Making Claims Under Warranty
The case of Teoco UK Ltd –v- Aircom Jersey 4 Ltd and another, reported in January this year demonstrates the need to take great care when making a claim under a warranty. Legal advice should certainly be taken. Lawyers are sometimes accused of being too pedantic, but the fact is that vague wording can lead to sticky ends.
This case followed an agreement when Teoco (the buyer) had purchased all of the shares of a company from Aircom Jersey 4 (the seller). The particular facts of the case are slightly exotic and unlikely to crop-up locally, but the basic principles apply on the enforcement of warranties under any share sale agreement or similar.
As usual, the written agreement included numerous warranties and indemnities from the seller, including indemnities on tax liabilities of the company and its subsidiaries.
It also included various limitations on the seller’s liability, including an important term that the buyer must give written notice of any claim “setting out reasonable details of the claim, including the grounds on which it is based”, not later than the end of July 2015. Another term stated that the buyer must notify the seller as soon as reasonably practicable if it thought that it is likely to have a claim. This was intended to sound an early warning of a possible claim later, but it is not the notification itself.
The company’s subsidiaries were subject to substantial tax liabilities in Brazil and the Philippines. That’s the exotic bit. Before the deadline, the buyer’s solicitors wrote twice to the seller claiming an indemnity and mentioning that part of the agreement referring to “warranty claims or tax claims”. They set out how the alleged tax liabilities had been calculated and the sums they said were due. The sellers gave no indemnity and the buyer issued proceedings. The seller applied to strike out the claim and the High Court agreed. The buyer appealed, but the Court of Appeal upheld the decision.
Each case depends on its own wording, but warranties of this type and requirements to give written notice within a set time are both very common. Most standard forms and precedents include similar terms.
The Court of Appeal said that merely referring to warranties was not enough. It was essential that the buyer spell out exactly which warranty it relied upon. The legal basis of its claim must be precisely identified.
In exceptional cases, it might be that merely stating background facts would unequivocally identify a specific warranty, but not in this case. There was real doubt about which warranty the buyers claimed to be relevant to their claim. The letters did not make clear that they were intended to be notices of actual claims, rather than merely warning of a possible claim later. Therefore, they did not give proper notice and so the seller escaped liability.
Lord Justice Newey commented that the buyer doubtlessly wished to keep their options open by framing their notices as widely as possible. The words used certainly included the particular warranty they later identified in court, but since they also covered a “multitude of other possibilities”, it was not enough.
This is why many claims (and notices of those claims) are drafted along the lines:
We allege that you have breached warranty A because…
We also allege that you have breached warranty B because…
We also allege that you have breach warranty C because… and so on.
It may be pedantic, but simply saying that, “We allege a breach of a warranty” is simply not enough.
I said earlier that anyone seeking to rely on a warranty should take legal advice. In this case I expect that the buyers will be asking very difficult questions of their solicitors…
Stephen Allen, partner