A recent UK Court of Appeal case, Teoco UK Limited v Aircom Jersey 4 Limited, Aircom Global Operations Limited EWCA Civ 23, provides a cautionary warning to purchasers seeking to claim under the provisions of a share purchase agreement (“SPA”).
The Court held that the purchaser’s purported notice of claim failed as it did not identify the particular warranties in the SPA alleged to have been breached.
Teoco (the Purchaser) acquired Aircom International Limited under an SPA dated November 2013, which contained a schedule of warranties and a tax indemnity.
A significant tax liability of two of the subsidiaries within the Aircom group was discovered post acquisition. The purchaser notified the sellers of these claims under the SPA in letters sent in February and June of 2015. In August 2015 the purchaser issued proceedings in respect of the tax liabilities.
The sellers applied to strike out the claim on the basis of non-compliance with the SPA’s provisions regarding notification of claims.
The sellers’ application was successful in the UK High Court and the purchaser appealed this decision to the UK Court of Appeal.
The SPA provided that the sellers would not be liable for any claim unless the purchaser had given notice “…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….).”
The letters the purchaser sent in February and June 2015 provided certain details of how the claims arose and the possible amount of the claim. However, they were held not to satisfy the notification provisions of the SPA as they did not set out “the grounds of the Claim” due to no reference in the letters to the particular warranties being relied upon or the basis for the trigger of the tax covenant. The purchaser also reserved its position as to whether it was claiming under the warranties or the tax indemnity.
Court of Appeal
Before the Court of Appeal, the purchaser argued that there was no general principle that particular warranties had to be referenced where a notification clause in an SPA requires details to be given of a claim.
The Court considered relevant case law which held that purchasers should provide sellers with the legal basis for a warranty claim. The Court also highlighted the importance of providing sellers with certainty so that they are clearly informed about the particulars of a complaint. The Court endorsed the view of the High Court judge that an “omnibus reference to Warranty Claims or Tax Claims…..was not good enough”.
The Court took the view that the purchaser’s rationale for not referencing specific warranties or other provisions of the SPA was clearly to keep its options open when taking a claim. However, by reserving its position, the purchaser left the sellers in real doubt about which provisions of the SPA it thought to be relevant.
The Court of Appeal affirmed the High Court’s decision to strike out the claim.
The case underlines the importance of strict compliance with notice provisions when notifying claims for breach of warranties or indemnities and serves as a reminder to pay close attention to such provisions when negotiating the terms of an SPA or similar transaction document.
Contributed by: Paul McNamara
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