'Notice of claim' clauses – when can a claimant change its mind?

'Notice of claim' clauses are a common feature in share purchase agreements and serve a useful purpose by excluding liability for claims not notified properly or within specified time limits.

While there may be less room for dispute in relation to compliance with deadlines, disagreements over compliance with a contract's form and content stipulations for notices of claim can still cause headaches. For example, has the buyer provided sufficient 'reasonable detail' of its claim, its anticipated losses and how those losses are calculated? In Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited¹, the Court of Appeal considered these points, including whether the buyer's notice was sufficient even when, months later, it sought to change the basis for how it calculated its losses.

Key takeaway

The High Court had strictly interpreted a notice of claim clause to hold that Drax was unable to rely on new calculations of its losses. The Court of Appeal allowed Drax's appeal stating that notice of claim clauses are essentially exclusion clauses, which reduce the ambit of either a contractual obligation or the remedy for breach. While commercial parties are entitled to allocate risk between them, clear wording is likely required before being able to read-in an intention to cut down the remedies available for breaches of important contractual obligations. If there is any ambiguity in an exclusion or notice of claim clause, it may have to be resolved by narrow construction.

The Court of Appeal confirmed that notice of claim clauses are intended to facilitate finality and certainty in commercial dealings. In the absence of a valid notice of claim by the contractual deadline, parties may draw a line under a transaction and move forward.

However, parties should not dismiss these clauses as boilerplate – instead, they should pay attention to the drafting to ensure that it reflects their intentions. Where a notice of claim clause is drafted in broad and general terms to require 'reasonable detail' of the 'nature of the claim' and amounts claimed, then it should be interpreted in light of its commercial purpose. Following Dodika Ltd v United Luck Group Holdings Ltd², the purpose is to allow the recipient of the notice to:

make the necessary inquiries into the factual circumstances;
gather and preserve relevant evidence; and
assess the merits of the claim.

Drax demonstrates a pragmatic approach to notice of claim clauses and emphasises that the Court is unwilling to interpret such clauses in a way that imposes obligations on intended claimants that serve "no commercial purpose and merely introduces a trap to defeat what may be a valid claim."³

Background

At the heart of this dispute was a "long and complex" Share Purchase Agreement ("SPA") dated 16 October 2018 between Drax Smart Generation HoldCo Limited ("Drax" or the "Buyer") and Scottish Power Retail Holdings Limited ("Scottish Power", or the "Seller"). Under the SPA, Drax was to acquire a Scottish Power subsidiary (the "Company") and its assets for a purchase price of £702 million. This included a site known as ‘Damhead Creek II’, on which Drax intended to locate a new power station.

For Drax, one important asset was an option agreement that, if exercised, would allow the Company to lay power cables over adjacent land ("Kingsnorth"), owned by a third party. Such cabling would be essential for connecting the intended Damhead Creek II power station to the national grid.

Under the SPA, Scottish Power warranted that the Company would have the benefit of the option agreement, and agreed to procure that the benefit of the option agreement would be assigned to the Company.

Around six months after the SPA completion date, Drax became aware that the Company did not in fact have the benefit of the option agreement. This left Drax with two costly alternatives for connecting the Damhead Creek II power station to the national grid: to negotiate a new easement with the current owner of Kingsnorth; or to apply for a compulsory purchase order (a "CPO").

The notice of claim

The SPA excluded Scottish Power's liability for certain claims, unless Drax first gave proper notice, within specified timeframes, "stating in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer's calculation of the Loss thereby alleged to be suffered)" (the "Notice of Claim Clause"). The Notice of Claim Clause was subject to two deeds of variation, which introduced a new 'Damhead Creek II Option Agreement Claim', then extended the time period for notice of such a claim from 24 to 30 months from the SPA's completion date. This gave Drax until 30 June 2021 to give proper notice of its claims arising out of the (lack of an) option agreement.

