Know your limits

Insights - 30/06/2020

It is very common to see limitation clauses, akin to claims “conditions”, being included in commercial contracts which seek to limit one party from suing the other for breach of contract if these conditions are not met.  These conditions are commonly included in “cut off dates” which often incorporate a requirement to notify the other contracting party of the claim within an agreed period of time of becoming aware of it.  Non-adherence to these conditions  can lead to the claim being barred.

Particular care must be taken in the drafting of these types of limitation clauses.  As recent case law (Towergate Financial (Group) Ltd v Hopkinson [2020] EWHC 984 (Comm) (24 April 2020),)  has shown, courts will take heed of these “conditions” and will interpret these literally, with the result being that a claim can be defeated if it can be shown that the terms of the limitation clause has not been strictly complied with.

The facts of the case in point are that the Buyer bought shares from the Seller in August 2008, “the Completion Date”,  in a company that specialised in giving financial advice to retail customers (“the Company”),  subject to the terms of a negotiated share sale agreement ( “the Agreement”)

Within the Agreement, the Seller had agreed to indemnify the Buyer for any losses suffered by the Company or the Buyer for any professional negligence claims arising due to mis-selling that had occurred prior to the Completion Date.

The clause limiting the terms of the indemnity “Limitation Clause”  had a number of limitations drafted in the Seller’s favour and these specified  that the Seller would have no liability for an indemnity claim unless

  • notice in writing of the relevant matter…. is given to the defendant.. as soon as possible and in any event prior to….
  • “ …. on or before the seventh anniversary of the date of this agreement

In July 201 a Financial Conduct Authority review concluded that advice given by the Company prior to the Completion Date amounted to mis-selling and substantial liabilities were incurred. On the face of it this meant that the Buyer had a potential claim for breach of indemnity against the Seller under the Agreement.

The Buyer notified their insurers but failed to notify the Seller of the potential breach of the indemnity until July 2015, one year later after the potential liability was bought to its attention,  and only one month prior to the expiry of the 7 year cut-off date in the limitation clause under the Agreement.

Upon eventual notification of the potential breach of indemnity claim, the Seller disputed its liability, arguing that the Buyer had not been compliant with the first limb of the Limitation Clause, in that they had failed to notify “as soon as possible” and had instead waited 12 months upon realisation of the potential breach before notifying them.  The Seller therefore alleged that the Buyer now had no right to bring an indemnity claim.

The Buyer accepted that this was a pre-condition, but argued, that this had been overridden by the second limb in the Limitation Clause, i.e that the indemnity claim had to be made before the expiry of the 7 year period following the Completion Date (and that by notifying  6 years and 11 months following this date they had  complied with this aspect of the condition).

The High Court ruled against the Buyer and concluded that there was a dual condition precedent ie that a potential indemnity claim had to be notified as soon as possible and within 7 years of the Completion Date. The Limitation Clause was found to be clear, grammatical and workable. The Buyer had not adhered to both limbs and so their indemnity claim against the Seller was defeated.

The concept of “ as soon as possible” was held to have started to commence from July 2014 when the Financial Conduct Authority review identified issues with the mis-selling and it was at that point that the Buyer should have notified the Seller.

The conclusion to be drawn from this is that if acting for a party  seeking to rely upon such a clause, there must be no ambiguity in the drafting of any limitations which can be seen, and will be treated as a condition precedent, thereby defeating any valid claim that a one party  may have against the other.

If you would like advice or assistance on any of the issues raised in this blog please contact Louise Fegan. Louise is a Partner in our Corporate and Commercial team and can be contacted by email at [email protected] or by telephone 01737 854 504.

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Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.