The Importance of the Contents of Notices of Breach of Warranty or Tax Covenant Claims

11 November, 2020

If you have noticed this notice then you will notice that this notice is not worth noticing, somebody once said.  Never is this more true than when it comes to a notice of breach of warranty or covenant in a share purchase agreement.

 

In most share purchase agreements (SPAs) the buyer will protect their position by requiring the seller to give warranties or covenants about the company that is being purchased.  Breach of those warranties or covenants will entitle the buyer to seek damages from the seller.  The warranties or covenants are nearly always time limited, with notice of any breach being required to be served by a specified date.

 

Sometimes they are backed by money being held on escrow account.  This means that part of the sale price is not paid over but instead placed in a joint account to be released when certain conditions are satisfied.  A typical condition is that the money will be released on a certain date unless notice of a breach of warranty or covenant has been received by that date.

 

In light of this, getting the notice of breach of warranty or covenant right is essential for the buyer.  If the correct notice is not properly delivered before the deadline then it may not be possible for the buyer to bring any claim or it may mean that money is released from the escrow account, taking away the security which the buyer had in relation to payment of such claims.

 

The court has traditionally taken a hard line with the interpretation of the requirements of notice clauses in SPAs.  Judges will not tinker with them to make them fit the facts and this makes it vital that the requirements for the notice are followed to the letter.  A case that firmly illustrates this is Dodika Ltd v United Luck Group Holdings Ltd [2020] EWHC 2101.

 

In this case what was required was a notice “… stating in reasonable detail the matter which give[s] rise to such Claim and (so far as reasonably practical) the amount claimed in respect thereof …”. Such a notice had to be served before a specified date, failing which the money held in the escrow account would be released.

 

The relevant claim was in relation to a tax covenant and related to a Slovenian tax authority investigation.  The seller’s representatives had been kept informed of progress with the investigation and supplied with surrounding documentation.  The notice which was served identified that the claim related to the investigation and gave details of the chronology of the investigation.  However, the seller claimed that this was insufficient.

 

What the notice did not do was state in reasonable detail the underlying facts, events and circumstances giving rise to the claim.  The seller therefore claimed that the notice was defective.  The court agreed and also stated that it did not matter whether the seller’s representatives had been kept generally informed or that they might have been able to infer what facts and matters gave rise to the claim from information in their possession.  The absence of the details in the notice itself was fatal as it did not as a result comply with the contractual requirements.

 

The end result was that the seller obtained the release of $50,000,000 held in an escrow account.  This was a potentially very expensive lesson for the buyer (or their lawyers if they had drafted the notice).  It is also an object lesson in the need to strictly comply with the terms of such notice provisions.