Providing valid notice of a contractual claim
Dodika v United Luck Group (High Court) [2020]
Contracting parties should always strive to comply with contractual notice provisions to the absolute letter. Failure to do so may render a claim invalid or out of time and, in this case, United’s luck ran out
Facts:
In December 2016, United purchased shares in a holding company for US$1 billion. Under the Share Purchase Agreement (‘SPA’) US$ 100 million of the price was held in escrow to be released in two tranches. If a claim was made under the SPA before each tranche was to be released, the tranche would remain in escrow until the claim was determined. If the claim was determined in favour of United the claim would be satisfied out of the escrow amount.
The SPA required United to bring claims by giving written notice to the sellers stating in reasonable detail the matter which gave rise to the claim, the nature of the claim and (so far as reasonably practical) the amount claimed in respect of the claim.
In July 2018, the Slovenian tax authorities initiated an investigation into one of the group’s companies regarding its transfer pricing practices. Representatives of the sellers were informed of the investigation and its material developments, had access to relevant documents, attended important meetings and were involved in strategy discussions.
The tax investigation remained unresolved in June 2019 when United sent a letter to the sellers which purported to give written notice of a claim under the SPA. The notice referred to the tax investigation initiated by the Slovenian tax authorities into the group company’s transfer pricing practices and provided a chronology. The notice also explained how the group company had responded to the investigation by providing information, stated that the investigation was ongoing and that it was not possible to quantify the amount claimed at that stage.
The final tranche of the purchase price was not, therefore, released from escrow. The sellers issued proceedings seeking declarations that United’s notice of a claim did not comply with the claim notification provision under the SPA.
Decision:
The judge noted that the notification provision did not absolutely require the claim to be quantified. Instead, a claim was required to be quantified “so far as reasonably practical”. At the time the letter was sent, the amount of any tax liability resulting from the tax authorities’ investigation remained contingent. The judge said that on the available evidence he was unable to conclude whether it was reasonably practical to quantify the claim.
However, the court held that the letter failed to give reasonable detail about the matters giving rise to the claim. United argued that the matters giving rise to the claim would have been obvious to the sellers. The sellers were aware of the tax investigation and had been involved in responding to it. United argued that the notice had to be construed having regard to the background information which was available to both parties. The sellers maintained, notwithstanding the relevant transfer practices had been adopted during their control of the company, that whatever the parties’ shared knowledge, this could not rectify any lack of reasonable detail in the letter.
The judge accepted this argument. He held that “the matter giving rise to the claim” meant the facts, events or circumstances on which the claim was based. The words “giving rise to” pointed to the factual reasons why a tax liability might accrue. The tax investigation would not itself give rise to a tax liability. It was not enough for the letter to leave the sellers to infer which facts were relied on by United as the basis of a claim by reference, in general terms, to what was being investigated by the tax authorities. The sellers required sufficient detail to deal with the claim, including for example to investigate the matters which allegedly gave rise to a claim. A valid notice was therefore required to identify the specific transfer pricing practices or transactions which United relied on in support of its claim against the sellers. The letter did not do so. Compliant notice of the claim had not been given in time and the claim was therefore contractually barred.
Points to Note:
- On its face this decision seems quite harsh. Contractual notice provisions are a common stumbling block. Take great care to comply with their terms and always err on the side of caution. Provide more detail rather than less even if the recipient of the notice already has a high degree of knowledge of the matters leading to the claim as such knowledge is unlikely to fill in any gaps in the notice itself.