Getting Warranty Protection Right

March 24, 2023

A recent 2023 case in the High Court, regarding warranty protection, has underlined the importance of strictly complying with the terms of the share purchase agreement when bringing a claim for breach of warranty.

 

Overview

In the case Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited [2023] EWHC 412 (Comm), the High Court considered a breach of warranty claim made by the buyer against the seller. Warranties are contractual statements given by a seller to a buyer about the condition and state of affairs of the target at completion and will be contained in the share purchase agreement. In this case one of the target’s key assets was a piece of land which could operate as a potential site for a new combined cycle gas turbine power station; which was of material importance to the buyer. In order to make the land fit to operate the power station the buyer required a right to lay cables across a site owned by E.ON (another company within the Scottish Power group).

 

It was a condition of the share sale, that the seller was to ensure that Scottish Power group assigned the benefit of an option agreement relating to the land to the target, which would enable it to acquire the easement and lay the necessary cables in due course. The seller gave a warranty in relation to the option and also gave an indemnity to the buyer whereby it promised to pay the buyer any losses arising from a failure to implement the reorganisation (which would allow for the option over the land).

 

However, on completion of the sale, it was discovered that the option had not been validly assigned to the Company due to a technical defect. The buyer tried to bring a claim against the seller for breach of the warranty. However, the Court dismissed the buyer’s claim because their “notice of claim” did not fully comply with the requirements set out in the share purchase agreement.

 

The Decision

The share purchase agreement stated that any claim for breach of warranty must be served before a specified date and state “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)…”. The Court found in favour of the seller because the buyer’s notice failed to notify any claim for loss based on a reduction in the value of shares acquired (this being the normal basis upon which damages for breach of warranty are calculated) and in the court’s opinion the notice did not provide reasonable detail.

 

However, the court on review of the indemnity concluded that the buyer was entitled to claim reimbursement under the indemnity; highlighting the importance of indemnities and their cruciality of being utilised in share purchase agreements. Had the seller not given an indemnity, the buyer would have been left completely without a remedy due to the failure to serve an adequate notice of breach of warranty.

 

What might this mean for me?

If you think you may have a claim for breach of warranty, or need warranty protection, take legal advice as soon as possible. Do not try and handle it on your own. Warranty claims usually have time limits and failure to comply in full with the requirements of the share purchase agreement when making a claim might (as was the case here) invalidate it.

 

When agreeing the terms of a share purchase agreement, it is always better for the buyer to keep the requirements of the notice clear, concise and not open to subjective interpretation.

 

Get in Touch

For more information on warranty protection, please contact Tracy Evans, Principal of EMW Law at tracy.evans@emwllp.com.

If you’re interested in further information on a share sale, get in touch with us here.

 

 

 

 

 

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