In the third blog published in our series on M&A disputes, we provided five practical pointers when faced with a breach of warranty claim and commented that inadequate notice of a potential breach of warranty claim is fertile ground for litigation.
The Court of Appeal has once again considered the role of formal notice requirements in underlying transaction documents when making a breach of warranty claim. In Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477, the Court of Appeal overturned an earlier decision of the High Court which had barred a breach of warranty claim on the basis that the notice did not adequately specify the basis of the loss claimed as required by the transaction documents.
This Court of Appeal’s decision is likely to be welcomed by buyers in commercial transactions – and sends a strong signal that technical arguments regarding claim notices in a breach of warranty claim are unlikely to succeed where they serve no real commercial purpose.
Background
The claim arose out of a share purchase agreement between Drax Smart Generation Holdco as Purchaser and Scottish Power Retail Holdings as Seller. The Seller warranted that the benefit of an option agreement giving it the right to obtain an easement would be assigned to the target company (the Company) before completion. However, the option agreement was not validly assigned and the Company was subsequently unable to exercise its rights under the option agreement.
The Purchaser brought breach of warranty claims against the Seller who argued that the claims were barred because the claim notice did not satisfy the requirements prescribed by the SPA.
Notice requirements – the devil is in the detail
The notice requirements in the SPA required the Purchaser to state “in reasonable detail the nature of the claim and the amount claimed (detailing the calculation of the loss thereby alleged to have been suffered)”.
The Purchaser issued a claim notice running to nine pages in length and setting out the factual background and relevant provisions of the SPA. Crucially, the claim notice claimed losses that were estimated to be suffered by the Company on two alternative bases – namely, the cost of acquiring the easement from the relevant third party, and the cost of compulsory acquisition of the land over which the easement was sought.
The Seller did not accept liability and the Purchaser issued a claim in the High Court seeking losses on the basis of the difference in value of the shares of the Company.
High Court decision – a strict approach
The Purchaser’s claim failed at first instance. The High Court held that the fact that the claim was based on the difference in value of the shares was both “part of the nature of the claim” and part of the “reasonable detail” of the Purchaser’s calculation of the claim. This basis of loss was not stated in the claim notice and, as a result, the claim notice was not complaint with the SPA.
Court of Appeal judgment – the claim notice was compliant
The Court of Appeal agreed that it was impossible to read the claim notice as advancing a claim based on the difference in value of the shares of the Company. But, this was not enough on its own to bar a claim for breach of warranty.
The Court of Appeal considered that the nature of the claim was straightforward – it was a claim that the Company should have had the benefit of the option agreement. Similarly, the claim notice provided detail of the amount claimed and stated two alternative bases for the amount claimed and details of how these were calculated. It did not matter that the Purchaser subsequently put forward a different basis of loss because the notice requirements simply required a genuine estimate to be provided.
In short, the Seller had all the information it needed to identify the alleged breach and assess its liability and as result the claim notice was found to be compliant.
Key takeaways – don’t fall into the trap of notice requirements
The Court of Appeal recognised that the initial purpose of clauses imposing notice requirements is to promote “finality and certainty in commercial dealings”, but it also said that some clauses can introduce a “trap to defeat what may be a valid claim”.
The Court warned that notice requirements should not introduce a technical minefield to be navigated, divorced from the underlying merits of a claim. It encouraged courts not to interpret notice clauses as prescribing requirements which serve no real commercial purpose unless compelled to do so by the language of the clause.
Although this judgment is likely to provide comfort to buyers, it remains important for those on the buy-side of commercial transactions to identify any applicable notice requirements to avoid opening the door to technical challenges to an otherwise strong claim.
Freshfields has in-depth experience on both the buy- and sell-side of M&A disputes. This is the fourth blog published in our series on M&A disputes: M&A Earnout Provisions: Recent Trends in US Law and How to Draft Your Clause to Avoid Disputes (part one); The Curious Case of Crossover Witnesses in Post-M&A Arbitration (part two); Is It a Done Deal? Breach of Warranty Claims: How to Protect Your Position (part three); and Tax Indemnity Claims: Complying With the Notice Provisions in ‘Full-Recourse’ and ‘W&I-Backed’ M&A Deals (part four). You can stay up to date with the latest trends on our Transactions blog and our Risk and compliance blog.
