A common situation on an SME deal that has gone wrong: the buyer discovers something after completion that should have been disclosed (an undisclosed debt, an unlawful dividend, a regulatory breach), the company eventually recovers from the wrongdoer or sorts the problem out, and the seller turns up to the warranty claim saying “no harm done, no loss to claim”.
That argument has just been comprehensively rejected by the High Court.
In ETL Holdings (UK) Ltd v Munn [2026] EWHC 860 (Ch), HHJ Paul Matthews (sitting as a High Court judge) held that a buyer’s loss for breach of warranty is fixed at completion. Subsequent events that improve the company’s position (including the company itself recovering from the defaulting seller) do not reduce the buyer’s warranty claim. The sellers in ETL tried to use exactly that “but it all worked out” argument. It got them nowhere.
For SME sellers and buyers, this is an important reminder of how warranty damages actually work, and where the risk really sits.
The deal and the dispute
In February 2015, ETL Holdings paid £2.88 million for 40% of a target company (CHL).
In breach of warranties given by the sellers (the Munns) in the SPA, the sellers had failed to disclose two things:
- A £3.1 million debt owed by CHL to one of its subsidiaries (the “Dormco Debt”).
- The fact that a 2014 dividend paid to the first defendant had been unlawful.
In 2017, two years after completion, CHL took action. It compromised the Dormco Debt at £1.05 million (so the company received roughly £2 million less than the face value) and brought its own claim against the first defendant for breach of duty in respect of the unlawful dividend, the Dormco Debt and associated legal costs. CHL recovered £1.25 million by forfeiting and selling the defendants’ remaining shares in CHL.
ETL then brought its breach of warranty proceedings. It got summary judgment on liability in April 2021. The April 2026 judgment is the reassessment of damages, after a previous assessment had been set aside on appeal.
The seller’s argument on damages was, broadly: the Dormco Debt was compromised at a discount, the company recovered from me directly, my shares in the company were forfeited and sold, so the buyer’s loss has been substantially reduced. The court should look at what actually happened, not what the position looked like in 2015.
The court said no.
The rule: warranty damages are fixed at completion
The judge restated the basic rule and the narrow exception:
- The starting point. Damages for breach of warranty are assessed at the date of breach, by reference to events known by that date. On a share sale, the date of breach is usually completion. The well-known calculation compares the “Warranty True” value of the shares (what the buyer paid for) with the “Warranty False” value (what the buyer actually got), and the buyer is awarded the difference.
- The narrow exception. A court can depart from that rule and take subsequent events into account, but only where two conditions are met. First, doing so is necessary to give effect to the compensatory principle (the principle that damages put the claimant in the position they would have been in had the warranty been true). Second, the parties have not already allocated the risk of the relevant subsequent events by contract.
That second limb matters. SPAs allocate risk all the time. Indemnity caps, baskets, de minimis thresholds, time limits, the disclosure letter, the warranty schedule itself: all of these are the parties saying who bears what risk. Where the SPA has spoken, the court is not going to use hindsight to rewrite the bargain.
Why the seller’s “no harm done” argument failed
The judge gave several reasons why the post-completion recovery did not reduce ETL’s warranty loss. They are worth understanding because they apply directly to SME breach of warranty disputes.
One: the loss accrued in 2015. ETL paid £2.88 million in 2015 for shares that were worth less than that because of the undisclosed debt and the unlawful dividend. That loss crystallised on the day the deal completed. What happened to the company afterwards did not change what ETL had paid or what the shares were actually worth on the day it paid for them.
Two: the company’s claim and the buyer’s claim were different things. CHL had its own claim against the first defendant for breach of fiduciary duty in respect of his role in creating the Dormco Debt and authorising the unlawful dividend. That was a company asset. The fact that the company successfully turned that asset into cash did not reduce ETL’s warranty loss any more than if the company had developed a piece of land and made a profit. The two causes of action were distinct: the company’s was about director duties; ETL’s was about non-disclosure under the SPA.
Three: the same logic in reverse. The judge made a sharp point. If ETL had known the truth in 2015 and paid less for the shares, the company would still have had its own cause of action against the first defendant, and that cause of action would have been worth the same. So the company’s later recovery is a benefit that exists independently of what ETL paid. There is no double-counting to fix.
Four: the SPA did the risk allocation. Before completion, the risk of and reward for the company’s assets and liabilities lay with the sellers. After completion, both lay with the buyer. The SPA had drawn that line. Subsequent events on the buyer’s side of the line (including the company’s own recovery) were the buyer’s, and did not feed back across the line to reduce the seller’s liability for what was wrong on the seller’s side of the line at completion.
What this means in practice
A few takeaways for SME sellers and buyers.
For sellers.
- “It all worked out” is not a defence. If you breach warranties, you are exposed to the buyer’s loss as at completion, and you do not get credit for the company’s subsequent recovery, mitigation or good fortune.
- Your protection comes from the SPA itself, not from later events. Caps on liability, baskets and de minimis thresholds, time limits for notification, properly scoped warranties qualified by a comprehensive disclosure letter – these are how a careful seller controls exposure. If you do not have them, or they are weak, you are exposed.
- Disclosure is the single most important step. A warranty qualified by a clear disclosure in the disclosure letter is not breached when the disclosed fact comes out later. Sellers who under-disclose, hoping problems will not surface, are taking a risk that does not get smaller with time.
For buyers.
- A breach of warranty claim does not evaporate because the company later recovered from the wrongdoer or worked through the problem. The claim is yours, the loss is yours, and it crystallised on the day of completion.
- This matters particularly on minority or significant minority acquisitions. Even where the company itself separately enforces against the wrongdoing seller, the buyer’s own warranty claim continues to exist and continues to be recoverable.
- Watch your time limits. SPAs typically restrict warranty notification to 12 to 24 months after completion (and sometimes longer for tax warranties). The window closes whether or not the company’s own recovery process is finished. If you have a warranty claim, notify it in time.
For both sides.
- Get the SPA right. Hindsight only enters the calculation when the contract has not allocated the risk. Properly drafted SPAs allocate risk comprehensively. Lightly drafted SPAs leave the door open to arguments about hindsight, contingencies and double recovery that take years and substantial costs to resolve.
- Treat the warranties and the disclosure letter as the heart of the deal. Most SME deals collapse, when they collapse, around what was warranted, what was disclosed, and what was not. Time spent here is the cheapest insurance on the deal.
The wider picture
ETL v Munn is not a doctrinal earthquake. It applies and reinforces the line of authority running through MDW Holdings Ltd v Norvill [2022] EWCA Civ 883: warranty damages are assessed at completion; the compensatory principle does not allow sellers to use hindsight to reduce their liability; and the SPA’s own risk allocation is the controlling document.
For SME owners selling a business, the message is clear: clean up before you sell, disclose properly when you do sell, and rely on the SPA to allocate risk in a way you have actually negotiated. For SME buyers, the message is equally clear: if you find a warranty breach, the loss is yours from the day of completion, and you do not lose it because the company later muddles through.
The full judgment is reported as ETL Holdings (UK) Ltd v Munn [2026] EWHC 860 (Ch). The leading authority on hindsight in warranty damages is MDW Holdings Ltd v Norvill & Ors [2022] EWCA Civ 883.
If you are selling or buying an SME business, or you are dealing with a warranty issue post-completion, please get in touch. We can review your draft SPA, advise on the disclosure letter, or assess whether you have a warranty claim worth bringing.
Steven Mather is a solicitor specialising in business sales and acquisitions for SME owner-managers. This article is for general information and does not constitute legal advice.