Notifying claims under a tax deed and warranties

The Court of Appeal decision in Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA 23 provides a stark warning concerning both the requirements for giving valid notice of a tax claim and the dangers of accepting a widely drafted requirement to provide notice of claims to the seller. Despite providing lengthy details of the nature of the tax liabilities in the target companies, the purchaser was held not to have provided valid notice under the terms of the contractual arrangements since the relevant letters had failed to point out the particular provisions of the tax deed or particular tax warranties on which the purchaser based their claim.

Background

The purchaser, Teoco, acquired a group of companies from Aircom Jersey in 2013. There was a share purchase agreement (SPA) containing tax warranties and a tax covenant containing an obligation to make payment in relation to certain tax liabilities of the acquired group in standard terms. In 2015, Teoco discovered that the Brazilian and Philippine subsidiaries potentially had additional tax liabilities which had not been included in the relevant acquisition accounts and sought to bring a claim either for breach of the tax warranties or under the terms of the tax covenant.

The SPA included a provision (Schedule 4 Clause 4) dealing with giving notice for claims which provided that the purchaser must give notice “setting out reasonable details of the Claim (including the grounds on which it is based)” and which must be given “as soon as reasonably practicable after the Purchaser becomes aware” of the claim. Legal proceedings were required to be brought within six months of providing valid notice under Clause 4.

An additional provision (Schedule 4 Clause 13) contained a general obligation on the purchaser to give notice to the seller as soon as reasonably practicable containing reasonable details of any matter or thing of which the purchaser became aware and which might give rise to a Claim.

Teoco’s lawyers provided a notice to the seller in February 2015 expressed as “notification in accordance with Schedule 4 to the SPA of the existence of Claims, being either Warranty or Tax Claims” and providing details of the nature of the tax liabilities which formed the basis for those Claims. This was followed in June 2015 by a further letter again referring generally to “notification in accordance with Schedule 4 to the SPA” providing further details of the Claims.

The seller resisted the Claims and Teoco brought legal proceedings to enforce its Claims under the SPA. The seller then sought to strike out those claims on the basis that Teoco had not provided valid notice of the Claims under the terms of the SPA. The High Court judge agreed with the seller and Teoco appealed that decision to the Court of Appeal.

Decision of the Court of Appeal

The Court of Appeal agreed with the High Court judge. As all parties recognised, “every notification clause turns on its own individual wording”. The terms of the notice provision of the SPA here clearly required the purchaser to provide details of the “grounds” of the claims. The High Court judge considered that the grounds must include identification of the warranties said to the breached or the basis of the trigger of the claim under the tax covenant. An “omnibus reference” to a Warranty Claim or Tax Claim was not sufficient for these purposes to inform the seller of the grounds of the claim and the consequences for them. Since the letters purporting to provide notice did not meet the requirements of Clause 4, they did not constitute valid notice under the terms of the SPA.

Teoco argued that there was no general principle that particular warranties must be identified and a reasonable recipient of the letters would have understood how the Tax Warranties and the Tax Covenant would be engaged by the issues explained in those letters. However, the court considered that the requirement for the “setting out” of the “grounds” of a claim meant that the legal basis of the claim had to be identified. This will normally require explicit reference to the particular warranties or other provisions relied on. Whilst there may be some circumstances in which, exceptionally, notice of the grounds might be achieved without mentioning a particular warranty etc explicitly (where for example recitation of the particular facts unequivocally indicated a specific warranty), that was not the case here. The notice in this case generally to the warranties “encompassed a multitude of possibilities” and did not serve to identify the “grounds” of the Claims.

The court was reinforced in its conclusion by the fact that it was consistent with the importance of the principle of certainty identified by the courts in similar cases. Accordingly, by failing to identify the particular warranties and other provisions on which the Claims were based, the letters did not comply with the terms of the SPA and no valid notice had been given to the seller.

Comment

At first glance, the decision may seem somewhat harsh on the purchaser. After all, it was not difficult to determine that the letters concerning the additional tax liabilities of the relevant subsidiaries were intended to suggest that the general warranty concerning tax returns being “true and accurate” had been breached and that the provision in the tax deed for a payment equal to a liability for taxation had been engaged. As such, the decision of the Court of Appeal highlights the importance of correct procedure. The fact that a reasonable seller may have been able to infer the grounds is not sufficient to provide valid notice where notice of the grounds is required. Indeed, it might be noted that the mention of Schedule 4 in the notice letters could have equally been a reference to notice under Clause 13 of a potential liability.

As such, the decision of the Court of Appeal draws attention to the fact that any notice of a claim under warranties or a tax deed must be carefully drafted to comply with the particular terms agreed. And if that notice requires the “grounds” of a claim to be given, then a general reference to the warranties or the tax deed will be insufficient. Notice sufficient to provide the seller with the grounds of the claim must be specific about the warranties said to be breached or the provisions of the tax deed said to be activated.

More generally, the case is also a reminder of the need to take care when acting for a purchaser not to agree to notice provisions that unnecessarily prevent the purchaser bringing a claim. For example, failure to meet a requirement to provide notice or details “as soon as reasonably practicable” should not prevent a claim altogether, though may prevent the making of a claim to the extent that it has increased the relevant tax liability.