Dodika Ltd & Ors v United Luck Group Holdings Ltd

A contractual notice requiring a claim-generating matter to be stated “in reasonable detail” must identify the underlying facts or circumstances on which the claim is based. A tax investigation alone does not constitute the matter giving rise to a claim under a tax covenant.

The adequacy of the detail is nevertheless assessed in all the circumstances. Relevant circumstances include the recipient’s existing knowledge, the information reasonably available to the notifying party and the commercial purposes of the notice clause. Where the recipient already knows the limited additional detail available, the notice need not repeat it merely as a formality, particularly where repetition would serve no commercial purpose.

The appellant buyer acquired the share capital of a corporate group under a sale and purchase agreement. The respondent warrantors covenanted to meet tax liabilities arising from pre-completion events or pre-completion income, profits or gains. The buyer’s rights were enforceable only if it gave timely written notice stating, in reasonable detail, the matter giving rise to the claim.

The buyer notified the warrantors of potential claims arising from a Slovenian tax investigation into a group company’s transfer-pricing practices. On the assumed facts, the warrantors knew the details of the investigation. The Commercial Court granted the warrantors summary judgment and declared the notice ineffective: [2020] EWHC 2101 (Comm).

The central issues on appeal were what constituted the matter giving rise to the claim and whether the notice stated that matter in reasonable detail.

1. Appeal allowed. The Court of Appeal unanimously set aside the order below and dismissed the warrantors’ application for summary judgment.

2. Per Nugee LJ, the matter giving rise to a claim under the tax covenant comprised the underlying pre-completion facts or circumstances capable of producing the tax liability. Those matters were the relevant transfer-pricing practices, rather than merely the existence of the tax authority’s investigation. The investigation might form part of the matter, but it could not constitute its entirety.

3. The notice identified the underlying matter by stating that the tax authority was investigating the group company’s transfer-pricing practices over the relevant periods. Read as a whole, it conveyed that the authority was investigating whether prices charged for intra-group services had been inappropriately low and might impose a tax liability on that basis.

4. Whether that matter had been stated “in reasonable detail” depended on all the circumstances. The recipient’s existing knowledge could be relevant to compliance where the contract prescribed a standard of reasonable detail rather than requiring particular specified information. The distinction between construing a notice and determining its contractual compliance was therefore not absolute. The contextual approach in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 was relevant, although knowledge could not excuse omission of information which the contract expressly made indispensable.

5. On the assumptions required for the summary judgment application, the warrantors knew both the transfer-pricing methodology and the tax authority’s limited, generic criticism of it. The authority itself had provided no transaction-specific or more detailed basis for its concerns. Repetition of the limited additional information in the notice would therefore have conveyed nothing new.

6. Popplewell LJ emphasised that reasonableness takes its colour from the commercial purposes of the notice clause. Those purposes included enabling recipients to investigate and preserve evidence, assess the merits, participate in the tax investigation and account for potential liability in future dealings. Additional detail which would advance none of those purposes was not reasonably required. Underhill LJ agreed with Nugee LJ and, on this aspect, with Popplewell LJ.

1. Court of Appeal (Civil Division): The buyer’s appeal was allowed unanimously. The order below was set aside and the warrantors’ application for summary judgment was dismissed: [2021] EWCA Civ 638.

2. Commercial Court: A Deputy High Court Judge granted the warrantors summary judgment and declared that the notice failed to provide reasonable details of the matter giving rise to the tax-covenant claim: [2020] EWHC 2101 (Comm).