In share purchase agreements (SPA), provision is usually included for the buyer to give notice of a potential claim for a breach of warranty within a certain time period by providing details of the nature of the claim, with sufficient detail. The consequence of failing to do so generally creates a bar for the buyer to bring a claim against the seller for breach of warranties provided.
In Drax Smart v Scottish Power, the High Court had struck out the claimant’s breach of warranty claim under an SPA following successful argument from the seller that the notice of claim provision in the SPA obliged the buyer to particularise its loss in terms of diminution in value of the shares in the company purchased (which is ordinarily the standard basis for quantifying loss in a breach of warranty claim), which the buyer did not do within the notice. Rather, the buyer set out the details as to its loss in the particulars of claim.
On appeal, the Court of Appeal reversed the lower court’s decision, deciding that the buyer’s claim for damages was not barred by the notice of claim clause. The court found that there was nothing within the wording of the notice of claim clause, or within the wider commercial purpose of the same, that forced the buyer to specify exactly the quantum of damages sought.
The court explained that notice of claims clauses are provided for within SPAs to serve as a contractual limitation period for parties to comply with, and if no notice is given by the deadline contained, this brings finality to their commercial dealings. Importantly though, the court highlighted that notice of claim clauses should “not become a technical minefield to be navigated, divorced from the underlying merits of a buyer’s claim”. In practice, the drafting of the notice of claim clause should essentially be treated as an exclusion clause meaning that such clauses will be narrowly construed and that commercial parties will not generally be taken to have restricted the right and remedies under the SPA unless there is express wording of that effect.
In Onecom Group Ltd v Palmer, the buyer’s case was centred around a claim for breach of warranty by the seller under an SPA in which the buyer had purchased the entire share capital of the target company.
Aside from the above, the SPA provided for the seller’s entitlement to deferred consideration by way of an earn-out clause. In the event of any dispute as to the entitlement under the earn-out clause, the SPA provided that the dispute would be referred for expert determination.
Upon a dispute arising as to the earn-out accounts, the seller gave notice to the buyer of his dispute and failing resolution between the parties, the matter was referred to expert determination. Around three months after referral to expert determination, the buyer gave notice to the seller for breach of warranty, however there was a cross-over as to the issues in dispute for the buyers’ warranty claim and the dispute as to earn-out provisions. The parties sought to agree an extension of the deadline provided for within the SPA for proceedings to commence but were unable to resolve that issue.
The buyer commenced legal proceedings against the seller one day before the end of the litigation period, which is a common tactic for parties to protect their litigation position. The buyer successfully obtained permission from the court for an extension of time to serve it’s claim form on the seller as it was awaiting expert evidence in relation to the earn-out provision. Upon receipt of the report, the buyer served the claim form on the seller. The seller sought an application for strike-out and/or summary judgement arguing that the buyer was out of time for commencing the proceedings on the basis that the claim form had been served after the end of the litigation period; in spite of the fact that it had been served in compliance of the extension for doing so granted by the court.
In opposing the seller’s application, the buyer argued that the claims were not time-barred as without the expert report, the claims were unquantifiable, and the limitation period did not begin until the date in which the expert had provided determination as to the earn-out payment.
The court agreed with the buyer, that the claims were contingent and unquantifiable up until the point in which the expert had provided determination and thus the litigation period had not actually commenced as set out in the SPA. The seller’s application was dismissed.
These judgments demonstrate that whilst notice of claims clauses should be adhered to by buyers when notifying claims to the seller, a pragmatic approach will be adopted by the courts to avoid sellers claiming no liability in otherwise valid claims from buyers where notice is within the requirements of the SPA.
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