Notice of claim clauses – interpreting broad and general terms such as “the nature of the claim” and “in reasonable detail”

Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477

The question

How much detail should be provided in a notice of claim to comply with a clause requiring provision of “the nature of the claim” and “in reasonable detail”?

The key takeaway

A party giving notice of a claim will not be required to provide commercially purposeless details of that claim unless those details are expressly required by the wording of the relevant notification clause. It is sufficient to provide the recipient with enough detail so that it can assess the claim and take any necessary preparatory steps.

The background

As set out in our previous Snapshot on the High Court decision, the dispute relates to the content and timing of Drax’s notice of claim for breach of warranty, an indemnity and other contractual breaches under a share purchase agreement (SPA) between it and Scottish Power.

Drax had purchased the shares in a company (the Company) which owned a potential location for an as yet unbuilt power station. In order for the power station to be built, the site needed to be connected to the national electricity grid, via cables that would run over a key piece of land. Rights under an option agreement, that gave Scottish Power the right to require the grant of an easement over the key land to run the cables, were improperly transferred. As a result, the Company was not entitled to exercise these rights under the option agreement.

Under the SPA, Scottish Power had warranted that the benefit of the option agreement would be assigned to the Company prior to completion and agreed to indemnify Drax for all losses suffered in relation to the option agreement as a result of Scottish Power failing to implement an internal reorganisation of its group fully and correctly before completion.

A notice of claim clause was included at paragraph 2.1 of Schedule 4 of the SPA stating that Scottish Power’s liability for certain claims necessitated a notification of 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)”.

Drax only discovered that the option had not been effectively assigned to the Company, and was of no effect, after the expiry of the option period. On the last day of the relevant time limit for Drax to provide notification of a claim, it served a notice of claim alleging breach of warranty, other contractual breaches and an indemnity claim. In terms of the nature and amount of loss suffered, Drax changed its case from that submitted in its notice of claim to its reformulated claims in the proceedings, and then sought to amend its particulars at a later date alleging that Drax, not the Company, had sustained loss in that the Company’s value (and therefore the shares acquired by Drax) were less than they would have been had Scottish Power complied with its contractual obligations.

In High Court summary judgment proceedings, the court dismissed Drax’s claim on the basis that the claim as notified did not state in reasonable detail the nature of the claim later brought in the amended particulars of claim. The court found that the fact the claim was based on the difference in value of the shares was both part of the nature of the claim and an essential part of the explanation necessary to provide “reasonable detail” of Drax’s calculation of the claim. Since it had not been stated in the notice, the notice did not comply with paragraph 2.1 of Schedule 4.

Drax appealed the decision.

The decision

In considering Drax’s appeal, the Court of Appeal drew out some general points on notice of claim clauses:

• their initial purpose is to provide a contractual limitation period. If no notice is given by the specified deadline, the parties can close their books on the transaction giving finality and certainty in commercial dealings
• whether a notice is sufficient to satisfy the requirements of any given clause depends primarily on the language of the clause. In interpreting the clause, the courts will use linguistic, contextual, purposive and common sense analysis to interpret the meaning of the clause
• commercial parties are free to impose whatever requirements and risk they wish. However, where they use broad and general terms such as “the nature of the claim” and “in reasonable detail”, those requirements should be interpreted in the light of the commercial purposes of such clauses and what businessmen in the position of the parties would treat as reasonable
• ·notice of claim clauses should not become a technical minefield to be navigated, divorced from the underlying merits of a buyer’s claim
• such clauses are essentially exclusion clauses that cut down or detract from the ambit of an important obligation in a contract, or a remedy such as (in the present case) an obligation to give effect to a contractual warranty by paying compensation for breach. As such, to resolve any ambiguity, they should be narrowly construed. Parties do not normally give up valuable rights without making it clear that they intend to do so.

On the facts, the critical issue for the Court of Appeal was whether it was necessary for the notice of claim to state that the claim was founded on a diminution of value in the shares purchased by Drax in order for it to be effective.

The Court of Appeal found the “nature of the claim” which Drax sought to advance was straightforward. It was not necessary for the notice to set out that the claim was based on decreased share value. Instead, the court held that even a simple statement that Scottish Power had failed in its obligation to ensure that the Company had the benefit of the option would have told Scottish Power all that it needed to know.

A requirement on Drax to explain that the claim was based on decreased share value was of no commercial purpose. The requirement to state “the amount claimed” only imposed an obligation to provide a good faith calculation of the loss alleged. The notice of claim provided did this.

The court took a common-sense view that Scottish Power had all of the information it needed in order to assess its liability and to consider both the nature of the claim and its value. It could have sought clarification, it could have taken legal advice (and probably did), and it had been engaged in lengthy correspondence with Drax on the issues in dispute.

The Court of Appeal allowed Drax’s appeal – the notice of claim did satisfy the notice of claim clause.

Why is this important?

Whilst such decisions will always depend on the interpretation of the notice clause in issue, the case appears to focus on the need to notify the existence of a claim and the notifying party’s actual good faith calculation of its loss – rather than the legal basis or detail of the allegations. I Similarly, in Decision Inc Holdings Proprietary Ltd v Garbett, [2023] EWHC 588 (Ch), handed down just over a year ago, the Court of Appeal decided that on a proper construction of the clause in question (see below), in order for the claimants to pursue a claim for breach of warranty, the notice had to include the “amount claimed” in respect of that breach. As it did not, it meant that the notice was defective.

Decision Inc Holdings Proprietary Ltd v Garbett clause:

“The Sellers shall not be liable for a Claim unless notice in writing summarising the nature of the Claim (in so far as it is known to the Buyer) and, as far as is reasonably practicable, the amount claimed, has been given by or on behalf of the Buyer to the Sellers”.

Any practical tips?

Ensure the notification clause is drafted with the factual matrix of the agreement and the potential claims in mind.

The clause should be drafted to reflect practicalities and be workable – as to the parties to be notified, the manner of notification and the detail of the notice(s). If there is particular information that is required (eg to understand or respond to the claim), specify that it must be provided. Bear in mind that general terms such as “nature of the claim” and “in reasonable detail” are uncertain in scope, but are likely to be interpreted narrowly.

When serving notices, try to avoid serving notices on, or immediately before any deadline, to mitigate the risk that the notice is defective (eg through invalid service or insufficient detail). At a minimum ensure the notice references the claim(s) and an estimate of the losses.

Summer 2024