Signed, sealed, (but not) delivered: why email wasn’t enough in Hughes v CSC
Whilst notice provisions may not form the basis of commercial negotiations between parties to sale and purchase agreements, failure to consider the practical requirements of these clauses can have stark consequences.
In the recent High Court decision of Hughes v CSC Computer Sciences Limited, earn out calculations were found not to have been validly served because they did not comply with contractual notice requirements. This case serves as an important reminder for transaction parties to ensure that notice requirements are carefully complied with.
Facts
The shareholders (the Sellers) of Fixnetix (the Target), a company which provided trading infrastructure services to participants in capital markets, entered into an agreement (the SPA) with CSC Computer Sciences Limited (CSC) under which CSC agreed to acquire the entire issued share capital of the Target (the Transaction). The SPA included an earn-out mechanism whereby a portion of the purchase price was deferred and payable in two tranches based on the Target's financial performance in the two years immediately following completion of the Transaction.
The SPA required CSC to "submit" earn-out determinations for each of the two years to the Sellers, which the Sellers would then have the opportunity to dispute.
CSC emailed its year 1 earn-out determination (the Year 1 Determination) to the Sellers and their legal advisors. The Sellers disagreed with the underlying calculations which led to protracted discussions between the parties. CSC also emailed its year 2 earn-out determination (the Year 2 Determination) to the Sellers and, similarly, the Sellers disagreed with the calculations but, unlike the Year 1 Determination, they also questioned whether the Year 2 Determination had been validly served. Several years later, representatives of the Sellers issued proceedings against CSC claiming, among other things, that both the Year 1 Determination and the Year 2 Determination (together, the Determinations) had not been validly served.
The notices clause
The notices clause in the SPA (the Notices Clause) stipulated that:
“Any notice or other communication under or in connection with this Agreement shall be in writing and shall be delivered personally or sent by first class post pre-paid recorded delivery (or air mail if overseas) or by fax…”
The Determinations were sent by email and therefore, ostensibly, not in accordance with the Notices Clause. However, CSC argued that the Notices Clause did not apply to the Determinations. In support of this view, CSC cited the fact that the earn-out determination provisions in the SPA merely obliged CSC to "submit" the Determinations to the Sellers and did not set out any specific requirements on their content or form. CSC also highlighted that the drafting of the earn-out provisions could be contrasted with that of certain other clauses in the SPA, which expressly required the relevant communications between the parties to be made "in writing". In CSC's view, the Notices Clause was therefore only intended to apply to communications which were expressly required to be "in writing" and, this intention, CSC argued, was evidenced by the lack of specificity in the earn-out determination provisions.
Decision
The Court disagreed with CSC and found that the Determinations were not validly served. In reaching this conclusion, the judge highlighted that the Notices Clause had been broadly drafted, referring to "Any notice or other communication" [our emphasis]. The judge also considered that it would be commercially undesirable and illogical if the Notices Clause did not to apply to the Determinations given their contractual significance.
Whilst CSC was unsuccessful on this issue, it is worth noting that the Sellers were estopped from denying the validity of the Year 1 Determination due to their failure to question it from the outset and their subsequent engagement with CSC. However, CSC's estoppel claim in respect of the Year 2 Determination was unsuccessful on the basis that the Sellers did question the validity of this notice, albeit some three months after receipt.
Key takeaways
- Notice provisions will be enforced strictly. Failure to follow notice provisions precisely may lead notices or communications delivered under a sale and purchase agreement to be deemed invalid. When parties are drafting, serving or receiving notices they should carefully consider the contractual requirements of the relevant agreement, including the content, form, method of delivery, and recipient.
- Be careful when drafting notice provisions. Many contracts do not envisage email as an accepted method of service. In these circumstances, courts may deem notices or communications served by email to be invalid, even though this is the method that parties typically use to engage with each other. Transaction parties should therefore take care when drafting and agreeing notice provisions to ensure these reflect likely practical arrangements. This may include considering:
- Whether notices should be sent to company email addresses (as opposed to specific individuals who may leave a business).
- When notices or communications will be deemed to be received.
- Whether alternative methods of delivery should be provided for in the event of technical failures, for example where an email might be undeliverable.
- What language the notice or communication is required to be in.
- Be cautious when responding to notices. Engaging with a non-compliant notice may waive a party's ability to challenge it in the future. If a party receives a notice that does not comply with the contractual provisions, they should consider reserving their rights, raising the issue with their counterparty, and seeking legal advice.
- Require acknowledgement of validity if formal process not followed. If a party does choose to send communications which do not strictly comply with formal notice requirements, it should ask the recipient to acknowledge that the relevant communications have been validly served and received. This should prevent the recipient from claiming invalid service at a later date.
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