Take note of notice provisions

Teoco UK Limited v Aircom Jersey 4 Limited and Aircom Global Operations Limited [2018] EWCA Civ 23Pursuant to a share purchase agreement dated 19 November 2013 ("SPA") Teoco ("Purchaser") purchased, and Aircom Global Operations Limited and Aircom Jersey 4 Limited ("Sellers") sold, the entire issued share capital of Aircom International Limited ("Aircom UK"). Following completion of the SPA, it came to light that Aircom UK was owed tax by two of its subsidiaries (those subsidiaries being incorporated in Brazil and the Philippines respectively).

The Purchaser issued a claim for in excess of £3.5million, claiming damages for breach of a number of tax warranties and a Tax Covenant contained in the SPA. The Sellers applied to strike out the Purchaser's claim on the basis that the Purchaser had given notice of the claims in accordance with the procedure set out at schedule 4 of the SPA.

 

Schedule 4 of the SPA set out:

"4. Notice of Claims.

No Seller shall be liable for any claim unless the Purchaser has given notice to the Seller of such claim 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 (detailing the Purchaser’s calculation of loss, liability or damage alleged to have been suffered or incurred)).

5.1 No Seller shall be liable for any claim unless the Purchaser has given notice of such claim in accordance with paragraph 4…"

 

The Sellers argued that letters sent by the Purchaser's solicitors, in February and June 2015, did not satisfy the requirements of paragraph 4 of schedule 4 of the SPA. As such, paragraph 5.1 of schedule 4 was engaged and the Sellers were not liable on the Purchaser's claim. At first instance the Court agreed with the Sellers and held that letters sent by the Purchaser's solicitor did not constitute due notification of the claim.

 

More specifically, the Judge considered that:

1. A reasonable recipient of the letters would not have understood the letters to be giving notice of the claims under paragraph 4 of schedule 4 of the SPA (as opposed to simply notifying the Sellers of the potential existence of the claims).
2. Even supposing that the letters would have been taken as intended (to give notice of the claims under paragraph 4 of schedule 4), the letters did not satisfy the requirements of that paragraph since they did not set out 'reasonable details of the claim' (including the grounds on which it is based…)". The Judge considered that ‘"he grounds of a claim must include identification of the warranties said to be breached (or the basis of the trigger of the Tax Indemnity)". The Judge expressed the view that it was fatal that the letters did not identify the warranties said by the Purchaser to have been breached. The "omnibus" reference in the letters to warranty claims or tax claims was not nearly sufficient to inform the Sellers of what they had done wrong and what consequences flowed. a. In any event, the proceedings as brought by the Purchaser were not ‘in respect of’ the “claim” as intimated in the letters.

 

The Purchaser argued that contrary to the Judge's view, there is no principle that particular warranties must be identified where a notification clause in an SPA provides for details to be given of a claim. The Purchaser argued that paragraph 4 of schedule 4 did not impose an obligation to specify individual warranties. In any case, a reasonable recipient of the letters would, the Purchaser argued, have understood how the tax warranties and/or tax covenant were or might be engaged. The Court of Appeal agreed with the first instance Judge and agreed that that the letters failed to satisfy the requirements of paragraph 4 of schedule 4 to the SPA because they did not identify the particular warranties and the provisions of the tax covenant on which the claims were based. The Court of Appeal accepted the Sellers' submission that the 'setting out' of the 'grounds' of a claim that paragraph 4 called for meant that the legal basis of the claim had to be identified and that in general it seemed that 'setting out' the 'grounds' of a claim required explicit reference to particular warranties or other provisions. The Court of Appeal considered that it was doubtless that the letters were framed in the wide way that they were in order to allow the Purchaser to keep its options open, but the result is that the letters cannot be said to have identified particular warranties or the 'grounds' on which the claims were based. In particular, the Court of Appeal agreed that the 'omnibus reference to Warranty Claims or Tax Claims' was not good enough. The Court of Appeal highlighted that its conclusion was consistent with the importance of certainty.

 

Practice Points

When drafting letters of notification under contracts, you must leave no doubt whatsoever as to the underlying circumstances giving rise to the claim and the particular provisions alleged to have been breached as a result.

This may require detailed investigations to take place before a proposed claimant is in a position to send letters of notification. However, an advantage to this is that conducting thorough investigations at the outset may lead to early ADR/mediation, rather than entering into formal Court proceedings.