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9 November 20218 minute read

From Courtroom to Boardroom

Contractual limitation periods – When the music stops, it’s all over

The recent decision in Almacantar (Marble Arch) SARL & Anor v The Railway Pension Exempt Unit Trust1, is a timely reminder that contractual limitation periods are absolute and should be carefully and strictly adhered to. The judgment is the latest in a line of important decisions to highlight the three key requirements for claimants to consider when dealing with contractual limitation provisions: timings, contents, and formalities.

Background, key facts and the English Commercial Court’s decision
  • In 2011, the Railway Pension Exempt Unit Trust (RailPen) sold various property interests in the “Marble Arch Tower” development to certain Almacantar entities (Almacantar) (the Agreement). Completion occurred on 23 June 2011.
  • The Agreement contained a contractual indemnity with respect to any potential stamp duty land tax (SDLT) liability arising out of the underlying transaction which might be payable to HMRC. In brief, RailPen (as warrantor) would pay half of any SDLT liability (capped at GBP1.6 million) subject to the following contractual time limits:
    • No claim to an indemnity might be made unless a notice of claim was given within 7 years after the completion (i.e. by 23 June 2018, at the latest); and
    • Any claim would be deemed to have been waived or withdrawn on the expiration of 6 months after the date it was made, unless court proceedings were issued and served within that period (i.e. by 23 December 2018, at the latest).
  • In May 2015, HMRC determined that SDLT was in fact payable in the sum of GBP3.2 million (plus interest) (SDLT Determination). Prior to this, Almacantar and RailPen had cooperated closely to dispute any SDLT liability and continued to do so for the next few years.
  • Soon after 23 June 2018 (the 7th anniversary of the completion date), RailPen notified Almacantar that it did not have any liability vis-à-vis the SDLT Determination as the contractual indemnity had expired without Almacantar giving notice of any related claim. Some months later, Almacantar did eventually notify RailPen of its claim and issued proceedings before the English Commercial Court seeking payment for, inter alia, the sum of GBP1.6 million (i.e. RailPen’s allocated share of the SDLT liability). RailPen filed an application for summary judgment and/or strike out on the basis that notice was not given within the contractual limitation period.
  • In its decision, the English Commercial Court affirmed the importance which English law attaches to both (a) contractual limitation periods, in the interest of commercial certainty; and (b) notice provisions, whose purpose is to debar claims not (properly) notified within the required period. The Court concluded that there was no real prospect of Almacantar succeeding at trial and dismissed the claim.
Best practice regarding contractual limitation periods

If you are considering bringing a claim under the indemnity or warranty provisions under an agreement, this 4-step checklist summarises the key stages of the process.

Step 1 – Check for any contractual limitation periods.

Contractual limitation periods are absolute. They are specifically designed to provide the vendor with the commercial certainty that the purchaser cannot pursue them for claims relating to an underlying transaction beyond a specified time period.2

  • Generally, contractual limitation periods range from between (a) 1-2 years post-completion for general or commercial warranties3; to (b) up to 7 years post-completion for tax warranties or indemnities.
  • Many contractual limitation periods contain two-fold restrictions whereby there is both (a) the initial period in which the purchaser must notify the vendor and/or guarantor (as applicable) of a claim (the Claim Notice); followed by (b) the far shorter period (usually 6-9 months) within which the same purchaser must issue (and generally serve) proceedings.
  • Generally, the second, shorter period to issue (and serve) proceedings is triggered by the purchaser serving the Claim Notice (as in Almacantar). It is therefore important to consider that these two periods are usually not cumulative but consecutive.
Step 2 – Comply with any notice requirements.

Contractual limitation provisions commonly require notice of the claim (i.e. the Claim Notice) to be served on the putative defendant(s) (i.e. the vendor and/or guarantor) in a specific manner. In Almacantar, for example: “no Claim may be made unless notice in writing of the Claim (specifying in reasonable detail with supporting evidence the event, matter or default which gives rise to the Claim and an estimate of the amount claimed) to the Seller’s representative” (emphasis added).

If you are within the relevant contractual limitation period for pursuing a claim, verify whether you need to serve notice of your prospective claim and, if so, comply with each particular requirement. These generally include:

  • When you must serve notice (i.e. is it any time within the contractual limitation period or as soon as possible following knowledge of the potential claim? In the latter case, any delay or failure to notify promptly may preclude a valid claim as in Towergate Financial v Hopkinson4).
  • Which party must be served (i.e. vendor, vendor’s agent, guarantor, etc).
  • The basis for the prospective claim (i.e. cause of action, reference to any relevant warranty or indemnity in the underlying contract, etc.).
  • Whether any evidence must be provided (i.e. proof of breach, expert evidence, etc.).
  • The potential value of the claim (where known).

Notice requirements are contractual requirements to pursue a prospective claim. Non-compliance will not only provide the putative defendant with an obvious defence (i.e. that you failed to comply with the relevant provision) but serious breaches can successfully defeat the purchaser’s right to pursue the claim in the first place. In Teoco5, the purchaser’s failure to state which particular warranty had been breached in its Claim Notice resulted in the vendor (represented by DLA Piper) successfully obtaining summary determination of the claim.

Step 3 – Check for any notice formalities.

Commercial contracts generally include separate provisions governing the form in which any notices relating to the contract are to be made. Notice provisions typically detail the means (i.e. registered post, personal delivery, email, etc.) and recipient name and address pursuant to which such notices must be sent. Whilst not necessarily absolute, you should always comply with these provisions to avoid unnecessary disputes over form.

You should therefore always ensure that any notices are sent in compliance with both (a) the contractual limitation provisions; as well as (b) the contractual notice provisions.

Step 4 – Serve your claim notice within the contractual time period.

If you are pursuing a warranty or indemnity claim under a commercial agreement, you must take every step to ensure that your Claim Notice is served on the putative defendant within the relevant contractual time period. You cannot let other parties or events distract you from this imperative.

Almacantar is a cautionary tale in this regard: Almacantar as purchaser apparently lost sight of the critical importance of the 7-year contractual limitation, by failing to appreciate that the parties’ common front against HMRC (which spanned several years of negotiation) was only in the RailPen’s commercial interests as vendor until that period lapsed. Thereafter, RailPen was ‘off the hook’ and Almacantar was left with a GBP3.2 million tax liability. Needless to say, the outcome could have been avoided.

Conclusion

Contractual warranties and indemnities exist for the protection of purchasers. In order to avoid losing the benefit of such provisions, purchasers would be well advised to:

(a) Carefully consider the extent and formulation of such protections during the transaction process;

(b) Keep in mind any applicable contractual limitation periods following completion of the transaction, regularly monitor the status of any potential claims or disputes against them; and

(c) Seek legal advice as soon as they become aware of any potential claim.


1 Almacantar (Marble Arch) SARL & Anor v The Railway Pension Exempt Unit Trust [2021] EWHC 2385 (Comm).
2 Laminates Acquisition Co v BTR Australia Ltd. [2003] EWHC (Comm).
3 The contractual limitation periods for general and commercial warranties is between 12-24 months in 68% of European M&A transactions. See the DLA Piper client publication for the full breakdown of limitation periods for general and commercial warranties: “Global M&A Intelligence Report 2021” (page 25).
4 Towergate Financial (Group) Ltd v Hopkinson [2020] EWHC 984 (Comm). See the DLA Piper client publication on the lessons drawn from this case: A costly reminder: When is a deadline not in fact a deadline?
5 Teoco UK Ltd v Aircom Jersey 4 Ltd & Anor [2018] EWCA Civ 23.
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