Take care when providing notice of warranty claims

Two cases in the last year highlight the importance of ensuring that the exact terms of notice provisions in share sale and purchase agreements (SPAs) are complied with before any claim for breach of warranty is brought.

The Hut Group Limited -v- Oliver Nohabar-Cookson and another [2014] EWCH 3842 (Comm), 20 November 2014

Facts

This dispute concerned breach of the warranties relating to the preparation and accuracy of the target company's management accounts. As is common practice, the SPA contained various contractual limitations on the parties' liabilities under the agreement. One such limitation was that the seller (the defendants) would "not be liable for any Claim unless [the claimant] served notice of the Claim on the [defendants] (specifying in reasonable detail the nature of the claim and so far as practical the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter".

The claimant (THG) brought a claim for damages for breach of warranty regarding the target's management accounts, claiming that several adjustments needed to be made to these accounts in order for them to give a true and fair view of the target's financial information and for the accounts to be prepared on a basis consistent with those methods used in the preparation of the target's statutory accounts. THG gave three notices of the breaches of warranty of claim on 2 February 2012, 20 March 2012 and 4 April 2012. The defendants denied there was any breach of warranty but alleged that, even if there was, the breach of warranty claim was not actionable because (1) notification was not given in time (it was common ground between the parties that the cut-off date for notification was 9 January 2012) and (2), even if it was given in time, the notices were not valid because they did not contain sufficient detail.

Decision

There were three areas of dispute between the parties with regard to the construction of the notice provision:

• what is meant by "becoming aware of the matter";
• who within the buyer has to become aware of the matter; and
• the level of detail required in the notice.

On issue 1 Mr Justice Blair preferred THG's construction that being "aware of the matter" meant being aware that the claim had a proper basis as opposed to the defendants' argument that "aware of the matter" meant being aware of the factual grounds for a breach of warranty claim rather than being aware that those grounds may constitute an actionable claim. On the facts, the time limit in the notice provisions started running from 20 January 2012, when THG's external forensic accounting advisers (PwC) had provided their initial advice that there were reasonable grounds for proceeding with a warranty claim. The notice of claim sent to the defendants on 2 February 2012 was, therefore, well within the 20 Business Day time period provided for in the SPA (the parties' cut-off date being 9 January 2012).

On issue 2, the defendants accepted that the matter had to come to the attention of somebody with knowledge of the SPA, and for relevant purposes limited that to the Group Commercial Director and Group Legal Director of THG.

With regard to issue 3, the defendants alleged that the notice of 2 February 2012 was defective because (a) it massively understated, for tactical reasons, the amount now claimed; (b) it contained no information about the basis of the calculation, and (c) it inaccurately described the nature of one of the adjustments to the management accounts. The allegation in (a) was based on the fact that the notice gave the amount of the adjustments but did not mention the multiple used when calculating damages in the actual claim made.

The Judge found that the notice provided all that was practicable by way of notice at this early stage. He found that the notice of claim on 2 February 2012 was not invalidated by the fact that the method of calculation of loss was not supplied until later. With regard to the description of one of the adjustments, the Judge agreed with THG that the issue was identified in sufficient detail as "at this stage, not much was contractually required" and "details would quite likely follow".

Ipsos SA -v- Dentsu Aegis Network Limited [2015] EWHC 1171 (Comm), 15 June 2015

Facts

Here the defendant applied to strike out the claim for damages for breach of warranty on the grounds that Ipsos had failed to comply with the contractual notification requirements in the SPA.

Ipsos had purchased from the defendant the shares in companies within the Synovate Group. The seller (the defendant) gave various warranties including warranties that no member of the Synovate Group was facing any employment claims and each member of the Synovate Group had materially complied with all applicable employment and social security laws. The contractual limitations included the following provisions: -

• No warranty claim could be brought against the seller unless the purchaser had given written notice of the claim within two years of completion "specifying in reasonable detail: (i) the matter which gives rise to the claim; (ii) the nature of the claim; and (iii) (so far as reasonably practicable at the time of notification) the amount claimed… (comprising the Purchaser's good faith calculation of the loss thereby alleged to have been suffered)…". The seller's liability in respect of any such warranty claim would end if legal proceedings had not been commenced within six months of service of the relevant notice.
• With regard to third-party claims against the Synovate Group which might give rise to a claim under the SPA against the seller, the purchaser should "as soon as practicable, notify the Seller by written notice specifying (in reasonable detail) the matter which may or will give rise to the relevant Claim and that there will or may be a relevant Claim as a result of the Third Party Claim". Failure to comply with the provisions should not "prevent any relevant Claim by the Purchaser or extinguish any liability of the Seller but shall be taken into account in calculating any such liability of the Seller to the extent that such liability is increased by such failure".

