Interpretation of time limit for warranty claim
THE HUT GROUP v COOKSON [2014]
Here the interpretation of a clause imposing a time limit for serving notice of a breach of a warranty claim was critical to whether the buyer had an actionable claim. The question was whether time starts to run when the party becomes aware of factual grounds that may amount to a claim, or only at the point at which the buyer knows there is a proper basis for bringing a claim.
Facts:
- A Share Purchase Agreement (SPA) between the parties under which The Hut Group (the Buyer) was to buy the share capital of a company owned by Cookson (the Seller) provided that: "The Sellers will not be liable for any Claim unless the Buyer serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter”.
- What was meant by "becoming aware of the matter" was key to determining whether notice had been given within the relevant time limit. The Buyer argued that "matter" should be read to mean "claim" and required it to be aware that there was a proper basis for putting forward a claim for breach of warranty.
- The Seller argued that the relevant moment in time was when the Buyer became aware of factual grounds for a breach of warranty claim.
- A second issue which the Court had to decide was whether a counter-claim by the Seller was covered by the cap in the limitation of liability clause due to the fraud of the Buyer’s financial controller. The Buyer claimed that the relevant liability limit restricted any claim to £7.24 million.
- The clause in question said: “Save insofar as it results from the fraud of [the Buyer], [the limit of liability] for claims against [the Buyer] is £7.24 million”. After an investigation, it became clear that the Buyer’s financial controller had been manipulating profitability on a monthly basis, by overstating stock and debtors and understating liabilities. It seems that the Buyer’s senior management was unaware of this manipulation.
- The question was when could fraudulent acts of particular individuals be attributed to the corporate entity? The Buyer argued that only acts of those individuals who actively represented the company in connection with the negotiation of the SPA could suffice. Conversely, the Seller argued that this was not a case of an individual having gone off ‘on a frolic of his own’ and that therefore the fraudulent acts in question should be attributed to the company.
- The Court therefore had to decide:
- at what point did the warranty claim need to be notified to the Seller?
- were the fraudulent acts of the Buyer covered by the cap on liability?
Decision:
- Notification of warranty claim
- The judge held that a party could not be said to be aware of the “matter” before it is aware that there is a proper basis for putting forward a claim. The Court then had to decide at which precise point that could be said to occur. It found that neither internal discussions about the possible need for adjustments to the management accounts nor the preparation of an internal memo in order to seek external advice was the decisive moment. It was only at the point at which that advice was received did the clock start running. On this basis, the Buyer had given notice within the time limits.
- Fraudulent acts
- The judge found in favour of the Seller and attributed the fraud to the Buyer. Amongst the factors which influenced this decision was:
- as a financial controller, the individual in question did have an important role in preparing financial figures which were essential for the deal to go through. This was not the act of the ‘post boy’;
- the scale of the fraud. This was not fraud of one person acting completely alone; several members of the finance team were consequently sacked or disciplined;
- the company being content to delegate responsibility to the individual or team concerned;
- an atmosphere under which fraud in the finance team was allowed to flourish and a degree of ‘pressure’ was exerted to produce figures which painted a favourable trading position.
- The judge found in favour of the Seller and attributed the fraud to the Buyer. Amongst the factors which influenced this decision was:
Points to note:
- Whilst in many ways the decision on the timeframe for bringing the warranty claim seems a sensible conclusion based on the wording of the clause in question, what it does mean is that the provision as drafted did not operate so as to provide an overall time limit on when a claim could have been brought (as is often the intention with clauses of this type). Alternative drafting would be required to achieve that result.
- As a side issue 20 business days seems pretty short in context and could quite easily mean that a valid claim could be defeated (although query whether such a short time limit would be upheld if challenged under the Unfair Contract Terms Act 1977 (UCTA) as an unreasonable limit on liability?).
- The finding on the fraud point demonstrates that judges will look at the individual facts of each case in the light of ‘commercial common sense’ when deciding whether to attribute fraud to the employing company in question. This case is another example of an injured party using fraudulent behaviour as an argument to successfully circumvent the application of a limitation of liability clause - see also BSkyB v EDS [2010].
- Cookson appealed to the Court of Appeal in 2016 - see our update on this case).