The importance of getting your notice for a share purchase agreement related claim right
We consider a case where the courts have provided guidance on how warranty claims need to be framed in order to have the best chance of success.
In this article, Andrew Cromby and Benjamin Turner consider another recent case in which the courts have provided guidance regarding the way in which warranty claims need to be framed in order to have the best chance of success.
As previously considered, ensuring that the finer details of a warranty claim following a share purchase agreement are correctly framed is fundamental to ensuring its validity. Court decisions demonstrate that getting this right can be make or break – with substantial sums of money in the balance.
This was confirmed, yet again, in the case of Dodika Ltd v United Luck Group Holdings Ltd  EWHC 2101 (Comm), where the High Court determined that a buyer’s notice of claim under a tax covenant was invalid because it did not give a reasonable amount of detail to the matter which gave rise to the claim.
In this case, the buyer’s notice identified the claim as being related to an ongoing investigation by the Slovenian tax authorities into the transfer pricing practices of a member of the acquired group, outlining that the buyer was claiming an amount equal to any tax liability (within the meaning of the tax covenant) imposed following the investigation. The sellers argued that the note did not provide reasonable detail of the matter giving rise to the claim as it did not identify the underlying facts, events and circumstances which could result in a tax liability. The sellers stated that it was those underlying facts, events and circumstances which were the subject of the investigation and which would potentially create a tax liability, as opposed to the tax investigation itself.
Upon the court reading the notice provisions contained within the share purchase agreement (SPA), it agreed, finding that the “matter” giving rise to the claim was, as stated by the seller, the factual matrix giving rise to the investigation – and not the fact of the investigation itself. The court therefore ruled that the notice was invalid. Merely making reference to the existence of the tax investigation, without more detail of the reasons and circumstances on which the investigation was founded, did not serve the purpose of informing the sellers of the “matter” giving rise to the claim.
The notice also failed to identify facts which might have been discovered in the course of the tax investigation, on which the buyer was seeking to rely. This meant that the sellers were not in a position to assess or deal with the prospects of liability for a breach of the tax covenant.
This is a key point in understanding the nuances of ensuring that a notice is valid – the terms in a purchase agreement are typically drafted in order to be fair to both parties. It can be easy to fall into the trap of believing you have unearthed grounds for a claim as soon as an issue arises, but taking the time to understand and explain the potential liability is essential. In this instance, adhering to the wording of the notice and thus, in the court’s view, providing the sellers with a fair opportunity to prepare for those liabilities would likely have resulted in a successful claim, pending the outcome of the investigations. It is always in the interests of a party receiving a notice of this kind to find a flaw in it, and this case again emphasises that substance and semantics are inextricably linked in drafting a notice that complies with the requirements of a SPA.
It is also worth noting that the court rejected the buyer’s argument that, as the sellers’ representatives were aware of all communications with the tax authority concerning the investigation, the notice should be construed in light of their knowledge. The court found that mere reference to the tax investigation did not outline the specific comments and allegations made against the seller, even if the seller was aware of them. This linked back to the wording of the notice provisions in the SPA which required whatever grounds the buyer was relying on to support its claim to be specified in the notice. The court found that a reasonable person would not have understood the mere reference to a “tax investigation” to have incorporated notices and discussions which were the subject of the investigation as the factual basis of the claim. According to the wording of the agreement, in this case, there must be a more detailed indication of how the claim arose out of facts for the notice to be compliant.
This outcome only serves to further emphasise the precision with which warranty claim notices must be drafted.
Some key points to remember:
- DO: interpret every word of the clauses in question as relevant – seeking legal advice for these purposes is always sensible
- DO: outline all of the facts involved in appropriate detail when serving a notice of a warranty claim
- DON’T: rush into making a claim because you believe you have found something for which the seller might be liable. More care and patience by the buyer in the case referred to above would in all likelihood have given them the ability to make a claim, instead of being prevented from doing so
- DON’T: assume that because the other side is aware of something that this transcends the need for clarity and compliance with the wording of your agreement. It is easy to see why the buyer here assumed that they would be successful, but the court took a dim view of their lack of clarity and precision
If this article raises any queries for you, please contact Benjamin Turner, Paralegal at email@example.com or Andrew Cromby (see details below).