The significance of notice and service provisions in post-M&A disputes

Why should I read this?

Notice provisions, which typically specify the required form, manner, and timeframe for communications regarding points of contractual significance, can be a regular trip hazard for parties seeking to exercise their rights under a contract. Awareness of, and compliance with, the requirements is essential, particularly after the completion of corporate transactions when there are price adjustment mechanisms in play.

In the case of Hughes v CSC Computer Sciences Ltd [2025] EWHC 302 (Comm) both parties ran into difficulties on the issue of compliance with the contractual notice requirements. The court found that notifying the sellers of the earn-out determination by email did not meet the contractual requirements in the share purchase agreement (“SPA”). Equally the sellers’ dispute notice was served out of time.

Background

Under the SPA, the buyer was obliged to pay the sellers deferred consideration through an earn-out if the company met financial performance targets in the first two years following the sale. The SPA provided that the buyer would determine the amount payable to the sellers in each year and the buyer would “submit” their determination to the sellers. The sellers could raise objections by way of dispute notice (which had to be sent “within 20 Business Days”) which would trigger the dispute resolution procedure in the SPA.

The only provision in the SPA which dealt with notices and communications between the parties stated: “Any notice or other communication under or in connection with this Agreement shall be in writing and shall be delivered ... to the party due to receive the notice or communication” personally, by first class post or by fax (the “Notice Clause”).

The buyer sent the earn-out determinations by email at the end of the first year (Year 1) and second year (Year 2) following completion, both of which stated that no deferred consideration was payable due to the company’s failure to meet the required revenue target. The sellers accepted this conclusion for the first year but queried the revenue calculation. In response to the second year determination, the seller served a dispute notice, however, this was sent after the 20 Business Day period.

The sellers challenged the validity of the earn-out determinations because service by email did not comply with the Notice Clause. The buyer contended that the Notice Clause was not applicable to the earn-out determinations, or that the sellers had waived the right to object to the validity of the determinations by election, or were estopped from doing so, having responded to the determinations as if they were valid. The buyer also asserted that the dispute notice was out of time.

The sellers issued proceedings seeking a declaration that the buyer’s determinations in Year 1 and Year 2 were invalid and an order for specific performance that the buyer commence and engage in the dispute resolution procedure under the SPA.

Decision

Judge Christopher Hancock KC adopted a broad interpretation of “other communication” in the Notice Clause, finding that the buyer’s communication relating to earn-out determinations fell within the Notice Clause. As such, for a determination to be valid it should have been sent to the sellers by post or fax, or served personally. Email did not suffice.

There had been no valid or binding election by the sellers between two alternative courses of action. In this instance there were three possible responses to the determinations which were: accepting, rejecting or ignoring the determinations.

The court also considered whether the sellers were estopped from challenging the validity of the determinations, referring to the test for promissory estoppel and estoppel by representation. The sellers were estopped from challenging the earn-out determination for Year 1 because they had made clear representations as to its validity. However, the sellers were not estopped from challenging the validity of the Year 2 earn-out determination, as no similar positive representations had been made.

The court also found that the sellers’ dispute notice was invalid, having been served outside the prescribed period. However, the court exercised its discretion to grant an order for specific performance in respect of the Year 2 earn-out determination only, with the parties being ordered to commence the dispute resolution procedure in respect of the objections raised by the sellers as if both the Year 2 determination and the dispute notice had been validly served.

Key takeaways

Deferred consideration and earns-out provisions in share purchase agreements are often subject to significant negotiation and scrutiny and disputes often arise between sellers and buyers when it comes to the determination and calculation of deferred consideration and earn-out.

In contrast, notice provisions are often boiler plate and not subject to significant scrutiny. However, the interplay between these provisions and the parties’ substantive rights is significant. Contractual notice provisions which are not specific as to which communications they apply are likely to be found to apply to communications of contractual significance (in this case earn-out determinations). The court found that in the interests of certainty, parties to commercial agreements should have clarity as to how they are expected to correspond with regard to exercising rights under a contract.

Practical tips for avoiding disputes in this arena include:

• parties should ensure that they know when the notice clause applies and what they need to do to comply. Clear and unambiguous drafting is needed if the intention is to carve important communications out of any notice clause. If a different notification method is required, then this should be expressly set out in the contract
• email service is now the norm, but the provisions of the particular contract should always be checked to ensure it is permitted in the relevant notice clause
• caution should be taken if there is a basis to challenge the way that a communication has been served - positive representations they accept the validity of a communication may undermine the ability to challenge the notice later

Commentary

The Hughes decision highlights the potential pitfalls when serving contractual notices in relation to earn-out determinations. Its impact is likely to extend to other financial determination processes in SPAs such as completion accounts.

The decision in Hughes follows the approach taken in the Court of Appeal case of Drax v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477. In Drax the Court of Appeal confirmed that the courts are not looking for “traps to defeat what may a valid claim” and are conscious of clauses which serve no commercial purpose. Instead, the correct approach is to look to interpret the clause by considering its specific language and its commercial purpose. The wording of the notice clause is itself likely to be determinative of how much leeway the court can allow the parties. 

For further reading around corporate disputes please see Corporate disputes – 2024 in review.