England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
(His Honour Judge Norris QC)

		The Royal Courts of Justice Strand London WC2 Tuesday 16th July, 2002

1. LORD JUSTICE ALDOUS: These are appeals against the judgment and order of His Honour Judge Norris QC of 14th December 2001. In that judgment he answered six questions as to the construction and effect of an agreement of 26th July 1999 between Mr M France and 3i Plc, described as the vendors, and Home Doors (GB) Ltd, the purchaser. That agreement provided for the purchase of the shares of Aqualux Products Ltd, which was a company owned by Mr France and 3i.
2. At the date of the agreement Aqualux manufactured shower products and draft excluders. The company had been bought by Mr France in 1989 with the aid of finance from 3i. 3i took an equity participation with the result that at the date of the sale in July 1998 Mr France owned 120,000 ordinary £1 shares and 3i 80,000 shares, together with 249,726 £1 preference shares.
3. The background facts were set out in full by the judge. I can therefore extract from his judgment sufficient of them to act as a basis for the reasons for the conclusions to which I have come. In 1997 Aqualux got into financial difficulty. According to Mr France this was caused by a production bottleneck. He said that that resulted in a build-up of raw materials which could not be processed fast enough to produce a suitable income. That led the company to exceed its credit limit and to a rise in its overdraft. That generated cash flow problems such that Aqualux was not able to pay its creditors when money became due. That is clear from one of the schedules to the agreement which lists the court proceedings against Aqualux and current demands then outstanding against them. It shows that on 22nd January 1998 county court proceedings had been issued claiming £70,000 by one creditor, £37,000 by another and that a statutory demand for £98,000 had been issued by a third. It is clear that the finances of Aqualux were such that, as the judge said, it was in a parlous state.
4. Mr France gave evidence and he explained the attempts that had been made to find finance. He told the judge that he had been looking for funds for the expansion of the company, that is to say the creation of extra manufacturing capacity. It was clear that the amount of stock was critical. It was the value of the stock which provided the basis upon which the company could be said to be solvent. In 1997 the company's margin of solvency had been relatively small, about £292,000. The stock level in the 1997 accounts was recorded at £2.9 million. An overvaluation of stock of only 10% would have reduced the solvency to nil.
5. Because stock levels were critical and were appreciated by Mr France to be critical to the state of the company in December 1997 and January 1998, stock checks were put in place even though the company's year ended in March. That stock check revealed that there was a £1 million discrepancy between the stock figures shown in the accounts for the year ending 31st March 1997 and the position at the end of December. It resulted in Arthur Andersen (the auditors) producing a balance sheet as at 31st December 1997 (headed "Draft for discussion purposes only") which showed the value of the stock at £1.9 million.
6. As I have said, the agreement was made on 26th January 1998. It was concluded at negotiations that took place between representatives of the parties on 22nd and 23rd January. The completion meeting which followed began at the offices of Arthur Andersen in the morning and then moved on to Eversheds. The result was the agreement of that date. I shall have to come to a detailed consideration of a number of the terms of that agreement; but before doing so it is convenient to set out its general layout. Clause 1 was the interpretation clause. Clause 2 provided for the sale of the shares. The consideration for the sale of those shares, £1 to each vendor, was recorded in clause 3. Clause 4 contains a number of warranties by Mr France. Clause 5 contains a number of restrictive covenants with which these proceedings are not concerned and clause 6 contains provision for completion. Clauses 7, 8, 9 and 10 are clauses which are not directly relevant to these proceedings. They include matters such as notices, post-completion obligations, costs and announcements.
7. These proceedings arise out of a claim by Home Doors against Mr Michael France for damages in respect of a breach of warranty arising out of the agreement. In the particulars of claim Home Doors plead certain of the warranties set out in clause 4 of the agreement. They allege that in breach of the agreement and in particular the warranties the true state of the assets and liabilities of the company were not disclosed in that there was a shortfall of stock of over £600,000. They also allege that the information contained in the accounts amounted to what I will call Derry v Peek misrepresentations. They claimed damages of just over £600,000. The defence disputes the facts and raises a number of issues as to the construction of the warranty clauses. It is for that reason that a number of preliminary issues were ordered to be tried.
8. I shall have to come to the way that the judge answered the questions posed in the preliminary issues, but before doing so I pay tribute to the clarity of his judgment. In my view he came to the right result for the right reasons. Save for the helpful submissions of counsel both orally and in writing, I would have been content to rely upon the judge's judgment for the conclusions of this appeal. With that introduction I turn to the issues that were raised. But before doing so I will set out the relevant parts of the agreement.
9. Clause 1 defined the words "the warranties" in this way:

"The warranties, representations and undertakings set out or referred to in clause 4 and Schedule 4."

