Commercial and Insolvency Update March 2018 Case Update 2

Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23

Newey LJ in the Court of Appeal upheld a decision in the High Court striking out claims for breach of warranty on the basis that they were not notified in accordance with the relevant mandatory contractual provisions. A share purchase agreement (“SPA”) provided that a purchaser should provide details of a claim, and the Court held that a party seeking to comply with it should make explicit reference to the particular warranties alleged to have been breached when setting out the grounds of a claim. Framing a notification widely to keep options regarding future claims open would be unwise.

The purchaser had bought two companies and their subsidiaries from the seller. The SPA contained a tax covenant and tax warranties under which the seller warrantied that there no outstanding tax liabilities. The seller's liability under the warranties was subject to a notification of claims clause, stating that the purchaser had to give notice "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 ...)". Notification was to be given as soon as reasonably practicable after the purchaser became aware of the claim, and there was a long-stop date. In the event of a claim, the purchaser was required to "obtain a written opinion, from a commercial barrister …, that … the Purchaser has a more than likely chance of success and … provide a copy of such opinion to the Sellers together with the Purchaser's estimate". The purchaser was to hold a portion of the purchase price in escrow until the long-stop date for the purposes of such potential claims.

Two subsidiary companies owed approximately £3.46 million in unpaid tax. The purchaser's solicitors wrote to the sellers in February 2015 alleging that it had breached "the Tax Covenant, the Tax Warranties and the General Warranties", followed by a letter in June 2015 setting out a breakdown of the tax allegedly due. A judge concluded that the letters did not constitute due notification of the claim because they did not set out reasonable details of the claim, including the grounds on which it was based, since the grounds had to include identification of the warranties said to have been breached.

The purchaser appealed, on the basis that there is no general principle that particular warranties must be identified where there is a notification clause in an SPA. Further, the relevant provisions did not impose an obligation to specify individual warranties, the parties had in place a scheme which ensured that the sellers did not need to make separate financial provision for claims, and the barrister's opinion would include details of the grounds. A reasonable recipient of each letter would have understood how the tax warranties were engaged and that the purchaser was also notifying claims under the tax covenant.

Both parties recognised that "Every notification clause turns on its own individual wording" (per Gloster J in RWE Nukem Ltd v AEA Technology plc [2005] EWHC 78 (Comm), at [10]). Newey LJ dismissed the appeal, holding that the letters failed to satisfy the requirements of the SPA, and accepting that the "setting out" of the "grounds" of a claim meant that the legal basis of the claim had to be identified. It was not inconceivable that that could have been achieved without mentioning a warranty or other provision in terms, if, for example, a recitation of the relevant facts unequivocally indicated a specific warranty. Further, there were circumstances in which reference to the wrong warranty would not invalidate a notice, if a reasonable recipient would not have been misled by the error and would have understood which warranty was being relied upon. The case was not one in which either the purchaser erroneously referred to the wrong warranty or the facts unequivocally pointed to a specific warranty. There was real scope for doubt about which provisions the purchaser thought to be relevant. It was to keep the purchaser's options open that the letters were framed in the wide way they were, and an "omnibus reference to Warranty Claims or Tax Claims" was not good enough [27]. The phrasing included the relevant warranties and other provisions, but also encompassed a multitude of other possibilities, and so did not identify the "grounds" of the claims.

This conclusion was consistent with the importance of certainty, which was “only achieved when the vendor is left in no reasonable doubt not only that a claim may be brought but of the particulars of the ground upon which the claim is to be based”, per Stuart-Smith LJ in the Court of Appeal in Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423, at [91].

Newey LJ also dismissed an argument that the contra proferentem principle meant that the clauses should be construed in the purchaser’s favour. In Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128 Briggs LJ accepted that ambiguity in an exclusion clause may have to be resolved by a narrow construction, observing that “the court must still use all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means”. Here, those tools led only to the conclusion that it was incumbent on the purchaser to specify the material warranties or other provisions. Furthermore, Newey LJ rejected the purchaser’s submission that the requirement to obtain a barrister’s opinion would entail a setting out of the basis at that stage. The mere fact that an opinion from a barrister might include reference to warranties or other provisions was not significant [28].