In the recent case of Teoco UK Limited v Aircom Jersey 4 Limited and Aircom Global Operations Limited [2015] EWHC (Ch), the High Court considered the validity of breach of warranty claim notification letters.

Facts

The claimant acquired two companies and their subsidiaries from the defendants. In the sale and purchase agreement (“SPA”) the defendants gave various general warranties, tax warranties and a tax covenant which applied in certain circumstances. The SPA contained limitation of liability provisions which provided that a defendant would not be liable for any claim unless:

  • the claimant had given notice to the defendant of the claim setting out reasonable details of the claim (including the grounds on which it was based and the claimant’s good faith estimate of the amount of the claim (including the claimant’s calculation of the loss, liability or damage alleged to have been suffered or incurred));
  • the claimant had given 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. The claimant was also required to, as soon as reasonably practicable, give notice to a defendant containing reasonable details of any matter or thing of which the claimant Group becomes aware that indicated that the claimant had or was likely to have a claim; and
  • legal proceedings in respect of the claim had been commenced by being properly issued and validly served on the defendant within six months of the date the defendant was first notified of the claim.

In February 2015 the claimant lawyers sent a letter to the defendants to notify them of various claims being made against the target company. The letter was tentative as it referred to “tax exposures [which] may exist”, “potential…tax liabilities” and the “estimate of…possible quantum” set out in a “preliminary report prepared by PwC”. The claimant alleged that these factors indicated that certain tax liabilities may have existed, which were not disclosed to the claimant when the SPA was signed and the claimant reserved the right to make a claim. The letter did not identify the specific warranties the claimant alleged the defendants had breached.

The defendants responded stating that the letter did not contain reasonable details of the claims. In June 2015 the claimant sent another letter which provided some further information.

In August 2015 the claimant commenced proceedings and served a claim for breach of warranties in the High Court. The defendants made an application to strike out the claim.

Decision

The High Court granted the strike out application, holding that the February and June 2015 letters were not sufficiently detailed enough to be valid notification letters. The key question was how a purported notification would be understood by a reasonable recipient with the knowledge of the context in which the notification was sent. The High Court ruled that the claimant’s letters could not be viewed by a reasonable recipient as notices setting out an actual claim as opposed to a contingent claim, which may be made in the future for the following reasons:

  • The letters had a generic reference to potential claims along with a reservation of rights but did not provide any reasonable detail and did not specifically identify the warranties the claimant alleged had been breached, even though it was aware of most of the claims several months before they were actually brought.
  • The letters did not make reference to the relevant paragraph of schedule 4 but simply schedule 4 as a whole.
  • A reasonable recipient would not understand that the letters comprised the making of claims as opposed to the notification by the claimant that it may have claims against the defendants in the future.

Conclusion

This case highlights the consequences of failing to comply with the requirements of notice of claims provisions when pursuing a warranty or indemnity claim under an SPA. Although each case will depend on the facts and the provisions in the SPA, as a minimum, it is likely that a claimant’s claim notice will need to address the points below.

  • Be clear that a claim is being made rather than the potential of a claim being made.
  • Be clear that the notice is given pursuant to the relevant limitation clause in the SPA.
  • Ensure each of the particular warranties or indemnities under which the claim is being made are identified, even if you do not intend to pursue them.