In Ipsos S.A. v Dentus Aegis Network Limited [2015] EWHC 1171, Ipsos S.A. (theBuyer) purchased shares in the target group from Dentsu Aegis Network Limited (theSeller).

The Seller warranted that no member of the target group was facing an employee claim and that each member of the group had at all times materially complied with all applicable employment laws.

The sale and purchase agreement (SPA) contained the following provisions:

  • the Seller was only liable for a breach of warranty claim if the Buyer had served written notice "specifying in reasonable detail: (i) the matter which gives rise to the claim; (ii) the nature of the claim; and (iii) (so far as is reasonably practicable at the time of notification) the amount claimed in respect thereof". A claim would also be barred if legal proceedings were not commenced within six months of notice being given (the Notice Limitation)
  • the Buyer had an obligation to notify the Seller of any claim it received from a third party which might result in a warranty claim. A failure to comply with this clause would not prevent a warranty claim being made, but it could be taken into account when calculating damages
  • a two-year limitation period on warranty claims.

Following completion, a large number of employment claims were filed against a Brazilian subsidiary of the target group by contract workers (the Employment Claims).

The Buyer issued proceedings against the Seller for breach of warranty, claiming that the target group had breached a number of Brazilian labour laws. The Seller argued that this warranty claim was barred by the Notice Limitation.

The first letter that the Buyer relied on notified the Seller of the Employment Claims, but specifically stated that it was not notice given pursuant to the Notice Limitation so as not to commence the six-month time limit to issue proceedings.

About a year later, and just before the two-year limitation period expired, the Buyer sent another letter relating to the same claims. This letter included the sums involved and gave notice of a number of further employment claims. It also requested the Seller to clarify its position in relation to the third-party claims and stated that following such confirmation the Buyer would provide a further breakdown of losses, costs and expenses "which it claims or may claim from [the Seller] for breach of warranty".

The High Court found in favour of the Seller on the basis that:

  • the original letter was clear it was not notification of a warranty claim; and
  • the second letter:
    • failed to clearly specify its purpose, the matter giving rise to the claim, and the amount being claimed (in accordance with the Notice Limitation)
    • did not contain a reference to the specific clause of the SPA which contained the Notice Limitation
    • did not allege a breach of Brazilian labour law, which was the essence of the Buyer's complaint
    • did not specify the nature of the complaint.

The judge rejected the Buyer's argument that the timing of the second letter, shortly before the limitation period expired, should have suggested to the reasonable reader that it was to be understood as notice of a warranty claim.

WM comment

Take particular care when drafting notice of a breach of warranty. It is essential to accurately comply with the provisions in an SPA which govern the conduct of warranty claims. The courts will apply and interpret these clauses strictly.

There are four general principles that the courts will apply when deciding if a notice is valid:

  • Commercial purpose: does it ensure the seller has sufficient knowledge of the claim to allow it to make financial provision? This is not met if the notice is uninformative or unclear. [1]
  • Would the notice be understood by a reasonable recipient with knowledge of the context in which it was sent? [2]
  • Is it clear, from the notice, that a claim is actually being made, rather than indicating the possibility that a claim may be made? [3]. The courts may cross-refer to previous correspondence here.
  • If there were any requirements specified in the SPA, have these been met?

A notice of a claim should state which provision of the SPA it relates to.