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Tax Covenant Claim - The value of consistency

A recent case highlights the dangers of having inconsistent provisions in separate transaction documents dealing with the same subject matter.Inconsistencies in the documentationThe documents in A recent case highlights the dangers of having inconsistent provisions in separate transaction documents dealing with the same subject matter.

Inconsistencies in the documentation

The documents in question were a share purchase agreement ("SPA") and deed of tax covenant ("Tax Deed") relating to the purchase of a group of companies operating a ski holiday business. The SPA provided that:

(i) any claim under the SPA warranties or under the Tax Deed must be made before the expiry of 7 years from completion of the transaction; and

(ii) no such claim would be deemed to have been made unless notice was made in writing to the sellers specifying certain information "as soon as reasonably practicable but in any event within 30 days of the [buyer] or the target becoming aware thereof".

The Tax Deed provided, in relation to liability under the principal tax covenant, that written notice of a claim had to be served on any of the sellers on or before the expiry of 7 years from the end of the accounting period which was current at completion. This is similar to (i) above, though not identical.

However, the Tax Deed did not contain an equivalent provision to (ii) above. Further, it stated that while the limitations and exclusions of liability in the SPA applied to the Tax Deed, the provisions of the Tax Deed only applied in the case of any conflict between the two regimes.

The claim

A claim arose under the Tax Deed arising out of a value added tax liability to the Swiss authorities, and the buyer sought to notify the claim in writing to the sellers. The notification was made well within any 7 year period, whether under the SPA or Tax Deed. The sellers nevertheless claimed that the 30 day time limit required by the SPA also applied, and that the buyer had failed to comply with this. The buyer countered that

(i) the 30 day time limit did not apply to the claim under the Tax Deed;

(ii) if this was incorrect, the buyer had in fact complied with the time limit as it did not have the necessary awareness more than 30 days prior to the notification.


The judge agreed with the buyer on both points. First, he held that there was an inconsistency between the SPA and Tax Deed, and the respective provisions were not merely complementary as the sellers sought to argue. He indicated that he might have decided differently were it not for the fact that the Tax Deed did deal expressly with notifications.

The Tax Deed therefore provided that the inconsistency was to be resolved by applying the requirements of the Tax Deed alone, which imposed no time limitation based on awareness.

The judge went on to find that, even if was wrong and the 30 day time limit was applicable, it had been satisfied by the buyer. Awareness was to be differentiated from simply having information available, and required the conscious knowledge of a person who was fully responsible for the issue. He was also prepared to allow for the fact that the relevant personnel "will have a variety of tasks to do and will not have a single minded concentration on the tax issue to the exclusion of other duties". Applying that analysis to the facts, the notification was compliant.

Key lessons

This case illustrates a general concern where two transaction documents (or possibly more) have overlapping provisions dealing with claims and liabilities. The parties should either have:

(i) ensured that the relevant provisions were truly identical in both documents, or

(ii) set out a single overarching claims regime in just one of the documents so that inconsistencies could not arise.

As it happens, this would not have defeated the particular claim, but a less diligent buyer could easily be caught out by a 30 day limit, and the sellers would escape all liability.

On share purchase transactions, the tax covenant is commonly contained in a schedule to the SPA rather than in a separate deed, but that would not automatically solve the problem - especially if the schedule was only "dropped into" the SPA just prior to execution.

In practice, the solution requires very careful transaction management. It is tempting to allow separate teams of specialist advisers to negotiate their own documents in parallel, but someone needs to be given overall responsibility for ensuring that mismatches do not occur. Any additional time spent or expense incurred on the transaction is likely to be greatly outweighed by the consequences of an error arising.

The case discussed is Kuoni Travel Limited v Boyle & others [2013] EWHC 877 (QB) and the full judgment can be read here.

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