In the recently reported case of Teoco UK Limited v Aircom Jersey 4 Limited and another [2018] EWHC Civ 23, the Court of Appeal considered the validity of breach of warranty claim notification letters which were challenged for being too vague and ambiguous.

A party can be prevented from bringing a claim for breach of warranty if notices are not issued properly; potentially a very costly mistake.

Background

Teoco UK Ltd (“Teoco”) (the Purchaser and Claimant in these proceedings) acquired two companies from the Defendants, Jersey 4 Limited and another (“Jersey 4”), for £41 million in 2013 (the “Sale”). The sale and purchase agreement governing the deal (the “SPA”) contained general warranties, tax warranties and a tax covenants, given by Jersey 4 to Teoco.

The SPA importantly provided that Jersey 4 would not be liable for claims arising from the Sale unless:

  • a notice of a claim setting out the “reasonable details” of the claim, including the grounds on which it was based and a “good faith estimate” of the amount of the claim, was provided;
  • such notice was given as soon “as reasonably practicable” after becoming aware of such a claim, and in any event on or before the 31 July 2015 long stop date; and
  • legal proceedings in respect of any claim had been commenced by being issued and validly served on Jersey 4 within six months of the date it was first notified of the claim.

In February 2015 Teoco’s solicitors sent a letter to Jersey 4 to notify them of various claims (the “Letter”). Teoco alleged that certain tax liabilities – valued at approximately £3.45 million - may have existed against the acquired companies before the Sale, which were not disclosed to Teoco before completion of the Sale.

The Letter was arguably ambiguous, in that it referred to “tax exposures [which] may exist”, “potential…tax liabilities” and the “estimate of…possible quantum” set out in a “preliminary report prepared by PwC”. Also, and importantly, the letter did not identify the specific warranties contained in the SPA which were alleged to have been breached.

Jersey 4 responded stating that the Letter did not contain the requisite detail in respect of the alleged claims as required by the SPA. In June 2015, Teoco sent a further letter to Jersey 4 which provided additional information in respect of its claims (together with the Letter “Teoco’s Letters”), and in August 2015 it issued a breach of warranty claim against Jersey 4 in the High Court (the “Claim”).

Deciding on an application for strike-out of the Claim, the High Court found that the notice of the Claim provided in Teoco’s Letters was not compliant with the specific wording of the SPA. It was found that Tecoco’s Letters were not sufficiently detailed to constitute valid notification under the SPA, and the Claim was accordingly struck-out.

Court of Appeal Decision

Teoco appealed the High Court’s decision to strike-out the Claim.

The Court of Appeal agreed with the decision of the High Court to strike-out the Claim, ruling that Teoco’s Letters could not be viewed by a “reasonable recipient” as notices setting out an actual claim as opposed to a potential claim, which may (or may not) be made in the future.

LJ Newey noted in his Judgment that:

  • Teoco’s Letters contained only generic reference to potential claims along with a reservation of rights, but did not set out reasonable detail of the claims;
  • Teoco’s Letters did not refer to the relevant warranties of the SPA that had been allegedly breached, but simply to a schedule of the SPA as a whole;
  • a “reasonable recipient” would not understand that Tecoco’s Letters comprised the making of claims as opposed to the mere notification that Tecoco may have claims in the future; and
  • the wording of Teoco’s Letters in relation to the potential clams could have “encompassed a multitude of other possibilities” and caused “real scope for doubt” in relation to the potential claims.

As a result, Teoco is unable to bring its envisaged breach of warranty claim against Jersey 4 under the SPA. Teoco is therefore unable to try and recover up to £3.45 million from Jersey 4 arising from the Sale, as they intended.

Comment

This case highlights the importance of conformance with the requirements of the relevant SPA provisions and providing sufficient details of the alleged claim when notifying the seller of a warranty or indemnity claim under an SPA. Although each case will depend on the facts and the provisions in the SPA, as a minimum, it is likely that a purchaser’s claim notice will need to:

  • clearly state that a claim – rather than a potential claim - is being made;
  • identify the particular warranties or indemnities in the SPA which give rise to the claim; and
  • ensure that the notice is given to the seller before expiration of the deadline for doing so contained in the SPA.