Court of Appeal clarifies level of detail required in indemnity claim notices

Out-Law News | 14 Jun 2021 | 10:35 am | 2 min. read

The English Court of Appeal has confirmed how much detail is needed in a notice of an indemnity claim under a sale and purchase agreement (SPA).

The decision overturned the High Court’s ruling in the same case, with the Court of Appeal finding that a notice did not need to include matters which its recipients should already have been aware of.

Dispute resolution expert Michael Fletcher of Pinsent Masons, the law firm behind Out-Law, said that despite the decision, more detail would always be better than less.

The case was originally brought against United Luck Group Holdings, which entered into an SPA to purchase shares in technology company Outfit7 Investments in December 2016. Some of the sellers provided warranties under the SPA, including the seven companies involved in this litigation.

An escrow account was set up to hold $100 million of the purchase price, from which $50m was released in 2018 with the final $50m due to be released in July 2019.

The SPA contained a tax covenant which provided that the sellers would reimburse United for any undisclosed tax liabilities of any of the group companies. In order to be able to claim under the covenant, the SPA required United to give written notice to the warrantors stating “in reasonable detail” why they were claiming.

In June 2019, United sent a letter to the sellers purporting to be a written notice under the tax covenant of the SPA. The notice referred to an investigation by the Slovenian tax authority into transfer pricing practices between a subsidiary and a group company.

The letter also set out a basic timeframe of the investigation, but no further details regarding the matters under investigation. A number of the sellers' representatives knew of the investigation, had access to some documents and had attended meetings.

In the High Court the sellers applied for a declaration that the letter was not a valid notice under the SPA, and that United was therefore obliged to release the outstanding part of the purchase price from the escrow account. United argued that the tax investigation itself was the "matter" for the purpose of the notice, while the sellers argued that "matter" in this case referred to the underlying facts, events and circumstances which were subject to the investigation.

In the High Court the judge said the letter was not detailed enough, and ruled in favour of the sellers. However, the Court of Appeal disagreed.

Lord Justice Nugee said “reasonable detail” depended on all the circumstances of the matter, including what the sellers knew. It did not need to include matters of which they were aware, as this would not have conveyed any different or new information. He added that to require United to include information of which the sellers were aware would “elevate the requirement to state matters in reasonable detail into empty formalism”.

Pinsent Masons’ Fletcher said the Court of Appeal had put the question of ‘reasonable detail’ into the context of the commercial purpose of the clause.

“The Court of Appeal’s rejection of ‘empty formalism’ is a welcome recognition that there should not be a one-size fits all approach to contractual notices; the Court will look at the circumstances to determine whether sufficient information was given for the notice to be compliant.  However, it is always best to err on the side of caution and add as much detail as possible in a notice, while at the same time giving the notice within any time limits that need to be complied with and ensuring that the notice provisions are strictly complied with,” Fletcher said.