Zayo Group International Ltd v. Ainger is the latest in a line of cases showing the need to comply strictly with the contractual requirements for notifying a warranty claim. The court also commented on the meaning of "to the extent that" in the sellers' exclusion of liability under an accounts warranty.
Facts
The claimant company bought the entire issued share capital of the target from the seven defendant managers. The claimant alleged that the defendants had breached the management warranties in the share purchase agreement and wished to bring a claim.
The agreement provided:
"No Management Vendor shall have any liability for a Management Warranty Claim except in circumstances where [claimant] gives notice to the Management Vendors before [5pm on 13 November 2015]."
The agreement allowed delivery of notice by hand to each defendant at his/her individual address as set out in the agreement " ... or such other address as may be notified in writing ... by the relevant defendant to the claimant.".
On the last day for service the claimant engaged couriers to serve notice of its warranty claim on each defendant. Notice was validly served on six of the seven defendants. However, there was a dispute about whether notice had been properly served on the seventh (J). When the courier had arrived at the address stated for J in the agreement, he was told she no longer lived there. He then left with the notice, although he later returned and left it there after the deadline for service.
The claimant argued that J's failure to provide a new address meant the courier's attempt to serve the notice should be enough.
Held
The court found that notice had not been validly served on J. The agreement was clear that a notice was served by delivering it to the address for J in the agreement. It did not matter that she no longer lived there. While the agreement allowed her to provide a new address, this was simply permissive. Therefore, her failure to update her address had no impact on the claimant's duty to leave the notice at the stated address.
As the agreement required notice to go to "the Management Vendors", the claimant's failure to serve notice on every liable management vendor meant that none of them was liable.
Although these conclusions resulted in the court dismissing the claimant's case, the court did consider other arguments raised by the claimant:
- The warranty claim notification clause in the agreement had also required the buyer to provide "a reasonable estimate of the amount claimed". However, several of the estimates in the notices were based on an indemnity measure for loss suffered by the target rather than on a diminution in value of the shares. The latter is the usual measure of loss for warranty claims in a UK share sale and purchase transaction and was the proper measure in this case. The court held that, on the facts, this did not amount to a reasonable estimate of the amount claimed. However, it declined to answer the more general question of whether an estimate based on a measure of loss that is wrong in law can ever be a reasonable estimate.
- The agreement contained the exclusion that a management vendor would not be liable for a claim " ... to the extent that provision or reserve in respect of the liability or other matter giving rise to the claim in question was made in the Accounts, which could be reasonably demonstrated from the audit papers and other books and records of the Group."
The point argued before the court was whether this meant that:
- any provision in the relevant accounts, however inadequate, would preclude the sellers' liability; or
- the exclusion only applied to the amount of the provision, meaning the sellers' remained liable to the extent that the actual amount of the target liability exceeded the amount of the provision.
The court noted that, as an exclusion clause, the drafting, if ambiguous, should be narrowly interpreted. It found the meaning that most closely accorded with business common sense was that any provision for unknown liabilities triggered the application of the exclusion over the whole liability.
Comment
Given the potentially fatal effects of failing to comply strictly with a contractual notices clause, it is important that a party wishing to serve notice understands exactly what the particular clause they are dealing with requires and what the time limits are. As this case shows, leaving service to the last minute is potentially risky. If something goes wrong, it may to be too late to correct it.
On the accounts provision point, it is surprising that the court decided that the words "to the extent that" denoted "if" rather than proportionality. As the claimant pointed out, the effect of this interpretation is that a provision of £1 for a £1 million liability would trigger an exclusion of liability. Although the court's decision on this point is obiter and was on the facts of the particular case, the case does highlight a potential risk with this phrase. If parties intend the exclusion to apply only up to the amount of the provision, the drafting should make this clear. Failing that, the accountants should carefully check the provisions for any unknown liabilities and raise further queries if they consider it necessary.
Zayo Group International Ltd v. Ainger [2017] EWHC 2542 (Comm)
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