Drax No Longer Stopped in Its Tracks: English Court of Appeal Gives Green Light to Breach of Warranty Claim

Introduction

On 8 May 2024, the Court of Appeal in Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477 (“Drax”) handed down judgment overturning the decision of the High Court, finding that the claimant had complied with the notification clause in the relevant agreement and therefore its claim should not have been summarily dismissed. As explained below, the Court of Appeal has taken a pragmatic and sensible approach to the interpretation of content requirements for such notices.

Notification Clauses

It is common to find notification clauses in share purchase agreements and, increasingly, in other types of agreements. Notification clauses essentially provide that, before a party to the agreement can bring a claim against the other party to the agreement, the claiming party must serve a notice of the claim on that other party.

Usually, notices served under these notification clauses must comply with certain prescribed requirements, such as the requirement to provide reasonable details of the nature of the claim and the amount claimed. Failure to comply with these requirements may render the claim unenforceable and liable to be struck out and/or summarily dismissed.

It is therefore unsurprising that disputes around notification clauses tend to centre around what the requirements of the notice actually are. Drax is one of many such disputes.

Brief Summary of Drax

In Drax, Drax Smart Generation HoldCo Ltd (the “Buyer”) and Scottish Power Retail Holdings Ltd (the “Seller”) entered into a share purchase agreement dated 16 October 2018 (the “SPA”), by which the Buyer bought the shares in Scottish Power Generation Limited (now called VPI Power Limited) (the “Company”) from the Seller. One of the assets of the Company was a site in Kent that was a potential location for a new gas power station. This power station, if built, would need to be connected to the national electricity grid. The obvious connection point would be in the adjacent land, over which cables could be laid to connect the power station to the grid.

At the time, the Company had already entered into an agreement with another Scottish Power company called “SPDCL”, pursuant to which SPDCL agreed to assign the benefit of an option agreement to the Company. This option agreement contained the right to obtain an easement over the adjacent land, which would allow the necessary cables to be laid.

The Seller warranted that the benefit of this option agreement would be assigned to the Company prior to completion of the SPA, and further agreed to indemnify the Buyer for all losses suffered as a result of, inter alia, any failure to transfer the benefit of the option agreement to the Company. However, when the Company tried to exercise the option after completion (when it was under the Buyer’s control), it was told that the benefit of the option agreement was not transferred to the Company and therefore the purported exercise of the option was of no effect and, further, the option had by then already expired.

The Buyer subsequently gave notice of its alleged claims based on the indemnity in the SPA (the “Indemnity Claim”) as well as for breach of warranty and other contractual provisions in the SPA (the “Contractual Claim” and, together with the Indemnity Claim, the “Claims”).

Decision in Drax

The Seller applied for summary judgment to dismiss the Claims, arguing that the Claims had no reasonable prospect of success because, inter alia, the Buyer had failed to comply with paragraph 2.1 of Schedule 4 to the SPA.

Paragraph 2.1 of Schedule 4 to the SPA provided that “the Seller shall not be liable for a claim unless the Buyer has notified the Seller of the claim, stating 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...)”. In respect of that clause in particular, the Seller alleged that the notice the Buyer provided failed to (i) state in reasonable detail the nature of the Contractual Claim; and (ii) state in reasonable detail the amount claimed (detailing the Buyer’s calculation of the loss thereby suffered) in relation to both the Contractual Claim and the Indemnity Claim.

Decision of the High Court

At first instance, the Seller succeeded in part. Mr Simon Birt KC (sitting as a Deputy Judge of the High Court) granted summary judgment dismissing the Contractual Claim but refused summary judgment in respect of the Indemnity Claim. In respect of the Contractual Claim, the Deputy Judge held that:

1. to state in reasonable detail the nature of the claim, the Buyer had to state in the notice that the claim was based on the diminution in value of the shares in the Company at the point of the Buyer’s discovery of the Seller’s breaches; and
2. to state in reasonable detail the amount claimed, the Buyer had to explain that the calculation of its loss was the difference between the warranted value of the shares in the Company and the actual value of the shares, and either state those two values or otherwise explain the basis on which a figure had been arrived at for the difference.

Decision of the Court of Appeal

Both the Buyer and the Seller appealed: the Buyer on the Contractual Claim and the Seller on the Indemnity Claim. The Court of Appeal found in favour of the Buyer, overturning the High Court on both points identified above and dismissing the appeal in respect of the Indemnity Claim, thereby allowing both Claims to proceed to trial.

The Court of Appeal observed that notification clauses are essentially exclusion clauses and should therefore be narrowly construed. This method of interpretation reflects the common-sense principle that parties do not normally give up valuable rights (such as a claim in damages for breach of warranty) without making it clear that they intend to do so. On the Contractual Claim in particular, the Court of Appeal concluded as follows:

1. There was no requirement to state that the claim was based on the diminution in value of the shares in the Company. To impose such a requirement would serve no commercial purpose and merely introduce a trap to defeat what may be a valid claim. It was sufficient for the Buyer to simply state how the Seller had breached its obligations under the SPA (and in this regard, the court also doubted it was necessary to identify the exact terms breached).
2. As for the amount of the claim, all that was required was for the Buyer to put forward a calculation in good faith (in other words, a genuine estimate of the loss suffered). If further reflection indicates that the calculation was legally unsound, or capable of improvement, the Buyer would not be held to the way in which the calculation was formulated in the notice.

Of particular interest is the Court of Appeal’s observation that if the Seller thought the information in the notice was inadequate to assess its potential liability, it could have sought clarification or indeed legal advice (and in practice, it had likely done so on receipt of the notice in any event). It therefore appears that the Court of Appeal was keen to ensure that otherwise perfectly valid claims were not dismissed or struck out solely on formalistic grounds. So long as the recipient of the notice knew enough to be able to take steps to assess or prepare itself for any impending claim (including seeking any clarification or advice it deems appropriate), that should be sufficient.

Looking Ahead

The Court of Appeal’s decision in Drax is a welcome step back (and we would say, also a welcome step forward) from the robust approach to notification clauses in other recent decisions, such as the High Court’s decision in Drax as well as the Court of Appeal’s decision in Decision Inc Holdings Proprietary Ltd v Garbett [2023] EWCA Civ 1284 (“Garbett”), where Newey LJ held that a similarly worded notification clause required the claimant to provide an estimated claim amount for each alleged breach and not just a global figure in respect of the entire claim. The decision in Garbett seems rather harsh, and the extent to which the decisions in Drax and Garbett are consistent in principle is unclear. Even if the two cases are distinguishable on the facts, they appear to reflect different approaches to construing notification clauses. If this reading is right, the Court of Appeal or the Supreme Court may see fit to revisit this issue in the future.

In the meantime, given the uncertainty, parties are well advised to:

• give careful thought as to whether a notification clause should be included in the agreement in the first place – and whether to spell out the consequences of non-compliance. These provisions should not be treated as boilerplate;
• when drafting a notification clause, ensure that any requirements in the clause can in practice be complied with;
• use clear language in the notification clause (avoid ambiguous language such as “promptly” or “as soon as possible/practicable”); and
• whilst an obvious point, if a notice of claim must be given, be very careful that sufficient information is included in the notice based on the language of the relevant notification clause.

If you have any questions on this case or would like advice on your matter, please do get in touch.