Recent Commercial Court decision highlights the importance of strict compliance with claim notification provisions in share and business sale and purchase agreements

In a recently delivered decision, Dodika Limited & Others v. United Luck Group Holdings Limited [2020] EWHC 2101 (Comm), Mr Peter MacDonald Eggers Q.C. (sitting as a Deputy Judge of the Commercial Court) has ruled that a notice of claim under a tax covenant contained in a share sale and purchase agreement (SPA) failed to comply with the requirements of the claim notification provisions in the SPA. As a result, a sum of USD 50 million held in escrow was liable to be released to the SPA sellers.

The decision is of particular interest because of its treatment of the relevance of the sellers’ pre-existing knowledge of the circumstances giving rise to the claim purportedly notified by the buyer.

It is common for SPAs generally to contain claim notification provisions. Compliance with such provisions is typically a condition precedent to the enforceability of the notified claims. These claim notification provisions usually stipulate that any claim under a warranty, indemnity or tax (or other form of) covenant contained in the SPA is only enforceable if a notice of claim containing reasonable detail of the matter which gives rise to the claim, the nature of the claim, and the amount of the claim, is given by the buyer to the seller on or before a specified date.

In this particular case, the Deputy Judge found that the buyer’s notice did not contain reasonable detail of the matter which gives rise to the claim, because it failed to set out any detail about the underlying facts, events and circumstances giving rise to the claim. The relevant notice merely referred to the existence of a tax investigation but did not give details of the underlying facts that might trigger a claim under the relevant tax covenant.

The buyer’s riposte was that a general reference to the tax investigation was sufficient because the details of all communications and discussions with the tax authority (and hence, by inference, the details of all underlying facts, events and circumstances) were already known to the sellers, and that the notice of claim should be construed in light of what was already known to the sellers. In rejecting this argument, the Deputy Judge held that the sellers’ pre-existing knowledge was irrelevant to whether the buyer had in fact set out the requisite amount of detail in its notice. The latter question turned on what was or was not contained in the notice. The sellers’ independent knowledge could not be relied upon by the buyer in order to remedy a failure on the buyer’s part to set out in its notice what was required to be set out pursuant to the claim notification provision.

Importantly, this was not a case in which there was any issue as to meaning of what was stated in the buyer’s notice. That meaning was clear and remained the same whether or not the sellers’ pre-existing knowledge was taken into account. Rather, the issue was as to whether the buyer had set out sufficient detail in its notice, as it was required to do pursuant to the claim notification provision. In other words, the issue was as to whether the notice complied with the claim notification provision, not as to the proper construction of the notice.

Alain Choo-Choy Q.C. appeared for the successful parties, the sellers, instructed by Taylor Wessing LLP. A copy of the Judgment can be found here.