10. Clause 3 stated:

"3. Consideration.

3.1. The consideration for the sale of the Shares will be the sum of £2 (two pounds) and accordingly each of the Vendors will be entitled to receive the sum of £1. ..."

11. The relevant parts of clause 4 are in these terms:

4. Warranties

4.1.1 warrants, represents and undertakes to the Purchaser in the terns if the Warranties, provided however that the Purchaser will not be entitled to claim that any fact or combination of facts constitutes a breach of any of the Warranties if and to the extent that such fact or combination of facts has been fully, fairly and clearly disclosed in the Disclosure Letter;

4.1.2 agrees that the Purchaser is entering into this Agreement in reliance on each of the Warranties and that save as provided in clause 4.1.1 no information of which the Purchaser has knowledge (actual or constructive) will prejudice any claim made by the Purchaser in respect of the Warranties or will operate to reduce any amount recoverable in respect of any breach of any of the Warranties or will operate to prevent any claim being made by the Purchaser for any breach by the Warrantor of the covenants implied by the Law of Property (Miscellaneous Provisions) Act 1994;

...

4.1.6 acknowledges that the Purchaser will be investing monies (whether by equity, loan or other method) in the Company and such funding shall be regarded as consideration paid for the purposes of the Warranties.

4.2 Without restricting the rights of the Purchaser or the ability of the Purchaser to claim damages on any basis available to it, the Warrantor undertakes to the Purchaser that in the event of a breach of any of the Warranties, the Warrantor will, forthwith on demand by the Purchaser, pay to the Purchaser or the Company (as the Purchaser directs) or, in the case of a liability to another person which has not been discharged, the person to whom the liability has been incurred, the full amount of any shortfall or diminution in the value of any assets of the Company, or the full amount of any liability of the Company incurred by it, as a result of or in relation to any act, matter, thing or circumstance constituting a breach of any such Warranties.

4.3 Each of the Warranties will be construed as a separate Warranty and will not be limited or restricted by reference to, or inference from, the terms of any other Warranty or any other term of this Agreement.

4.4 In this Agreement, unless otherwise specified, where any Warranty refers to the knowledge, information, belief or awareness of the Warrantor (or similar expression), the Warrantor will be deemed to have such knowledge, information, belief or awareness as such Warrantor would have obtained had he made all due and careful enquiries into the subject matter of the Warranty.

4.5 In this clause 4.5 and 4.6 `claim' means any claim which would (disregarding the provisions of this clause 4.5) be capable of being made against the Warrantor for breach of the Warranties. Notwithstanding the foregoing provisions of clause 4:-

4.5.1 subject to the provisions of clause 4.5.2 the aggregate liability of the Warrantor in respect of all claims will be limited to £250,000 (two hundred and fifty thousand pounds);

4.5.2 the Warrantor will be under no liability to make any payment in respect of any claim unless the amount of his liability in respect of such claim is (when aggregated with his liability in respect of any other claim or claims made by the Purchaser or which would have been made but for the provisions of this clause 4.5.2) in excess of £20,000 (twenty thousand pounds), in which event the Warrantor will be liable merely for the excess above £20,000;

4.5.3 the Warrantor will be under no liability to make any payment in respect of any claim unless:-

4.5.3.1 written particulars of the claim (giving details of the specific matter in respect of which such claim is made) are given to the Warrantor;

4.5.3.2 such particulars are given within a period of seven years from the date of this Agreement or (in the case only of any claim not relating to Taxation (as defined in Schedule 4)) 18 months from the date of this Agreement; and.

