The Court of Appeal (CoA) gave helpful guidance on interpreting notice provision in light of their commercial purpose and warned against them becoming “a technical minefield to be navigated”.
Background:
The dispute arises out of an agreement for the sale and purchase of shares (SPAs) dated 16 October 2018 between Drax Smart Generation Holdco Limited and Scottish Power Retail Holdings Limited concerning the acquisition of VPI Power Limited. One of the assets of VPI Power Limited was a site in Kent which is a potential location for a new power station. For a new power station to be built, it would need to be connected to the national electricity grid at a neighbouring site. The seller negotiated an option with the owner of that site (E.ON) to acquire it within an option period. The sale and purchase agreement contained warranties that VPI Power was sold with the benefit of an option to acquire an easement over neighbouring land for the purposes of connecting the site to the national electricity grid. It also provided an indemnity for losses suffered by Drax as a result of any failure to transfer the benefit of the option agreement to the company.
After completion, it transpired that the company did not have the benefit of that option or any easement over the neighbouring land. Drax took steps to bring claims against Scottish Power for a breach of warranty and the payment under the indemnity. The High Court found that the notice did not meet the requirements in the SPA for a notice of breach of warranty but found in favour of Draw in respect to the indemnity claim. Both parties appealed.
Decision:
The CoA overturned the decision of the High Court, finding that the claimant had complied with the notification clause in the relevant agreement. The CoA also dismissed Scottish Power’s appeal in respect of the indemnity claim.
Lord Justice Males started by explaining the purpose of notice of claim clauses in SPAs. The CoA observed that notification clauses are essentially exclusion clauses and should therefore be narrowly construed. That said, the Court also found that there was no requirement to specify the precise basis on which damages could be claimed. The commercial purpose of the notice is to give sufficient information to enable the receiver to investigate the claims and assess potential liability. Imposing a requirement to lay out the diminution in value of the shares would serve no commercial purpose and merely introduces a trap to defeat what may otherwise be a valid claim. It was sufficient for Drax to simply state how Scottish Retail had breached its obligations under the SPA.
Implications:
Lord Justice Males gave guidance on the interpretation of notice of claim clauses which will be helpful in the future. This case clarifies that SPAs with vague and broad terms do not impose a requirement on the buyer to set out in precise terms that the claim was based on the difference in the company's share value without the benefit of the option.
This ruling also demonstrates that courts are unlikely to agree to dismiss good faith claims on a technical argument relating to the level of detail included in a notice of claim. Instead, it has been made crystal clear that those notice clauses will be interpreted in accordance with their commercial purpose.
This is good news if you have existing clauses that might be broad and general. It is also a good reminder that, to avoid potential challenges, it is important to include notice provisions that are precise and clear. When drafting contractual notices, it is important to comply with all elements set out in the provisions. This is even more so that this decision is somewhat conflicting with Decision Inc Holdings Proprietary Ltd v Garbett [2023] in which the Court took a stricter approach towards compliance.