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Notice givers take care – ignore the contract at your peril

29 August 2019. Published by Geraldine Elliott, Partner and Tim Potts, Associate

The Court of Appeal has confirmed in Stobart Group Ltd & Anor v William Stobart & Anor [1] that an objective test will be applied when assessing whether a unilateral contractual notice has been validly given. This decision also provides a cautionary reminder of the consequences of a party's failure to comply strictly with contractual notice provisions.

Background

This dispute arose in the context of a 2008 share purchase agreement (the SPA) under which Stobart Group Ltd (SGL) acquired Stobart Rail Limited (SRL) from sellers, William Stobart and Andrew Tinkler.

As is common in such transactions, the SPA provided for the sellers to pay any tax liability incurred by SRL prior to the sale but which had not been recognised until after the sale.

The dispute centred on two notice provisions relating to the tax covenants in the SPA:

  • Paragraph 6.3: related to a claim by SGL against the sellers and set out the requirement for SGL to send the sellers an advance notice if it intended to make a claim against the sellers for a tax liability. The sellers would not incur any such tax liability unless a paragraph 6 notice was served within seven years of the completion of the acquisition.

  • Paragraph 7.1: related to a claim by HMRC against SRL and set out the requirement for SGL to send the sellers a notice providing details of any such HMRC claim.

As to how these provisions were intended to operate in practice, following receipt of a tax demand by HMRC, SGL was required to send the sellers a paragraph 7 notice informing them of a claim by HMRC. SGL could also send the sellers a paragraph 6 notice informing them that SGL required them to pay this tax liability pursuant to the tax covenants in the SPA.

SRL subsequently incurred a tax liability and SGL served a notice of claim against the sellers for this liability. The sellers argued that the notice was invalid and that they were therefore not required to pay.

The key question was whether a notice sent by SGL to the sellers on 24 March 2015, very shortly before the end of the seven year limitation period, was a valid paragraph 6 notice. If the letter did constitute a paragraph 6 notice then the sellers would be liable for the HMRC tax demand. Conversely, if the letter did not constitute a paragraph 6 notice the seven year limitation period having subsequently expired SGL/SRL would be required to cover this liability themselves.

Objective test

The dispute came before the Court of Appeal which found that the letter of 24 March 2015 was not a valid paragraph 6 notice and dismissed the appeal.

In reaching this conclusion, the Court of Appeal affirmed the House of Lords' decision in Mannai Investment Co Ltd v Eagle Star Life Assurance[2] which stated that contractual notices must be construed objectively, noting that "The question is not how the [recipient] understood the notices. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene ".

Exploring this test, the Court of Appeal noted in particular that:

  • The letter contained no reference to a Tax Claim, or to a claim under paragraph 6.3 or to any claim being made against the sellers.
  • Instead, the letter referred only to a "potential Liability to Taxation" and a "potential" claim rather than an actual claim.
  • The letter referred to paragraph 7 of the SPA and, in accordance with the terms of the SPA, sought the sellers' confirmation as to whether they wanted to have conduct of any further discussions with HMRC in relation to SRL's tax liability.

How important was context?

SGL argued that, notwithstanding the terms of the 24 March 2015 letter, the sellers would have understood that it was a paragraph 6, and not a paragraph 7 notice. It had sent the sellers a letter a month earlier that referred to SGL's ability to send a paragraph 6 notice and requesting an extension to the seven year limitation period while discussions with HMRC continued. This letter would have put the sellers on notice that they might expect to receive a paragraph 6 notice before the end of the seven year limitation period and was a key piece in the contextual jigsaw. The Court of Appeal rejected this argument on the basis that, even after the 24 March 2015 letter, there was still time for SGL to send a valid paragraph 6 notice and so it would not be clear to the sellers that no further notice would be received.

In the light of the finding that the relevant notice had to be construed objectively it was irrelevant that SGL may have subjectively intended the letter of 24 March 2015 to represent a paragraph 6 notice.  Instead, following its review of the terms of the letter, the Court of Appeal concluded that a reasonable recipient with knowledge of the terms of the SPA would have understood it to be a paragraph 7 notice, and not a paragraph 6 notice.

Comment

This decision serves as a helpful reminder to notice givers that the courts will apply an objective test when construing unilateral notice clauses and, in the absence of a common understanding between the parties, the sender's subjective intention will not be relevant to questions of construction.

In addition, this decision represents yet another example of the courts emphasising the role contractual notices play in providing certainty and, consequently, the importance of complying strictly with notice provisions. Finer details of contractual notice provisions are not mere technicalities; parties must remain alive to the fact that failure to comply with the mechanics of the notice provisions set out in the contract may have serious consequences.

 

[1] [2019] EWCA Civ 1376

[2] [1997] AC 749