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M&A Warranty Claims - Risk of Invalid Notices

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It is a feature of many company acquisitions that the purchaser finds at some point that it has grounds to bring a breach of warranty claim against the vendor, whether under a share purchase agreement (“SPA”) or asset purchase agreement.  However, all too often claim notices are not served until shortly before the specified deadline and all too often, their preparation is hurried, and limited information is provided by the purchaser as to the basis of the claim. 

The perils of a purchaser only providing limited information in a claim notice have been highlighted by the recent decision of the Court of Appeal in the case of Teoco UK v Aircom Jersey & another [2018].  In that case, the Court of Appeal upheld the High Court’s decision in striking out claims for breach of warranty on the basis that the claim notice was not contractually compliant.

While the information to be provided in a valid warranty claim notice will turn on the precise wording of the relevant agreement, the ruling in the Teoco case makes it clear that a purchaser who is required to provide a notice setting out the grounds on which the claim is based, will need to explicitly state the factual and legal basis of the claim and identify each and every specific warranty that has been breached. A widely drafted notice is therefore at risk of being successfully challenged as being too vague and ambiguous.

Background

The Teoco case concerned an SPA that required the purchaser to notify the seller of any claims by a certain date, “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…).”

The purchaser served a notice of claim arising out of non-disclosure “against the Tax Warranties or General Warranties” whilst reserving its position as to which particular head of claim it would fall under.  In its efforts to keep its options open, the purchaser’s notice was not definitive. It only referred to “tax exposures [which] may exist”, “potential… Tax liabilities” and the “estimate of… possible quantum” set out in a “preliminary report prepared by PwC…”.  The notice failed to identify with clarity and certainty the specific warranties in the SPA which were allegedly breached.

Decision

Given the blanket references to the warranties under the SPA and the lack of detail of the claim, the High Court found that the notice was not compliant with the specific wording of the SPA and therefore struck out the purchaser’s claim.  Agreeing with the High Court’s decision, the Court of Appeal ruled that the notice of claim served by the purchaser:

  1. could not be viewed by a “reasonable recipient” as a notice setting out an actual claim as opposed to potential claim due to the use of words such as “may”, “potential” and “possible”;
  2. did not identify the legal “grounds” of the claim;
  3. did not explicitly refer to the relevant warranties of the SPA that it alleged had been breached, only the warranties as a whole; and
  4. caused “real scope for doubt” as the wording could have “encompassed a multitude of other possibilities”.

Owing to the deficiencies in the notice, the purchaser was accordingly prevented from pursuing a warranty claim approximately worth £3.5 million.

Practical Tips

Although each case will depend on the facts and the provisions in the SPA, the Teoco case nevertheless highlights the importance of following the precise wording in the SPA where it sets out specific requirements for notifying a breach of warranty claim.

At the very least, a purchaser’s claim notice will need to specifically identify the factual and legal basis for the claim that is being made and explicitly cite the specific warranties in the SPA which have been breached.

In the context of a sale agreement being drafted and negotiated, greater consideration should now be given by both a purchaser and vendor as to the warranty claim notice provisions.  A purchaser should typically seek less onerous notification terms, whereas a vendor should seek more onerous terms.

How can Clarion Help?

Clarion has a highly regarded and leading Dispute Resolution and Litigation team and has significant experience in handling warranty claims arising from company acquisitions for both purchasers and vendors. If you have any concerns arising from issues highlighted by the Teoco case or otherwise we are happy to discuss your specific circumstances and you can contact one of our experienced team members.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.