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27 August 2019
The Court of Appeal recently confirmed in Stobart Group Ltd & Anor v William Stobart & Anor(1) that an objective test will be applied when assessing whether a unilateral contractual notice has been validly given. This decision provides a cautionary reminder of the consequences of a party's failure to comply strictly with contractual notice provisions.
A dispute arose in the context of a 2008 share purchase agreement under which Stobart Group Ltd (SGL) acquired Stobart Rail Limited (SRL) from sellers, William Stobart and Andrew Tinkler.
As is common in such transactions, the share purchase agreement provided for the sellers to pay any tax liability incurred by SRL before the sale but which had not been recognised until after the sale.
The dispute centred on the following two notice provisions relating to the tax covenants in the share purchase agreement:
As to how these provisions were intended to operate in practice, following receipt of a tax demand by HMRC, SGL was required to send the sellers a Paragraph 7 notice informing them of a claim by HMRC. SGL could also send the sellers a Paragraph 6 notice informing them that SGL required them to pay this tax liability pursuant to the tax covenants in the share purchase agreement.
SRL subsequently incurred a tax liability and SGL served a notice of claim against the sellers for this liability. The sellers argued that the notice had been invalid and that they were therefore not required to pay.
The key question was whether a notice sent by SGL to the sellers on 24 March 2015, shortly before the end of the seven-year limitation period, had been a valid Paragraph 6 notice. If the letter did constitute a Paragraph 6 notice, the sellers would be liable for the HMRC tax demand. Conversely, if the letter did not constitute a Paragraph 6 notice, and the seven-year limitation period had already expired, SGL/SRL would be required to cover this liability themselves.
The dispute came before the Court of Appeal, which found that the letter of 24 March 2015 was not a valid Paragraph 6 notice and dismissed the appeal.
In reaching this conclusion, the Court of Appeal affirmed the House of Lords' decision in Mannai Investment Co Ltd v Eagle Star Life Assurance,(2) which stated that contractual notices must be construed objectively, noting that:
The question is not how the [recipient] understood the notices. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene.
Exploring this test, the Court of Appeal noted in particular that:
SGL argued that, notwithstanding the terms of the 24 March 2015 letter, the sellers would have understood that it was a Paragraph 6 and not a Paragraph 7 notice. It had sent the sellers a letter a month earlier that referred to SGL's ability to send a Paragraph 6 notice and requested an extension of the seven-year limitation period while discussions with HMRC continued. This letter would have put the sellers on notice that they might expect to receive a Paragraph 6 notice before the end of the seven-year limitation period and was a key piece in the contextual jigsaw. The Court of Appeal rejected this argument on the basis that, even after the 24 March 2015 letter, SGL still had time to send a valid Paragraph 6 notice and so it would be unclear to the sellers that no further notice would be received.
In light of the finding that the relevant notice had to be construed objectively, it was irrelevant that SGL may have subjectively intended the letter of 24 March 2015 to represent a Paragraph 6 notice. Instead, following its review of the terms of the letter, the Court of Appeal concluded that a reasonable recipient with knowledge of the terms of the share purchase agreement would have understood it to be a Paragraph 7 notice and not a Paragraph 6 notice.
This decision serves as a helpful reminder to notice givers that the courts will apply an objective test when construing unilateral notice clauses and, in the absence of a common understanding between the parties, the sender's subjective intention will not be relevant to questions of construction.
In addition, this decision represents yet another example of the courts emphasising the role which contractual notices play in providing certainty and, consequently, the importance of complying strictly with notice provisions. Finer details of contractual notice provisions are not mere technicalities; parties must remain aware of the fact that failure to comply with the mechanics of the notice provisions set out in a contract may have serious consequences.
For further information on this topic please contact Geraldine Elliott or Tim Potts at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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