Compliance with Contractual Requirements in Notice of Warranties Claims: A Lesson from Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited  EWHC 412 (Comm)
A recent case before the High Court has highlighted the need to get a notice of a warranty claim right.
Drax Smart Generation Holdco Limited (the “Buyer”) acquired the target company (the “Company”) from Scottish Power Retail Holdings Limited (the “Seller”). Under the share purchase agreement (the “SPA”), the Seller provided a warranty that a reorganisation would occur, and also gave an indemnity in favour of the Buyer in respect of any losses resulting from a failure to implement the reorganisation before a specific deadline. It transpired that the reorganisation was not implemented correctly, with the result that the Company suffered a loss and, accordingly, the Buyer claimed against the Seller: (i) for breach of warranty; and (ii) under the indemnity.
Under the SPA, notice of a claim issued needed to state “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. The Court examined whether the “reasonable recipient” of the notice would have understood it, and while the identification of the events and relevant clauses of the SPA giving rise to the claims were properly inserted in the notice, the key issue was whether the Buyer had stated in reasonable detail the nature of the claim and the calculation of the loss suffered, which the Seller disputed.
The notice of claim issued by the Buyer referred to the losses suffered by the Company instead of the reduction in the value of the shares acquire by the Buyer. The Seller argued that the loss should have been based on the diminution in the value of the acquired shares (being the typical measure of loss for breach of warranty in an SPA) and that this was not demonstrated in the notice, as was required under the SPA. The Court agreed that the Buyer had failed to properly explain the calculation of its loss, which should have been the difference between the “warranted” value of the shares and their actual value. Instead, the Buyer’s wording meant a reasonable recipient would assume that the loss was that of the Company rather than the Buyer. Accordingly, the notice did not state the loss suffered directly by the Buyer based on the diminution in the value of the shares.
The notice also referred to future losses likely to arise, which were unrelated to the diminution in the value of the shares. As the Buyer did not properly detail the calculation of the loss and did not meet the SPA’s requirements, the Court deemed the notice invalid and, accordingly, the Buyer had failed to issue a valid claim for breach of warranty within the period required by the SPA.
However, in this case, all was not lost as the Buyer had an alternative action under the indemnity in the SPA. The Court held that, unlike a warranty claim, the Buyer was not required to identify an ascertained amount within the time limits imposed by the SPA in order to bring an indemnity claim.
So if you are considering bring a warranty claim under an SPA, make sure you get it right and rigorously follow the terms of the underlying agreement. Courts are unlikely to be lenient where this is not the case. The case also re-iterates why buyers should try and negotiate cover for certain historic liabilities through both representations and warranties and specific indemnities, albeit this is often a much-argued point in the context of agreeing the terms of an SPA.
Hugh Naylor, Head of Private Equity
Rita Doureradjam, Associate