Why keeping your options open is not always a good idea…

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A Share Purchase Agreement (SPA) should always include a claims notification clause, setting out how notification of any claim(s) under the warranties must be given.

Any failure to provide notice in accordance with such a clause can invalidate any notice purportedly given, so it is vitally important to serve a notice of claim that complies with the relevant SPA provisions, in time, before any contractual limitation period for doing so expires.

The Court of Appeal recently considered this issue in Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23. In this case, the relevant SPA contained a tax covenant and tax warranties under which the seller had given warranties to the purchaser that each company in the group had paid all tax due. The seller’s liability under the warranties was subject to a claims notification clause, which stated that the purchaser had to give notice “setting out reasonable details of the claim (including the grounds on which it is based and the Purchaser’s good faith estimate of the amount of the claim …)”. The SPA required the notification to be given as soon as reasonably practicable after the purchaser became aware of the claim and in any event by the long-stop date. The SPA also provided that any proceedings in respect of any duly notified claims had to be issued and served within six months.

The purchaser had written to the sellers alleging breaches of “the Tax Covenant, the Tax Warranties and the General Warranties” and had subsequently written another letter containing a breakdown of the tax allegedly due. The purchaser then issued proceedings to recover the tax alleged to be due from the seller. The seller/defendant applied to strike out parts of the claim or for summary judgment on the grounds that notification of those claims had not been given by the purchaser/claimant under the SPA.

At first instance, the judge concluded that the purchaser’s letters had failed to comply with the requirements of the SPA for notification of claims because they did not set out reasonable details of the claim, including the grounds on which the claim was based, since the grounds had to include identification of the warranties allegedly breached. The purchaser argued that where a notification clause provides for details of a claim to be given, there is no general principle that specific warranties must be identified in the claims notice.

On appeal, the Court of Appeal confirmed that the purchaser’s letters failed to comply with the requirements of the SPA for notification of claims because they did not identify the specific warranties and provisions of the tax covenant on which the claims were based. “Setting out” the grounds of a claim meant that the legal basis of the claim had to be identified and this required explicit reference to particular warranties or other provisions. The judge said an “omnibus reference to Warranty Claims or Tax Claims” was not good enough, since it encompassed a multitude of other possibilities and failed to identify the “grounds” of the claims. There was real scope for doubt about which provisions the purchaser thought were relevant. The court noted that this was probably done to keep the purchaser’s options open. However, the result was that the letters failed to identify the specific warranties and other provisions and therefore the “grounds” on which the purchaser’s claims were based. A “compliant notice would identify the particular warranty that was alleged to have been breached.”

Every notification clause turns on its own individual wording. Certainty is also important. Because of the risk that a warranty claim could be struck out if the purchaser fails to comply with the requirements of the SPA, advice should be sought as soon as a claim arises to ensure that the claims notice complies with the requirements of the SPA.