The importance of compliant warranty claim notices

Strict compliance with claim notification procedures is a crucial step in any successful warranty claim. Failure to comply with notice content or service requirements may lead to a claim being unsuccessful before the substantive issues have even been considered.

The courts have considered warranty claim requirements on several occasions. While every notification provision turns on its own wording, useful guidance on the legal principles in this area can be found in the court decisions. 

This article considers the lessons that can be learnt from the landmark Court of Appeal decision in Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23.

Background

In the Teoco case the buyer entered into a share purchase agreement (SPA) with Aircom, the seller, to acquire two companies. The buyer subsequently issued proceedings against the seller claiming damages for breach of warranty in relation to tax owed by two seller subsidiaries based in Brazil and the Philippines. The total tax liabilities were valued at £3.45m.

The seller argued that the buyer had not given notice of the claims in accordance with the provisions of the SPA. The seller’s argument focused on two letters sent by the buyer’s solicitors, which the seller claimed were insufficient to satisfy the contractual notice requirements.

The High Court struck out the buyer’s claim but the buyer then appealed that decision.

Share purchase agreement

The SPA included various warranties given by the seller, some of which related to the tax position of the two subsidiaries.

As is common practice, the SPA also included limitations on the seller’s liability under the warranties. In particular, a provision stated that the seller would not be liable for any claim unless the buyer had: “given notice to the seller of any claim setting out reasonable details of the claim (including the grounds on which it is based).”

The buyer’s first letter notifying the seller of the warranty claims referred to “claims arising out of the tax warranties and the general warranties”, but reserved its position “as to which particular head of claim it would fall under”. The letter was also ambiguous as it referred to “tax exposures which may exist”, “potential tax liabilities” and the “estimate of potential quantum”. The court said this was just a “generic reference to potential claims” and it did not set out the basis of the claims in reasonable detail. Despite a second letter being sent containing additional information relating to the buyer’s claims, the High Court held that the letters did not comply with the wording of the SPA and they were not sufficiently detailed to constitute valid notification under the SPA.

The most important point for the court was that the letter did not identify the specific warranties in the SPA which the seller was alleged to have breached. This point was considered further in the Court of Appeal.

Court of Appeal

Agreeing with the High Court’s decision, the Court of Appeal ruled that the letters could not be viewed by a “reasonable recipient” as notices setting out an actual claim, rather than a potential claim. The judge pointed to the wording used – ‘may’, ‘potential’, ‘estimate’ – as a reason for the decision.

The judge also considered that even if the letters had been notice of an actual claim, they still did not satisfy the requirements of the SPA. The letters did not set out reasonable details of the claim, including “the grounds on which it was based” as required by the SPA, and the judge clarified that the grounds of a claim must include identification of the breached warranties. The reference to “warranty claims or tax claims” was not sufficient to inform the sellers of what they had done and what they could have done to rectify the breach.

The Court of Appeal concluded that the letters failed to satisfy the requirements of the SPA because they did not identify the particular warranties on which the claims were based. The judge agreed with the seller’s argument that “setting out the grounds” of a claim required the legal basis to be identified.

The court accepted that this might be achieved without mentioning a specific warranty, for example where relevant facts included in the notice point towards a specific warranty. However, this was not the case in the buyer’s letters, which only contained wide references and therefore cast “real doubt” on the grounds of the warranty claim since they “encompassed a multitude of other possibilities”. The notice did not achieve the required level of certainty.

Lessons learnt

The Teoco decision is a warning to buyers of the vital importance of complying with the claim provisions of an SPA. The buyer appeared to be keeping its options open by drafting a notice widely in order for it to catch a range of warranty breaches. However, the court highlighted that the wording of a notice must not only be wide enough to include the relevant provisions, but also narrow enough to exclude with certainty the possibilities that were not being relied on. Where the notice must include the grounds on which a claim is based, sufficient information will also have to be provided to identify the breached warranties. 

There have been several cases since Teoco (including Arani v Cordic Group Ltd, Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd, and Decision Inc Holdings Proprietary Ltd v Garbett) that have taken a strict approach to the interpretation of notice requirements and where warranty claims have failed due to non-compliance with those requirements.

For buyers, the message from these cases is clear: cite the relevant provisions if they can be identified, comply with the contractual provisions for notification and make it clear that a claim is being made.

In contrast, the decisions appear to be of benefit to sellers and should encourage the incorporation of specific requirements into SPAs regarding the contents (and service) of a notice of claim. Buyers will have to overcome the hurdle of meeting those notice requirements if they are to have any chance of success in a breach of warranty claim.