Partner Karen Jones, head of our Planning & Environmental Law team, explains.
The case of MDW Holdings Ltd v Norvill [2021] (EWHC 1135) provides an interesting and relatively rare example of a breach of warranty claim based on environmental warranties given on the sale of a waste business. A buyer agreed to purchase the entire share capital of G.D. Environmental Services Limited (GDE). The High Court upheld a claim that the sellers of the company breached warranties in the Share Purchase agreement (SPA), the contractual document governing the transaction.
GDE operated a waste management business involved in the processing and disposal of various types of dry and wet waste, including cess waste, non-hazardous waste (such as gulley waste) hazardous waste (such as waste from garage forecourts containing oils and other contaminants) and leachate. GDE did not have facilities for the treatment of cess waste and was not permitted to discharge cess waste from its premises into the public sewer. Cess waste was taken to the sewage treatment works operated by Dwr Cymru Welsh Water (WW) for processing and discharge. The other waste categories were brought to GDE’s premises for processing following which they were discharged into the public sewers.
The business involved operating a regulated facility within the meaning of (the then applicable) Regulation 8 of the Environmental Permitting Regulations 2010 (the 2010 Regulations). Under Regulation 12 of the 2010 Regulations GDE was prohibited from operating that regulated facility except under and to the extent authorised by an environmental permit. The permit was subject to various conditions. To monitor compliance with that permit GDE was subject to periodic assessments by National Resources Wales which resulted in Compliance Assessment Reports that were placed on the public register. A consent to discharge trade effluent to public sewers was also granted subject to various conditions, including limits on the permitted levels of specified substances and recording the rate of discharge and keeping records of the volume, rate, nature and composition of the trade effluent discharged.
Between 2013 and October 2015 sampling carried out by GDE and WW indicated that the level of certain contaminants exceeded the limits prescribed by the discharge consent. During 2014 the sellers prepared for the sale of GDE. A company called MDW Holdings assembled an acquisition project team to deal with the acquisition including environmental due diligence enquiries.
Despite the knowledge of the seller of the continued failings in the limits prescribed by the discharge consent they told the buyer in environmental due diligence exchanges, that there were no outstanding investigations or enforcement actions by a regulatory body. In October 2015 the SPA was signed and completion of the purchase of the entire issued share capital of GDE took place.
The SPA contained detailed warranties relating to GDE’s environmental permit and compliance record including that GDE had complied with all permits and that there were no circumstances likely to result in revocation, suspension, variation or non-renewal, that they had operated in compliance with all environmental laws and there had been no claims, investigations, prosecutions or other proceedings against or threatened against GDE in the 36 months prior to completion. GDE also gave a warranty that they had disclosed all relevant enforcement authority correspondence.
Following completion WW sent an email to GDE’s General Manager detailing further breaches. This culminated in a warning from the Head of Operational Legal Services that consideration was being given to bringing a prosecution for breach of the conditions of the discharge consent. The warning contained a list of breaches in respect of levels on dates in 2014 and 2015.
In August 2017 the buyer notified the sellers of its claims under the SPA concerning the trade effluent consent breaches that had taken place between February 2014 and September 2015 and which the sellers had failed to disclose, claiming losses of £1 million. In the legal proceedings the buyer alleged that GDE had been systematically breaching environmental law and unlawfully avoiding the costs of environmental compliance, thereby increasing its profits to levels it would not have achieved if it had acted lawfully. In consequence it paid substantially more for the shares in GDE than they were worth. The buyer sought damages on two grounds, the primary claim being a contractual claim for breach of the warranties in the SPA. Alternatively the buyer claimed damages for pre-contractual misrepresentation as they relied on written representations contained in the due diligence responses.
The Court ruled that the sellers were liable for breaching warranties in the SPA. They found that from 2012 up until completion GDE was in persistent breach of the discharge consent by failing to operate within the permitted limits of discharges of leachate. GDE had on occasions provided false test results in order to conceal its breaches of the discharge consent and during the course of 2013 and 2014 GDE had engaged in the unlawful disposal of cess waste directly into the public sewer. The Court also found that GDE’s persistent failure to bring discharges within the scope of the discharge consent and provision of false and misleading information constituted a breach of the environmental warranties in the SPA and by failing to disclose correspondence from WW regarding discharges the sellers had breached the warranties given.
The consequence was that GDE’s accounts did not show a true or fair view of the state of its affairs as financial performance had been artificially enhanced by non-compliant practices in respect of compliance, in breach of warranties given in the SPA. The Court found the actions of GDE involved wilful misconduct on the part of those controlling and running GDE and that there was wilful misconduct and dishonesty in the provision of false information to the regulators.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice. A similar article was first published in Waste Planning Magazine.
