Tax Warranty & Indemnity Claim Rejected For Failure To Follow Notice Procedure
A recent decision of the Court of Appeal has highlighted the importance of following the correct procedure for notifying tax warranty and tax covenant claims under a sale and purchase agreement (SPA) (Teoco UK Ltd v Aircom Jersey 4 Limited [2018] EWCA Civ 23).
The case involved the sale of a group of companies in 2013. In 2015 the purchaser commenced legal proceedings claiming to be entitled to, among other things, damages for breach of warranty or an indemnity in relation to tax. The seller contested the claim on the basis the correct notice procedure specified in the SPA had not been followed, and that the claim was out of time.
The dispute was initially heard by the High Court who found in favour of the seller. The purchaser then appealed to the Court of Appeal. The main issue before the Court of Appeal was the meaning of the notice of claims provision in paragraph 4 of schedule 4 to the SPA, which provided:
No Seller shall be liable for any Claim unless the Purchaser has given notice to the Seller of such Claim setting out reasonable details of the Claim (including the grounds on which it is based and the Purchaser's good faith estimate of the amount of the Claim (detailing the Purchaser's calculation of the loss, liability or damage alleged to have been suffered or incurred)).
The Court of Appeal agreed with the High Court that "setting out" the "grounds" of a claim under paragraph 4 meant the legal basis of the claim had to be identified. In all but exceptional cases this requires explicit reference to the particular warranties or other provisions. An "omnibus reference to Warranty Claims or Tax Claims" is not good enough.
The decision is noteworthy because it highlights the importance of drafting notice clauses in a way that does not cause unnecessary procedural difficulty for a purchaser making a claim. It also underlines the importance of following agreed notice procedure. If a notice needs to be given, it should track the notice provisions closely, including giving as much information as possible.
Posted on 02/06/2018 by Ortolan
