High Court strikes out warranty claim due to shortcomings in claim notice

The High Court has held that a notice delivered by a purchaser under a sale and purchase agreement did not meet the contractual requirements of a claim notice, even though it alleged a breach of warranty, described the circumstances giving rise to the alleged breach, and provided information about the likely quantum of the claim: IPSOS S.A. v Dentsu Aegis Network Limited (formerly Aegis Group plc) [2015] EWHC 1171 (Comm).

The court found that the letter did not make clear that a claim was being asserted against the seller, and thus did not amount to a claim notice under the relevant provision of the SPA. Because the two-year limitation period provided in the SPA for service of a claim notice had since expired, the claim was barred.

This decision highlights an important practical lesson: those who wish to bring claims for breach of warranty should ensure that they comply carefully with both the form and the substance of any contractual notice requirements.

Donny Surtani, a senior associate in our dispute resolution team, considers the decision further below.

Background

Under the SPA, the defendant seller contracted  to sell a group of companies (the Synovate Group) to the claimant purchaser . The SPA included a warranty that each member of the Synovate Group had materially complied with all applicable employment and social security laws (paragraph 17.24 of Schedule 3). The seller made certain disclosures against that warranty in its Disclosure Letter, in respect of 62 employment-related claims against the Synovate entity in Brazil. Such claims were carved out of the warranty by virtue of having been disclosed, but were potentially subject to an indemnity in the SPA in respect of disclosed litigation.

As is common practice, the SPA imposed various procedural requirements on the purchaser in relation to actual or potential claims, including:

• (at paragraph 3.1 of Schedule 5) that no warranty claim or indemnity claim could be brought against the seller unless within two years of completion the purchaser had given the seller written notice (a "Claim Notice"): "specifying in reasonable detail: (i) the matter which gives rise to the Claim; (ii) the nature of the Claim; and (iii) (so far as reasonably practicable at the time of notification) the amount claimed in respect thereof"; and
• (at paragraph 5.1 of Schedule 5) that upon becoming aware of a third party claim which would or might give rise to a warranty or indemnity claim under the SPA, the purchaser would "as soon as practicable, notify the Seller by written notice specifying (in reasonable detail) the matter which may or will give rise to the relevant Claim …". Failure to comply with paragraph 5.1 would not prevent a claim, but might affect the amount recoverable, if such failure had increased the liability.

About a year after completion, the purchaser wrote to the seller purporting to give notice under paragraph 5.1 of some 200 employment-related claims that had arisen against the Synovate entity in Brazil. The letter stated that it was not a "Claim Notice" for the purposes of paragraph 3.1.

The seller responded the next day saying it did not consider the letter to be a valid notice under paragraph 5.1, noting in particular that "no account appears to have been taken of the disclosures made by Aegis in relation to the Brazilian labour claims which were set out in the Disclosure Letter".

The purchaser next wrote about a year later (and twelve days before the deadline for notifying claims under paragraph 3.1). It referred to its previous letter and stated that "as previously advised, Synovate Brazil … is facing a number of employment claims, which were not disclosed in the Data Room or Disclosure Letter in breach of, inter alia, paragraph 17.24 of Schedule 3 of the SPA …". The letter noted that there had been some disclosure in the Disclosure Letter, but stated that "these claims cannot be matched to the records of claims held by Synovate Brazil". The letter went on to describe the nature and basis of the third party claims, and provided schedules of claims settled by Synovate Brazil, decided claims, as well as open claims. It invited the seller to confirm which of these claims it considered it had disclosed.

The letter also set out the value of the closed claims, the amounts in dispute in the open claims, and local counsels' opinions on the merits and likely values of those open claims. It concluded by stating that once the seller "clarifies which claims it considers were disclosed pursuant to applicable warranties, [the purchaser] will provide a further breakdown of which of these losses, costs and expenses, if any, fall, or may fall, under the [SPA indemnity covering disclosed litigation] and which it claims or may claim from [the seller] for breach of warranty."

