Notice of claim provisions in APAs and SPAs: Parties beware

Notice of claim clauses

When a seller agrees to provide warranties to a buyer in an acquisition agreement, they typically include contractual limitations on those warranties. One such limitation is a notice of claim clause, which requires the buyer to inform the seller of any potential breach of warranty claims, detailing the nature and amount of the claim within a specified timeframe. This clause ensures the seller is promptly notified of any claims. If the notice given by the buyer does not meet the clause’s requirements, it is often deemed invalid, causing the buyer to lose the right to pursue a warranty or indemnity claim under the acquisition agreement.

Case background

In Drax Smart v Scottish Power, the SPA included warranties that the target company had an option to acquire an easement over land necessary for laying cables. Post-completion, it was revealed that the target company did not have such an option. Drax Smart (as the buyer) subsequently brought a claim against Scottish Power (as the seller) for breach of warranty and sought an indemnity for the losses incurred by the target company.

The SPA contained a notice of claim clause that required Drax Smart to provide written notice, before a specified date, specifying in reasonable detail the nature of the claim and the amount being claimed, along with a calculation of the alleged loss (specifying its loss as being the difference between the warranted value of Drax Smart’s shares in the target company and their actual value).

Scottish Power challenged Drax Smart’s claim on two main grounds:

1. Insufficient detail: that Drax Smart had not sufficiently detailed the nature of the claim and the amount claimed in its notice of claim for the warranty breaches.
2. Time-barred indemnity claim: that Drax Smart’s indemnity claim was time-barred as the notice was served out of time according to the terms of the SPA.

High Court decision

The High Court agreed with Scottish Power and struck out Drax Smart’s warranty claim.

Court of Appeal Decision

The Court of Appeal held that the language of the notice clause did not require Drax Smart to ‘spell out’ the nature of the claim in exhaustive detail, instead, the purpose of the notice of claim clause was to give sufficient information to Scottish Power to enable it to investigate potential liability against it, and the notice achieved this purpose.

Having the view that additional obligations would serve no commercial purpose and would simply create a trap to invalidate what might be a legitimate claim, and noting that Scottish Power was aware of the substance of Drax Smart’s claim through the notice and prior discussions, the court also held:

• the notice of claim did set out the nature of the claim and the amount claimed.
• Drax Smart was not precluded from calculating damages on a different basis.
• Drax Smart’s calculation was not ‘set in stone’.

Implications for Notice of Claims Clauses

The proper construction of notice of claims clauses is frequently contested, especially in cases involving breaches of warranties and indemnities under an acquisition agreement. This case reinforces the need for clear and precise drafting of notice of claims clauses to avoid ambiguity and potential disputes. Key takeaways include:

• Clarity and precision when drafting: Ensure that notice of claims clauses are drafted with clear and precise language to avoid differing interpretations and help mitigate the risk of disputes. During negotiations, sellers should be wary that overly stringent requirements for details of the claim may not be enforceable, and buyers should aim to minimise the content requirements of the notice. Notice of claim clauses should not become overly technical, detracting from the merits of the buyer’s claim.
• Reasonable particularisation in notice: While detailed particularisation may not always be necessary, providing sufficient information to identify the nature of the claim is advisable.
• Adherence to timelines: Adhere strictly to the timelines specified in the acquisition agreement to avoid claims being time-barred.

Conclusion

When interpreting a notice of claim clause, courts will primarily follow the specific provisions agreed upon by the parties. If a buyer’s notice does not comply with the clause, the seller is likely to succeed in having the claim dismissed due to the notice being insufficient and invalid.

Therefore, when filing a breach of warranty claim, buyers must ensure that the notice served on the seller adheres to the notice of claim clause. This typically involves specifying the type of claim, identifying the breached provision of the acquisition agreement, and explaining the breach in accordance with the clause’s requirements.

In appropriate circumstances, the court may interpret the validity of a notice in a more pragmatic manner, recognising the clause’s commercial purpose, which is to allow the seller to investigate and assess the claim.

The Drax Smart ruling suggests that a notice served by the buyer that does not strictly comply with the notice of claim clause may not be invalidated if the surrounding circumstances support an interpretation that acknowledges the clause’s commercial purpose. Consequently, sellers may now be less certain about defeating a buyer’s breach of warranty claim solely by demonstrating non-compliance with the notice of claim clause.

Contact our Corporate & Commercial team if you would like help with interpreting notice of claims provisions in an acquisition agreement, or if you are considering an acquisition or a disposal.

¹ Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477 (08 May 2024) (bailii.org)