Drax v Scottish Power: Court Of Appeal Provides Guidance On The Interpretation Of Notice Of Claim Clauses

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In Drax Smart Generation Holdco Limited v. Scottish Power Retail Holdings Limited] EWCA Civ 477, the Court of Appeal considered the sufficiency of a notice of claim made under an SPA.
UK Corporate/Commercial Law
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In Drax Smart Generation Holdco Limited v. Scottish Power Retail Holdings Limited [2024] EWCA Civ 477, the Court of Appeal considered the sufficiency of a notice of claim made under an SPA. Allowing the buyer's appeal, the Court of Appeal cautioned against notice of claim clauses becoming "technical minefield[s]" that are "divorced from the underlying merits of a buyer's claim".

Background to the claim

The dispute arose under an agreement for the sale and purchase of shares dated 16 October 2018 (the SPA), pursuant to which Scottish Power sold the shares in a company that is now known as VPI Power Limited (the Company) to Drax. One of the assets of the Company was a site in Kent which represented a potential location for a new gas power station. If such a power station was to be built, it would need to be connected to the national electricity grid, and the obvious connection point was at a nearby former power station, adjacent to the site and owned by a third party. The SPA contained warranties to the effect that the Company had the benefit of an option to acquire an easement over this neighbouring land for the purposes of laying cables to connect the site to the national grid. After the completion of the sale, it transpired that the Company did not in fact have the benefit of such an option.

Drax brought a claim against Scottish Power for breach of warranty and for an indemnity for losses that it and the Company had suffered. Scottish Power applied for summary judgment, contending that Drax's claim had no real prospect of success on the grounds that:

  1. in respect of the breach of warranty claims, Drax had not sufficiently particularised the "nature of the claim and the amount claimed" in its notice of claim; and

  2. in respect of the indemnity claim, Drax's claim was time-barred because it had notified Scottish Power of its claim out of time under the terms of the SPA.

The notice of claim clause

The notice of claim clause in the SPA provided (in material part) as follows:

"In the case of the types of claim detailed below, the Seller shall not be liable for a claim unless the Buyer has notified the Seller of the claim, stating in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer's calculation of the Loss thereby alleged to have been suffered) ...".

Drax's notice of claim identified itself as constituting a formal notice of claim under the relevant clauses of the SPA, set out in detail those clauses and also identified the various respects in which Drax contended that it had a claim against Scottish Power. Under the heading "Loss", Drax provided estimate calculations on the basis that the loss suffered was yet to crystallise. The first calculation set out an estimate of the cost of acquiring an easement from the then-owner of the neighbouring land. The second set out an estimate of the losses that would be incurred if the Company had to purchase the land itself in order to lay the power cables.

Drax's original pleading averred that these were losses that would be suffered by the Company. However, Drax subsequently sought to amend its particulars of claim to plead instead that the losses (1) were suffered by Drax alone, (2) were suffered at the transaction completion date and (3) comprised the difference between the warranted value of the Company and its true value.

First instance decision

Mr Simon Birt KC, sitting as a Deputy High Court Judge, found in favour of Scottish Power on the warranty claims and in favour of Drax on the indemnity claim. In relation to the warranty claims, he agreed with Scottish Power that the reasonable recipient of Drax's notice of claim would have understood it to be a claim for loss suffered in the first place by the Company, for which Drax was liable. Accordingly, the notice of claim did not meet the requirements imposed by the SPA because it did not reflect the claim for Drax's own loss based on the traditional difference in value measure applied in warranty claims.

Court of Appeal decision

The Court of Appeal (Males LJ giving the leading judgment, with which Sir Geoffrey Vos, MR, and Birss LJ agreed) allowed Drax's appeal on the warranty claims and dismissed Scottish Power's cross-appeal on the indemnity claim. All of Drax's claims can therefore proceed to trial.

Males LJ explained that the commercial purpose of a notice of claim clause is to function as an exclusion clause. By providing a contractual limitation period for a buyer to bring a claim, such a provision allows the parties to close their books on a transaction – thereby promoting finality and certainty in commercial dealings. Whilst it is open to parties to include a notice of claim clause in their agreement which imposes particular requirements, a court should not "interpret such clauses as imposing requirements which serve no real commercial purpose unless compelled to do so by the language of the clause" (Males LJ at paragraph 50 of the judgment).

The language of the clause did not require Drax to spell out – as part of its statement as to the "nature of the claim" – that the damages would be based on the difference in the value of the shares in the Company as a result of it not in fact having had the benefit of the option to acquire the easement. In fact, the Court of Appeal held that a single statement that Scottish Power had failed in its obligation to ensure that the Company had the benefit of the option would have told Scottish Power all that it needed to know about the nature of Drax's claim in order to be in a position to assess its liability (for example, by seeking legal advice). As to the requirement to specify the amount claimed, the estimate calculations that Drax had put forward in good faith were sufficient; they stated the amount claimed (even if on two alternative bases) and provided details of the way in which the amounts had been calculated.

Conclusion

Functioning as the gateway to a valid claim, the proper construction of a notice clause is often hotly contested in circumstances where the buyer is pursuing the seller in respect of breaches of warranties and/or indemnities under an SPA. As such, the Court of Appeal's pragmatic and commercially focused approach provides clarity for parties both in relation to negotiating such a clause at the time of a transaction and interpreting it subsequently.

Whilst the decision will undoubtedly be of some comfort to buyers who fear falling foul of the technical requirements of notification provisions, it is notable that warranty and indemnity (W&I) insurance policies – the market for which has grown significantly in recent years, such that buyers are increasingly seeking recourse from insurers rather than proceeding against sellers – tend not to impose stringent notification requirements (or at least provide that such requirements cannot be utilised by the insurer to defeat a claim). As such, the decision in Drax might not have as much practical significance for the market as would first appear to be the case, likely applying only in circumstances where no W&I insurance is in place.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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