05 Jul 2018

Notification of breach of warranty claims

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Introduction

A share purchase agreement ("SPA") often requires notice to be given of a claim for breach of a warranty in the SPA, within a specified period. The recent Court of Appeal decision in Teoco UK Limited v Aircom Jersey 4 Ltd [2018] EWCA Civ highlighted the importance of complying strictly with claim notification requirements in an SPA. If proper notice is not given, the result could be detrimental as the claim may be struck out.

Teoco UK Ltd v Aircom Jersey 4 Ltd [2018]

The Court of Appeal upheld the decision to strike out a buyer’s warranty claims against the seller in respect of an SPA between the parties on the basis that proper notification of the claim was not provided in accordance with the requirements of the SPA.

Schedule 4 of the SPA required the purchaser to give notice of any claims in respect of the seller's warranties "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 ...)". Paragraph 5 required such notification to be given as soon as reasonably practicable after the purchaser became aware of the claim, and in any event by a long-stop date. The purchaser's solicitors wrote to the sellers in February 2015 alleging that it had breached the Tax Covenant, the Tax Warranties and the General Warranties. The purchaser's solicitors sent a further letter to the seller in June 2015 setting out a breakdown of the tax allegedly due.

It was held that the letters did not constitute due notification of the claim because they did not set out the specific warranties and provisions of the tax covenants that had been breached. "Setting out reasonable details of the claim (including the grounds of the claim…" meant that the legal basis of the claims had to be provided and in this case, this required explicit reference to particular warranties or other provisions. The reference simply to Warranty Claims or Tax Claims was not good enough.

The Court said that the legal basis of the claim could have been provided without mentioning a warranty or other provision if, for example, recitation of the relevant facts had unequivocally indicated a specific warranty. It was also possible to imagine circumstances in which reference to the wrong warranty would not have invalidated a notice, if a reasonable recipient would not have been misled by the error and would have understood which warranty the purchaser was intending to rely on.

Whilst each notification clause will be assessed on its own individual wording, the key appears to be to provide sufficient information in the notice to enable a reasonable recipient to understand the claim that is being made and, in particular, identify the warranty or provision that has allegedly been breached.

Comment

When negotiating an SPA, buyers should try to avoid agreeing to stringent claim notification requirements. This will provide more flexibility when considering bringing a breach of warranty claim against the seller.

When notifying the seller of a breach of warranty claim, the buyer should:

  • Provide the level of detail about the claim as required by the SPA. If the SPA does not specify the level of detail required or is ambiguous, the buyer should err on the side of caution and set out as much detail as possible of its claim, including the warranties and provisions that have been breached. The aim of the notice is to provide sufficient detail of the claim to enable the recipient of the notice to properly understand the claim that is being made.
  • Ensure that the language of the notice reflects the fact that this is a notice of a claim and not of a possible claim or the intention to bring a claim.
  • Ensure that the notice is served before the expiration of any deadline in the SPA for serving a notice of claim. There may be a requirement to notify the other party as soon as reasonably practicable after becoming aware of the claim and then a long stop date by which to serve a notice of claim.
  • Comply with requirements for service of the notice in the SPA, e.g. the form of notice required, the method of service, to whom the notice should be served and the correct address for service.

When served with a notice of claim, the first thing for a seller to do is to consider whether the notice complies with the requirements of the SPA and whether it provides sufficient detail about the claim that is being brought. If it does not, this may be a ground for applying to strike out the claim.

Conclusion

If a notice of a breach of warranty claim does not comply strictly with the requirements of the SPA, the claim may be struck out. If the claim is struck out, then the buyer may be able to serve a further compliant notice and recommence proceedings but there is the risk that by that stage, the contractual time limit by which to serve a notice of claim has expired. Therefore, a failure to serve a compliant notice may be very costly.

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Rabia Ramputh

Rabia Ramputh
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