Breach of Warranty Claims

How to deal with a Warranty Notice

Senior Lawyer Peter Kaye, emphasizes the critical importance of precise drafting in business sales agreement warranty clauses to avoid pitfalls and ensure effective enforcement.

Anyone dealing in the arena of buying and selling a business will be aware of the importance of Warranty clauses in the sales agreement. In this article, Senior Litigation Lawyer, Peter Kaye, explains how trying to enforce a warranty clause can prove to be problematical from the outset and the reasons why great care needs to be taken to ensure you get it right.

Depending on whether you are a buyer or seller there are certain aspects which need to be carefully considered when agreeing to warranty clauses in the sales agreement and the knock-on effect when trying to enforce the terms.

There is no doubt that from the seller’s perspective you may want to make the possibility of being bound by any warranty terms as practically difficult as one can, whereas from the buyers’ perspective you want to ensure that these clauses can be easily and effectively enforced.

So what should you look out for and what are the common pitfalls ?

There are usually 4 key elements where either side can be caught out if a proper understanding of the legal issues surrounding the service of a warranty Notice are not known in detail.

1. Timing—usually the timing to bring a warranty claim is linked to the date of completion of the Contract. The most simple clause would be to say that a claim should be notified within one of two years of completion and perhaps  proceedings issued within 6 months thereafter. However, what if the clause says wording like “……. Unless Notice has been given as soon as possible (“asap”)….. but on or before the 2^nd anniversary of the date of the agreement”. Does this mean that  you can simply wait for up to the 2^nd anniversary? How does the reference to “ as soon as possible(asap) ” affect this? One argument may be that the claim must be made before the 2^nd anniversary and “asap” is irrelevant? In other words, it was just a single condition that applied. The other argument is that it is a “dual” condition and that “asap” meant that once the party became aware of the alleged breaches then the Notice should be served.

The likely outcome is that there is a dual condition. Usually, the Courts require strict compliance of the term and, therefore, clauses of this nature should be carefully drafted to avoid any form of ambiguity.

If there is any apparent ambiguity in relation to a clause, it would be construed by the courts against the party seeking to rely on that clause or condition. The courts, however, would be looking to find commercial common sense in relation to the interpretation of any clause.

The more clearly and accurately a clause is drafted should enable that clause to be applied and accepted by a court when a dispute arises. The key takeaway from this is that one should not assume the trigger date is obvious because the consequences of getting it wrong can be critical to the outcome of the claim one way or another.

2. Knowledge- it is usually the case that a warranty clause is linked to a definite default deadline date i.e. 2 years from the date of completion of the agreement.

But what if the trigger date is to be based on one’s “knowledge” of the alleged breach? For example, to give Notice “as soon as reasonably practicable and in any event within x days after becoming aware of the matter”?

How is “as soon as reasonably practicable” defined?

The reference to the interpretation of “aware” can create difficulties. What is the legal interpretation of the extent of the “awareness”? is it just simple awareness   that there may be a claim in due course or knowledge of a proper basis for a claim? These are points that have to be carefully considered in the light of the claim that could arise on a case-by-case basis.

3. Content—let’s say a Warranty clause states that the wording  of the Notice must specify “…… in reasonable detail the legal and factual basis of the claim and the evidence on which the party relies…..”. This clause or clauses of a similar nature seek to require the party looking to bring a claim to set out the detail of the claim in sufficient detail. So, what is “reasonable detail”? How much depth does one have to go into to comply with the relevant clause? What must be set out? Do you need to specifically refer to the warranties themselves? Is a vague or broad reference to the nature and value of the potential claim sufficient? The rule of thumb should be that the content of the Notice should enable the other or opposing party  to determine whether there is or there may be  liability and where possible the anticipated value of the claim which it may be facing. It does not however need to contain so much detail as one would expect to find in a fully prepared court “pleading”.
4. Manner of delivery-—this refers to how the Notice is in fact delivered to the other party. Ie should it be in writing? Signed? Sent to what address and in what format? Once delivered how such “delivery”can be evidenced . All these points can create problems if not properly dealt with and could make the difference to a claim being validly notified or not.

All of the points highlighted above have been the subject of litigation and tested before the courts.

Therefore , whichever side of the fence you are on the main “takeaways “ from this article  is that the service of a Warranty Notice can be fraught with risk if not properly dealt with and all the more reason why all the above points must be considered  properly and in detail by your lawyers at the time of sending  out a Warranty Notice or where you have received one from your opponent

It is important that the content of your Notice complies fully with the requirements of the documented  Agreement, refers to the relevant warranties , gives enough detail of the claim  so that the other party would understand the nature of the potential claim against it , to ensure that timeframes are carefully adhered to and finally that it is properly delivered.

You should avoid at all costs, leaving the service of  the Notice to the last minute  because dealing with any errors that may arise  could be very costly because the risk is the courts may interpret any failures to adhere to the terms of the Agreement very strictly against you.

Our commercial litigation team can assist in steering you down the right path whichever side of the fence you sit on.