Notification clauses and the importance of being specific

17 May 2018

The Court of Appeal has sent out a warning to parties intending to pursue a breach of warranty claim in a recent decision highlighting the importance of contractual notification provisions. The court’s strict approach in Teoco UK Limited v (1) Aircom Jersey 4 Limited (2) Aircom Global Operations Limited is a reminder that where a claim notification clause requires “reasonable details” of the claim to be provided in the notice, the notice may be invalid if it does not identify the specific warranty or provision which is alleged to have been breached. A failure to set out a claim with as much specificity as possible could therefore lead to the claim being barred, which can easily be avoided if proper attention is paid to the requirements of the claim notification.

In November 2013, Teoco (Buyer) purchased the shares in two companies from Aircom (Seller). The Share Purchase Agreement (SPA) contained warranties given by the Sellers as to the tax position of two subsidiaries of Aircom. On 19 February 2015 and 29 June 2015 the Buyer sent letters to the Seller claiming breaches of the tax warranties in the SPA. The letters described the claims by reference to the contractually defined terms “Tax Warranties” (which designated five warranties in the SPA) and “Tax Covenant”. Both of the letters claimed to be letters of notice in accordance with schedule 4 of the SPA, which specified that notice of any claim had to set out “reasonable details” of the claim including the grounds on which it is based. At first instance, the court held that neither of the letters was a valid claim notice, a decision which was subsequently upheld by the Court of Appeal.

The Court of Appeal held that “setting out” the “grounds” of a claim meant that the legal basis of the claims had to be clearly identified. That could have been achieved without mentioning a warranty or other provision in terms (if, for example, recitation of the relevant facts had unequivocally indicated a specific warranty; though it was suggested this would not be a common occurrence). However, it was further held that in general the “setting out” of the “grounds” required explicit reference to the specific warranties or provisions which were alleged to have been breached. Here, however, the fatal flaw was that the letters of notification failed to identify the specific warranties that the Buyer claimed had been breached. Although the reference to “Tax Warranties” included the two tax warranties which it was alleged had been breached, it also encompassed other possibilities and as such the court ruled that the Buyer’s letters left scope for doubt.

This decision highlights a new risk for potential claimants, namely that wide notifications of claims for breach of warranty may be struck down, irrespective of the level of factual detail provided, if a potential defendant cannot ascertain what specific warranties are alleged to have been breached. The case also serves as a helpful prompt to those involved in negotiating and drafting sale agreements to ensure that any notification clause clearly and unambiguously sets out the requirements of the claim notification procedure.

Alice Morrissey Author
Alice Morrissey
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