In this this week’s update: a warranty claim notice was invalid, the European Commission adopts proposals for sustainability reporting and climate taxonomy and ecoDa publishes revised corporate governance guidance for unlisted European companies.

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Court orders release of retention as warranty claim out of time and ineffective

In an application for summary judgment, the High Court has ordered that a sum held in escrow on a share sale be released to the sellers on the basis that a purported claim for breach of warranty was made out of time and not properly notified.

What happened?

Arani v Cordic Group Ltd [2021] EWHC 829 (Comm) concerned the sale of a company by five individuals. The sale was governed by a share sale and purchase agreement (SPA), which contained a number of provisions that are commonplace on a sale of shares, including:

  • various warranties given by the sellers as to the state of the target company’s affairs, coupled with a series of disclosures where those warranties were not accurate;
  • various limitations on the sellers’ liability for certain types of claim in connection with the sale; and
  • a retention mechanism, under which part of the price would be held in suspense for a time.

The SPA stated that, in order to bring a warranty claim against the sellers, the buyer had to give the sellers notice containing “full particulars” of the claim within 16 months of completion of the sale. After that, the sellers would have no liability for breach of warranty (except for certain specified warranties).

The SPA also contained a relatively standard clause stating that the various limitations in the SPA did not apply to claims arising out of fraud.

Under the retention mechanism, a portion of the purchase price would be held in a bank account operated by the buyer’s solicitors, instead of being paid to the sellers on completion of the sale. This would act as a form of protection should the buyer need to bring a claim against the sellers.

If the buyer had not notified any warranty claims to the sellers by the deadline in the SPA, the buyer’s solicitors would release the retention to the sellers. However, if the buyer had validly notified the sellers of a warranty claim by that date, an amount equal to the estimate value of the claim would remain in the escrow account, with the balance being paid to the sellers. In order to be able to withhold the amount of a claim in the retention account, the relevant notice of claim had to set out the estimated amount of the claim.

The sale completed on 1 November 2018. This meant that the deadline for notifying a warranty claim, and so the release date for the retention, was 1 March 2020.

However, the buyer’s solicitors did not release the retention on that date. Subsequently, on 2 March 2020 they wrote to the sellers notifying them of an alleged breach of several warranties. On this basis, the buyer’s solicitors withheld payment of the retention. The warranty claim notice read as follows:

As you are aware, [the company] is a booking and data despatch service provider who provide fleet management solutions targeted at the taxi, private hire and courier service sectors. [The company] makes use of so called PAF data from Royal Mail in its systems and services. It has come to the Purchaser’s attention that there is no commercial licence to do this, in breach of numerous warranties provided to the Purchaser by the Vendors under the SPA, including but not necessarily limited to the following.

The sellers initiated legal proceedings. They argued the following.

  • The notice of warranty claim was given the day after the deadline. It was therefore out of time and, under the terms of the SPA, the sellers had no liability for any alleged breach of warranty.
  • In any case, the wording of the notice was inadequate. It did not give enough detail to amount to “full particulars” of the purported warranty claim. Indeed, it did not even state that it was a notice of warranty claim, which previously cases had established was necessary for the notice to be valid.
  • As a result, the buyer’s solicitors were required to release the retention payment to the sellers. The sellers sought “specific performance” to require the payment of the retention.

The buyer responded by launching counterclaims for breach of warranty, misrepresentation and negligent misstatement. In particular, the buyer argued that the contractual deadline in the SPA did not apply because the sellers had acted fraudulently by not disclosing the particular issue.

What did the court say?

The court agreed that the retention money was to be paid to the sellers.

The judge found that the buyer’s notice of warranty claim was invalid for several reasons:

  • It had not been sent within the deadline imposed by the SPA.
  • It did not contain “full particulars” of the alleged breach of warranty, as required by the SPA.
  • It had reserved the right to bring proceedings, but it had not specified the claim which the buyer was making. Previous case law has shown that a notice of a claim under an SPA (be it a warranty claim or an indemnity claim) must state exactly what claim the buyer is making (by reference to the relevant provisions of the SPA) and confirm that the buyer is in fact bringing the claim.
  • It had not set out the estimate amount of the claim, which was required in order for the buyer to withhold part of the retention money.

