Traps and tips for serving effective legal notices

April 2018 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

Corporate counsel and contract managers might be aware that in the past couple of years the UK courts have repeatedly focused on the importance of clarity and accuracy when notifying breach of warranty claims. The issue has recently come before the courts again, and flags some wider traps and tips for anyone involved in the service of warranty claims and legal notices generally.

In the high profile Teoco UK v. Aircom Jersey appeal, the Court of Appeal was asked to determine whether the purchaser or claimant’s notification of a breach of sale and purchase agreement (SPA) warranty claim, worth £3.46m, was valid.

Notification requirements

The purchaser had bought group companies pursuant to an SPA which contained a tax covenant and various warranties, under which the seller warranted that the companies had paid all tax due. As is typical, the seller’s liability was subject to notification of claims obligations which, in this case, required the purchaser to give notice: “setting out reasonable details of the claim (including the grounds on which it is based and the purchaser’s good faith estimate of the amount of the claim)”.

Notification letters

In February 2015, the purchaser’s solicitors wrote to the seller, referring generally to the tax covenant, tax warranties and general warranties, alleging potential breaches and purporting to comply with the notification of claims obligations within the SPA. When the seller responded that the letter contained insufficient detail to constitute a valid notification, the purchaser’s solicitors wrote again, this time simply setting out a breakdown of tax allegedly due.

Court of Appeal confirmation

The High Court had previously concluded that the purchaser’s letters did not constitute valid notification of a claim because, without identification of the specific warranties alleged to have been breached, they did not set out the legal grounds for a claim. The Court of Appeal agreed and clarified that while every notification clause, like every other contractual provision, will turn on its own individual wording: (i) certainty is important; (ii) a compliant notification of warranty claim should identify the particular warranties alleged to have been breached; and (iii) there may be some cases in which the ‘reasonable recipient’ test may be relevant (that is, the objective test, established in the House of Lords case of Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd, which can (in some circumstances) save an otherwise defective notice if the reasonable recipient would nevertheless have been left in no doubt as to its meaning). However, in this case, there was real scope for doubt about which provisions the purchaser thought may found a claim.

The notification of warranty claims obligations in the Teoco SPA were also time-limited. Notice had to be given as soon as reasonably practicable after the purchaser became aware of a claim, and in any event on or before the longstop date of 31 July 2015. Legal proceedings also had to be commenced within six months of the date the seller was notified and, once a claim had been commenced, no new claim may be brought in respect of the same matter. The purchaser therefore effectively had only one ‘shot’ at getting its claim right.

Such time limits and other claim restrictions are common, not only in relation to warranty claim notifications, but also in relation to the service of all sorts of contractual notices.

Most modern commercial contracts also contain separate, detailed service of notice clauses with additional obligations and requirements which, if they are not strictly complied with, can invalidate any notice. The consequences of that can be significant.

In the recent case of Zayo Group International Ltd v. Michael Ainger & Ors, the claimant had left service of the relevant notices until the last minute. The contract in question provided for notices to be served on all seven defendants by hand at the addresses specified in the contract or such other addresses as may be notified in writing. When the courier arrived at the address of one of the defendants, he discovered that she no longer lived there and left without leaving the notice. The deadline for service expired later that day, so the claimant had no opportunity to further attempt service. When the claimant subsequently sought to bring proceedings, the High Court dismissed its claim in full and against all defendants, on the basis that service had not been validly affected.

Practical advice

A good tip, when it comes to the service of any contractual notice, is to remember the mantra ‘who, when and how?’

Immediately after a party considers serving a notice, it should ascertain exactly who is required to give notice and on whom the notice should be served. Consider the party or counterparty itself? Legal representatives? Other agents? Have there been any assignments, novations or variations which change the position? What are the current names and addresses and contract arrangements for the relevant parties and agents?

Companies should also consider when the notice should be served, including whether there are any long-stop dates for service or for completion of any other conditional or procedural steps, such as commencing any follow-on court claims or the like.

It is also important to bear in mind, when calculating dates, that there may be different dates to ascertain. For example, depending on the nature and wording of the notice clause, you may need to know the date on which a notice actually has to take effect, the date by which it has to be served on the receiving party and the date by which it has to be issued.

All of those dates can be influenced by other factors, such as the required method of valid service, how long that will take, whether the contract designates when service will take place or whether the contract relies on external deeming provisions, whether there are any weekends or bank holidays to take into account and whether only working or business days count – which can differ across different countries, and so on.

The ‘how’ covers the content of the notice – such as the requirement in this claim (and in the majority of notification of warranty claim cases) to set out, with the requisite specificity, the legal basis of the claim, the form of the notice and any strict procedural requirements, and the fact that service must be effected in accordance with any contractually specified method. That, in turn, can lead to problems if notification obligations within contracts are drafted in isolation from, or inconsistently with, more general service clauses and other relevant contractual provisions. For example, what happens if a party gives a PO Box as its service address, but the contract specifies service by recorded delivery? What happens if the contract specifies that the service address is a party’s registered office, but the agreement is assigned to an individual?

The best advice is to leave the issue of warranty claim notifications – and indeed the service of legal notices generally – entirely to the experts. The consequences of getting any such notice wrong can be too costly to gamble. That is particularly the case where, as in Teoco, the potential claimant only has one bite at the cherry. Instructing specialist legal representatives to take on the risk for you reduces the chance of any problems arising.

Gwendoline Davies is a partner at Walker Morris. She can be contacted on +44 (0)113 283 2517 or by email: gwendoline.davies@walkermorris.co.uk.

Gwendoline Davies

Walker Morris