A failure to comply with provisions governing the notification of claims under share purchase agreements is an issue that comes before the courts with surprising regularity. Given that such failure could result in any subsequent claim being summarily dismissed, it is self-evident that utmost care must be taken when drafting notices of claim – you rarely get a second chance to make a compliant notification.
In Drax Smart Generation Holdco Ltd v Scottish Power Retailing Holdings Ltd[1], the High Court of England and Wales held that disparities between the Notice of Claim and the (Amended) Particulars of Claim in respect of how the claimant’s loss was to be determined meant that the claimant had not provided reasonable detail regarding the nature of the claim as required by the SPA. The claimant’s claims were summarily dismissed.
Background
The claim related to an SPA by which the claimant (‘Drax’) purchased the shares in Scottish Power Generation Ltd (‘the Company’) from the defendant (‘Scottish Power’) for £702 million.
One of the assets of the Company was a site known as Damhead Creek II (the ‘Property’), which was a potential site for a new power station. If a power station were to be built, it would need to be connected to the national grid, which would necessitate the laying of cables over land adjacent to the Property owned by a third party. Scottish Power warranted that the benefit of an option agreement requiring the grant of an easement over the third party’s land would be assigned to the Company prior to completion of the SPA and agreed to indemnify Drax for all losses suffered in relation to that option agreement.
Following completion, Drax discovered that the assignment of the option had not been effective, and the option had fallen away. Drax entered into negotiations with the owner of the land adjacent to the Property, Uniper UK Limited (‘Uniper’), and Uniper indicated that it would be willing to grant an easement over a separate cable route on its land at current market rates but the alternative route would lead to increased costs for the Company. In the event that Drax was unable to agree terms with Uniper, it would have to consider applying for a compulsory purchase order. In any event, in December 2022, Drax sold the Company to VPI Generation Limited (‘VPI’).
The key provision relating to notification for the purpose of Drax’s claim read as follows:
‘[…] the Seller shall not be liable for a claim unless the Buyer has notified the Seller of the claim, stating in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer’s calculation of the Loss thereby alleged to have been suffered) […]’
Drax served a detailed Notice of Claim, providing particulars of the events giving rise to the claims (namely the failure to effectively to assign the benefit of the option to the Company) and making express reference to the relevant provisions of the SPA.With regard to loss, the Notice of Claim stated that despite the sale of the Company to VPI, Drax remained liable for all losses suffered by the Company in this regard. It identified the likely heads of loss as: (i) costs associated with re-negotiating the option (both those incurred to-date and future costs); and (ii) if those negations failed, costs associated with a potential compulsory acquisition of the land, but stated that the losses suffered had yet to crystallise.
When it came to setting out loss in its Particulars of Claim (which it sought to amend), Drax asserted that it had suffered loss directly by way of the diminution in value of the Company (i.e., the difference between the warranted value of the Company with the benefit of the option rights and what Drax contended was now the true value of the Company without the benefit of those rights).
The Law
The applicable principles of contractual construction were not disputed and it was accepted that ‘the only true principles to be derived from the authorities is that every notification clause turns on its own wording’[2].
However, there was some broad guidance that the authorities offered. Primarily, it has been emphasised in case law that the purpose of notification provisions is to provide certainty to the party that is being notified and that failure to comply with these provisions is more than a mere technical breach that can be overlooked.
Secondly, while it is not possible to determine a rule for what ‘reasonable detail’ means in any particular context, it is clear that it does not mean as much as detail as possible nor even the same level of detail that would be given in formal legal proceedings. Rather, it should be informed by the context of the relationship between the parties and in light of the fact that these clauses are typically included to ensure that the party being notified knows ‘what he is up against’ (not least because then settlement might be possible).
The High Court’s decision
It was the Court’s task to determine the objective meaning of the notification provision in the SPA and whether the Notice of Claim was sufficient to satisfy its requirements. The Court found that, in many respects, the Notice of Claim was ‘an informative document’ and that ‘a reasonable recipient of the letter would have understood the reasons why claims were being notified’. However, this was irrelevant in the view of the Court in addressing the question of whether Drax gave reasonable detail of the nature of its claim and the loss it suffered as a result.
The Court found that the Notice of Claim indicated that the loss being claimed was loss initially suffered by the Company and for which Drax was subsequently liable. In contrast, the (Amended) Particulars of Claim being advanced by Drax alleged that it suffered loss directly as a result of the diminution of value of the Company arising from Scottish Power’s failure to assign the option to the Company. The Court therefore found that ‘if Drax’s claim was one based on the diminution in value of the shares in the Company at the point of Drax’s discovery of Scottish Power’s breaches, as is now the claim sought to be brought in the Amended Particulars of Claim, that had to be identified in the Notice of Claim’.
Drax argued that the only material difference between the two positions was the measure of loss and that “cost of cure” and “difference in value” were proxies for each other. The Court disagreed and found that the difference between the Drax’s Notice of Claim and (Amended) Particulars of Claim went beyond the measure of loss into the way in which Drax was alleged to have suffered loss at all. Drax sought also to argue that the Notice of Claim’s numerical estimate of loss suffered was sufficient detail to satisfy the requirements of the SPA. Again the Court disagreed and found that a mere numerical estimate was not the ‘reasonable detail’ envisaged under the SPA and that there was a requirement to provide further explanation for how such a figure was arrived at.
Takeaway
Although Drax was able to continue its indemnity claims, this matter is a stark reminder that by the time defects in a claim become apparent, it is usually too late to remedy it. Accordingly, it is critical that any notice of claim captures all of the possible alternatives on which a claim may be advanced and that it is rigorously tested against the requirements of the relevant notification provision to ensure that it satisfies each of them. Given the severe consequences of a flawed notice of claim, it would also serve companies well to consider instructing external counsel as soon as possible to formulate the various claims that could be brought.
[1] [2023] EWHC 412 (Comm)
[2] Ipsos S.A. Dentsu Aegis Network Limited [2015] EWHC 1171 (Comm)
Contributors
Ben Sharrock-Mason