Warranty Claim Teoco v Aircom EM Law Photo by Kaique Rocha

Share Purchase Agreement Claim Fails Because It Didn’t Follow Contract Procedure - Teoco UK Ltd v Aircom Jersey 4 Ltd & Anor [2018] EWCA Civ 23 (18 January 2018) 

Background

In November 2013 Aicom and Aircom Global (the Respondents) signed a share purchase agreement in which the Respondents sold their shares in two companies that were part of their corporate group to Teoco for £41 million.

In February 2015 Teoco’s lawyers wrote to the Respondents lawyers claiming damages of approximately £3.4 million for breach of warranty or an indemnity in relation to tax said to be owed by two subsidiaries of one of the companies that Teoco had purchased. The letter was stated to constitute “notification in accordance with clause 24 and Schedule 4 of the SPA of the existence of Claims, being either Warranty Claims or Tax Claims, as further detailed below”, and which went on to set out details of the potential tax liabilities of the subsidiaries in Brazil and the Philippines.

In June 2015 Teoco’s lawyers issued a further letter providing more detail around how the level of damages was arrived at.

In August 2015 Teoco issued proceedings in the High Court.

On 18 December 2015 the Respondents applied to the High Court to strike out Teoco’s claim on the basis that it did not follow the procedure for making claims as set out in the share purchase agreement.

On 28 April 2016 the High Court ruled in favour of the Respondents and dismissed Teoco’s claim.

Teoco appealed.

The Appeal Decision

The Court of Appeal dismissed the appeal.

Lord Justice Newey examined the SPA and noted that Clause 10 of the SPA imposed limitations on the Sellers' potential liabilities. It stated:

“The liability of the Sellers under or in respect of any claim for breach of this agreement shall be limited by, and all claims for breach of this agreement shall be dealt with in accordance with, the provisions set out in schedule 4.”

The key provisions of schedule 4 in the SPA read as follows:

“4. Notice of Claims

No Seller shall be liable for any Claim unless the Purchaser has given notice to the Seller of such Claim 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 (detailing the Purchaser's calculation of the loss, liability or damage alleged to have been suffered or incurred)).

5. Time limits for Claims

5.1 No Seller shall be liable for any Claim unless the Purchaser has given notice of such Claim in accordance with paragraph 4, as soon as reasonably practicable after the Purchaser Group becomes aware that the Purchaser has such a Claim, and in any event on or before 31 July 2015.”

Judge Newey reviewed the letters that Teoco’s lawyers had sent to the Respondents’ lawyers and concluded that they did not constitute sufficient notice under paragraph 4 of Schedule 4 of the SPA. He found that the letters did not make specific reference to the warranties that the Respondents had allegedly breached or the grounds upon which the tax indemnity was triggered and therefore could not be considered to have been “setting out” the “grounds” of a claim.

Comment

I suspect most non-lawyers would find the decision harsh. In their February and June letters Teoco’s lawyers set out the nature of the claim in detail. Paragraph 4 of Schedule 4 in the SPA did not explicitly state that Teoco would have to make specific reference to the warranties that were breached or how the indemnity in the SPA was triggered in order to bring a claim. Wouldn’t justice be served, you may ask, if the court allowed the claim to be heard and then decided on its merits rather than thrown out on a technicality?

As a lawyer I am not so surprised by the decision (yes, hindsight is a wonderful thing!) because I read court cases all the time. I am used to seeing how somebody not quite getting it right or missing something altogether can lead to a court decision that has serious negative consequences for one of the parties.

Lessons to be learned:

  • don’t let the seller put claims limitation clauses in a share purchase agreement that you, if you are the buyer, are not totally clear on;
  • pay massive attention to detail when you are bringing a claim.

If you are buying or selling a company or need any other help with a share purchase agreement please get in touch.