Damages expert acted unfairly in nursery sale row, court rules

Thursday 03 August 2023

An expert appointed to determine damages in a dispute arising from the sale of a children's nursery business acted unfairly, the Royal Court has ruled, setting aside a £1.6m damages award.

Dawn Patricia McLachlan and Robert John McLachlan, former owners of Organic Kids Limited and Organic Kids (Castle Quay) Limited, were ordered to pay the money following the sale of their business to Busy Bees for £5,125,000 in November 2019.

Contrary to the terms of the sale agreement, they had not made Busy Bees aware of the impact of staffing difficulties which which had effectively cut the capacity of the Castle Quay nursery from a maximum of 69 to 46.

But the Royal Court has found that the approach Advocate John Kelleher – appointed as the expert by the two parties – accepted to calculate the damages was fundamentally flawed. It has ordered that the matter should be sent back to be decided afresh.

At a recent hearing, there was no dispute over the facts of the case which concerned Mr and Mrs McLachlan's obligation to confirm under the terms of the sale that the companies had "all necessary licences and consents", and that they were "in full force and effect and there [were] no circumstances of which the vendors [were] which could lead to their non-renewal or to their termination."

In fact, because of staff shortages, Mr and Mrs McLachlan had agreed with the Child Care and Early Years Service that the nursery at Castle Quay would operate with no more than 46 children until staff numbers had been increased, 23 fewer than it had been licensed for. This had not been disclosed at the time of the sale of the companies.

However, when deciding on damages, Advocate Keheller had accepted an approach based on applying the percentage reduction in the nursery's new capacity – from 69 to 46 – to its profitability on which the original sale price was based, something which the court accepted was unfair.

Giving the court's judgment, Commissioner Sir William Bailhache, who was sitting with Jurats Charles Blampied and Robert Christensen, said: "The model assumes that if the cap on the number of children is reduced from 69 to 46, that same percentage reduction will be applied to the occupancy or full-time equivalent children attending the nurseries: we think that is a false assumption."

"...The point that it is not right to assume that there will be the same percentage drop in attendees as the percentage drop in maximum numbers as capped by CEYS seems to us to be a fair one," he said.

Representing the couple, Advocate Olaf Blakeley had argued that there was no reason why – if the nursery were operating with 50 of its registered maximum 69 children – it then followed that this number would fall to 33 just because the maximum capacity had fallen.

"We agree that this is a fair criticism," the Commissioner said. 

Ordering that the quantum of damages should be reconsidered by Advocate Kelleher, or another expert agreed by the parties, Sir William said it was essential 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.

Following the judgment, Mr and Mrs McLachlan said in a statement: "We are delighted that justice has prevailed and that the Royal Court has found that the expert determination was unfair and irrational. We are incredibly disappointed that Busy Bees advanced, and that Advocate Kelleher adopted, a calculation that was so obviously wrong when determining the damages claim that was brought against us. 

"On our behalf, Advocate Olaf Blakeley successfully challenged the award in the Royal Court, which set aside the award. We had sold a profitable, established business to Busy Bees who no doubt have benefitted hugely from their purchase over the past three and a half years. The Royal Court found that the regulatory position did not make the business a 'distressed asset', as claimed. The figures advanced in Busy Bees' initial claim were perverse, as the Royal Court has now found."

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Former nursery owner asked to pay back £1.6m from sale