SPA warranty claims – case update

Three decisions earlier this year provide helpful illustrations of those principles in practice when it comes to the substance of notifications:

MDW Holdings v Norvill [2021] EWHC 1135 (Ch)

In the MDW case the court considered whether the Buyer had complied with the following notification provision:

“The Sellers shall not be liable for a Claim unless notice in writing summarising the nature of the Claim (in so far as it is known to the Buyer) and, as far as is reasonably practicable, the amount claimed, has been given by or on behalf of the Sellers…prior to the expiry of the period of 2 years commencing on the Completion Date”

The Buyer had submitted a notice in writing within time which included an estimate of the value of their claims in total. However, the Sellers complained that the Buyer had not provided any evidence of the steps it had taken to quantify its losses before giving notification, and it had failed to identify the losses that could be causally linked to each specific claim. Accordingly, the Sellers argued that, whilst the Buyer had set out the value of its claim, it had not done so “as far as is reasonably practicable”.

The Judge considered that the notification provision set a low threshold. It did not contain any requirement to set out the specific grounds of the claim, or reasonable detail concerning the matters said to constitute the breach. Similarly, there was no requirement to explain how the amount claimed had been calculated or the manner in which it was causally related to the matters complained of. That, in the Judge’s view was relevant in considering the approach to the requirement. The Judge considered that, having regard to the available evidence at the time, the notification requirement had been complied with as it (a) stated a figure, and (b) made clear that the figure represented the reduction in value of the shares by reason of the breaches complained of. 

Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638

In Dodika, the relevant notice provision for a tax indemnity required the Buyer to give written notice “in reasonable detail” of various things, including “the matter which gives rise to such Claim”. The Buyer wished to make a claim in respect of matters which were the subject of a tax investigation.

Both the Judge at first instance, and the Court of Appeal, considered that the “matter which gives rise to such Claim” was not solely the fact of the tax investigation itself, but the underlying events, facts or circumstances. However, the High Court and the Court of Appeal reached different conclusions on the question of whether or not the matter was stated “in reasonable detail”.  

The Court of Appeal, overruling the Judge at first instance, held that the Buyer had provided reasonable detail since:

(i) the additional information that was available, but not included in the notice, was still at a high level of generality;

(ii) in any event, the additional detail was known (or must have been assumed to have been known) to the Sellers;

(iii) in light of (i) and (ii), it would have served no commercial purpose to have set out the further limited and generic detail available, and requiring the Buyer to do so would “elevate the requirement to state matters in reasonable detail into empty formalism”.

The Court of Appeal did make clear though that, if the notice had specified that particular information did need to be included in the notice, then that information (even if known to the Sellers) would have to be included, in order for the notice to be valid.  What saved the Buyer here was the fact that the clause only required “reasonable detail”.  

TP ICAP Ltd v NEX Group Ltd [2021] EWHC 1375 (Comm)

In TP ICAP Ltd v NEX Group Ltd, the Buyer was faced with a difficult situation. The Seller had warranted that the target had not breached any applicable law or regulation. Under the terms of the SPA, the Buyer had to notify the Seller of any warranty claims within two years of completion.  Prior to the expiry of that two year time limit, various authorities had commenced investigations into the target company.  It was possible that those investigations would lead to a finding that certain laws had been breached (which would have given rise to a claim under the warranties). However, those investigations had not been concluded before the two year cut-off for notifying the Seller of any warranty claims. The Buyer did not want to notify the Seller that there had been an actual breach of applicable laws and regulations, as it was concerned that by doing so it would prejudice the outcome of the authorities’ investigations, and that would not be in either the Buyer’s or the Seller’s interests (“the jeopardy point”). 

The Buyer therefore notified the Seller of a potential claim under the warranties. The Seller applied to the High Court to have certain of the Buyer’s claims struck out on the basis that the Buyer had failed to comply with the notification provisions. 
The Judge considered that the notification provision set a low threshold for the level of detail required to be given of the claim, but held that the Buyer’s notices were defective on the basis that:

• the relevant notification provision operated as a limitation clause; it required notification of an actual breach within the time limit; and
  
  
• the notification (that was made within the time limit), that an unspecified breach may be revealed at some point in the future, was ineffective (if such a notice was effective, the time limit could always be circumvented by making an “in time” notification of a potential future claim).

Conclusion

In all of the cases referred to the Court made clear that each notification clause turns on its own wording, but each of the cases provides a helpful indication of the Court’s approach to the interpretation of those provisions.

Despite the Court finding in the Buyer’s favour in both the MDW and Dodika cases, Buyers would be well advised to err on the side of caution and include more, rather than less, detail in their notices.  Although the Buyers ultimately succeeded they only did so after lengthy, and costly, court proceedings. In the Dodika case, the buyer only won on appeal, and Nugee LJ made clear that he had reached his conclusion with “some hesitation”. The cost and delay associated with dealing with those arguments may have been avoided had the Buyer erred on the side of caution and invested some more time and effort upfront in providing as full a notice as possible. Nonetheless, the nature of these so-called gateway provisions – which make notification a pre-condition to a claim – will always invite close scrutiny by Sellers. If they are able to convince a court that the notice is defective (either out of time or inadequate in substance), this will kill off a claim entirely at a summary stage.

The TP ICAP Ltd case serves as a warning to Buyers, both as regards: (i) the dangers associated with agreeing to short time limits for the notification of actual (rather than possible) claims, and (ii) ensuring that the requirements of a clause are met. If warranties are given in respect of matters which may be investigated by third parties (perhaps regulators), longer time periods may be appropriate. That is the normal approach in respect of tax warranties for example.