Notice of breach and commercial reality: what does 'reasonable detail' mean?
Published on 19th Jul 2022
The Court of Appeal has struck a balance between objective and subjective knowledge when considering whether notices of breach are compliant, indicating that a more purposive approach to interpretation be adopted
Any veteran of a corporate sale or purchase can vouch that a long time is spent making sure that the warranties and indemnities are both broad and painfully accurate. Yet the significant protection offered by warranties and indemnities can easily be lost if, upon their breach, the prescribed notice provisions are not respected and followed.
Last year, came the latest in a long line of cases showing where things can go wrong: Dodika v United Luck Group (2021). In that case, the defendant gave notice to the claimant that it may need to enforce a tax covenant under a sale and purchase agreement (SPA). The Slovenian tax authority was investigating transfer pricing practices of a group company transferred under the SPA. The defendant served notice on the claimant informing it that a) the tax investigations were ongoing and b) that if the investigations resulted in a tax liability, it would call upon the tax covenant under the SPA. The claimant challenged this notice, asserting that it failed to meet the requirements of the notice provision to the letter.
Decision at first instance
There were three elements required for the notice to be compliant i) reasonable details of the matter which gives rise to the claim on the covenant, ii) detail of the nature of the claim, and iii) an estimated value or amount of the claim, as far as reasonably practical to provide.
It was common ground that the nature of the claim was explained in the notice, being the existence of the tax investigations and the possible tax liability. But what was disputed was whether the notice provided "reasonable details" of the matters giving rise to the claim, and an indication of its value.
In the first instance, the High Court concluded it did not. Although the notice referred to the nature of the claim – being a claim arising out of the tax investigations – it did not explain the context behind the claim, nor did it include an estimate of the amount of the claim.
The High Court made the point that the tax investigation did not itself give rise to the claim; instead it was the transfer pricing practices which did. Therefore to provide "reasonable details of matters giving rise to the claim", the notice should have provided an explanation of what was being investigated, not just that an investigation was ongoing. As a result the High Court found that the notice was, to the cost of the defendant, invalid.
Things took a different turn in the Court of Appeal, where the issue of whether the matter had been stated in reasonable detail was considered again. The claimant argued that a compliant notice would have set out sufficient information so that the receiving party, acting reasonably, would have known what matter gave rise to the claim. However, it admitted that, in this case, the claimant already knew about the matter giving rise to the claim.
The Court of Appeal found that the purpose of such a notice was to provide information to the warrantors, although the SPA did not specify precisely what information the notice needed to contain; the only requirement was to state the issue in reasonable detail.
What is reasonable depends on all the circumstances of the case, including what was already known to the recipient. Given that the recipient already knew about the matters giving rise to the claim, it would have been redundant and simply empty formalism to set out more detail than necessary.
In its judgment, the Court of Appeal took a very commercial approach, stating that "what is reasonable takes its colour from the commercial purpose of the clause, and what businessmen in the position of the parties would treat as reasonable. Businessmen would not expect or require further detail which served no commercial purpose. That would be the antithesis of what was reasonable."
Osborne Clarke Comment
The Court of Appeal's interpretation of the particular clause strikes a balance between an objective standard and subjective knowledge. It has become all too easy for lawyers to seek to score an early point in SPA disputes by asserting the notice of dispute is technically non-compliant, ignoring the commercial reality. A purposive interpretation is very welcome as a means of keeping focus on the real issues in dispute.
Those tasked with drafting a valid notice of breach under an SPA will still need to be wary of the precise requirement under that SPA for giving notice. But where the obligation is to give "reasonable" details, at least it is now clear that they can limit the amount of information provided by reference to knowledge already held and to what is necessary to fulfil the commercial purpose of giving notice.