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UK ruling shows need for businesses to make purposes of actions subject to contract clear, says expert

Only the “dominant purpose” of actions governed by commercial contracts will be considered by courts in dispute over what is meant by ‘the purpose’ of those actions unless businesses are more specific in the way they word those clauses, a litigation expert has said.

Richard Twomey of Pinsent Masons, the law firm behind Out-Law.com, said a recent ruling by the Court of Appeal in London should spur businesses that wish to avoid uncertainty and risk to specify whether ‘the purpose’ in their commercial agreement is the sole purpose, one of multiple purposes or something else.

The case, which concerned contract terms relating to the sale of a brewing business, also shows that generally courts will construe anti-avoidance provisions in commercial agreements widely to prevent parties from side-stepping them, he said. 

The dispute in the case was between by Interbrew Central European Holdings (ICEH), a Dutch subsidiary of Anheuser Busch Inbev (ABI), and another company, Starbev. In 2009 Starbev, together with private equity firm CVC Capital Partners (CVC), bought a Dutch brewing business from ABI for €1.475 billion.

The terms of the sale of the company provided ABI with a 'contingent value right' (CVR), which provided the business with a right to share in profits generated from the on-sale of the Dutch brewing business by Starbev.

The precise value of ABI's rights depended on when any on-sale happened, with higher thresholds applying to regulate those rights, and decrease their value, the longer any on-sale took to happen.

In 2012 Starbev on-sold the business to US brewer Molson Coors for €2.65bn. As part of that deal Starbev had in place a 'convertible note', which granted the Starbev a right to payment of €500m from Molson Coors on 31 December 2013, or alternatively earlier payment of another amount if the US brewers' share price had increased by more than 15%.

In August 2013 Starbev exercised its right to "earlier realisation", receiving €466m from Molson Coors at the time. It also received a further subsequent payment in January 2014 to account for a reduction in Molson Coors' warranty claims and the related security it had withheld at the time it paid the initial amount to Starbev.

Starbev passed on a share of the amounts it received to ABI in recognition of ABI's CVR, however ABI argued that a purpose of Starbev's deal with Molson Coors, and particularly the existence of the convertible note, had been to reduce the extent of its liabilities to ABI under the terms of the CVR. ABI said that it was entitled to additional payments under the CVR because the convertible note was in breach of anti-avoidance provisions contained in the agreement.  

Starbev disagreed. It argued that although the convertible note may have had the effect of reducing sums payable under the CVR, for the anti-avoidance provisions to apply the reduction in payments would have had to have been the sole purpose for the use of the note. 

The Court of Appeal said, though, that it was the "dominant purpose" of the action that mattered for the purposes of assessing whether it was caught by the anti-avoidance provisions, and upheld an earlier High Court finding that "reducing the payments due to ABI was indeed the dominant purpose of the transaction". This is "because Starbev had deliberately structured the sale to Molson Coors mainly to achieve that effect by making the agreement for the convertible note part of the total consideration", Lord Justice Longmore said.

"If the reduction of payments had to be the 'sole' purpose, then it would be too easy for the anti-avoidance provision to be itself avoided, which would hugely reduce its significance," Twomey of Pinsent Masons said.

"In other words, in commercial arm’s length agreements the courts seem willing to give a wide meaning to anti-avoidance provisions. You can see why this is. If they were too narrowly interpreted, then the provisions might be too easily avoided and devoid of practical effect," he said.

"Giving wider application to this case, wherever agreements refer to 'the purpose' of particular actions, the relevant purpose will be the 'dominant purpose' – if parties intend something else, then they will need to specify precisely what that is," Twomey said.

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