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'Common sense' approach to notice taken in breach of warranty case

Triumph, the multinational aerospace company, has partially succeeded in a damages claim arising out of its 2013 acquisition of three businesses belonging to the components manufacturer Primus.26 Mar 2019

The High Court found in favour of Triumph on one of several claims against Primus for breaches of warranty provided as part of the share purchase agreement (SPA) giving effect to the acquisition. The judge found that Primus had not properly taken into account certain operations and financial assumptions in the financial projections it supplied to Triumph, in breach of a warranty that these must be "carefully prepared".

The judge dismissed an argument by Primus that Triumph had failed to provide adequate notice of its claims, other than for one of the claims, where notice was served out of time. While the judge's findings turned on the wording of the particular notice clause, the court "showed some welcome flexibility and common sense" on this, according to commercial litigation expert Michael Fletcher of Pinsent Masons, the law firm behind Out-Law.com.

"Triumph may consider itself fortunate to succeed in demonstrating valid service," he said. "If the wording of the clause had not given the judge the opportunity, Triumph's service may well have been defective, and their claims lost. This is a salutary reminder of the importance of getting service right, down to the finest detail."

The notice clause, 20.2, stated that any notice to be given to Primus would be deemed to have been properly given if it was given to any "two of the persons named in clause 20.3". Clause 20.3 listed Primus' general counsel, then his name; "with copies to" three other people, including one external lawyer.

Primus' general counsel changed after the SPA completed, and Primus gave valid notice of this change to Triumph. However, when Triumph served its notice of claim for breach of warranty, it addressed it to Primus' old general counsel, providing copies to the three other people listed in clause 20.3. Primus argued that the notice had not been validly served, because it has not been served on its new general counsel. Triumph argued that correct service on the three other named individuals was sufficient.

"On a strict contractual interpretation, applying the principle of what an objective person would have understood clause 20 to mean at the time of contracting, Primus' argument had some merit," said Fletcher. "The wording of clause 20.3 might be read to require correct service, as a minimum, on the named general counsel."

"However, this would have ignored commercial common sense. The judge noted that 'the purpose of the clause 20 procedure was to ensure that any formal notice served by Triumph would come to the attention of senior members of [Primus' parent company] or its legal representative' and that 'such purpose would be achieved by service of the notice on any one, or more, of the individuals named in clause 20.3'. The fact that clause 20.2 allowed service to be made on 'any two of the persons named in clause 20.3' gave the judge the opportunity to find in Triumph's favour on this point," he said.

Triumph and Primus entered into the SPA on 27 March 2013, with the deal completing on 3 May 2013. Under the SPA, Triumph purchased the share capital of three Primus companies, based in Farnborough in England and Rayong in Thailand, for just over $76.5 million.

Following the acquisition, Triumph discovered evidence of delivery and quality problems at the Farnborough site, which it claimed Primus had not disclosed in breach of warranty. It also claimed damages related to the loss, in late 2013, of an industry quality accreditation at the Farnborough site, as well as Primus' failure to prepare future financial projections with care. A fourth breach of warranty claim, based on Primus' failure to notify Triumph of the claimed breaches of warranty, was dismissed immediately as it was brought outside of the contractual 18 month limitation period.

After finding that Triumph had properly complied with the notice requirements in the SPA, she went on to consider each of the claims for breach of warranty in turn. First, she dismissed the claim related to the loss of industry quality accreditation. As this did not occur until December 2013, seven months after completion, she found that this was Triumph's responsibility and not a breach of warranty. Triumph attempted to argue that Primus had only obtained accreditation the year by dishonest means, but the judge said that this "serious allegation" was not supported by the evidence.

The judge also dismissed a breach of warranty claim based on what Triumph alleged were "ongoing operational failings" at the Farnborough site at the time of the SPA and at completion. She agreed with Primus that these issues were fairly and clearly disclosed at the time.

The judge did, however, uphold Triumph's breach of warranty claim in respect of Primus' forward-looking business projections. The term 'carefully prepared' was not defined in the SPA. However, in the judge's view, Primus failed on an objective assessment of the wording, as its projections "failed to take into account, properly or accurately, key operational and financial assumptions" and therefore "failed to adequately model the known operational and financial position of Primus as at October 2012".

She concluded that Triumph was entitled to damages "based on the difference between the price agreed on the assumption of the [long-range planning] and what the price would have been, using the same method of calculation, if the properly adjusted LRP had been made", subject to a contractual cap of $15m. This will be calculated and agreed by experts on behalf of the parties.