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A recent case has illustrated how easily a buyer’s entitlement to pursue a warranty or indemnity claim under a share or business purchase agreement can be compromised by a defective notice of claim, according to a corporate lawyer.
“A properly negotiated purchase agreement will usually exclude the seller’s liability for claims unless the buyer notifies them in a specified manner prior to an agreed limitation date,” says Philip Round, a partner at George Green LLP. “The case of Teoco UK Limited -v- Aircom Jersey 4 Limited demonstrates the importance of complying with the strict terms of the limitation clause when notifying claims.”
Mr Round continues, “in the Teoco case, the purchaser acquired two companies. The share purchase agreement provided that the seller would not be liable for any claim unless the buyer served notice specifying reasonable details of the claim, including the grounds and giving a good faith estimate of the amount of the buyer’s loss, as soon as reasonably practicable after becoming aware of the circumstances of the claim and in any event prior to a specified long stop date. The buyer’s solicitors sent various letters identifying that a tax exposure might arise from certain intercompany recharges but that the buyer’s position was reserved. The buyer did not identify the particular warranties that had been breached or indicate whether it purported to claim under the warranties or the tax indemnity.”
According to Mr Round, the court held that the letters did not constitute due notice of the claim for the purpose of the agreement. “What constitutes reasonable details of a claim depends on the circumstances. Any explanation of the grounds of the claim must, however, identify the warranties alleged to have been breached. The letters were not a valid notice of claim because, save for one letter, they did not make an actual demand but referred in tentative terms to possible claims. Furthermore, they did not refer to the specific warranties from which the claim arose or explain whether the buyer was claiming under the warranties or tax covenant. Finally, many months had elapsed between the buyer becoming aware of the claim and serving the notice. It could not therefore be said that the buyer had notified the claim as soon as reasonably practicable after becoming aware of it.”
Mr Round concludes, “Whilst a sensible purchaser will usually consider a formal warranty claim to be a last resort, it is essential that the buyer seeks legal advice, not only on the drafting of the limitation clauses in the sale agreement, but also in preparing any subsequent notice of claim. This will help to ensure that if a commercial settlement cannot be reached, the buyer has not inadvertently forfeited its right to commence proceedings.”
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