Breach - Damages for breach

Porton Capital Technology Funds and other companies v 3M UK Holdings Ltd and another company: Queen's Bench Division, Commercial Court (Mr Justice Hamblen): 7 November 2011

In February 2007, the first defendant (3M) agreed to buy the entire shareholding of A Ltd (the business) under a share purchase agreement (the SPA). The claimants were some of the shareholder vendors, representing a total of 60.4% of the shareholding. The consideration for the shares was £10.4m in cash and an earn-out payment based on net sales for the calendar year 2009.

The only commercial product of the business was BacLite MRSA (BacLite), a diagnostic assay used for the purpose of detecting MRSA. 3M was subject to ongoing obligations pursuant to the SPA, including, inter alia: (i) the obligation to actively market, inter alia, BacLite in the US, the EU, Canada, Australia and those countries where 3M had obtained regulatory approval to do so; and (ii) the obligation to diligently seek regulatory approval for, inter alia, BacLite in the US, EU, Canada and Australia. The SPA also provided that 3M would not cease to carry on the business of developing and marketing, inter alia, BacLite, without the written consent of the vendors which should not be unreasonably withheld. In the event, the business was not successful and, by letters dated 14 July and 15 August 2008, 3M invited the vendors to consent to the cessation of the development and marketing of, inter alia, BacLite.

The vendors declined to provide such consent and on 8 December 2008, 3M announced that it was ceasing the business with effect from 31 December 2008. Accordingly, there were no net sales in 2009. The claimants brought proceedings alleging, inter alia, that the failure and termination of the business involved breaches of contract on the part of 3M, that the termination was wrongful and had been knowingly induced by the second defendant (3M US) and that the claimants had accordingly lost their 60.4% share of the net sales which should have been achieved.

The principle issues that fell to be determined were: (i) whether 3M was in breach of its contractual obligations diligently to seek regulatory approval for BacLite; (ii) whether 3M was in breach of its contractual obligation actively to market BacLite; (iii) whether the claimants had acted unreasonably in withholding consent to terminate the business in late 2008 and how and when the SPA came to an end; (iv) how much the net sales of BacLite would have been in 2009, if 3M had performed its obligations under the SPA and the business had continued; and (v) whether 3M US had knowingly induced the breaches of contract by 3M UK. In relation to (iv), consideration was given to the principle applied in Armory v Delamirie [1558-1774] All ER Rep 121 (Armory), that where the actions of the defendant made the quantification of damages more difficult, the court should resolve any uncertainties in favour of the claimant. In relation to (v), consideration was given to the principle of 'intentional causative participation' in OBG Ltd v Allan [2007] 4 All ER 545 [2008] 1 All ER (Comm) 1.

The court ruled: (1) On the facts, 3M had been in breach of its obligation diligently to seek regulatory approval. The word 'diligently' in the context meant with reasonable application, industry and perseverance and did not involve any distinct requirement of reasonable care. As from the end of March 2008, 3M had been in breach of its obligation diligently to seek regulatory approval for BacLite in the US. Further, had that obligation been complied with, such approval would have been obtained by the beginning of February 2009. 3M's obligation had been diligently to seek regulatory approval as from the date of the SPA and the difficulties that had subsequently been encountered in the US did not mean that regulatory approval in Canada could not have been sought and obtained.

Allowing for a preparatory period and a delay of up to six months in obtaining the approval, approval in Canada could and should have been obtained by January 2008. The failure to obtain regulatory approval in Canada had been however of no consequence until October 2008, which had been the earliest time that BacLite could have been successfully launched in Canada (see [98], [158], [161]-[162], [165]-[166] of the judgment).

(2) On the facts, 3M had been in material breach of its obligation actively to market BacLite as follows: (i) in the EU, as from the end of June 2008; (ii) in the US, as from February 2009; (iii) in Canada, as from October 2008; and (iv) in Australia, as from October 2008 (see [209], [212], [214], [217]-[218] of the judgment).

(3) It was established law that the burden was upon 3M to show that the claimants' refusal to consent to the cessation of the business was unreasonable. It was not for the claimants to show that their refusal of consent was right or justified, simply that it was reasonable in the circumstances. In determining what was reasonable, the claimants were entitled to have regard to their own interests and were not required to balance their own interests with those of 3M (see [223], [228] of the judgment).

On the facts, the claimants' consent had not been unreasonably withheld and 3M's cessation of the business on 8 December 2008 had been a repudiation of the SPA (see [234]-[235] of the judgment). International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 All ER 321 applied; British Gas Trading Ltd v Eastern Electricity (1996) Times, 29 November applied; Ashworth Frazer Ltd v Gloucester City Council [2002] 1 All ER 377 applied.

(4) It was established law that the application of the principle in Armory was subject to limitations. Furthermore, that that decision was difficult to reconcile with the indemnity principle and the principle that the claimant had to prove his loss (see [243] of the judgment).

As a matter of authority, there was no requirement to apply the principle of Armory to a case such as the instant case. As a matter of principle, there was good reason not to do so and the application of the principle ought not to be extended further than was necessary. The instant case did not concern the value of goods which the defendant had refused to produce, or the suppression of evidence, as in Armory. It was a claim for lost profits for breach of contract and there was factual and expert evidence before the court relating to that claim. Whilst it was correct that the claim involved a degree of conjecture, that was the case in relation to many contractual damages claims, and in all such claims it could be said that it was the defendant's breach of contract which had made that conjecture necessary.

On the evidence, the total net sales that would have been achieved if 3M had not breached the SPA and the business had continued throughout 2009 were $2,152,000 (see [244], [348]-[349] of the judgment).

Zabihi v Janzemini [2009] All ER (D) 357 (Jul) applied; Armory v Delamirie [1558-1774] All ER Rep 121 distinguished; Browning v Brachers [2005] All ER (D) 203 (Jun) distinguished; Fearns (t/a Autopaint International) v Anglo-Dutch Paint & Chemical [2010] All ER (D) 100 (Jul) considered; Double G Communications Ltd v News Group International Ltd [2011] All ER (D) 140 (Apr) considered.

(5) The requisite 'intentional causative participation' in the breach had not been proved and the claimants' case on that issue would accordingly be rejected. Whilst 3M had been in breach failing actively to market from the end of June 2008, there was no satisfactory evidence that that was known and intended by 3M US. There was equally no satisfactory evidence that 3M had known that the termination of the business was a breach of contract and that it had intended such breach to take place (see [354]-[357] of the judgment). The claimants' damages claim would succeed in the amount of $1,299,808, being 60.4% of the total net sales figure of $2,152,000 (see [349], [358] of the judgment).

OBG Ltd v Allan; Douglas v Hello! Ltd (No 3); Mainstream Properties Ltd v Young [2008] 1 All ER (Comm) 1 applied.

Stephen Phillips QC and Matthew Parker (instructed by DLA Piper) for the claimants; Mark Howard QC and Simon Salzedo QC (instructed by Simmons & Simmons LLP and Dorsey & Whitney (Europe) LLP) for the defendants.