21 Feb 2018

A share purchase agreement dated 19 November 2013 (SPA) provided that Aircom Jersey 4 Limited and Aircom Global Operations Limited (Sellers), sold to Teoco UK Limited (Purchaser), the issued shares in two subsidiaries, one of which was Aircom International Limited (Aircom UK) for £41 million (less certain deductions). On 14 August 2015, the Purchaser issued proceedings claiming damages for breach of warranty or an indemnity in relation to tax said to be owed by two subsidiaries of Aircom UK, a Brazilian company and a company incorporated in the Philippines. The Brazilian Claim was put at £3.1 million and the Philippines Claim at £366,000 (Teoco UK Limited v (1) Aircom Jersey 4 Limited (2) Aircom Global Operations Limited [2018]).

The SPA

Clause 10 of the SPA imposed limitations on the Sellers' potential liabilities and provided for claims to be dealt with in accordance with Schedule 4 to the SPA.

Two provisions of Schedule 4 of particular relevance were:

'4.    Notice of Claims

No Seller shall be liable for any Claim unless the Purchaser has given notice to the Seller of such Claim 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 (detailing the Purchaser's calculation of the loss, liability or damage alleged to have been suffered or incurred)).' [Emphasis added]

and

'13.    Claims handling: information and access

The Purchaser shall, as soon as reasonably practicable, give notice to a Seller containing reasonable details of any matter or thing of which the

Purchaser Group becomes aware that indicates that:
  

13.1.1    the Purchaser has or is likely to have a Claim
 …

Such notice shall not be a condition precedent to the liability of a Seller in relation to any Claim, provided that such Claim is notified in accordance with paragraph 5.1.' [Time limits for claims]

Notifying the Claims

In February 2015, the Purchaser's solicitors sent a letter to the Sellers identifying the potential tax liabilities in Brazil and the Philippines. The letter explained that the Purchaser's solicitors were referring to the Tax Covenant, the Tax Warranties and the General Warranties and stated that it constituted notification, in accordance with Schedule 4 of the claims, 'being either Warranty Claims or Tax Claims', but reserved their clients' position as to which particular head of claim each of the two claims would fall under. Further details of the claims were given in a further letter in June, expressed to be further notification in accordance with Schedule 4.

High Court

The Sellers applied to strike out the two claims on the basis that the Purchaser had not given them notice of the claims in accordance with Schedule 4 to the SPA because the grounds on which the claims were based were not adequately identified, as required by paragraph 4.

The Deputy High Court Judge agreed and struck out the claims. A reasonable recipient of the letters notifying the Sellers of the Claims would not have understood them to be giving notice of the Brazilian and Philippines Claims under paragraph 4 rather than notifying their existence (or potential existence) under paragraph 13 of Schedule 4.

The Purchaser appealed arguing that the Judge was wrong. Contrary to the Judge's view, there was no general principle that particular warranties must be identified where (as here) a notification clause in an SPA provides for details to be given of a claim.

Court of Appeal

The Court of Appeal unanimously upheld the decision of the High Court that the February and June letters failed to satisfy the requirements of paragraph 4 of Schedule 4 because they did not identify the particular warranties and provisions of the tax covenant on which the Brazilian and Philippines Claims were based. The setting out of the grounds of a claim that paragraph 4 called for meant that the legal basis of the claim had to be identified. "The grounds of a claim must", Lord Justice Newey said, "include identification of the warranties said to be breached (or the basis of the trigger of the tax indemnity)". An omnibus reference to warranty claims or tax claims was not nearly sufficient to inform the Sellers of what they had done wrong and what consequences flow. 

It was not inconceivable that, exceptionally, valid notification could have been achieved without mentioning a specific warranty or other provision (if, say, 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). In general, however, "setting out" the "grounds" of a claim required explicit reference to particular warranties or other provisions. The present case was not one in which either the Purchaser erroneously referred to the wrong warranty or the facts unequivocally pointed to a specific warranty. To the contrary, there was real scope for doubt about which provisions were thought by the Purchaser to be relevant. 

It was no doubt to keep the Purchaser's options open that the February and June letters were framed in the wide way they were, but the result was that they could not be said to have identified particular warranties and other provisions or, therefore, the "grounds" on which the Brazilian and Philippines Claims were based. The "omnibus reference to Warranty Claims or Tax Claims" will have included the relevant warranties and other provisions, but since it also encompassed a multitude of other possibilities, it did not serve to identify the "grounds" of the claims.

These conclusions are consistent with the importance of certainty which the Court of Appeal recognised in Senate Electrical Wholesales Ltd v Alcatel Submarine Networks Ltd [1999] and with Gloster J's expectation in RWE Nukem Ltd v AEA Technology plc [2005], that in the context of the clause at issue before her, a "compliant notice would identify the particular warranty that was alleged to have been breached".

Gloster J went on to say in the RWE Nukem case that she "would expect that at least in general terms, the notice would explain why it had been breached, with at least some sort of particularisation of the facts upon which such an allegation was based and would give at least some sort of indication of what loss had been suffered as a result of the breach". However, "every notification clause turns on its own individual wording."

The order of the High Court was upheld.

Comment

Whilst, as Gloster J (as she then was) commented in the RWE Nukem case, every notification clause turns on its own individual wording, this case demonstrates the importance of complying very carefully with notification requirements in SPAs and how the courts interpret the requirement to set out the grounds of a claim, which includes specifying clearly its legal basis.