Notice of breach of warranty on company purchase – Drax lucky

Giving valid a notice on a claim for breach of warranty on the purchase of a business has become something of a problem for buyers as our previous article on the subject shows.  However, the Court of Appeal injected some welcome common sense and good news for buyers in the case of Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477.

Drax bought a company from Scottish Power (‘the Company’).  One of the Company’s assets was a site in Kent.  Use of the site required cables to be laid across adjoining land.  The Share Purchase Agreement (SPA) stated that there was an option agreement that would facilitate this.  The SPA contained warranties that the option would be transferred and an indemnity for loss suffered if it was not.

The benefit of the option was not transferred, and the parties engaged in discussions to try and resolve things.  On the last possible day Drax gave formal notice of a claim under the indemnity and for breach of warranty (‘the Notice’).  Court proceedings were then pursued.

The key requirements for the Notice as set out in the SPA were:

“the Seller shall not be liable for a claim unless the Buyer has notified the Seller of the claim, 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)…”.

In the Notice Drax identified the problem and claimed losses suffered by the Company itself.  However, this did not reflect the correct legal position which is that the loss which can be claimed is that suffered by Drax (not the Company), being the difference in the value of the shares in the Company (i.e. the difference between the value if the warranty had been true and the actual value because of the warranty being breached).  The correct measure of loss was then raised in Drax’s pleaded case in the legal claim, being quite different to that which had been stated in the Notice.

Scottish Power challenged the validity of the Notice.  Their claim was that because the Notice did not set out the basis on which the legal claim was ultimately advanced it was defective.  Against the background of a line of cases upholding strict enforcement of the contractual wording in relation to notice clauses, the Judge agreed, and the warranty claim was effectively struck out.

Drax appealed.  Lord Justice Males gave the leading judgment in the Court of Appeal and came down firmly on the side of Drax and of common sense.  His comments are a useful guide to how the court is likely to approach future cases.

He indicated that the court should not encourage purely technical challenges:

“It is important that Notice of Claim clauses should not become a technical minefield to be navigated, divorced from the underlying merits of a buyer’s claim. While a seller’s interest will always be to knock the claim out if it can on the technical ground that the notice is insufficient, courts should not interpret such clauses as imposing requirements which serve no real commercial purpose unless compelled to do so by the language of the clause.”

In relation to the substance of the Notice, the Judge noted that the core factual elements of the claim were set out in that Scottish Power had failed to deliver the option they said they would, and loss had been suffered accordingly.  He summarised the position as follows:

“I can see nothing in the language of the clause or in its commercial purpose which required Drax to spell out, as part of a statement as to the nature of the claim, that the damages claimed would be based on the difference in value of the shares in the Company as a result of not having the benefit of the [option agreement]. To impose such a requirement serves no commercial purpose and merely introduces a trap to defeat what may be a valid claim.”

He also addressed the specific point about the requirement for the Notice to state “the amount claimed” and stated:

“[S]o long as what is put forward in the Notice of Claim is a genuine estimate, it is as a matter of fact ‘the Buyer’s calculation of the Loss thereby alleged to have been suffered’, which is all that the clause requires. There is nothing in the clause to set in stone the calculation of the loss which is stated in the Notice of Claim. If further reflection indicates that the calculation is legally unsound, or capable of improvement, there is nothing in the clause and no good reason to insist that the buyer should be held to the way in which the calculation was formulated in the Notice of Claim.”

Conclusions

The case is authority that the court should interpret notice clauses by reference to their commercial purpose and not take an overly technical approach based on the language of such clauses which may impose additional requirements or hurdles for buyers. Each such clause will always be considered on its own merits and the commercial purposes will flow from the factual context, but this case gives some comfort to buyers that a notice will not fail just because it does not dot every “i” or cross every “t”.

How we can help

Getting the notice right in the first place is obviously critical.  Our commercial disputes team can ensure that the wording does what it needs to do.  If it is too late for that and a potentially defective notice has gone in, then we can act for either buyer or seller to protect their position.