Recent Court of Appeal decision highlights the importance of getting your warranty claim notice right

February 20, 2018

The Court of Appeal decision highlights the importance of careful review of the requirements of the notice provisions when preparing a notice of warranty claims.

In the recently reported case of Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23 (18 January 2018), the Court of Appeal has upheld a High Court decision striking out a buyer’s claims for breach of warranty on the basis that the notice of the claims was not given in accordance with the claims notification provision in the share purchase agreement.

Background

Teoco UK Ltd (the “Buyer”) bought two companies and their subsidiaries (the “Targets”) from Aircom Jersey 4 Limited and Aircom Global Operations Limited (the “Sellers”) for £41 million in 2013, pursuant to a share purchase agreement (the “SPA”). The SPA contained a tax covenant and tax warranties under which the Sellers warranted that the Targets had paid all tax due.

The Sellers’ liability under the warranties was subject to a notification of claims clause, which stated that the Buyer had to give notice (among other things) “setting out reasonable details of the claim (including the grounds on which it is based and the [Buyer]’s good faith estimate of the amount of the claim …)”. It also required such notification to be given as soon as reasonably practicable after the Buyer became aware of the claim, and in any event on or before 31 July 2015, the long-stop date.

The Buyer’s solicitors wrote to the Sellers in February 2015 alleging that the Sellers had breached “the Tax Covenant, the Tax Warranties and the General Warranties” as two subsidiary companies in Brazil and the Philippines owed approximately £3.46 million in unpaid tax. However, the letter contained only generic reference to potential claims along with a reservation of rights; it did not identify the specific warranties contained in the SPA which were alleged to have been breached. The Sellers replied that the letter did not contain reasonable details of the claims. The Buyer’s solicitors sent a further letter in June 2015 setting out a breakdown of the tax allegedly due, but still failed to identify the particular warranties that were said to have been breached.

The Buyer issued a breach of warranty claim against the Sellers in the High Court in August 2015. The High Court concluded that the letters from the Buyer’s solicitors did not constitute due notification of its claim because they did not set out “reasonable details” of the claim, including the grounds on which it was based which should identify the warranties said to have been breached.

The Buyer appealed to the Court of Appeal.

Court of Appeal Decision

Unanimously upholding the High Court decision, the Court of Appeal found that the Buyer’s letters did not satisfy the requirements of the SPA.  The court found that the wording of the SPA which required that the “grounds” of a claim to be “set out” meant that the legal basis of the claim had to be identified and as a general rule, this required “explicit reference to particular warranties or other provisions”.  A general reference in the Buyer’s letter to “the Tax Covenant, the Tax Warranties and the General Warranties” was not sufficient to identify the “grounds” of the intended claim since it also “encompassed a multitude of other possibilities” and caused “real scope for doubt”.

As a result, the Buyer’s claim was barred accordingly.

Comment

The Court of Appeal decision highlights the importance of careful review of the requirements of the notice provisions when preparing a notice of warranty claims.  Although every agreement would have to be interpreted on its own terms, in all but exceptional circumstances, it is advisable for a warranty claim notice to be:

  • Clear that it is a notice of a warranty claim, rather than a potential claim; and
  • Specific by referring to the relevant provisions in the agreement giving rise to the claim.

 

More generally, this decision is also a reminder of the need to take care when negotiating the notice provisions in the sale and purchase agreement itself.   When acting for a buyer, the provision in the sale and purchase agreement should make clear that failure to identify specific clauses or paragraphs of the agreement or specific warranties upon which the claim is based, will not prejudice the right to bring the claim.  On the other hand when acting for a seller, one should ensure the notice provision requires the “grounds for such claim“ to be included in any notice. This will then require the buyer to specify those clauses or warranties he is relying on in bringing the claim and if he fails to do so the notice will be invalid.

For more information or if you require advice on notifying warranty claims, please do get in touch.

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