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Complying with your notice provisions

The information herein is of a general nature and you should not act or refrain from acting on it without professional advice

In the recent case of Teoco UK Ltd v Aircom Jersey 4 Ltd date, the Court of Appeal considered the validity of breach of warranty notices.

Background

The appeal relates to a share purchase agreement dated 19 November 2013 (the SPA), under which the respondents, Aircom Jersey 4 Limited and Aircom Global Operations Limited (the Sellers) sold to the appellant, Teoco UK Limited (the Purchasers), the issued shares in Aircom International Limited (Aircom UK), for £41 million.

In August 2015 the Purchasers issued proceedings, claiming to be entitled to damages for breach of warranty or an indemnity in relation to tax said to be owed by two subsidiaries in Aircom UK. The Sellers were said to be liable for around £3.5 million.

The Sellers applied to strike out the claim, on the basis that notice of claims was not given in accordance with the notice provisions contained in schedule 4 of the SPA. On 28 April 2016, the High Court ruled in favour of the Sellers, striking out the claim.

The Purchasers appealed this decision and argued the Judge was wrong to strike out the claim.

The SPA

Schedule 4 of the SPA was in a standard form and provided that the Sellers would not be liable for any claim, unless:

  • the Purchasers had given notice to the Sellers of the breach, setting out the details;

  • the Purchasers had given that notice as soon as reasonably practicable after it became aware that it had such a claim, and in any event on or before 31 July 2015; and

  • Legal proceedings in respect of the claim had been commenced by being both properly issued and validly served on the Sellers within six months of the date the Sellers were first notified of the claim.

Paragraph 12 of the SPA provided that the Sellers would not be liable if the matter was remedied within 60 days of the date on which notice of such claim was given.

Under paragraph 13, the Purchasers were required to give notice to the Sellers containing reasonable details of any matter which they became aware of which could give rise to a claim.

Notice

On 19 February 2015, the Purchasers’ solicitors sent a letter to the Sellers’ solicitors stating that the letter was “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 alleged that these tax warranty claims were “potential claims” which “may exist”, with an “initial estimate of quantum”.

The Sellers’ solicitors replied on 4 June 2015, stating that the letter did not constitute sufficient notice of a claim because it did not provide “reasonable details”, as specified under paragraph 4 of Schedule 4.

On 29 June 2015, the Purchasers’ solicitors sent a second letter, which contained a more detailed breakdown of the claims and their quantum.

The Purchasers brought a claim on 14 August 2015 and the Sellers applied to strike out parts of the claims against them on the basis that notice had not been given by the date set out in the SPA.

Findings

The High Court granted the strike out application, finding that the Purchasers did not specify the warranties under which claims were trying to be made, and that the Purchasers had been too “tentative and contingent” in the description of these claims.

The Judge stated the letters of 19 February and 29 June had failed to comply with the notice requirements specified in Schedule 4 and so notice had not been given as stipulated in the SPA.

With regards to the second letter, although quantum was specified, it still used the same language as the first letter, referring to the claims as “possible or potential”, rather than actual claims.

The Purchasers subsequently appealed and the Court of Appeal found, dismissing the appeal, that a blanket reference to warranties under the SPA did not constitute notice of a claim.

What to take away from this

This is an example of how a purchaser’s right to pursue a claim can be lost due to not complying with notice provisions and highlights the importance of paying special attention to the notice provisions of an SPA during negotiations.

An SPA will include a deadline for notifying the seller of a claim and it is important to fully consider the importance of this.

Each case will invariably turn on its own sets of facts, but by way of some general comments, it is likely that the Purchasers’ notice will need to:

  • Confirm a claim is being made, rather than suggestions a claim may not be made yet;

  • Highlight that notice of the claim is being made in accordance with the governing provisions of the SPA;

  • Clearly identify each specific warranty or indemnity that the claims are being made against.