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Warranty Claims: requirements for buyer’s notice of claim

Teoco UK Ltd v Aircom Jersey 4 Ltd is one of a number of recent decisions demonstrating the importance of complying with contractual notice of claim provisions when bringing a claim for a breach of warranty in respect of a share or business sale.

In Teoco, the sale and purchase agreement (SPA) required the seller to give notice, as soon as reasonably practicable, setting out reasonable details of the claim, including the grounds on which it was based and the buyer’s good faith estimate of the amount of the claim.

The buyer sought to rely on two letters to the seller in its argument that it had complied with the notification requirements of the SPA.

The High Court held that the first letter did not constitute notice of a claim in compliance with the SPA as it was not clear that the letter was intended to be a notice of claim. What was being notified was a possible claim, or at best a likely claim, rather than an actual claim for the purposes of the notification clause.

It was held that a reasonable recipient would not have understood that the letter comprised the making of claims pursuant to the SPA. Further, the letter did not idenfity the particular warranties that had been breached.

While the second letter set out tax exposure in unconditional terms, it still failed to identify the warranties that had been breached and did not elect between breach of a warranty and a claim under the tax indemnity.

The court struck out the claims on the basis that the purchaser did not give proper notice of them pursuant to the SPA.

While each case will turn on its facts and the drafting of the relevant agreement, in order to comply with a typical notice of claims clause in an SPA, it is likely that the buyer will need to, at a minimum:

  • ensure that the notice is given pursuant to and for the purposes of the corresponding limitation clause in the SPA, specifying the clause and number in the notice;
  • make it clear in the notice that an actual claim is being made, as opposed to indicating the possibility of warranty or indemnity claims;
  • identify each of the particular warranties or indemnities under which the claim is being made.

The decisions is an important reminder of the need for care when drafting warranty and indemnity provisions and in serving notice pursuant to a notification clause under an SPA.

Please contact our business team for further information:

http://www.foskettmarr.co.uk/index.php/our-team/business-solicitor-essex/