A recent decision of the High Court, TP ICAP Limited v Nex Group Limited [2022] EWHC 2700 (Comm) (“TP ICAP”), has underscored the importance of the drafting of, and compliance with, contractual notice provisions in a sale and purchase agreement. The decision reiterates the conclusions of the Court of Appeal in Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638 (“Dodika”) that claim notifications should not “elevate the requirement to state matters in ‘reasonable detail’ into empty formalism” by requiring an explanation of details which the respondent already knew. Both decisions highlight a number of important practical considerations and potential pitfalls that are particularly relevant in the context of claims for breach of tax warranties and tax covenants.

Dodika and “reasonable detail

Dodika was an appeal by United Luck Group Holdings Ltd (the “Appellant”)against a decision of the High Court that its notice of claim under a tax covenant against Dodika Ltd and others (the “Respondents”) was invalid because it failed to give written notice in “reasonable detail” of (among other things) the matter which gave rise to the claim. The Court of Appeal allowed the appeal.

The Appellant entered into a sale and purchase agreement relating to the acquisition of Outfit7 Investments Ltd (“Outfit7”). Certain sellers of Outfit7 (the “Warrantors”) provided a tax covenant in respect of pre-completion tax liabilities. Claims under the tax covenant were only enforceable if the Appellant gave written notice to the Warrantors before a specified date, stating “in reasonable detail” the matter which gives rise to the claim, the nature of the claim and (so far as reasonably practical) the amount claimed in respect thereof. Notice provisions of this sort are relatively commonplace in commercial contracts.

Following completion, the Appellant gave written notice to the Warrantors of claims relating to an investigation by the Slovene tax authority into the target group’s transfer pricing practices. The Appellant noted that the amount of any tax liability remained contingent on the outcome of the Slovene tax authority’s investigation and, as such, it was not possible to quantify the potential tax liability or the claims at that stage. The Respondents argued that the contractual obligation to provide “reasonable detail” required more than that. In particular, they argued that the notice should have elaborated on what the relevant group company had in fact done with respect to its transfer pricing policies for the relevant period and the position of the Slovene tax authority.

The Court of Appeal accepted the principle established in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (“Mannai”) that, if a contract prescribes that certain information must be included, a notice that fails to do so will be invalid and it will be no answer to say that the recipient already knew it. Here, however, the notice was only required to state things “in reasonable detail”. The Court noted that what is reasonable must depend on all the circumstances, which may be affected by the background context and must take into account, in particular, whether any information is already known to the recipient. Given that the Respondents already knew what the relevant group company’s transfer pricing practices had been in the relevant period, the requirement to provide reasonable detail did not require an explanation of those practices and the general information provided by the Appellant was reasonable in the circumstances.

Popplewell LJ, in his concurring judgment, went further in commenting that, given the lack of detail provided by the tax authority, any additional detail the Appellant could have included in the notification letter at that stage would have been “of a generic and limited nature” and  would not have furthered any of the commercial purposes for giving such a notice. As Popplewell LJ put it, “[b]usinessmen [in the position of the parties] would not expect or require further detail which served no commercial purpose”, as this “would be the antithesis of what was reasonable.”

TP ICAP, awareness and materiality

TP ICAP concerned an application by Nex Group Limited (the “Seller”) to strike out breach of warranty claims made by TP ICAP Limited (the “Buyer”) under a sale and purchase agreement (the “SPA”) relating to ICAP Global Broking Holdings Limited (the “Target”). The Seller applied to strike out the claims on the grounds that the Buyer’s notice failed to comply with a contractual requirement that the Buyer give the Seller written notice stating “in reasonable detail” the nature of the claim and, if practicable, the amount claimed. The High Court declined the Seller’s application.

The Seller was alleged to have breached certain warranties relating to:

  1. litigation by or against a Target group company where the value of the claim exceeded £500,000 (the “Target Litigation Warranty”);and
  2. certain Target group personnel having been subject to any non-routine investigations by a governmental authority in relation to the Target group business within the preceding 18 months (the “Employee Investigation Warranty”)

((i) and (ii) together, the “Warranties”).

The Warranties were qualified by the Seller’s awareness, which the SPA defined as the actual knowledge of eight named individuals. The Warranties were given on the date of the SPA and repeated at the date of completion. When repeated at completion, the Employee Investigation Warranty was deemed to have the following materiality qualifier added: “… that, in each case, has or would have a material adverse impact on the operation of the [Target group] business (taken as a whole)”.

