Court of Appeal finds buyer gave sufficient notice of claim under SPA, emphasising need to construe such clauses in light of commercial purpose

The Court of Appeal has found that a buyer gave sufficient notice of a claim for breach of warranty under a share purchase agreement where the notice specified a different basis for assessing loss than was ultimately pursued: Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477.

The Court of Appeal held that the requirement in the notice of claims clause to state the nature of the claim in reasonable detail did not require the notifying party to specify the precise basis on which damages were claimed. Put broadly, the commercial purpose of the notice provision was to give sufficient information to enable the receiving party to investigate the claims against it and assess potential liability, and the notice in question had met that threshold.

Further, the requirement to state the amount claimed and how it was calculated did not mean that the notifying party was precluded from calculating damages on a different basis. The notice provision merely required the notice to set out the party's genuine calculation at the time of notification.

The court noted that the interpretation of a notice of claims clause will depend primarily on the words used. However, where the parties use broad and general terms such as "the nature of the claim" and "in reasonable detail", those requirements should be interpreted in the light of the commercial purpose of such clauses, which is essentially to allow the recipient of the notice to investigate the claim and take legal advice:

"While a seller’s interest will always be to knock the claim out if it can on the technical ground that the notice is insufficient, courts should not interpret such clauses as imposing requirements which serve no real commercial purpose unless compelled to do so by the language of the clause."

The decision suggests that parties providing notices of claim may be given some latitude, where it is argued that a notice does not provide sufficient detail. However, each case will turn on its facts, and notices should always be prepared with close reference to the specific notice provisions agreed between the parties.

Background

The claimant ("Drax") purchased the shares in (as it was then known) Scottish Power Generation Limited ("the Company") from the defendant ("Scottish Power") under a share purchase agreement ("SPA"). The SPA provided that Scottish Power would not be liable for certain types of claim unless Drax had notified Scottish Power 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)" within a specific timeframe (the "Notice of Claim Clause").

Drax alleged that, contrary to a warranty in the SPA, the Company did not have the benefit of an option agreement that would entitle it to an easement over land adjacent to one of the Company's assets (a site for a potential new gas power station). Drax provided Scottish Power with a notice setting out claims for breaches of the SPA, including for breach of the above warranty (the "Notice of Claim"). The Notice of Claim also addressed an indemnity provision in the SPA, which raised separate issues that are not relevant to this note.

In the Notice of Claim, Drax set out the factual background to and the bases for its claims against Scottish Power. It noted that the loss suffered was yet to crystallise, but set out the "likely heads of loss […] and where possible an estimate of the potential loss that is likely to be suffered". The losses identified in the Notice of Claim were losses it was anticipated would be suffered by the Company, including the costs of acquiring the easement from a third party.

Scottish Power did not accept liability and Drax issued its claim form, in which it pleaded its losses as per its Notice of Claim. Scottish Power applied for summary judgment on the basis that the Notice of Claim did not sufficiently state "the nature of the claim and the amount claimed" for the purpose of the Notice of Claim Clause.

Drax sought to amend its claims, including so as to: (i) plead that losses were suffered by Drax rather than by the Company; and (ii) base the alleged loss on the difference between the value of the Company as warranted (ie with the benefit of the option agreement) and its true value (ie without the benefit of the option agreement).

The High Court (Simon Birt KC sitting as a Deputy High Court Judge) held that if Drax was claiming that it suffered loss based on a diminution in the value of the Company, that had to be set out in the Notice of Claim. Since the Notice of Claim had not set out the difference in value approach and instead had identified losses said to have been suffered by the Company itself, Drax had not met the requirements of the Notice of Claim Clause. The High Court therefore granted Scottish Power summary judgment in respect of the breach of warranty claim. Drax appealed that decision.

Decision

The Court of Appeal allowed Drax's appeal. Lord Justice Males gave the leading judgment, with which Lord Justice Birss and Sir Geoffrey Vos MR agreed.

The court explained that the initial purpose of a notice of claim clause is to provide a contractual limitation period, which promotes finality and certainty in commercial dealings. If some kind of notice is given, then its purpose is as described in Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638 (considered here), ie to enable the recipient to make inquiries into the factual circumstances giving rise to the claim, with a view to gathering or preserving evidence, assessing the merits of the claim, and so forth.

Whether a notice is sufficient to satisfy the requirements of any given clause depends primarily on the language used. However, where the parties use broad and general terms such as "the nature of the claim" and "in reasonable detail", those requirements should be interpreted in the light of the commercial purpose of such clauses, including those identified in Dodika. Males LJ commented that notice of claim clauses should not become a "technical minefield to be navigated".

The court also pointed out that such clauses are essentially exclusion clauses and are therefore subject to the common sense principle that parties are not lightly to be taken to have given up valuable rights without making it clear that they intend to do so (referring to Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128, considered here).

On the facts of the present case, the Court of Appeal found that it was impossible to read Drax's Notice of Claim as advancing a claim based on the difference in value of the shares. However, that did not matter, for the reasons outlined below.

Nature of the claim

The Court of Appeal found that, in order to set out "the nature of the claim" in accordance with the Notice of Claim Clause, it was not necessary for the Notice of Claim to state that Drax was claiming damages on the basis of a difference in value.

For the purposes of the clause, it was sufficient for Drax merely to state that Scottish Power had breached its obligation to ensure that the Company had the benefit of the option agreement. This provided Scottish Power with sufficient information to identify files relevant to the claim, identify individuals who could be asked about the claim and seek legal advice as to its potential liability, meaning that the commercial purpose of the Notice of Claim Clause had been met.

Requiring the Notice of Claim to go further than this by making clear that Drax claimed damages based on a difference in value would serve "no commercial purpose" and would create "a trap to defeat what may be a valid claim".

Amount claimed

As to the requirement in the Notice of Claim Clause to state the "amount claimed (detailing the Buyer's calculation of the Loss thereby alleged to have been suffered)", the key consideration was whether the Notice of Claim had set out, in good faith, Drax's genuine calculation of the loss it was claiming at the time. As the parties had not disputed that the Notice of Claim had been made in good faith, it did in fact constitute Drax's calculation of the alleged loss at the time of notification and so was in accordance with the Notice of Claim Clause.

There was no good reason, and nothing in the language of the clause, to preclude Drax from reflecting on the calculation and amending its claim at a later stage. In any case, the Notice of Claim had put Scottish Power in a position where it could assess its liability, such as by seeking legal advice regarding Drax's calculation of loss.