Introduction

The recent High Court judgment in Towergate Financial (Group) Ltd and other companies v Hopkinson and others (2020) has served as a very stark reminder of potential pitfalls relating to notification of claims in respect of warranties and indemnities contained in share purchase agreements.

Cockerill J held that a clause which required notice for a claim under an indemnity to be given “as soon as possible and in any event prior to…on or before the seventh anniversary of the date of this Agreement” had not been satisfied even where the claim had been notified before the seventh anniversary of the agreement. Failure to give notice “as soon as possible” meant that the notice was invalid. The result was to preclude potential damages under the indemnity for in excess of GBP50 million.

The case acts as a hugely important reminder to contracting parties and practitioners to pay very close attention to the drafting of notification clauses.

Background

The salient facts of the case were as follows:

  • On 5 August 2008, Towergate Financial, a financial advisory firm, purchased the entire issued share capital of M2 Holdings Limited (M2) from the trustees, Mr Hopkinson and Mr Howard.
  • Mr Hopkinson and Mr Howard gave certain indemnities to Towergate under Clause 5.9 of the Share Purchase Agreement (SPA). Clause 6.7 of the SPA stated that any indemnity claim had to be brought “as soon as possible and in any event prior to…on or before the seventh anniversary of the date of this Agreement.”
  • By mid-2012, the Financial Conduct Authority (FCA) had been in contact with Towergate with regards to undertaking a review of certain historic transactions. By early 2013, the FCA had flagged a number of “major issues” and failures of risk and compliance in relation to historic financial advice by M2. By March 2013, the claimant provided a report to insurers of potential claims. And by 2014 an FCA review had found that negligent advice had in fact been given by M2.
  • On 29 July 2015, a week before the seventh anniversary of the SPA, Towergate wrote a letter to Mr Hopkinson and Mr Howard with notice of possible indemnity claims under the SPA.

Issue

Mr Hopkinson and Mr Howard argued that the notice of claim was invalid because it had not been provided “as soon as possible.” Towergate, on the other hand, argued that the notice had been given before the deadline of the seventh anniversary of the SPA.

The court ordered a preliminary issue hearing to determine:

  1. With respect to the notice, whether there was a condition precedent as to the time by which such notice had to be given.
  2. If there was a condition precedent, did it require the notice to be given prior to the 7th anniversary of the SPA, or “as soon as possible.”
  3. If notice had to be given “as soon as possible,” had Towergate complied with that requirement.

Judgment

Cockerill J held the following:

  1. The clauses, while not perfect, were “in real terms – perfectly clear” and “not ambiguous.” They contained a dual condition precedent: “as soon as possible” and “in any event seven years.” She held that this wording was “clear, grammatical and workable.”
  2. The clauses had two purposes, not one: (i) “as soon as possible” required early notice to enable a defence to be undertaken promptly; and (ii) “seven years” provided a longstop, or limitation period. As such, the indemnitors would be under no liability under Clause 5.9 unless notice of any matter or thing had been given to them “as soon as possible.”
  3. Notice had to be given at the point at which Towergate knew any matter or thing, or which any reasonable person would have known might give rise to a claim under the indemnity. An obvious indication of this was the notification given by Towergate to its insurers in March 2013, which had to be done when the insured was aware of information or facts or matters which were “likely to give rise to a claim.” This became clearer still as the year progressed.

In view of the above, Cockerill J held that Towergate’s argument that it was entitled to wait for over two years after it had made insurers aware of the situation was “manifestly unrealistic.” She held that this conclusion was only reinforced by the fact that Towergate was unable to point to what new “material and useful information” had been obtained in July 2015 to prompt notification at that stage.

Practical points

This is a remarkable case because Towergate would have assumed that by serving the notice within the longstop deadline of seven years that a compliant notice had been served. This is particularly so, where the words “as soon as possible” are plainly very subjective and fact-sensitive.

This case therefore serves as both a timely warning and reminder for parties to:

  1. Ensure notice clauses are drafted very carefully and clearly to ensure the true commercial purpose is reflected in the agreement. The courts have shown they will favour a narrow and purely linguistic interpretation of a clause where possible.
  2. Ensure very careful attention is paid to the relevant notice requirements. It will not be sufficient for parties to simply rely on a longstop limitation date where a clause contains a dual condition precedent.
  3. Seek early legal advice as soon as they become aware of a potential claim to determine whether and when any notifications must be sent to ensure compliance.

Please contact Sohail Ali if you would require any further information in relation to this case.

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