In previous articles, we have discussed cases in which notice provisions in share purchase agreements have been construed strictly, and a case in which a more commercial approach was taken.
The Court of Appeal has considered notice provisions again in the recent case of Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd. This article summarises the Court of Appeal’s decision in this case and highlights the consequences for parties bringing warranty claims.
Drax Smart Generation Holdco Ltd had bought a company, later renamed VPI Power Ltd, from Scottish Power Retail Holdings Ltd for a purchase price of £702 million in 2018. The target company owned a site in Kent which was a potential location for a new gas-fired power station.
To enable any new power station to be connected to the national grid, the previous owner of the site (SPDCL, another Scottish Power company) had secured the right to be granted an easement to lay cables over adjacent land belonging to a third party (E.ON UK plc), by way of an option agreement. When transferring its business to VPI, SPDCL had assigned its rights under the option agreement to VPI, and in 2016 VPI had entered into a deed of covenant with E.ON, as the option agreement required.
By that time, however, E.ON had already transferred the adjacent land to another company, Uniper UK Ltd. This meant that VPI’s deed of covenant was ineffective, because it was in favour of the wrong party, a fact that was not discovered before the option agreement expired.
When Drax understood that VPI did not have the right to lay cables over the adjacent land, it wrote to Scottish Power to give notice of a claim under the share purchase agreement. Three provisions of the agreement were relevant, since Scottish Power had given Drax:
The notice of claim stated that the loss suffered by Drax had yet to crystallise, but set out two alternative calculations of potential loss. The first calculation was based on the cost of obtaining an easement from Uniper at market rate to lay cables over an alternative route and the resulting increased expense, which together would amount to over £8.1 million. The alternative calculation was set out on the basis that Drax would pursue a compulsory purchase order, at a cost of about £6.7 million, if no agreement with Uniper could be reached.
Scottish Power denied liability, and so Drax issued a claim form. In response, Scottish Power applied for summary judgment dismissing the claim, on the grounds (among others) that Drax’s notice of claim had not stated in reasonable detail the nature of the claim and the amount claimed, as the relevant provision of the share purchase agreement required.
Drax sought permission to amend its claim, so that the amount claimed was the difference between the value of the shares in VPI as warranted, with the benefit of the rights under the option agreement, and their true value without the benefit of those rights. The cost of negotiating an easement with Uniper and laying cables over a longer route was evidence of that difference in value.
In the High Court, the judge agreed with Scottish Power that Drax’s notice of claim had not stated in reasonable detail the nature of the claim, since the notice of claim did not explain that Drax’s claim was based on the diminution in value of its shares in VPI. Drax appealed.
Allowing Drax’s appeal, Males LJ, with whom Birss LJ and Sir Geoffrey Vos MR agreed, held that the purpose of a notice of claim clause in a share purchase agreement is to give the parties certainty by providing a contractual limitation period – it effectively functions as an exclusion clause.
Where a party is bound to state the nature of the claim in reasonable detail, there is no need to require detail which serves no commercial purpose. In this case, Drax had formulated its notice of claim in good faith, setting out the nature of the claim – which in essence was that VPI ought to have had the benefit of the option agreement, but did not – and including its calculation of the loss suffered. That fulfilled the requirements of the notice of claim clause, and was sufficient for Scottish Power to assess its liability and respond to the notice. There was nothing to prevent Drax from reformulating its calculation subsequently when it came to court proceedings.
It remains important for a party seeking to bring a warranty claim under a share purchase agreement to comply strictly with the provisions of any relevant notice of claim clause, in particular in relation to service and the notice period.
But this case is welcome confirmation that a requirement to provide reasonable details of a claim does not oblige a claimant to provide more information than is needed to enable the nature of the claim to be understood.
To read the judgment, please click here. Please contact our corporate team for further information or advice.
