Case Update: Warranty Claims and Procedural Pitfalls
The crucial importance of complying with the precise terms of a share purchase agreement (SPA) when making a warranty claim was brought into sharp focus recently in Teoco UK Limited v Aircom Jersey 4 Limited  EWCA Civ 23.
The buyer Teoco purchased the target company from the seller Aircom for £41m by way of share purchase. The SPA contained the usual general warranties and tax warranties, and a tax covenant, typical of a share purchase transaction.
Shortly after completion significant tax liabilities were identified by Teoco and in June 2015 the buyer’s solicitors wrote to Aircom to notify the seller of the potential claims for unpaid tax, on the basis that it was a breach of warranty. Shortly thereafter Teoco issued legal proceedings for damages for breach of warranty and an indemnity in respect of the unpaid tax. The issue that came before the court in the first instance was whether the buyer had complied with the requirements of the SPA in respect of notification of warranty claims.
The relevant provision of the SPA read as follows:
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 did fake estimate of the Claim) detailing the Purchaser’s calculation of the loss, liability or damage alleged to have been suffered or incurred.
Whilst the notice, by way of letter, launching the claim made reference to breach of the warranties under the SPA, the solicitors acting for the buyer failed to specify exactly what warranties and provisions of the tax covenant were alleged to have been breached. In the first instance decision, the English High Court granted the Aircom’s strike out application on the grounds that the buyer failed to sufficiently particularise the warranty claim in its notice.
Teoco appealed, but the English Court of Appeal agreed with the first instance judge. The court said that the provision of the SPA required the buyer to state expressly the grounds for the claim and the particular warranties and provisions of the agreement on which the claim was founded, and that a general and vague reference to breach of the warranties was not sufficient.
The court examined previous case law, including Senate Electrical Wholesalers v Alcatel Submarine Networks  2 Lloyd’s Rep 423, and RWE Nukem v AEA Technology  EWHC 78, that supported the principle of the need for certainty when making a claim for breach of warranty in order to prevent any “reasonable doubt not only that a claim may be brought but of the particulars of the ground upon which the claim is to be based”.
The ambiguity and vagueness of the notice sent by Teoco’s lawyers appeared to be by design, rather than by accident. This may have been driven by a motivation to capture all possible claims that may have arisen as a result of the alleged breach, and not just be committed to a specific and narrow part of the warranties. But the clear message from the decision is that a buyer needs to be reasonably precise when making a warranty claim, they need to avoid ambiguity and leave the seller in no doubt about whether a claim is being made, and what the claim had been made for.
Moreover, the notice must be given in accordance with the precise contractual mechanism set out in the SPA and, more importantly, within the contractual limitation period for bringing warranty claims which are typical in a standard SPA, and usually significantly shorter than statutory limitation periods. For Teoco, they had run out of time to serve a fresh notice, hence the litigation.
Had the substantive claim gone the distance, and had the buyer established breach of warranty against the seller, then Teoco stood to recover losses of around £34m. Accordingly, the failure to follow the relatively simple procedural mechanism for making a claim under SPA appears to have been a very, very expensive mistake indeed.
If you wish to discuss any aspect of this article further, please contact Desmond Carr, a director in our Commercial Litigation Department on email@example.com or on 028 9082 0507 .
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.