Notice clauses are usually found at the end of commercial contracts and so can often be overlooked. We blogged back in September on why you should check this clause before serving a notice on your supplier or customer, after the Scottish Court of Session decided that a notice hadn’t been validly served in Hoe International Limited v Martha Goodnow Andersen & Another. This decision has now been overturned on appeal but compliance with notice clauses remains important.
Hoe International Limited (the Buyer) purchased a company from Martha Goodnow Andersen and Sir James Aykroyd (the Sellers).
The company subsequently received notice of a claim against it by a third party, which the Buyer contended was a breach of warranties given by the Sellers.
According to the share purchase agreement between the Buyer and the Sellers, the Buyer was required to give notice to the Sellers of any such claims before it could raise a breach of warranty action against the Sellers. The notice clause specified that the notice had to be sent: 1) by personal delivery, pre-paid first class post or recorded delivery; 2) marked for the attention of a specific person; and 3) to a specific address.
The Buyer’s agents subsequently served a notice on the Sellers’ agents by DX (legal courier) and email, enclosing a copy of the letter of claim received from the third party. The third party’s claim was subsequently settled and the Buyer raised an action against the Sellers in the Court of Session for breach of warranty.
The Sellers argued that the breach of warranty claim should not succeed because the notice was invalid. Although it was received by their solicitors, their position was that 1) it did not contain sufficient information and 2) it was not sent in accordance with the notice clause.
Did the notice contain sufficient information?
Last year Lord Woolman found that the notice did contain sufficient information as it provided all the details known to the Buyer at the point the third party’s claim was received. The Inner House, the appeal court, agreed with that.
Was the notice validly served?
Lord Woolman had found that the notice clause specified exactly what constituted a valid notice, and that the parties did not intend to allow deviation from that. As the notice had been sent by DX and had not been marked for the attention of the person specified in the notice clause, it was invalid.
However, the Inner House focused on the purpose of the notice. It found that the more drastic the consequences of a notice, the greater the need for strict compliance with the notice clause. For example, a termination notice was a drastic notice because it brought about a fundamental alteration in the parties’ legal relationship. Here the notice was informative in nature, and so fell at the less drastic end of the scale.
Crucially, the Sellers had not been prejudiced as a result of the alleged non-compliance with the notice clause. As the notice had actually been received by their solicitors, the means of delivery were of no real significance and it didn’t matter that it wasn’t sent to the identified person.
In any event, the court found that DX was a form of personal delivery and therefore the notice had been sent in compliance with that part of the notice clause.
As a result, it decided that the notice had been validly served and the Buyer was entitled to proceed with the warranty claim against the Sellers.
While the Inner House took a pragmatic approach in this case, this decision turned on the fact that the notice was informative in nature and that the Sellers had not been prejudiced by the failure to comply with the notice clause, which may not always be the case. If a notice is not served in strict compliance with the contractual notice provisions, this judgement leaves open the possibility of a challenge by a recipient depending on the purpose of the notice.
Accordingly, our advice remains that you should carefully check your contract and seek legal advice before serving any notices to ensure that the notice itself, and the service of it, complies with the notice clause. This is especially important when the notice is one with “drastic” consequences such as a termination notice under a commercial contract.
Finally, you should ensure that your terms and conditions and new contracts provide for the service of notices by commonly-used and up-to-date methods. The same should also apply when drafting and negotiating transactional documents such as share purchase agreements, investment agreements and the like. DX is already frequently used in the legal profession in Scotland to transmit documents between one firm of solicitors and another, but it will be interesting to see if it becomes a more common method of serving notices going forward.
On May 1, 2017