were reasonably foreseeable.).

Decision

His Honour Judge Keyser QC considered the breach of warranty claims first and found that GDE were in persistent breach of the trade effluent discharge limits detailed in the permits and that GDE also falsified the test results of the sample data regarding discharge amounts to DCWW in order to conceal its breaches of the limits. Furthermore, His Honour Judge Keyser QC found that during 2013 and 2014, GDE had engaged in the unlawful disposal of hard solids on the Dry Site and the disposal of cess waste down a “magic hole” (an inspection chamber located on the Wet Site) amounting to knowing and deliberate misconduct. As such, GDE’s persistent failure to bring the discharges of leachate within the boundaries set and the misleading information provided to DCWW constituted a breach of the environmental warranties given in the SPA (as well as breaching the general legal compliance warranties).

When assessing the defence of the Sellers, His Honour Judge Keyser QC found that the Sellers had failed to establish any of the contractual defences which they had brought forward, namely:

  • Matters disclosed: the Sellers claimed that the matters were fairly disclosed in the disclosure letter and sale process, arguing that, as such, they could not be liable for the breach of warranty claims brought forth. This defence was denied as neither the disposal of cess waste through the “magic hole” nor the improper disposal at the Dry Site of the sediment in the bottom of the tanks were disclosed in the disclosure letter.
  • Matters known to MDW: the Sellers were absolved from liability for breach of warranty to the extent that MDW had actual knowledge of the matter, fact or circumstance giving rise to the claim. To this end, the Sellers claimed that MDW were aware there had been breaches over a long period of time and thereby knew there was a material risk that there would be breaches in the future. His Honour Judge Keyser QC found that this defence offered no real assistance to the Sellers, stating that, whilst MDW knew there had been some one-off breaches, MDW believed these to be historic breaches and had no reason to believe that the Sellers had repeatedly given false information to DCWW.
  • Late notification: the Sellers relied on a contractual notification and limitation provision which outlined that the Sellers would not be liable for a claim brought two years after the completion date. Whilst this was correct, His Honour Judge Keyser QC relied on the ruling in Laminates Acquisition Co v BTR Australia Ltd [2] where Cooke J outlined that ‘each notice clause has to be construed for itself and in the light of the commercial context in which it is found and the commercial purpose it is intended to serve’. His Honour Judge Keyser QC ruled that, whilst the claim was outside the contractual limitation provision, it arose ‘as a result of dishonesty, fraud, wilful misconduct or wilful concealment’ by the Sellers and therefore, he dismissed this defence and upheld the breach of warranty claim.

Moving to MDW’s claims of misrepresentation, the Sellers denied that they had made any, but, if they had, they were excluded by the entire agreement clause in the SPA. His Honour Judge Keyser QC found that the Sellers had made fraudulent misrepresentations. The following are noteworthy:

  • The fact that the Sellers’ corporate finance adviser had provided the responses to MDW was neither here nor there – the corporate finance adviser had been acting as the agent of the Sellers and so the Sellers were liable for its responses.
  • MDW had relied on the responses given – the only reason the questions were asked were to inform MDW’s decision whether to buy the shares of GDE.
  • Several responses were inaccurate because the Sellers had omitted information that was relevant in the context of the statements given.
  • One of the Sellers (also the CEO) had known of the relevant matters (including the falsified data provided to DCWW). His statements were, therefore, dishonest and amounted to fraudulent misrepresentations.
  • Even though the other Sellers had not acted dishonestly, they were nevertheless liable for the fraudulent misrepresentation because they had left negotiations to the CEO, who acted as their agent and so were responsible for his fraud.
  • The entire agreement clause did not exclude liability for misrepresentation – it merely provided that nothing said or done before signing the SPA created any contractual obligations or liabilities.

Comment

This case highlights and should serve as a reminder that:

  • Statements given by sellers as part of a due diligence exercise are important – they can and are relied upon by a buyer and may give rise to claims for misrepresentation. As such, it is critical that any such statements are carefully considered by sellers – both in terms of their accuracy and their completeness – before they are provided to buyers. Even if the sellers are not preparing or compiling the responses themselves, they should nevertheless have oversight and the ability to review any responses provided.
  • A principal is responsible for the actions of their agent. If multiple sellers are relying on one seller to conduct negotiations, that one seller is their agent for the purpose of the transaction and its negotiation.
  • Sellers should be aware that a comprehensive entire agreement clause has several aspects: a statement that nothing said or done before signing creates any contractual obligations or liabilities; no reliance is placed by the buyer on any such pre-signing actions or statements; an exclusion of liability for misrepresentation (offered coupled with a waiver of any non-contractual damages, such as rescission or tortious damages); and a carve-out for fraudulent misrepresentations.
  • Fraud unravels all.

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Should you have any questions or wish to discuss any issues raised in this article, please get in touch with your usual contact at Rosenblatt, or the authors named below.

Authors

Christopher Allen, Partner

Elliott Dagul, Solicitor

James Bateman, Trainee Solicitor

[1] [2021] EWHC 1135 (Ch)

[2] [2004] 1 AII ER (Comm) 737

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