The Court of Appeal has held that a notice of a claim under a tax warranty in a sale and purchase agreement (SPA) did not have to include details of the underlying facts and of the investigation by the tax authorities that were already known to the recipients.

Background

In Dodika Ltd & others v United Luck Group Holdings Ltd [2021] EWCA (Civ) 638, the buyer gave notice to the sellers of a potential claim under the tax warranties in the SPA. The agreement required the notice to provide “reasonable detail” of “the matter which gives rise to such Claim”. It also appointed the former CEO and Deputy CEO of the target company as the sellers’ representatives for any matter arising between the sellers and the buyer.

The notice stated that the claim related to an investigation by the Slovene tax authority into the transfer pricing practices of one of the target company’s subsidiaries during the periods 2013-14 and 2015-17. No other detail was provided as to the substance of the matters under investigation. However, prior to giving notice, the buyer had been keeping the sellers’ representatives informed of the progress of the investigation, and those representatives were involved in strategic discussions in relation to it and had access to relevant documents.

The issues

The sellers issued proceedings for a declaration that the notice was invalid and applied for summary judgment on that claim. They argued that the notice should have provided details of the facts underlying the tax investigation that were said to give rise to a potential tax liability which would be recoverable from the sellers under the warranty. The court therefore had to decide:

  • whether the phrase “the matter which gives rise to such Claim” referred to the investigation or to the underlying facts emerging from it; and

  • if it referred to the underlying facts, whether the reference to transfer pricing practices during certain periods constituted “reasonable detail”.

Matter giving rise to the claim

At first instance, Mr Peter McDonald Eggers QC (sitting as a Deputy Judge) held that the reference to “the matter giving rise to the Claim” meant the underlying facts, events or circumstances and not just the fact of the tax investigation itself. The Court of Appeal agreed, basing their conclusion on an analysis of how “Claim” was defined, and of what the buyer would have had to plead, were it to bring such a claim before the court.

Reasonable detail

The Deputy Judge concluded at first instance that the phrase “reasonable detail” required the buyer to identify which particular features of the company’s transfer pricing practices were alleged to give rise to a potential tax liability.

However, the Court of Appeal held that the reasonableness qualification meant that the buyers did not have to include details of which the sellers’ representatives were already aware. Since they were aware from their earlier communications with the buyers that the investigation focused on allegations that intra-group prices charged by the company during the relevant periods had been unduly low, and knew how those prices had been calculated, it was not necessary for that information to be repeated in the notice.

The court also took into account that the tax authority had not shared with the buyer which specific transactions it was concerned about, or on what basis it considered that the company’s role in those transactions might not have been correctly described for the purposes of claiming tax reductions. There was therefore limited further detail the buyer could have provided, most of which was already known to the sellers and which would have added no commercial benefit. As noted by Popplewell LJ,

What is reasonable takes its colour from the commercial purpose of the clause, and what businessmen in the position of the parties would treat as reasonable. Businessmen would not expect or require further detail which served no commercial purpose. That would be the antithesis of what is reasonable.

The court held that the purpose of the notice clause was to enable the sellers to make such inquiries as they were able, and in this case they accepted that additional detail would not have furthered that purpose.

Comment

While the conclusions reached by the Court of Appeal were based on the specific drafting used in the SPA, that wording does not appear to have had any particularly unusual features. Indeed, the requirement to give reasonable detail about the matter (or matters) giving rise to a claim is commonly found in notices of claim provisions. To mitigate the risk of any such notice being declared invalid, it remains the case that potential claimants should ensure they comply fully with any notice requirements. It would be prudent to assume that a notice under a warranty provision should provide details of the underlying facts, and not just of any third party claim or investigation that may have prompted the notice.

That said, the court will be reluctant to require a party to provide details that add no benefit to the recipient, unless those details are unambiguously called for in the wording of the notice requirement. Parties in receipt of such a notice should consider carefully whether the prospects of a successful challenge to the validity of the notice are sufficient to justify risking the additional costs and time involved, instead of engaging with the substance of the matters notified.

The case also serves as a useful reminder to buyers and their advisers of the importance of negotiating precisely what ought to be included in a valid notice of claim, thereby avoiding any dispute in that regard. A well advised buyer may also consider it prudent to seek to agree in the SPA that any alleged failure to give notice as contemplated does not prevent the buyer from making a claim but may, for example, be taken into account in relation to matters concerning quantum (but not the validity of the notice itself).