The actual wording of legal documents is the lodestar followed by judges seeking to interpret them, and arguments that they do not accurately reflect what was intended rarely succeed. The Court of Appeal made that point in a case concerning tax liabilities arising following the sale of a transport company.

The sale agreement included a common clause by which the vendors were required to indemnify the purchaser against any tax liabilities which related to the company's operations prior to the sale, but which were only recognised subsequently. If the purchaser wished to make a claim under that indemnity, it was required to serve a formal notice on the vendors within seven years of the sale's completion.

The purchased company incurred a tax liability of about £3.8 million in respect of an employee share option scheme that pre-dated the sale. The purchaser sought to exercise its rights under the indemnity but, following proceedings, a judge found that it had failed to serve the notice required before expiry of the seven-year time limit. The vendors were thus awarded summary judgment on the issue and discharged from liability under the indemnity.

In challenging that decision, the purchaser argued that a letter it had sent to the vendors 10 days before the time limit expired amounted to a valid contractual notice of its intention to trigger the indemnity clause. It was submitted that, in the light of the factual context, the vendors clearly had a subjective understanding that the purchaser's intention was to serve such a notice.

In dismissing the appeal, however, the Court found that the contingent wording of the letter meant that it was incapable of amounting to a valid notice. Background factual evidence on which the purchaser sought to rely in support of its interpretation of the letter in any event failed to establish that there was a common understanding that it would serve as such a notice.

Contracts for purchase and sale of businesses are often complex and it is critical to ensure that they are clearly worded and, if a claim under the contract is to be made, the provisions of the contract are strictly adhered to. For advice on any contract dispute or how to protect your interests when negotiating an agreement, contact Roy Colaba on 0808 166 8827 or email your enquiry to r.colaba@sydneymitchell.co.uk.

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