Interpretation of Warranty Clauses

Case

The English Court of Appeal interprets contractual limitation period for the making of warranty claims in a share purchase agreement (“SPA”) in Nobahar-Cookson & Ors v The Hut Group Ltd [2016] EWCA Civ 128.

Facts

This case concerns the sale and purchase of the entire issued share capital of a company. Both the Buyer and the Seller made multiple warranties to each other relating to the accounts, business, assets and affairs of the target company. The relevant warranty clause stipulates that: “The Sellers will not be liable for any Claim unless the Buyer serves 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 and the Seller subsequently both made warranty claims against each other, including a claim for breach of the Seller’s warranties on management accounts. The issue was whether the Buyer’s notice for breach of warranty claim was defective rendering the Buyer’s claim out of time. The Seller argued that the correct construction of the notice limitation was that the period for notifying claims began to run when the Buyer became aware of the factual grounds for a breach of warranty, not when it became aware that those grounds might constitute an actionable claim.

At the High Court, the Trial Judge refused to apply the contra proferentem rule and rejected the Seller’s argument that the Claim was time barred on the basis that both sides had given warranties to each other, subject in each case to an exclusion clause with similar time limit.

The contra proferentem rule is a rule designed to resolve ambiguities in a contract such that words or clauses will be construed against the person seeking to rely on them.

Issues on Appeal

The Seller appealed the Trial Judge’s decision who ruled that the Buyer’s notice was not outside the contractual time limit in the SPA. The Court of Appeal was asked to consider the meaning of “aware of the matter” and which of the following scenarios was applicable to this case:

1. aware of the facts giving rise to the Claim (even if the party is unaware that those facts did give rise to a claim);
2. aware that there might be a claim under the warranties; or
3. aware of the Claim, in the sense of an awareness that there was a proper basis for the Claim.

Decision of the English Court of Appeal

The English Court of Appeal unanimously dismissed the appeal but provided a different justification for doing so. The Court of Appeal considered that the Trial Judge was wrong in concluding that the contra proferentem rule did not apply. In considering which of the three interpretations should apply, the Court took the view that ambiguity may have to be resolved by adopting the narrower construction, if linguistic, contextual and purposive analysis do not disclose an answer to the question with sufficient clarity. Accordingly, irrespective of the fact that the exclusion clause applies to both parties, the narrowest of available interpretations should be adopted, the Court of Appeal decided in favour of construction 3.

Comment

Although decisions of the English Courts are no longer binding on the Courts of Hong Kong, English authorities are still regarded as highly persuasive. It is therefore expected that the Hong Kong Courts may follow the English Court of Appeal’s approach to the interpretation of limitation clauses.

Care should be taken when drafting limitation clauses in a share sale and purchase agreement which regulate how and when notice of warranty claims must be given. Such limitation should be clearly spelt out to avoid potential litigation.