Update: Court Of Appeal Sees Sense In Challenge To Validity Of Claim Notice

• Published date: 31 May 2021
• Subject Matter: Corporate/Commercial Law, Tax, M&A/Private Equity, Transfer Pricing, Tax Authorities
• Law Firm: Arthur Cox
• Author: Mr Fintan Clancy, Caroline Devlin, Ailish Finnerty, David Kilty, Elaine Mooney and Suzanne Kearney

We previously published a briefing on a decision of the High Court of England and Wales in the case of Dodika Limited v United Luck Group Holdings Ltd¹, which has now been overturned by the Court of Appeal.

The High Court decision had reached what seemed an unfair decision from a buyer's perspective, finding a claim notice in relation to a breach of a tax covenant was invalid as it lacked sufficient detail despite the seller having prior knowledge of the details of the matter. As such, the buyer's successful outcome on appeal is a welcome development.

Background

The case concerned a claim notice issued pursuant to a sale and purchase agreement (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 .".

The buyer issued written notice of a claim for breach of the Tax Covenant relating to an investigation by the Slovenian tax authorities into transfer pricing practices of a target company. 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, and accordingly that the purported notice did not comply with the requirements of the SPA. The High Court found that the claim notice did not satisfy the requirements of the SPA, in that it merely notified the sellers of a tax investigation, without setting out, in sufficient detail, the subject matter of the investigation, and therefore was invalid.

Court of Appeal Decision

The Court of Appeal of England and Wales² reversed the decision of the High Court. The Court of Appeal focused on two questions:

• What was the 'matter' which gave rise to the claim?
• Was the matter stated 'in reasonable detail'?

The Court stated that in order for there to be a claim on the tax covenant there must be a tax liability that has arisen in consequence of an event which occurred before completion of the SPA or in respect of any income, profits or gains which were earned accrued or received before completion. 'A matter which gives rise to' a claim is a reference to these underlying pre-completion facts giving...