In December 2018, the Buyer sent two breach of warranty notifications to the Seller (the “Notification Letters”). The first related to an investigation by the US Commodities Futures Trading Commission concerning the conduct of certain members of the Target group and its employees (the “CFTC Investigation”) and the second related to an investigation by a Frankfurt prosecutor into a named director of a Target group company (the “ISL Director Investigation” and, together with the CFTC Investigation, the “Investigations”)). The Buyer alleged that the Seller had breached both Warranties in respect of the Investigations.

The Seller argued that the awareness qualifier meant that in order to state “in reasonable detail” the nature of the claim, the Notification Letters should have identified the named individual(s) in the SPA alleged to have had the relevant knowledge. The Buyer countered that the Notification Letters were to be read against the background of what was already known to the Seller.

The High Court agreed with the Buyer and found that the Seller’s argument went further than what was required under the SPA (which did not expressly require the names of the relevant individuals to be identified in any notification), noting that it was “arguably obvious, when a notification is given of what it is said the Seller was aware, that it is talking about awareness as defined in the SPA.” The Court also rejected the Seller’s attempts to invoke the importance of commercial certainty and commercial purpose, stating that it had not provided any explanation as to why the context required the Buyer to include the names in the Notification Letters. 

The Seller separately argued that the Notification Letters failed to state how the alleged breach of the Employee Investigation Warranty “had or would have a material adverse impact” on the operation of the Target group business (taken as a whole). In its first Notification Letter, the Buyer noted that, as matters were still ongoing, it was unable at that stage to quantify accurately the liability resulting from the CFTC Investigation. However, the Buyer did state that it had already incurred costs and expenses amounting to approximately £1,250,000 and, in the event of an adverse finding, might also incur fines, penalties or other similar liabilities. The second Notification Letter contained similar language with respect to the ISL Director Investigation.

The High Court again rejected the Seller’s argument, stating that they could see “nothing in the SPA that requires an explanation of how an investigation had an impact to be included in a Notification Letter, such that without such an explanation the Notification Letter would be ineffective.” Drawing on the judgment of Popplewell LJ in Dodika, the Court rejected the Seller’s argument that each constituent element of the claim needed to be alleged in order for the notification to be valid. The Court held that adding a statement in the Notification Letter that the Investigations “had or would have a material adverse impact on the operation of [the Target group business] (taken as a whole)” would not have advanced any of the commercial purposes for giving notice and the failure to do so did not mean that the Buyer had failed to comply with its contractual notification obligations. 

Practical considerations

There are several practical considerations arising out of Dodika and TP ICAP in relation to the drafting of, and compliance with, notification clauses in contractual agreements.

  • Purpose:
    • Decisions such as Dodika and TP ICAP demonstrate the importance of clearly setting out the particulars of the claim and the correct contractual provisions under which the notification is being made, so as to make sufficiently clear to the recipient both that a claim is being brought against them and the basis on which the claim is being brought.  
  • Substance:
    • The notifying party should consider whether, and to what extent, specific details are required in a claim notification, based on the provisions of the relevant contract. Following Dodika and TP ICAP, and to avoid any dispute about more generic notification guidelines (such as what constitutes “reasonable detail”), parties may wish to consider enumerating key requirements in the notification provisions of the contract (albeit in a non-exhaustive manner). This may not always be practical, or desirable, but it is something to think about where both parties are in agreement as to what would constitute fundamental features of a particular notice. For example, in the context of tax claims made following an assessment by a tax authority, parties will often want details such as the nature of the claim (including the type of tax and the basis for the assessment), an estimate of the amount at stake, the due date for payment of the tax liability and the time limit for any appeal.
  • Recipient and broader commercial context:
    • Notwithstanding the importance of express contractual requirements, both Dodika and TP ICAP demonstrate that such requirements – to the extent they leave scope for interpretation – must be construed in light of the wider circumstances, having regard to what business people in the parties’ position would regard as reasonable. Where a contract specifies that certain details must be included in a notice, the recipient’s prior knowledge of those details will not justify an omission. Where this is not the case, however, the particular circumstances and background context (including the recipient’s knowledge) may have an impact on what is reasonable. For tax claims, there may be limited information about the scope or quantum of the underlying liability when the claimant makes the initial notification. Both Dodika and TP ICAP demonstrate that a lack of information may not, in and of itself, render a claim invalid provided that the notification generally complies with express contractual requirements and affords sufficient notice to alert the recipient – taking into account what the recipient already knows – of the existence and general nature of the claim.