Breach of warranty notification clause requirements: Court of Appeal’s pragmatic turn as Drax decision overturns High Court

The Court of Appeal recently overturned a High Court decision that dismissed a breach of warranty claim under a share purchase agreement (“SPA”) on the basis that the buyer’s notice did not meet the requirement 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)…” (the “Notice Requirement”).

The High Court had initially ruled in Drax Smart Generation HoldCo Ltd v Scottish Power Retail Holdings Ltd [2024] (“Drax”) against the buyer stating that it had not sufficiently complied with and fulfilled the Notice Requirement.

On 8 May 2024, the Court of Appeal disagreed with the High Court and subsequently overturned the decision while also providing guidance on interpreting notification clauses in a commercial context that should encourage those seeking to avoid unnecessary prescriptive and technical drafting.

Background

Pursuant to an SPA entered into in 2018, Scottish Power Retail Holdings Ltd (the “Seller”) sold its shares in Scottish Power Generation Limited (the “Company”) to Drax Smart Generation HoldCo Ltd (the “Buyer”).

One of the key assets of the Company was a site in Kent which was a potential location for a new gas power station. For the power station to be built, it would require cables to be laid over the adjacent land in order to connect the power station to the national electricity grid.

Accordingly, the Seller had been granted an option to acquire the adjacent land by its owner. The option had to be exercised during an option period. The Seller warranted in the SPA that the benefit of the option agreement would be assigned to the Company prior to completion. The Seller also provided an indemnity in the SPA under which it would indemnify the Buyer for any losses suffered as a result of failing to assign the benefit of the option agreement.

Post-completion, the Company set out to exercise the option, upon which it discovered that the benefit of the option agreement had in fact not been validly assigned to the Company. It also transpired that the option had lapsed thereby leaving the Company without the ability to lay cables on the adjacent land.

The Buyer proceeded to provide the Seller with a detailed nine-page notice of the breach of warranty relating to the lack of assignment detailed above and payment required under the indemnity (the “Notice”). Crucially, the Notice set out the loss suffered by the Company, rather than the loss suffered by the Buyer (which is what a breach of warranty claim requires). Subsequently, the Buyer issued a claim in the High Court in December 2021.

The High Court’s decision

The Seller argued that the Notice was insufficient and applied for summary judgement and dismissal of the breach of warranty claim. It argued that the Buyer had not sufficiently stated “the nature of the claim and the amount claimed” and therefore had not complied with the Notice Requirement.

The High Court found in favour of the Seller. In its decision, the High Court held that the Notice Requirement had not been sufficiently complied with and highlighted that the Buyer had failed to state in the Notice that the breach of warranty claim was based on the diminution in value of the Buyer’s shares in the Company. The Notice had instead only identified the losses suffered by the Company itself. Accordingly, summary judgment was granted in respect of the Seller. The Buyer then proceeded to appeal that decision.

The Court of Appeal’s decision

The Court of Appeal upheld the Buyer’s appeal and found that the Buyer had in fact complied with the Notice Requirement.

It found that the language of the Notice Requirement did not contain any requirement for the Buyer to set out in its Notice that it was claiming based on the difference in the value of the acquired shares in light of the breach of warranty. The Court of Appeal held that requiring the Buyer to include such language would serve “no commercial purpose” and the Courts “should not interpret such clause as imposing requirements which serve no real commercial purpose unless compelled to do so by the language of the clause”.

Instead and as regards the amount stated in the claim, the Court of Appeal explained that the Buyer only had to produce a statement of “…the amount claimed (detailing [the Buyer’s] calculation of the Loss thereby alleged to have been suffered)”, which the Court of Appeal stated had been complied with. Provided that this calculation was a genuine estimate and put forward in good faith, in the Court’s view, the Notice Requirement had been complied with.

Concluding thoughts

The Court of Appeal’s decision in Drax has signified a pragmatic shift in the Court’s thinking and the importance of interpreting notification clauses in light of their intended commercial purpose.

The Court went on to warn against notice provisions from becoming “a technical minefield to be navigated”, which will be a welcomed approach by many, especially buyers who may have to pursue a breach of warranty claim at some point in time.

Drax has yet again highlighted the importance of clear and concise drafting in such agreements and the need for that to be kept in mind when drafting and negotiating such notification clauses to ensure that ambiguity and unnecessarily complex language is not included.

This piece was written by Sanya Bhambhani with input from Robert Humphreys.  Do please reach out to a member of the team if you would like to discuss matters relating to M&A generally.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

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