The Importance of Notice Clauses in Share Purchase Agreements

As a matter of course share purchase agreements contain clauses about the notifying of claims. The norm is to see provision for the person(s) to be notified and the method by which notice should be given. It is also not unusual for the clause to set out the level of detail required for there to be a valid claim writes Kirsty White, Barrister, St Philips Chambers.

In the recent case of Dodika Ltd & Ors v United Luck Group Holdings Ltd [2020] EWHC 2101 the High Court determined that the buyer’s notice of claim did not fulfil the notice provisions and was therefore inadequate.

The SPA provided that “the rights of the buyer in respect of: any… claim under the tax covenant shall be enforceable if the buyer gives written notice to the warrantors stating in reasonable detail the matter which give rise to such claim, the nature of such claim and (so far as reasonably practicable) the amount claimed in respect thereof on or before [a specified date]”.

The tax warranties in the SPA provided that in certain circumstances the Dodika Ltd (“Dodika”) would pay the costs of any tax liability. In its letter of claim the United Luck Group Holdings Ltd (“United”) gave notice of a tax investigation by the Slovenian authorities. The letter before claim was general in nature, informing Dodika of the existence of the enquiry but gave none of the substantive details. United  stated the value of the claim as an amount equal to that it considered likely the Slovenian authorities might impose. Dodika brought Part 8 proceedings and applied for summary judgment that United had not complied with the notice provision.

The United argued that the Dodika was aware of the investigation prior to the notice of claim, as various pieces of correspondence had been exchanged by the parties. United further argued that the notice of claim should be considered in light of that knowledge.

The judge rejected that argument, stating that the SPA required United to provide reasonable detail of the claim and it could not rely upon Dodika’s existing knowledge. The judge stated that as a minimum “a compliant notice would identify the particular warranty that was alleged to have been breached;… at least in general terms the notice would explain why it has been breached, with at least some sort of particularisation of the facts upon which such an allegation was based, and would give at least some sort of indication of what loss had been suffered as a result of the breach of warranty”.

PRACTICAL POINTS

It seems obvious to say that a notice of claim should be drafted having first reviewed the notice clause and understanding the requirements of the same. Notice clauses are contractual requirements and the failure to observe the same can rarely be dismissed as a technicality that can be brushed aside. The law in relation to contractual interpretation and the well-known line of authorities including Arnold v Britton [2015] UKSC 36 will be applied when determining the meaning of the term. If the notice of claim does not comply with the clause then a claim stands liable to be struck out.

A clause requiring reasonable detail of the claim, as above, should give the recipient enough information to consider the merits of the claim and to take any necessary steps so as to properly respond to the claim, and notify any other relevant parties.

If there has been previous correspondence between the parties then that should be properly referenced, and possibly appended to the notice rather than a simple reference made.

Equally if you are responding to a notice of claim check the notice clause before delving further into the correspondence.

Kirsty is a barrister at St Philips Chambers specialising in Commercial, Company and Insolvency law. She can be contacted via her clerks at commercial@st-philips.com

 

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