Court of Appeal gives guidance on interpreting SPA notice of claim provisions

In Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477 the Court of Appeal overturned a decision to strike out a breach of warranty claim under a share sale agreement. The High Court held that the buyer’s warranty notice had not satisfied the requirement to state, “in reasonable detail the nature of the claim.” This was on the basis that this wording required the buyer to detail its loss in terms of the diminution in the value of the shares in the target company, as the buyer later set out in its Particulars of Claim. The Court of Appeal unanimously disagreed with this analysis. While the requirements of a notice of claim provision will depend on the particular language used, the Court of Appeal gave helpful guidance on interpreting these provisions in light of their commercial purpose and warned against them becoming, “a technical minefield to be navigated.” This more commercial approach will be welcomed by buyers who may often have numerous warranty claims to prepare in advance of strict notification periods.

Background

Pursuant to an agreement for the sale and purchase of shares entered into in 2018 (the SPA), Scottish Power sold its shares in a company (the Company) to Drax. One of the assets of the Company was a site in Kent which was a potential location for a new gas power station. Use of the site would require the laying of cables over adjacent land owned by a third party. The SPA contained warranties which provided that the benefit of an option agreement giving a right to obtain an easement over the adjacent land would be assigned to the Company prior to completion. It also provided an indemnity for losses suffered by Drax as a result of any failure to transfer the benefit of the option agreement to the Company.

After completion of the SPA, it transpired that the Company did not have the benefit of the option agreement. Correspondence between the parties followed, and they agreed to extend the time limit for notifying claims under the SPA. The notice of claim clause in the SPA provided that, “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 June 2021, on the last day of the extended time limit, Drax gave Scottish Power ‘formal notice’ of its claim in relation to the option agreement, claiming damages for both breach of warranty and under the indemnity (the Notice of Claim). This article focuses on the breach of warranty claim. In its Notice of Claim, Drax quantified its claim based on losses sustained by the Company (principally being the costs of obtaining an easement from the relevant third party).

High Court decision

Scottish Power did not accept liability and Drax issued a claim in the High Court in December 2021. Drax then sought permission to amend its Particulars of Claim. The amendments deleted references to the Company suffering the loss and pleaded a case that the loss was suffered by Drax at completion and consisted of the difference in the value of the shares in the Company (i.e. based on the recoverable loss for a breach of warranty claim, namely the difference between the warranty “true” valuation and the warranty “false” valuation).

Scottish Power applied for summary judgment and dismissal of the breach of warranty claim on the basis that the 'the nature of the claim and the amount claimed' had not been sufficiently notified as required by the notice of claim clause, in particular in relation to what was said about the claim for loss and how loss was alleged to have been suffered.

The Judge held that the Notice of Claim was not sufficient to fulfil the requirements of the notice provisions in the SPA for breach of warranty claims. The Notice of Claim did not reflect the claim for Drax's own loss based on diminution in share value. The fact that the claim was one based on the difference in value of the shares had to be notified in the Notice of Claim – this was both 'part of the nature of the claim' and also an essential part of the explanation required to provide the necessary 'reasonable detail' of Drax's calculation of the claim. The claim pleaded in the draft Amended Particulars therefore had no real prospect of success and the judge granted summary judgment in favour of Scottish Power. Drax appealed.

Court of Appeal

Approach to interpretation of notice of claim clauses

In upholding the appeal, Lord Justice Males commented on the purpose of notice of claim clauses in SPAs, and gave guidance on the interpretation of such clauses which will be helpful for future disputes about whether a claim has been sufficiently notified.

He noted that the initial purpose of such clauses is to provide a contractual limitation period – if no notice is provided by the deadline the parties can ‘close their books on the transaction’ which promotes finality and certainty in commercial dealings. He reiterated earlier comments by Popplewell LJ that where a notice of claim is given, the purpose of such a clause is to enable the recipient to make inquiries into the factual circumstances in order to gather or preserve evidence, to assess the merits of the claim, and to take into account the nature and scope of the claim in its future business dealings. What amounts to reasonable detail in the notice depends on these commercial purposes for giving such a notice. He stated:

“Whether a notice is sufficient to satisfy the requirements of any given clause must depend primarily on the language of the clause. Commercial parties are free to impose whatever requirements they wish. However, where they use broad and general terms such as 'the nature of the claim' and 'in reasonable detail', those requirements should be interpreted in the light of the commercial purposes of such clauses... 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.”

He also noted that notice clauses are essentially exclusion clauses, and in interpreting them, the courts will keep in mind that parties are not lightly to be taken to have intended to cut down remedies for breach of important contractual obligations without using clear words to that effect.

Application to the facts

The Court of Appeal held that the Notice of Claim did satisfy the requirements of the notice of claim clause, both in relation to the ‘nature of the claim’ and the ‘amount claimed’ and Drax’s appeal should be allowed.

In relation to the ‘nature of the claim’, Males LJ agreed with the lower court that the Notice of Claim did not advance a claim based on the difference in the value of the shares in the Company. However, he held that the ‘nature of the claim’ Drax sought to advance was straightforward – it was a claim under the SPA that the Company ought to have had the benefit of the option agreement but did not. Males LJ did not think it was even necessary to identify the terms of the SPA allegedly breached. A simple statement that Scottish Power had failed in its obligation to ensure that the Company had the benefit of the option agreement would have provided sufficient information. This would have enabled Scottish Power to identify the relevant contractual obligations (or seek advice from a lawyer), investigate potential defences to the claim and assess its potential liability. In summary, the Judge stated that, “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.”

As to the ‘amount claimed’, the Court of Appeal held that all that was required by the clause was a statement of the amount claimed with the buyer’s calculation of the loss suffered. The Notice of Claim did state the amount claimed together with details of the way the amount was calculated, and nothing further should be required. It did not matter that the claim as then formulated was not a claim based on the difference in value of the shares; it was nevertheless Drax’s actual calculation of the loss which it was claiming.

“[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.”

Key Takeaways

The pragmatic approach of the Court of Appeal confirmed that notice clauses should be interpreted in accordance with their commercial purpose. Courts should not impose additional requirements which could defeat valid claims and which are not justified by the language. While each notification clause in an SPA must be considered and interpreted separately, many contain similar general wording to that seen in the current case. The decision should therefore provide comfort to buyers that technical arguments that a warranty claim has not been sufficiently notified are less likely to succeed, and changes in how a claim is quantified will not necessarily invalidate the notice of claim.