A recent case, Dodika Ltd & Others v United Luck Group Holdings Limited, involved a standard clause that is included in most company and business sale agreements and underlined the importance of taking legal advice before serving a notice in relation to such clauses.
The case related to a US$1 billion acquisition of a gaming company, part of the purchase price for which was held in an escrow account for a period of time, not to be released to the sellers in case the buyer bought a claim for a breach of warranty or tax indemnity during that period.
Before the escrow sum was due to be released, Slovenian authorities launched an investigation relating to tax declarations made by the Company prior to the acquisition, alleging an underpayment of tax, and the buyer wished to bring a claim for a breach of warranty and tax indemnity, while the actual sums involved remained to be ascertained.
The contract stated that notice of such a claim had to be issued by a specific date and the notice “must state in reasonable detail the matter giving rise to such claim, the nature of the claim and (so far as is reasonable) the amount of such claim”. The buyer sent a letter to the sellers purporting to be a notice of a claim one week before the last date on which such a notice could be served.
The sellers challenged the validity of the purported notice on the grounds that it did not specify the amount or nature of the claim in sufficient detail. At first instance the High Court held that while the notice did not include detail of the amount claimed (as it was still contingent and unknown) or sufficient detail of the factual basis of the claim and was therefore invalid. Consequently, the sum held in escrow – worth US$ 50 million – should be released to the Sellers.
On appeal, the Court of Appeal overruled the earlier decision and ruled that there was no requirement to set out matters of which the sellers would have been aware: the test of what was “reasonable detail” in this clause was what would be reasonably expected given the commercial purpose of the business people involved in the transaction – this meant that the notice did not need to include all the particular details which might be required on issue of the actual claim.
While many cases will not necessarily involve the sums at stake in this case, there are some important points to take away from it:
- Always seek legal advice before serving a notice to assert rights in relation to a contract and do so as early as possible
- In serving a notice claiming a breach of warranty or a breach of a tax indemnity following a purchase of shares or assets, it will usually be important to include as full details as possible of the nature of the claim and the potential amount at stake
- Serving a notice is not always a simple as writing a letter – you may need to provide supporting information and need to make allowance for the time needed to obtain this information
- Keep an eye on the deadline and manner for the service of notices