20 September 2021

Claim notifications: How less could constitute “reasonable detail” in share purchase agreements

Last year, we wrote about the High Court’s decision in the case of Dodika Limited & Others v. United Luck Group Holdings Limited where it was held that the level of detail to be included in a notice of warranty claim pursuant to a share purchase agreement (an SPA) would not be affected by the warrantors’ prior knowledge.

The Court of Appeal has since reversed the High Court’s ruling, creating (arguably) a more commercial approach, but one which may lead to more extensive negotiation and complex drafting of limitation clauses.

Background

The parties entered into an SPA for the entire issued share capital of Outfit7 Investments Ltd (the Company). Included in the SPA was a tax covenant which stated that the warrantors would indemnify the buyer for any pre-completion tax liability. In order to bring a claim under the tax covenant the buyer had to give:

“written notice to the Warrantors stating in reasonable detail the matter which gives rise to such Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed…”

Due to an ongoing investigation by the Slovenian tax authority into the transfer pricing practices of one of the Company’s subsidiaries, the buyer issued the warrantors with a notice of claim under the tax covenant. Despite the warrantors being fully aware of the reasons for the tax authority’s investigation and having been kept up-to-speed with the status of the investigation, the High Court ruled in favour of the warrantors on the grounds that the buyer had not fully complied with the SPA’s notification requirements. The High Court held that the notice of claim did not specify in reasonable detail the matter which gave rise to the claim; this was not the tax investigation itself but the underlying facts, events or circumstances on which the claim was based.

The decision was seen by some as uncommercial, onerous and unjust, potentially creating a stricter threshold for buy-side notification compliance, although it could also be viewed as providing certainty as contractual notices should follow the letter of the contract.

Court of Appeal decision

The buyer appealed and earlier this year, the Court of Appeal overruled the High Court’s decision, holding that the notice of claim was valid.

Although the High Court had been correct to say that it was the underlying facts, events or circumstances, rather than the tax investigation itself, which gave rise to the claim, consideration had to be given as to whether the matter had been stated in “reasonable detail”.

The Court of Appeal reiterated that a notice of claim must comply with the terms of the underlying contract, in this case the SPA. If the SPA had been specific as to the information to be included, the outcome of the case may have been very different but because the SPA only provided for “reasonable detail”, the question of what was reasonable would depend on the circumstances, which, in Nugee LJ’s view, “must include in particular what is already known to the recipient”.

The Court of Appeal also went on to say that the purpose of a notice of claim is to provide information about the claim to the warrantors. In this case, although the notice of claim did not provide much detail, the warrantors were fully aware of the details and so any extra detail would have served no commercial purpose. As Popplewell LJ stated:

“Businessmen would not expect or require further detail which served no commercial purpose. That would be the antithesis of what was reasonable.”

A further consideration was that the tax authority itself had only provided general and limited information regarding the investigation and therefore the buyer would not have been able to provide further specifics.

What does it mean for me?

Although sellers are likely to argue for detailed and extensive notification requirements to be set out in the SPA, buyers will want to err on the less is more principle. In any event, closely following any given notice requirements is crucial and legal advice should be taken before issuing any notice of claim. Providing as much detail as possible in any notice of claim is likely to be the safest option unless the sellers have been explicitly involved and have a full understanding of the situation as they did in this case.

That said, the Court of Appeal’s acknowledgment that the warrantors were unable to duck out of their liability on a procedural issue when they had full knowledge of the facts is to be welcomed; whilst arguably establishing an area of ambiguity in terms of the extent of notification, the decision ultimately promotes a commercially sound and pragmatic approach.

Disclaimer

This note reflects our opinion and views as of 17 September 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

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