In Dodika Ltd & Ors v United Luck Group Holdings Limited, the High Court (HC) has accepted the sellers’ argument that a notice of a tax claim under a tax covenant served on them by the buyer was invalid because it did not contain the level of information required by the provision in the related share purchase agreement (SPA) governing notices of claim. This meant that the buyer could not pursue the claim because the time period for notification had passed.
The decision appears harsh to the buyer in its outcome but is a salutary reminder that purchasers should consider very carefully both the precise claim notice terms that they agree to when entering into a purchase and then, given those terms, the precise information that should be provided to the seller when a claim is made.
The case related to a $1 billion sale of a group where, under the terms of the SPA, there was a $100 million escrow in respect of possible claims under the warranties and tax covenant given by the sellers. The buyer, prior to the final repayment of amounts from escrow, sent a notice of claim letter to the sellers referring to a transfer pricing investigation being undertaken by the Slovenian tax authority in respect of a group company. Prior to this letter being sent, the sellers had been made aware of the investigation and were kept informed of its progress.
The terms of the notice of claim provision in the SPA required the notice of claim to state “in reasonable detail the matter which gives rise to [the claim]”. The sellers argued that the notice of claim was invalid because it did not include sufficient detail about the matter giving rise to the claim and that the relevant matter was not the tax authority’s investigation itself (which was referenced in the letter) but the underlying facts, circumstances and events that were the subject of the investigation (which were not included in the letter).
The HC agreed with the seller’s argument that “the matter which gives rise to” the claim in this instance was the facts, circumstances and events which were the subject of the tax authority’s investigation and agreed to the seller’s request for summary judgement that the notice of claim letter was invalid. The HC stated that a claim would not be based simply on the existence of the investigation but on the factual reasons why a tax liability accruing before completion has accrued or might accrue. Therefore, the buyer needed to include sufficient detail about those factual matters.
The case looks in detail at the purpose behind notice of claims provisions and how their wording should be construed, concluding that the general purpose is to provide the party claimed against with sufficient knowledge about the underlying facts and circumstances that the claim relates to and that the level of detail and information required to be provided will depend on the wording of the claims notice provision being considered. The reference to “the matter which gives rise to” the claim in this case (being wording seen in many SPA notice of claim provisions) required more than a statement that the tax authority was investigating the group’s transfer pricing position. It required details about the underlying arrangements that were being investigated. The HC also stated that the sellers’ knowledge of the circumstances of the claim was not relevant to whether the notice did or did not satisfy the relevant SPA provision, highlighting that the courts should be expected to be unwilling to diverge from a strict reading of negotiated documents to allow a claim to be pursued.
So, while seemingly very harsh on the buyer in this case, the decision confirms just how important it is for the parties (and particularly the purchaser) to (i) think very carefully about the notice of claim obligations that they agree to and whether the level of information requested by the seller is actually required given its presumed understanding of the affairs of the group it has sold and then (ii) ensure that the provisions of the notice of claim provision are followed strictly and thoroughly, quite possibly by providing more information than might actually be required.
The full transcript can be found here.