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Court of Appeal indicates widely-drafted breach of warranty notices may not be sufficient, says expert

A recent Court of Appeal decision reinforces the need for strict compliance with notice clauses when bringing a claim for breach of warranty, an expert has said.26 Jan 2018

The appeal court ruled that a breach of tax warranty claim under a share purchase agreement (SPA) had been correctly struck out, as the purchasing company had failed to sufficiently 'set out' its claim as required by the warranty.

"The decision emphasises that contractual claim notifications can be non-compliant if the reasonable recipient cannot ascertain with any certainty which of the contractual provisions is being relied upon," said corporate litigation expert Suzie Davies of Pinsent Masons, the law firm behind Out-Law.com.

"Non-compliance often centres on notices which fail to identify the factual or broad legal basis of the claim. This case signals there is also a risk for claimants that widely-drafted notices may not be sufficient," she said.

Purchaser Teoco had attempted to raise a claim against Aircom in relation to two outstanding tax matters, dating back to before the SPA was completed in November 2013. The warranty clause in the SPA required it to give notice to Aircom "setting out 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))".

The trial judge ruled that letters sent to Aircom by Teoco's lawyers in February 2015 and June 2015 were not sufficient for this purpose. The letter referred broadly to breaches of the 'tax warranties' in the SPA, but did not identify to which of the five warranties included in that document the breaches related.

The Court of Appeal agreed, finding that the letters "did not identify the particular warranties and provisions of the Tax Covenant on which [the claims] were based".

"In general … it seems to me that 'setting out' the 'grounds' of a claim required explicit reference to particular warranties or other provisions," said Lord Justice Newey, giving the judgment of the court. "Moreover, the present case was not one in which either the purchaser erroneously referred to the wrong warranty or the facts unequivocally pointed to a specific warranty. To the contrary, there was real scope for doubt ... about which provisions were thought by the purchaser to be relevant."

"It was doubtless to keep the purchaser's options open that the February and June letters were framed in the wide way they were, but the result is that they cannot be said to have identified particular warranties and other provision or, hence, the 'grounds' on which [the claims] were based. As the [trial judge] said, the 'omnibus reference to warranty claims or tax claims' was not good enough," he said.

The judge said that it was "not inconceivable" that Teoco could have sufficiently set out its claim without identifying which warranties or provisions had been breached; for example, if the way in which the letter was written had "unequivocally indicated a specific warranty". It was also possible to "imagine the circumstances in which reference to the wrong warranty would not have invalidated a notice", assuming a "reasonable recipient" would have understood what was meant by the notice. However, this was not the case here, he said.

Lord Justice Newey said that the requirements for a notification clause would, in any case, "[turn] on its own individual wording". However, in this case, his conclusions were "consistent with the importance of certainty", he said.

"Clearly every notification clause will turn on its own individual wording but in this case the fact that there was an 'omnibus' of warranties that could have applied meant that there needed to be certainty and the failure to identify a specific warranty here was fatal," said corporate litigation expert Suzie Davies. "Care must be taken to draft notices in an unambiguous way."

"This case serves as a reminder to allow sufficient time when considering notification provisions to carefully consider the requirements of the provisions and the meaning of the words used - otherwise, there is a risk that a claim will fail at the first hurdle," she said.