4.5.3.3 legal proceedings in respect of such claim are commenced and served upon the Warrantor within six months after such written particulars have been given to the Warrantor.

4.5.4 the Warrantor will have no liability in respect of any claim to the extent that it relates to any matter specifically provided for, or included as a liability or disclosed, in the Accounts (as defined in Schedule 4).

...

4.6 Notwithstanding any other provision of this Agreement, the provisions of clause 4.5 shall not apply to exclude or limit the liability of the Warrantor to the extent that any claim arises by reason of fraud, or dishonest, reckless or wilful misstatement or omission by or on behalf of the Warrantor."

12. Clauses 3 and 4 of the Schedule were in this form:

"3. Information supplied to the Purchaser

The information given in the Disclosure Letter is complete and accurate in all respects and is not misleading because of any omission or ambiguity.

4. Accounts and Records

4.1 The Accounts:-

4.1.1 comply with the requirements of the Act and have been prepared in accordance with all applicable accounting standards (as that term is defined in section 256 of the Act) and (to the extent that none are applicable) with accounting principles and practices generally accepted in the United Kingdom;

4.1.2 have been prepared in bases and principles which are consistent with those used in the preparation of the audited statutory accounts of the Company for the 2 financial periods immediately preceding that which ended on the Accounting Date;

4.1.3 show a true and fair view of the assets and liabilities (including contingent, unquantified and disputed liabilities) of the Company and of the state of affairs of the Company as at the Accounting Date and of the results of the Company for the financial year ended on that date; and

4.1.4 are not affected (except as disclosed in the Accounts) by any extraordinary or exceptional item.

4.2 The accounting records of the Company are up to date and contain complete and accurate details of all transactions of the Company and comply with the provisions of sections 221 and 222 of the Act.

4.3 The balance sheet of the Company as at 31 December attached to the Disclosure Letter has been properly prepared using the same accounting principles used in the preparation of the Accounts and reasonably reflects the assets and liability of the Company and the trading performance of the Company as at that date."

13. The Disclosure Letter was dated 26th January 1998. It said:

"We refer to the agreement (`the Agreement') to be entered into today between us relating to the sale and purchase of the entire issued share capital of the Company.

This letter is the Disclosure Letter referred to in the Agreement and words and expressions used in this letter have the same meaning as set out in the Agreement, unless the context otherwise requires.

The disclosure of any matter or document in this letter shall neither imply any condition, warranty or representation not expressly given in the Agreement nor be taken as extending the scope of any condition, warranty or representation given in the Agreement. The disclosures contained in this letter are not to be taken as an admission on our behalf that all or any of the matters call for disclosure, but are merely made for the purposes as they may serve representing as they do matters which might arise from the wording of Schedule 4 to the Agreement.

This letter shall be deemed to include, and there are hereby incorporated into it by reference and generally disclosed, the following matters:- ...

4.3. The Warrantor does not accept that the figure of £1.9 million made in the balance sheet is correct. The Warrantor accepts that the figure of £1.6 million is correct and the warranty is to be qualified accordingly."

14. Issue 1:

"What was the effect, if any, of the letter of 3 December 1998 under the terms of clause 4.5.3 of the Agreement, and in particular is the Claimant prevented from bringing this claim as a result of that letter?"

15. The judge answered that issue in this way:

"The effect of the letter of 3 December 1998 was to prevent the Claimant from bringing this claim and to compel the Claimant to pursue its alternative case under clause 4.6 of the Agreement."

16. This issue arises from the letter that was written on 3rd December 1998. In that letter Eversheds acting on behalf of the claimant, Home Doors, wrote to the solicitors acting on behalf of Mr France in these terms:

"As you will, no doubt, be aware, under clause 4.3 of the Share Sale Agreement made between your client, 3i PLC and Home Doors (GB) Limited dated 28 January 1998 (`the Share Sale Agreement') (and as qualified by the disclosure letter of the same date) your client warranted that as at 31 December 1997 the value of stock held by Aqualux Products Limited was £1.6m. Our client has substantiated that the valuation of stock was, in fact, no more than £1.2m. Accordingly, we have advised our client that it has a valid claim against Mr France to recover damages for breach of the stock valuation warranty contained in the Share Sale Agreement and potentially, damages pursuant to Section 2(1) of the Misrepresentation Act 1967.

