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Serving effective [warranty claim] notices

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15/02/2018

Walker Morris’ Head of Commercial Dispute Resolution, Gwendoline Davies, explains why notifying contractual warranty claims – and serving legal notices generally – can be a particularly tricky business. Gwendoline shares some practical advice.

Notification of warranty claims…

Back in 2016, Walker Morris’ Corporate partner Richard Naish reported on the importance of clarity and accuracy when notifying breach of warranty claims.  The issue has recently come before the courts again.

In Teoco UK v Aircom Jersey [1] the Court of Appeal was asked to determine whether the purchaser/claimant’s notification of a breach of SPA warranty claim – worth some £3.46 million – was valid.

Notification requirements

The purchaser had bought group companies pursuant to a sale and purchase agreement (the SPA) which contained a tax covenant and various warranties under which the seller warranted that the companies had paid all tax due.  As is typical, the seller’s liability was subject to notification of claims obligations which, in this case, required the purchaser to give notice: “setting out reasonable details of the claim (including the grounds on which it is based and the Purchaser’s good faith estimate of the amount of the claim)”.

Notification letters

In February 2015 the purchaser’s solicitors wrote to the seller, referring generally to the tax covenant, tax warranties and general warranties, alleging potential breaches and purporting to comply with the notification of claims obligations within the SPA. When the seller responded that the letter contained insufficient detail to constitute a valid notification, the purchaser’s solicitors wrote again, this time simply setting out a breakdown of tax allegedly due.

Court of Appeal confirmation

The High Court had previously concluded that the purchaser’s letters did not constitute valid notification of a claim because, without identification of the specific warranties alleged to have been breached, they did not set out the legal grounds for a claim. The Court of Appeal agreed and clarified as follows:

  • While every notification clause (like every other contractual provision) will turn on its own individual wording…
  • …certainty is important [2].
  • A compliant notification of warranty claim should identify the particular warranty/ies alleged to have been breached [3].
  • Whilst there may be some cases in which the ‘reasonable recipient’ test may be relevant [4], in this case there was real scope for doubt about which provisions the purchaser thought may found a claim.

…and service of notices generally

The notification of warranty claims obligations in the Teoco SPA were also time-limited: notice had to be given as soon as reasonably practicable after the purchaser became aware of a claim, and in any event on or before the longstop date of 31 July 2015.  Legal proceedings also had to be commenced within six months of the date the seller was notified and, once a claim had been commenced, no new claim may be brought in respect of the same matter.  (The purchaser therefore effectively had only one ‘shot’ at getting any claim right).

Such time limits and other claim restrictions are common, not only in relation to warranty claim notifications, but also in relation to the service of all sorts of contractual notices.

Most modern commercial contracts also contain separate, detailed service of notice clauses with additional obligations and requirements which, if they are not strictly complied with, can invalidate any notice. The consequences of that can be significant.

In the recent case of Zayo Group International Ltd v Michael Ainger & Ors [5] (incidentally, also a notification of warranty claim dispute) the claimant had left service of the relevant notices until the last minute.  The contract in question provided for notices to be served on all seven defendants by hand at the addresses specified in the contract or such other addresses as may be notified in writing.  When the courier arrived at the address of one of the defendants, he discovered that she no longer lived there and left without leaving the notice.  The deadline for service expired later that day, so the claimant had no opportunity to further attempt service.  When the claimant subsequently sought to bring proceedings, the High Court dismissed its claim in full and against all defendants, on the basis that service had not been validly effected.

Practical advice

A good tip, when it comes to the service of any contractual notice, is to remember the mantra: who, when and how?  Immediately a party considers serving a notice, it should ascertain exactly:

  • Who is required to give notice and on whom the notice should be served. (Consider the party/counter-party itself? Legal representatives? Other agents? Have there been any assignments, novations or variations which change the position? What are the current names and addresses/contract arrangements for the relevant parties/agents?).
  • When the notice should be served, including whether there are any long-stop dates for service or for completion of any other conditional/procedural steps (such as commencing any follow-on court claims, or the like).
    • It is also important to bear in mind, when calculating dates, that there may be different dates to ascertain. For example, depending on the nature and wording of the notice clause, you may need to know the date on which a notice actually has to take effect; the date by which it has to be served on (i.e. received by) the receiving party; and/or the date by which it has to be issued.
    • All of those dates can be influenced by other factors (such as the required method of valid service; how long that will take; whether the contract designates when service will take place or whether the contract relies on external deeming provisions; whether there are any weekends/bank holidays to take into account and/or whether only working/business days count (which can differ across different countries); and so on.
  • The ‘how‘ covers:
    • The content of the notice – such as the requirement in this claim (and in the majority of notification of warranty claim cases) to set out, with the requisite specificity, the legal basis of the claim.
    • The form of the notice and any strict procedural requirements (in Mannai Lord Hoffmann famously said: “if the [termination] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper“).
    • The fact that service must be effected in accordance with any contractually specified method. That, in turn, can lead to problems if notification obligations within contracts are drafted in isolation from, or inconsistently with, more general service clauses and other relevant contractual provisions. For example, what happens if a party gives a PO box as its service address, but the contract specifies service by recorded delivery? (You cannot effect recorded delivery on a PO box.) What happens if the contract specifies that the service address is a party’s registered office, but the agreement is assigned to an individual? (Individuals do not have registered offices).

The best advice is to leave the issue of warranty claim notifications – and indeed the service of legal notices generally – entirely to the experts. The consequences of getting any such notice wrong can be too costly to gamble.  That is particularly the case where, as in Teoco, the potential claimant only has one bite at the cherry.  Instructing specialist legal representatives to take on the risk for you reduces the chance of any problems arising.

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[1] Teoco UK Ltd v Aircom Jersey 4 Ltd & Anor [2018] EWCA Civ 23
[2] Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423
[3] RWE Nukem Ltd v AEA Technology Plc [2005] EWHC 78 (Comm)
[4] i.e. the objective test, established in the House of Lords case of Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, HL, which can (in some circumstances) save an otherwise defective notice if the reasonable recipient would nevertheless have been left in no doubt as to its meaning
[5] [2017] EWHC 2542 (Comm)

 

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