Notification Of Breach Of Warranty Claims

Introduction

A share purchase agreement ("SPA") often requires notice to be given of a claim for breach of a warranty in the SPA, within a specified period. The recent Court of Appeal decision in Teoco UK Limited v Aircom Jersey 4 Ltd [2018] EWCA Civ highlighted the importance of complying strictly with claim notification requirements in an SPA. If proper notice is not given, the result could be detrimental as the claim may be struck out.

Teoco UK Ltd v Aircom Jersey 4 Ltd [2018]

The Court of Appeal upheld the decision to strike out a buyer's warranty claims against the seller in respect of an SPA between the parties on the basis that proper notification of the claim was not provided in accordance with the requirements of the SPA.

Schedule 4 of the SPA required the purchaser to give notice of any claims in respect of the seller's warranties "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 ...)". Paragraph 5 required such notification to be given as soon as reasonably practicable after the purchaser became aware of the claim, and in any event by a long-stop date. The purchaser's solicitors wrote to the sellers in February 2015 alleging that it had breached the Tax Covenant, the Tax Warranties and the General Warranties. The purchaser's solicitors sent a further letter to the seller in June 2015 setting out a breakdown of the tax allegedly due.

It was held that the letters did not constitute due notification of the claim because they did not set out the specific warranties and provisions of the tax covenants that had been breached. "Setting out reasonable details of the claim (including the grounds of the claim..." meant that the legal basis of the claims had to be provided and in this case, this required explicit reference to particular warranties or other provisions. The reference simply to Warranty Claims or Tax Claims was not good enough.

The Court said that the legal basis of the claim could have been provided without mentioning a warranty or other provision if, for example, recitation of the relevant facts had unequivocally indicated a specific warranty. It was also possible to imagine circumstances in which reference to the wrong warranty would not have invalidated a notice, if a reasonable recipient would not have been misled by the error and would have understood which warranty the purchaser was intending to rely on.

Whilst each...