On 30 June 2021, being the last possible date for notice of a Damhead Creek II Option Agreement Claim, Drax served its notice of claim on Scottish Power (the "Notice of Claim").

Drax had sought to negotiate with the current owner of Kingsnorth and calculated that the potential losses would be:

£8.1 million, being the costs of agreeing the new easement; or
£6.7 million, being the estimated costs of a CPO.

Proceedings

Drax pleaded its losses as it had done in the Notice of Claim. However, the pleaded losses would be the Company's losses, not those of Drax. Scottish Power denied liability and applied for summary judgment, alleging the Notice of Claim was defective and that Drax was out of time to serve a fresh notice of claim. In response, Drax applied to amend its Particulars of Claim to re-plead that Drax alone suffered loss, being the diminution in value of the Company's shares without the benefit of the option agreement, instead of the loss calculations it had included in the Notice of Claim.

The High Court

Simon Birt KC, sitting as Deputy High Court Judge, held that the difference in value of the Company's shares was both part of the "nature of the claim" and part of the explanation necessary to provide the requisite "reasonable detail" of the losses claimed. As the 'new' calculation of loss was not that which was set out in the Notice of Claim, Drax had failed to give proper, timely notice of a Damhead Creek II Option Agreement Claim. Therefore, the High Court concluded that there was no real prospect of success in a Damhead Creek II Option Agreement Claim.

The Court of Appeal

The Court of Appeal took a different approach. While it agreed with the High Court that it was impossible to read the original Notice of Claim as advancing a claim based on the difference in value of the shares, it still held that this did not prevent Drax from relying on the original Notice of Claim, because:

The 'nature of the claim' which Drax sought to advance was straightforward. The Company did not have the benefit of an option agreement that, under the terms for SPA, it should have done. In the circumstances where the parties had been in correspondence on the topic for over a year, Males LJ considered that sufficient notice of a Damhead Creek II Option Agreement Claim required only a simple statement that Scottish Power had failed to ensure the Company had the benefit of the option agreement. By the time it received the Notice of Claim, Scottish Power already had all the information it needed to understand the nature of the claim. The Court of Appeal considered the language of the Notice of Claim Clause and its commercial purpose and saw no requirement for Drax to also set out that it would be claiming damages for the difference in value of the Company.
As to the 'amount claimed', the Notice of Claim Clause required an amount, and "the Buyer's calculation" of loss. The Court of Appeal considered that Drax's genuine, good faith calculation as provided in the Notice of Claim (on two alternative bases, even if not the basis of calculation ultimately put forward in the Amended Particulars) was sufficient.

For the above reasons the Court of Appeal allowed Drax's appeal.

Practical tips

Lawyers take note – whether in the transactional or contentious sphere, the judgment gives plenty of food for thought as concerns notice of claim clauses:

Clear and unambiguous language – as with other provisions in commercial contracts, parties are free to agree all manner of requirements for a notice of claim. In the absence of express wording, the Court of Appeal has demonstrated an unwillingness to 'read-in' additional requirements to a notice of claim clause, in particular where that would serve no commercial purpose and defeat an unwitting claimant's otherwise valid claim. Therefore, parties should take care to ensure that any and all specific requirements for any 'notice of claim' are drafted clearly and umambiguously.
Reasonable detail of the nature of the claim – following the test in Dodika, the Courts will apply an objective test – what is reasonable will depend on the wording of the notice of claim clause, its commercial purpose and what businesspeople in the parties' positions would consider reasonable. While the commercial purpose of including a notice of claim clause in an SPA is to time-bar certain claims and allow the parties some finality to be able to close their books on a transaction, this is suspended once a notice of claim is served and the Dodika principles come into play.
Drafting and serving a notice of claim – the claimant must follow all necessary steps required in the drafting and service of a notice of claim. In addition, the claimant must ensure that a fair reading of the notice as a whole provides the defendant with sufficient information to understand the claim, seek advice, request further information (as needed) and assess its liability.