18 March 2020

Buyers read the fine print when serving notices

Stobart Group Ltd v Stobart & Tinkler [2019] EWCA Civ 1376

The construction of unilateral notices under share purchase agreements was recently considered by the UK’s Court of Appeal.  

In keeping with the disproportionate amount of litigation in this area, the Court of Appeal found that a failure to draft unilateral notices clearly and unambiguously, particularly in respect to warranty claims, can lead to parties being successful by virtue of a technicality (i.e. a non-compliant notice), without having to proceed with formal proceedings relating to the substance of the dispute. 

With this in mind, from a seller’s perspective, with the Court of Appeal reiterating that the purpose of notice clauses in contracts is to provide certainty to the party being notified, it is worth checking the notice carefully, to see if there are any grounds for challenge on the basis of poorly drafted notices.  

Since the UK courts will rarely consider the subjective intent (or common assumption) of either party, if a purchaser wishes to make a claim, the provisions of the SPA they are relying on to bring a claim should be stated in unequivocal terms.  Distinction between notices is key and a failure to do so can be fatal, as it was in this case.  The principle of objective construction for such notices is well-established in English law, with any subjective tests reserved for uncontroversial matters, such as misstating the relevant contractual provision by a single number. 

Therefore, it is extremely important for notices to clearly state that a claim is being made and as “best practice” the notice should cross-refer to the relevant provisions and warranties in the SPA (Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23).  If the relevant clause in a SPA requires a notice to include specific details, those should also be included.

Facts

Stobart Group Ltd (the appellant, “SGL”) had purchased the entire issued share capital of Stobart Rail Limited (“SRL”) from Mr. Stobart and Mr. Tinkler (the “Sellers”) in 2008.  The share purchase agreement (“SPA”) contained a covenant under which the Sellers were required to pay certain of SRL’s tax liabilities incurred prior to the sale of SRL but recognised afterwards.  

Under clause 7.1 of the SPA, SGL were required to notify the Sellers of any potential claim against SRL by HMRC (“Clause 7.1 Notice”).  Additionally, under clause 6.3, the Sellers had no liability to pay SGL unless SGL had, by the seventh anniversary of completion (the “Claim Date”), given written notice that it was in turn bringing a “tax claim” against the Sellers in respect of SRL’s tax liability (“Clause 6.3 Notice”).  

SGL subsequently incurred a tax liability of £3.8 million.  Shortly before the expiration of the Claim Date, SGL wrote to the Sellers to inform them of this “potential” claim and asked if the Sellers wished to have “conduct of discussions with HMRC in relation to the claim”.  SGL, believing this to be a valid Clause 6.3 Notice and then issued proceedings against the Sellers to recover SRL’s tax liability.  The Sellers argued that the notice given by SGL was a Clause 7.1 Notice, rather than a Clause 6.3 Notice. The High Court agreed and found that on the proper construction of the notice, SGL had not given a Clause 6.3 Notice to the Sellers and consequently were not entitled to any payment under the SPA.

Judgment

The UK Court of Appeal agreed with the High Court and dismissed SGL’s appeal.  When considering the construction of the Clause 7.1 and Clause 6.3 Notices, the Court of Appeal identified four key principles:

  1. an objective and contextual approach should be the starting point of construction for unilateral notices, rather than consider the subjective intent of the parties (as per Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749);

  2. whether the wording of the document or the factual context was considered and analysed first was immaterial (Wood v Capita Insurance Services Ltd [2017] UKSC 24);

  3. the subjective intent of the parties was irrelevant unless there was a clear common understanding to enable the correction of mistakes by construction (Chartbrook Ltd v Persimmon Homes [2009] 1 AC 1101); and

  4. the purpose of the notification clauses in the SPA was to make it clear in sufficiently formal, “unambiguous” terms so as to leave the Sellers “in no reasonable doubt” that a claim was being made against them (Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep. 423), but there was no need to include the full particulars of claim to the extent required for formal legal proceedings (ROK Plc (In Administration) v S Harrison Group Ltd [2011] EWHC 270 (Comm)).

Lessons

In applying the above principles, the Court of Appeal found that the language of the notice provided by SRL to the Sellers did not make it clear that’s SRL was bringing a claim against the Sellers.  The Court highlighted the distinction between notifying the Sellers of a potential claim, as opposed to an actual claim.  The wording used in the notice was expressed in terms of a contingency (i.e. the query as to whether the Sellers wanted to continue the discussions with HMRC).  

In addition, there were numerous other defects in the notice, for example, it did not make reference to a tax claim, clause 6.3, or the detailed schedule setting out the “likely estimate” of quantum (rendering it a summary of exposure to HRMC, not of SRL’s claim against the Sellers).  This made it clear to the Court of Appeal that the notice was a Clause 7.1 Notice of a potential claim and was not an adequate Clause 6.3 Notice of an actual “tax claim”.  

Assessing the notification objectively, it found that anyone with knowledge of the terms of the SPA would have understood SGL’s notification to be a Clause 7.1 Notice.  The Court of Appeal therefore dismissed SGL’s appeal in the first instance, SGL were barred from bringing a claim in relation to the tax liability and the High Court’s finding of summary judgment in favour of the Sellers was upheld. 

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