Lion Nathan Ltd v C-C Bottlers Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 May 1996 |
| Date | 14 May 1996 |
| Court | Privy Council |
Damages - Contract - Breach of warranty - Plaintiffs purchasing defendants' business in reliance on defendants' projected earnings forecast - Actual earnings substantially less than forecast - Defendants' warranty that forecast “achievable” - Whether warranty as to quality - Whether defendants entitled to rely on highest figure within range of reasonable forecasts - Whether damages to be assessed on basis of most probable outcome
The defendants agreed to sell the entire issued share capital of a soft drinks company to the plaintiffs for N.Z.$250m., subject to adjustment. The plaintiffs could not be given access to the company's books and had to rely upon the information provided by the defendants. The price was calculated by applying a multiple of 20 to the defendants' forecast of the expected profits after tax in the company's year of account ending 2 September 1989. The defendants warranted the accuracy of their forecast up to the date of completion, which was fixed for 3 July 1989, with the contract providing for an adjustment of the price to reflect any shortfall in the forecast profit up to that date, but, in respect of their projected revenue forecast for the remaining two months of $2,223,000 before interest and tax, they warranted only that the forecast had been “calculated … on a proper basis” and was “achievable based on current trends and performance.” In the event, there was a substantial shortfall in earnings over the whole of the financial year which led, in accordance with the contract, to an adjustment of the price by reference to the shortfall in the first 10 months. In respect of the earnings during the remaining two months, which were $1,233,000, the plaintiffs commenced proceedings in the High Court of New Zealand for damages for breach of warranty. The judge found that the forecast had not been calculated on a proper basis and that the forecast results had not been reasonably achievable. He held that the measure of damages was the difference between the price agreed on the assumption of $2,223,000 earnings and what the price would have been, using the same method of calculation, if the forecast had been properly made. He assessed the latter figure at $1.6m. as being the “highest tolerable forecast” that the defendants could properly have made without being in breach of the warranty. After deducting tax and applying the multiplier to that amount he made an award of damages of $8,285,000.
On the defendants' appeal, the Court of Appeal of New Zealand upheld the judge's findings on liability, but allowed the plaintiffs' cross-appeal as to the level of damages. The court held that a distinction was to be drawn between the two parts of the warranty. With regard to the statement that the forecast had been prepared on a proper basis the court held that a properly prepared forecast would have been in the region of the actual outcome of $1,233,000. The court then held that the statement that the forecast results were “achievable” was a separate warranty as to quality but that since it was an alternative claim and the damages assessed under that head were less, it was to be disregarded. A figure of $13,167,000 was substituted for the judge's award.
On the defendants' appeal to the Judicial Committee on the question of damages: —
Held, dismissing the appeal, that the warranty given by the plaintiffs had been to the effect that reasonable care had been taken in the preparation of the forecast without any warranty as to quality, and the measure of damages fell to be assessed by reference to the difference between the price agreed on the assumption of the forecast earnings and what the price would have been had a properly prepared forecast been made; that since there was a range of figures which were equally probable, the forecast had to be a bona fide estimate made without regard to whether it would have produced a higher or lower price and there was no basis for assuming that the defendants could have chosen the highest figure which could have been put forward without negligence; that the court had to choose the figure which it considered a forecast made with reasonable care was most likely to have produced and, in the absence of contrary evidence, was to assume that if proper care had been taken the most likely figure would have been the actual outcome; and that, accordingly, since there was no evidence to displace the prima facie assumption that a properly prepared forecast would have reflected the actual earnings of $1,233,000 the award of damages as substituted by the Court of Appeal of New Zealand would stand (post, pp. 1442A–E, 1446G–1447A, C–E, H).
The following cases are referred to in the judgment of their Lordships:
Lavarack v. Woods of Colchester Ltd. [
Lee (Paula) Ltd. v. Robert Zehil & Co. Ltd. [
The following additional cases were cited in argument:
Efploia Shipping Corporation Ltd. v. Canadian Transport Co. Ltd. [
Flint v. Lovell [
APPEAL (No. 64 of 1995) by the defendants, Lion Nathan Ltd., Equipment Investments Ltd. and L.D. Nathan & Co. Nominees Ltd., against the judgment of the Court of Appeal of New Zealand (Richardson, Gault and McKay JJ.) delivered on 15 February 1995 in so far as it increased an award of damages in favour of the plaintiffs, C–C Bottlers Ltd., Oasis Enterprises Ltd. and CCA Beverages NZ Ltd. (formerly Oasis Industries Ltd.), made by Blanchard J. on 29 March 1994 after he had found that the defendants were liable for breach of a warranty given by them as to the method by which a profit forecast for July and August 1989 had been prepared consequent upon the sale by the defendants to the plaintiffs of the whole share capital of Oasis Industries Ltd.
The facts are stated in the judgment of their Lordships.
Jonathan Sumption Q.C., David A. R. Williams Q.C. (of the New Zealand Bar) and Lyn L. Stevens (of the New Zealand Bar) for the defendants.
Alan Galbraith Q.C., David Hurd and Jane F. Anderson (all of the New Zealand Bar) for the plaintiffs.
14 May. The judgment of their Lordships was delivered by LORD HOFFMAN.
This appeal raises a point of principle about the extent of the liability of a vendor of shares who gives a limited warranty as to the preparation of a profit forecast upon which the purchaser relies.
The vendor was a subsidiary of a listed New Zealand company called Lion Nathan Ltd., which guaranteed the vendor's obligations. In the contract, Lion Nathan Ltd. is called “the guarantor” but for present purposes it will be convenient to call it “the vendor.” By a contract dated 13 May 1989 the vendor agreed to sell the entire issued share capital of Oasis Industries Ltd. (“Oasis”) to a substantial Australian company called C–C Bottlers Ltd. (“the purchaser”). The price was N.Z.$250m., subject to adjustment. Oasis carried on business bottling and selling soft drinks. It held the Schweppes franchise for the whole of New Zealand and the Coca-Cola franchise for all but Wellington. The purchaser was in the same line of business in Australia.
The contract was negotiated with some haste and secrecy because neither party wanted other players in the soft drinks market to know that Oasis was being sold. This meant that the purchaser could not be given access to the company's books and had to rely upon the information provided by the vendor. The price was calculated by applying a multiple of 20 to the vendor's forecast of the expected profits after tax in the company's 1988–89 year of account, which ran from 1 September 1988 to 2 September 1989. The vendor was willing to warrant the accuracy of its forecast up to the date of completion, which was fixed for 3 July 1989. The contract...
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