In The Hut Group Ltd v Oliver Nohabar-Cookson & anr [2014] EWHC 3842 (Comm) it was held that the interpretation of a limitation of liability clause imposing a time limit on the buyer for serving notice of a breach of warranty claim was critical to whether the buyer had an actionable claim.

The question before the court was whether time starts to run when the buyer becomes aware of factual grounds that may amount to a claim, or only at the point at which the buyer knows there is a proper basis for bringing a claim.

The dispute arose following the acquisition by the claimant, The Hut Group Ltd, of an online business (Cend Ltd) owned by the defendants. In consideration for the share purchase, the defendants received a combination of cash consideration and shares in The Hut Group. Post-completion, each party brought claims for breach of warranty under the Share Purchase Agreement (the SPA). The Hut Group claimed that the defendants had breached their warranty as to the accuracy of the Cend Management Accounts, while the defendants counterclaimed for The Hut Group's breach of its warranties as to the accuracy of its accounts (the latter breaches were admitted to by The Hut Group, though it sought to limit its liability under the SPA).

Faced with The Hut Group's breach of warranty claim, the defendants argued that notice of this claim had not complied with the limitation of liability clause in the SPA imposing a time limit on notifying claims to the other party (the time limits clause), which provided that: 

"The Sellers [the defendants] will not be liable for any Claim unless the Buyer [The Hut Group] serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter."

Establishing the meaning of the buyer "becoming aware of the matter" was key to determining whether notice had been given within the relevant time limit and therefore whether, even if there had been a breach of warranty by the defendants, such breach was actionable.

Further issues in this case, though not considered here, arose from the defendants' counterclaim for breach of warranty. Such issues included a detailed statement and application of the principles of quantification of damages, and a decision that the fraud of the buyer's financial controller should be attributed to the buyer with the effect that a liability cap in the SPA should be disapplied.

What does it mean to become "aware of a matter"?

The Hut Group argued that "matter" should be read to mean "claim" and refers back to the use of "Claim" earlier in the clause. The clause thus required the buyer to be aware that there was a proper basis for putting forward a claim for breach of warranty. In contrast, the defendants submitted that "matter" refers to the factual matters forming the basis for a claim, and that the relevant moment in time was therefore the buyer becoming aware of factual grounds for a breach of warranty claim, and not when the buyer knew there may be an actionable claim. The defendants' interpretation would have the effect of starting the clock running far earlier in time for the purposes of satisfying the time limits clause.

In deciding this point of construction, Blair J did not find it necessary to consider the rule of contra proferentem, since the contract imposed similar time limits on both parties. Nor did Blair J find that the tightness of the timelines was a relevant factor, given that parties are entitled to negotiate limitations on what can be costly breach of warranty claims.

Blair J was ultimately persuaded by The Hut Group's construction of "awareness of the matter", on two main grounds. First, "aware of the matter" was found to refer back to awareness of "the Claim" in the earlier part of the clause, rather than being read as having a different meaning. Secondly, with an eye to the need for commercial sense and certainty, Blair J did not favour the defendants' construction since this would have the effect of starting time running when the relevant individuals became aware of underlying facts, even if they were unaware they may give rise to a claim. Instead, Blair J held that a party could not be said to be aware of the matter before it is aware that there is a proper basis for putting forward a claim:

"As a matter of commercial sense, without knowing that a claim has a proper basis, a party to a share purchase agreement would not expect to (or wish to) have to notify the other party of it."

Having found that the test was when The Hut Group became aware that there was a proper basis for a breach of warranty claim, the court had to decide what factual events could amount to this moment of awareness. Were internal discussions about the need for adjustments to the Cend Ltd management accounts sufficient to indicate knowledge of a breach of warranty claim? Or was the preparation of an internal memo for the legal department, summarising the issues in order for The Hut Group's lawyers to seek external advice as the process for bringing a warranty claim, the decisive moment?

Blair J found that neither of these events started the clock running. Even the internal memo, though it identified the adjustments that would eventually form the basis of the claim, did not commit as to whether there was such a claim because the author believed further external advice was needed as to whether there were grounds for a claim. The point of instructing external advisers (in this case, forensic accountants at PwC) was not sufficient: it was only the point at which such advice was received for the purposes of the time limits clause that the clock started running. On this basis Blair J found The Hut Group had given notice within the time limits and therefore had an actionable claim for breach of warranty.

Ultimately, each party succeeded in its respective breach of warranty claim (and the defendants' claim was not capped under the SPA by reason of the fraud by the claimant’s financial controller). 

COMMENT

The conclusion in this case was that the time limit for giving notice of a claim only began to run once the relevant party had an awareness of the proper basis for bringing a claim. The decision confirmed that when interpreting notice clauses the court will be look to achieve an outcome that makes good commercial sense, and will also be willing to leave parties to negotiate tight time limits as between themselves in breach of warranty contexts and not be predisposed towards interpreting tight deadlines in favour of the party obliged to give notice.

The decision also provides helpful indications as to the sorts of events that may amount to mere preparatory work to identify possible grounds for a claim, and those that will be held to amount to awareness of the proper basis for a claim (and therefore start the clock running for notice purposes). The line drawn in this case is a helpful one for the claimant, with awareness only being attributed to them at the point at which external advice was received indicating that there was a basis for a claim, and earlier internal discussions disregarded. Parties should nevertheless be mindful of the point at which they may be deemed to be straying into the territory of the latter when discussing potential claims both internally and with external advisers.

Inevitably, being a matter of construction, this decision was rooted in the precise wording of the clause in question, one particularly relevant factor being the earlier reference to "Claim" in the clause, which added weight to the buyer's argument that the later reference to "matter" ought to be understood to be referring back to "claim".