Invalidity of buyer's notice sinks warranty claim

In Ipsos SA v Dentos Aegis Network Limited, the Defendants obtained judgment in the High Court against the Claimants in respect of their claim for breach of warranty for failure to comply with contractual notification requirements set out in a share purchase agreement.

In Ipsos SA v Dentos Aegis Network Limited, the Defendants obtained judgment in the High Court against the Claimants in respect of their claim for breach of warranty for failure to comply with contractual notification requirements set out in a share purchase agreement.  The Court's strict interpretation of the notification provisions in the SPA concerning warranty claims highlights the importance of ensuring claims notices conform to the content requirements set out in the SPA.  The case is also a reminder to buyers that any potential warranty claims of which it becomes aware post completion should be dealt with promptly so as to avoid limitation issues. 

Facts

On 12 October 2011 the parties completed a share sale and purchase agreement under which the Claimants, Ipsos, purchased shares in the Synovate Group companies owned by the Defendants, Aegis. 

Under clause 9.1 of the SPA, Aegis warranted to Ipsos that each of the "Seller Warranties" was true and correct as at the date of completion of the SPA.  The warranties themselves were set out at Schedule 3 to the SPA.  Paragraph 17 of Schedule 3 set out the warranties with respect to employment liabilities. 

Following completion of the SPA, some 200 claims were then submitted in Brazil by contract workers against a company within the group, Synovate Brazil Ltda.  Ipsos issued proceedings against Aegis in respect of all but 62 of the 200 claims (accepting that some of the claims had been disclosed by Aegis prior to completion) on the basis that Aegis had breached clause 17.24 of Schedule 3 of the SPA.  This warranted that:

"Each member of the [Synovate Group] has at all times materially complied with all applicable employment and social security Laws or other Laws affecting contractual or other relations between employers and their officers, employees or workers."

Aegis responded robustly, applying to Court to strike out the claim or alternatively to enter summary judgment against Ipsos on the basis that they had not complied with the contractual limitation and notification requirements applicable to warranty claims set out at Schedule 5 of the SPA.  Paragraph 3 of Schedule 5 in particular provided that:

"No Seller Warranty Claim […] shall be brought against the Seller unless (and the Seller shall only have liability in respect of any such Claim if) the Purchaser shall have given to the Seller written notice of such Claim…(a 'Claim Notice') specifying in reasonable detail: (i) the matter which gives rise to the Claim; (ii) the nature of the Claim; and (iii) […] the amount claimed in respect thereof  […] such Claim Notice to be given by: (A) in the case of a Seller Warranty Claim […] the second anniversary of Completion."

Of relevance was also paragraph 5 of Schedule 5 which obliged Ipsos to notify Aegis of any third party claims of which it was aware which may give rise to a warranty claim. 

Prior to issuing proceedings, Ipsos had sent Aegis two letters which it said together constituted compliance with the Schedule 5 notification requirements.  The first letter was sent on 14 August 2012 and was signed by its Group Corporate Counsel.  This letter purported to constitute notice to Aegis of the Brazilian employee claims under paragraph 5 of Schedule 5.  The letter expressly stated "For the avoidance of doubt, this is not a Claim Notice".

Over a year later on 30 September 2013 and two days prior to the expiry of the two year period for submitting warranty claims, Ipsos then sent another letter to Aegis referring back to the letter of 14 August 2012.  In the letter Ipsos provided further information on the third party claims with a commitment that it would "provide a further breakdown of [the] losses, costs and expenses, if any, fall, or may fall, under the indemnity of clause 12.1 of the SPA and which it claims or may claim from Aegis for breach of warranty".

Ipsos argued that the second letter contained the information that was required by paragraph 3 of Schedule 5 to the SPA and therefore constituted a valid Claim Notice. While Ipsos accepted the second letter was not well drafted, they submitted that a reasonable person with the knowledge of the background, including the details of the claims made by the contract workers, together with the contents of the first letter, would have read and understood the second letter as a Claims Notice.

Aegis argued that the two letters did not constitute notice of a Seller Warranty Claim as required by paragraph 3.1, Schedule 5 of the SPA; the 14 August 2012 letter expressly stated it was not a claim notice, and the 30 September 2013 letter, by merely referring back to the August letter, purported to give notice of third party claims under paragraph 5, not paragraph 3. 

The judge sided with Aegis and disagreed with Ipsos' submission that a reasonable person reading the second letter, alongside the first, would have effectively inferred that the second letter was meant as a notice of warranty claim within the meaning of paragraph 3 of Schedule 5.   Furthermore, neither letter contained the requisite level of detail proscribed by the Schedule 5 notification provisions. 

Comment

The warranty provisions in a share purchase agreement tend to constitute the bulk of the agreement and also represent the most time consuming aspect of all the SPA provisions for parties to agree in a corporate acquisition.  The warranties function as a mechanism by which parties adjust the price of a deal if something is found to be amiss with the company being purchased.  It is therefore generally the area of highest litigation risk to parties and it has become standard practice for a seller to seek to limit its liability to the buyer under the warranty provisions.  This is typically achieved by, for example, insisting on a strict process for the submission of claims and providing for a shorter limitation period. 

Ipsos illustrates that the Courts will take a strict approach when interpreting the notification provisions when determining whether a disputed notice is valid.  It also highlights the importance of identifying and dealing with any potential warranty claims as early as possible so as not to be caught out by any limitation issues that could arise, bearing in mind that most SPAs impose compressed limitation periods.