What is "reasonable detail" when notifying a tax claim under an SPA?

In Dodika Limited (and others) v United Luck Group Holdings Limited [2021] EWCA Civ 638, the Court of Appeal held that the Defendant had complied with the requirement to give "reasonable detail" of the matter giving rise to a tax claim under the SPA when notifying the claim to the sellers.  The tax claim arose in connection with an ongoing transfer pricing enquiry (conducted by the Slovenian tax authority), of which the sellers were already aware.

The decision is of general relevance to (a) the negotiation of SPA terms and (b) the preparation of notices of claims or potential claims under an SPA (particularly where the claim concerns a potential tax liability that may arise from an ongoing enquiry) where the tax has not yet been quantified or assessed.

Further details and analysis of the decision can be found on our Litigation Notes page here.

Comment

Buyers can breathe a sigh of relief following a decision which appears to be grounded in commercial reality.

The notification of a potential tax claim that was made by the Defendant (the buyer under the SPA) was made shortly before the deadline for notifying claims, in circumstances where the tax authority's transfer pricing investigation was ongoing and the Claimants (the sellers under the SPA) had been kept fully aware of the investigation and of its developments.

The effect of the High Court's decision had been to knock out the Defendant's SPA claim because of a technical failure to comply with the obligation to provide reasonable detail in the notice, notwithstanding the fact that the Claimants were fully apprised of all of the relevant facts.  The High Court had found the notice of claim to be invalid not because it failed to inform the sellers of anything that they needed to know, but because it failed to go through a ritual of setting out things the sellers already knew.

The Court of Appeal achieved a fair and common-sense result, by taking into account all of circumstances of the case (in particular, the Claimants' knowledge of the basis of the claim) in interpreting what "reasonable detail" meant.

Although the buyer succeeded in its appeal, the case serves as a useful reminder to buyers and their advisors of (a) the importance of negotiating precisely what must be included in a valid notice of claim (so that a dispute of this kind can be avoided), and (b) the need to consider carefully the content of any notification of claim to ensure that the required level of detail is met.

It is relatively common for tax enquiries to remain ongoing at the point when the deadline for notifying tax claims under an SPA (or tax insurance policy) passes.  At that stage, the precise nature or amount of the potential tax liability may still be unclear.  However, generally speaking, the more information and detail that can be included in any notification, the better (though, of course, there will also be cases where the underlying facts of the potential claim are sensitive – for example, where they are relevant to other ongoing investigations and litigation – in which case it will be imperative that the content of the notice does not prejudice the business’s position in those other matters or proceedings).

Parties negotiating an SPA should be alert to these potential issues and consider carefully the kinds of tax enquiries or investigations that may arise; how and in what level of detail claims and potential claims should be notified; and how notification requirements should be affected by the seller's knowledge of, or involvement in, a relevant enquiry or investigation.   If the due diligence exercise identifies particular risks for post-completion claims, the buyer may even consider including tailored notification of claim provisions that are specific to those contemplated potential claims.  As this case has shown, vague and unclear notification requirements can lead to costly and time-consuming disputes, which could have been avoided if the parties had agreed a clear set of rules for notifying claims.