Case Update: You Must Comply With Any SPA Terms Before Making a Notice of Warranty or Indemnity Claim

In the recent High Court case of Drax Smart Generation Holdco Limited (Buyer) v Scottish Power Retail Holdings Limited (Seller) [2023] EWHC 412 (Comm), it was considered whether to dismiss the Buyer’s warranty and indemnity claims under a share purchase agreement (SPA). It was alleged that the Buyer’s notice of the claims failed to comply with the requirement of a claims notification clause (a standard clause used in an SPA to ensure there is a structured claims procedure) to state in reasonable detail the amount claimed and the Buyer’s calculation of the alleged loss suffered.

Background

It had been intended that the target company sold under the SPA (through the sale of the shares from the Seller to the Buyer) would have the benefit of a contractual “option” (this was viewed as integral to the value of the target company and important to the Buyer). An “option” is usually a contractual right to do something within a certain time period. The Buyer discovered after the share sale that the option had not been effectively assigned to the target company as part of a pre-sale reorganisation of the Seller’s group. The option was therefore lost.

In the SPA agreed between the Seller and Buyer, the Seller provided a warranty and an indemnity in respect of the presale reorganisation and the assignment of the option to the target company. The Buyer decided to bring warranty and indemnity claims against the Seller in respect of the purported breach.

The notification of claims clause required the Buyer (as a condition to the Seller’s liability) to give written notice “…stating in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer’s calculation of the Loss thereby alleged to have been suffered)…” before a specified date.

It is standard for an SPA to state that a buyer cannot bring a warranty claim against the seller unless it gives the seller written notice of a warranty claim within a specified period of time and with certain information. In this case, the Buyer’s purported notice of their claims was set out in a detailed nine-page letter drafted by their solicitor.

The Seller contended that the notice did not state in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer’s calculation of the loss suffered) because it failed to notify any claim for loss based on diminution in value of the acquired shares (this is usually the starting point when assessing the value of a warranty claim).

Outcome

In respect of the warranty claim, the court found in favour of the Seller. Where a buyer’s warranty claim is based on the diminution in value of the shares it has acquired, this should be identified in any notice of claim it makes to the seller. In this case, the claims notification clause (as drafted above) required the Buyer to explain that the calculation of its loss was the difference between the warranted value of the acquired shares, and their actual value. The Buyer’s notice of claim to the Seller didn’t state this, it actually stated a different calculation of loss, namely that the Buyer bore the liability for losses suffered by the target company which it had acquired through the share sale.

Thankfully for the Buyer, the court did not dismiss its indemnity claim because of a contractual technicality in the SPA (there were very specific notice requirements in respect of indemnity claims). However, in different circumstances where the Seller had not given an indemnity, the Buyer may have been left with no recourse in respect of the issue, merely because its calculation of loss hadn’t been outlined correctly in its notice of claim.

This case highlights the need to comply strictly with the relevant terms of any SPA when preparing and making a notice of warranty claim. If you believe you may have a warranty claim under an SPA, please contact BHW on 0116 289 7000.