How do I notify a breach of warranty claim?

10 minute read
06 February 2018

In its recent judgment in Teoco UK Limited v Aircom Jersey 4 Ltd and another, the Court of Appeal considered the steps the claimant needed to take to provide a valid notification of claim under the warranties in a share purchase agreement (SPA).

When a business is sold, the seller gives the purchaser various warranties as to the business. These warranties (together with disclosures against them) give the purchaser crucial information about the affairs of the business (for example as to its solvency, borrowings, claims or potential claims against it, and tax liabilities) in order to assess its value. The warranties form part of the purchase documentation (share or asset purchase agreement) and give the purchaser contractual protection - if any of the warranties turns out to be untrue, then the purchaser may have a claim against the seller for breach of warranty and for any consequential reduction in the value of the business. However, it is common for the agreement also to contain limitations on the seller's liability under the warranties. These could include a de minimis financial level for claims, a cap on the seller's financial liability, a restriction on the period in which claims may be brought, and, as in this case, a requirement for the purchaser to notify potential warranty claims to the seller.

Background to the case

In this case, the purchaser issued court proceedings against the sellers for, inter alia, breach of warranties as to the tax position of some of the target companies. The purchaser valued the claims at c.£3.5m.

The sellers asked the court to strike the purchaser's claim, relying on various limitations of liability in the SPA:

  • First, the SPA provided that the purchaser had, as soon as reasonably practicable, to give the sellers notice, containing reasonable details of any matter or thing of which the purchaser became aware that indicated that the purchaser had or was likely to have a claim ("Early Warning"). Such Early Warning was not however a pre-condition to the liability of a seller, provided that the purchaser gave notice as described below.
  • Secondly, the SPA required the purchaser to give notice of any claim setting out reasonable details of it, including the grounds on which it was based and an estimate of the value of the claim ("Notice"). Such Notice was to be given as soon as reasonably practicable after the purchaser becoming aware that it had such a claim, and in any event before 31 July 2015, failing which the sellers would have no liability.
  • Finally, the SPA provided that the purchaser must issue and serve legal proceedings in respect of a claim within six months of giving Notice of that claim, failing which the sellers would have no liability.

The sellers argued that the purchaser had not complied with these contractual notice provisions, and so they had no liability for the claims.

The purchaser's claim notification

The purchaser's solicitors had first intimated claims in a letter to the sellers' solicitors in February 2015. The letter purported to be Notice under the SPA, and outlined the purchaser's complaints (in brief, that various potential tax exposures had been identified and a loan advance had become repayable) and asserted that these were breaches of the 'General Warranties' and / or 'Tax Warranties' (as defined in the SPA). They reserved their clients' position as to which head of claim the claims would fall under.

In June 2015, the purchaser's solicitors wrote to the sellers' solicitors again. This letter was stated to be further notification under the SPA, providing further details of claims.

The sellers argued that these letters did not comply with the requirements of the claim notification procedure in the SPA, and so the sellers had no liability.

High Court decision

On hearing the sellers' strike-out application, the Judge ruled that:

  • The February and June letters were not Notices within the meaning of the SPA; alternatively
  • They did not comply with the Notice requirements of the SPA; and in any event
  • The purchaser had failed to bring proceedings in respect of notified claims in time or at all.

He found that the reasonable recipient of the letters would have understood them to be Early Warnings rather than Notices - their language referred for example to the "possible existence of tax exposures", referred generally to the Tax Warranties and the General Warranties, without specifying which warranties were said to have been breached, and reserved their client's position as to which head the claims would fall under.

Even if the recipient had understood the letters to be intended as Notices, they did not satisfy the formal requirements for a Notice under the SPA. First, they did not set out the grounds of a claim. The judge found that "grounds of a claim must include identification of the Warranties said to be breached", and said the "omnibus reference to Warranty Claims or Tax Claims" was not nearly sufficient to inform the Sellers... what they had done wrong". Secondly, in respect of one claim, he found the purchaser had been aware of the claim for some time before the letters and so even if the letters were Notices, the purchaser had failed to give Notice "as soon as reasonably practicable", as it was required to do.

Finally, the judge noted that even if the letters constituted Notices, the claims ultimately brought by the purchaser did not directly correspond with the claims intimated in the letters, such that the purchaser had failed to bring a claim in respect of the claims in any Notice in time or at all.

Accordingly, the judge struck out the purchaser's claim. The purchaser appealed the decision to the Court of Appeal.

Court of Appeal decision

Giving the leading judgment in the Court of Appeal, Newey LJ agreed with the Judge's finding that the letters failed to satisfy the Notice requirements of the SPA because they did not identify the particular warranties on which the claims were based. He accepted the sellers' submission that the requirement in the SPA to set out the grounds of a claim meant that the legal basis of the claim had to be identified. That could feasibly, in an exceptional case, be done without expressly identifying a particular warranty, if the facts recited in the Notice pointed unequivocally to a particular warranty. In this case though, that was not the case - there was real scope for doubt as to which particular warranty or warranties the purchaser alleged had been breached. In those circumstances, explicit reference to particular warranties was required. Newey LJ recognised that "[i]t was doubtless to keep the purchaser's options open that the February and June Letters were framed in the wide way they were, but the result is that they cannot be said to have identified particular warranties and other provision or, hence, the "grounds" on which [the claims] were based".

Having found that the purchaser's failure to identify particular warranties meant the letters did not comply with the Notice requirements in the SPA, the Court of Appeal did not need to address the other grounds on which the Judge found for the sellers. The purchaser's appeal was dismissed.

What can we take away from this?

In reaching its judgment, the Court of Appeal cited various passages from Gloster J's judgment in RWE Nukem Ltd v AEA Technology plc [2005] EWHC 78 (Comm), in particular the following, which provide a useful summary of take-away points:

  • Every notification clause turns on its own individual wording. Both parties in this case relied upon this maxim. For example, the presence of both an Early Warning and a Notice provision in this case was a complicating factor which may not always be present. However, the Court of Appeal did acknowledge that previous case law in this area can still be of assistance.
  • There can be no rigid formula for notification of a claim but, as a minimum, a compliant notice should:
    • Identify the particular warranty that is alleged to have been breached;
    • Explain why it has been breached;
    • Particularise the facts upon which the allegation is based; and
    • Give some indication of what loss has been suffered as a result
  • Failure to refer to all relevant warranties will not necessarily be fatal if claims have been adequately notified in this way

Purchasers seeking to notify warranty claims should therefore:

  • review the detailed notification provisions in the SPA, and any related conditions and limitations;
  • be as particular as they can be in identifying breaches; and
  • avoid compendious references to the warranties in general.

As this case shows, those who fail to adhere to contractual notice requirements run the risk that otherwise viable and valuable claims may be struck out.

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