Court of Appeal holds that notice of tax covenant claim is valid, despite lack of detail

Dodika Ltd and others v United Luck Group Holdings Ltd [2021] EWCA Civ 638

The question

Was the notice of a potential claim invalid because it failed to provide “reasonable detail”?

The key takeaway

Whilst notice clauses in contracts are intended to provide sufficient information to the recipient, adhering to notice requirements should not result in “empty formalism”. The Court should be slow to conclude that a notice is invalid if it does not spell out what was already known to the recipient and what constituted “reasonable detail” depends on the background context, including the recipient’s knowledge.

The background

Under a sale and purchase agreement (SPA), United Luck Group Holdings (ULG) was the buyer of the issued share capital of an English company, Outfit7 Investments Ltd. Dodika Ltd (Dodika) was one of the sellers and warrantors. 

Under the SPA, Dodika gave ULG a tax covenant, under which it agreed to pay an amount equal to any potential tax liability of a group company arising out of post-completion matters. To claim under the tax covenant, ULG had to give written notice to Dodika by 1 July 2019 stating, “in reasonable detail” various things such as “the matter which gives rise to such a Claim”.

ULG gave notice to Dodika via its solicitors on 24 June 2019 (the Notice), referring to a Slovenian tax investigation into a group company’s transfer pricing practices which launched in July 2018. 

Dodika argued that the Notice was invalid as it failed to state the matter giving rise to the claim and the amount claimed in reasonable detail. At first instance, the High Court agreed that the Notice did not comply with the SPA requirements. ULG appealed the decision.

The decision

(i) What was the “matter” giving rise to the Claim?

The Court of Appeal agreed with the judge that the “matter” giving rise to the claim was based on the factual reasons why a tax liability had, or may have, accrued pre-completion, rather than the existence of the tax investigation itself. 

(ii) Did the Notice state the matter “in reasonable detail”?

However, despite the decision on (i) above, the Court of Appeal held that the Notice did state the matter in reasonable detail. The SPA did not specify exactly what information the Notice must contain and the requirement for “reasonable detail” was dependant on all circumstances, including the recipient’s knowledge. Dodika were assumed to know the reasons why the Slovenian tax authority thought that the transfer pricing may be too low, and the Notice did not need to contain more detail than it did. The additional detail sought by Dodika was of a generic and limited nature and already known to them.

Why is this important?

If a contract prescribes that certain information must be included in a notice, failure to include that information will result in the notice being invalid and it is no answer to say that the recipient already knew it. However, where the contract does not specify precisely what is required (as was the case here), the Court will be reluctant to conclude that a notice is invalid if it does not spell out what was already known to the recipient. 

Any practical tips?

When drafting notice provisions, ensure that they are workable and ideally specify what must be included. Where notice provisions are less specific, the level of information to be provided in the notice will depend on the circumstances. 

When drafting a notice, ensure that all the requirements are fully satisfied – if something is expressly prescribed, it must be included. Doublecheck timing, content and service of the notice. And do not leave notices until the final deadline – allowing time for any issues to be remedied if necessary.