This was an appeal against the High Court decision in Dodika Ltd & Ors v United Luck Group Holdings Limited from August 2020 (see our Tax Blog on this). The case concerns the question of whether the notice given by the buyer to the sellers under a sale and purchase agreement ("SPA") of a potential claim under a tax covenant complied with the requirements of the SPA.
As a reminder of the facts, the case related to a $1 billion sale of a group where, under the terms of the SPA, there was a $100 million escrow in respect of possible claims under the warranties and tax covenant given by the sellers. Before the final repayment of amounts from escrow, the buyer sent a notice of claim letter to the sellers referring to a transfer pricing investigation being undertaken by the Slovenian tax authority in respect of a group company. Prior to this letter being sent, the sellers and their representatives had been made aware of the investigation and were kept informed of its progress.
The terms of the SPA required the notice of claim to state "in reasonable detail the matter which gives rise to [the claim]". The sellers argued that the notice of claim was invalid because it did not include sufficient detail about the matter giving rise to the claim and that the relevant matter was not the tax authority's investigation itself (which was referenced in the letter) but the underlying facts, circumstances and events that were the subject of the transfer pricing investigation (which were not included in the letter other than stating that the Slovenian tax authority was enquiring into the relevant group companies' historic pricing method).
The High Court had agreed with the sellers that the buyer was required to provide sufficient details relating to the facts, circumstances, and events that were the subject of the tax authority's investigation and should not have relied on the sellers' knowledge of the group's historic activities.
Having reviewed the High Court's decision, the Court of Appeal ("CA") concluded that the buyer did provide sufficient details in the notice given to the sellers given the circumstances.
In reaching its conclusion, the CA noted the following:
- In the CA's view, the "matter which gives rise to a claim" should include not only the fact that the tax authority had started to investigate one of the group company's tax affairs but also the surrounding facts and circumstances of the company's tax affairs. In this case, this was the adoption by the company of the disputed transfer pricing practices.
- The CA accepted that if a contract prescribes that certain information must be included in a notice, then a notice that fails to do so will be invalid, and the recipient's knowledge of that specified information can be ignored.
- However, the CA noted that in this case, the SPA did not specify precisely what information the notice needs to contain, because the SPA simply required the notice to state things "in reasonable detail". In the CA's view, what is reasonable depends on all the circumstances and does not necessarily have to include what is already known to the recipient.
- Based on the facts, because the sellers already knew what the company's transfer pricing practices were and so could surmise the general basis for the tax authority's challenge, it was not reasonable to require the buyer to include this level of detail in the notice as it would not have conveyed any new or different information or identify anything the sellers could not establish for themselves.
- The CA concluded that the purpose of a notice of tax claim is to provide the recipient reasonable information to allow it to decide how it should approach the claim, what additional information it might request, what action it might require the claimant to take and similar. In this case, given the sellers' intimate knowledge of the group's prior transfer pricing practices, providing information that the tax authority was enquiring into the historic pricing methodology was sufficient to provide the sellers with this level of information.
As a result, the CA concluded that the notice provided by the buyer to the sellers complied with the terms of the SPA as it stated in reasonable detail the matter giving rise to the tax claim.
Although the decision is welcome in that it provides a more rational explanation on what a claims notice should include and the limits to sellers using highly technical arguments to seek to avoid the protections that they have agreed to give to a buyer, the case serves as a striking reminder to buyers and sellers just how much attention should be paid to claims notice provisions in the commercial documentation, where such provisions might not be considered as key terms.
In particular, when negotiating tax claim notice provisions, buyers would be well advised to carefully review the provisions with the view to establishing a clear framework of what information they are required to provide in relation to the underlying tax claim. While the sellers may wish to avoid limiting the notice requirements, it would be in the buyers' interests to limit the scope of the requirements to the bare minimum so as to place the onus back onto the sellers to request further information as required.
If the buyers are in a position where they need to give a tax claim notice and the notice is required to include "reasonable detail" of the underlying tax matter, it would be prudent to provide to the sellers as many additional details as possible, including:
- the summary of the underlying tax claim,
- a detailed description of any facts and circumstances that gave rise to the claim, and
- all supporting information (including any documentation and correspondence from/to tax authority) relating to the claim.
In the event of doubt, the buyer should err on the side of caution and provide more information rather than less. The information and documentation should be provided irrespective of any assumed knowledge by the seller of the underlying facts and circumstances of the tax claim.
It would also be advisable for the claimants to avoid sending the claims notice to the sellers at the very end of the claims limitation period to ensure sufficient time to provide further information if necessary and have meaningful discussions with the sellers.
If the above considerations are taken into account, this could minimise the risk of any dispute arising as to the validity of a tax claim notice in the future.
In addition, if the contract provides for the final release of any escrow funds subject to the buyer submitting a valid claims notice, the buyer should consider including an appropriate dispute resolution mechanism. Such a mechanism could ensure that the escrow funds are not released to the sellers until any dispute relating to the claims notice has been resolved without a possibility of a further appeal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.