Tax covenant notice provisions considered in Court of Appeal

United Kingdom

In Stobart Group Ltd & Stobart Rail Ltd v Stobart & Tinkler [2019] EWCA (Civ) 1376, the Court of Appeal considered the extent to which valid notice had been given of a tax covenant claim prior to the expiry of the relevant limitation period. The Court of Appeal dismissed the appeal and upheld the original judgment, finding that valid notice had not been given for the purposes of the limitation period, but only for the purposes of the conduct provisions relating to potential tax covenant claims. The claim under the tax covenant was time-barred as a result.


Mr Stobart and Mr Tinkler (the ‘Sellers’ or ‘Vendors’) had sold the entire issued share capital in Stobart Rail Limited to Stobart Group Limited (the ‘Purchaser’). The sale and purchase agreement (‘SPA’) for the shares contained a tax covenant, which alongside other typical pre-completion tax liabilities of Stobart Rail Limited expressly covered any employee remuneration schemes in which HM Revenue and Customs (‘HMRC’) had indicated an interest. A liability covered by this limb of the tax covenant subsequently arose.

The SPA contained two provisions relevant to giving notice of tax covenant claims. The first was in the conduct provisions relating to tax covenant claims, and broadly required that upon becoming aware of a potential assessment or claim by a tax authority for a liability for which the Sellers may be liable under the tax covenant, the Purchaser would notify the Sellers of such claim. The provision stated:

‘Upon the Purchaser or the Company becoming aware of any Claim, the Purchaser shall as soon as reasonably practicable, and in any event within 10 Business Days of the date thereof, give notice of such Claim to the [Sellers’] Representative stating how the liability arises under paragraph 3 or pursuant to the Tax Warranties and a reasonable estimate of the quantum of the Liability to Taxation or other liability, and upon the Purchaser or the Company becoming aware of any event, fact or circumstances which may give rise to such a Claim, the Purchaser shall give notice thereof and of the possible Claim to the [‘Sellers’] Representative provided that the giving of notice under this paragraph 7.1 shall not be a condition precedent to the liability of the [Sellers] under this schedule.’

It then went on to provide a mechanism by which the Purchaser was obliged (a) to ensure that the company being purchased provided information and assistance to the Sellers in relation to disputing the claim and (b) to delegate the conduct of the defence of the claim to the Sellers or their agents or professional advisers at the Sellers’ request

The second was in the limitation schedule, and provided that the Sellers would not be liable for a claim under the tax covenant unless written notice of that claim was given to the Sellers by the seventh anniversary of completion. The provision stated:

The [Sellers] shall not be liable in respect of a Tax Claim unless the Purchaser has given the [Sellers] written notice of such Tax Claim (stating in reasonable detail the nature of such Tax Claim and, if practicable, the amount claimed) on or before the seventh anniversary of Completion in respect of such Tax Claim unless a Tax Authority is [un]able to assess the Company in respect of the Liability to Taxation or other liability giving rise to the relevant Tax Claim because of fraudulent conduct.

Having received the claim from HMRC, the Purchaser gave notice of that claim to the Sellers under the conduct provisions relevant to the tax covenant, and the Sellers subsequently exercised their conduct rights and inputted into correspondence with HMRC. As the seventh anniversary deadline approached, the Purchaser wrote to the Sellers and stated that unless the Sellers agreed by return to extend the deadline so as to allow the dispute with HMRC to continue, the Purchasers would serve notice for the purposes of the limitation provision. The Sellers did not agree, and the Purchasers sent a further letter on 24 March 2015, shortly before the limitation period expired. The Seller argued that this letter did not constitute valid notice for the purposes of the limitation provision, and applied for summary judgment that the claim was time-barred.

Although the Court of Appeal did not consider this issue, it is interesting to note that at first instance the Purchasers also argued that the Sellers were estopped (either by acquiescence or by convention) from asserting that the notice was not compliant. This was rejected, and permission to appeal on this ground refused.


The Court of Appeal set out the authority on the proper approach to the construction of notices by reference to Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, in which Lord Steyn held the ‘cardinal principle of construction’ to be that:

The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. 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.

Lord Justice Simon distinguished a unilateral notice, where the court construes words used by one party as opposed to agreed words, from a contract. By reference to the case of Wood v. Capita Insurance Services Ltd [2017] UKSC 24; [2017] AC 1173, the Court of Appeal upheld the approach that it is irrelevant in which order the analysis of the notice was carried out and that the Judge at first instance should not be criticised for considering the wording of the notice before the factual context.

The Court of Appeal assessed whether it should consider subjective intent or common assumption of parties to a notice. By reference to Lord Steyn's judgment in Mannai Investment, it was accepted 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’. One situation in which this rule may bite is where there is a clear mistake in a contract, for example ‘a party has misstated the relevant contractual provision by one numeral (paragraph 6.2 for 6.3) but where otherwise the intent is clear’.

The Court of Appeal did not accept the broad submission of the Purchaser that an objective approach to construction should not be adopted where a common subjective intent can clearly be demonstrated. There was a practical difficulty in obtaining evidence of subjective evidence, other than by admission or subsequent conduct. In the present case, even if the Court of Appeal took an approach based on the Sellers' subjective intention, there was no basis on which to ascribe this intention to the Sellers due to the lack of contemporaneous evidence shedding light on their understanding in relation to the notice.

The Court of Appeal concluded its review of the authorities by emphasizing the importance of making the terms of a notice clear, in sufficiently formal terms. The importance of certainty of notices is reiterated in Senate Electrical Wholesalers Ltd v. Alcatel Submarine Networks Ltd (formerly STC Submarine Systems Ltd) [1999] 2 Lloyds L.R 423 where Lord Justice Stuart-Smith found that:

‘Notice clauses of this kind are usually inserted for a purpose, to give some certainty to the party to be notified and a failure to observe their terms can rarely be dismissed as a technicality.’

The Court of Appeal found that the letter of 24 March was not compliant with the notice provisions for the purposes of the limitation period. In doing so, the Court of Appeal noted that the letter made no reference to a Tax Claim (the defined term used in the SPA for claims under the tax covenant), or to notice of a claim being given for the purposes of the limitation provision. Instead, it identified a ‘potential’ liability under the tax covenant, and reference to confirming the extent to which the Sellers wished to continue discussions with HMRC pursuant to the conduct provisions. A person receiving this letter would therefore have understood it to be a further notice under the conduct provisions.

While the Purchaser argued that it would be absurd to have given a further notice of this type, the Court of Appeal noted both that the form of the notice was strikingly similar to that given once the original claim was received from HMRC, and that the March 24 letter included a different subject matter relating to the claim (the payment of dividends rather than national insurance contributions). The March 24 letter was therefore not valid notice for the purposes of the limitation provisions, and the claim under the tax covenant was time-barred.


The provisions considered in this case are typical of tax covenants given on M&A transactions. These will commonly include a requirement to notify the seller (or the relevant covenantor) once a tax assessment or claim is received from HMRC that suggests they may be liable under the tax covenant, as well as also requiring notice to be given before the expiry of a limitation period if a claim under the agreement is to be permitted. The two types of claim relevant to these provisions will usually be defined using very similar terms, as they were here. This case demonstrates the importance of ensuring that when giving notice in relation to a tax covenant, it is very clear for which of these two purposes the notice is being given.

Judges: The Master of The Rolls (Sir Terence Etherton), Lord Justice Simon, and Lord Justice Hickinbottom