Two recent cases – Teoco UK Ltd v Aircom Jersey 4 Ltd (2015) and Nobahar-Cookson & Ors v The Hut Group Ltd (2016) – provide a useful reminder of the importance of ensuring compliance with contractual provisions relating to notices of warranty claims.
In Teoco, the SPA contained a limitation clause providing that the sellers would not be liable for any claim unless the buyer gave written notice of such claim setting out reasonable details of the claim (including the grounds and the buyer's estimate of the amount with details of the calculation) as soon as reasonably practicable after becoming aware of the claim, and in any event before 31 July 2015. The buyer had written two letters to the sellers' on 19 February and 29 June 2015, purporting to notify them of warranty claims arising out of the tax affairs of the target's Brazilian and Philippines subsidiaries. The buyer subsequently issued a claim form and served particulars of claim on 14 August 2015. The sellers applied for strike out or summary judgment on the grounds that the buyer had not given notice of the claims by 31 July.
The High Court struck out the buyer's claims, finding that the buyer's letters had not amounted to notice of its claims under the SPA for the following reasons:
- The letters did not state on their face that they were notices of claim under the relevant paragraph of the SPA. The sellers could have reasonably assumed that they were notices of a potential claim (which was required under a separate provision of the SPA), but not of an actual claim.
- The letters did not identify the specific warranties which the buyer claimed had been breached, but instead referred generally to "Warranty Claims" or "Tax Claims".
- On the Brazilian tax issue specifically, even if the letters could be interpreted as notice of a contingent claim, the claim in the proceedings commenced by the buyer was not contingent. Therefore, there had been no notice of the claim that was the subject of proceedings, as required in the SPA.
- On the Philippines tax issue specifically, the buyer was aware that it had a claim for breach of warranty from either September or November 2014. Even if points 1 and 2 above were wrong, the buyer had not provided notice until its letter of 19 February 2015, which was not "as soon as reasonably practicable" after becoming aware of the claim.
In Nobahar-Cookson, the SPA contained a limitation clause providing that the seller would not be liable for a warranty claim unless the buyer served notice of the claim "as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter". The seller argued that a claim brought by the buyer was time-barred on the grounds that the contractual limitation period for notice began to run when the buyer was aware of the factual grounds for a claim, not when it became aware that those facts might give rise to a claim. At first instance, the High Court found that the claim was not time-barred on the basis that "becoming aware of the matter" was properly construed as becoming aware of the claim.
The question for the Court of Appeal was whether the phrase "becoming aware of the matter" meant:
- aware of the facts giving rise to the claim;
- aware that there might be a claim; or
- aware that there was a proper basis for the claim.
The Court of Appeal preferred the last of these options, with Briggs LJ giving the leading judgment on the following grounds:
- There is a general principle that ambiguities in an exclusion clause should be resolved by a narrow construction if those ambiguities cannot be resolved by a linguistic, contextual or purposive analysis.
- The exclusion clause was linguistically and contextually ambiguous, as the use of "matter" in the clause could refer to any of: the claim itself (the High Court's construction); an entitlement to bring the claim; or facts and/or law from which the claim would arise.
- The second of the possible constructions above was so uncommercial that it should be rejected, but either of the first or third interpretations were commercially reasonable.
- The purpose of the exclusion clause was to prevent the buyer from keeping claims up its sleeve before bringing them. That purpose was supported by construing the clause to mean awareness of a proper basis for the claim rather than awareness of the underlying facts. The principle of construing ambiguous exclusion clauses narrowly also pointed towards this result.
Although warranty claim limitation and exclusion clauses may be viewed as boilerplate parts of an SPA, these cases illustrate the importance of paying close attention to the wording of such clauses, both in negotiating the SPA itself and in bringing or defending warranty claims.
Each case will turn on the specific terms of any given SPA, but a claiming party should ensure at a minimum that it:
- provides notice of its claim in a timely manner;
- provides sufficient detail of the claim in the notice;
- makes clear that it is a notice of claim pursuant to the specific relevant clause and for breach of the specific relevant warranties in the SPA; and
- complies with any other relevant provisions in the SPA relating to the notice.On the other side, the party against whom a claim is made should consider carefully the sufficiency and timeliness of a claim notice and any possible grounds for challenging it.
These may seem like technical points at first glance, but they can be fatal to warranty claims, as the above cases demonstrate.