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February 13 2018
In Teoco UK Limited v Aircom Jersey 4 Limited, Aircom Global Operations Limited(1) the Court of Appeal upheld the High Court's decision to strike out certain breach of warranty claims on the basis that the buyer had given the seller inadequate notice of those claims. The buyer's attempt to keep its options open by drafting its notices widely proved fatal to its claims, as it failed to identify the specific warranties to which its claims related as required by the share purchase agreement.
The respondent companies, Aircom 4 Jersey Limited and Aircom Global Operations Limited (the sellers), entered into a share purchase agreement to sell two companies to the appellant Teoco UK Limited (the buyer) for around £41 million.
Share purchase agreement
Under the share purchase agreement, the sellers gave warranties (Schedule 3), including certain tax warranties. The share purchase agreement also contained a tax covenant at Schedule 8. Schedule 4 set out limitations on the sellers' liabilities and, as such, was of central importance to the appeal.
Schedule 4, Paragraph 4 provided that the seller would not be liable for any claim unless the buyer had given notice to the seller of its claim "setting out reasonable details of the Claim", including the grounds on which it was based.
Separately, Schedule 4, Paragraph 13 provided that the buyer was obliged to give the seller notice containing "reasonable details" of any matter indicating that the buyer had or was likely to have a claim.
Also relevant was Schedule 4, Paragraph 10, which provided that in respect of a tax claim (as defined in the share purchase agreement), the buyer could make a claim under either the tax warranties or the tax covenant, but not both.
Following the acquisition, on February 19 2015 the buyer's solicitors wrote to the sellers regarding two potential tax claims relating to the tax affairs of the acquired companies in Brazil and the Philippines. The letter estimated the potential claim values to be £3.6 million and £200,000 respectively. The February letter did not identify specific warranties on which the potential claims were based, but instead referred generally to "Warranty Claims or Tax Claims". The February letter concluded with a general reservation of rights.
In a further letter to the sellers, dated June 29 2015, the buyer's solicitors purported to give a "further notification" in accordance with Schedule 4 of the share purchase agreement. This letter referred generally to claims under the tax warranties and the tax covenant and set out a breakdown of the tax due.
On August 14 2015 the buyer commenced proceedings in relation to the tax claims and on December 18 2015 the sellers applied to strike them out.
In summary, the judge granted the sellers' application to strike out the tax claims on the basis that the February and June letters had failed to comply with the specific requirements of Schedule 4 of the share purchase agreement (for further details please see "Caveat emptor: buyer's inadequate notice precludes £3.5 million warranty claim").
The judge at first instance found that:
The buyer appealed, arguing that there was no general principle that particular warranties must be identified where a notification clause in a share purchase agreement provides for details to be given of a claim. Further, the buyer argued that Schedule 4, Paragraph 4 did not in terms impose an obligation to specify individual warranties.
The Court of Appeal unanimously dismissed the buyer's appeal. In reaching its decision, the court held that the following principles applied to the construction of claim notification clauses:
This decision demonstrates that a buyer's right to pursue a warranty or indemnity claim under a share purchase agreement can be jeopardised by failing to adhere to the requirements of a claims notification clause. In this case, the buyer took the wrong approach to keeping its options open. Instead of widely drafting its notices of claim and avoiding reference to specific warranties in favour of a general reservation of rights, the buyer would have been better served by specifying each of the warranties that were relevant in the circumstances.
While the decision might seem harsh – particularly in light of the High Court and Court of Appeal decisions in Nobahar-Cookson, where a similar notice provision was construed in favour of the buyer – it underlines the importance of paying close attention to notice provisions and conforming to their requirements.
For further information on this topic please contact Eliot Henderson or Geraldine Elliott at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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