Sit Up and Take Notice!

19 September 2019

Giving notice of a claim under a contract should be simple. But where contractual notice provisions apply, parties must be aware that any such notice must be given in accordance with those terms. The Court of Appeal’s decision in Stobart Group Ltd & Anor v William Stobart & Anor serves as a cautionary reminder of which all businesses should be cognisant.

 In March 2008, Stobart Group Limited (SGL) agreed to purchase Stobart Rail Limited (SRL) from William Stobart and Andrew Tinkker. As is common in such agreements, the SPA provided for the sellers to pay any tax liability incurred by SRL before completion but which had not been known until after the sale. The relevant sections of the SPA as to notification of such claims were:

  • Schedule 4, paragraph 6.3 provided that the sellers would not be liable for a Tax Claim unless SGL had given written notice of such a claim on or before the seventh anniversary of completion (being 4 April 2015); and
  • Schedule 4, paragraph 7.1 provided that SGL must also give notice and sufficient details to the sellers of any potential claim by HMRC against SRL.

In short, there were two types of notice that could be served: a Paragraph 7 Notice informing the sellers that there was a claim by HMRC, and a Paragraph 6 Notice informing the sellers that they are required to pay that tax liability.

Subsequently SRL incurred a tax liability. On 24 March 2015 SGL sent the sellers a notice in respect of this claim. A dispute then arose as to whether the notice had been invalid; specifically whether the notice constituted a Paragraph 6 Notice (in which case the sellers would be liable) or a Paragraph 7 Notice (in which case they would not).

Summary judgment in the sellers’ favour was granted at first instance. That decision was upheld by the Court of Appeal. In reaching that decision, the Court reaffirmed the House of Lords’ decision in Mannai Investment Co Ltd v Eagle Star Life Assurance, stating that the construction of the notices must be approached objectively. In short, the question is not how the recipient understood the notice, but rather how a reasonable recipient would have understood the notice.

Here the relevant notice made no reference to a Tax Claim (as defined in the SPA) or any claim to be brought by SGL under paragraph 6.3. It gave notice in terms of a contingency – referring to “a potential Liability to Taxation”, and a “potential claim” – and set out the “likely estimate” of the quantum of the claim attaching a schedule headed: “Summary of company exposure” (in other words, a summary of SRL’s exposure to HMRC, not the value of a claim to be brought against the sellers). In short, it said nothing that a reasonable recipient could objectively interpret as being a claim under paragraph 6.3.

Potential claimants should take heed of this decision – objectivity rather than factual context is king. Notices must be drafted fully in compliance with the specific terms required under the relevant contract. They must be clear and unequivocal, preferably with as much detail as possible, and with reference to the relevant terms bring relied on. A failure to do so could result in an otherwise strong claim failing even to get off the ground.

Leigh Callaway Author
Leigh Callaway
Senior Associate
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