Buyers beware

The importance of complying with SPA notice provisions

Publication October 2015


Introduction

Notice provisions are a common feature of most commercial contracts, prescribing how contractual notices are to be served, when and in what form. In many cases, a notice provision will be included for administrative convenience, with the primary aim of ensuring that a contractual communication is brought to the attention of the intended recipient, with no obviously material consequences attached to non-compliance. However, not all such clauses are so innocuous.

In certain instances, the penalties for non-compliance may be very significant indeed, two paradigm and much-litigated examples being, in the real estate context, notices to quit and, in the insurance context, notifications of circumstances. If a notice to quit is wrongly worded, it can make the difference between exercising a break clause under a lease or being bound to the lease for a further, unwanted period. Similarly, a notification which does not meet the specific requirements of the liability insurance policy under which it is given may have serious repercussions for future coverage.

The general rules on contractual notices

Where the validity of a notice is in doubt, the first task is to identify what the notice provision requires. This is a matter of contractual interpretation in accordance with the usual rules on construction. There are no special rules for notice provisions – as Gloster J said in RWE Nukem Ltd v AEA Technology plc [2005] EWHC (Comm) 78, ‘Every notification clause turns on its own individual wording.’

The second task is to ascertain whether the notice that is served complies with the requirements laid down in the notice provision. In doing so, a distinction should be drawn between matters of form and substance. On the first count (i.e. matters of form), it is common for notice provisions to prescribe, in specific detail, what form the notice must take and how it should be conveyed. While every notice should be considered on its own terms, a prudent rule of thumb for those serving notice is to proceed on the basis that strict compliance is necessary. As Lord Hoffman observed in Mannai Investment Co. Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 W.L.R. 945 in relation to a notice to quit, ‘If the clause had said that notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease’.

On the second count (i.e. matters of substance), the question to be asked is how the notice would be understood by a reasonable recipient with knowledge of the context in which the notice was sent. In practice, this is also a relatively stringent test, although it is worth noting that Mannai is still sometimes cited as authority for a more lenient approach (see, for example, Lord Clyde’s comment that ‘the evident intention of a notice should not in matters of this kind be rejected in preference for a technical precision’). However, the clear emphasis of the subsequent cases in this area has been that Mannai should not be understood as endorsing a more relaxed attitude.

Notice provisions in SPAs

In sale and purchase agreements (SPAs), notice provisions can appear in various guises. They feature prominently where the SPA imposes contractual limitations on the Seller’s ability to bring claims against the Buyer, principally for breach of warranty. Those limitations are often embedded in a notice provision whose purpose is to debar claims which are not notified within a certain period of time following completion and to ensure that the Seller is furnished with sufficient information for it to understand the basis of the claim (the content of which may be prescribed with a lesser or greater degree of specificity).

Accordingly, a failure to provide adequate notice of a claim in timely fashion may result in a potentially valuable claim being time-barred. That was the result in two key authorities, Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423 and Laminates Acquisition Co v BTR Australia Ltd [2003] EWHC 2540 (Comm), where the respective notices were held to be defective on the grounds that they did not set out ‘such particulars of the grounds on which such claim is based as are then known to the Purchaser’ (Senate Electrical) or ‘(in reasonable detail, to the extent that such information is available at the time of the claim), the matter which gives rise to the claim, the nature of the claim and the amount claimed in respect thereof’ (Laminates).

On the other side of the coin, a similar notice was recently upheld in The Hut Group Ltd v Nobahar-Cookson & Anor [2014] EWHC 3842 (QB) where the provision required the Buyer to specify ‘in reasonable detail the nature of the claim and, as far as practicable, the amount claimed in respect of it’. Construing this clause in relation to a claim concerning the accuracy of the target company’s accounts, Blair J based his conclusion on a finding that, at this stage, ‘not much was contractually required’.

A recent cautionary tale

All of which brings us, in a roundabout way, to Ipsos S.A. v Dentsu Aegis Network Limited [2015] EWHC 1171 (Comm) – the latest authority in a chain of cases stretching back to Senate Electrical, and beyond, where a Buyer’s Claim Notice has been called into question. In Ipsos, the notice provision in the SPA was in similar terms to the equivalent clause in Laminates, namely:

‘No Seller Warranty Claim…shall be brought against the Seller unless (and the Seller shall only have liability in respect of any such Claim if) the Purchaser shall have given to the Seller written notice of such Claim… specifying in reasonable detail: (i) the matter which gives rise to the Claim; (ii) the nature of the Claim; and (iii) (so far as is reasonably practicable at the time of notification) the amount claimed in respect thereof (comprising the Purchaser’s good faith calculation of the loss thereby alleged to have been suffered)… such Claim Notice to be given by…the second anniversary of Completion.’

The question for the Court was whether an effective Claim Notice had been served in relation to a substantial breach of warranty claim. This was a matter of some importance because, if the notice which the Buyer had served was not effective, the Seller would have no liability.

Construing the notice provision, the judge observed that, to be effective, the notice needed to state that a claim was being made and clearly specify the matters identified in (i) to (iii). Drawing on Cooke J’s judgment in Laminates, he considered that ‘the matter which gives rise to the Claim’ encompassed the underlying facts, events and circumstances which constituted the factual basis on which the claim is posited, ‘the nature of the Claim’ meant what was being claimed and the basis of it by reference to the SPA and ‘the amount claimed’ required a calculation on the Buyer’s part of the loss which had been suffered. As for what amounted to ‘reasonable detail’, this depended on the nature of the claim, bearing in mind that the details to be provided need not be as extensive as those required in the legal proceedings to be issued and served within six months of the notice.

Analysing the Buyer’s notice, the judge went on to conclude that a reasonable recipient with knowledge of the context in which it was written would not have understood it to be a Claim Notice. This was because the Buyer’s notice did not identify itself as a Claim Notice, make any reference to the governing notice provision or indicate an intent to claim damages for breach of warranty. It also could not be inferred that the notice was a Claim Notice, simply because the Buyer’s notice had been served two days before the deadline. In the judge’s view, the Buyer’s notice otherwise fell down because it did not specify ‘the matter which gives rise to the Claim’ (in this case, an alleged breach of Brazilian labour law) or ‘the nature of the Claim’ (because the notice made no real attempt to identify the form and substance of the Claim). As a result, the Buyer’s claim failed.

Conclusion

In SPAs, as in many other contracts, a defective notice can have very serious consequences. As in Ipsos, this can cause a Buyer’s breach of warranty (or indemnity) claim to fall at the first hurdle. While such arguments do not always succeed (see The Hut Group, for example), the possibility of defeating a claim at the outset on such grounds will ensure that notice points continue to be argued where possible. From a Buyer’s point of view, the key is therefore to take care when drafting a claim notice, making certain that the requirements of the notice provision are identified and satisfied. Surprisingly often, claim notices are drafted at the eleventh hour of the contractual limitation period. However, even when acting in haste in order to ensure that a claim is not time-barred, the high price for getting it wrong necessitates a considered approach. In this context, what is apparent from cases such as Ipsos, the cases which have preceded it and the general rules, is that the Courts will not bend over backwards in order to uphold a notice which does not meet the requirements stipulated by the contract. As a result, Buyers in such situations would do well to heed the guidance provided by the Court of Appeal in Senate Electrical that ‘Certainty is a crucial foundation for commercial activity. Certainty is only achieved when the vendor is left in no 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.’


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