Notification of Claim Clauses – Clarity is Key

The findings of Cockerill J in Towergate Financial (Group) Ltd & Ors v Hopkinson & Ors [2020] EWHC 984 (Comm) highlight the potential pitfalls and issues that will arise from the unclear drafting of notification of claim clauses relating to warranties and indemnities.

Facts of the case

Towergate Financial Group (the claimants) purchased the entire share capital of a financial advisory firm, M2 Holdings Limited (M2), from the sellers (the defendants) on 5 August 2008.

The agreement was governed by an SPA, in which the defendants under clause 5.9 gave an indemnity to the claimants against all losses as a result of claims or complaints against M2 arising from mis-selling financial products prior to the purchase of M2 by the claimants.

In July 2014, the FCA conducted section 166 FSMA reviews to investigate negligent advice given by M2 in respect of benefit pension schemes and unregulated collective investment schemes between 2001 and 2014. The FCA review led to the claimant having to make compensatory payments to customers and the internally estimated assessment of claims was up to £53.6 million.

It is important to note that the FCA first contacted the claimants in 2012 with information that a potential review of certain historic transactions involving M2 could take place. The claimants also sent a report to their insurers that referred to the potential claims. Notwithstanding the above, the claimants did not send notice of the claims to the defendants until the 29 July 2015, a week before the seventh anniversary of the SPA and two years after insurers were notified.

The date of the seventh anniversary is relevant to the claimants’ case, as they sent the notice of claims to the defendants in accordance (in their minds) with clause 6.7 of the SPA, which states:

6.7 The Purchaser [claimants] shall not make any Claims against the Warrantors [defendants] nor shall the Warrantors [defendants] have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing (specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims) is given to all the Warrantors as soon as possible and in any event prior to:
…
6.7.3 in relation to a claim under the indemnity in clause 5.9 on or before the seventh anniversary of the date of this Agreement.

At a quick read, it is clear that the clause has not been drafted as clearly as it could have been and the claimants relied on the notion that a condition precedent must be clear and unambiguous if it is to be enforceable. The claimants sent the notice of the claims to the defendants on the basis that it was prior to the seventh anniversary of the date of the SPA.

The defendants contended that the claimants did not comply with clause 6.7 as the obligation was in fact to notify them “as soon as possible”.

Decision

Cockerill J sought to iron out the construction of clause 6.7, focusing in the first place on the language of the clause. She acknowledged that the clause was far from perfect, but was able to conclude that the condition precedent requiring notice to be given “as soon as possible” was indeed enforceable and formed the first part of a dual condition precedent that was “perfectly clear” and “not ambiguous”:

1. as soon as possible; and
2. in any event, within seven years of the date of the SPA.

‘As soon as possible’ had the purpose of giving the defendants time to analyse the situation and prepare a defence (if need be), whilst the ‘seventh anniversary’ functioned as a limitation period.

Importantly, Cockerill J made the point that when analysing the language of the notification clause, thought must be given to the commercial purpose and context of the clause and agreement as a whole. It would have been “materially unrealistic”, according to Cockerill J, for the purpose of the clause to allow the claimants to sit on the claim for two years after they had notified insurers, before notifying the defendants.

It was then determined that the claimants had not given notice to the defendant as soon as possible and there was no justification for their delay. The claimants’ claim for an indemnity against the defendants under clause 6.7 failed as the condition precedent had not been met.

Comment

With Cockerill J’s findings in mind, parties to an agreement must ensure that the commercial context and purpose of the transaction or contract is echoed in the drafting of a notification of claim clause. Buyers are also minded to avoid a subjective trigger to a condition precedent, such as ‘as soon as possible’, instead opting for more certain language, especially if the clause calls for a dual condition precedent. Legal advice must not only be sought when drafting such clauses, but also immediately if and when a potential claim arises that may trigger a notification clause.

The case is a reminder of the disputes that can arise as a result of poor drafting and evidences a move towards a ‘common sense’ analysis by the courts when it comes to ambiguous contract drafting, particularly notification of claim clauses, which should be positively received by commercial businesses.