Court of Appeal clarifies ‘reasonable detail’ in a claims notice

In Dodika Ltd and others v United Luck Group Holdings Ltd [2021] EWCA (Civ) 638 the Court of Appeal in England and Wales clarified that ‘reasonable detail’ in a buyer’s notice of claim under a warranty in a sale and purchase agreement (“SPA”) does not need to include facts already known to the sellers.

Background

The buyer gave notice to the sellers of a potential claim under the tax warranties in the SPA relating to an investigation by the Slovene Tax Authority into the transfer pricing practices of one of the target company’s subsidiaries. The buyer simply provided a chronology of events and did not provide details of the underlying circumstances or of the substance of the matters under investigation.

However, the buyer had been keeping the sellers’ representatives in the target company informed of the progress of the investigation and those representatives were involved in strategic discussions in relation to it and had access to relevant documents.

The SPA only required the notice to provide “reasonable detail” of “the matter which gives rise to such Claim.”

The Appeal

The sellers issued High Court proceedings for a declaration that the notice was invalid and applied for summary judgment on that claim. They argued that the notice of claim did not state "in reasonable detail the matter which give[s] rise to such Claim” and would, therefore, be recoverable from the sellers under the warranty.

The buyer appealed the High Court’s decision to grant a summary judgment in the case. The Court of Appeal, consequently, had to decide:

• Whether the phrase “the matter which gives rise to such Claim” referred to the investigation or to the underlying facts emerging from it; and
• If it referred to the underlying facts, whether the reference to transfer pricing practices during certain periods constituted “reasonable detail.”

1. Matter giving rise to the claim

The Court of Appeal agreed with the findings of the High Court, namely that the reference to “the matter giving rise to the Claim” meant the underlying facts, events or circumstances and not just the fact of the tax investigation itself.

2. Reasonable detail

The Court of Appeal diverted from the High Court decision and held that the buyer did not have to include details of which the sellers’ representatives were already aware. Since they were aware of the details of the investigation from their earlier communications with the buyers, it was not necessary for that information to be repeated in the notice.

The court held that the purpose of the notice clause was to enable the sellers to make such inquiries as necessary, and in this case they accepted that additional detail would not have furthered that purpose.

Conclusion

This decision highlights that whilst the buyer must include the details of the underlying factual basis for the claim and fully comply with any notice requirements in the SPA, the court will be reluctant to require a party to provide details that add no benefit to the recipient unless those details are unambiguously called for in the wording of the notice requirement. However, potential buyers should not rely on this decision to omit information on the basis that the seller may be aware of a claim – it is simply not worth the risk.

If you have any questions on how this might affect your business or if you want more information, please do not hesitate to get in touch with our Corporate team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.