Buyer’s notice of claim failed to disclose “reasonable detail”
The High Court has once again refused to allow a buyer’s claim for breach of the warranties in a share purchase agreement on the basis that the buyer’s notice of claim failed to meet the requirements set out in the agreement.
A string of cases have consistently shown that the success (or failure) of a buyer’s claim for breach of warranty may turn on whether or not the buyer complies with the relevant contractual provisions about making a claim and, in particular, the provisions concerning the contents and service of the relevant notice of claim.
The key point, as highlighted in RWE Nukem Limited v AEA Technology plc  EWHC 78, is that “Every notification clause turns on its own individual wording” so the buyer must ensure that it strictly follows that wording and meets the specific requirements of the relevant agreement. As the judge said in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd  UKHL 19 “if the clause had said that notice had to be on blue paper, it would have been no good serving notice on pink paper”, however clear the terms of the notice may be.
In TP Icap Ltd v Nex Group Ltd  EWHC 1375 (Comm) the buyer had agreed to acquire a target company which engaged in voice broking, a form of interdealer broking which takes place by telephone as opposed to through an electronic trading platform.
The seller gave various warranties to the buyer including one under which the seller had confirmed that the target had not contravened any applicable law or regulation which had resulted in any fine, penalty or other liability that had a material adverse impact on the operation of the target’s business (the Breach of Law Warranty).
The seller’s liability under those warranties was subject to various limitations set out in the agreement. In particular, those limitations provided that the seller would not be liable for a warranty claim unless, by a specified date, the buyer had given written notice of that claim “stating in reasonable detail the nature of the [claim] and, if practicable, the amount claimed”.
After completion, an ongoing investigation and enquiry by the US Commodities and Futures Trading Commission and the UK Financial Conduct Authority into the trading activities of the target group came to light. In addition, various German authorities began an investigation into allegations of tax-related offences.
As a result, the buyer brought a claim against the seller for breach of certain warranties in the agreement, including the Breach of Law Warranty. But the seller applied for the buyer’s claim to be struck out on the basis that its purported notice of claim did not give the required “reasonable detail” of the relevant claims.
The High Court considered what the relevant contractual requirements for the buyer’s notice of claim meant in the context of the Breach of Law Warranty. The court found that the requirement to state “in reasonable detail the nature of the [claim]” meant that the buyer’s notice must:
- describe the broad nature of the alleged contravention of the law or regulation, identifying the relevant law or regulation;
- make clear that as a result it is making a warranty claim against the seller – it was not sufficient to state, as the buyer had done, that as a result of particular circumstances a claim may be made in the future; and
- describe how any resulting fine or penalty had a material impact on the target’s business operations – this was a necessary and important element of the relevant warranty and it could not simply be left to the seller to infer this from the contents of the buyer’s notice.
As the buyer’s notice had failed to meet these requirements, the court allowed the seller’s application to strike out that part of the claim on the basis that it showed no reasonable cause of action.
Once again this decision highlights how easy it can be for a buyer’s claim to fail on what might be seen as a technicality. Buyers must be scrupulous in ensuring that their notice of claim complies with the strict requirements of the relevant agreement. In that sense, the case provides a useful examination of the specific information a notice had to contain in order to meet the required standard in the context of a specific warranty. However, in each case, it will be necessary to consider the specific words used, both in the warranty itself and in the relevant limitation provision, to ensure that the buyer’s notice is valid.
Who could sue for the missing Ferrari gearbox?
A recent case involving the purchase of a Ferrari 250 GTO has highlighted the rules for determining the parties to a contract, specifically confirming that where a person signs a contract with no qualification as to the capacity in which they sign, they will be a party to that contract.
Only 36 Ferrari 250 GTOs were made between 1962 and 1964. Although they originally cost US$18,000 they now sell for tens of millions of US dollars. In Gregor Fisken Limited v Bernard Carl  EWCA Civ 792 Bernard Carl agreed to sell one such car to Gregor Fisken Limited for US$44m. However, the car had become separated from its original gearbox which was in the possession of a third party. Under the contract, the seller agreed to use his best efforts to recover the gearbox and deliver it to the buyer. If he succeeded in doing that, the buyer would pay an additional US$500,000.
