£1.6m compensation in nursery sale "was reasonable"

Sunday 24 March 2024

An expert appointed to resolve a dispute over the sale of the Organic Kids nurseries acted reasonably when he granted more than £1.6 million compensation to the new owners, the Court of Appeal has ruled.

The court’s decision – which sets aside a previous Royal Court judgment – means that Robert and Dawn McLachlan will now have to pay the new owners, called Busy Bees, the compensation.

This arose from the couple’s failure to make Busy Bees aware of an occupancy limit imposed by the regulator, the Children and Early Years Service, on one of the company’s two children’s nurseries.

Because of difficulties securing staff, CEYS had restricted numbers at Organic Kids’ Castle Quay nursery to 45 but the couple failed to make Busy Bees aware of this when they sold the business for £5.1 million, leading to a dispute which it was agreed should be resolved by the appointment of an expert to quantify the impact.

In a report which the Court of Appeal described as a “detailed and closely reasoned piece of work”, Advocate John Kelleher decided that the couple should pay £1,610,400 plus interest, a decision which was challenged by Mr and Mrs McLachlan before the Royal Court in June last year.

On that occasion, the Royal Court agreed that the approach adopted by the expert had been wrong because it did not properly reflect the actual loss of business caused to Busy Bees.

It criticised the model used by Advocate Kelleher, saying it was wrong to assume that there would be a percentage drop in attendees at the nurseries corresponding to the percentage drop in numbers capped by CEYS.

It was essential, Royal Court Commissioner Sir William Bailhache said, that the award was linked directly with the actual loss resulting from the breach in warranty rather than a calculation of what Busy Bees would have offered for the company shares if it had been aware of the true position.

However, the Court of Appeal decided that the Royal Court was mistaken.

Delivering the court’s judgment, Michael Furness KC, who was sitting with Clare Montgomery KC and James Wolffe KC, said: “We respectfully disagree with the Royal Court’s ruling that the expert’s decision to use the model as the basis for his computation of loss was a decision which no reasonable expert could have reached.

“We also do not consider that the grounds advanced in the respondents’ notice justify the conclusion that the expert’s decision that the breach of warranty ... had a material effect on the value of the shares sold was a decision which no reasonable expert could have reached.

“It therefore follows that this appeal should be allowed, the Royal Court’s order should be set aside and the determination should be declared to be valid and enforceable by Busy Bees.”