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Welcome to EQUITY ISSUES, a short note on a relevant issue in the private equity and venture capital industry.

If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers.  

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Claire Cummings

020 7585 1406

claire.cummings@cummingslaw.com
www.cummingslaw.com


 

EQUITY ISSUES

Warranty Claims: Validity of Buyer’s Notice of Claim

A recent decision in the Court of Appeal, Teoco UK Ltd v Aircom Jersey 4 Ltd, has emphasised the importance of taking particular care when preparing a notice of a warranty claim to ensure it complies with all applicable requirements of the SPA.

Background

In connection with a share or business sale, it is common practice for the seller to give warranties to the buyer and for the seller to negotiate contractual limitations on its liability under those warranties.  Such warranties typically include a cut-off date by which the buyer must notify the seller of any potential warranty claim and a requirement that the buyer’s notice of claim shall include reasonable details of the claim and the amount claimed. 

While every notification clause turns on its own individual wording, previous decisions have found that where as a condition of liability of the seller for breach of warranty the buyer is required to give some level of detail of the claim, a compliant notice should identify the particular warranty that is alleged to have been breached, and say why, with some kind of particularisation of the facts on which the alleged breach is based.

Facts of Teoco UK Ltd v Aircom Jersey 4 Ltd

Teoco UK Ltd (“Teoco”) entered into an SPA with Aircom Jersey 4 Ltd (“Aircom”) under which Teoco acquired the entire issued share capital of a target company from Aircom.  The SPA contained various general warranties and tax warranties given by Aircom regarding the target company and its subsidiaries, including a tax indemnity.  Schedule 4 to the SPA set out various limitations on Aircom's liability for warranty and tax indemnity claims, including that Aircom would not be liable for any such claim unless Teoco gave them written notice of the claim "setting out reasonable details of the [claim] (including the grounds on which it was based…)".

Teoco’s solicitors sent a letter to Aircom which purported constitute "notification in accordance with clause 24 and Schedule 4 of the SPA of the existence of Claims, being either Warranty Claims or Tax Claims, as further detailed below", and which went on to set out details of potential tax liabilities of the Target's subsidiaries in Brazil and the Philippines.  Teoco’s solicitors also sent a second letter a few months later which was stated as constituting "further notification in accordance with Schedule 4 to the SPA, providing further details of [Teoco's] [claims] as outlined in [the letter]...", and which included a breakdown of the alleged tax liabilities.

Teoco then issued proceedings against Aircom claiming (among other things) damages for breach of warranty or an indemnity in relation to tax alleged to be owed by the target's subsidiaries in Brazil and the Philippines.  Aircom applied to strike out the Brazilian subsidiary tax claim and the Philippines subsidiary tax claim on the grounds that Teoco had failed to give them proper notice of the claims as required by the SPA.

Court Decisions

The High Court judge granted Aircom’s application to strike out the Brazilian subsidiary tax claim and the Philippines subsidiary tax claim, finding (among other things) that letter sent by Teoco’s solicitors constituted due notification of the claims in accordance with the specific requirements of the SPA, as they failed to set out "reasonable details of the Claim (including the grounds on which it is based…)". 
Teoco than appealed to the Court of Appeal, which dismissed the appeal, concluding that the High Court judge had been correct to hold that the letters failed to satisfy the requirements of the SPA by reason of the fact that they did not identify the particular warranties and provisions of the tax indemnity on which the Brazil and Philippine subsidiary tax claims were based.

Practical Implications

This decision further emphasises the importance of taking particular care when preparing notice of a warranty claim to ensure it complies with all applicable requirements of the SPA. While it remains the case that every notification clause will turn on its own individual wording, and the court acknowledged that there could be circumstances in which a failure to specify the relevant warranties would not be fatal to the validity of a notice, if an SPA includes an express requirement for the buyer to supply details of its claim when giving the seller notice of a warranty or tax covenant claim, it would be well advised to ensure that the notice explicitly refers to the particular warranties or provisions of the tax covenant that it is relying on.


 

This document is for general guidance only. It does not contain definitive advice.


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Cummings

Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327

Cummings Law
42 Brook Street
London Greater London W1K 5DB
United Kingdom

www.cummingslaw.com

14 12 2018

 
 

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