Market research company's claim for breach of warranties refused by Court

Article

19 June, 2015

In the case of IPSOS SA v Dentsu Aegis Network Ltd [2015] EWHC 1171 (Comm) the High Court has dismissed a claim for breach of warranty under a share purchase agreement, as the Buyer had not served the requisite notice on the Seller.

Background

The Claimant (Buyer), the market research company Ipsos, had purchased shares in the Synovate Group from the Defendant (Seller). As is typical in share purchase agreements, the Seller provided a number of warranties, including that no Group company was subject to employee claims and that all Group companies had materially complied with the applicable labour laws.

The Seller made disclosures against this warranty prior to completion, revealing that there were 68 subsisting employment claims.

Following completion, however, a considerable number of further employment claims were launched against one of the Seller's subsidiary's in Brazil. The actions were pursued by contract workers who alleged that they were acting in the roles of employees and should have been treated as such. When the Buyer sought to claim for breach of warranty some time later, the Seller raised a defence that the claim had been issued out of time.

Within the share purchase agreement (SPA), the seller had included a number of limitations on its liability for breach of warranty. In essence, the limitations required that the Buyer satisfy various conditions before a claim under the SPA could be properly brought. The key limitations were that:

  1. The Buyer must notify the seller of its claim in writing (Claim Notice);
  2. The Claim Notice should specify in reasonable detail, the following:
    1. The matter giving rise to the claim;
    2. The nature of the claim;
    3. The amount claimed - so far as it was reasonably practicable to do so.
  3. The Buyer must notify the seller of any third party claims, actions or demands made against the Buyer which may lead to a warranty claim against the Seller (Third Party Notice);
  4. Such notice should be in writing and specify in reasonable detail the matter which may cause the Buyer to take action against the Seller.

Legal Issues

When the Buyer subsequently claimed for breach of warranty, the Seller argued that the Buyer was time-barred from claiming because it had failed to serve a Claim Notice within 2 years of the date of completion, as it was obliged to do under the SPA.

In contrast, the Buyer pointed to two letters it had sent to the Seller, both within the two-year limitation period. The first was around 12 months after completion and detailed simply that a number of third party claims had been raised which may lead to a subsequent warranty claim against the Seller. The letter went on to say that "For the avoidance of doubt, this is not a Claim Notice." The Seller rebuffed this with its own correspondence alleging that the initial letter lacked the requisite detail to be a Third Party Notice.

In any event, the Buyer sent a further letter, a matter of days prior to the expiry of the limitation period. This letter referred to the initial letter and included more wording - if not more detail - in relation to the employment claims.

The Seller submitted that this second letter from the Buyer was not a Claim Notice for the purposes of the SPA. Whilst it purported to provide notice of third party claims, this was distinct from providing notice of a breach of warranty claim. The Buyer's Counsel admitted that the second letter had been poorly drafted but that it had provided the necessary information to be construed as a Claim Notice by a person with the knowledge of the context.

Judgment

Simon J determined that no effective Claim Notice had been served and as such, the Buyer was barred from bringing a claim.

The Judge reasoned that the first letter could be no more than a Third Party Notice, especially because it specifically stated that it was not a Claim Notice.

With regards to the question as to whether a Claim Notice had been served at all, it was necessary under the SPA to make clear that a claim was being made - it was insufficient to intimate that a claim may be made at some point in the future. The Judge then dissected the Buyer's second letter and found an absence of detail required for a Claim Notice (such as details of the matter leading to a claim by the Buyer against the Seller and the nature of that claim). Instead, he found that the context very much pointed towards a Third Party Notice. In light of this, Simon J ruled that "a reasonable recipient of the letter with knowledge of the previous correspondence and the business context in which it was written would not have understood it to be a Claim Notice."

Accordingly, the Judge ruled that the Buyer had failed to satisfy the conditions of the SPA by serving notice within the prescribed time period and, as such, the claim was to fail.

Forbes Comment

This case demonstrates how important it can be to Sellers to include carefully drafted warranties and limitations of liability within share purchase agreements. The Seller here was able to avoid costly litigation due to effectively worded limitations.

The case is also a useful reminder to Buyers that the specific wording of share purchase agreements is crucial to the post-completion conduct of the parties. Buyers should consider the content of any agreements in great detail before committing to costly litigation to ensure that post-completion requirements have been properly complied with.

If you are a potential seller who wants to limit their liability or a buyer who would like to ensure there are adequate protections in place post-completion, speak to Pauline Rigby, Head of Corporate and Restructuring on 0800 689 0831.

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