We would therefore put you on notice that unless we receive your client's proposals by 10 December 1998 to make good the loss and damage our client has suffered as a result of your client's breach, we will commence proceedings in the High Court without further recourse to you, for damages for breach of contract and/or damages under the Misrepresentation Act 1967. For the avoidance of doubt, it is acknowledged that other than if damages are sought pursuant to the Misrepresentation Act 1967, your client's liability for breach of warranty is capped at £250,000."

17. That reference to the damages being capped is of course a reference to clause 4.5.1 of the agreement.
18. Lee Crowder for Mr France replied on 9th December rejecting the claim that had been made and denying liability. They put forward proposals for settlement with which we are not concerned. No proceedings were started until the claim form in these proceedings was issued on 23rd December 1999. However, on 21st July 1999 Eversheds wrote again to Mr France a letter headed "Notice of breach of warranty". That letter alleged that there was a shortfall in stock and that there had been a breach of warranty in that the value of the stock was only £1,274,000 instead of that warranted.
19. Mr France drew attention to clause 4.5.3. On his behalf it was submitted that the clause acted so as to limit his liability in the circumstances provided for in that clause. He relied upon the letter of 3rd December and submitted that it contained written particulars of the claim as required by clause 4.5.3.1. It was written within the 18-month period provided for in clause 4.5.3.2, but legal proceedings were not started within the six-month period as required by clause 4.5.3. It followed that Home Doors were excluded from bringing this claim for breach of warranty. That meant that they could only pursue their misrepresentation claim, as that fell within clause 4.6 of the agreement.
20. On behalf of Home Doors it was accepted that the letter of 3rd December 1998 set out a claim and that it contained relevant written particulars. However, they relied upon the letter of 21st July 1999. They pointed out that proceedings had been bought within six months of that letter. They submitted that clause 4.5.3 did not contain any restriction upon the number of claims that could be made. Thus provided written particulars of a claim were made within 18 months and the proceedings were brought within six months after the letter had been written, the provisions of clause 4.5.3.3 would be satisfied. In essence, as I understand the submission, you could write a letter setting out particulars of the same claim every day for 18 months and provided the proceedings were served within six months of the last letter, the restrictions contained in the clause would have been satisfied.
21. The judge rejected that submission. He said:

"But once a claim is made, then it must be clearly pursued, and speedily. There is thus to be a generous interpretation in favour of the claimant as to whether or not he has given written particulars of the claim, but once it is clear that written particulars of the claim have been given, the warrantor is entitled to the protection of the provisions requiring proceedings to be commenced within 6 months. In the instant case, it is accepted by Home Doors that the letter of 3rd December did constitute a letter of claim for these purposes. I therefore hold that proceedings should have been commenced within 6 months from that letter of claim, and that it is not open to Home Doors to keep sending written particulars in order to keep alive a current 6 month period within which they may commence proceedings, nor is it open to them to repeat a claim earlier made in order to restart a 6 month period which has already expired. It follows from this that the effect of the letter of 3rd December is to compel the claimant to pursue its alternative case based on clause 4.6."

22. Mr Downes, on behalf of Home Doors, put forward the same submission as he had before the judge. He submitted that there were no words in clause 4.5.3 which showed an intention that there was a bar on making the same claim twice. Indeed, the words "any claim" implied the reverse intention. He submitted that the claimants' construction was more consistent with common sense and avoided absurdities. He put forward as an example the case where there was a letter of claim mentioning certain matters and a later claim letter setting out other matters. He submitted that it could not have been the intention of the parties that Home Doors were restricted to the date of the first claim only, even though both were served within the 18-month period provided for in clause 4.5.3.2.
23. In my view there is no absurdity in the position taken on behalf of Mr France as found to be correct by the judge. The clause does not envisage that there will be only one claim. It is concerned with particular claims. In the present case the letters of 3rd December 1998 and 21st July 1999 raise essentially the same claim. It was for that purpose that the judge answered the preliminary question in the way sought by Home Doors, namely:

"The effect of the letter of 3 December 1998 was to prevent the Claimant from bringing this claim and to compel the Claimant to pursue its alternative case under clause 4.6 of the Agreement."

