Stobart Group Ltd & Anor v Stobart & Anor (Rev 1)

The primary issue raised on this appeal is whether a unilateral notice served by the appellants was a compliant notice for the purpose of giving notice of claims under a Share Purchase Agreement dated 7 March 2008 (the ‘SPA’).

The issue arose at the hearing of Part 24 applications by the respondents and a crossapplication by the appellants heard before Phillips J (‘the Judge’) on 16 November 2018. He granted the respondents’ applications and dismissed the appellants’ crossapplication.

Mr Stobart and Mr Tinkler (the respondents) agreed to sell and Stobart Group Limited (the first appellant) agreed to purchase, the entire issued share capital in Stobart Rail Limited (the second appellant), then known as W.A. Developments Ltd. I shall refer to the two appellants respectively as SGL and SRL.

The SPA, as is usual, had provisions in relation to the tax liabilities of the acquired business, including a covenant covering the circumstances in which the respondents would pay SRL’s tax liability incurred prior to the sale but recognised after the sale. The covenant expressly covered tax liabilities in respect of employee remuneration schemes in which Her Majesty’s Revenue and Customs (‘HMRC’) had indicated an interest, see paragraph 3.1.2(c) of schedule 4.

The nature and structure of the tax covenants was set out in further provisions of schedule 4 of the SPA, which identified particular terms.

A ‘Tax Claim’ was defined in paragraph 1.1 of the SPA as ‘any claim under the Tax Warranties or Tax Covenant’. A ‘Claim’ in the definition section of schedule 4 was defined (so far as material to this appeal) as a claim, notice or demand made by HMRC or other tax authority from which it appeared that SRL would be subject to tax and in respect of which the vendors (the respondents) would or might be liable under the tax covenants. The distinction is important in the context of the claim: a ‘Tax Claim’ was a claim by SGL as purchaser against the vendors; a ‘Claim’ was claim by HMRC or other tax authority against SRL.

Paragraph 3 of schedule 4 contained the material tax covenants; and paragraph 6 contained limitations on the vendors’ liabilities under the tax warranties and covenants.

Materially, paragraph 6.3 provided:

In broad terms, the vendors were discharged from liability unless the SGL gave a written notice of a Tax Claim before 4 April 2015, the seventh anniversary of completion.

Paragraph 7 of Schedule 4 set out a ‘claims procedure’ in relation to Claims. Paragraph 7.1 was in the following terms:

Again, in broad terms, paragraph 7.1 was designed to give the vendors as much notice as possible of a potential ‘Claim’ by tax authorities against SRL. In contrast to the obligation in paragraph 6.3, compliance was not a condition precedent and there was no time limit for giving a notice. Paragraph 7.2 provided a mechanism by which the purchaser (SGL) was obliged (a) to ensure that SRL provided information and assistance to the vendors in relation to disputing the claim and (b) to delegate the conduct of the defence of the claim to the vendors or their agents or professional advisers at the vendors’ request.

SRL incurred a liability to taxation in relation to the conditional share schemes that it had concluded with employees in the sum of approximately £3.8 million; and the appellants issued proceedings claiming this amount under the SPA. Although they did not serve a defence, the respondents contended that the claim could not succeed because SGL had not given notice under paragraph 6.3 of schedule 4 by 4 April 2015, and for this reason SGL was not entitled to payment under the tax covenant in respect of the tax liability.

The material issue was whether a letter sent on 24 March 2015 (some 10 days before the 4 April deadline) was a compliant paragraph 6.3 notice. The appellants argued that it was, and that the construction of the letter was sufficiently clear to enable summary judgment to be entered in their favour for £3.8 million. The respondents argued that it was not a compliant notice and that there was therefore a failure of the condition precedent to their liability.

The Judge held that on its proper construction the 24 March letter was not an effective notice under paragraph 6.3; but was a notice under paragraph 7.1 in respect of a potential claim by HMRC against SRL.

