Outside of the insurance context, the case of Drax v Scottish Power highlights the importance of paying close attention to time limits, notification provisions and other procedural obligations in the SPA and other contractual documents.

Facts

The dispute arose in relation to Drax’s purchase of a power company from Scottish Power. One of the company’s assets was a site in Kent upon which a new power station was intended to be built, but in order to do so the new station would need to be connected to the national grid. The SPA contained a warranty to the effect that the company was sold with the benefit of an option to acquire an easement over adjoining land for that purpose, but it later transpired that the company no longer held the option when the SPA was executed.

Drax claimed against Scottish Power both for breach of warranty and for an indemnity under alternative provisions in the SPA. Without addressing the substance of the claim, Scottish Power applied for summary judgment on the basis that the notice provisions in the SPA had not been complied with and the claims were effectively time-barred. At first instance, Scottish Power was successful in relation to the warranty claim, but the court allowed the indemnity claim to proceed. Both sides appealed.

Decision

The Court of Appeal came down firmly on the side of Drax, reversing the lower court’s decision in relation to the warranty claim and upholding it in relation to the indemnity claim. Therefore, both claims were permitted to proceed (although no consideration was given to the substantive merits of Drax’s claim). The decision turned primarily on whether the notice given by Drax of its claim met the requirement in the SPA to set out “in reasonable detail the nature of the claim and the amount claimed”.

Scottish Power alleged that Drax’s notice failed on both counts because it set out a completely different basis on which Drax had suffered loss (by way of liability to a third party) from that now claimed in the proceedings (the difference between the warranted value of shares and the actual value). At first instance, the court agreed with Scottish Power.

Adopting a more purposive approach than the court at first instance, Lord Justice Males declined to allow the claim to be struck out for what he clearly saw as a merely technical breach of a contractual notice provision. Noting that the commercial purpose of such clauses is to provide a contractual limitation period, and given this effectively rendered the provision an exclusion clause, it was to be interpreted narrowly. Approving various earlier authorities, Lord Justice Males noted: “The parties are not lightly to be taken to have intended to cut down the remedies which the law provides for beach of important contractual obligations without using clear words having that effect.”

He continued: “It is important that Notice of Claim clauses should not become a technical minefield to be navigated, divorced from the underlying merits of a buyer’s claim.” The judge also said “courts should not interpret such clauses as imposing requirements which serve no real commercial purpose unless compelled to do so by the language of the clause”.

Against that background, Lord Justice Males found that Drax’s notice gave Scottish Power all it needed to assess its liability. He said that the estimate of loss given by Drax in the notice was a genuine estimate at the time, notwithstanding that Drax had later pivoted to an entirely different basis for its claim. He therefore found that the notice satisfied the requirements of the notice of claim clause. Drax’s appeal was allowed, and the claim was permitted to proceed

Takeaways

Lord Justice Males’ common-sense approach will provide comfort to claimants attempting to comply with notification provisions in contracts in circumstances where they may not yet have fully formed views on the exact scope of the claim to be pursued. The terms of such clauses should still be observed as far as possible, and differently drafted clauses may impose more stringent requirements than those considered in the Drax case. Nonetheless, the court’s approach demonstrates the court’s disclination to allow defendants to take technical points and escape liability by doing so.

The decision may have some helpful read across to the insurance context, where breaches of notification provisions are frequently raised as a defence to claims under the policy, even where late notification has caused the insurer no prejudice. Lord Justice Males’ “commercial purpose” approach may provide useful support to policyholders facing such challenges.

Conclusions

The appetite for W&I insurance is not slowing. With the M&A market now showing signs of rebounding from the 2023 slump and the hard insurance market yet to soften, disputed W&I insurance claims are becoming more commonplace.

The recent cases demonstrate some of the pitfalls that can arise with such claims and serve as a reminder that the claimant has two hurdles to overcome when pursuing a W&I insurance claim: first, proving that there has been a breach of warranty causing measurable loss to the claimant and secondly, that such breach and loss are covered (and not excluded) under the terms of the policy. The second aspect appears routinely to be neglected. It is therefore essential that policyholders seek specialist advice and representation in relation to their rights and obligations under the insurance policy as well as the SPA before pursuing a claim against insurers.

For further commentary, see our earlier articles:

Commercial Court determines policyholder unable to claim for breach of warranty under  warranty and indemnity policy [2023]

Breach of warranty by policyholder would preclude cover even when that breach  could not cause the loss [2024]

 


 

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This article is an extract from The Policyholder Review 2024/25. A detailed review and commentary on the key developments and trends across various commercial lines of insurance.

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