Bringing warranty claims under an SPA – as soon as possible means as soon as possible!

11 June, 2020

 

After you have bought a business unexpected problems or issues may be revealed. If you have a detailed Share Purchase Agreement (SPA) then you may be able to bring a claim against the seller for breach of warranty or under an indemnity.   An often overlooked detail is the time limits for bringing such claims.

 

SPAs are often long documents with multiple schedules. Warranties and indemnities given by the seller are often tucked away in these schedules. You will also find what are sometimes known as “seller’s protection” provisions. Typically these will include time limits within which notice must be given of any claims or within which certain other steps must be taken.

 

Such time limits should be at the forefront of a buyer’s mind and their impact carefully considered as the case of Towergate Financial (Group) Ltd and others v Clark and others neatly illustrates.

 

There is a long line of case law which establishes that the court will rigorously enforce such time limit clauses on the basis that if commercial parties have agreed them then there is no real scope for the court to interfere. Thus if you miss a time limit to give notice, or don’t give the right kind of notice, then you can find you have lost the right to bring a claim (except perhaps a claim for negligence against your own lawyers or accountants if they failed to correctly advise you of the deadline / form of notice).

 

What if the clause is ambiguous? In the Towergate case there was a clause which the Judge described as a “badly drafted provision”. With due fairness to corporate lawyers, in complex transactions such clauses can often be the subject of a lot of re-drafting and additions and the end result can be a bit of a dogs dinner. In this case there were effectively two time limits for notices in the clause, a long stop of the 7th anniversary of the agreement and a requirement for it to be “as soon as possible” which were then applied to various types of claims.

 

The defendants interpreted the clause as requiring indemnity claims to be notified as soon as possible. The claimants asserted that the clause was ambiguous with regard to indemnity claims and therefore should not be enforced given that it would prevent them from making what would otherwise be legitimate claims. The claimant’s lawyers had done a good job of picking the clause apart and setting out all its flaws of grammar and syntax to present a picture of multiple meanings and consequent uncertainty.

 

However, the Judge in the case took a robust approach. She recognised the imperfections of the clause but decided that it in real terms it was perfectly clear what it meant. Specifically, even if a clause is imperfect, if in reality it has only one sensible meaning then it has sufficient clarity and it is not ambiguous.

 

In light of this, “as soon as possible” meant as soon as possible and the claimant having on any analysis failed to give a timely notice was deemed to be out of time to bring their claim.

The lessons to be learned from this case by buyers of businesses are as follows:

  1. be aware of the time limits for bringing claims under the SPA; and
  2. diarise the final date for bringing such claims, with enough warning to enable, for example, the work in terms of collating the information required under a notice to be properly carried out, and
  3. if the time limit is ambiguous, err on the side of caution and assume the least favourable option.