The court did not reach a conclusion on whether the breaches of warranty had been fraudulent. The judge agreed that the deadline for notifying a warranty claim did not apply to claims arising out of fraud. However, the SPA did not permit the buyer to continue to hold the retention money after the release date where there may have been fraudulent breaches of warranty. The retention mechanism made no mention of delaying payment due to fraudulent claims.

As a result, even if the notice of claim was valid, the buyer’s solicitors were still required to pay the retention monies out to the sellers.

What does this mean for me?

This was merely a decision on summary judgment, without a full trial. As a result, it is important not to draw strong conclusions from it. However, the decision is clear, cogent and unsurprising.

Although it does not provide us with any new law, the judgment does highlight several important things to bear in mind when contemplating notifying a claim for breach of warranty.

  • Keep an eye on the claim deadline. It is standard for an SPA to contain a contractual deadline for notifying claims so that a seller is not required to “look over their shoulder” for a long period of time. If the deadline is approaching, consider carrying out an assessment of whether there are any potential claims that need to be notified.
  • Make sure the notice states that it is notifying a warranty claim. The purpose of a notice is to enable a seller to evaluate its potential liability under the SPA and make provision for it appropriately. The seller cannot do this if they do not understand the nature of the claim. The courts are usually more generous towards a seller where there is any doubt.
  • Be clear as to which warranties are likely to have been breached. This will usually involve analysing the wording of the warranties carefully to check whether the matter in question fits within the scope of the language.
  • Specify all possible warranties the seller may have breached. If a claim under one warranty fails, it may be difficult to claim later under a different warranty that was not mentioned at the time.
  • Include sufficient information on the claim. For a start, the level of information in the notice must comply with any specific requirements in the SPA. Beyond this, the notice must contain enough details to enable the seller to understand the basis of the claim.
  • Consider whether the notice should cover any other breaches of the SPA. This might include notification obligations (as in this case), but also any indemnities or other covenants in the SPA.

European Commission adopts proposals for sustainability reporting and climate taxonomy

The European Commission has adopted legislative proposals as part of a package of measures designed to “improve the flow of money towards sustainable activities across the European Union”.

Climate taxonomy

The Commission has agreed the test of a new EU Taxonomy Climate Delegated Act, which would supplement the existing European Union (EU) Taxonomy Regulation. The Act would create a common language for investors in projects and economic activities with a substantial positive impact on the climate and the environment. It contains technical screening criteria defining to define which activities contribute to environmental objectives contained in the Taxonomy Regulation.

The Commission states that the Act would cover roughly 40% of listed companies, in sectors responsible for almost 80% of direct greenhouse gas emissions in Europe (including energy, forestry, manufacturing, transport and buildings).

The Act would apply from 1 January 2022.

Sustainability reporting

Separately, the Commission has published a proposal for a new EU Corporate Sustainability Reporting Directive. The Directive would create a set of rules to bring sustainability reporting on a par with financial reporting by amending various existing pieces of EU legislation, including the EU Accounting, Audit and Takeover Directives.

In particular, the Directive would extend existing EU sustainability reporting requirements to:

  • all large companies (whether or not they are listed), regardless of how many employees they have; and
  • all listed companies (regardless of their size).

According to the Commission, this would increase the number of companies in the EU within the regime from around 11,000 at present to nearly 50,000. The Commission is proposing separate, proportionate standards for small and medium-sized enterprises (SMEs).

Impact in the UK

As the legislative proposals would form part of EU law following Brexit, they would not apply in the United Kingdom. They would, however, affect UK companies whose securities are admitted to trading on a European securities exchange or which carry on business within the EU.

It will be for the UK Government to decide whether to adopt similar proposals in the UK. The Government is already consulting on various initiatives relating to corporate reporting by UK-incorporated and UK-listed companies, including on mandatory reporting against the Recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and on audit and governance reforms more generally (see our previous Corporate Law Update). We will wait to see how closely it decides to align those initiatives with the EU’s proposals.

Also this week…

  • ecoDa publishes ESG guidance for European unlisted companies. The European Confederation of Directors’ Association has published an updated version of its Corporate Governance Guidance and Principles for Unlisted Companies in Europe. The document provides guidance for unlisted companies that are designing a corporate governance framework. Although directed at companies in Continental Europe, the guidance may be of interest to UK companies and benefits from input from the UK’s Institute of Directors.