Claims notification clauses – why they are vital
Warranty claims notification clauses are a standard feature of share purchase agreements (SPAs). They can be a minefield for both commercial lawyers and litigators alike. They prescribe the requirements for the purchaser to notify the seller of a claim under the warranties (contractual promises as to the ''condition'' of the company sold) within the agreement. Typically they will prescribe the form of notice, recipient, timeframe and contents. The purpose being to let the recipient know at the earliest possible date, and in sufficiently certain terms, that a claim is being made against it.
Compliance with these clauses will usually constitute a condition precedent or contractual prerequisite before warranty claims can be brought. And they are common grounds for dispute. In particular, the defendant/seller may seek strike out and/or obtain summary judgment in respect of a claim where it is alleged that these conditions have not been met, so the claim has not been validly brought. The onus is on the claimant/purchaser to ensure compliance. It follows that careful attention is key, whether in drafting the notification clause itself or delivering any subsequent notice. A claimant risks its claim being defeated on ''technical grounds'' rather than its merits where contractually binding notice provisions within the SPA have not been complied with. Problems may also arise where the time period for issuing any revised, compliant notice has lapsed - barring a claim in relation to the alleged breach of warranty.
Recent cases – compliance and non-compliance
The frequency with which disputes about these clauses come before the Courts tells us that lawyers and their clients easily fall foul of what may at first glance appear to be mundane procedural contractual stipulations. Three cases in the first half of this year are examples:
Where the claimant and purchaser (TP ICAP) brought a claim against the seller and defendant (NEX Group) under SPA warranties. NEX Group sought summary judgment and/or strike out on the grounds that a valid warranty claim notice had not been given under the SPA. This application was upheld by the Court in part (as discussed below).
Where the appellant/claimant, United Luck, successfully appealed against the decision to grant the defendants/respondents, Dodika and others, summary judgment against United Luck's claim for breach of the SPA's tax covenant. Summary judgment was initially granted at first instance on the basis that the notice of claim was non-compliant.
Where the court considered how to construe the notification requirements under an Engineering and Construction Contract and held that a notice of dissatisfaction had complied with the contract requirements.
The Court's starting point in TP ICAP was that every notification clause turned on its own wording as a question of contractual interpretation. Therefore, the need for careful thought and precise drafting starts with the SPA itself. For example, a requirement to notify the seller within 14 days once the purchaser becomes aware of ''the matter''. Is this intended to refer to when the purchaser is aware of the underlying facts that give rise to the dispute or when it becomes aware that these may, or alternatively do, constitute a claim? (See also Nobahar-Cookson & Ors v The Hut Group Ltd  EWCA Civ 128.) The same is true for the notice itself.
The test applied by the Court in TP ICAP was how a notice would be understood by a reasonable recipient taking into account the relevant objective, commercial context. Applying this test in Dodika, though specific to the facts of that case, the requirement for a ''reasonable detail'' did not necessitate the claimant reciting matters already known to the notice recipient, since doing so would fulfil no commercial purpose. Similarly, in TfGM, where the contract did not stipulate a form of words that had to be used, or the level of detail required, it was found that a notice should simply be "clear and unambiguous".
That said, it is established law, and repeated in TP ICAP, that any notification must specify that a claim is being actually made, rather than the mere possibility that such a claim may be brought. Additionally, even ''low threshold'' notice clauses (as categorised in TP ICAP) requiring only a broad description of the nature of the claim require a significant degree of specificity – i.e. stating the underlying contractual provisions / warranties that are alleged to have been breached.
Ultimately, the devil is in the detail, but there is a fine balance to be struck. Too little detail may not meet the requirements of the notification clause, however too much detail, when any claim is in its infancy and not fully constructed, may also be a pitfall. Should the claim proceed and develop with further investigation this could lead to the defendant forensically analysing the notification arguing that the claim it does not fully capture the claim now being brought.
So the most important lesson to take away has to be that preparing these notices can take a good deal of time and attention. They should not be left until the last few weeks, still less until the last few days before they are due. And no assumptions should be made about what exactly is required in any given case.
Written by Thomas Ash