The High Court has considered multiple warranty claims under a share purchase agreement (SPA), ultimately allowing one claim and disallowing two. It also considered whether the buyer had served proper notice of the claims, and how damages for breach of warranty were to be calculated.
The claim and decision deal with several important points that frequently come up in negotiations on a private share or business sale. Each of these is worth exploring in detail, and so we will report on different parts of this judgment over the next three weeks.
This week, we look at the background to the dispute and whether the buyer gave proper notice of its claims to the seller. Next week, we will examine two of the warranty claims in detail. Finally, in the following week, we will look at the third warranty claim, and at how the court calculated the damages payable by the seller.
Triumph Controls UK Limited v Primus International Holding Company concerned the acquisition of an aerospace components business. Triumph bought the shares in three subsidiaries owned by Primus. Those subsidiaries together comprised Primus’ composites manufacturing division, which was located in the UK and Thailand.
The SPA contained several standard provisions:
- Primus gave various warranties about the state of the subsidiaries and their business.
- To bring a claim against Primus for breach of warranty, Triumph had to give Primus written notice of the claim, giving certain information, within 18 months of the deal closing.
- Immediately before closing the deal, Primus was required to notify Triumph of any warranty breaches at that time and give an estimate of their value. If the value exceeded a certain amount, Triumph could walk away from the deal. (For ease, we will call this the “Primus notice clause”.)
- The maximum amount Triumph could claim for breaches of warranty was limited to US$15m.
- The maximum amount Triumph could claim for breaches of other obligations in the SPA was limited to just over US$63m.
The deal closed. Soon afterwards, the financial and operating position of the target business deteriorated rapidly. In particular, according to Triumph, operational issues at the UK site led to a significant shortfall in revenue, and numerous other issues caused the financial performance of the business to be significantly worse than forecast. Finally, seven months after the sale closed, the business lost its “Nadcap” industry accreditation, which it needed to continue operating.
According to Triumph, the value in the shares it had bought was wiped out, rendering them “worthless”.
What did Triumph claim?
Around 17 months after the deal closed, Triumph notified Primus that it intended to bring several warranty claims. It cited breaches of eight different warranties, which the court grouped as follows:
- Nadcap claim. Primus warranted that the subsidiaries had materially complied with all licences and authorities they needed to operate the business. Triumph claimed the subsidiaries had not been complying with their Nadcap accreditation (which, in due course, was revoked).
- Operations claim. Primus warranted that, as far as it was aware, there was nothing that might give rise to claims above a certain amount against the subsidiaries, and that no goods supplied by the subsidiaries were defective or would fail. It also warranted that the subsidiaries had not materially defaulted under any material contracts. Triumph described numerous matters which it said amounted to a breach of these warranties.
- Projections claim. Finally, Primus warranted that certain forward-looking projections given to Triumph had been “honestly and carefully prepared”. Triumph claimed that certain relevant matters had not been taken into account in the projections and that the forecasts had not been kept properly up to date.
In addition, Triumph said that Primus had breached the Primus notice clause, because it had failed to tell Triumph about these breaches of warranty at closing. This was significant because, whilst Primus’ liability for breaches of warranty was limited to $15m, it was not clear whether its liability for breaches of the Primus notice clause was limited to $15m or $63m. Triumph argued that the higher cap applied, allowing it to claim greater damages than it could have recovered under a mere warranty claim.
In response, Primus said that Triumph had not given proper notice of the warranty claims, and that, in each case, either there was no breach of warranty or it had already disclosed the matters in question.
Did Triumph give valid notice of its claims?
Under the SPA, Primus was not liable for a warranty claim unless Triumph gave it “notice in writing of the claim, summarising the nature of the claim as far as it is known … and the amount claimed … within the period of 18 months beginning on the Completion Date”.
This is relatively standard wording. The courts regard this kind of requirement as giving “commercial certainty” so that parties know where they stand (Ener-G Holdings v Hormell).
