Earn-out calculations served by email did not comply with contractual notice provisions
06 March 2025The High Court has held that two earn-out calculations prepared by the buyer under a share sale agreement were not validly communicated to the sellers because they were not sent in accordance with the contractual notice provisions.
What happened?
Hughes v CSC Computer Sciences Ltd [2025] EWHC 302 (Comm) concerned a share sale and purchase agreement (SPA), under which CSC acquired the shares in a trading infrastructure services company from certain individual sellers.
The parties agreed that part of the purchase price would be deferred and paid after completion in two tranches. The amount of each tranche would be calculated based on the target company’s financial performance over those two years, amounting to a form of earn-out.
Under the earn-out mechanism, the buyer would prepare an earn-out “determination” for Year 1 after completion of the sale and “submit” it to the sellers. The sellers would then have an opportunity to dispute the buyer’s calculation. The same process applied to the determination for Year 2.
The buyer prepared the Year 1 determination and emailed it to the sellers and their legal advisers. The sellers disputed the buyer’s calculations and discussions ensued that were not ultimately resolved.
The buyer subsequently prepared the Year 2 determination and likewise emailed it to the sellers and their legal advisers. Again, the sellers disputed the buyer’s calculations. This time, around three months later after receiving the Year 2 determination, the sellers also queried the validity of the Year 2 determination. However, subsequent discussions focussed on the calculation itself and not the notice.
Finally, around four years later, the sellers again suggested that the Year 2 determination may not have been validly served and that, indeed, the Year 1 determination may not have been validly served either. This culminated, a further 18 months later, in the sellers bringing proceedings alleging that the buyer had never validly served either earn-out determination.
Specifically, the sellers claimed that the earn-out determinations were communications governed by the “notices” clause in the SPA. That clause stated:
“Any notice or other communication under or in connection with this Agreement shall be in writing and shall be delivered personally or sent by first class post pre-paid recorded delivery (or air mail if overseas) or by fax to the party due to receive the notice or communication as follows…”
The notices clause required communications governed by it to be served personally (i.e. by hand), by post or by fax. However, in this case, both earn-out determinations had been served only by email.
The buyer claimed that the earn-out determinations were not specifically covered by the notices clause, as they were not described as written notices.
How do contractual notices work?
A commercial contract may envisage that the parties to the contract will send each other notices or other communications from time to time in connection with the contract. (We will refer to these generically as “notices”.)
Notices may be useful or necessary under various types of contract. This could include to notify a claim under the contract, to put in a purchase order, to request a change to the services being provided, to request consent to a matter, to determine a calculation or price, and so forth.
To ensure that the procedure for giving notices is clear and the parties know what to expect, it is typical to include a notices clause in the contract. That clause will normally spell out (among other things):
- the methods by which parties can send notices (e.g. by post or by email);
- who notices must be addressed to;
- the language notices must be written in; and
- when notices are deemed to be received.
Historically, the courts have been intent on holding contract parties to the letter of their notices clause. Although, in some cases, courts may tolerate a minor defect in a notice, generally speaking, failure to comply exactly with a notices clause will render a notice invalid in all respects.
This is because judges will assume that the parties to the contract are in the best position to determine what notice arrangements are most appropriate for their circumstances.
This has historically produced results that may at first glance seem harsh:
- In Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23, a notice of claim for breach of warranty was invalid because it did not refer to the relevant clauses of the sale agreement.
- In TP ICAP Ltd v NEX Group Ltd [2021] EWHC 1375 (Comm), a claim notice under an SPA was invalid because it stated that the circumstances “may” give rise to a claim, not that the buyer was actually making a claim.
- In Zayo Group International Ltd v Ainger [2017] EWHC 2542 (Comm), a claim notice was ineffective because it had not been served on all of the sellers in accordance with the requirements of the sale agreement. Indeed, in this case, the court went so far as to say that, if complying with a notice clause meant leaving the notice on the rubble of a former building, that is what must be done.
In this sense, it is critical to ensure that, where a notice clause specifies one or more methods for service, the notice is served using at least one of those methods.
What did the court say?
The court held that both determinations were communications governed by the notices clause. The clause was drafted in very broad terms and captured all types of communication.
The judge conceded that some types of non-material communications might fall outside the ambit of the notices clause. However, the earn-out determinations were part and parcel of the calculation of the purchase price and so were material communications that fell within the clause’s scope.
From here on in, the decision was simple. The notices clause did not contemplate service of notices or other communications by email. The buyer had not served personally, by post or by fax, and so both earn-out determinations were invalid.
The judge went on to consider whether, by responding to the determinations and engaging with the buyer, the sellers had elected to accept the notices or, alternatively, were prevented (in legal terms, estopped) from denying their effectiveness.
Decisions on election and estoppel are always very fact-specific. In this case, the court found that the sellers were estopped from denying the Year 1 determination, because they had actively contested it and engaged in discussions. However, they were not estopped from denying the Year 2 determination because they had specifically raised questions at the time as to its validity.
What does this mean for me?
The obvious point for parties to existing commercial contracts is to check the notices provisions within the contract when proposing to send a notice or other communication under the contract.
It is critical to ensure that all requirements of the contract are met, including as to the manner of delivery, names and addresses of the recipients, and any content requirements. If they are not, the notice may be completely invalid.
Similarly, a party that receives a notice under a commercial contract should check to ensure that all relevant formalities have been met. If they have not, the recipient should consider contesting the notice. As this case shows, if a recipient engages with a non-compliant notice, the courts may refuse to allow the recipient to subsequently deny the validity of the notice.
The decision also provides some useful pointers when drafting notices provisions in a commercial contract. It is important to ensure the parties agree a process for giving notices that suits their own circumstances and those of the commercial arrangement, and that is sufficiently workable and certain.
Key things to consider when deciding how notices should be given include the following.
- What medium should apply to giving notices? It is standard to permit notices to be served personally (e.g. by hand or by courier) or sent by post or airmail. It was once common to permit service by fax, although this is now much less common since the use of fax has declined (although it is still popular in some countries).
- Should the parties permit email notices? Once regarded as unsecure and unreliable, email is now the dominant form of business communication. Commercial parties therefore expect to be able to serve notices by email. A well-drafted contract should deal with the potential difficulties that arise from email, including “bounce-backs” and out-of-office responses, and parties should consider whether to require a delivery or read receipt as evidence that a notice has been served.
- What recipient details should a party give? It’s important to consider where and to whom notices should be sent. This should ensure notices are actually picked up by someone who understands their subject matter and will take action. It may be better to require notices to be sent to an officeholder (such as the “General Counsel” or “Company Secretary”), rather than a specific individual, or to a project-specific email address. Parties should also consider whether notices should be copied to their legal advisers.
- What language should notices be written in? On cross-border contracts, it may be useful to specify the language notices should adopt. This should be a language that recipients on both sides can readily and easily understand to ensure that notices are properly acted on.
- When should notices be deemed received? Normally, a contract will state that a notice is deemed to have been received by the recipient at a specific time after it is sent. This avoids problems later down the line of proving whether the notice actually reached its destination.
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