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Notification of warranty claims

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25/05/2016

In The Hut Group Ltd v Nobahar-Cookson and another [1] the main point arising from the buyer’s breach of warranty claim under a share purchase agreement centred on the buyer’s compliance with the following notice provision:

“The Sellers will not be liable for any Claim unless the Buyer serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter.” [Emphasis added]

The sellers argued that (1) the required notices were not given in time and (2) even if they had been given in time, they were not valid because they did not contain sufficient detail. The principal point at issue before the Court of Appeal concerned the meaning “becoming aware of the matter”.

Three competing interpretations were canvassed before the Court. These were that the expression meant:

  • aware of the facts giving rise to the claim (even if unaware that those facts did give rise to a claim)
  • aware that there might be a claim under the warranties
  • aware of the claim, in the sense of an awareness that there was a proper basis for a claim.

The Court’s conclusion was that the ambiguity in the drafting of the clause pointed to the final interpretation.

The approach of the Court of Appeal was that where there was ambiguity in the drafting of a contractual provision – as there was in this case – recourse should be had to the narrowest of the available contractual interpretations.

This case has subsequently been referred to by the High Court in TEOCO UK Limited v Aircom Jersey 4 Limited and another [2], another case which concerned compliance with notification of warranty claims provisions.  The judge made a number of general observations:

  • there is a significant difference between notifying a party of a claim and notifying a party that a claim may be made
  • where the agreement requires the buyer to give some level of detail of the claim, the notice should identify the particular warranty that is alleged to have been breached and state why, with some particularisation of the facts on which the alleged breach is based
  • the fundamental purpose of a contractual notice in these types of circumstances is commercial certainty
  • proper compliance with contractual notice requirements is not a technical or trivial matter.

In this case, the agreement required the buyer to give notice of any “matter or thing” “as soon as reasonably practical” of which it became aware, that indicated it “has or is likely to have” a claim and also that the sellers would have no liability for a claim unless notice of that claim had been given to them setting out “reasonable details” of the claim, including the grounds of the claim, and containing the buyer’s “good faith estimate of the amount”.   The Court considered that the buyer’s notice failed to meet the requirements of the agreement.  In the Court’s view it was unclear whether the notice that had been given was notice of a claim or of the existence of a possible claim.  Further the requirement for “reasonable details” meant that the sellers must at least be given a clear identification of the claim, and the “grounds on which it is based” meant the particular warranties must be identified.  The buyer had failed to do this.

WM comment

The clause in a sale and purchase agreement regarding the giving of notice of warranty claims is unusually fertile ground for litigation and these cases are a reminder of the importance of clarity of drafting as there can be no guarantee that a court will interpret an ambiguous clause in a particular way. For buyers it is vital to ensure that the trigger for the notice period beginning to run is drafted in clear terms.  The trigger should be expressly linked to the buyer’s actual knowledge that it has a proper basis for putting forward a claim under the relevant warranty.  Mere knowledge of the facts giving rise to the potential claim is not sufficient.

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[1] [2016] EWCA 128
[2] [2015] EWHC (Ch)

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