David Moore and India Link-Jones from our Commercial Disputes team look at the recent case of Drax Smart Generation Holdco Ltd v. Scottish Power Retail Holdings Ltd and the impact this may have on Share Purchase Agreement (SPA) Notice of Claim Clauses.
In commercial corporate transactions, warranties serve as a critical risk management tool. A warranty, simply, is a promise that certain facts relevant to a transaction are true. When a warranty is breached, or the promise is broken, it can lead to complex legal disputes. A vital aspect of litigation centred on warranties is the notice of claim provision. This dictates – by contract – how and when a breach of warranty claim must be communicated. Getting this right is of the upmost importance for a party claiming a breach.
The courts have traditionally taken a strict approach to interpreting notice requirements and compliance with them. The courts prefer the view that parties make their own commercial arrangements in relation to notice of claim clauses and judges should not interfere with how a contract, agreed between parties, is drafted. They do not wish to interpret the provisions of the contract to make it fit the facts and this means that notice requirements generally must be followed exactly, or the notice may be invalid as in Decision Inc Holdings Proprietary Ltd v Garbett.
The Court of Appeal’s recent decision in Drax Smart Generation Holdco Ltd v. Scottish Power Retail Holdings Ltd has highlighted that commercial purpose will be the important consideration in a claims notice clause, to avoid the technical minefield that has previously stopped valid claims due to complex or arbitrary notice of claim clauses.
High Court
This case was initially heard in the High Court. The claimant, Drax Smart Generation Holdco Limited (Drax), made a claim against Scottish Power Retail Holdings Limited (Scottish Power) for a breach of warranty under a share purchase agreement (SPA). Scottish Power denied liability and claimed that Drax had not complied with the notice of claim clause which read:
“… 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)…”
Drax’s notice of claim asserted a breach of warranty, but claimed an estimate of the potential loss that is likely to be suffered. Scottish Power applied for summary judgment (i.e. an immediate end to the claim) on the basis that the notice did not sufficiently include “the nature and the amount claimed” as required under the notice of claim clause.
On this basis, Drax decided to amend its claims to include:
- That the losses had been incurred by Drax rather than the company; and
- It also decided to reconsider its estimated loss and instead look at loss on the difference between the company’s value as warranted and its true value without the benefit of an option agreement.
The High Court decided that if Drax was claiming loss suffered based on diminution of value, this should have been included in the notice of claim. There was no reason to suggest that a reasonable recipient of the notice would have assumed that the buyer was claiming for a drop in the value of its shares simply because that is the normal measure for calculating loss arising from a breach of a warranty. This was particularly so given that the notice set out a different loss basis. Drax therefore had not met the requirements of the notice of claim clause in the SPA.
Court of Appeal
The Court of Appeal allowed the appeal. The judgment explains that the purpose of a notice of claim clause is to give a contractual limitation period which, in turn, should promote a definitive understanding and allow parties to look into the facts, consider evidence and assess the merits of a claim. Some points raised in the judgment were:
- The court referenced Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638. Here the court found a notice of claim clause should allow the other party to consider the notice and the information it would subsequently require.
- There is no limitation on parties as to what requirements they wish to make the notice of claim subject to. However, where wide terms are used such as ‘the nature of the claim’ and ‘reasonable detail’, these details should be interpreted in light of the commercial purpose.
- A notice of claim clause is, for all intents and purposes, an exclusion clause and should therefore be interpreted narrowly. Unless the drafting expressly says otherwise, the court will not impose conditions on a party that have no real commercial purpose. In this case, what this meant was that there was no real commercial purpose for Drax to explain that the damages being claimed would be the difference in the value of the shares.
Key takeaways
The Court of Appeal has clearly stated that a business common sense approach must be taken when interpreting notice provisions in SPAs, which is contrary to previous decisions.
The key takeaway is that the decision suggests the courts are unlikely to respond positively to attempts to knock-out bona fide claims based on technical arguments that relate to the level of detail included in a notice of claim. Notice clauses should be interpreted with their commercial purpose in mind and a party seeking to exclude a claim is likely to need to be able to point to clear provisions, a failure by the counterparty to seek to comply with the relevant provisions in good faith, or genuine prejudice to succeed.
So how will the courts deal with this moving forward? Drax demonstrates the court’s intention to take a commercial approach to the interpretation of notice of claim clauses. Despite this, this will probably continue to be a contentious point. Therefore, it would be sensible to take a cautious approach, such as that in Garbett, ensuring that notice of provisions are drafted carefully, in accordance with both parties intentions, and in a way which complies with other relevant clauses; whilst keen attention should – as ever – be paid when drafting a notice of claim under a SPA.
For more information or advice on the impact of this ruling on your SPAs, please get in touch with our Commercial Disputes team who will be able to support you.