24. He did not, in my view, conclude that if a claim to a separate matter was raised in another letter, then the failure to prosecute an earlier claim would act as a bar.
25. Mr Downes also raised the prospect of a claim being in terms which only gave sketchy details of it, but a later letter gave further particulars. So far as I am concerned that is irrelevant. The clause requires that written particulars of the claim should be given "giving details of the specific matter in respect of which such a claim is made". It would be a question of fact as to whether the details were sufficient. Clause 4.5.3 is not directly concerned with letters. It is concerned with "any claim" which means an assertion of a right to compensation. Clause 4.5.3.1 states that written particulars must be given of that claim, and 4.5.3.2 imposes a time limit of 18 months for the supply of the particulars. The parties accept that after the 18-month period the warrantor's liability to make a payment expires. Clause 4.5.3.3 is of similar effect. If legal proceedings are not brought within six months of "such claim", the warrantor's liability expires. The intention of the parties was to impose a limitation period of 18 months and a requirement that the claims made should be prosecuted within a six-month period after having been made. I cannot believe it was within the contemplation of the parties that the same claims could be repeated even when the six-month period had expired from when it was first made.
26. Mr Downes also addressed us upon the contra proferentem rule. In my view it has no application in this case, as I believe the true construction of the clause is clear.
27. For those reasons, I have come to the conclusion that the judge came to the right result on issue 1.
28. Issue 2 was in two parts:

"2.1. What was the warranty given in clause 4.3 of the warranties and in particular did the Defendant give any specific warranty as to the value of stock in clause 4.3 of the warranties, and if so, precisely what warranty was given?

2.2. Did the Defendant give any specific warranty as to the overall net liabilities in clause 4.3 of the warranties, and if so, precisely what warranty was given?"

29. The judge answered issue 2.1 in this way:

"The Warrantor did give a warranty as to the value of the stock in clause 4.3 of the warranties, in that the balance sheet as a whole reasonably reflected the assets and liability of the Company and the Company's trading position. Every figure on the balance sheet was warranted and therefore the figure of £1.9 million must have been a fair reflection of the Company's stock."

30. He went on to conclude that issue 2.2 should be determined in the same manner as issue 2.1.
31. As I have said, clause 1 defined the words "the warranties" as the warranties referred to in clause 4 and Schedule 4. I have read clause 4.3 and the relevant parts of Schedule 4.
32. For the purposes of this preliminary issue, it can be assumed that the facts as pleaded by Home Doors are correct, namely that the stock was overstated. It was about £1.27 million not the £1.9 million shown in the accounts. That Home Doors submitted was a breach of contract.
33. Mr Ashworth, who appeared on behalf of Mr France, put forward an argument that all that was warranted was the net asset figure and the accumulated loss. In essence, the warranty was that the final figures in the balance sheet were correct. He referred to clause 4.3 of the Schedule. There it was warranted that the balance sheet reasonably reflected:

"... the assets and liability of the Company and the trading performance of the Company ..."

34. He submitted that the words "assets and liability"must be referring to the bottom line of the accounts. The contrary suggestion that they referred to individual items in the balance sheet would not make commercial sense in the light of clause 4.2 of the agreement. What was important, he submitted, was the net position.
35. I, like the judge, reject that argument. The warranty in clause 4.3 must be read as part of the whole agreement. Under clause 4.1.6 the vendor acknowledged that the purchaser was going to invest money. Clause 4.2 set the damages payable at the amount of the shortfall or the diminution in value of any assets. Clause 4.1.3 of the Schedule required the accounts to show a true and fair view of the assets and liabilities, including contingent, unquantified and disputed liabilities of the company, and with the state of affairs as at the accounting date. Clause 4.3 of the Schedule must be considered in the same light. The balance sheet had to reflect the asset position.
36. There is, in my view, a warranty of each item on the balance sheet to the extent that that contributes to the overall picture. If one item on the balance sheet is overstated or understated there is a breach of warranty. As the judge held there may be in certain circumstances a compensating breach which would have an effect on the damages that might be ordered. I have no doubt the judge was right to answer the questions in the way that he did.
37. Issue 3:

"What was the effect, if any, on the warranty given in clause 4.3 of the warranties of the disclosure letter dated 26 January 1998?"

