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Ineffective notice renders SPA tax claim out of time

The following case serves an important reminder of strict compliance with contractual notice provisions and the significant repercussions of failing to draft them accurately.

Stobart Group Limited and another v William Stobart and another (2019)

In March 2008, Stobart Group Limited (SGL) entered into a Share Purchase Agreement (SPA) with William Stobart and another (Sellers) for SGL to purchase the entire issued share capital of Stobart Rail Limited (SRL/Company).

The SPA contained a tax covenant (Schedule 4, paragraphs 6.3 and 7.1) setting out the circumstances in which the Sellers would fall responsible for the Company's tax liability which incurred pre-Completion but which SGL became aware of post-Completion, in addition to seller limitation provisions, which aimed to limit the Sellers' liability in relation to such claims. The key limitation to note here related to notifying the Sellers of a claim, as defined in the SPA.

Tax Claim was defined in the SPA as a claim against the Sellers under a tax warranty or tax covenant.

Claim was defined in the SPA as any claim, notice or demand made by HMRC against the Company.

Schedule 4, paragraph 6.3 (Paragraph 6) stated that the Sellers would bear no liability with respect to a Tax Claim unless SGL gave written notice within seven years of Completion (i.e. 4 April 2015) that it was pursuing a Tax Claim against the Sellers.

Schedule 4, paragraph 7.1 (Paragraph 7) set out the requirements which SRL should comply with when notifying the Sellers' Representative of any potential Claim against the Company by HMRC. Paragraph 7 stated that SGL should notify the Sellers' Representative "as soon as reasonably practicable and in any event within 10 Business Days" of SGL becoming aware "of any Claim".

SGL notified the Sellers on 9 April 2008 of a Claim against the Company by HMRC under Paragraph 7. On 24 March 2015, however, SGL wrote to the Sellers (before 4 April 2015 deadline) providing formal notice of the Company's potential liability to a Tax Claim under Paragraph 6.

SGL claimed that valid notice had been provided under Paragraph 6 in March 2015. However, the Sellers argued that the notice provided in March 2015 was not effective nor in accordance with Paragraph 6. Rather, it was a Paragraph 7 notice of a potential Claim. SGL subsequently issued proceedings against the Sellers for the tax liability sum (circa £3,267,092).

Judgment

At first instance, the Sellers were awarded summary judgment. SGL subsequently appealed to the Court of Appeal.

In its judgment, the Court of Appeal confirmed the court's approach to construe a contract or unilateral notice objectively having regard to the express wording of the notice and the contextual scene of the agreement. As such, the March 2015 letter would be deemed to be a Paragraph 7 notice, due to express reference within the March 2015 letter to the Sellers confirming whether the Sellers wished to have "continued conduct of discussions with HMRC in relation to the Claim" pursuant to Paragraph 7. Therefore, the claim would fall outside the Tax Claim limitation period and be time-barred.

Accordingly, the Court of Appeal dismissed SGL's appeal.

What we learn

This case reveals that seller limitation provisions, and any subsequent notices served under such provisions, should be carefully drafted and applied in accordance with the provisions and formalities of the agreement, failing which significant consequences may ensue for the buyer/company. It is therefore important to get this right.

Therefore, be sure that the agreement you are entering into favours your position as a party to that agreement and provisions within the agreement, and any subsequent notices, are tailored and applied effectively to each case. As a buyer, you should be aware of such deadlines following completion of the transaction.

For more information contact Rebecca McCann in our Corporate department via email or phone on 0333 207 1140. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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