When circumstances arise that trigger a claim from the buyer to the seller for a breach of warranty in a share purchase agreement (“SPA”), we look to the wording in the SPA that dictates how notification must be provided to the seller, the timeframe, and the content of such notification. But how specific does the notification need to be in order to ensure it has ‘reasonable detail’ of the nature of a claim? A recent case highlights that it is what the SPA states in its terms that dictates the specificity of information required.
The dispute centred around the seller’s argument that the buyer’s claims for breach of warranty were not validly notified to the seller in accordance with the SPA. The SPA stated that in order to bring a claim for breach of warranty, the buyer must give the seller “written notice of the Seller Warranty Claim (stating in reasonable detail the nature of the Seller Warranty Claim, and if practicable, the amount claimed)”.
Tullet Prebon Plc, the buyer, entered into a SPA with ICAP Plc, the seller (whose obligations and liabilities were novated to Nex Group Ltd.) to buy ICAP Ltd., a company that provided voice broking services in the financial markets sector. The SPA contained warranties given by the seller about the affairs of the company. One of the warranties stated:
“No Voice Group Company, nor, so far as the Seller is aware, any director, officer or employee of any Voice Group Company nor (in relation to the Voice Group Business) any member of the Seller's Group or any director, officer or employee of any member of the Seller's Group, is or has in the preceding 18 months, been subject to any non-routine investigation, review or enquiry […] in each case by a Governmental Authority in relation to the Voice Group Business nor, so far as the Seller is aware, is any such investigation, review, enquiry, proceedings or process pending or threatened"
and the warranty when repeated at completion had the following words added:
“that, in each case, has or would have a material adverse impact on the operation of the Voice Group Business (taken as a whole)."
This warranty was qualified by the seller’s awareness (using the words “so far as the Seller is aware”), which under the SPA, was defined as the actual knowledge, having made reasonable enquiries, of eight particular individuals.
Within the required timeframe for notification (being the second anniversary of the date of completion), the buyer sent letters to Nex Group Ltd. due to two investigations that were undertaken within the preceding 18 months of completion and were contrary to the above warranty provided by the seller. One investigation was into the company by a US commodities futures trading commission, and the other into a particular director of the company by a German prosecutor. The buyer stated in its letters of notification that “the CFTC/FCA Matter and the ISL Director Investigation was each a non-routine investigation, review or enquiry which may include the imposition of remediation plans or requirements or a disciplinary or enforcement proceeding or formal process "that, in each case, has or would have a material adverse impact on the operation of the Voice Group Business (taken as a whole)"”.
Nex Group Ltd. argued that insufficient information had been provided by the buyer to constitute ‘reasonable detail’ and that the seller was not in a position to assess the prospects of liability for the alleged breach of warranty. Nex Group Ltd. asserted that the notification failed to state that any of the eight specific individuals said to have knowledge, had any knowledge of the investigation, and the notification ineffectively identified why the breach would result in a material adverse impact on the operation of the Voice Group Business.
The Court disagreed with Nex Group Ltd.’s arguments and they were rejected, as the “Seller’s argument requires more than the SPA states in its terms”. In particular:
The Court also maintained that whether the investigations into the company and director were of sufficient worth to warrant a claim for breach of warranty was a matter for determination of the claim at trial, rather than at the stage of notification.
It is important to consider the wording inserted into a SPA when negotiating its terms as to the specificity of information required, should notice need to be provided to the seller of any claim for breach of a warranty.
This case emphasises that it is the contractual construction of the SPA that will dictate the claim notification process and content between the parties. Understanding how this process works prior to completion and ensuring both parties are happy with the wording in the SPA will ensure that the ambiguity of smaller details doesn’t develop into a costly dispute.
For more information, please contact our Corporate team.
