In a recent decision, the High Court struck out claims for breach of warranty on the basis that they were not notified in accordance with the relevant mandatory contractual provisions: Teoco UK Limited v Aircom Jersey 4 Limited (unreported, 25 April 2016).
The decision is a helpful reminder of the need to ensure that claims for breach of warranty strictly conform to the notification requirements in the relevant agreement. Even if the substance of a claim is contained within a notice, if the form is not compliant with the terms of the agreement, the claim is at risk of being struck out. Each case will turn on its facts, including the wording of the relevant contractual requirements.
Tom Henderson, a senior associate in our dispute team, outlines the decision below.
The claimant Purchaser claimed damages for breach of various warranties contained in a sale and purchase agreement (SPA) entered into with the defendant Sellers. The sellers applied to strike out two heads of claim, the “Brazilian Tax Claims” and the “Philippine Tax Claims”, on the basis that the Purchaser had not complied with the notification requirements under Schedule 4 of the SPA. The relevant requirements provided that the Seller would not be liable for any claim unless:
- Paragraph 4: the Purchaser had given notice to the Seller of such claim setting out “reasonable details”, including the “grounds on which it is based and the Purchaser’s good faith estimate of the amount of the Claim”.
- Paragraph 5.1: the Purchaser had given the paragraph 4 notice “as soon as reasonably practicable” after the Purchaser “becomes aware” that it has such a Claim and before the long stop date of 31 July 2015.
- Paragraph 5.2: the Purchaser had issued and validly served proceedings in respect of “such Claim” within six months of the date that the Seller was first notified.
There were two other provisions in Schedule 4 worth noting:
- Paragraph 12: the Seller would not be liable if the Claim was capable of remedy and was remedied within 60 days of the date of the notice given under paragraph 4.
- Paragraph 13.1: the Purchaser was separately obliged to give notice, as soon as reasonably practicable, containing reasonable details of any matter which the Purchaser became aware of that indicated it had or was likely to have a Claim, albeit such notice was not a condition precedent provided paragraph 5.1 was complied with.
The Purchaser wrote two letters to the Sellers, the “February letter” and the “June letter”, which it alleged were compliant with the notification requirements. The question for the judge (Mr Richard Millett QC sitting as a Deputy Judge of the High Court) was whether the letters were properly compliant with the notification requirements in paragraphs 4, 5.1 and 5.2 of Schedule 4 of the SPA.
Before addressing the February and June letters specifically, the judge outlined a number of principles relevant to the construction of warranty claim notice requirements, including:
- Every notification clause will turn on its own wording (Forrest v Glasser  2 Lloyd’s Rep 392) and the court should focus on the meaning of the relevant words used in their documentary, factual and commercial context (Arnold v Britton  AC 1619 – see post).
- A notification clause which imposes a contractual time limit is a form of exclusion clause and as such should be construed narrowly, if necessary to resolve ambiguity (Nobahar-Cookson v The Hut Group  EWCA Civ 128 – see post).
- The commercial purpose of a notification clause includes ensuring that the seller knows in sufficiently formal terms that a claim for breach of warranty is to be made, so that financial provision can be made for it (Ipsos SA v Dentsu Aegis Network Ltd  EWHC 1171 – see post).
- In construing a notice of claim, the question is how it would be understood by a reasonable recipient with knowledge of the context in which it was sent (Laminates Acquisition v BTR Australia Ltd  1 All ER).
- The notice must specify that a claim is actually being made, rather than indicate the possibility that a claim may yet be made (Laminates – see above).
- When a notice needs to contain “reasonable detail”, what this means will depend on the nature of the claim but, as a general rule, identifying the particular warranty that is alleged to have been breached should ordinarily be a minimum requirement, in the interests of commercial certainty (RWE Nukem Ltd v AEA Technology Plc  EWHC 78).
The judge struck out the Brazilian Tax Claims and the Philippine Tax Claims on the basis that the Purchaser did not give proper notice of them.
The judge contrasted notices under paragraph 4, which governed the making of a claim and were a condition precedent to liability, with notices under paragraph 13.1, which merely notified the existence or likely existence of a claim, in contrast to notice of a claim being advanced.
He also noted paragraph 12, which provided that the Seller would not be liable, if a breach was capable of remedy, to the extent that it was remedied within 60 days following a notice under paragraph 4. This provision did not apply here as the breaches alleged were not capable of remedy. However, the judge said, it reinforced his conclusion that “reasonable details” for the purposes of paragraph 4 must at least identify the particular warranty so that the consequences which flowed from it could be put right.
Brazilian Tax Claims
In relation to both the February and June letters, the judge ruled that neither constituted notification for the purposes of the SPA. The judge ruled that neither letter was sufficiently precise to constitute notice that a claim was actually being made, but rather only served to alert the Sellers that the Purchaser had claims or may have claims. Neither letter contained any reference to paragraph 4 of Schedule 4 or the specific warranties that the Sellers had allegedly breached. Both letters were written in tentative language, suggesting that the claims were “possible” or “potential”, rather than actual.
The judge also found that even if it were possible to read the February and June letters as referencing a claim that was being made, the claim that was subsequently made in the proceedings was not the one that was found in the letters. Certain key allegations were not in the letters, and the particulars of claim served in the proceedings identified for the first time the specific warranties that were alleged to have been breached. This meant the Purchaser had failed to comply with paragraph 5.2 of the SPA which specifically stated that proceedings must be served “in respect of” the claim notified to the Seller.
Philippine Tax Claims
The judge found that the February letter was not compliant with the notification requirements in respect of these claims on the same basis as the Brazilian Tax Claims. With respect to the June letter, it was clear by this point that the Philippine Tax Claims were actual rather than potential claims. However, the Purchaser had failed to identify the warranties that were alleged to have been breached and did not elect between a tax warranty claim and claim under the tax indemnity; claims under both were forbidden by the SPA. As such, the June letter did not conform to the SPA for the purposes of this claim either.
Although it was not necessary for his decision, given his conclusion that the letters did not comply with the notice requirements in respect of the Philippine Tax Claims, the judge considered whether either letter was given “as soon as reasonably practicable after the Purchaser… [became] aware that [it had] such a Claim” as required by paragraph 5.1. On the facts, the judge found that the Purchaser knew that it had the Philippine Tax Claims from September or November 2014 but was considering whether it could, and would, avoid the liability through alternative means. This still constituted a failure to comply with paragraph 5.1. The judge stated that “the notification requirement … is triggered when the Purchaser becomes aware that it “has” a claim … not when it decides it will make a Claim, or decides not to eliminate or reduce its loss the subject of a Claim”.