Validity of a notice of warranty claim

The recent case of TP ICAP Ltd v NEX Group Ltd [2022] EWHC 2700 (Comm) highlights the importance of the disclosure process in a corporate acquisition/sale and also the requirements to have a clear and detailed notice of breach of warranty claim that is compliant with the requirements in the share purchase agreement (SPA), when providing notice of a claim.

The buyer (TP ICAP) intended to bring a claim against the seller, NEX Group Ltd for a breach of warranty claim failing to disclose certain documentation relating to a specific warranty under the SPA. The seller then argued that the claim should be struck out due to an ineffective notice of claim provided by the buyer.

The High Court did not strike out the breach of warranty claim under the SPA on the basis that the notice of claim provided by the buyer to the seller under the SPA failed to meet the notice requirements found in the terms of the SPA, specifically a limitation of liability clause.

This limitation required the buyer to provide written notice of the breach of warranty claim to the seller before a specified date which would state in reasonable detail the nature of the claim involved.

The warranty in question was limited by the seller’s awareness, which under the SPA was defined as the “actual knowledge” of eight specific individuals. The warranty in question was regarding there being no existing or pending non-routine investigations by a government authority in relation to the target company’s employees or officers which would have a material adverse impact on the running of the target business.

The proposed breach of this warranty was opposed by the seller as they asserted that the seller’s awareness meant that for there to be reasonable detail of the nature of the claim in the notice of claim, that it should include those individuals who are deemed to have knowledge in the SPA. The seller argued that as the notice failed to state that any of those individuals had knowledge, that it is an invalid notice. The seller also argued that because the notice did not identify why the breach would result in a material adverse impact on the target business, that the notice is ineffective.

The High Court rejected the seller’s argument. The notice requirements under the SPA did not specify that the individuals’ names would need to be included in the notice of claim. The judge was also of the view that there was nothing in the SPA that required an explanation or detail in the notice of claim as to why the breach (relating to the investigation by a governmental body) would adversely impact the running of the target company, and the omission of such in the notice would not result in the notice of claim being ineffective. The judge in this case had the view that the seller’s argument would require the buyer to do more than what is required pursuant to the SPA.

Overall, the High Court said that the breach of warranty claim should go to trial and should not be struck out due to the ineffective notice of the claim. This case is therefore ongoing; however, it does illustrate the importance of the disclosure process and in order to bring a breach of warranty claim, the buyer should ensure they comply with the SPA requirements when providing a notice of claim under the SPA.

For further advice and assistance please contact our Business Services team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk