The Court of Appeal has confirmed that a buyer was unable to recover damages for a breach of tax warranties in a share sale agreement because of deficiencies in the buyer's claim notification letter.
Notice provisions in contracts are often treated rather casually by the parties, but this decision is a reminder that certain requirements are sufficiently important that they must be met by the relevant deadlines if a successful claim is to be brought.
Unexpected tax liabilities post-completion
Following completion of a share sale, it became apparent to the purchaser (Teoco) that the target company would or may become liable for around £3.5m of tax liabilities for pre-completion periods which were covered by certain warranties in the share purchase agreement (SPA) and/or the tax deed.
The notification requirements in the SPA obliged the purchaser to notify the seller of claims within certain time frames, and for the notification to "set out reasonable details of the Claim (including the grounds on which it was based and the Purchaser's good faith estimate of the amount of the Claim…".
Teoco sought to rely on two letters that it had written to the seller before the expiry of the time limits as evidence that it had complied with its obligation to notify. The letters were stated to constitute "notification in accordance with [the notification provisions] of the SPA of the existence of Claims, being either Warranty Claims or Tax Claims, as further detailed below". The initial letter ended with a full reservation of rights, rather than a demand for payment as might more normally have been expected, given the nature of the letter.
Grounds of the claim must be specified
Although the judge reiterated that "every notification clause turns on its own individual wording" he considered that a seller must be left in no reasonable doubt, not only that a claim may be brought, but of the particulars of the ground upon which the claim is to be based. The notice must be couched in terms which are sufficiently clear and unambiguous as to leave no room for argument about the particulars.
Here, the Court of Appeal agreed with the High Court that the letters failed to satisfy the requirement of the SPA that the "grounds" of the claim be "set out" because they did not identify the particular warranties and provisions of the tax deed on which the claims were based, and there was "real scope for doubt" about which provisions were thought to be relevant. An "omnibus reference to Warranty Claims or Tax Claims" was not good enough because it encompassed a multitude of possibilities other than those actually relevant.
Practical points
From the High Court and Court of Appeal judgments in this case, one can usefully take away a number of important points:
- It is worth paying close attention to the drafting of the notice provisions to ensure that these are not so onerous as to make claims unnecessarily difficult. This is particularly important if the notice requirement is a condition precedent to liability (although purchasers will want to avoid this).
- Notice of a claim should clearly explain under which provision of the documents the claim is being brought. This includes not just whether it is a tax deed or warranty claim (or both), but precisely which warranty is alleged to have been breached. Where the claim is being issued under the tax deed, the claimant should state whether the claim is based on an actual or contingent liability.
- An unambiguous statement that the letter constitutes a claim or demand is also useful, to avoid any accusation that it is simply a preliminary provision of information in respect of a future possible claim. A reservation of rights is unhelpful in this regard.
- The interpretation of an obligation on the claimant to provide "reasonable details of the claim" will depend on the nature of the claim.
- Where a notice must provide a "good faith estimate of the amount of the claim", the figure must be calculated honestly, but the final figure claimed might be lower or higher.
- All identifiable claims should be included at the time of notification, even if it is not known at that point whether these will ultimately be pursued.
- The period of time within which it is "reasonably practicable" to give notice of claim may vary from case to case; in Teoco, three months was considered too long a period of time to sit on a claim before notifying the seller of it.
