Warranty claims and the duty to mitigate: Equitix v Fox
The judgment in Equitix EEEF Biomass 2 Ltd v Fox1 highlights the need to take care when drafting requirements for parties to take "all reasonable action", "all reasonable endeavours" or "best endeavours". But what do these clauses actually mean and what are the key differences between them?
In the view of Kerr J, "all reasonable action" means "action it would be unreasonable not to take". Arguably, that doesn't take the analysis much further forward. However, the judgment goes on to confirm that reasonable action does not include embarking on "expensive and uncertain litigation". It is not akin to an obligation to use "best endeavours" and, in effect, simply mirrors the common law duty to mitigate loss. The judgment also addresses the question of corporate knowledge in relation to warranty breaches.
The Claimant buyer ("Equitix") purchased the entire issued share capital of a Biomass company ("Gaia") from the Defendants under a share purchase agreement (respectively, the "Sellers" and the "SPA"). Gaia supplied steam from biomass boilers to a sole customer, Greenergy Biofuels Limited.
The SPA contained detailed warranties from the Sellers about the business and its assets. The warranties were expressed to be given as subject to "Disclosed Matters". The negotiation for Equitix was led by two directors, Mr Cashin and Mr Archer, and Equitix confirmed in the SPA that it was not aware of any fact constituting or giving rise to a claim for breach of warranty:
"[Equitix] confirms to the Sellers that, apart from the Disclosed Matters neither it nor any other member of the Buyer Group…is actually aware of any fact, matter, event or circumstance which constitutes a breach of Warranty…For this purpose, the Buyer and the relevant members of the Buyer Group shall be deemed to have knowledge of anything of which any of Ben Cashin and Egan Archer are actually aware of [sic] at the date of this Agreement."
In addition to the Disclosed Matters, the SPA contained a limitation on liability in relation to matters within the buyer's knowledge:
"The Buyer shall not be entitled to bring a claim and the Sellers shall have no liability to the Buyer where the facts and circumstances giving rise to the claim are within the actual knowledge of the Buyer (which for this purpose means the actual knowledge of Ben Cashin and Egan Archer at the date of Completion)."
The warranties were further limited by a liability cap and a provision obliging Equitix to take (and procure that Gaia took):
"all reasonable action to mitigate any loss suffered by it or the Company which would, could or might result in a claim…against the Sellers."
After the SPA was entered into, Greenergy terminated its contract with Gaia. Thereafter, Equitix commenced proceedings for breach of various warranties. The Court found that numerous warranties were untrue and rejected the Sellers' arguments that:
- the warranty claims were excluded by disclosure and / or the actual knowledge of Equitix; and
- Equitix had failed to mitigate its loss by commencing legal proceedings.
The scope of Equitix's knowledge
The Sellers argued that the confirmation given in the SPA (that neither Equitix nor members of its group were aware of any breach of warranty) extended to knowledge of Equitix's agents and was not limited solely to the knowledge of Mr Cashin and Dr Archer. This meant, the Sellers argued, that Equitix was precluded from bringing a breach of warranty claim in circumstances where its agents were aware of circumstances giving rise to a claim. The Sellers differentiated between the limitation of liability for matters within Equitix's knowledge, for which the SPA specified that the actual knowledge of Mr Cashin and Dr Archer was required, and the confirmation, where it argued the clause was wider.
However, the Court disagreed. It held that the reference to being "actually aware" in the confirmation meant the same as "actual knowledge" in the limitation on liability. Its interpretation was also influenced by the fact that the knowledge of Mr Cashin and Dr Archer as directors of Equitix would be imputed to the company in any event, meaning that unless the clause specifically referred only to matters of which Mr Cashin or Dr Archer were actually aware, the provision would be wholly unnecessary.
The Sellers contended that Equitix had failed to meet both its common law duty to mitigate loss and its contractual obligation to take "all reasonable action" to mitigate its loss, including by, amongst other things, failing to pursue and/or procure that Gaia pursued proceedings against Greenenergy arising out of the termination of its contract with Gaia. Again, the Court disagreed.
The common law rule on mitigation of loss is not, in fact, a "duty" to mitigate loss at all. Rather, it is a rule which means that avoidable losses will not be recoverable if a Claimant acts unreasonably in not avoiding them. Further, where, as here, the measure of damages relates to the valuation of shares, the Court held that "steps taken or not taken by the buyer to mitigate its loss after the purchase are simply irrelevant. The loss has already crystallised at the point of purchase."
In relation to the contractual duty to mitigate, the Court rejected the Sellers' argument that the clause imposed a "best endeavours" obligation. Instead, it held that the effect of the clause was to reintroduce the common law rule on mitigation of loss to the assessment of damages by reference to the diminution in share value (where, normally, it would be irrelevant). The contractual duty did no more than "mirror the common law standard, not… elevate it". Amongst other things, it was not unreasonable not to embark on expensive and uncertain litigation against Greenenergy and therefore this contractual obligation had not been breached.
This case emphasises the importance of ensuring that limitations on the scope of contractual warranties reflect the parties' agreed positions. Interpretation of clauses requiring parties to take "reasonable action" or "best endeavours" is notoriously difficult. In this case, the Court concluded that it was perfectly logical for the parties to have agreed to reintroduce the rule on mitigation of loss where it would not normally apply but without express wording, it found that taking reasonable action to mitigate loss meant no more than that.
1  EWHC 2531 (TCC)