Notice of warranty and indemnity claims valid as genuine estimate

Summary

A notice of claim under a sale and purchase agreement was held to have satisfied the contractual requirements, despite the warranty claim being quantified on the incorrect basis. The Seller was provided with the information required to challenge the Buyer’s claim.

Background

This decision concerned applications to dismiss various warranty and indemnity claims on the basis of failure to comply with the claim notification clause in the SPA.

The dispute arose out of the sale and purchase of shares in a target company (then Scottish Power General Ltd, now renamed VPI Power Ltd). The Seller was Scottish Power Retail Holdings Ltd, and the Buyer was Drax Smart Generation Holdco Ltd.

One of the main assets of the Target was a site which was a potential location for a new power station. For that project to be feasible, it would be necessary to connect the power station to the national grid using cables laid over adjacent land. Scottish Power had the benefit of an option agreement with the landowner, giving it a right to obtain an easement over the adjacent land, and those rights were assigned to the Target.

The Seller agreed to sell the Target to the Buyer. Thereafter, it became clear that the option had lapsed and the Target could not exercise its right to an easement.

The SPA contained warranties and indemnities that related to the obtaining of the easement. The Buyer gave notice of breach of these warranties and indemnities to the Seller, who rejected the notification. Amongst other things, the Seller argued that (a) the warranty claim notification was deficient, in that it contained insufficient information as to the basis of the Buyer’s damages claim to meet the requirements of the notification clause; and (b) the indemnity claim was bound to fail because the Buyer had made no demand on the Seller, which the Seller argued was required under the claim notification provision.

The claim notification - Court of Appeal decision

The pivotal claim notification clause in the SPA stated: “… the Seller shall not be liable for a claim unless the Buyer has notified the Seller of a claim, stating in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer’s calculation of the Loss thereby alleged to have been suffered)…”

The clause also contained various time limits within which different types of warranty and indemnity claims needed to be made.

The Court of Appeal concluded that:

• The “initial purpose” of a claim notification clause in an SPA is to provide a contractual limitation period. These clauses allow the parties to close their books on a transaction if notification is not given within the time period specified.

• Whether a notice is sufficient to meet the requirements of the clause depends primarily on the language of the notification clause.

• The courts “should not interpret such clause as imposing requirements which serve no real commercial purpose unless compelled to do so by the language of the clause.”

• Such clauses are “essentially exclusion clauses”. The parties are not to be taken to have given up valuable rights without making it clear that they intend to do so. (We would prefer to characterise these as performative conditions that provide formal requirements for a Buyer to meet to trigger the right to claim under an SPA.)

• The part of the notice relating to the warranty claims quantified the loss based on some anticipated future loss to a third party who had subsequently purchased the Target from the Buyer. It was not, as it should have been, quantified based on the difference in the value of the company as warranted and the actual value given the breach when bought by the Buyer. The Buyer sought to amend its Particulars of Claim to plead the diminution in the value of the shares purchased. This amendment was, if the contractual limitation period applied, out of time.

The Court considered that the notice was formulated in good faith. An attempt had been made to quantify the warranty claims, albeit they were wrong. The Seller was provided with the information required to challenge the Buyer’s claim. That could include challenging the basis of the valuation of the claim.

The Court’s approach is encapsulated in the following quotation:

“… so long as what is put forward in the Notice of Claim is a genuine estimate, it is as a matter of fact ‘the Buyer’s calculation of the Loss thereby alleged to have been suffered’, which is all that the clause requires. There is nothing in the clause to set in stone the calculation of the loss which is stated in the Notice of Claim. If further reflection indicates that the calculation is legally unsound, or capable of improvement, there is nothing in the clause and no good reason to insist that the buyer should be held to the way in which the calculation was formulated in the Notice of Claim. On the contrary, the notice has served its purpose by preventing the claim from becoming barred, and the parties will move forward promptly (if they cannot resolve the matter) to litigation…”

The Buyer also sought to amend its Particulars of Claim to quantify its indemnity claim based on the alleged drop in value of the Target. This approach is interesting: the calculation of indemnity damages is different from warranty damages. An indemnity covers all of the losses that flow from the statement being incorrect. The latter focusses on the difference in value of the Target as a result of the warranty being incorrect. In any event, given that the time limit for indemnity based claims was seven years under the Claim Notification Clause, the amendment to that claim was still well within time.

Commentary

The case will be of obvious interest to any W&I insurers who underwrite Seller-side policies. These turn on there being legal liability under the SPA. Therefore, any broadening of the Seller’s liability also broadens insurers’ exposure.

For Buyer-side W&I insurers (the vast majority of W&I insurance that is now procured) this may help inform the approach the Courts take to claim notification clauses in the policies. It is worth restating that the language in the notification will be crucial. However, this decision shows a willingness on the part of the Court to permit claims to proceed if sufficient information has been provided in time to allow the notified matter to be assessed, even if some of the detail turns out to have been incorrect.

Recent court decisions have flipped between a stricter approach to the language used and a more purposive approach. In this case, the Court followed the language used, even though it produced a result favourable to the Buyer. The Buyer had quantified its claim in the notice. It has just used the incorrect basis of calculation.

It is in marked contrast to the approach of the Court of Appeal in Decision Holdings, reported last year (see our article) and indeed the previous judgment in Teoco v Aircom (see our article). In Decision Holdings, although the Buyer had attempted to quantify its losses, the Court of Appeal held that the notice was defective because the Seller had not separately quantified each individual breach of warranty. It will be interesting to see how future courts interpret attempts to quantify losses at notification stage.