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Breach of warranty claim notification fails to comply with notice clause

Published on 07 July 2023

The question

What principles will a court consider when construing notification of claim clauses in a share purchase agreement to determine whether a party has given valid notice of loss?

The key takeaway

In determining whether a notification of claim is valid under a contractual notice clause that requires “reasonable detail”, a court will consider whether the notice includes sufficient detail to allow a reasonable recipient of the notice to understand the claim against it and the type of losses claimed (although specific amounts need not be identified).

The case

Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited [2023] EWHC 412 (Comm)

The background

The proceedings relate to the content and timing of Drax’s notice of claim for breach of warranty, an indemnity and other contractual breaches under a share purchase agreement (SPA) between it and Scottish Power.

In summary, Drax purchased the shares in a company (the Company) which owned a potential location for an as yet unbuilt power station. In order for the power station to be built, the site needed to be connected to the national electricity grid, via cables that would run over a key piece of land. Rights under an option agreement, that gave Scottish Power the right to require the grant of an easement over the key land to run the cables, were improperly transferred. As a result, the Company was not entitled to exercise these rights under the option agreement.

Under the SPA, Scottish Power had warranted that the benefit of the option agreement would be assigned to the Company prior to completion and agreed to indemnify Drax for all losses suffered in relation to the option agreement as a result of Scottish Power failing to implement an internal reorganisation of its group fully and correctly before completion.

A pre-condition was included in the SPA stating that the Scottish Power’s liability for certain claims necessitated a notification of claim setting out “in reasonable detail the nature of the claim and the amount claimed (including the Buyer’s calculation of the Loss thereby alleged to have been suffered)”.

Drax only discovered that the option had not been effectively assigned to the Company, and was of no effect, after the expiry of the option period. On the last day of the relevant time limit for Drax to provide notification of a claim, it served a notice of claim alleging breach of warranty, other contractual breaches and an indemnity claim. In terms of the nature and amount of loss suffered, Drax changed its case from that submitted in its notice of claim to its pleaded case in the proceedings, and then sought to amend its particulars at a later date alleging that Drax, not the Company, had sustained loss in that the Company’s value (and therefore the shares acquired by Drax) were less than they would have been had Scottish Power complied with its contractual obligations.

In relation to the breach of warranty claim, Scottish Power contended that the claim as notified did not give reasonable detail of the nature and amount of the claim brought in the particulars or draft amended particulars of claim. More importantly, Drax was now claiming for a different type of loss than that which it had specified in its notice (ie claiming for a loss suffered by Drax, rather than a loss suffered by the Company as notified) – Drax had therefore failed to comply with the notice requirements set out in the SPA and the notice was therefore invalid.

Scottish Power argued that the requirement that the notice give reasonable details of the amount claimed had also not been fulfilled in relation to the indemnity claim because under the SPA the claim notified had to be for an ascertained sum.

The decision

The key issue before the High Court was whether Drax’s notice was adequate in relation to its breach of warranty and other claims and in particular whether it gave reasonable detail of the nature of the claim in respect of the loss suffered, and in relation to the amount claimed and its calculation.
The court acknowledged that part of the purpose of a notification clause is certainty for the party being notified. It concluded that a reasonable recipient would understand from the notice of claim that the loss being claimed was heads and items of loss which the Company would suffer and for which Drax bore a liability. There was no reference in the notice of claim to a diminution in value of the shares in the Company, although this was how the claim was later pleaded in the draft amended particulars of claim.

The notice had to include sufficient detail to allow the seller to understand the claim against it in at least outline terms. The diminution in value of the shares in the Company should therefore have been included in the notice of claim. As it had not been included the notice did not comply with the SPA in relation to the warranty claim or other breach claim and there was therefore no real prospect of Scottish Power being liable for that claim.

In relation to the indemnity claim, the court reasoned that a requirement that the indemnity claim must be precisely ascertained within the timeframe given in the SPA would be uncommercial and not the intention of the parties. It would deprive Drax of a chance to bring a claim. As the full extent of the loss had not been ascertainable, stating the amount claimed in reasonable detail did not require identifying an ascertained sum.

There was sufficient information in the notice of claim, in terms of identifying what loss had been suffered and what was likely to be suffered, including the giving of figures where they could be given (and in some places estimates of figures), to allow Scottish Power to understand what was being claimed against it and for what amounts, and (where specific amounts were not identified) the types and categories of costs and liabilities in respect of which an indemnity would be claimed. The commercial purpose of the clause, including the level of certainty the clause sought to provide to Scottish Power, was satisfied.

Why is this important?

The case highlights that problems can arise where a clause requires notice of a claim to include specific information which might not be obvious, easy to ascertain or indeed might be omitted in error at the time the notice is served, especially if it is being served close to the deadline. This notice of claim was nine pages long and still, on the breach of warranty claim, failed to satisfy the SPA’s requirement to state the nature of the claim and the amount claimed (including a calculation of loss suffered) in “reasonable detail”. This was because Drax later changed its claim to a different type of loss depriving Scottish Power, as the party being notified, from the certainty and clarity it expected from the SPA’s notification clause.

Any practical tips?

Consider whether the notice clause should specify precisely what information the notice should contain such as the nature of the claim, the type of loss and the amount claimed (if known, or estimated), or whether it should be more general. A notice requiring “reasonable detail” is likely to be interpreted as providing enough information to allow “the vendor to know in sufficient detail what he is up against (not least because it might then enable the parties to settle without recourse to litigation)”.

When preparing notices, bear in mind the various contractual (and other) claims that may be available, and that they may differ both in their nature and in the losses that may be claimed. Consider taking an ‘over-inclusive’ approach to the notice (and/or multiple notices) to keep these options available if appropriate. Where detail is not available, provide estimates where possible or explain why information is not yet available. If possible, do not leave notices until the very end of time limits so as to mitigate risks of ineffective notices or defective service.

Summer 2023