WARRANTY CLAIMS: STOBART GROUP LTD V STOBART [2019] EWCA CIV 1376

James Potts QC considers the recent Court of Appeal decision on the construction of unilateral notices within the context of a share purchase agreement.

In Stobart Group Ltd v Stobart [2019] EWCA Civ 1376, the Court of Appeal unanimously dismissed an appeal by Stobart Group Ltd (SGL) and Stobart Rail Ltd (SRL) from a decision that a unilateral notice served by them giving notice of a tax claim under a share purchase agreement (SPA) was ineffective. The court considered that the construction of unilateral notices for the making of breach of warranty or indemnity claims must be viewed objectively and contextually, and agreed that the letter had not been compliant with the terms of the SPA.

Background

In 2008, Mr Stobart and Mr Tinkler (Vendors) entered into a SPA to sell the entire issued capital of SRL to SGL. The relevant aspects of the SPA were:

(i) the definition of Tax Claim as a claim by SGL as purchasers against the Vendors;

(ii) the definition of Claim as a potential claim by HMRC or other tax authority against SRL;

(iii) Schedule 4, paragraph 6.3, which stated that the Vendors would not be liable for a Tax Claim unless SGL had given them written notice of such claim on or before the seventh anniversary of completion; and

(iv) Schedule 4, paragraph 7.1, which stated that SGL must give notice and sufficient details to the Vendors of any potential Claim against SRL.

SRL subsequently incurred a taxation liability which led to SRL and SGL bringing proceedings against the Vendors for approximately £3.8 million. There was an application for summary judgment, and at that hearing one of the material issues was whether a letter sent on 24 March 2015 (March Letter) was a compliant paragraph 6.3 notice. The judge held that it was not, but was rather notice under paragraph 7.1. As the contractual period for the bringing of Tax Claims had now passed, SGL was not entitled to payments under the terms of the SPA. The court at first instance also granted summary judgment in favour of the Vendors on the other matters raised by SGL and SRL, holding that there was no arguable case that the Vendors were estopped from denying the validity of the notice and further that there was no arguable case that they had acted in breach of fiduciary duty.

SGL and SRL appealed (the Court of Appeal having only granted permission to appeal in relation to the interpretation issue).

Court of Appeal decision

Upon considering whether the March Letter was adequate notice for the purposes of paragraph 6.3, the Court of Appeal reviewed the construction of unilateral notices and identified the following principles:

(i) the starting point of construction for unilateral notices much be approached objectively and contextually (Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749);

(ii) the order in which the wording of the document and the factual context are considered is immaterial (Wood v Capita Insurance Services Ltd [2017] UKSC 24);

(iii) the subjective intent of the parties is generally irrelevant (Mannai Investment), except where there is a clear common understanding to enable the correction of mistakes by construction (Chartbrook Ltd v Persimmon Homes [2009] 1 AC 1101); and

(iv) the purpose of notification provisions in a SPA are to make clear, in sufficiently formal terms, that a vendor is aware that a claim is being made against it (Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyds LR 423Laminates Acquisition Co v BTR Australia Limited [2003] EWHC 2540 (Comm)).

In applying those principles, the court considered that a reasonable person would have understood the March Letter to be a notice under paragraph 7.1 rather than notice under paragraph 6.3. Such differing notification provisions are commonplace, and the distinction between notifying the existence of a possible claim by HMRC against a company, and notifying an actual claim by the purchaser against the vendors, is key. Failure to make such distinction could be fatal as it was in this case. It was immaterial that the Vendors had previously received a paragraph 7.1 notice in April 2008 and a letter in draft form from SGL’s solicitors attempting to make the Vendors agree to extend the deadline for Tax Claims. Since there was nothing in the factual background to change the reasonable person’s interpretation of the March Letter, the court agreed with the summary judgment that it was a notice under paragraph 7.1 and not adequate for the purposes of paragraph 6.3.

What to take away 

The refusal of the Court of Appeal to move away from the well-established principle of objective construction for unilateral notices underlines the importance of drafting such notices fully in compliance with the terms required under the SPA. The relevance of subjective intention or common assumption is confined to uncontroversial matters, such as a misnamed property or misstating the relevant contractual provision by a single numeral.

Even where there is no substantive defence to the claim itself (as was the case here) a failure to serve a compliant notice may mean that no claim can be brought. There is now a considerable body of authorities covering what may be required for a compliant notice (including what level of detail of the claim should be included). This case is an example of failings which are commonly seen: a failure to notify in clear and unequivocal terms that a claim by the purchaser against the vendor is actually being made and a failure perhaps to appreciate the difference between different defined terms (a Tax Claim being a claim by the purchaser against the vendor and a Claim being a potential claim by HMRC against the company). A purchaser wishing to make a claim would be well advised to make clear which provisions of the SPA are being relied upon, to make a claim against the purchaser in unequivocal terms and to check that their claim has been formulated in accordance with the appropriate defined terms and notified and served in accordance with the contractual requirements. Such failures may well expose the solicitors who drafted a defective notice to a claim for professional negligence.

The Court of Appeal reiterated that the purpose of notice clauses is to provide certainty to the party that is to be notified. The courts will very rarely be willing to depart far from the objective construction of the clause, which is especially important within the context of SPAs where, as in this case, a liability can arise many years after completion.

This case feature was first published in FromCounsel‘s Corporate Briefing on 7 August 2019.

Barristers
James Potts QC