Importantly for present purposes he rejected an argument raised by the appellants in respect of which permission to appeal has been refused. The appellants had argued that, whatever the proper construction of the 24 March 2015 letter, the respondents were estopped, either by acquiescence or by convention, from asserting that they did not receive a compliant paragraph 6.3 notice.

It is not in dispute that the respondents, and particularly Mr Tinkler (who remained a

For the purposes of the application it was accepted that a notice was sent on 9 April 2008 to the respondents by solicitors acting on behalf of SGL in the following terms.

This was plainly a notice under paragraph 7.1, relating to unpaid National Insurance contributions.

By February 2015, SGL’s solicitors were aware of the 7-year limitation in relation to Tax Claims by SGL and that either notification would have to be given or an extension procured from the vendors. On 11 February 2015, they wrote to Mr Tinkler and to Mr Stobart with a draft letter in a form that included:

The reference to paragraph 6.2 was plainly intended to be a reference to paragraph 6.3 and the suggestion was that the time limit for giving notice of Tax Claims be extended to the ninth anniversary of completion.

The draft letter invited signatures from the respondents under the words:

Mr Cogley QC submitted that this letter would clearly have put the respondents on notice that, if they did not agree to an extension, they could expect to receive a paragraph 6.3 notice before the seventh anniversary of completion; and that this throws light on the proper construction of, and the common understanding in relation to, the subsequent 24 March letter. He also sidled up to a submission that the draft letter was itself a notice under paragraph 6.3. The first argument was open to him. The second, in the light of the terms of the draft letter, was plainly not.

On 24 March 2015, SGL sent the letter to the respondents (copied to their solicitors) whose construction was at the centre of the dispute before the Judge.

The appellants contended that the letter constituted the notification of a claim under paragraph 6.3. The respondents contended that it was a further notification of a potential claim under paragraph 7. Before turning to this issue, it is right to note the appellants’ argument that the respondents did not take the point that the letter was not a conforming paragraph 6.3 notice at the time. It is clear that Mr Tinkler continued to deal with HMRC in relation to its claim against SRL; and it was not until 16 August 2017 that the respondents took the point that the 24 March 2015 letter did not constitute notice of a claim under paragraph 6.3 of the SPA. It was these and other circumstances that followed the sending of the 24 March 2015 letter that gave rise to the appellants’ arguments on estoppel, which did not find favour with the Judge.

The starting point for the construction of unilateral notices is the speech of Lord Steyn in Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] AC 749 (a case concerning a tenant’s notice exercising a break clause in a lease) at 767G, in which he made clear a cardinal principle of construction:

At p.775E, Lord Hoffmann said this:

In relation to what is admissible as the contextual scene or factual matrix, Lord Steyn added at 768B:

Lord Hodge’s more recent synthesis of the proper approach to the construction of contracts in Wood v. Capita Insurance Services Ltd [2017] UKSC 24; [2017] AC 1173 at [10], with which the other members of the Supreme Court agreed, is to like effect:

The reference to ‘the parties’ in this passage highlights a difference between a contract and a unilateral notice: in the latter case the court is not construing agreed words, it is construing words used by one party. Nevertheless, the approach to ascertaining meaning is similar: the words used in the 24 March 2015 letter and the context in which it was written are both relevant.

In the present case the Judge considered first the wording of the notice and then the factual context. Mr Cogley was critical of this approach, submitting that the context should have been considered first. That criticism is unfounded. It is clear from Lord Hodge’s judgment in Wood v. Capita (above) at [12] that the order in which the analysis is carried out is immaterial:

Another of the issues which arose in the course of Mr Cogley’s submissions was the extent to which the subjective intent of the parties may still be material. He accepted that a party’s intention when giving a notice must be viewed objectively; but he submitted that where the parties were agreed as to what was intended to be conveyed by a notice, it must be construed in accordance with that common intent.

