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WARRANTY CLAIMS – APPROACH WITH CAUTION

In this article we identify the key messages to be taken from two recent Court of Appeal cases regarding breach of warranty claims following a share purchase.

The importance of proper notice

In the recent case of Teoco UK Limited v Aircom Jersey 4 Limited and another [2018] EWHC Civ 23, the Court of Appeal ruled that a notice of claim letter for breach of warranty must adhere to the specific requirements contained in the SPA.

Background:

On these particular facts,  the Claimant, Teoco UK Limited (Teoco), had purchased two companies from the Defendants, Aircom Jersey 4 Limited and Aircom Global Operations Limited (Sellers).

In line with standard practice, the sale and purchase agreement (SPA) contained various general warranties, tax warranties and tax covenants and set out the process that Teoco would have to follow if it wished to make a claim for a breach of any of these.

This process included the need to serve a notice of claim on the Sellers setting out the “reasonable details” of the claim including the grounds upon which it was based and an estimate of the value of the claim as soon as reasonably practicable after becoming aware of the claim and in any event before the long stop date. Legal proceedings would then need to be issued and validly served on the Sellers within 6 months of the notice of claim.

What happened?

Before the longstop date Teoco sent two letters to the Sellers alleging that certain tax liabilities may have existed against two subsidiaries of one of the acquired companies prior to the sale, to the tune of approximately £3.45 million, which they said should have been disclosed to them before completion.  The letters were ambiguous, using words such as “may” and “possible”, and did not specify which warranty or indemnity within the SPA Teoco alleged had been breached.

Proceedings were issued in the High Court who found that the letters were not compliant with the specific wording of the SPA and the claim was accordingly struck out.

Teoco appealed the ruling, and the Court of Appeal upheld the decision of the High Court, stating that the letters:

  1. could not reasonably be viewed as notices setting out an actual claim as opposed to a potential claim, given the use of words such as “may” and “possible”;

  2. did not set out “reasonable details” of the claim;

  3. did not refer to relevant warranties of the SPA that it alleged had been breached, only the schedule as a whole; and

  4. caused “real scope for doubt” as the wording could have “encompassed a multitude of other possibilities”.

In short, Teoco did not follow the process specified in the SPA and as a result was unable to pursue a claim potentially worth £3.45 million.

Service – not just the icing on the cake

In Zayo Group International Limited v Michael Ainger & Others [2017] EWHC 2542 (Comm), the issue wasn’t the content of the notice, but more specifically the validity of the service of it.

Background:

Zayo Group International Limited (Zayo) bought a company (Target) from seven individual sellers and a private equity fund.  The seven individual sellers were the managers of the Target (Management Vendors) and accordingly gave various management warranties in the SPA. As above, the SPA included details of the process to be followed should Zayo wish to make a claim against the Management Vendors for a breach of any of these warranties. In this instance, the SPA stipulated that:

“No Management Vendor shall have any liability for a Management Warranty Claim except in circumstances where [Zayo] gives notice to the Management Vendors before the date that is eighteen months of Completion.”

What happened?

On the last day of the 18 month window, Zayo validly served a notice on six of the Sellers but their courier turned away from the seventh address after being told that the addressee no longer lived there.  The courier proceeded to serve that notice on one of the other Sellers instead.

Considering that the notice provisions of the SPA expressly stated that the notice needed to be served on the Management Vendors at the addresses set out in the SPA, the High Court ruled that the claim was struck out due to technical breach of the notice provisions.

“In proving such service, it shall be sufficient to prove that the envelope containing such notice was addressed to the address of the relevant Party set out in clause 12.2 (or as otherwise notified by that Party under this agreement) and delivered either to that address or into the custody of the postal authorities as a special delivery or airmail letter."

The distinction made here was that the wording of the SPA made clear that notice was to be served by leaving it at an address, not by delivering it to a person.  It was therefore irrelevant that the addressee no longer lived at the address, as although the SPA contained a mechanism for each party to update their address for service, there was no obligation for them to do so.

Also, the wording: “… gives notice to the Management Vendors ...” was interpreted to mean that notice was required to be served on all seven of the Management Vendors. Defective service on one of the seven Management Vendors therefore meant that the claim against all seven was struck out.

This case highlights the importance of both acting promptly when bringing a claim for breach of warranty and strictly adhering to the terms of the SPA under which a claim is being brought. Leaving service of the notice until the last day resulted in Zayo having no time to rectify its technical breach of the notice provisions. The case also illustrates that a notice of claim may still be valid even if it does not reach the attention of the intended recipient.

What does this mean for you or your business?

Every case is different, and will come down to the individual facts and specific terms of the SPA entered into in each case.  The cases here highlight the importance of following the precise wording in the SPA where it sets out conditions to making a breach of warranty claim under the contract. Make sure that you allow time to deal with any issues that may arise before the deadline. You won’t get the chance to rectify a mistake at a later date.

If you are thinking about making a breach of warranty claim, make sure you seek legal advice as soon as possible. BPE has many years of experience bringing and defending claims for breach of warranty. If you have any questions please contact Kathryn Broughton on Kathryn.broughton@bpe.co.uk or 01242 248419.

 

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.