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Notification Clauses: The Devil is in the Detail

Requiring a party to a contract to provide notice upon a certain event occurring is ubiquitous in modern-day contract drafting. Relevant to the era of COVID-19, many force majeure clauses require notice to be given within a certain period upon a “force majeure event” occurring. While this may seem like a sensible practical requirement at the time of drafting, imprecise wording and a lack of awareness around the actual outcome of the clause can result in serious adverse consequences for parties. To this end, the case of Towergate Financial (Group) Ltd & Ors v Hopkinson & Ors [2020] EWHC 984 (Comm) is a cautionary tale of how notification requirements can cause grief when drafted (and handled) without care.

Background

One of the claimants purchased M2 Holdings Limited (M2 Holdings) from some of the defendants for £9.9 million pursuant to a share sale agreement executed on 5 August 2008. M2 Holdings carried on a business of providing financial advice to retail customers. After purchasing M2 Holdings, the claimants discovered that M2 Holdings had been involved in mis-selling financial products, with the quantum of claims potentially around £50 million.

Usefully for the claimants, the share sale agreement contained indemnity provisions in their favour for up to £9.9 million. These indemnity provisions stipulated that the defendants had to indemnify the claimants against all loss suffered by the claimants, as a result of mis-selling claims being brought against M2 Holdings, that accrued before M2 Holdings was sold to the claimants.

Unhelpfully for the claimants, the indemnity provisions were linked to a very poorly drafted clause that specified that notice must be given by the claimants to the defendants before the indemnity provisions were activated. This clause had already been the subject of litigation[1] due to its poor drafting. The Court of Appeal determined that the clause read as follows:

"nor shall the Warrantors [determined to mean the Defendants] have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing:

...

is given to all the Warrantors as soon as possible and in any event prior to:

in relation to a claim under the indemnity in clause 5.9 on or before the seventh anniversary of the date of this Agreement."

Issue 1 – when was notice required?

The key question that arose from this clause was whether the claimants were required to give notice “as soon as possible” in addition to the requirement that notice be given on or before the seventh anniversary of the date of the share sale agreement? Put another way, did the clause provide:

  1. dual condition precedents requiring notice to be given (1) as soon as possible; or (2) on or before 7 years? or
  2. a single condition precedent requiring notice to be given on or before 7 years?

The court took a purely linguistic approach to determining the meaning of the clause and determined that dual condition precedents existed, both of which served different purposes. These purposes were:

  1. “As soon as possible” allowed the defendants to have early notice of potential claims under the indemnity clause. This was significant, as the share sale agreement contained a clause that allowed the defendants to require the claimants to take steps to defend claims that, if successful, would give rise to the defendants incurring liability under the indemnity provisions. Notably, this included allowing the defendants to receive all relevant information relating to such claims, and the power to require the claimants to delegate control of proceedings to the defendants. Obviously, the usefulness of such provision was directly related to the defendants receiving early notice.
  2. “On or before seven years from the date of the agreement” existed to provide the defendants the benefit of a limitation period for the indemnity provisions.

Issue 2 – was notice given “as soon as possible”?

The court then determined whether notice had been given “as soon as possible”. The court concluded that “as soon as possible” meant the point at which the claimants knew any matter or thing which they knew, or any reasonable person would have known, might give rise to a claim under the indemnity provisions.

In determining this issue, the court noted, amongst other things, that the claimants had:

  1. notified their insurer of the potential claims against M2 Holdings on 5 March 2013
  2. a solid understanding of the potential claims against M2 Holdings from at least February 2014
  3. only given notice to the defendants on 29 July 2015, well over a year after they knew a claim may be brought by them under the indemnity provisions.

Given these considerations, the court determined that the notice given by the claimants on 29 July 2015 was not given “as soon as possible”, meaning the claimants could not rely on the indemnity provisions against the defendants.

Practical tips

Some practical tips when dealing with notification clauses:

  1. draft requirements to give notice carefully. As demonstrated in Towergate, imprecise phrases such as “as soon as possible” can cause significant problems
  2. ensure requirements to give notice are clearly identified – preferably under a separate and headed clause
  3. when reviewing contracts, ensure the whole contract is reviewed to make certain there are no requirements to give notice hidden away
  4. where a contract does contain a notification requirement and you are unsure of whether notice is required, or when notice is required, seek legal advice as soon as possible.

Footnotes

[1]Towergate Financial (Group) Ltd & Ors v Clark & Ors [2017] EWHC 2330 (Comm) and Hopkinson & Ors v Towergate Financial (Group) Ltd & Ors [2018] EWCA Civ 2744. 

Related Lawyers: Hugh Tait, John McElroy
Related Practice Areas: Commercial Disputes

Related Lawyers