Summary
In the recent decision of Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638, the Court of Appeal concluded that a buyer had provided sufficient detail in their notice of claim under the SPA, overturning the decision of the High Court. In coming to that conclusion, the Court took into account the wider circumstances of the case, including what was already known to the recipient of the notice. While the decision is welcomed, and demonstrates a commercial and pragmatic approach, the case very much turned on its facts, and should not be seen to be paving the way for more lenient interpretation of such clauses more generally. Indeed, the Court of Appeal emphasised in its judgment the importance of complying with the requirements of such provisions.
Background and Judgment
The Appellant, United Luck, purchased shares under an SPA in a group's holding company from the Respondents (the "Sellers"). Under the SPA, $100m of the purchase price was to be held in escrow in case any claims were to arise under the warranties and/or tax covenants given by the Sellers.
A notice of claim was sent to the Sellers in relation to an ongoing tax investigation being conducted by the Slovenian tax authority into one of the group's companies over transfer pricing practices. The notice had to meet the requirements set out in the SPA in order for any compensation to be paid out of the sums held in escrow. Whilst the SPA required the notice to explain in "reasonable detail" the matter which gave rise to the claim, some of the Sellers were already aware of and involved in the tax investigation and had access to related documents. The notice identified that the tax investigation had begun and provided a chronology of the procedure so far.
High Court
The Sellers issued a Part 8 claim, seeking a declaration that the notice of claim failed to comply with the requirements of the SPA. The Sellers successfully applied for Summary Judgment, and the High Court ordered United Luck to take steps to release the sums held in escrow, subject to a stay pending any appeal.
Court of Appeal
The Court of Appeal upheld United Luck's appeal on the basis that sufficient detail had been provided in the notice, given that the Sellers were already aware of the tax investigation. The SPA required "reasonable detail" to be provided of the matter giving rise to the claim. Nugee LJ who provided the leading judgment, considered that what is reasonable must depend on all the circumstances and that those circumstances must include what is already known to the recipient. Both Nugee LJ and Popplewell LJ took a commercial and pragmatic approach, with Nugee LJ finding that requiring the provision of further details in this case where the Respondents already knew exactly what they were, would elevate the requirement to state matters in reasonable detail "into empty formalism". Popplewell LJ considered that what is reasonable takes its colour from the commercial purpose of the clause, and that business people would not expect or require further detail which served no commercial purpose.
However, Nugee LJ emphasised that if a contract does prescribe that certain information must be included, a notice which fails to do so will be invalid and it will be no answer to say that the recipient already knew it. He gave the example of a contractual notice provision requiring the address and postcode of a property to be given. Failure to do so would render the notice invalid, even if the recipient knew the address and postcode already.
Commentary
While the decision aligns with the more pragmatic approach the Courts have been known to take when interpreting notice clauses (for example: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd), each case will turn on its own facts and the specific requirements of the notice provision in question. As such, it serves to remind us that obligations set out within contractual notice provisions should be complied with precisely, in order to avoid the notice being found to be invalid. It is therefore best practice as a buyer to:
- Limit the scope and obligations set out in any notice clauses when negotiating the SPA. If there is any ambiguity as to what the notice clause requires for a sufficient letter of claim, seek to agree and define the obligations further;
- Carefully review the requirements set out in any notice clauses of the SPA when relying on it to draft a notice of claim. Make sure you have complied with all the obligations set out. If in doubt: the more information provided, the better;
- Refrain from relying on the seller's knowledge of the claim. While Dodika provides authority for doing so, each case turns on its facts;
- Ensure your notice of claim contains information on the matter giving rise to the claim. This should include a summary of the potential cause of action as well as any relevant background facts. In Dodika, United Luck provided the Sellers with a detailed chronology of events but were sparing on the detail of the potential claim itself; and
- Ensure your notice of claim attaches any relevant supporting documentation: This includes emails, attendance notes, letters as well as evidential documents surrounding the potential cause of action.