Share purchase agreement: validity of notice of warranty
The Buyer acquired the Company from the Seller under a share purchase agreement (SPA). The Seller provided a warranty that a reorganisation would occur, and gave an indemnity in favour of the Buyer in respect of any losses resulting from a failure to implement the reorganisation before a specific deadline.
The reorganisation was not implemented correctly and the Company suffered a loss. The Buyer claimed against the Seller: (i) for breach of warranty; and (ii) under the indemnity.
Under the SPA, a notice of a claim had to state “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” before a specified date.
The Court examined whether the Buyer had stated in reasonable detail the nature of the claim and the calculation of the loss suffered, which the Seller disputed.
The notice of claim referred to the losses suffered by the Company instead of the reduction in the value of the shares acquire by the Buyer. The Seller argued that the loss should have been based on the diminution in the value of the acquired shares (being the typical measure of loss for breach of warranty in an SPA) and that this was not demonstrated in the notice, as was required under the SPA.
The Court agreed that the Buyer had failed to properly explain the calculation of its loss, which should have been the difference between the “warranted” value of the shares and their actual value and found that the notice did not state the loss suffered directly by the Buyer based on the diminution in the value of the shares.
As the Buyer did not properly detail the calculation of the loss and did not meet the SPA’s requirements, the Court deemed the notice invalid and, accordingly, the Buyer had failed to issue a valid claim for breach of warranty within the period required by the SPA.
Luckily for the Buyer, it had an alternative action under the indemnity in the SPA.