Court Of Appeal Considers The Meaning Of 'Payable' In A Share Purchase Agreement Tax Covenant

This Court of Appeal decision highlights conflicting interpretations of the meaning of "payable" and illustrates how a court will go about resolving the conflict.

Facts

The case involved the acquisition of shares in a Peruvian company (the Target) which was part of a group developing and operating copper mines in Peru. Although the Target and its activities were all in Peru, the share purchase agreement, which was signed in April 2014, was written under English law and disputes were to be decided in the English courts.

Under the agreement the respondents (the Sellers) agreed to indemnify the appellants (the Buyers) in relation to "the amount of any Tax payable by a Group Company" to the extent the tax had not been discharged or paid on or before closing and related to the period before completion. The case centred around a VAT assessment which the Peruvian tax authorities levied on the Target group after completion, but which related to the relevant period.

Under Peruvian law a VAT assessment establishes an actual liability which remains an actual liability unless and until there is a decision of the tax court which sets it aside. However, the liability is not enforceable in that the tax cannot be collected through any coercive procedure while the assessment is under appeal to the tax court.

The Buyers argued that the VAT became "payable" when the existence and amount of a liability were established through the issue of a tax assessment. The Sellers, on the other hand, argued that tax became "payable" only when an enforceable obligation to pay the relevant amount arose - which would not occur before the appeal to the tax court had been decided.

Decision

At first instance the court concluded that the Sellers' interpretation was correct and the Court of Appeal agreed.

Citing the principles of construction set out in the 2017 judgment of the Supreme Court in Wood v. Capita Insurance Services Ltd , the court noted that its task was to ascertain the objective meaning of the relevant contractual language. This required it to consider the ordinary meaning of the words used, in the context of the contract as a whole and any relevant factual background. Where there were rival interpretations, the court should also consider their commercial consequences and which interpretation was more consistent with business common sense.

The court held that the word "payable" is not a legal term of art. It is a word which is capable of bearing different...