20 August 2020 - Post by:Edward McCullagh
A tax indemnity claim under a share purchase agreement was unenforceable because inadequate notice was given (Dodika v United Luck). The buyers gave notice of their claim by solicitors’ letter. However, that notice was inadequate, as it did not provide reasonable detail of the matter giving rise to the claim.
The letter (sent shortly before the relevant deadline) made reference to an ongoing “investigation by the Slovene Tax Authority … into the transfer pricing practices” of a subsidiary of Outfit7 (the company sold, and best known for the popular Talking Tom and Friends app and media franchise). However, there was no reference in the letter to the factual basis of the claim under the tax covenant – the claim would not be based on the mere existence of a tax investigation. In particular, the letter did not identify the underlying facts unearthed during the investigation which were relied on by the buyers to support their claim.
The court observed that the recipient of a notice would wish to know, at least in general terms, the three key elements of any contractual claim, i.e. the factual basis, the legal basis, and the quantum. The purpose of the notification was to enable the recipient to “deal with the [c]laim” (e.g. by performing further investigation, seeking clarification, notifying third parties, accessing archived documents, obtaining professional advice, assessing the merits of the claim, making a financial provision etc.).
However, in the court’s view, if a reasonable recipient of the letter had been asked what general facts the claim was based on, they would have answered “I do not know”.
Even if it was assumed that the sellers had detailed factual knowledge of the tax investigation, the notice was still inadequate. A compliant notice needed to indicate how the claim arose out of the specific facts identified. In the present notice, the compendious reference to the tax investigation was insufficient – it failed to identify the particular factual matters relied on by the buyers to support their claim. Further, the buyers had not identified the factual basis for their claim in any prior correspondence.
This case is another reminder that it is critical to comply carefully and fully with contractual notice provisions. The consequences can be severe if they escape notice.