In Drax Smart Generation Holdco Limited v. Scottish Power Retail Holdings Limited [2024] EWCA Civ 477, the Court of Appeal ("CA") reversed the High Court's decision and adopted a pragmatic approach in the construction of a notice of claim clause. As claims can be summarily dismissed by the courts for failure to comply with the requirements of a notification clause, the CA's focus on the underlying commercial considerations of such clauses is a significant departure from previous decisions.

Background

The claimant ("Drax") purchased shares in Scottish Power Generation Limited ("Company") from the defendant ("Scottish Power") under a Share Purchase Agreement ("SPA") for a total of £702 million. One of the Company's assets was a potential site for a new gas power station. In order for the power station to be connected to the national electricity grid, cables would have to be laid over adjacent land owned by a third party. Arrangements were made to obtain an easement so that the necessary cables could be laid. However, various issues in relation to the deed of covenant meant that the option to acquire an easement over the adjacent land was ultimately not transferred to Drax. This was discovered only after the SPA had been concluded.

Notice of Claim Clause

After discovering that the Company did not have the benefit of an option to acquire an easement over the adjacent land, Drax sent Scottish Power a notice of claim ("Notice of Claim"). While the Notice of Claim set out its claims for breaches of the SPA and breaches of warranty (amongst other things), it did not identify losses directly suffered by Drax. Instead, the Notice of Claim stated that "the loss suffered is yet to crystallise" [1].

Scottish Power then applied for summary judgment of Drax's claims on the basis that the Notice of Claim did not provide sufficient details in accordance with the requirements contained in paragraph 2.1 of Schedule 4 of the SPA, set out below.

“In the case of the types of claim detailed below, the Seller shall not be liable for a claim unless the Buyer has notified the Seller of the claim, stating in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer's calculation of the Loss thereby alleged to have been suffered): […]” [2] (emphasis added).

In an effort to avoid summary judgment, Drax applied to amend its Particulars of Claim ("Particulars") to plead that the losses were actually suffered by Drax (rather than the Company) and that the alleged loss was the difference between the warranted value of the Company and the true value of the Company (sans the benefit of the option to acquire an easement).

High Court's decision

The applications for amendment by Drax and summary judgment by Scottish Power were dealt with together. The High Court dismissed Drax's application to amend its claims and granted summary judgment in respect of the breach of warranty claim.

The High Court reasoned that if Drax wanted to claim for its loss being the difference in value of shares, this should have been set out in the Notice of Claim [3].  By listing only losses suffered by the Company (i.e., the cost of acquiring an easement from a third party), a reasonable recipient of the Notice of Claim would not have understood the claim as a loss suffered by Drax. The judge's view was that the difference in value of shares was both part of the nature of claim and essential to explain the amount claimed. The failure to identify this loss and the amount claimed, as well as a lack of explanation on how this loss was suffered, compounded the problems with the Notice of Claim [4].  Accordingly, the High Court found that the Notice of Claim did not comply with the contractual requirements in the SPA.

Court of Appeal's decision

The CA overruled the High Court decision and allowed Drax's appeal to amend its Particulars.

The Notice of Claim was found to have satisfied the requirements of the SPA in relation to both "nature of the claim" as well as "amount claimed". The "nature of the claim" sought by Drax was straightforward – i.e., a claim under the SPA that the Company ought to have had the benefit of the option agreement but did not. The CA did not find it necessary to identify the terms of the SPA which were breached nor details such as the fact that damages claimed would be based on the difference in value of shares, which Drax had sought to introduce through its draft amendments. This was because imposing such a requirement "serves no commercial purpose and merely introduces a trap to defeat what may be a valid claim" [5].

The "amount claimed" in the Notice of Claim was also sufficient, despite being formulated differently in the draft amended Particulars. The CA held that the language of the clause required a "genuine" calculation or estimate that was "put forward in good faith" [6],  based on the claim formulated in the Notice of Claim. Importantly the CA highlighted that Drax's calculation in the Notice of Claim was not set in stone and Drax should not be held to it if subsequent refinements arise. Ultimately, the Notice of Claim served its purpose of preventing the claim from being barred. This is aligned with the CA's view that the "initial purpose of such clauses is to provide a contractual limitation period" [7].

The CA noted that the sufficiency of a notice of claim ultimately depends primarily on the language of the clause, especially given that commercial parties are free to impose any requirements. Nonetheless, requirements must be "interpreted in light of the commercial purposes of such clauses" and "not become a technical minefield to be navigated, divorced from the underlying merits of a buyer’s claim". With the CA's categorisation of such clauses as "exclusion clauses", the courts will adopt a pragmatic approach to resolve any ambiguity with narrow construction and purposive, common-sense analysis. Parties' intentions in allocation of risk are also important in discerning the commercial purpose of such clauses. In this case, the CA found that Scottish Power had all the information it needed from the Notice of Claim to assess its potential liability.  

Key takeaways

The CA's reversal of the High Court's decision reflects the different approaches to construing such clauses. In some cases, courts may recognise that it is not always necessary or possible to provide full details of the extent and nature of damages suffered in a notice of claim. While the CA's pragmatic approach in this case is a positive step towards recognising the commercial purpose of such clauses, the effect of strict language may still invalidate notices and bar claims. Therefore, parties must carefully consider the language when drafting and negotiating such clauses. It is prudent to avoid ambiguous and broad language. This provides certainty, while striking a balance with the level of detail of claims and also ensuring the recipient has sufficient information to assess its liability.

Contributors to this article include Yvette Fong.