Court Of Appeal Upholds Literal Reading Of Contract

ING Bank NV v Ros Roca SA [2001] EWCA Civ 353

ING acted as a financial adviser to Ros Roca, a Spanish company specialising in waste and environmental services. Under an agreement relating to the purchase of another company by Ros Roca, ING was entitled to a fixed fee and an additional fee: "based on the Enterprise Value/EBITDA 2006 ... entry multiple implicit in the Transaction". At the time of the agreement, it was assumed that the Transaction would occur in 2006, but in the event it did not happen until the end of 2007. ING sought a fee based on EBITDA 2006. Ros Roca claimed that the intention was that the fees should be based on the EBITDA for the current year i.e. EBITDA 2007. The difference was some €5.7 million. The High Court judge applied the principles of contract construction set out in Chartbrook v Persimmon Homes and considered whether something had gone wrong with the language, and if so "is it clear what a reasonable person would have understood the parties to have meant?". He held that ING's construction was "commercial nonsense". ING appealed. Ros Roca argued that even if the fees should be calculated by reference to EBITDA 2006, ING was estopped from claiming a fee on that basis.

The Court of Appeal held as follows:

Construction The Court applied the test in Chartbrook, but came to a different conclusion from the Judge. The wording of the formula did create problems. Ros Roca's interpretation involved ignoring the reference to the year 2006 altogether. ING's interpretation involved treating the words "implicit in the transaction" as applying only to the numerator (i.e. Enterprise Value) rather than, as the word order suggested, to the "entry multiple" as a whole. The Court sympathised with the Judge's view that a reasonable observer would be looking for an alternative interpretation, but was not convinced that this was sufficient to bring the Chartbrook two stage test in to play. It was of the view that nothing had gone wrong with the language as such. The reference to EBITDA 2006 was intentional. The mistake was not in the language, but in failing to anticipate its consequences. The court was also of the view that, applying the second part of the test (i.e. what a reasonable person would have understood the parties to have meant),"implicit in the Transaction" might mean that the EBITDA valuation should be by reference to a different period, but it is equally plausible that the very uncertainty of the concept would have led...