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Interpretation of a contractual limitation period in a share purchase agreement

In The Hut Group Ltd v Nobahar-Cookson and another [2016] EWCA Civ 128, the defendants (the Sellers) sold a sports nutrition business to the claimant (Buyer) pursuant to a share purchase agreement (SPA). The SPA provided that the Sellers would not be liable for any warranty claim unless the Buyer served notice of the claim on the Sellers “as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter." The Buyer subsequently brought a warranty claim on the basis that the target company’s management accounts did not give a true and fair view of the target’s financial position. The Sellers argued that the Buyer’s claim was time-barred, as the Buyer had failed to serve notice within the specified time period. The Sellers submitted that “becoming aware of the matter” should be interpreted as becoming aware of the facts giving rise to the claim, as opposed to becoming aware that those facts may give rise to a claim. If the Sellers interpretation was accepted, then the Buyer’s claim would be time-barred, as the Buyer had not notified the Sellers of the claim within 20 Business Days of becoming aware of the relevant facts.

The High Court held that the Buyer’s claim was not time barred, preferring the Buyer’s interpretation that “becoming aware of the matter” meant becoming aware that it had a claim for breach of warranty. On the facts, the Buyer had not been aware of the claim until it had received advice from its forensic accountants, with the consequence that the Buyer had served notice of the claim on time. However, the High Court judge did not apply the contra proferentem rule (a rule in contract law which states that any clause considered to be ambiguous should be interpreted against the interests of the party that requested that the clause be included) in reaching its decision on the basis that both parties had provided warranties in the SPA. The Sellers appealed.

The Court of Appeal had to decide whether “becoming aware of the matter” should be interpreted as becoming aware:

  1. of the facts giving rise to the claim;
  2. that there might be a claim under the warranties; or
  3. of the claim itself (in other words, that there was a proper basis for the claim).

If the Court adopted interpretation 1 or 2, then it was common ground that the Sellers appeal should be allowed.

The Court unanimously dismissed the Sellers’ appeal. The Court noted that it was common ground that contractual limitation periods for the notification of bringing claims were a form of exclusion clause. The Court also disagreed with the High Court that the clause should not be construed contra proferentem just because both sides had given warranties. Rather, in the leading judgment, Lord Justice Briggs said that he had based his decision on the principle that any ambiguity in an exclusion clause should be resolved by adopting the narrowest possible interpretation, if linguistic, contextual and purposive analysis did not disclose an answer to the question with sufficient clarity. As interpretation 3 was the narrowest of the three, it was to be preferred. The Court viewed interpretation 2, that the obligation to notify arose when a claim was merely suspected, as commercially absurd. Interpretation 1 (that the obligation to notify arose when the Buyer became aware of the facts giving rise to the claim), which was contended for by the Sellers, would make such a large inroad into the Buyer’s ability to make a claim, for no sensible purpose, that the parties would had to have used clearer words to achieve that result. The Court also noted that the purpose of the contractual notice period was to prevent the Buyer from keeping claims up its sleeve, and that such purpose was better served by an interpretation which focused on awareness of the claim itself, rather than awareness of the underlying facts.

In this decision, the Court of Appeal chose an inherently sensible interpretation of an ambiguously drafted provision. The case is a reminder that any clause which seeks to limit the period in which a buyer may bring a warranty claim will be viewed as an exclusion clause. On this basis, to avoid uncertainty, any such clauses should be given additional attention by the parties and drafted as clearly as possible. If the commercial agreement is that the buyer’s ability to bring a claim should be significantly restricted in any way, then the parties should ensure that they use very clear words to that effect. 

For further information, please contact Adam Kuan.

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