Inadequate notification of warranty claim under share purchase agreement

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When a claims notification clause in a share purchase agreement states that a party must "set out reasonable details" of a claim in a notice of claims, including “the grounds on which it is based”, the party must make explicit reference to the particular warranties alleged to have been breached in order for the notice of claims to be valid: Teoco UK Ltd v (1) Aircom Jersey 4 Ltd (2) Aircom Global Operations Ltd [2018] EWCA Civ 23, 18 January 2018

Schedule 4 of a share purchase agreement (the SPA) between the parties contained the following notification clause:

"No Seller shall be liable for any Claim unless the Purchaser has given notice to the Seller of such Claim setting out reasonable details of the Claim (including the grounds on which it is based and the Purchaser's good faith estimate of the amount of the Claim (detailing the Purchaser's calculation of the loss, liability or damage alleged to have been suffered or incurred)."

Teoco UK Ltd (the Purchaser) issued proceedings against Aircom Global Operations Ltd (the Sellers) in which it claimed, among other things, damages for breach of warranty and an indemnity in relation to tax. The Sellers applied to strike out the Purchaser's claims on the basis that the Purchaser had not given valid notice of the claims under the SPA.

The Purchaser’s notices

The Purchaser's lawyers had originally written to the Sellers, referring to the "Tax Covenant, the Tax Warranties and the General Warranties". The letter was stated to constitute "notification in accordance with clause 24 and schedule 4 of the SPA of the existence of Claims, being either Warranty Claims or Tax Claims, as further detailed below". The letter contained a reservation of rights by the Purchaser and enclosed a draft report from Pricewaterhouse Coopers setting out comments on possible tax implications of certain intercompany transactions in which one of the target’s subsidiaries had been involved.

A further letter was sent some months later by way of "further notification in accordance with Schedule 4 to the SPA". That letter indicated that two of Aircom's subsidiaries had tax exposures, detailed the amounts of such exposures and appended further evidence.

The Seller argued that neither of these communications constituted sufficient notification under the SPA because both failed to identify the particular warranties and provisions of the Tax Covenant on which the claims were based.

Existing law on claims notification clauses

The Court of Appeal acknowledged that every notification clause turns on its own wording. However, there are cases in which notification clauses have been analysed, and the Court of Appeal held that these decisions1 can still be of assistance, and noted the following points that were made in them:

- A claims notification clause requiring notice in writing of a claim "setting out such particulars of the grounds on which such claim is based as are then known to the Purchaser promptly" would require that the notice is “sufficiently clear and unambiguous as to leave no room for argument about the particulars of the complaint" (Senate Electrical).

- At least in the  At least in the Senate Electrical case, one purpose of the clause was to provide certainty as to the claims being made. In that case, it was said that "certainty is only achieved when the vendor is left in no reasonable doubt not only that a claim may be brought, but of the particulars of the grounds upon which the claim is to be based".

- Similarly, a claims notification clause that stipulated that the vendor of a business would be under no liability in respect of a claim "unless written particulars of such Claim (giving details of the specific matter as are available to the Purchaser in respect of which such Claim is made)" would require the identification of the particular warranty that had been breached; an explanation as to why it had been breached; and a description of the facts giving rise to the breach (RWE Nukem).

- Ambiguity in an exclusion clause may have to be resolved by a preference for a narrower construction if linguistic, contextual and purposive analyses do not disclose an answer to the question of what a clause is intended to mean with sufficient clarity. However, the court must "still use all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means" (Nobahar-Cookson).

Notice failed to set out details of the claims and their grounds

Applying these principles, the Court of Appeal agreed with the High Court that the Purchaser's purported notifications had failed to satisfy the requirements of the notice of claims clause in the SPA because they did not identify the particular warranties and provisions of the Tax Covenant on which the claims were based. The Court of Appeal explained that the reference to "setting out" and the "grounds" of a claim meant that the legal basis of the claim had to be identified, ie explicit reference most likely had to be made to particular warranties or other provisions. The contra preferentum rule did not alter the analysis.

COMMENT

Like previous cases that we have commented on, this case emphasises that the requirements of a claims notification clause can be highly sensitive to the precise language used. It is crucial to ensure that a claims notice complies with the particular claims notification clause under which it is given. The courts tend to consider that the purpose of these clauses is to allow sellers to be certain as to the claims that are being made against them. As a result, it can be risky for a buyer (as in this case) to be vague in its claims notice as to the basis for its claims. In particular, where such a clause requires that the details of the claims and their grounds be set out, the legal basis, and at least some factual basis, for that claim will need to be identified. Equally, if a buyer fails to include a particular claim in its claims notice, it may (depending on the terms of the claims notification clause) be precluded from pursuing that claim. Thus (while bearing in mind that the right approach will turn on the terms of the applicable claims notification clause), as a rule of thumb it is sensible to be both (1) comprehensive, by including all possible claims in the notice of claims, and (2) specific, as to the precise claims being notified.

Footnote:
Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd's Rep 423; RWE Nukem v AEA Technology plc [2005] EWHC 78 (Comm); and Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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