Author

Debbie Heywood

Senior professional support lawyer

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Author

Debbie Heywood

Senior professional support lawyer

Read More

22 November 2021

Radar - November 2021 – 3 of 3 Insights

Courts give pointers on liability and mitigation clauses in SPAs

What's the issue?

The precise drafting of imitation of liability clauses and clauses dealing with what happens in the event of a breach of contract is one of the things that keeps commercial lawyers in business.  But they don't always get it right.  There is a seemingly never ending stream of case law on the subject.

What's the development?

There have been two linked rulings in the case of Equitix Eeef Biomass 2 Limited v Fox and others which have raised some useful general points on drafting liability clauses and duty to mitigate.

High Court ruling on mitigation clause in SPA

In its principle judgment, the High Court ruled that the sellers of shares in an energy company were liable for breach of various warranties in the SPA governing the transaction.  It also found that a mitigation clause which imposed a duty of mitigation on the buyers did not set a standard of conduct any higher than the common law threshold under the doctrine of mitigation of loss.

The court rejected the sellers' arguments that the buyers' warranty claims were excluded because the matters giving rise to them had been disclosed or were otherwise within the buyer's actual knowledge, and precluded under a clause whereby the buyer confirmed that it was not aware of anything which constituted a breach of warranty at the date of the SPA.

The sellers submitted that the buyers' damages should be reduced due to its failure to comply with the mitigation clause which required it to take "all reasonable action to mitigate any loss suffered".

The court said that while the clause did impose a duty to mitigate, it did not impose a 'best endeavours' level of effort.  It was for 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 the steps the sellers proposed would be reasonable.  In their commercial context, the words "all reasonable action" meant action it would unreasonable not to take, but did not extend to an obligation on the buyer to commence proceedings against a third party as the sellers contended.

High Court decision on liability cap in SPA

The High Court then went on to rule in its judgment on consequential matters, as to whether the limitation of liability clause cap applied only to damages for breach of the relevant warranties, or also to ancillary liabilities including litigation costs.   The cap was expressed as applying to liability "in respect of" any claim under the SPA for breach of warranty.

The sellers argued that this imposed an aggregate financial limit which included not only damages but also interest on damages, any uplift under CPR36.17(4)(d), costs, interest on costs and any order to make payment on account of costs.

The buyers argued that the language only captured damages because 'claim' was defined as "any claim under [the SPA] for breach of warranties".  As such, it would not cover liability in respect of the litigation process.

The court agreed with the buyers that while the wording "in respect of" was broad, it only related to claims under the SPA and the wording was not as broad as, for example "arising out of or in connection with".  That being the case, it would have expected interest and costs to be mentioned expressly in the liability cap if the parties had intended to include them.

What does this mean for you?

Cases which revolve around the minutiae of drafting are often highly specific to the circumstances but these judgments contain some more widely relevant points including:

  • Think carefully about whether you want to require a 'best endeavours' level of effort in a mitigation clause. A requirement to take "all reasonable action" will mean action it would be unreasonable not to take, particularly where the party required to mitigate is not at fault.
  • Be careful how you define a breach of an SPA.
  • If you want to ensure interest and litigation costs are included in the liability cap, you should say so.

In this series

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