Buyers beware - get your warranty claim notice right

Loan facility agreements: when does one party deal on the others written standard terms of business?

Two recent decisions have highlighted the need for buyers to take extreme care to ensure that they properly notify intended claims under a share purchase agreement (“SPA”). 

When selling a company, sellers will usually be required to make promises (i.e. they give warranties and covenants) in order to give the buyers comfort about different aspects of the business which will have the potential to impact on the value of the shares. If any of the warranties turn out to be incorrect, the buyer may have a claim against the seller based on the reduced value of the business. Likewise, if a liability accrues for which the sellers have agreed to indemnify the buyer, the covenant will be triggered.

The SPA will usually stipulate for advance notice of any intended claim to be given by the buyer to the sellers, as well as how and by when that notice is to be given.

Be specific

In Teoco UK Limited v Aircom Jersey 4 Limited, Aircom Global Operations Limited the Court ruled Teoco had not done enough to notify the sellers of claims valued at nearly £3.5 million and so the claim failed. 

Teoco purchased two companies under an SPA which included warranties about the tax position of the targets and a tax covenant. In order to be able to claim under the warranties Teoco was required to have first given notice to the sellers “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”. 

Teoco became aware of a £3.5 million tax liability owed by the target.  Teoco’s solicitors wrote to the sellers with a “notification” of claims and referred to the “Tax Covenant, the Tax Warranties and the General Warranties”. The letter was ambiguous and no specific warranties were referred to. Teoco went on to serve another letter purporting to be a “further notification” but that too was vague.

Teoco later issued a claim for breach of warranty and sought to rely on the letters as the notice required by the SPA. The sellers applied to strike out the claim saying they had not been properly notified and won, both in the High Court and in the Court of Appeal.  The Court ruled that the letters did not satisfy the notice requirements of the SPA. Although every agreement would have to be interpreted on its own terms, the Court of Appeal found that in all but exceptional situations, setting out the legal basis of a claim required a notice to make “explicit reference to particular warranties or other provisions”.  The general references to the “Tax Covenant, the Tax Warranties and the General Warranties”, without identifying specific warranties, was an exercise in the purchaser keeping its options open and was not sufficient to adequately set out the grounds of the intended claim.

Proper service is vital

The drafting of the notice is not the only important consideration when pursuing a warranty claim.  Another decision highlights the potential pitfalls around service of notices.  In Zayo Group International v Ainger and others, the High Court ruled that a notice had not been validly served in accordance with the SPA leaving the purchaser unable to pursue a claim. 

Zayo had purchased the entire issued share capital of a company from a group of seven sellers.  The SPA set out specific notice requirements for intended warranty claims, including that notice of any claims had to be given to the sellers within 18 months of the SPA, in that case by 5pm on 13 November 2015. 

Zayo claimed certain accounting warranties had been breached and it prepared notices which it attempted to serve on each of the seven sellers on 13 November 2015.  The notices were successfully served by courier on six of the individuals but not the seventh, Ms Jaggard.  A courier took the notice to Ms Jaggard’s service address but, told she no longer lived there, left taking the notice with him. However, presumably having had second thoughts, he returned and left the notice, at 7.50pm. 

The Court ruled that Zayo had failed to serve Ms Jaggard within the time required and the sellers successfully argued that, as a result, none of the seven sellers could be liable, the SPA stating that “No Management Vendor shall have any liability for a Management Warranty Claim except in circumstances where the Purchaser gives notice to the Management Vendors before the date that is eighteen months of Completion”. 

Lessons

Both cases highlight the need for careful scrutiny of notice provisions particularly given the strict time limits and the costly consequences of failure to do so.  Here are some simple, but important steps to follow when starting a warranty claim:

  • be specific in your notice;
  • refer to the relevant clauses in the SPA;
  • proper service is vital – follow the letter of the SPA (even if that does not appear to make sense as you know someone has moved away);
  • do not leave it until the last minute to notify claims;
  • always take advice from your solicitors as soon as you become aware of a matter which you think might give rise to a claim.

For any further information about notifying warranty claims, contact Catherine Penny or Lorna Sleave or your usual S&B contact.            

 

Teoco UK Limited v Aircom Jersey 4 Limited, Aircom Global Operations Limited [2018] EWCA Civ 23

Zayo Group International v Ainger and others [2017] EWHC 2542 (Comm)

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View profile for Catherine PennyCatherine Penny, View profile for Lorna SleaveLorna Sleave

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