Claiming under tax covenants - what is "reasonable detail"?

In the recent case of Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638 the Court of Appeal held that a notice of claim under a tax covenant in a sale and purchase agreement did not need to include facts or details that were already known to its recipients.

Background

The transaction being considered was the sale of the issued share capital of Outfit7 Investments Ltd (governed by the terms of a sale and purchase agreement (the SPA)). The SPA provided for US$100m of the purchase price to be held in escrow and to be released in two tranches to the sellers on specified dates provided that no claims were made by the buyer under the SPA.

The SPA contained a tax covenant provided by certain sellers (the warrantors) in favour of the buyer whereby the warrantors agreed to reimburse the buyer for any tax liabilities incurred by the target group before completion of the sale. The buyer’s ability to make a claim under the tax covenant was conditional on the buyer providing written notice to the sellers before a deadline specified in the SPA. The notice required the buyer to state “in reasonable detail”: 

• The matter which gave rise to such claim
• The nature of such claim
• So far as is reasonably practical, the amount claimed

Shortly before the notification deadline, the buyer’s solicitors sent a letter to each of the warrantors purporting to give notice of a claim under the SPA’s tax covenant. The letter referred to an investigation by the Slovene tax authority into the transfer pricing practices of a member of the target group and set out a brief chronology of the investigation.

Prior to receiving the notice, the representatives of the sellers had been aware of the investigation, been provided with access to relevant documentation and participated in relevant meetings and discussions. However, the sellers contended that the notice sent to the warrantors was invalid due to a failure by the buyer to provide “reasonable details” of the matters that gave rise to the claim as required under the SPA.

In the first instance decision, the High Court held that the notice failed to provide sufficient information to allow the sellers to identify the matters giving rise to the buyer’s claim and granted summary judgment in favour of the sellers releasing the first tranche of escrow funds to the sellers. The judge concluded that the statement that the claims related to the investigation did not explain the basis on which the indemnity claim was made and the existence of the investigation, without further detail, did not serve the purpose of informing the sellers of the matters giving rise to the claim.

Court of Appeal decision

The buyer appealed the decision and the Court of Appeal allowed the appeal, dismissing the sellers’ summary judgment. 

In reaching its conclusions, the Court of Appeal had to consider two questions:

1. What was the “matter” giving rise to the claim?
2. Was the matter stated in “reasonable detail”?

Taking each in turn:

1. Matter: The Court of Appeal agreed with the High Court’s decision that “the matter giving rise to the claim” included the underlying facts, events or circumstances of the investigation into the group’s transfer pricing practices, rather than just the investigation itself.
2. "Reasonable detail": The Court of Appeal accepted that what is reasonable detail must depend on all the relevant circumstances. However, in the leading judgment Nugee LJ stated that this must include “what is already known to the recipient”. As the sellers were already aware of the investigation and its focus there was no need for the buyer to repeat such information in the notice. Further, the tax authority conducting the investigation had not provided the buyer with details of which specific transactions were of concern or the basis on which it believed the group company’s actions to be improper. The Court of Appeal therefore concluded the buyer could provide little further detail. The purpose of the notice was to allow the sellers to make enquiries into the factual circumstances of a claim to determine its merits. It would have “served no commercial purpose” for the notice to set out further limited or generic detail or facts of which the sellers already had knowledge.

Conclusion

The requirements of a contractual notice will depend on both the precise contractual wording and the specific factual background to the dispute. This decision makes clear that the relevant circumstances in this regard may include the knowledge of the recipient. While this may provide some reassurance to those seeking to rely on contractual indemnities, careful thought must be given to the content of notices of claims. It is well established that notices under SPAs can be deemed void if vague or unparticularised details of the claim are provided. The decision in Dodika highlights that, when preparing these notices, a balance should be struck between providing sufficient information, bearing in mind the contractual requirements, and not including lengthy detail that is common ground and serves no commercial purpose.