The question of the subjective intent or the common assumption of parties to a notice was considered by Lord Steyn in Mannai Investments (above) in terms of estoppel, see p.768D; and Lord Clyde in the same case expressed the point at p.783D:

I would accept that, if it is clear that the parties have a common understanding as to the effect of a contractual term, the court should construe the contract in accordance with that understanding. In other words, without the need for rectification: see for example Lord Hoffmann’s discussion of what is meant by ‘correction of mistakes by construction’ in Chartbrook Ltd v. Persimmon Homes [2009] 1 AC 1101 at [23]. An example would be where a party has misnamed a property when giving a contractual notice in relation to it, or in a nearer example to the present case, where a party has simply misstated the relevant contractual provision by one numeral (paragraph 6.2 for 6.3) but where otherwise the intent is clear.

Mr Cogley relied on two cases in support of his broad submission that an objective approach to construction should not be adopted where a common subjective intent can clearly be demonstrated: HSBC Bank Plc v. 5th Avenue Partners Ltd and another [2007] EWHC 2819 (Comm) and MW Trustees Ltd and others v. Telular Corporation [2011] EWHC 104 (Ch). Neither provides substantial support for his submission. The former case was not about contractual interpretation and Walker J’s observations

Quite apart from the absence of authority in favour of Mr Cogley’s broad submission, there is a practical difficulty. The appellants’ case relies on what is said to be the understanding of the respondents when they received the letter: namely, that it was a compliant notice under paragraph 6.3 regardless of its terms. It is unclear how evidence of subjective evidence may be secured other than by admission or subsequent conduct. In the present case the Judge found ‘no evidence which demonstrates what Mr Tinkler’s subjective intention and understanding was in relation to the notice’, see [45], adding that there was ‘no basis upon which one could ascribe to Mr Tinkler, let alone Mr Stobart, as of the date of receipt of the notice, a subjective understanding that it was a notice under paragraph 6.3’ [46]. So far as subsequent conduct was concerned, it could not provide relevant contractual context for the interpretation of the notice nor assist in its construction, see above, and also the cases cited in Lewison, ‘The Interpretation of Contracts’ 6th ed. P.179-182. The Judge rejected the appellants’ case on estoppel.

The final principle which emerges from the cases is that, although every notification provision is likely to turn on its own wording, see for example Ipsos SA v. Dentsu Aegis Network Ltd [2015] EWHC 1171 (Comm) and the cases referred to at [16], the purpose of notification in this type of contract is to make clear in sufficiently formal terms that a claim is being made against the vendors, see also Senate Electrical Wholesalers Ltd v. Alcatel Submarine Networks Ltd (formerly STC Submarine Systems Ltd) [1999] 2 Lloyds L.R 423, at [90].

At [91] Stuart-Smith LJ went on to say:

Furthermore, as Cooke J observed in Laminates Acquisition Co v. BTR Australia Limited [2003] EWHC 2540 (Comm) at [29] having referred to the speech of Lord Steyn in Mannai Investments (above) and the judgment of Stuart-Smith LJ in Senate Electrical:

Before turning to the construction of the 24 March 2015 letter, it is convenient to add a few preliminary points.

As noted above schedule 4 of the SPA draws a distinction between claims that are made by HMRC against SRL and claims that are made by SGL against the vendors. The former may lead to the latter, but they are treated differently in the SPA. Thus, the giving of a paragraph 7.1 notice may give rise to a paragraph 6.3 claim, but it does not necessarily mean that a paragraph 6.3 claim will be made, see for a similar distinction in the nature of the contractual obligations those identified by Cooke J in the Laminates case (above) at [32] and [33].

Mr Cogley complained that the Judge did not pay sufficient regard to the ‘contextual landscape’ of the 24 March 2015 notice. He submitted that even if the subjective intent of the parties is immaterial, the court must still look to see what purpose the letter was intended to achieve, viewed objectively.

The much earlier 9 April 2008 letter was very plainly the notification by SGL of a claim by HMRC against SRL under paragraph 7.1 in relation to unpaid National Insurance contributions.

