In the English Court of Appeal's judgment in Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited [2024] EWCA Civ 477, it considered the validity of a notice of claim served pursuant to a share purchase agreement.
The relevant provision required the notice to state "...in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer's calculation of the Loss...)". The notice originally served by the buyer on the seller had specified a different basis for assessing the buyer's loss to that subsequently asserted by the buyer in the proceedings. However, the Court of Appeal overturned the first instance decision and unanimously decided that the buyer had given sufficient notice of a claim for breach of warranty. The Court held that notice of claim provisions should not become a "technical minefield to be navigated, divorced from the underlying merits of a buyer's claim".1
The decision suggests that the courts will take into account the commercial purpose of such provisions and may, in some circumstances, be reluctant to entertain attempts by parties to try and knock-out claims based on notice-related technicalities, if the claim can reasonably be understood from the notice of claim. However, in light of other recent decisions, the approach that will be taken remains uncertain and fact-sensitive and, as a matter of good practice, claim notices should be prepared with a close eye on the clause's specific requirements.
Background / High Court's decision
The background to the dispute is as follows:
- The dispute arose out of a share purchase agreement dated 16 October 2018 ("SPA") between Drax Smart Generation Holdco Limited (the "Buyer") and Scottish Power Retail Holdings Limited (the "Seller") concerning the acquisition of VPI Power Limited (the "Company").
- Pursuant to the SPA, the Seller warranted that the Company would have the benefit of an option (the "Option") prior to completion.The Option would allow the Company to obtain an easement over neighbouring land in order to connect the site to the national electricity grid.
- Following completion, the Company sought to exercise the Option. However it transpired that the Option had not been validly assigned to the Company prior to completion. The Option therefore had no effect and due to the time that had elapsed, the Option had fallen away.
The Buyer proceeded to give formal notice to the Seller for breach of warranty in relation to the Option. The relevant notice of claim provision 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...". (emphasis added)
The Buyer subsequently issued proceedings seeking damages for the losses suffered by the Company that would be incurred in obtaining the easement and laying cables (the "Warranty Claim"). However, the Buyer later applied to amend its Particulars of Claim in order to delete references to the Company suffering the loss and instead sought to plead a case based on the loss that was suffered by the Buyer at completion.
The Seller contended that the claim had no real prospects of success because the nature of the claim and the amount claimed had not been sufficiently notified for the purposes of the notice of claim clause in the SPA and applied for summary judgment in respect of the Warranty Claim.
In determining the summary judgment application at first instance, Simon Birt KC (sitting as a Deputy Judge of the High Court) dismissed the Warranty Claim for not satisfying the notice requirements under the SPA.
Court of Appeal decision
The Court of Appeal allowed the Buyer's appeal and found that the Buyer's notice was in fact compliant with the SPA's requirements – the result being that the matter could proceed to trial.
The Court of Appeal held that the specific wording used in the SPA's notice of claim provision did not impose a requirement on the Buyer to set out in precise terms that the claim was based on the difference in the Company's share value without the benefit of the Option. Males LJ explained that imposing such a requirement would serve "no commercial purpose and merely introduces a trap to defeat what may be a valid claim".
Males LJ further observed that a good faith and genuine calculation was all that was required insofar as the claim amount was concerned and that the notice had given the Seller all the information it needed to assess liability, in accordance with the terms of the SPA.
Key takeaways
This decision suggests that the courts are unlikely to be attracted to attempts to knock-out bona fide claims based on technical arguments relating to the level of detail included in a notice of claim. Notice clauses should interpreted in accordance with their commercial purpose 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 some real prejudice in order to succeed.
However, in order to reduce the risks and uncertainty associated with a potential challenge, parties should always review notice provisions carefully and draft their contractual notices in a way which seeks to comply with all elements set out in the provision. This is particularly important given the tension between this decision and the Court of Appeal's decision in late 2023 in Decision Holdings v Garbett2 (on which we commented previously) where the Court took a stricter approach towards notice compliance, against a different factual background.
Future disputes relating to similar issues will ultimately turn on the wording used in the relevant notice provision, but we will watch with interest to see how these two recent Court of Appeal judgments are reconciled and whether the Supreme Court considers it appropriate to address this issue in the future.
Footnoes
1 Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited [2024] EWCA Civ 477 at [50]
2 Decision Inc Holdings Proprietary Ltd v Garbett and El-Mariesh [2023] EWCA Civ 1284
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