The Court of Appeal highlights the importance of precision when drafting limitation clauses in share purchase agreements

A recent verdict issued by the Court of Appeal serves to illustrate, to all those involved with business transactions, the significance of accurate legal drafting.

The dispute in question concerned a share purchase agreement (“SPA”) under which Drax Smart Generation Holdco Ltd (the “buyer”), acquired the shares in a company from Scottish Power Retail Holdings Ltd (the “seller”).

The claim was based on the buyer’s notice that the seller failed to transfer the benefit of an option agreement, which negatively impacted the share value. When making a claim, this particular SPA states that the buyer needed to provide detailed notification of claims, including their nature and their total calculated losses.

Despite providing a nine-page notice, the seller contended that the buyer had not adequately fulfilled these requirements. Initially, a High Court judge found the buyer’s notice to be insufficient under the SPA when making a warranty claim. Their reasoning was that the buyer had quantified the claim based on the loss suffered by the company rather than the acquired shares’ drop in value – that is to say, the loss suffered by the buyer.

However, the Court of Appeal unanimously reversed this decision. They explained that the notice requirement in a share purchase agreement should not impose excessive technical burdens and should be interpreted to facilitate their commercial purpose.

Furthermore, they stressed that the SPA stated the quantum required was to be the seller’s ‘calculation of the loss thereby alleged to be suffered.’ As a result, this calculation did not need to be entirely accurate, and the figures provided by the buyer were sufficient.

The court could find nothing in the language of the limitation notice clause that obliged the buyer to spell out it was claiming damages based on the difference in value of the acquired shares as a result of the alleged breach of warranty. It only required the buyer’s actual good faith calculation of its loss.

This Court of Appeal judgment stresses that a buyer who is looking to bring a warranty claim should be careful to ensure that sufficient information is provided in the notice, based on the language of the notice clause. However, a buyer can take comfort in that the technical arguments that a warranty claim has not been sufficiently notified are unlikely to succeed, as it appears that the courts are likely to take a pragmatic approach.

The upshot of this ruling is the importance of taking professional advice (both accounting and legal ) if you are going to make a warranty claim under an SPA.