However, the courts have set a high standard for this kind of notice:
- The notice must be “unambiguous” and leave the seller “in no reasonable doubt” as to the grounds of the claim (Senate Electrical v Alcatel), although the notice does not need to contain the level of detail required to begin formal court proceedings (ROK v S Harrison Group)
- It must be clear that the notice relates to a claim under the warranties, as opposed to some other part of the SPA (Laminates Acquisition v BTR Australia).
- The notice should specify which warranties have allegedly been breached (Teoco UK v Aircom).
In this case, Primus said that Triumph had failed to summarise the nature of its claims properly. In particular, it said that Triumph had described certain matters in its notice, but on launching legal proceedings it had included different or additional complaints in its claim. For example:
- In its initial notice, Triumph claimed that the targets had breached material contracts by failing to deliver on time, but subsequently it alleged that there were also “quality breaches”.
- Initially, Triumph based its projections claim solely on forecasts of production hours. But it later expanded the basis of its claim to include forecasts relating to labour costs, scrap costs, raw material costs and revenue streams.
- At first, the projections claim mentioned only a “long-range plan” provided by Primus, but Triumph later extended the claim to cover other forward-looking projections.
Primus argued that these additional matters were not covered by Triumph’s initial notice and so could not form part of its claims. The court did not agree. It took a relatively holistic view of Triumph’s notice and said that Primus was aware of the substance of the claims.
For example, although Triumph did not explicitly mention “quality breaches” when alleging breaches of material contracts, it had mentioned them in relation to a claim under another warranty. Reading those claims together, it was clear that Triumph’s complaint extended to quality issues overall.
Likewise, Triumph had not referred to each and every forward-looking projection in its initial claim notice, but it had not needed to. The language it had used gave a sufficient level of detail and was wide enough to encompass other kinds of forward-looking projection.
Could Triumph claim beyond the liability cap?
As mentioned above, Triumph claimed that Primus had breached not just the warranties, but also the Primus notice clause. Strictly read, the $15m cap in the SPA applied only to “Claims”, which the SPA defined as claims for breach of warranty. However, the Primus notice clause was not a warranty, but a notification obligation. Triumph argued, therefore, that the Primus liability for breaches of this obligation were subject to the higher, $63m cap.
The judge disagreed. She said that, although “Claim” was defined as a breach of warranty, the parties must have intended it to cover claims arising out of breaches of warranty as well. If that were not the case, Triumph could have used the Primus notice clause effectively to sue for breach of warranty and claim almost $50m more than the maximum amount Primus had agreed it would pay for warranty claims. This would have defeated the purpose of the $15m cap.
How does that affect me?
Putting together a notice of warranty claim can be tricky, and it is important to strike the right balance.
On the one hand, a notice must give the seller enough information to be able to understand the substance of the claim. On the other hand, it is important not to “over-provide”, or the buyer may end up “strait-jacketing” itself when it comes to bringing a claim. As this case shows, a notice does not need to lay out every last element of a potential claim, so buyers do have a degree of flexibility.
Ultimately the contents of a warranty claim notice must comply with any requirements in the SPA. A buyer should check these requirements before drafting its notice.
The court’s decision to disallow the claim under the Primus notice clause is interesting, if perhaps expected. Deciding which kinds of claim fall within which liability cap requires care. Exactly how “Claim” is defined is often regarded as key, but this decision suggests that courts might be quicker than expected to interpret definitions broadly so as to achieve a sensible commercial purpose.
Buyers who are considering bringing a warranty claim should consider the following:
- Be clear as to which warranties are likely to have been breached. Although this sounds simple, it will usually involve carefully analysing the wording of the warranty to check whether the matter in question fits within the scope of the language.
- Ensure the claim notice specifies all possible warranties the seller is alleged to have breached. If it later turns out that the matter did not contravene a given warranty, it may be difficult to claim instead under a different warranty unless the notice mentions it.
- Engage advisers early enough to ensure they can properly investigate the suspected breaches and formulate a compliant and comprehensive claim notice. If notice is not given before the applicable contractual period expires, the claim will be barred in its entirety.
- 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.
- Include details of the specific matters that have caused the breach of warranty. The seller must be able to understand the basis of the claim. A buyer might consider using broad but still specific wording for this purpose, rather than listing out numerous individual breaches.