38. This issue is concerned with the construction of clause 4.1.1 which contained the statement that:

"The warrantor:-

4.1.1. warrants, represents and undertakes to the Purchaser in the terms of the Warranties ..."

39. The warranties are defined as the warranties in clause 4 and in Schedule 4. However, clause 4.1.1 contains the proviso that Home Doors would not be entitled to claim that any fact or combination of facts constitutes a breach of any of the warranties if and to the extent that such fact or combination of facts had been fully, fairly and clearly disclosed in the Disclosure Letter. The Disclosure Letter itself stated clearly that the warrantor did not accept the figure of £1.9 million shown in the balance sheet was correct, but accepted that the figure of £1.6 million was correct and that "the warranty was to be qualified accordingly".
40. Before the judge both parties took somewhat extreme positions which the judge rejected. He concluded that the primary obligation was to be found in the agreement, that is to say the warrantor had warranted that the balance sheet fairly represented the assets of the company. However, the proviso prevented any action being brought for breach of warranty if there had been disclosure of the facts on which such a warranty claim was based. In this case the Disclosure Letter fully and fairly set out that the figure of £1.9 million was not correct, but the warrantor accepted a figure of £1.6 million. The words of the Disclosure Letter did not mean that there was no warranty. They had the effect that the warranty was to be read as a warranty of £1.6 million.
41. Before us Mr Ashworth placed reliance upon the terms of the Disclosure Letter. He submitted that paragraph 4.3 of that letter had the effect of preventing there being a warranty that the stock had the value of £1.9 million. That being so, there was no warranty as to the value of the stock. The final sentence of paragraph 4.3 did not substitute the figure of £1.6 million for the £1.9 million contained in the balance sheet. In my view that submission disregards the final words of paragraph 4.3 of the letter.
42. The purpose of the Disclosure Letter is clear. It was to disclose facts, and in that respect to modify the terms of the warranty. To suggest that a claim could be based upon a warranty that the stock value was £1.9 million is contrary to common sense in the light of the Disclosure Letter. Also to suggest that the warranty as to assets was removed by the letter is also, in my view, contrary to common sense. The effect of the letter was stated by the judge. It was to substitute the figure of £1.6 million for that of £1.9 million. It follows that upon the assumed facts the damages could not be more than the difference between £1.27 million and £1.6 million.
43. Issue 5 was in two parts. I need not read it, as Mr Ashworth accepted that if he did not succeed in his submissions on issues 2 and 3 then he could not succeed on his appeal against the judge's conclusion on issue 5. It follows that the appeal in respect of issue 5 must be dismissed.
44. Issue 6 was also in two parts:

"6.1. If the value of the stock as at 31 December 1997 was £1.27m (assumed to be correct for this preliminary issue only) and the Defendant was in breach of the warranty in clause 4.3, what would be the measure of damages if there was no operable limits on the amount of damages?

6.2. If the value of stock as at 31 December 1997 was £1.27m (assumed to be correct for this preliminary issue only) and the remaining assets and liabilities were as stated in the balance sheet as at 31 December 1997 what would be the measure of damages if there were no operable limits on the amount of damages?"

45. The judge determined issue 6.1 as follows:

"Prima facie the measure of damages is the shortfall between the warranty figure for stock and the actual figure for stock as stated in clause 4.2 of the Agreement."

