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The Court of Appeal clarifies requirements for specifying anticipated loss in notice of warranty claims

Giving notice of a warranty claim under a Share Purchase Agreement (SPA) can be a delicate issue. Getting it wrong can mean the difference between a party being contractually within time to bring a valid warranty claim, and not. 

In Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings EWCA Civ 477, the buyer, Drax, acquired shares in a company from the seller, Scottish Power.  As part of the SPA, the seller warranted that the benefit of an option agreement would be assigned to the buyer. 

Later and pursuant to the SPA, the buyer gave notice to the seller that it intended to bring a warranty claim under the SPA for the seller’s alleged failure to assign the option agreement, as well as a claim under an indemnity given by the seller. 

As is customary when drafting similar clauses, the notice provisions within the SPA  provided that “the Seller shall not be liable for a claim unless the Buyer has notified the Seller of the claim, stating in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer’s calculation of the Loss thereby alleged to have been suffered)”

In the initial notice of warranty claim, the buyer had indicated that the loss suffered was based on loss to the acquired company for making good the lack of option and not to the buyer for any reduction in share value, i.e. the difference between the warranted value of the target with the benefit of the option and the true value without it. The Particulars of Claim reiterated this approach to loss. The seller applied for summary judgment on the basis that the buyer’s notice of claim did not sufficiently state “the nature of the claim and the amount claimed”. In response, the buyer sought to amend its pleading to claim the losses suffered by the buyer itself (i.e. the proper measure of loss in a warranty claim) and not by the acquired company. 

The High Court originally upheld the seller’s application and held that the notice given by the buyer had not accurately stated the nature of the buyer’s loss under the SPA. The notice had referred to an incorrect measure of loss. It therefore did not meet the requirements in the SPA for a notice of breach of warranty and the buyer was now out of time to bring its claim. 

The buyer appealed. In upholding the appeal, the Court of Appeal agreed that the buyer’s initial claim for loss could not have been construed as claiming for the proper measure of loss in a warranty claim. However, the Court of Appeal determined that this did not mean the notice of warranty claim was invalid.  The Court of Appeal said that it was unnecessary for the buyer to state that the claim was based upon a difference in value of the shares in the company. This was not part of the 'nature of the claim' and it did not have to be identified in order to give reasonable details of the amount claimed. 

All that the buyer was required to say was that it was a claim in contract for damages for breaches of specific provisions and for an indemnity, and that it related to the failure of seller to transfer the benefit of the option to the company. There was nothing in the language of the notification clause or in its commercial purpose which required the buyer to specify that the damages claimed would be based on the difference in value of the shares in the company. Instead, all that was required was for the buyer to state, in good faith and based on a ‘genuine calculation’ the amount claimed. Whilst the claim as initially formulated was not a claim based on the difference in value of the shares (and the draft amended particulars of claim sought to put forward loss on a different basis), it was nevertheless the buyer’s actual calculation of the loss which it was claiming and was made in good faith at the time. 

Therefore, so long as what was put forward in the notice was a genuine estimate, the notification clause did not require the calculation of loss to be set in stone. This created room for manoeuvre if on further reflection the buyer determined that loss should be put another way, as was the case here. 

The takeaway point here is that, subject to the wording of the notice provisions in an SPA, exact particularisation of a prospective claim may not be necessary, nor will a notice necessarily need to be completely consistent with the claim ultimately brought. 

Care should nevertheless still be exercised when giving notice of a warranty claim to ensure that the contents of any such notice are compliant with the wording of the notice clause, which can vary between SPAs. Those seeking to bring a warranty claim should therefore take advice at the earliest opportunity. 

 A link to the judgment is here: https://www.bailii.org/ew/cases/EWCA/Civ/2024/477.html

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