The recent decision in Teoco UK Limited v Aircom Jersey 4 Limited and anor  EWCA Civ 23 highlights the importance of complying with procedural requirements stipulated in a contract when bringing a breach of warranty (or similar) claim.
Agreements containing warranties (or other related provisions) will often stipulate certain procedural requirements which must be met by a party wishing to make a claim under those provisions.
In the recent decision in Teoco UK Limited v Aircom Jersey 4 Limited and anor  EWCA Civ 23, the Court of Appeal confirmed the need for strict compliance with any such procedural requirements. In this case, the Purchaser of shares in a target company was required to notify the Sellers of any post-completion breach of warranty claim and to “set out” in the notice the “grounds” of the claim. Both the High Court and the Court of Appeal said that this required the Purchaser to identify expressly in the notice the warranty or warranties which were said to have been breached and that the Purchaser’s failure to do so was fatal to its claim.
The Court of Appeal’s decision is an important reminder that:
- Parties should not ignore procedural requirements at the drafting stage. They should be considered and negotiated along with the more substantive provisions, particularly as they can significantly impact upon the success or failure of a claim, as this case demonstrates. Purchasers should be wary of agreeing to strict procedural requirements, which may be difficult to satisfy at the time of bringing a claim.
- When bringing a breach of warranty (or similar) claim, parties should ensure that any procedural requirements are met. Where there is ambiguity as to any such requirements, parties should be cautious and do more than appears necessary, in order to mitigate the risk of failing to satisfy these requirements.
The Teoco case
The Teoco case involved a typical agreement for the purchase of shares, governed by a Share Purchase Agreement (SPA) pursuant to which the Sellers provided various warranties, including Tax Warranties and General Warranties.
Paragraph 4 of Schedule 4 to the SPA purported to exclude liability on the Seller’s part for any breach of warranty unless:
"the Purchaser has given notice to the Seller of such Claim setting our reasonable details of the Claim (including the grounds on which it is based and the Purchaser’s good faith estimate of the amount of the Claim (detailing the Purchaser’s calculation of the loss, liability or damage alleged to have been suffered or incurred))".
Following completion of the transaction, the Purchaser wrote (through its solicitors) to the Sellers, indicating that two of the subsidiaries of the target company might be subject to tax liabilities which were not disclosed prior to the transaction.
The Purchaser’s letter was stated to be a “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”, although it said that the Purchaser’s position was “reserved” as to which particular head the claims would fall under. The letter also enclosed a preliminary report from PwC which was said to set out “the basis of” the liabilities and an initial estimate of their possible quantum. The letter itself also included the Purchaser’s initial estimate of the quantum of the claims.
In a further letter from the Purchaser’s solicitors (also stated to be a “notification in accordance with schedule 4 to the SPA”), the Purchaser provided further details of the tax liabilities, but, again, did not specify which specific warranty (or warranties) was alleged to have been breached.
Court of Appeal decision
The Court of Appeal relied on Gloster J’s observation in RWE Nuken Ltd v AEA Technology plc that “[e]very notification clause turns on its own individual wording”.
Ultimately, the Court of Appeal agreed with the High Court’s decision. At first instance the Sellers had successfully obtained a strike-out of the Purchaser’s claim, on the basis that (i) a reasonable recipient of the two letters would not have understood them to have been giving notice of a warranty claim, and (ii) in any event, neither letter set out the grounds of the claim. The Purchaser’s obligation in paragraph 4 of Schedule 4 of the SPA, to “set out” in the notice the “grounds” on which the warranty claim was based, required explicit reference to the particular warranty or warranties said to have been breached. The Purchaser could not keep its options open and leave “real scope for doubt” as to the basis of its claim.
As above, this is an important reminder to contracting counterparties that they should ensure that proper attention is given to the detail of procedural requirements, both at the time of concluding an agreement, and, subsequently, when seeking to rely on a particular contractual provision.