A further reminder of the need for strict compliance in notifying warranty claims

In a recent decision, the High Court found that claims for breach of warranty had not been validly notified to one of seven defendants in accordance with the contractual provisions of a sale and purchase agreement, with the result that claims against all defendants were dismissed: Zayo Group International Ltd v Ainger and others [2017] EWHC 2542 (Comm).

While each case will turn on its own facts, this decision is a further reminder of the need to ensure that notice of warranty claims is given in strict compliance with the terms of the agreement. It follows a number of recent decisions in which the court has struck out warranty claims for defective notice, including Teoco UK Limited v Aircom Jersey 4 Limited (unreported, 25 April 2016) (see post).

The judge in the present case emphasised that the purpose of contractual notice requirements for warranty claims is commercial certainty, and that compliance with such requirements is not a technical or trivial matter.

The case is also of interest in finding service could have been validly effected (if done in time) even though the defendant no longer lived at the address for service given in the agreement.

Tom Henderson, a senior associate in our disputes team, outlines the decision below.

Background

Under a sale and purchase agreement dated 14 May 2014 (SPA), the claimant purchased the entire issued share capital of Ego Holdings Limited (Ego) and its subsidiaries from the seven defendants, who were individuals, and a private equity fund. Management warranties were given by the defendants in the SPA. The SPA contained certain limitations on the defendants' liability under the warranties, including the following:

Paragraph 3 of Schedule 6: "No Management Warranty Claim shall be made against any Management Vendor … unless a claim is made against all Management Vendors who are liable in respect of the same facts or circumstances."

Paragraph 3.2 of Schedule 6: "No Management Vendor shall have any liability for a Management Warranty Claim [unless] the Purchaser gives notice to the Management Vendors [within] eighteen months of Completion. The notice must be in writing and state in reasonable detail the nature of the Management Warranty Claim … and a reasonable estimate of the amount claimed …."

Clause 12.1: "Any notice … shall be served by delivering it by hand or sending it by special delivery … to the address … set out in clause 12.2 (or as otherwise notified by that Party under this agreement). Any such notice shall be deemed to have been received … if delivered by [courier], at the time of delivery … provided that if deemed receipt … would have occurred after 5.00pm on a Business Day, or on a day which is not a Business Day,  the notice shall be deemed to have been received at 9.00am on the next Business Day."

Under these provisions, any warranty claims had to be notified to the defendants by Sunday 15 November 2015, being 18 months after completion of the SPA. As a result of the deeming provisions, in reality the claimant needed to serve its notices by 5pm on Friday 13 November 2015.

On 13 November 2015, a courier successfully served notices of claim on the first to fourth and sixth and seventh defendants. In relation to the fifth defendant (Ms Jaggard), the courier arrived at the address specified in the SPA only to discover that Ms Jaggard no longer lived there. The courier left with the notice but returned at 7.50pm to leave a copy of it at the address.

When the claimant later brought proceedings for breach of warranty, the defendants argued that the claimant had failed to comply with the notice provisions with the consequence that, not only did Ms Jaggard have no liability to the claimant, but none of the other defendants had any liability either. The defendants also argued that the content of the notices fell short of the standard required by the SPA, in particular for failing to include a reasonable estimate of the amount claimed.

The defendants accordingly issued an application to strike out the claimant's claim under CPR 3.4 on the basis that the particulars of claim disclosed no reasonable grounds for bringing the claim and/or for summary judgment under CPR 24 on the basis that the claimant had no reasonable prospects of success.

Decision

The judge (Mr Simon Bryan QC sitting as a deputy judge of the High Court) dismissed all of the claims on the basis that notice had not been validly served on Ms Jaggard, and therefore none of the defendants was liable.

He reached his decision on the balance of probabilities, as the parties had agreed that he should (where possible) finally determine points of construction as preliminary issues, rather than merely to the extent necessary to address the issues of summary judgment and strike out. He noted that it was good practice in the Commercial Court to determine pure points of construction finally where possible, as this saved time and costs. However, had it been necessary, he would have found that the claim should be struck out and/or summary judgment granted for the defendants.

The judge cited six legal principles identified in the judgment in Teoco which he considered "to be of general application" (see post on Teoco). These include that every notification clause turns on its own wording, and that a notification clause which imposes a contractual time limit is a type of exclusion clause and therefore should be construed narrowly. He also specifically noted that:

• The commercial purpose of contractual notices for warranty claims is that of commercial certainty.
• Compliance with contractual notice requirements is not a technical or trivial matter.

Was Ms Jaggard notified of the claims in accordance with the SPA?

The judge found that the ordinary meaning of clause 12 was that notice was served (where a courier is used) by delivering the notice to the address listed in the SPA, for example by posting it through a letter box or leaving it under a mat, whether or not the intended recipient resided at the address. That was particularly clear from clause 12.3, which said it would be sufficient to prove that the envelope containing the notice was delivered to the address of the relevant party. There was no ambiguity and there was nothing uncommercial about this construction. It promoted certainty as it ensured that the parties knew where they stood. As the claimant had not done this by 5pm on 13 November 2015, it had failed to give Ms Jaggard valid notice of the warranty claim.

In reaching this conclusion, the judge noted that, although it is a purpose of the clause that the notice will likely be brought to the attention of the defendant, it is not the purpose of the clause. A notice could be validly served but still not be brought to the attention of the party, for example as a result of a postal error or their absence from their address at the time.

It was not possible, as the claimant argued, to imply a term into the SPA that where an address for notification had not been updated, a reasonable attempt to deliver the notice at the original address would suffice for the purposes of the notice provisions. Such a construction would cause uncertainty given the difficulty in establishing what a "reasonable attempt to deliver" would be. In any event, it was inconsistent with the express terms of clause 12; since service was effected by leaving the notice at the relevant address, attempts to deliver simply did not come into it.

The judge also rejected the claimant's argument that, as Ms Jaggard had failed to update her address for receiving notices, she should not be able to rely on that default to deny liability. The failure to update her address was not a breach of the SPA. The wording of the SPA at clause 12.2 was permissive rather than mandatory, referring to "such other address … as may be notified in writing" (emphasis added).

The consequences for the other defendants

The judge found that the ordinary and natural meaning of paragraph 3.2, with its reference to giving notice to the management vendors (plural) was that no management vendor would have liability unless notice was given to all management vendors. As Ms Jaggard had not been validly served, none of the other defendants had any liability to the claimant, notwithstanding that they had been validly served.

The judge further noted that this "sue one, sue all" clause was commercially rational – for instance, to ensure that those with knowledge needed for defence of any of the claims were all defendants and had an incentive to assist in the defence of the claims.

Measure of loss

As the judge had dismissed the claims on the basis of the failed warranty notice, he did not need to decide whether the claimant had failed to include a reasonable estimate of the amount claimed, but he went on to consider the point briefly.

It is well established, and was not disputed, that the measure of loss for breach of warranty as to shares in a share sale and purchase agreement is the difference in value between: (1) the value of the shares purchased if the warranties had been true (usually, but not always, the price paid); and (2) the actual value of the shares (in light of the breach of warranty). The claimant had sought damages in the amount of sums paid out by one of Ego's subsidiaries – in effect seeking an indemnity in respect of loss suffered by a subsidiary.

The judge accepted that, as the sums claimed were based on sums paid out rather than diminution in value of the shares purchased, they were not based on the correct measure of loss and so did not amount to a reasonable estimate on the facts of this case.