Ipsos relied on two letters in support of its case that it had complied with the notice provisions, dated 14 August 2012 (Letter 1) and 30 September 2013 (Letter 2).

Letter 1 was expressly stated not to be a claim notice and mrely notified the seller of a set of claims made against Synovate Brazil Ltda which may give rise to a warranty claim against the seller. Details of the claims were annexed to the letter. Letter 2 was over a year later and a few days before the contractual limitation period expired. It did not expressly give written notice of a seller warranty claim but gave written notice of a number of third-party claims in addition to those notified in Letter 1. Letter 2 sought clarification from the defendant as to which of these claims the defendant considered it had disclosed and stated that, on receiving this clarification, Ipsos would provide a further breakdown detailing which of these losses, costs and expenses it claimed from the defendant for breach of warranty.

The defendant argued that Letter 2 did not give written notice of a warranty claim but instead gave notice of a number of third-party claims in addition to those notified in Letter 1. Ipsos accepted that Letter 2 was not well drafted, but argued that the necessary information was contained within the letter and that a reasonable person with knowledge of the background, including the history of the claims made by Brazilian contract workers and the contents of Letter 1, would have read the letter as constituting a claim notice.

Decision

Mr Justice Simon observed that the "only true principle to be derived from the authorities is that every notification clause turns on its own wording". Justice Simon felt that there were four broad propositions that could be derived from past cases: -

1. The purpose of this type of contractual notification clause is to bar claims which are not notified within a finite period. It ensures that sellers know, in sufficiently formal terms, that a claim for breach of warranty will be made, so that they can make financial provision for it. That purpose is not served if the notice is uninformative or unclear.
2. The notice has to be construed by reference to how it would be understood by a reasonable recipient with knowledge of the context in which it was sent.
3. The notice must specify that a claim is actually being made rather than indicating the possibility that the claim may yet be made.
4. The requirement of notice of the claim is often, as in this case, accompanied by a requirement to specify certain matters in the notice. The use of the word "specifying" in the SPA "suggests very strongly that it is not sufficient that the matters referred to in (i)-(iii) [of the notice clause in issue] may be inferred".

Mr Justice Simon found that, while Letter 1 expressly stated that it was "not a claim notice", Letter 2 did not state that it was intended to be a claim notice as opposed to continuing correspondence. He concluded that a reasonable recipient of Letter 2, with knowledge of the previous correspondence and the business context in which it was written, would not have understood it to be a claim notice for the following reasons: -

1. While there were references to "circumstances that may give rise to a Seller Warranty Claim" and to potential claims which might fall under the indemnity clause, there was no statement that Ipsos was giving notice of a claim for damages for breach of warranty. The Judge did not accept Ipsos' submission that the timing of the letter, a matter of days before the two-year deadline for claims, should have suggested to the reasonable reader that it was to be understood as a claim notice.
2. Letter 2 did not specify "(i) the matter which gives rise to the claim". The letter was largely a description of events and there was no sufficient attempt to specify "the underlying facts, events or circumstances which constituted the factual basis upon which the claim was posited" ie. that Brazilian labour law had been breached. Ipsos had submitted that while there was no allegation of a breach of Brazilian labour law, which was the essential complaint being made, it must have been clear, when read with the rest of the letter, that this was what was being alleged.
3. The letter did not specify "(ii) the nature of the claim" because there was no real attempt to identify the form and substance of the claim.

On this basis the Judge found that no claim notice was given prior to the deadline of 12 October 2013. Accordingly, the claim failed.

Comment

Both cases indicate that there is considerable scope for argument in relation to the interpretation of contractual notification clauses. Given that it is the purchaser who runs the risk that its claim will fail if it has not complied with the notice provisions, the purchaser should ensure that these are drafted carefully to avoid any ambiguity either as to the information which must be provided to comply with the notice obligations, or as to the time from when any limitation period runs. Close attention should also be paid to the actual terms of the notice provisions when providing notice of any warranty claim.

While the contents of any notice will turn on the wording of a particular notice provision, the Hut case suggests that, where an agreement provides that reasonable details of the nature of the claim must be given, a relatively low level of detail is required. The Ipsos case suggests that the courts will expect strict compliance with the notice provisions. The court will look at the context in which a notice is sent, but where a notice provision expressly states that certain matters must be specified, it will not be prepared to accept that the specified matters may be inferred. Any notice should make it absolutely clear that a claim is actually being made rather than indicating the possibility that a claim may be made in the future.