Claim notifications: Why less is more
Recent case law has shown that the devil is in the detail when notifying a party to a share purchase agreement of a potential claim under that agreement. It’s long been a principle of English law that a potential defendant in litigation has the right to some certainty, without the spectre of litigation looming indefinitely in respect of historic events or disputes.
In share acquisitions, this is commonly reflected in the share purchase agreement where the parties agree limitations on the buyer’s right to bring a claim against the seller for breach of warranty or under the tax covenant.
The Limitation Act 1980 sets a period of six years within which a claim must be brought if the contract is made under hand (section 5), or 12 years if the document is executed as a deed (section 8). These statutory limitation periods are usually reduced further by the parties, with buyers and sellers generally agreeing:
- A period within which the buyer must notify the seller of any potential claim under the contract.
- A deadline by which the buyer must have progressed any potential claim once it has been notified.
Parties will typically agree a period of anywhere between 12 and 36 months for notification of non-tax claims, and up to seven years for tax-related claims. Having made a notification, a buyer will then be given anything up to 12 months to actually formally commence proceedings after which it will lose its right to bring the claim.
Although emphasis is understandably placed on negotiating the relevant time periods themselves, the recent case of Dodika Limited & Others v. United Luck Group Holdings Limited [2020] EWHC 2101] highlights the importance of complying with all other notification requirements set out in the share purchase agreement in order to ensure that a claim is not prejudiced.
In this case, the buyer served the sellers with notice of a claim under the tax covenant with a view to retaining $50 million which had been placed in escrow.
The share purchase agreement required a notice of claim to “state 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 in respect thereof…"
The sellers claimed that although the notice referred to the existence of a tax investigation, it did not provide any detail of the underlying facts, events and circumstances giving rise to the claim, and particularly how these triggered a claim under the tax covenant, which meant that it was not a valid notice for the purposes of the share purchase agreement. The buyer on the other hand argued that this was irrelevant because the sellers were already fully aware of the underlying facts and circumstances, as they had actually been involved in responding to the tax investigations.
The High Court held that the notice was not compliant with the requirements of the share purchase agreement and the sellers’ knowledge could not be used to “remedy” this defect. The issue in question was not whether the sellers understood the claim and the matters giving rise to it – it was whether the procedural requirements of the share purchase agreement had been satisfied, which they had not. The notice of claim given by the buyer to the sellers was not valid and the buyer was out of time to bring the claim.
Although some may view this as a somewhat harsh judgement, it serves to remind parties that care must be taken to comply fully with any contractual notification requirements. Although most parties will sensibly seek legal advice as to the exact form of any notice, it is important to check that the content is itself full and complete.
An ill-judged decision to be overly concise can have expensive consequences.
Christine Dubignon is a Partner in the Corporate team.
Disclaimer
This note reflects our opinion and views as of 13 October 2020 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.