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On 18 January 2018, the Court of Appeal dismissed a buyer's appeal on whether it had given reasonable information to the seller of a business in Teoco UK Limited v Aircom Jersey 4 Limited & Aircom Global Operations Limited  EWCA Civ 23. The effect of the Court of Appeal's decision is the buyer of a business cannot bring a warranty and indemnity claim against the seller. This decision usefully reminds buyers to make sure they clearly refer to the particular warranty and the provisions of the agreement they say have been breached.
On 19 November 2013, Teoco UK Limited (Teoco) entered into a share purchase agreement (the SPA) with Aircom Jersey 4 Limited and Aircom Global Operations Limited (together Aircom). Under the SPA, Teoco bought the issued shares from Aircom in Aircom International Limited and Aircom International (Austria) Holdings for around £41 million. Aircom provided warranties on the tax position of their subsidiaries.
On 14 August 2015, Teoco issued proceedings claiming it was entitled to damages for breach of warranty or indemnity because of tax said to be owed by two of the subsidiaries. Aircom applied to strike out the claim on the basis Teoco had not complied with the notice provisions in the SPA.
If Teoco had a claim against Aircom under the SPA, it needed to:
On 19 February 2015, Aircom’s solicitors wrote to Teoco (the February Letter). They said their letter constituted notification under the SPA of the existence of the claims (being either warranty claims or tax claims). Further (but limited) information was set out and Teoco reserved all of its rights.
On 19 June 2015, Aircom’s solicitors wrote again (the June Letter). They said their letter constituted further notice under the SPA. Further details of Teoco's claims (as outlined in the February letter) were given including a breakdown of the alleged tax liabilities. Teoco said the June Letter provided ‘…both proper notification and reasonable details of Teoco's dispute’.
In the High Court, Mr Richard Millett QC decided neither the February Letter nor June Letter gave notice under the SPA because they failed to set out '…reasonable details of the Claim (including the grounds on which it is based)'. The judge also said Teoco had failed to bring proceedings in time. The judge said setting out the 'grounds of a claim' must include identification of the particularly warranties breached, or the basis of the trigger for the tax indemnity. Teoco's claim was therefore struck-out.
Teoco appealed arguing the judge was wrong. The Court of Appeal had to decide whether the February Letter and the June Letter gave reasonable details of the claim including the grounds on which it is based. The Court of Appeal said they did not and approved the High Court's decision. The Court decided setting out of the grounds of the claim which the SPA called for meant the legal basis of the claim had to be identified. It said there was real scope for doubt about which provisions of the SPA Teoco thought were relevant to its claims.
The Court also said the omnibus reference to 'warranty claims or tax claims' in the letters was not good enough. Whilst this could have included the relevant warranties, it could have also included other possibilities. It was therefore not sufficient to identify the grounds of Teoco's claims.
The decision emphasises the importance of taking care when preparing any notice of a warranty claim to ensure it complies with all applicable requirements of the SPA. Each case will be considered on its own facts but this is a useful reminder that if a SPA includes an express requirement for the buyer to set out the details of its claim, the claim explicitly needs to refer to the particular warranties or provisions relied on. This problem could, of course, be avoided by the inclusion of a template (or sample) form of notification in the SPA.
Contributor: Paula Twist (Legal Executive)
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions
28 February 2018
by Russell Kelsall
News 26 NOVEMBER 2021