It was accepted, for the purposes of the Part 24 proceedings that the vendors might have expected a paragraph 6.3 claim in view of the draft letter of 11 February 2015 and the prior email exchanges. However, that does not throw decisive light on whether the 24 March letter is properly to be construed as a paragraph 6.3 notice of claim. This is because there would still have been 10 days in which to serve a conforming paragraph 6.3 notice before the seventh anniversary of the completion date on 4 April 2015. A similar point was made in relation to the notice that was served in the Laminates case (above) where the notice was within 3 days of the deadline for giving a compliant notice. The argument was rejected by Cooke J, see [34], with the observation that the recipient in these circumstances might have expected a compliant notice to have been served immediately following the noncompliant one.

As the Judge put it in the present case at [36] of his judgment:

The Judge added, at [37], that the only point at which the respondents would have known that they would not receive a paragraph 6.3 notice was at the end of 4 April 2015, at which point it would be too late to serve one. However, although this observation has a certain logical purity, it was plainly not the way in which the respondents viewed the notice at the time.

Turning then to the terms of the 24 March 2015 letter, the following points may be noted.

First, the letter was plainly drafted by a lawyer and expressly adopted the definitions set out in the SPA. As the Judge noted at [25], the starting point was the consideration of the language of the notice: it made no reference to a Tax Claim, nor does it refer to a claim being made by SGL under paragraph 6.3 or against the vendors.

On the contrary, second, it gave notice in terms of a contingency: ‘a potential Liability to Taxation’, and a ‘potential claim’ by reference to paragraph 3.1.2(c). The distinction is important, see for example the Laminates case (above) at [33]:

Third, as already noted, schedule 4 of the SPA envisages two possible but distinct forms of notice (the notice of a Tax Claim by SGL against the vendors, and a notice of a claim by HMRC against SRL). The express reference to confirming whether the respondents wished to have continued discussions with HMRC ‘pursuant to paragraph 7 …’ makes it quite clear that it is the latter form of notice and not the former.

Fourth, the letter concluded by setting out ‘the likely estimate’ of the quantum of the claim and the attached detailed schedule was headed: ‘Summary of company exposure.’ In other words, a summary of SRL’s exposure to HMRC.

In my view, a person receiving the 24 March letter with knowledge of the terms of the SPA would have understood it to be a notice under paragraph 7. As Mr Fealy QC put it: it was not a defective paragraph 6.3 notice, it was a compliant paragraph 7 notice. The question then arises: does the factual background change that?

Mr Cogley submitted that having served a paragraph 7 notice on 9 April 2008 in relation to the same potential liability, it would have been nonsense to have served another paragraph 7 notice on 24 March 2015, and the respondents would have been aware of this absurdity. However, as the Judge noted at [32] it is striking how similar the 9 April 2008 notice is to the 24 March 2015 notice. The notices are structured in a similar way and both refer to the tax covenant and to a Claim.

Furthermore, there is an express reference to confirmation ‘pursuant to paragraph 7’ as to whether the vendors wished ‘to have continued conduct of discussions with HMRC in relation to the claim.’ Again, on an ordinary reading of the words, this was a further reference to a claim for tax by HMRC against SRL and the trigger for a

In addition, the 9 April 2008 notice was expressed to relate to claims for National Insurance contributions, whereas the 24 March 2015 notice was expressed to relate to the declaration and payment of dividends to employees. Both were notices reflecting an obligation of the purchaser to give notice of such claims under paragraph 7.

The Judge acknowledged a further point raised by Mr Cogley: namely, that the 24 March 2015 notice was addressed not only to the respondents but also to their legal representative as required by paragraph 6.3, whereas a paragraph 7 notice had only to be served on the respondents’ representatives. The Judge concluded that the form of address was consistent with a paragraph 6.3 notice, but this ‘minor aspect’ of the form of notice did not affect his overall conclusion. He might have added that the 9 April 2008 letter, which was plainly a paragraph 7 notice, was also copied to the respondents’ legal representative.

In my view the Judge was right in his view that the letter of 24 March 2015, both in its own terms and viewed against the admissible background, was not a compliant notice of claim under paragraph 6.3 of the SPA, that no notice of a Tax Claim had been made within 7 years of the completion date, that such a claim was therefore barred and that the respondents were entitled to summary judgment on the issue.

Accordingly, I would dismiss the appeal.

I agree.

I also agree.