Out-Law Analysis | 02 Sep 2020 | 11:11 am | 3 min. read
A recent decision by the English courts has provided some guidance on the interpretation of notice requirements for indemnity claims under a sale and purchase agreement (SPA).
The case demonstrates that it is vitally important that the notice provisions of an SPA are read, understood and fully complied with, whether in terms of the timing of the notice, the content or the method of notification. Any party serving a notice should assume that the courts will strictly apply the notification provisions and, as in this case, a failure to comply with the provisions could be fatal to any claim.
Any party serving a notice should assume that the courts will strictly apply the notification provisions and, as in this case, a failure to comply with the provisions could be fatal to any claim.
The buyer in this case, United Luck Group Holdings Ltd (United), entered into an SPA to purchase shares in Outfit7 Investments Ltd in December 2016. Some of the sellers provided warranties under the SPA. $100 million of the purchase price was held in an escrow account, 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 the matter which gives rise to such Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed in respect thereof".
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 chronology and 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.
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.
The judge, Mr Justice MacDonald Egger, found that on a fair reading of the contractual clause in question, the reference "matter giving rise to the claim" referred to the facts, event or circumstances on which the claim is based. A valid notice must therefore provide sufficient or reasonable detail of the circumstances on which United relied in support of or to make good its claim.
Before relying on any warranty as the basis of an indemnity claim, the notifying party must properly investigate the terms of that warranty - including, where necessary, instructing experts such as forensic accountants.
The judge further held that the "reasonable detail" part of the clause meant that United had to provide "sufficient information so that the receiving party, acting reasonably, knows what matter (facts, events or circumstances) gives rise to the claim being made or contingently made (as well as the nature of the claim and, if reasonably practical, the amount of the claim".
According to the judge, the fact that some of the sellers' representatives had knowledge of the tax investigation was not sufficient to save the notice. The SPA unequivocally required United to set out specific grounds and matters in a written notification. As a result, the letter did not give adequate notice as it did not set out any of the relevant facts, events or circumstances and therefore did not provide the reasonable detail required by the provision.
The case shows that, before relying on any warranty as the basis of an indemnity claim, the notifying party must properly investigate the terms of that warranty - including, where necessary, instructing experts such as forensic accountants. Investigation of a potential claim and preparing the notification is a time consuming process, and once the SPA has been completed it's important to diarise the deadlines for notifying claims to allow a notifying party enough time both to meet the deadline and to provide the level of detail required under the SPA.
Where any level of detail regarding a potential claim needs to be provided, it would be sensible to as a minimum identify the warranty that is said to be breached, the facts of the alleged breach, and an indication of the potential loss.