Warranty claim disputes: fair disclosure and valid notifications

In the case of Triumph Controls UK Limited & Others v Primus International Holding Company & Others, it also considered whether Triumph had served proper notice of the warranty claims.  

The case concerned the acquisition of an aerospace components business. Triumph bought the shares in three subsidiaries owned by Primus and together those subsidiaries comprised the manufacturing division.

After the deal closed, according to Triumph, the financial and operating position of the target business deteriorated leading to a significant shortfall in revenue. Seven months after the sale closed, the business lost its “Nadcap” industry accreditation, which it needed to continue operating.

The judgment involved many issues arising on a warranty dispute. For clients negotiating SPAs and subsequently seeking to enforce them, two notable points arose from this case. First, what is considered to be valid notice in the context of warranty claims. Second, what is considered to be fair disclosure against the warranties.

What is valid notice of warranty claims?

Under the SPA, Primus was not liable for a warranty claim unless Triumph gave it “notice in writing of the claim, summarising the nature of the claim as far as it is known…and the amount claimed…within the period of 18 months beginning on the Completion Date”.

This is fairly standard language. The courts regard this kind of requirement as giving “commercial certainty” so that parties know where they stand (Ener-G Holdings v Hormell [2012] EWCA Civ 1059). However, there is a high standard for this kind of notice:

• the notice must be “unambiguous” and leave the seller “in no reasonable doubt” as to the grounds of the claim (Senate Electrical v Alcatel [1999] 2 L. Rep. 23), although the notice does not need to contain the level of detail required to begin formal court proceedings (ROK v S Harrison Group [2011] EWHC 270 (Comm));
• it must be clear that the notice relates to a claim under the warranties, as opposed to some other part of the SPA (Laminates Acquisition v BTR Australia [2003] EWHC 2540 (Comm)); and
• the notice should specify which warranties have allegedly been breached (Teoco UK v Aircom [2018] EWCA Civ 23).

In this case, it was alleged that Triumph had failed to summarise the nature of its claims properly. In particular, that they had described certain matters in their notice, but on launching legal proceedings had included different or additional complaints.

Primus argued that these additional matters were not covered by Triumph’s initial notice and so could not form part of its claims. The court did not agree. It took a relatively holistic view of Triumph’s notice and said that Primus was aware of the substance of the claims.

For example, although Triumph did not explicitly mention “quality breaches” when alleging breaches of material contracts, it had mentioned them in relation to a claim under another warranty. Reading those claims together, it was clear that Triumph’s complaint extended to quality issues overall. It was not necessary for every relevant warranty to be listed.

Likewise, Triumph had not referred to each and every forward-looking projection in its initial claim notice, but it had not needed to. The language it had used gave a sufficient level of detail and was wide enough to encompass other kinds of forward-looking projections.

The Court therefore found the claimants had given adequate notice of their warranty claims in their letter of claim. In particular:

• a summary of the claim did not require full details or particulars of the claims, as in a pleading;
• the buyer had to give formal, unambiguous notice of the basis of the allegations, sufficient for Primus to investigate, respond to, and make financial provision for the claims; and
• where a notification letter for one head of claim did not refer to the claim at all it was excluded by the court.

Notice and the liability cap

Separately, as the seller, Primus was required to notify Triumph of any existing warranty breaches immediately before closing the deal and give an estimate of their value. This can take the form of a notification requirement (as was the case here) or a seller warranty.

The SPA contained a US$15m cap for “Claims” which was defined in the SPA as claims for breach of warranty. The maximum amount Triumph could claim for breaches of other obligations in the SPA was limited to just over US$63m.

Triumph said that Primus had failed to tell them about the breaches of warranty at closing and so had breached the notice clause. They argued that the higher cap of US$63m applied to a breach of the notice clause because it fell under “other obligations” and was not breach of a warranty.

The judge, Mrs Justice O'Farrell DBE, disagreed. She said that the parties must have intended the definition of a “Claim” to cover claims arising out of breaches of warranty. If Triumph was able to use the notice clause to sue for breach of warranty and claim almost US$50m more than that agreed for breach of warranty claims, it would defeat the purpose of the US$15m cap.

Tips: drafting notice of warranty claims

• A seller must be given enough information in a notice of a warranty claim for them to understand the substance of the claim. In particular consider: 
  
  • which warranties are likely to have been breached;
  • specify all possible warranties the seller is alleged to have breached;
  • consider other breaches of the SPA such as notification obligations; and
  • include details of the specific matters that have caused the breach of warranty.
• As a buyer, however, it is important not to over-provide when it comes to giving information in the notice.
• The contents of the warranty claim notice must comply with any requirements in the SPA.
• Whilst courts may interpret definitions broadly, exactly how “Claim” is defined is key.

Fair disclosure

Primus said it had disclosed the operational failings to Triumph as they were disclosed in the disclosure letter as well as in correspondence and the data room. It is generally accepted that, under English law, a buyer cannot bring a warranty claim if it knew about the breach when it entered into the contract (Eurocopy v Teesdale [1992] BCLC 1067), although it may be possible to modify this in the contract (Infiniteland v Artisan Contracting [2005] EWCA Civ 758).

The SPA allowed for breaches of the warranties if these had been "fairly and clearly disclosed in writing in or under the Disclosure letter". To be considered fair, disclosure must allow the buyer to reach conclusions for itself (Levison v Farin [1978] 2 All ER 1149) and decide whether to exercise its contractual rights (Edward Prentice v Scottish Power [1997] BCC 269).

Disclosure is unlikely to be fair if it simply refers to a complex body of information, instead of drawing the matter out specifically (New Hearts v Cosmopolitan Investments [1997] 2 BCLC 249), or if the matter in question is not apparent from the documents that have been provided (Man Nutzfahrzeuge v Freightliner [2005] EWHC 2347 (Comm)).

The Court ruled in favour of Primus. The judge said that the specific and general disclosures given by Primus were effective, meaning they were not liable under the warranty claim.

The main points made by the judge were:

• the SPA allowed disclosure to be made “in or under” the disclosure letter. This meant the disclosure letter did not have to set out every warranty breach expressly;
• Primus had effectively disclosed the entire data room. It was clear Triumph had agreed to this, particularly because the data room had been provided on-line, and both parties had initialled an index and attached it to the disclosure letter;
• Triumph could still argue that a particular document in the data room didn’t “fairly disclose” an issue, but it had accepted general disclosure of the data room “as a matter of principle”; and
• the SPA required the nature of any matters to be disclosed, but it didn’t require the seller to give details of the extent or scope of the matter. Triumph argued that the documents Primus had disclosed didn’t reveal the full scale of the problem, but the court said this was irrelevant. The SPA didn’t require Primus to spell out the full extent of any issues.

Tips: fair disclosure 

• A seller should spend time on the disclosure process so that it includes enough detail to be considered “fair”. Disclosure should contain enough information to enable the buyer to appreciate the significance of the matter and decide what to do in response. 
• Disclosing the entire deal data room is a relatively widespread approach in the UK. Best practice would be to include a copy of the data room on an electronic storage medium with the index appended to the letter. 
• Sellers should not attempt a “data dump” by disclosing a significant volume of information to a buyer. 
• If information is contained in some obscure part of a document, or in an unrelated section of the data room, it is unlikely to be fairly disclosed. The data room should be properly structured and important sections of the data room referred to in the seller’s disclosure letter.