Disputes Quick Read: Care required when drafting SPA claim notices

QUICK READ

The recent decision of Dodika Limited & Others v United Luck Group Holdings Limited – in which we acted for several of the warrantors – highlights the strict approach that the English courts will adopt when assessing compliance with claim notification provisions in a Share Purchase Agreement (SPA).

Compliance with those provisions will generally be a condition precedent in order to enforce any claims for breaches of warranties or of a tax covenant.

Let's take a closer look at the the Dodika decision and what it means for similar cases in the future.

Case overview

In our clients' case, the buyer of Outfit7 (Talking Tom digital games developer) purported to serve a notice of a claim under a tax covenant. It relied on a transfer pricing investigation relating, in part, to pre-acquisition tax liabilities. By serving the notice, the buyer attempted to retain $50m of the sale consideration which was due to be released from an escrow account.

The SPA required a valid notice to "[state] in reasonable detail the matter which gives rise to such Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed in respect thereof…".

The buyer referred expressly to the existence of the tax investigation, but the judge found that this was insufficient because it did not set out any detail about the underlying facts, events and circumstances giving rise to the claim (ie the underlying transactions or features of the transfer pricing practices that could give rise to additional tax liability).

The buyer contended that the sellers already knew about the underlying facts, events and circumstances because they were involved in responding to the tax investigation. This was not, however, a case where the wording of the notice was ambiguous and needed to be construed by the court. Reliance on the warrantors' knowledge could not "plug gaps" or add detail that should have been stated in the notice.

While the requirements of each notice will turn on the relevant clause of the SPA, this is a further illustration of the care required when drafting a formal claims notice.

A harsh outcome?

Some may view the result as harsh. Based on this analysis, a buyer may be unable to pursue a claim under an SPA where the seller already knows all of the relevant details and is not therefore misled or prejudiced by an insufficiently detailed notice.

But that was not the commercial bargain agreed between the parties. Where they have agreed a condition precedent, it must be complied with and the English courts will uphold that agreement.