UK High Court Considers The Meaning Of "Subject To Tax" In A Share Purchase Agreement

• Published date: 09 September 2020
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Contracts and Commercial Law, Tax Authorities
• Law Firm: Arthur Cox
• Author: Mr Fintan Clancy, Caroline Devlin, Ailish Finnerty and David Kilty

In AXA SA v Genworth Financial International Holdings, LLC [2020] EWHC 2024, the UK High Court had to determine the meaning of the term "subject to taxation in the hands of the receiving party" in the context of a gross-up clause in a share purchase agreement.

AXA, as buyer, had argued that the amounts receivable were "subject to taxation" even though they were able to benefit from an exemption in relation to that particular part of the receipt. The argument was that the obligation to gross-up applied if the amounts were merely within the scope of tax and that an exemption from that scope was not material. The High Court disagreed and applied an approach of interpreting the different strands of the contract in a harmonious way to understand the commercial arrangement between the parties.

The Court's view

The basis of the Court's decision was that the commercial intent of the gross-up clause was to ensure that the injured party (in this case AXA) was "made whole" against the incidence of taxation on any sums it received. The Court believed that the objective of the clause was that AXA would not be left out of pocket but it would also not profit by way of a windfall. The Court concluded that there was no commercial sense in requiring the sellers (Genworth) to make payments which were alleged to be in respect of tax, yet at that time no tax was payable, it was possible that tax may never be payable and almost certainly would not be payable in the amount that AXA demanded.

There are a number of interesting parts to this decision and some consequences which are discussed below. The key point to remember is that in interpreting contract law (or indeed statute) both the context and purpose are important. Mechanically applying a decision on specific words to a different situation or different context is not a reliable means of interpretation. Whilst it could be argued that, as a result, legal interpretation becomes subjective and therefore unreliable, we would submit that this is the appropriate way to interpret both contracts and statutes.

Impact on drafting

In the case, the parties offered several authorities to the High Court which interpreted the term "subject to taxation". It is reassuring that the Court appreciated the bespoke nature of the gross-up clause and focused on the importance of clear language whilst highlighting the inherent dangers of a poorly drafted clause. With this in mind the most immediate impact of this case is on the drafting not just of...