In 2016, United Luck Group Holdings Ltd bought Outfit7 Investments Ltd, the holding company of a group which develops apps for mobile phones. The share purchase agreement included a tax covenant under which the sellers agreed to pay the buyer an amount equal to any tax liability of a group company arising from pre-completion matters. To bring a claim under the tax covenant, the buyer was required to give written notice to the sellers stating ‘in reasonable detail the matter which gives rise to such Claim’.
One of the companies in the group, Ekipa2 d.o.o., is incorporated in Slovenia. It became subject to an investigation by the Slovenian tax authority into its transfer pricing practices. In 2019, the buyer wrote to the sellers’ representative to give notice of a claim under the tax covenant, referring to the transfer pricing practices and the tax authority’s investigation. The sellers responded by issuing proceedings, seeking a declaration from the court that the buyer’s letter failed to state the matter giving rise to the claim in reasonable detail.
In the High Court, it was held that the letter did not provide reasonable details, because a reasonable recipient reading the letter would learn only of the tax investigation, not of the underlying facts, events or circumstances giving rise to the claim. The buyer appealed.
In the Court of Appeal, Nugee LJ, with whom Popplewell and Underhill LJJ agreed, said the first question to be determined was whether the matter giving rise to the claim was (i) the underlying facts, events or circumstances or (ii) the fact that the tax investigation was taking place. On this point, Nugee LJ agreed with the judgment of the High Court, that the matter giving rise to the claim was the underlying pre-completion facts giving rise to a tax liability.
The second question was then whether the letter stated that matter in reasonable detail. Here, the Court of Appeal took a different view from the High Court. Nugee LJ said that, where an agreement prescribes that a notice must contain certain information, a notice which does not contain that information would be invalid. In this case, however, the requirement was that the letter should state the matter ‘in reasonable detail’. What is reasonable would depend on all the circumstances, including what was already known by the sellers’ representative, the recipient of the letter. Because the sellers’ representative already knew about Ekipa2’s transfer pricing arrangements, and had been kept apprised of the tax investigation from an early stage, it was not reasonably required that these matters should be set out in detail in the letter. Since further detail would have served no commercial purpose, Popplewell LJ added, it should not be considered to be a reasonable requirement.
It remains essential that a party giving notice of a claim under an agreement should take great care to fulfil all applicable notice requirements. It may be that, if the buyer in this case had provided further details in the letter, the litigation could have been avoided. A party receiving notice of a claim, on the other hand, should not assume it can have the notice declared invalid for failure to include material which could have been included but is not strictly required.
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