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8 November 2019 0 Comments
Posted in Corporate, Opinion

Warranty claims – “noticing” the importance of precise wording

Posted by , Solicitor

The recent judgment in Stobart Group Ltd & Stobart Rail Ltd v Stobart & Tinkler [2019] EWCA Civ 1376 serves as a timely reminder to buyers of the importance of providing effective notice in relation to claims under M&A transaction documents.

The case

Stobart Group (Buyer) acquired Stobart Rail from Stobart & Tinkler (Seller) on 7 March 2008. As is commonplace, the share purchase agreement (SPA) included provisions pursuant to which the Seller was to be liable for any tax liabilities of the target which arose pre-completion provided the claim was brought within the seven years following completion.

An issue arose when HMRC issued a claim against the target for unpaid NICs relating to an employee share scheme established by the target. The Buyer gave notice, as required by the SPA, to the Seller of HMRC’s claim in April 2008. Then, on 24 March 2015, the Buyer purported to formally notify the Vendor of the claim.

The Buyer later issued proceedings against the Seller but, rather than issuing a defence, the Seller sought summary judgment striking out the claim on the basis that the Buyer had failed to notify the tax claim in time.

The SPA contained the following paragraphs:

Paragraph 6.3. The Vendors shall not be liable in respect of a Tax Claim unless the Purchaser has given the Vendors written notice of such Tax Claim (stating in reasonable detail the nature of such Tax Claim and, if practicable, the amount claimed) on or before the seventh anniversary of Completion in respect of such Tax Claim unless a Tax Authority is [un]able to assess the Company in respect of the Liability to Taxation or other liability giving rise to the relevant Tax Claim because of fraudulent conduct.

Paragraph 7.1. Upon the Purchaser or the Company becoming aware of any Claim, the Purchaser shall as soon as reasonably practicable, and in any event within 10 Business Days of the date thereof, give notice of such Claim to the Vendors’ Representative stating how the liability arises under paragraph 3 or pursuant to the Tax Warranties and a reasonable estimate of the quantum of the Liability to Taxation or other liability, and upon the Purchaser or the Company becoming aware of any event, fact or circumstances which may give rise to such a Claim, the Purchaser shall give notice thereof and of the possible Claim to the Vendors’ Representative provided that the giving of notice under this paragraph 7.1 shall not be a condition precedent to the liability of the Vendors under this schedule.

The decision

The High Court granted the Seller’s application. It held that the letter sent on 24 March 2015 was not effective notice under paragraph 6.3 but was notice of under paragraph 7.1 of a potential claim.

The Buyer appealed the decision to the Court of Appeal, which upheld the High Court’s decision and dismissed the appeal. The Court of Appeal held that a reasonable recipient of the 24 March 2015 letter would not have understood that it had been notified of a tax claim for the purposes of paragraph 6.4 of the SPA.

In reaching its decision the court applied the “cardinal principle of construction” , that when construing unilateral notices, the knowledge of the recipient is not relevant and the test is how a reasonable recipient with knowledge of the objective context would have understood the notice and how it was intended to operate. The Court of Appeal’s judgment noted that the letter made no reference to a ‘Tax Claim’, did not refer to a claim being made under paragraph 6.4 of the SPA and did not reference a claim being made against the Seller.

What can buyers and sellers learn from this?

On the facts of the case the Court of Appeal’s decision was not surprising, but it serves as a reminder of the importance of paying close attention to the requirements of an SPA when seeking to serve notices. Notices should be clear and unambiguous such that the reasonable recipient of the notice would understand the effect of the notice received.

For more information about issuing notices under M&A transaction documents, or any other aspect of M&A transactions contact Janetta Barrett or another member of our Corporate team on:

01225 459921     Email usjanetta.barrett@roydswithyking.com

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