When warranty claims go wrong – notice of claim

When warranty claims go wrong – notice of claim

What happens when a promise made by a seller in a share purchase agreement appears to a buyer after the deal has closed not to be true? The buyer usually turns to the contract between the parties to look at the promises made by the seller (warranties) and what recourse might be available. Any such contract will usually also contain provisions about what notice the buyer has to give the seller if it wants to bring a warranty claim, but beware: getting it wrong may prevent an aggrieved party from enforcing certain rights and remedies to which it might otherwise have been entitled.

What should a buyer think about if contemplating making a warranty claim?

• Note any time limits in the contract – practically this means diarising any deadlines for making claims prescribed by the contract. It is important to act quickly to avoid any “out of time” arguments.

• Check the details for service (and email addresses if appropriate) in the contract and ensure that any notice of claim is sent to the correct recipient at the correct address.

• Make clear what the notice is intending to do. Ensure that on the face of it, it is a notice specifying the exact claim with the appropriate particulars and not a document merely reserving a right to bring a claim at a later date.

• Take legal advice!

Why is this important?

A recent case of Arani & Others v Cordic Group [2021] EWHC 829 (Comm) concerned a buyer that had bought a company that provided fleet management solutions for taxi, private hire and courier businesses through a software it had developed itself. The sale was recorded in a share purchase agreement (SPA) and allowed for a certain amount of the purchase price to be paid over to the seller 16 months after completion of the deal (Retention Monies). The Retention Monies were only to be paid to the buyer if by that time no notice of warranty claim had been served on the seller by the buyer, such notice needing to set out full particulars of any warranty claim.

The buyer discovered an apparent breach of one of the warranties in the SPA, and on that basis served a warranty notice on the seller (and didn’t pay over the Retention Monies). Crucially however, the notice was (i) outside the 16-month period, (ii) did not include the full particulars of the claim and (iii) reserved a right to bring legal proceedings without specifying what the claim was.

The seller issued its own court claim asking the court for an order that the buyer pay the Retention Monies with interest. The buyer counterclaimed asserting that the seller had been fraudulent in its representations, which would have meant that any notice requirements within the SPA did not in fact apply to their claim.

The case did not go to full trial but certain issues were dealt with at a separate hearing applied for by the seller.

The judge found (among other things outside the scope of this note) that the contractual warranties themselves (given by the seller) could not amount to representations. In order for a claim for fraudulent misrepresentation to have been successful, the representations would have to have been made before a contract had been entered into and the buyer would have had to have relied on them in the absence of a clause in the agreement excluding representations. Therefore, the contractual notice periods did indeed apply to the buyer’s notice of claim.

The judge concluded that there had been no valid notification of a claim and accordingly there was no basis for withholding payment of the Retention Monies.  The buyer had no option but to pay over the Retention Monies to the seller.

Contact our corporate lawyers in Sussex and Kent

If you would like to discuss a warranty claim or any of the points mentioned above in more detail, or if you would like advice in connection with business affairs, please contact our Corporate and Commercial team or tel 01825 744447.