What’s ‘the purpose’ of a contractual transaction?

The facts of the case  are complex, but involved the purchase of a brewing business in Central and Eastern Europe for €1.475 billion.  There was a highly complicated Contingent Value Right (CVR) agreed between the parties, however, the CVR contained an Anti-Avoidance provision in relation to “any transaction” specified within the provision.

The question was whether a €500 million Convertible Note fell within this anti-avoidance provision as it was a payment undertaken “with the purpose of reducing payments”.  The crux of this was the meaning of “the purpose”. In this case, the claimant argued that the words used in the context of sale and purchase should be interpreted as meaning the ‘sole’ purpose. The defendant disagreed, saying it referred to ‘a’ purpose.   The Court of Appeal ruled that “the purpose” should be interpreted as meaning the “dominant” purpose of the transaction – and the anti-avoidance clause was, therefore, activated.

What does this mean?
This case is a salutary reminder that drafting commercial clauses and their wording requires great care.   The words used need careful consideration, and businesses must look ahead to determine whether they are adequately protected should a dispute arise at some point in the future.    Any potential ambiguity should be avoided where possible.

It also illustrates the tendency of the courts to adopt a common sense approach to the interpretation of contract clauses.  The Court of Appeal cited an earlier ruling  that noted that “A person’s purposes are almost always to some extent mixed, and the ordinary principle is that the relevant purpose is the dominant one”.  Where a commercial contract refers to “the purpose” of a transaction (or similar), the parties should take the view that it will likely mean the “dominant purpose”.  Where there is any doubt as to the meaning of words within a commercial contract, take specialist legal advice.

How can we help?
We provide expert advice on the effective drafting of all types of commercial contracts.   If you are considering new contract terms, or if you have any concerns about how your existing commercial contracts apply in your business, contact the experienced commercial solicitors at Herrington Carmichael for specialist advice. 

Please contact Mark Chapman on 01276 686222.