A unilateral notice relating to a tax liability under a share sale and purchase agreement was not a valid notice within the relevant limitation period for a claim. The construction of a unilateral notice must be viewed objectively, having in mind the relevant factual context. As a matter of construction, the notice had not been sufficiently clear as to which provision of the SPA it related to. The case is a cautionary tale for those involved in sending (or receiving) notices under a contract: (1) Stobart Group Ltd (2) Stobart Rail Ltd (formerly WA Developments Ltd) v (1) William Stobart (2) William Andrew Tinkler [2019] EWCA Civ 1376

The respondents, Mr Stobart and Mr Tinkler, agreed to sell to Stobart Group Limited (SGL) the entire issued share capital in Stobart Rail Limited (SRL). The Share Purchase Agreement (SPA) included a covenant by the vendors to pay SRL’s tax liabilities incurred prior to the sale.

Paragraph 6.3 of the SPA provided that the vendors would not be liable in respect of a “Tax Claim” (ie a claim by SGL against the vendors) unless SGL had given written notice of that “Tax Claim” within seven years of completion of the sale (the Limitation Period).

Paragraph 7.1 of the SPA stated that, upon the purchaser or SRL becoming aware of any “Claim” (ie a claim by a tax authority against SRL), the purchaser should (within 10 business days) give notice of the “Claim” to the vendors. In contrast to a notice under paragraph 6.3 relating to “Tax Claims”, the giving of notice (and timing for doing so) in paragraph 7.1 was not a condition precedent to any liability on the part of the vendors.

The issue for the Court of Appeal was whether a letter sent on 24 March 2015 (the March Letter), ten days before expiry of the Limitation Period, was valid notice of a “Tax Claim” under paragraph 6.3. The vendors argued that the letter was no more than a notice of a “Claim” under paragraph 7.1, and that that they could not be liable for the “Tax Claim” as the Limitation Period had since passed, and no paragraph 6.3 notice had been served.

Construction of a unilateral notice

The Court of Appeal considered the construction of a unilateral notice, noting the following:

− The approach to construing a unilateral notice is similar to that taken on construing a contract: both the meaning of the words used (objectively construed) and the context in which they are written are relevant (Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL19).

− The order in which the analysis (ie construing the meaning of the words and considering the context) is carried out is immaterial (Wood v Capita Insurance Services [2017] UKSC 24).

− The subjective intention of the parties is generally irrelevant, except where it is clear that the parties have a common understanding as to the effect of a term, then the courts should construe in accordance with that understanding (ie without the need for rectification).

− The purpose of the notification provisions in this case was to make it clear in sufficiently formal terms that a claim was being made against the vendors – ie to give some certainty to the party being notified.

On considering the objective meaning of the notice in this case, Simon LJ noted that the March Letter had clearly been drafted by a lawyer, but made no reference to a “Tax Claim”, nor to a claim being made under paragraph 6.3. The letter referred only to a “potential liability to taxation” rather than an actual claim against the vendors. Simon LJ considered that a reasonable person would have understood the letter to be a notice under paragraph 7.1 rather than under paragraph 6.3.

As to the factual context, the purchasers argued that the vendors would have understood the letter to be a paragraph 6.3 notice because an earlier letter had been sent requesting an extension of the Limitation Period, which would have put the vendors on notice to expect a paragraph 6.3 notification before the end of the Limitation Period. Simon LJ disagreed, noting that there was still time for SGL to send a valid paragraph 6.3 notice even following the March Letter, so the vendors could not have been expected to realise that no further notice would be received.

The court concluded that the March Letter, as a matter of construction, was not a valid paragraph 6.3 notice.

Comment

There is a disproportionate amount of litigation relating to the validity of notices for warranty claims. This is because you can win on a technicality (a non compliant notice) without having to get into the substance of the issue in dispute. This means that, if you are serving a notice, you need to be careful to comply exactly with the letter of the contract. You generally cannot hedge your bets, so when making a claim, it is important to clearly identify to which warranty/ies it relates. If the relevant clause requires you to include “reasonable details”, you need to think more in terms of a formal pleading than a letter. If you are the recipient of a notice, it is worth checking these points to see if there are any grounds for challenge.