Although the gearbox was located, a dispute arose between the parties when the buyer wanted to inspect the gearbox at Ferrari’s premises in Italy but the seller refused to pay the additional costs required to ship it there.
As the situation between the parties deteriorated, the seller alleged that the buyer had repudiated the contract, meaning the seller was no longer obliged to deliver the gearbox. The buyer thought otherwise and sought to enforce the contract via an order for specific performance.
A number of issues between the parties were considered in the High Court which ultimately found in favour of the buyer and made an order for specific performance. However, the seller appealed against that decision arguing, in particular, that the buyer – Gregor Fisken Limited – was not entitled to enforce the contract.
The seller’s case rested on the fact that the contract described Gregor Fisken Limited as “agent for an undisclosed principal”. In fact Gregor Fisken Limited was not acting as the agent for any unidentified buyer, but was negotiating as a principal with a view to reselling the Ferrari at a profit, which in fact it did. However, it did not tell the seller this.
The Court of Appeal held that where a person signs a contract with no qualification as to the capacity in which they sign, they will be a party to the contract unless the document makes it clear that they contracted as an agent.
In this case, although the buyer was described in the contract heading as “agent for an undisclosed principal”, its actual signature on the contract was unqualified. There was nothing in the signature block to indicate that Gregor Fisken Limited was acting as agent for an undisclosed third party. The Court of Appeal said that the mere description of a person as an agent in the heading of a contract was not sufficient to outweigh the effect of an unqualified signature.
As a result, the court held that Gregor Fisken Limited was the contracting party in this case and was entitled to enforce the contract.
The case is a useful reminder that the signature principle will operate to resolve any discrepancy between the way a contract has been signed and the description of the party in the body of that contract. In the absence of any qualification to the signature, it will be the signature that will prevail to confirm the identity of the contracting party.
Increased scrutiny over the conduct of directors of dissolved companies
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, which is currently making its way through Parliament, will extend the scope of the directors’ disqualification regime to directors of dissolved companies.
The measures contained in the Bill were borne out of the Government’s 2018 consultation paper setting out proposals to improve the corporate governance of firms that are in or approaching insolvency. That paper identified a gap in the current regime which prevented the investigation of potential misconduct by directors of dissolved companies.
Before that could be done, an application had to be made to restore the company. Whilst that application could be made by the Insolvency Service (or indeed a range of other people, including any member or creditor of the company), it was both costly and time-consuming to do this, leading to delays in investigations and an increasing burden on the public purse. So the new Bill aims to remove this potential barrier.
It is also intended that the new measures will help to prevent directors avoiding liabilities by applying for a company to be dissolved – so called “phoenixism”, where a company ceases trading leaving its creditors unpaid, and a new company takes over the business without its outstanding liabilities.
The new Bill will enable disqualification proceedings to be brought against a director of a dissolved company where their conduct as a director of that company makes them unfit to be concerned in the management of a company. It will no longer be necessary to restore the company first before bringing such proceedings. To help support such an application, the Insolvency Service will be able to compel anyone to provide information or documentation relating to the conduct of a former director of a dissolved company.
An application for disqualification in respect of a former director of a dissolved company must be made within three years of the relevant company being dissolved. But the proposed provisions will have retrospective effect so that the Insolvency Service may investigate a former director’s conduct which occurred before the new provisions come into force, including in companies which are not dissolved at that time.
If a disqualification order is made against a former director of a dissolved company it will be for a period of between two and 15 years, mirroring the current periods for orders against directors of insolvent companies.
From the explanatory notes which accompany the new Bill, it appears that one of the driving forces behind the retrospective nature of the new powers is to enable greater scrutiny of companies which have taken out Government-backed loans to support them during the Covid-19 pandemic. The Government hopes that the new measures will help prevent directors using the dissolution process as a method of avoiding repayment of those loans.
*Article first published in Accountancy Daily