Posted by James Worrall, Partner
Buyers beware: limitations on bringing claims under a share purchase agreement
The recent High Court decision in Teoco UK Ltd v Aircom Jersey 4 Ltd serves as a timely warning to all buyers of companies who later seek to bring claims under the warranties or tax covenants in the share purchase agreement.
The buyer claimed damages for breach of certain warranties in the share purchase agreement (SPA). The sellers applied to strike out certain aspects of the claims, asserting that the buyer had not complied with the notification requirements in the SPA whereby the buyer was obliged to notify the sellers of claims within certain timeframes.
The buyer’s letters
The buyer sought to rely on two letters that it had written to the seller as evidence that it had complied with its obligation to notify. The court rejected the buyer’s claims for the following reasons:
The court decided that the first letter the buyer had sent did not amount to a notice of the claim as it made no reference to the notice of claims clause in the SPA and it would not have been apparent to a recipient that it amounted to the buyer notifying a claim. Additionally, the letter did not identify which warranties it was alleging had been breached or make clear whether it was a claim under the warranties or a claim under the tax covenant.
The second letter sent by the buyer set out the tax liability (which was the subject matter of the warranty claims), providing figures, but again failed to identify which warranties were allegedly breached or to make clear whether it was a claim under the warranties or a claim under the tax covenant. It therefore did not amount to notice of a claim. Another feature was that the letter did not end with a demand (as might have been expected given the nature of the letter) but with a full reservation of rights. The court also determined that the buyer had been aware of the right to bring the claim for a number of months and had failed to notify the seller as soon as reasonably practicable, as it was obliged to do so under the notification requirements in the SPA.
The court’s guidance
The court went on to provide some guidance for when interpreting such terms in a share purchase agreement:
The interpretation of an obligation on the claimant to provide “reasonable details of the claim” will depend on the nature of the claim. Where the claim is being issued under the tax covenant, the claimant should state whether the claim is based on an actual or contingent liability. Simply identifying facts or matters that may constitute a claim under the warranties or tax covenant is unlikely to be sufficient.
Where a notice must outline the “grounds on which the claim is based”, it must include identification of the warranties or provisions in the tax covenant which are alleged to have been breached.
Where a notice must provide a “good faith estimate of the amount of the claim”, the figure must be calculated honestly but the final figure claimed might be lower or higher.
What are the implications for buyers and sellers?
It is normal for a seller to negotiate limitations on its liability under warranties in a share purchase agreement. These limitations often include a time limit on the buyer for bringing any claims and, as was the case here, an obligation on the buyer to notify the seller of claims promptly. This is to make sure that the seller can make financial provision for the potential liability. The case highlights how easily a buyer’s right to bring a claim under a share purchase agreement can be lost by failing to comply strictly with any notification requirements set out in the share purchase agreement and the importance of carefully considering any provisions relating to notice when negotiating the share purchase agreement.
For more information please contact James Worrall or another member of our Corporate & Commercial team.
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