The Court of Appeal has recently reaffirmed the principle that notice provisions in a share purchase agreement are to be construed strictly.
In March 2008, Mr William Stobart and Mr William Tinkler sold Stobart Rail Ltd, an engineering company, to the Stobart Group.
The share purchase agreement included a tax covenant by which the sellers would pay certain tax liabilities of the company after completion. Distinguishing between a ‘Claim’ (a claim for unpaid tax made by HMRC against the company) and a ‘Tax Claim’ (a claim by the buyer against the sellers under the tax covenant), schedule 4 required the buyer to give notice to the sellers as follows:
- Paragraph 6.3 required the buyer to give the sellers written notice of any Tax Claim within seven years of completion of the sale. If no such notice was given, the sellers would not be liable.
- Paragraph 7.1 required the buyer to give the sellers notice of any Claim by HMRC against the company within ten business days of becoming aware of the Claim.
The company incurred a tax liability in relation to certain employee share schemes which was eventually assessed at £3.8 million. The buyer wrote to the sellers in April 2008, advising them that HMRC had issued a Claim, and again in February 2015, requesting an extension of the seven-year deadline for giving notice of a Tax Claim.
The sellers did not reply, and in March 2015, shortly before expiry of the seven-year period, the buyer wrote to the sellers once more, giving notice of a potential liability to tax, referring to paragraph 7 of schedule 4, and asking the sellers whether they wanted to have conduct of discussions with HMRC in relation to the Claim.
The sellers argued that the buyer had not given them notice of a Tax Claim pursuant to paragraph 6.3 within the prescribed seven-year period and that they were therefore not liable. The High Court agreed with the sellers, and the buyer appealed.
Giving judgment in the Court of Appeal, Simon LJ, with whom Hickinbottom LJ and the Master of the Rolls agreed, said the construction of a unilateral notice must be approached objectively. The question was not the recipient’s actual knowledge, which would in any event be difficult to evidence, but how a reasonable recipient would have understood the notice, taking into account the relevant objective contextual scene. The requirements of any notice clause should be fulfilled, since the purpose of the notice was to leave the recipient in no reasonable doubt that a claim would be brought.
Applying these principles, the Court of Appeal upheld the High Court’s judgment that the buyer had not given the sellers notice of a Tax Claim as required by paragraph 6.3. The March 2015 letter made no reference to a Tax Claim, referenced paragraph 7 rather than paragraph 6.3, referred in contingent terms to ‘a potential Liability to Taxation’ and a ‘potential claim’, and asked the sellers whether they wanted to have discussions with HMRC. A person receiving that letter with knowledge of the share purchase agreement and the wider factual background would have understood it to be a notice under paragraph 7. Consequently, no notice under paragraph 6.3 had been served, and the sellers would not be liable for the Tax Claim.
This case is further illustration of the strict approach taken by the courts to the construction of notice clauses that we have noted previously. When giving notice under an agreement, a party should take care to comply with the terms of any notice provisions, especially if the notice period is about to expire.