SPA warranty claims - getting the notice right
17 June 2021
Today’s challenging economic climate has reduced the value of many businesses.
Recent buyers may be looking for an opportunity to revisit sums paid (or to be paid) under a Sale and Purchase Agreement (“SPA”), particularly where the price was negotiated in brighter times. A way to achieve this may be to claim under the warranties. For example, close scrutiny may be given to accounting warranties to assess whether the target’s performance has fallen short, particularly under a Material Adverse Change (“MAC”) warranty.
Warranty provisions in well-drafted transaction documents commonly include so-called “gateway provisions”. These set out the requirements for notifying the seller(s) of claims within a specified period following completion. Often these are framed as a pre-condition to making a claim. The provisions may also prescribe qualitative requirements, setting out minimum levels of information that must be included for a notification to be valid. Failing to meet these requirements can result in an otherwise good claim being shut out.
There is no doubt that the economic impact of both Brexit and COVID will see the fortune of some businesses deteriorating. Buyers who find their recent acquisition is worth less than anticipated and may be considering warranty claims face a closing door: prompt action should be taken to review the SPA, assess rights and the particular notification provisions before developing a strategic route to a claim.
The requirements of every notification clause will turn on its wording. A clause will typically set out formal requirements for the following:
In some cases, the threshold is low, with a buyer being required to give little more than a simple notification in writing, without the need for particulars. The threshold is somewhat higher if the provision requires details of the ‘nature of the claim’ or the ‘grounds on which it is based’ and higher again where the clause requires details of the ‘matters, events or circumstances giving rise to the claim’ (i.e. an explanation of the underlying facts). Some clauses also require the buyer to set out an estimate of the value of the claim, in which case it may be necessary to marshal early support from accountants.
At its heart, a warranty claim is a breach of contract claim. The starting position is therefore that a buyer has six years from the date of the breach in which to make a claim, but notification clauses typically truncate this period, with a long stop of around two years for general warranty claims being commonplace (and sometimes less).
Greater time pressure arises where a provision requires the claim to be notified ‘promptly’ or ‘as soon as reasonably practicable’ after the buyer becomes aware of certain facts or of a claim. The purpose of ‘knowledge triggers’ like these is to ensure that the seller knows at the earliest practicable date what particular claim(s) for breach of warranty will be made so it can take steps to deal with it. If there is such a clause, it is critical for the buyer to understand, from the words used, whose knowledge and knowledge of what issues is relevant for these purposes.
A party may have invested significant time and expense crafting an excellent, and compliant, notice which is ready for service on time. However, there is often a further trip wire around service. It is common for service requirements to be strict and if a notice is not served in accordance with the relevant requirement, it may be of no effect and, again, the claim may be lost. If the notice provision specifies a particular method of service (e.g. first-class post or courier) and/or who must be served, those requirements must be complied with. Quite often email is not a permitted method of service.
Consequences of getting it wrong
All of the above formalities may be mandatory, with the result that a buyer will be precluded from making a claim unless it meets the strict requirements. This places the burden firmly on the buyer and allocates the risk of non-compliance to it.
Time and again the courts have shown a willingness to uphold the strict nature of these clauses, taking the view that the commercial purpose is to give the seller certainty, both in terms of requiring the buyer to give sufficient warning and information about an impending claim, and in setting a cut-off point for liability. Because of their effect, courts have tended to construe ambiguous requirements in favour of the buyer, or at least narrowly.
Tips for buyers… and sellers
Although it is difficult to generalise about the requirements for the notification of a breach of warranty claim, it will always be the case that the particular words used in the relevant notice provision of the SPA are crucial. Those seeking to give notice of a claim should get specialist advice regarding the qualitative requirements set down in the relevant clause. An accountant’s input may be required, particularly where the notice requirements extend to quantum issues like providing an indication of loss. Naturally, this means early preparation is essential so that those who need to assist with the preparation of the notice can be engaged in good time.
Buyers and sellers have diametrically opposed interests in seeing that the threshold requirements for notification are set low or high. In appropriate cases, it will be important to consider carefully the language under negotiation. Those who receive notification of a warranty claim should consider carefully whether the various requirements have been met. It is not unusual for buyers to wait until the deadline is close before taking steps. In such cases, a prospective defendant may be wise to wait for time to expire before challenging the content and quality of a notice. Otherwise there may be little to prevent a would-be claimant from curing the position with a second (compliant) notice.
Click here for our flowchart summarising these issues – “Notification Issues for Warranty Claims”