Buyer Beware ' Sellers' Challenge To Validity Of Claim Notice Successful Despite Knowledge Of Ongoing Tax Investigation

• Published date: 29 September 2020
• Subject Matter: Tax, Transfer Pricing, Tax Authorities
• Law Firm: Arthur Cox
• Author: Mr Fintan Clancy, Caroline Devlin, Ailish Finnerty, David Kilty and Suzanne Kearney

The High Court of England and Wales recently held that a claim under a tax covenant in a sale and purchase agreement was unenforceable because the claim notice did not contain sufficient detail of the matter which gave rise to the claim.

Facts

The case of Dodika Limited v United Luck Group Holdings Ltd [2020] EWHC 2101 (Comm), concerned a claim notice issued pursuant to a sale and purchase agreement entered into in December 2016 in relation to the purchase of a target group (the "SPA"). The SPA contained a tax covenant which provided that the sellers would reimburse the buyer in respect of tax liabilities arising from certain pre-sale events (the "Tax Covenant"). The SPA provided that in order for the buyer to make a claim under the Tax Covenant the buyer was required to give written notice "stating in reasonable detail the matter which gives rise to such Claim ...".

In June 2019, the buyer sent a letter to the sellers, which purported to be written notice of a claim for breach of the Tax Covenant. The notice identified and provided a chronology of an on-going investigation which was commenced in 2018 by the Slovenian tax authority into certain transfer pricing practices of the target group. The sellers' representatives were aware of this investigation, had access to relevant documents, attended meetings and were involved in strategy discussions in relation to the investigation. Nonetheless, the sellers issued legal proceedings seeking declarations that the June 2019 notice from the buyer did not comply with the notice provisions of the SPA, and that therefore the claim was not enforceable. Although it was uncontested that the buyer's notice gave reasonable detail of the nature of the claim, the sellers submitted that the notice failed to provide the reasonable detail required of the matter which constituted the factual basis of the claim.

Court's View

The Court concluded that the notice from the buyer was not a valid claim notice under the SPA as it did not provide reasonable detail of the matter which gave rise to the claim, being the facts events and circumstances that were the subject of the investigation by the Slovenian tax authority, rather than the mere existence of the investigation. The claim would not be based on the existence of a tax investigation, but on the factual reasons why a tax liability had or might accrue, such as particular features of transfer pricing practices or specific transactions. While the Court noted that the sellers'...