Notice provisions: how much detail is reasonable detail? (Dodika v United Luck Group)

Background

The buyer ("Dodika") had entered into a share purchase agreement (the "SPA") with a number of sellers, some of whom were also warrantors (including the Respondents "United"). The SPA contained a Tax Covenant, pursuant to which United agreed to pay Dodika an amount equivalent to any tax liability of any Group Company arising (in summary) from pre-completion matters. Any such payment would be made from a tranche of the purchase price held in escrow. If Dodika failed to claim under the Tax Covenant, or failed to give adequate notice of any claims, the funds held in escrow would be released to the sellers.

The relevant contractual notice provision in the SPA (the "Notice Provision") stated that:

"any Indemnity Claim or Claim under the Tax Covenant shall be enforceable if the Buyer gives written notice to the Warrantors stating in reasonable detail the matter which gives rise to such a Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed in respect thereof on or before the Second Claims Escrow Release Date"

In June 2019, a week before the escrow release date, Dodika sent a letter (the "June Letter") to the sellers purporting to be a written notice of an indemnity claim under the Tax Covenant. This letter stated:

"We hereby give you written notice … of Claims under the Tax Covenant of the SPA. Such claims relate to an investigation by the Slovene Tax Authority (the "Tax Authority") into the transfer pricing practices of Ekipa 2 d.o.o. ("Ekip") a Subsidiary Undertaking of the Company and a Group Company"

Whilst the June Letter included a chronology of key milestones, it provided no further detail regarding the facts and matters giving rise to the Ekip investigation (which, at the time, remained live). However, representatives of United knew of the investigation, had access to relevant documents, attended various important meetings, and were involved in strategy discussions about it.

The first instance decision

Thereafter, United issued Part 8 proceedings seeking declarations that: 1) the June Letter did not comply with the Notice Provision; 2) the claim by Dodika was invalid; and 3) the funds held in escrow should be released to the sellers.

Peter Macdonald Eggers QC (sitting as a Deputy High Court Judge) held that the June Letter failed to state "in reasonable detail" the matter giving rise to the claim. He held that the reference to Ekip's transfer pricing methods indicated the existence of a tax investigation, but did not serve the purpose of explaining or identifying the underlying facts and circumstances giving rise to Dodika's claim, and was not therefore compliant with the Notice Provision. Accordingly, he granted summary judgment on United's claim.

Dodika appealed, with permission granted by Lord Justice Males, on 23 November 2020.

Court of Appeal

Judgment was given by Lord Justice Nugee, Lord Justice Popplewell and Lord Justice Underhill, all allowing the appeal and overturning Peter Macdonald Eggers QC's decision at first instance.

Lord Justice Nugee's leading judgment considered two issues in detail:

(1) "what was the 'matter' giving rise to the claim?"

(2) "was the matter stated in 'reasonable detail'"?

What was the 'matter' giving rise to the claim?

Lord Justice Nugee found the former question more straightforward to analyse than the latter. He concluded that the matter that gives rise to a claim under the Tax Covenant is a reference to any underlying pre-completion facts giving rise a tax liability. It was not, therefore, the mere fact that there had been an investigation, but the underlying matters themselves, namely the transfer pricing practices now being investigated.

Lord Justice Nugee grappled with the fact that the June Letter did not provide great detail on these underlying matters. However, he accepted that the SPA did not specify precisely what information the notice needed to contain, therefore a compliant notice was simply required to state matters in "reasonable detail".

What is reasonable detail?

An important consideration in Lord Justice Nugee's approach to assessing what was reasonable was that United's representatives already possessed full details of the tax investigation. In this regard, Counsel for United conceded that "he could not think how [providing the underlying detail] would have made any difference to the Respondents" but argued that, in any event: "notification clauses of this type served a particular purpose and whether that had any practical impact in a particular case did not affect what such a clause required".

However, Lord Justice Nugee disagreed holding that:

(i) the purpose of this type of notice was, prima facie, to provide information. He considered that the Court should therefore be "slow to conclude" that the June Letter failed to qualify as a compliant notice for failing to spell out facts which both parties already knew. To require this information to be repeated would "elevate the requirement to state matters in reasonable detail into empty formalism"; and

(ii) given this context, on the facts, sufficient detail had been provided of the "matter giving rise to a claim".

Lord Justice Nugee emphasised that "what is reasonable must depend on all the circumstances. In my view those circumstances must include in particular what is already known to the recipient".

Lord Justice Popplewell agreed with this analysis, and added that he "reached that conclusion with less hesitation" as, in addition to being known to United already, the further level of detail required by the Notice Provision:

(i) was still "at a high level of generality”, which would not have aided the recipients' understanding; and

(ii) would not have served any commercial purpose.

He considered that the purpose of a notice clause is to enable the recipient to assess the merits of the claim, participate in any investigation with a view to influencing it, and to take into account the nature and scope of the claim in its future business dealings. The additional detail required pursuant to the Notice Provision would not have advanced any of those purposes; "what is reasonable takes its colour from the commercial purpose of the clause … businessmen would not expect or require further detail which served no commercial purpose. That would be the antithesis of what is reasonable".

Accordingly, the panel considered that the June Letter described the matter giving rise to the claim in reasonable detail and complied with the Notice Provision.

Practical considerations

Where a notice clause does not specify precisely what information must be included in it, the Court of Appeal’s decision suggests that sellers may potentially struggle to rely on highly prescriptive arguments to seek to avoid the protections they have agreed to give to a buyer. However, relying on such approach naturally entails some degree of risk.

The Court of Appeal's decision (and the decision at first instance which preceded it) also highlights the care that must be taken in the preparation and service of contractual notices. Whilst in this case the buyer was, on appeal, able to successfully demonstrate that it had complied with the notice requirement, the decision was fact-specific. In this case the Notice Provision was not prescriptive thereby giving the Court broad discretion to take into account all the circumstances. Indeed, in reaching its decision, the Court of Appeal emphasised the need for strict compliance with such clauses, making it clear that a notice which failed to comply with a contractual notice provision would be invalid, even if the sellers already knew about the matter in question¹.