Back in December we wrote about the importance of following the rules set out in an agreement when bringing a claim under that agreement. The buyer in that case found out to its detriment just how vital it is to follow the procedure set out in the agreement.
Recently the Court of Appeal considered the provisions of a share purchase agreement and upheld a decision that a buyer had failed to comply with the contractual requirements relating to a warranty claim.
Background
Teoco, the buyer, entered into a share purchase agreement (SPA) with Aircom, the seller, to acquire two companies in 2013. In August 2015, the buyer issued proceedings against the seller claiming damages for breach of warranty in relation to tax owed by two seller subsidiaries based in Brazil and the Philippines. The total tax liabilities were valued at £3.45 million.
The seller argued that the buyer had not given notice of the claims in accordance with the provisions of the SPA. The seller’s argument focused on two letters sent by the buyer’s solicitors to the seller in February 2015 and June 2015. The seller argued that both of these were insufficient to satisfy the contractual notice requirements.
The High Court struck out the buyer’s claim but the buyer then appealed that decision.
Share purchase agreement
The SPA included various warranties given by the seller, some of which related to the tax position of the two subsidiaries.
As is common practice, the SPA also included limitations on the seller’s liability under the warranties. In particular, a provision stated that the seller would not be liable for any claim unless the buyer had: “given notice to the seller of any claim setting out reasonable details of the claim (including the grounds on which it is based).”
The letters
The buyer’s first letter notifying the seller of the warranty claims, sent in February 2015, referred to “claims arising out of the tax warranties and the general warranties”, but reserved its position “as to which particular head of claim it would fall under”.
The letter was also ambiguous as it referred to “tax exposures which may exist”, “potential tax liabilities” and the “estimate of potential quantum”. The court said this was just a “generic reference to potential claims” and it did not set out the basis of the claims in reasonable detail.
Despite a second letter being sent in June 2015 containing additional information relating to the buyer’s claims, the High Court held that the letters did not comply with the wording of the SPA and they were not sufficiently detailed to constitute valid notification under the SPA.
The most important point for the court was that the letter did not identify the specific warranties in the SPA which the seller was alleged to have breached. This point was considered further in the Court of Appeal.
