Take great care when drafting contractual notices
Stobart Group v Stobart (Court of Appeal) [2019]
Another useful reminder that very great care must be taken when drafting (and serving) notices pursuant to a contract. Failure to do so may invalidate the notice and deprive a contracting party of a very valuable claim.
Facts:
Stobart Group acquired a company called Stobart Rail from Messrs Stobart and Tinkler pursuant to a share purchase agreement dated 7 March 2008 (SPA). The SPA contained two key notice provisions: Paragraph 6.3. which provided that the Vendors would not be liable in respect of a Tax Claim [by the Purchasers] unless written notice of the Tax Claim (stating in reasonable detail the nature of such Tax Claim and, if practicable, the amount claimed) [had been served] on or before the seventh anniversary of completion. Paragraph 7.1. Upon the Purchaser or the Company becoming aware of any Claim [by HMRC], the Purchaser shall as soon as reasonably practicable, and in any event within 10 Business Days, give notice of such Claim to the Vendors stating how the liability arises and a reasonable estimate of the quantum of the Liability to Taxation or other liability. ‘Claim’ was defined in the SPA as, broadly, a claim, notice or demand made by HMRC against Stobart Rail and ‘Tax Claim’ as any claim [by the Purchasers against the Vendors] under the Tax Warranties.
On 13 March 2008, HMRC issued a claim against Stobart Rail for unpaid National Insurance Contributions. The Purchaser's solicitors notified the Vendors of HMRC's claim in accordance with paragraph 7.1 on 9 April 2008.
The 7 year anniversary of completion was 4 April 2015. Conscious of this deadline approaching, on 11 February 2015 the Purchaser's solicitors sought to agree a voluntary extension of the seven-year time limit applicable under paragraph 6.3 for submitting a Tax Claim against the Vendors, but the Vendors did not respond.
On 24 March 2015 the Purchasers issued a further notification letter which:
- gave formal notice of a potential ‘Liability to Taxation’ [the language of 7.3];
- invited the Vendors to confirm whether they wanted continued conduct of discussions with HMRC [again, something explicitly covered in paragraph 7];
- provided an estimate of the quantum of the Claim [by HMRC].
Decision:
The High Court held that the letter sent on 24 March 2015 was not an effective notice under paragraph 6.3 but was a notice under paragraph 7.1.
The Court of Appeal, dismissing the appeal, held that a reasonable recipient of the 24 March 2015 letter, with knowledge of the factual context, would not have understood it to be a notification of a Tax Claim for the purposes of paragraph 6.3 because the letter:
- Made no reference to a Tax Claim;
- Did not refer to a claim being made by the Purchasers under paragraph 6.3; rather it expressly referred to paragraph 7 and whether the Vendors wished to have ongoing conduct of the [HMRC] claim;
- Provided a likely estimate of the exposure to HMRC rather than an indication of the quantum of the Tax Claim.
The Court of Appeal applied the "cardinal principle of construction" when construing unilateral notices, saying that the subjective understanding of the actual recipient is not relevant; rather, the test is how a reasonable recipient with knowledge of the context would have objectively understood the notice to operate.
Points to Note:
- As a result of the confused drafting of the March 2015 notice, the Purchasers lost the possibility of pursuing a multi-million pound claim since the contractual limitation period had expired. Great care must be taken with the drafting of such notices, ensuring that appropriate clause references are accurate and that the meaning of any notice is objectively clear.