The recent Court of Appeal decision in Teoco UK Ltd -v- Aircom Jersey 4 Ltd (2018) acts as an important reminder of the importance of complying with the strict terms of a share purchase agreement (SPA) when providing notice of a claim for breach of warranty.

Background

In November 2013, Teoco UK Ltd (Teoco) acquired two companies and their subsidiaries from Aircom Jersey 4 Ltd and Aircom Global Operations Ltd (together, Aircom) for around £41 million.

As you might expect, the SPA between the parties contained various general warranties and tax warranties regarding the target companies as well as a tax covenant in Teoco’s favour. As you also might expect, the SPA placed limits on those warranties and the tax covenant, including the notification procedure for a claim as follows:

‘Schedule 4

4.Notice of claims

[Aircom] shall [not] be liable for any [claim] unless [Teoco] has given notice to [Aircom] of such [claim] setting out reasonable details of the [claim] (including the grounds on which it is based and [Teoco’s] good faith estimate of the amount of the [claim] (detailing [Teoco] calculation of the loss, liability or damage alleged to have suffered or incurred)).'

Teoco was also required to give notice of any claim by no later than 31 July 2015, with proceedings to be commenced within six months of the date of the notice.

On 19 February 2015, Teoco’s solicitors sent a letter to Aircom stated to represent ‘notification in accordance with schedule 4 of the SPA of the existence of [claims], being either Warranty Claims or Tax Claims, as further detailed below’. The letter was tentative, referencing ‘potential’ tax exposures and liabilities of the target companies’ subsidiaries and enclosing a ‘preliminary report’ in respect of the ‘possible’ value of the claim. The letter did not identify the specific warranties alleged to have been breached.

Teoco’s solicitors sent a further letter on 29 June 2015 by way of ‘further notification in accordance with schedule 4 of the SPA, providing further details of Teoco’s claims as outlined in the letter of 19 February 2015’. The letter included a breakdown of alleged tax liabilities ‘amounting to claims under the tax warranties and the tax covenants of the SPA’. Again, however, no specific warranties were identified.

Teoco issued proceedings on 14 August 2015 seeking damages of around £3.5 million for breach of warranty or an indemnity in relation to the tax liabilities referenced within the letters. Aircom applied to strike out the claim on the basis that Teoco had failed to provide proper notice in accordance with the SPA.

Decision

The High Court was tasked with deciding whether Teoco had complied with the terms of schedule 4 of the SPA, as set out above.

The High Court judge held that:

  • the letters did not make it clear that Teoco intended to bring a claim, as opposed to merely notifying Aircom that it may have a claim in the future. The cautious approach adopted by Teoco’s solicitors was fatal
  • setting out “the grounds of claim” must include identification of the particular warranties said to be breached, or the basis of the trigger of the tax indemnity. Given that Teoco had failed to identify the specific warranties, relying instead on an all-encompassing reference to ‘the tax covenant, the tax warranties and the general warranties’, neither of the Teoco’s solicitors’ letters represented due notification of claims in accordance with clause 5.1 of schedule 4 of the SPA

Accordingly, and no doubt much to the dismay of Teoco’s solicitors, the claim was struck out.

Teoco appealed to the Court of Appeal on the basis that there was no general principle that particular warranties must be identified where a notification clause in an SPA provides for details of a claim to be given. However, the Court of Appeal dismissed the appeal unanimously.

The judges agreed that the SPA required the legal basis of any claim to be identified and the notice should have made explicit reference to the particular warranties alleged to have been breached. There was real scope for doubt about which SPA provisions Teoco thought to be relevant to its claims. The letters were framed in a wide way purposefully to keep Teoco’s options open, but the result was that the grounds could not be identified. The blanket reference to ‘warranty claims or tax claims’ did not serve to help identify the grounds as, while it no doubt did include the relevant warranties, it also encompassed a number of irrelevant clauses.

Comments

Every warranty claim will depend on the precise terms of the SPA and the facts of the case. However, the implications of this claim impact on anyone considering bringing a warranty claim.

SPAs often provide tight deadlines in which to notify the sellers of a claim and, thereafter, to issue and serve proceedings. Buyers should act promptly to identify any potential breaches of warranties or indemnities under an SPA and take assertive action to protect any claim they may have.

Buyers should review the SPA carefully and ensure any notification of a claim follows the terms the SPA’s procedures closely and identifies clearly the particular warranties or indemnities under which the claim is being made. A widely framed notification which sets out the factual background and the losses may still be deficient if it does not identify the legal grounds of the claim with sufficient certainty.