The importance of compliant warranty claim notices

Back in December we wrote about the importance of following the rules set out in an agreement when bringing a claim under that agreement. The buyer in that case[1] found out to its detriment just how vital it is to follow the procedure set out in the agreement.

Recently[2] the Court of Appeal considered the provisions of a share purchase agreement and upheld a decision that a buyer had failed to comply with the contractual requirements relating to a warranty claim.

Background

Teoco, the buyer, entered into a share purchase agreement (SPA) with Aircom, the seller, to acquire two companies in 2013. In August 2015, the buyer issued proceedings against the seller claiming damages for breach of warranty in relation to tax owed by two seller subsidiaries based in Brazil and the Philippines. The total tax liabilities were valued at £3.45 million.

The seller argued that the buyer had not given notice of the claims in accordance with the provisions of the SPA. The seller’s argument focused on two letters sent by the buyer’s solicitors to the seller in February 2015 and June 2015. The seller argued that both of these were insufficient to satisfy the contractual notice requirements.

The High Court struck out the buyer’s claim but the buyer then appealed that decision.

Share purchase agreement

The SPA included various warranties given by the seller, some of which related to the tax position of the two subsidiaries.

As is common practice, the SPA also included limitations on the seller’s liability under the warranties. In particular, a provision stated that the seller would not be liable for any claim unless the buyer had: “given notice to the seller of any claim setting out reasonable details of the claim (including the grounds on which it is based).”

The letters

The buyer’s first letter notifying the seller of the warranty claims, sent in February 2015, referred to “claims arising out of the tax warranties and the general warranties”, but reserved its position “as to which particular head of claim it would fall under”.

The letter was also ambiguous as it referred to “tax exposures which may exist”, “potential tax liabilities” and the “estimate of potential quantum”. The court said this was just a “generic reference to potential claims” and it did not set out the basis of the claims in reasonable detail.

Despite a second letter being sent in June 2015 containing additional information relating to the buyer’s claims, the High Court held that the letters did not comply with the wording of the SPA and they were not sufficiently detailed to constitute valid notification under the SPA.

The most important point for the court was that the letter did not identify the specific warranties in the SPA which the seller was alleged to have breached. This point was considered further in the Court of Appeal.

Court of Appeal

Agreeing with the High Court’s decision, the Court of Appeal ruled that the letters could not be viewed by a “reasonable recipient” as notices setting out an actual claim, rather than a potential claim. The judge pointed to the wording used – ‘may’, ‘potential’, ‘estimate’ – as a reason for the decision.

The judge also considered that even if the letters had been notice of an actual claim, they still did not satisfy the requirements of the SPA. The letters did not set out reasonable details of the claim, including “the grounds on which it was based” as required by the SPA, and the judge clarified that the grounds of a claim must include identification of the breached warranties. The reference to “warranty claims or tax claims” was not sufficient to inform the sellers of what they had done and what they could have done to rectify the breach.

The Court of Appeal concluded that the letters failed to satisfy the requirements of the SPA because they did not identify the particular warranties on which the claims were based. The judge agreed with the seller’s argument that “setting out the grounds” of a claim required the legal basis to be identified.

The court accepted that this might be achieved without mentioning a specific warranty, for example where relevant facts included in the notice point towards a specific warranty. However, this was not the case in the buyer’s letters, which only contained wide references and therefore cast “real doubt” on the grounds of the warranty claim since they “encompassed a multitude of other possibilities”. The notice did not achieve the required level of certainty[3].

A warning?

This decision is a warning to buyers that it is vitally important to comply with the provisions of an SPA. The buyer appeared to be keeping its options open by drafting a notice widely in order for it to catch a range of warranty breaches. However, the court highlighted that the wording of a notice must not only be wide enough to include the relevant provisions, but also narrow enough to exclude with certainty the possibilities that were not being relied on.

The decision could be beneficial to sellers and encourage the incorporation of specific requirements into SPAs regarding the contents of a notice of claim.

For buyers, the message is clear: cite the relevant provisions if they can be identified, comply with the contractual provisions for notification and make it clear that a claim is being made.

[1] Zayo Group International Ltd v Ainger and others [2017] EWHC 2542 (Comm)

[2] Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23

[3] Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423