Validity of buyer’s notice of claims

Alice Brunning web

by Alice Brunning

In the recent case of Teoco UK Ltd v Aircom Jersey 4 Ltd, the High Court considered whether a buyer’s potential warranty claims under a share purchase agreement (“SPA”) were barred by a contractual limitation of liability. The limitation required the buyer to give the seller written notice of a claim setting out reasonable details of the claim as soon as reasonably practicable after it became aware that it had such a claim.

The buyer relied on two letters it had written to the seller in support of its case to show that it had given valid notices of claims.

The court held that it was not clear that the first letter was intended to be a notice of claim as it did not refer to the specific notice of claims clause in the SPA. It also held that a reasonable recipient would not have understood that it comprised the making of claims under the notice of claims clause. Further, the letter did not identify the particular warranties that had been breached and failed to elect between breach of warranty and a claim under the tax indemnity.

The second letter set out a tax exposure in unconditional terms and provided figures, supported by workings and made an actual claim. However, it also failed to identify the warranties said to have been breached and failed to elect between breach of warranty and a claim under the tax indemnity. The court noted that the buyer had been well aware that it had the claim for several months and failed to notify the seller as soon as reasonably practicable as required by the SPA.

It was therefore held that the letters did not constitute due notification of potential claims under the SPA and the court granted the seller’s application to strike out the relevant paragraphs of the particulars of claim.

While each case depends on its facts and the specific drafting of the agreement concerned, it seems that to comply with a typical notice of claims clause in an SPA, it is likely that the buyer’s notice will need to:

  • Clearly identify each of the particular warranties under which the potential claim is being made;
  • Ensure that the notice is given pursuant to, and for the purposes of, the corresponding limitation clause in the agreement (by stating the relevant clause and its number) in the notice; and
  • Make it clear to the seller that a claim is being made. It is not sufficient to indicate the possibility that a claim may made, or just to identify facts that may constitute a possible warranty or indemnity claim.

Whilst the decision is not a novel application of the law it is a useful summary of the relevant legal principles and a reminder that warranty and limitation provisions need to be drafted very carefully.

Alice Brunning is a trainee solicitor in the Business Services Team at Barker Gotelee, Solicitors in Ipswich.

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