When the purchaser eventually commenced proceedings, the seller applied for the claim to be struck out, alternatively for summary judgment, on the ground that there had not been a valid Claim Notice in accordance with paragraph 3.1 within the two-year limitation period.

Decision

Mr Justice Simon, while starting with the proposition that the only true principle to be derived from the authorities was that every notification clause turns on its own wording, suggested that four broad propositions could be derived from the authorities (particularly the decision in Laminates Acquisitions v BTR Australia [2004] 1 All ER (Comm) 737):

• First, the commercial purpose of clauses such as 3.1 included "ensuring that sellers know in sufficiently formal terms that a claim for breach of warranty is to be made, so that financial provision can be made for it". Such a purpose would not be served if the notice was uninformative or unclear.
• Secondly, the relevant question was how the notice would be understood by a reasonable recipient with knowledge of the context in which it was sent.
• Thirdly, the notice must specify that a claim is actually being made, rather than merely indicating the possibility that a claim might be made.
• Fourthly, a requirement that particular matters be "specified" in the notice suggests very strongly that it is not sufficient that those matters could be inferred.

The judge considered the content of the letter and noted that it did not expressly state that it was a Claim Notice, nor did it refer to paragraph 3.1. It had referred to the previous letter (which was expressly stated not to be a Claim Notice) but "did not use the opportunity to state by way of contrast that it is intended to be a Claim Notice …". The judge expressly rejected the submission that the timing of the letter, shortly before the expiry of the two-year deadline for Claim Notices, should have suggested to the reasonable reader that it was to be understood as a Claim Notice.

The judge also considered that the letter did not specify "the matter which gives rise to the Claim" or "the nature of the Claim". It did not, he said, allege that Synovate Brazil had breached Brazilian labour law (notwithstanding that it had specified claims against Synovate Brazil, the bases of those claims, and the fact that some claims had succeeded and on open claims Brazilian counsel had expressed the view that the claims were very likely to succeed). Although there was one single, short reference to the relevant warranty, there was, in the judge's view, "no real attempt to identify the form and substance of the claim".

Finally, the judge took the view that "such light as was shed on the nature of the claim … was diffused by the reference to a possible claim to an indemnity …".

Taking all those matters into account, the judge held that a reasonable recipient of the letter, with knowledge of the previous correspondence and the business context in which it was written, would not have understood it to be a Claim Notice. The seller was therefore successful in its limitation defence.

Comment

There has in recent years been a trend towards greater flexibility and less formality in construing claim notices. In Mannai Investment Co v Eagle Star Life Assurance Co [1997] AC 749, the House of Lords encouraged judges to adopt a more flexible approach when construing contractual notices, and to ask not whether a notice technically "ticked all the boxes", but how the notice would be understood by a reasonable recipient with knowledge of the relevant context. Similarly, in Laminates, it was noted that when construing provisions such as paragraph 3.1, "the usual principles which apply to construction of exclusion clauses" should be applied.

The judge in the present case applied the "reasonable recipient" test, in line with these authorities. However, the decision demonstrates that it is important for claimants to comply very carefully with any contractual notice requirements, both as to form and substance, or they will run the risk of finding their claims are time-barred. In particular, the notice should leave no room for doubt that a claim is actually being made, and on what basis, rather than indicating the possibility of a claim in future. Here the notice was found lacking despite having identified the relevant warranty, described the circumstances giving rise to its breach, and given information as to likely quantum.

As noted above, the statement that the claims would be broken down as between warranty claims and indemnity claims upon receiving the seller's response also counted against the letter being a claim notice. It was perhaps inadvisable to make the formulation of the claim contingent on the seller's response, with only 12 days left in the limitation period. Rather than anticipating the seller's potential defence in this way, the purchaser might have been better off notifying all 200 claims as breach of warranty claims, and asserting an indemnity claim in the alternative, to the extent that any such claims were fairly disclosed in the Disclosure Letter.

The judgment also makes it clear that the timing of a notice, being sent shortly before the deadline for claims, will not be enough to save it if it does not comply with the relevant requirements.