In Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477, the Court of Appeal considered whether a notice of claim met the requirement in a share purchase agreement (SPA) for the notice to provide 'reasonable detail' of the nature of the claim and amount claimed. The court unanimously allowed the appeal brought by the buyer, finding that there was nothing in the language or commercial purpose of the notice of claim clause which required the buyer to set out in the notice of claim that the damages claimed would be based on the difference in value of the shares in the company.
Background
Drax Smart Generation Holdco Ltd (Buyer) acquired the shares in a company now known as VPI Power Ltd (Company) from Scottish Power Retail Holdings Ltd (Seller) pursuant to an SPA. A key asset of the Company was a real estate site in Kent (Damhead Creek II), which was a potential location for a new gas power station. Damhead Creek II was previously owned by a member of the Seller's group (SPDCL). SPDCL had the benefit of an option agreement giving it the right to obtain an easement to lay any necessary connecting cables across adjacent land to connect a station at Damhead Creek II to the national electricity grid (Option Agreement).
In the SPA, the Seller warranted that the benefit of the Option Agreement would be assigned to the Company. The Seller also agreed to indemnify the Buyer for all losses suffered as a result of any failure to transfer the benefit of the Option Agreement.
Due to a technical defect, the Option Agreement was not assigned to the Company and thereafter the period in which rights under the Option Agreement could be exercised elapsed. The Buyer gave formal notice of a claim under the SPA, founded on the fact that the Company never had the benefit of the Option Agreement, as had been contractually agreed (Notice of Claim). The claim was formulated as a claim for breach of the SPA for failure to assign the Option Agreement, a claim for damages for breach of warranty in respect of loss suffered by the Company, and alternatively as a claim for payment under the indemnity. The Seller contended that the claim had no real prospect of success because the Buyer had failed to comply with a requirement in the SPA for any notice of claim to set out 'in reasonable detail the nature of the claim and the amount claimed (including the Buyer's calculation of the Loss thereby alleged to have been suffered)' (Notice of Claim Clause). Further, the Seller alleged that the claim under the indemnity must fail because it was not brought within the time limit stipulated in the SPA.
The Buyer sought permission to amend its particulars of claim (Amended Particulars of Claim). In particular, the Amended Particulars of Claim pleaded a case that the loss suffered was by the Buyer itself, rather than the Company, and that such loss consisted of the difference between the warranted value of the Company (ie including the value of the benefit of the Option Agreement) and the true value of the Company. In the same proceedings, the Seller sought summary judgment in its favour. Both applications turned on whether the reformulated claims in the Buyer's Amended Particulars of Claim had a real prospect of success at trial.
High Court
Simon Birt KC, sitting as a deputy High Court judge, held that since the draft Amended Particulars of Claim was based on the difference in value of the Company's shares, a calculation not identified in the Notice of Claim, the Notice of Claim did not provide sufficiently 'reasonable detail' of the nature of the claim or of the amount claimed. He considered that a reasonable recipient would not have understood the Notice of Claim, as formulated, to mean that the Buyer was attempting to recover the reduction in the value of its shares in the Company. Consequently, the Notice of Claim did not comply with the Notice of Claim Clause and Simon Birt KC held that the claim pleaded in the draft Amended Particulars of Claim had no real prospect of success. Nonetheless, the Notice of Claim was held to be sufficient insofar as the claim under the indemnity was concerned, which proceeded to trial. Both parties appealed.
Court of Appeal
The Court of Appeal allowed the Buyer's appeal, finding that the Buyer's calculation of the loss suffered in the Notice of Claim provided sufficiently 'reasonable detail' of the nature of the claim and the amount claimed.
Males LJ (giving the judgment) agreed with the High Court that, when read as a whole, the Notice of Claim would not be understood by a reasonable recipient as including a claim based on the difference in the value of the Company's shares, especially since the Buyer did not have any apparent onward legal liability as a result of the Company not having the benefit of an easement over the adjacent piece of land. Nonetheless, this did not render the Notice of Claim for the breach of warranty invalid
Males LJ referenced Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638 (see FC Case Feature 25 May 2021) which also considered the meaning of 'reasonable detail' in the context of a notice of claim clause. He noted that the "initial purpose of such clauses is to provide a contractual limitation period." Whether a notice satisfies the requirements of a notice of claim clause depends primarily on the language of the clause: "where they use broad and general terms such as 'the nature of the claim' and 'in reasonable detail', those requirements should be interpreted in the light of the commercial purposes of such clauses". In the judge's view, the nature of the claim which the Buyer sought to advance was straightforward. Under the terms of the SPA, the Company ought to have had the benefit of the Option Agreement but due to the technical defect did not. It was unnecessary for the Buyer to set out the specific terms of the SPA that had allegedly been breached; a simple statement that it was a claim relating to the Seller's failure in its obligation to ensure the benefit of the Option Agreement was sufficient.
In addition, there was nothing in the language of the clause or its commercial purpose that required the Buyer to spell out, as part of a statement as to the nature of the claim, that the damages claimed would be based on the difference in value of the shares in the Company. Males LJ noted that "to impose such a requirement serves no commercial purpose and merely introduces a trap to defeat what may be a valid claim." Furthermore, the Notice of Claim fulfilled the requirement of stating the 'amount claimed' and provided in reasonable detail the way in which the amount was originally calculated. While the claim as then formulated was not a claim based on the difference in value of the shares, it was nevertheless the Buyer's actual calculation of loss, put forward in good faith. There was nothing in the Notice of Claim Clause and no good reason to tie the Buyer to the calculation as formulated in the Notice of Claim. Males LJ found that the notice has served its purpose: preventing the claim from becoming time barred.
The Court of Appeal therefore held that the Notice of Claim did satisfy the requirements of the Notice of Claim Clause and allowed the appeal. Consequently, the Seller's application for summary judgment was dismissed and the Buyer was granted permission to amend its Particulars of Claim.
Males LJ considered that since the Buyer's appeal was to succeed, the alternative claim for an indemnity added nothing of substance as the pleaded calculation of the amount claimed was the same for both ways of putting the case: whether in damages or by way of indemnity.
Comment
This decision is helpful for buyers, confirming that the courts will try to take a commercial approach to notification of claims provisions that use broad and general terms, giving them their ordinary meaning, rather than finding areas of technicality to strike out claims, imposing their own conditions, or interpreting such provisions in a way which has no practical purpose.
For information on breach of warranty generally, see Corporate due diligence, Q&A here.
First published on the Corporate News Service on 31 May 2024.
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