UK: Warranty Claims: The Importance Of Complying With Contractual Requirements

Last Updated: 23 April 2018
Article by David Collins, Richard Barham and Candice Chapman

The Court of Appeal has recently upheld a High Court decision which highlights again the importance of complying strictly with the claims notification provisions in a share purchase agreement when making any warranty claim. In this case, the dispute centred around the contractual requirements as to the content of a claims notification.

Facts

Under the terms of the relevant share purchase agreement the notice of claims clause provided:

"No Seller shall be liable for any Claim unless the Purchaser has given notice to the Seller of such Claim setting out reasonable details of the Claim (including the grounds on which it was based and the Purchaser's good faith estimate of the amount of the Claim (detailing the Purchaser's calculation of the loss, liability or damage alleged to have been suffered or incurred))."

A separate provision required the buyer to give notice to a seller containing "reasonable details of any matter or thing of which the Purchaser's Group becomes aware that indicates that ... the Purchaser has or is likely to have a Claim". However, it stated that this notice was not "a condition precedent to the liability of a Seller in relation to a Claim provided the Claim is notified" as set out above.

The buyer claimed damages for breach of various warranties contained in the agreement. The sellers applied to strike out two heads of the claim, on the basis that the buyer had not complied with the notification requirements. The buyer relied on two letters it had written to the sellers in support of its case that it had given a valid notice of claims. 

At first instance (and after outlining the legal principles covered in more detail in our summer 2016 bulletin) the High Court agreed with the sellers that the buyer had not given valid notice of its claims. The first letter did not refer to the notice of claims clause and a reasonable recipient would not have understood it to be notice of a claim as opposed to notification of a potential claim. Although the second letter did make an actual claim, it failed to identify any specific warranties and therefore did not comply with the requirement to state the grounds for making the claim. Further the buyer failed to choose between a tax warranty claim and a tax covenant claim, despite a "double recovery" provision prohibiting a dual track approach.

Held

The Court of Appeal upheld the High Court decision. On the facts, the two letters had failed to comply with the notification requirements under the agreement as they did not identify the relevant warranties and other provisions on which the claims were based. The court focused in particular on whether the letters contained "reasonable detail of the Claim (including the grounds on which it is based)". It commented that:

  • generally reference to the particular warranty or other provision will be necessary;
  • the notice should explain why (at least in general terms) the particular warranty has been breached with some particularisation of the facts, and give some indication of what loss has been suffered; and
  • an important purpose of notification provisions is certainty.

Comment

Each case will turn on its facts (and the Court of Appeal made it clear that failure to include specific references may not always be fatal). However, the decision does confirm that at the start of a transaction, when drafting a share purchase agreement, clarity around claim notification requirements is important. Further, after a transaction has completed, if preparing to make a warranty claim care must be taken to ensure that any required formal notifications comply with the terms of the underlying agreement.

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

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