46. He went on to determine issue 6.2 in the same way as issue 6.1.
47. The purpose of these preliminary issues was to resolve an issue between the parties as to how damages were to be assessed. Mr France's position is that the true measure of damages is the difference between what Home Doors actually obtained and what Home Doors would have obtained if the warranty had been performed. On the evidence Mr Ashworth submitted that it could not be proved than this was other than £2. Home Doors had obtained shares for which it paid £2. There was no evidence to show that even if the warranty had been correct the shares would have been worth more than £2. Accordingly, the correct measure of damages was £2. That was below the limit of £20,000 set out in clause 4.5.2 and therefore no damages were payable.
48. That submission was rightly rejected by the judge. At page 28 of the transcript he said this:

"The investment that had been made in the Company depended on the nature and amount of the Company's assets. The value of those assets was warranted. Clause 4.1.6 of the agreement acknowledged that Home Doors would be investing monies, whether by equity or loan or other method, and that such funding should be regarded as consideration paid for the purposes of the warranties. Accordingly, the consideration paid for the shares was the sum of £125,002 plus anything under the tax liabilities, plus the amount that was invested. If the net assets were less than the warrantor had said they would be, more would have to be invested. Home Doors had bought the shares on the footing that they would have to invest £X to reach a particular result. In fact, they had to invest £X + Y. It is similar to the position that would obtain if the purchaser had contracted to discharge a particular liability and the vendor had warranted the size of the liability. The sum required to put the purchaser in the position he would have been in if the warranty had been performed is prima facie £Y. That is the additional sum he has to invest in order to achieve the position as it was warranted to be, or the additional sum in my other example, which he has to invest in order to discharge the liability, the size of which has been warranted.

I say that this is prima facie, the measure of loss, because it could be more or it could be less. The loss could be less than the shortfall between warranted value and true value if, for example, following the acquisition the purchaser had decided to discontinue a particular line of stock and the whole of that stock was written off. On the other hand, it could be more. For example, if covering the shortfall involved very substantial additional costs being incurred, those additional costs might form part of the recoverable loss. Or if, suppose, no additional finance was available so that the investment that had been made in the Company had to be written off because the entire investment was lost through lack of that additional extra funding which proved to be required."

49. The judge then went on to consider the effect of clause 4.2. I will return to that later.
50. In my view it is only necessary to look at clause 4.5 to see that the parties contemplated that damages would not be limited to the cost of the shares. The parties made provision for de minimis claims below £20,000 to be excluded and capped the liability at £250,000 in clause 4.5.1. Also in clause 4.1.6 the parties acknowledged that Home Doors would be investing monies in the company and that such funding would be considered as consideration paid for the purposes of the warranties. The investment that had to be made in the company by Home Doors depended on the nature and the amount of Aqualux assets. The value of those assets was warranted and it could be properly argued that Home Doors bought the shares on the understanding that they would have to invest a certain amount of money. Upon finding that the stock was overstated, their liability to invest was increased.
51. I reject Mr Ashworth's submission that this was just a contract for the sale of shares. It was not. It was in essence a contact for the sale of Aqualux.
52. Mr Ashworth criticised the way that the judge had relied on clause 4.2 in his judgment at page 29E. Mr Ashworth submitted that clause 4.2 construed in that way was a penalty clause. I do not agree. For it to be a penalty clause it would have to be unconscionable or extravagant (see the speech of Lord Halsbury in Clydebank Engineering & Shipbuilding Co v Don Jose Ramos [1905] AC 6 at page 10). Clause 4.2 does set out a base amount of damages, but such a clause cannot be said to be extravagant or unconscionable. Here was a warrantor who was selling the company. He was the person who knew what were the assets of Aqualux. There is no reason why the parties should not agree the sum to be payable if the warranted figure is wrong. That could provide a relatively quick and easy way of arriving at a figure for compensation.
53. I accept that at trial there may be arguments as to what is the true measure of damage. But I have no doubt that the judge was right to conclude:

"Prima facie the measure of damages is the shortfall between the warranty figure for stock and the actual figure for stock as stated in clause 4.2 of the Agreement."

54. For those reasons, I have come to the conclusion that both appeals should be dismissed.
55. LORD JUSTICE LAWS: I agree with all that my Lord has said about the preliminary questions which require our attention, and that the appeal should be dismissed for the reasons given by him.
56. LORD JUSTICE JONATHAN PARKER: I also agree.
ORDER: Appeal and cross-appeal dismissed; no order as to costs; permission to appeal to the House of Lords refused. (Order not part of approved judgment)