Notice of Claim for Breach of Warranty
In Teoco UK Ltd v Aircom Jersey 4 Ltd the court struck out claims for breach of warranty under a share purchase agreement on the basis that the claimant (the Purchaser) had failed to meet the requirements for notification of the claims to the defendants.
Case Update
Posted 30 January 2018
The Purchaser appealed this decision and the Court of Appeal unanimously upheld the initial decision outlined above.
The Court found that the Purchaser's notice of breach of warranty did not sufficiently identify the legal basis of its claim. Whilst every notification clause turns on its specific wording, the appeal highlights the importance for a purchaser making a warranty claim to follow the procedure outlined in the claims notification clause and identify the particular warranty that has been allegedly breached.
Background
In 2013 the Purchaser acquired two companies, together with their subsidiaries, from the Sellers under the terms of a share purchase agreement (SPA). The Sellers gave various warranties, including tax warranties, in the SPA, which also contained a tax covenant. In 2014 the Purchaser became aware that certain tax liabilities of the purchased companies in various jurisdictions had not been disclosed by the Sellers, in breach of the warranties given. Solicitors for the Purchaser wrote to the Sellers in February 2015 and again in June 2015 regarding potential claims under the SPA, and subsequently commenced proceedings in August.
The Sellers applied to strike out certainty of the claims, or for summary judgement that they stood no real prospect of success, on the grounds that the Purchaser had failed to comply with the notice requirements in the SPA. The claims which were the subject of the Sellers' application (the Claims) were worth in total around £3.5 million.
The Court's Decision
Under the terms of the SPA, the judge found that the first letter did not constitute sufficient notice for a number of reasons.
- Three provisions of the SPA required notice by the Purchaser when it knew it was likely to have a claim, when it knew it had a claim and when it was to make a claim. The letter failed to specify which provision notice it was being made under, however the content notified only that the Purchaser had 'potential' claims. Therefore notice of the Claims themselves, required in the provision governing the making of any claim, was not given.
- The letter did not provide sufficient details of the Claims. In particular, it did not identify the specific warranties which had been breached, even referring to the tax warranties and the tax covenant together without clarifying which the Claims would be made under.
- Certain allegations contained in the Particulars of Claim subsequently filed weren't referred to in the letter at all.
Solicitors for the Sellers responded that the letter contained insufficient detail and was inadequate as notice under the SPA. A second letter was then sent on behalf of the Purchaser which made a more definitive statement that claims were to be made but in all other respects suffered the inadequacies of the first. Therefore the judge found that neither letter constituted due notification of the Claims, which were struck out on this basis.
The judge went on to state that, even had either letter constituted notice, the Claims would have been unsuccessful on the grounds that there was too great a delay between the Purchaser becoming aware of them and providing notice to the Sellers. The Purchasers argued that despite becoming aware of the tax liabilities in 2014, they were not sufficiently aware of the Claims to give notice until June 2015, because until that time had intended to avoid the tax exposures by declaring dividends. However the judge rejected that characterisation of the Purchaser's position, considering that while the Purchaser had only decided to pursue the Claims in 2015 it had in fact known of them from 2014. As the SPA required notice as soon as reasonably practicable after the Purchaser became aware of anything indicating likelihood of a claim, this alone would have been sufficient to have the Claims struck out.
Best Practice
The case highlights the importance of paying close attention to notice provisions and reinforces the principle that 'a failure to observe their terms can rarely be dismissed on a technicality' (Laminates Acquisitions v BTR Australia Ltd). Potential factors to consider include the triggers and deadlines for the giving of notice, and the levels of detail, specificity and certainty required.