10th April 2018
Most company and business sales will involve the Sellers giving a series of warranties (statements) to the buyer in connection with the company, business and assets being acquired. These warranty statements cover a wide range of potential issues. For example in a share acquisition the buyer is likely to seek warranty statements in relation to the ownership of the shares, that there are no other shares in issue and no share options have been granted and that the shares are not subject to any charges or other third party rights. Warranties would also extend to address issues relating to the business’ assets, finances, tax affairs, employee relations, pensions, intellectual property, IT, real estate, environmental and health and safety compliance and so on.
The warranty statements are usually set out in the main Sale and Purchase Agreement (SPA) and will frequently run to many tens of pages and are usually accompanied by various contractual limitations limiting the Sellers liability in respect of those warranty statements. Typical limitations will include a maximum liability (often the aggregate sale price) and minimum liability thresholds that must be reached before any claim can be brought. Commonly there is also a limitation to the period within which buyers must give notice of any claims and this provision is usually supported by a requirement for the buyer’s notice of claim to include reasonable details of the claim and the amount claimed. Whilst the interpretation of such a notification clause will depend upon the exact wording of the particular clause a recent Court of Appeal decision has highlighted the importance of ensuring that any notice of claim that is brought complies with certain basic requirements in order for it to meet the required threshold so as to be a valid notice under the sale and purchase agreement. Teoco UK Ltd v Aircom Jersey 4 Ltd & Anor  EWCA Civ 23 (18 January 2018), Sir Ernest Ryder, Lindblom LJ and Newey LJ.
The share purchase agreement in this particular case included a fairly standard notification clause which stated that the sellers would not be liable for any warranty or tax indemnity claims unless the buyer gave written notice of the claim “setting out reasonable details of the [claim] (including the grounds on which it was based…)” no later than 31 July 2015. The buyer’s solicitors sent two letters to the Sellers. The first in February 2015 in which they stated the letter constituted “notification in accordance with clause 24 and Schedule 4 of the SPA of the existence of claims being either warranty claims or tax claims as further detailed below” and which went on to set out details of potential tax liabilities of the acquired company’s subsidiaries in Brazil and the Philippines. A second letter was sent in June 2015 which was stated to be “further notification in accordance with Schedule 4 to the SPA, providing further details of the [buyer’s] claims] as outlined in the [February letter]…” , and which included a breakdown of the alleged tax liabilities. Proceedings were subsequently issued by the buyer in August 2015 against the sellers, claiming damages for breach of warranty or an indemnity in relation to tax allegedly owed by the acquired company’s subsidiaries in Brazil and the Philippines. In turn, the sellers applied to the court to strike out the tax claims on the grounds that the buyer had not given proper notice of the claims as required under the share purchase agreement.
In the High Court the judge granted the sellers application to strike out the tax claims on the basis that neither the February letter nor the June letter amounted to due notification of the claims in accordance with the requirements of the SPA as each letter failed to set out reasonable details of the claim, including the grounds on which the claim was based. The judge confirmed that setting out the grounds of the claim must include identification of the particular warranties that are claimed to have been breached or the basis upon which it is claimed the tax indemnity has been triggered.
The buyer appealed the High Court’s decision but the Court of Appeal dismissed the appeal unanimously approving the High Court judgement. The Court of Appeal considered that the terms of the notification clause of the SPA required the buyer’s notice to refer, not only to the nature of the claims, but also to the legal basis on which the claims were being brought i.e. to identify the particular warranties and or indemnities that the buyer was looking to, to establish liability on the part of the sellers. Whilst the court did not rule out potential exceptions the general rule should be that where the notification clause required the grounds of the claim to be set out this would require the notice making explicit reference to the particular warranties and or indemnities that the buyer believed had been breached or triggered. In the present case there was considerable potential doubt as to which particular provisions of the SPA were relevant to the buyers claim and the facts themselves did not unequivocally point to any specific warranties. The court felt that the general reference to “warranty claims or tax claims” that had been used in the notices issued in February and June 2015 were not sufficient to identify the “grounds” of the buyer’s claims and therefore was not a valid notice of claim for the purposes of the SPA.
The decision emphasises the importance for any buyer who wishes to give notice of a potential breach of warranty and/or indemnity claim to take great care when preparing and issuing their notice to ensure that it complies with the express wording of the SPA. The interpretation of any notification clause will depend upon the particular wording used but, as a general rule, buyers are strongly advised to ensure that any notice that they do serve in relation to a potential warranty or indemnity claim explicitly refers to the particular warranties or provisions of the tax covenant that it is relying on. Even where a number of warranties may have been breached, each should be listed in the notice of claim.
The contents of this update are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this update. © Mundays LLP 2018.
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