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Court Opines on the Meaning of 'the Purpose' in a Commercial Contract

on Monday, 01 August 2016.

Starbev GP Limited v Interbrew Central European Holdings BV,

In the case of Starbev GP Limited v Interbrew Central European Holdings BV, the Court of Appeal has ruled on the meaning of 'the purpose' in a contract.

This is following a precedent for contractual interpretation set out by the Supreme Court, in that:

  • There is no general rule as to how 'purpose' is to be established
  • The purpose referred to in the contract does not have to be the sole purpose
  • The relevant purpose is the dominant one when looking at a person's range of purposes.

The Facts

The facts of the case are as follows. Interbrew sold a business to Starbev. The sale contract included a clause which referred to payment by deferred consideration. The clause stated that if Starbev sold the business to a third party, that it had to share some of the profit from that sale to Interbrew as part payment of the deferred consideration. This onward sale was referred to in the contract as a transaction which was for 'the purpose' of reducing the deferred consideration payments owed from Starbev to Interbrew.

A dispute arose between Starbev and Interbrew over the interpretation of 'the purpose'. Starbev argued that 'the' in the clause should be interpreted as meaning that the transaction to reduce the payments had to be the sole purpose. Interbrew felt that the clause should be interpreted more loosely and that the reduction of the payments was one purpose for the transaction, but not the sole motivator.

The High Court concluded that reducing the deferred consideration payments was the dominant purpose of the transaction and therefore Interbrew was entitled to a larger share of the consideration. Starbev appealed against the decision.

The Appeal

The Court of Appeal dismissed the appeal and concluded that the High Court had been correct in its decision. The purpose of the clause was to reduce the deferred consideration, but this was not its sole purpose as it also sought to act an anti-avoidance provision in the contract. If Starbev's interpretation had been correct, the clause would not have been an anti-avoidance term.

Commercial Application

It is important to draft contracts in a clear and concise manner in order to avoid disputes such as this one. Even though the Court of Appeal has confirmed the established test in this case, considering interpretation in the context of a particular contract is key. To avoid ambiguity, when drafting a contract, parties should look to include more specific words than simply using 'the purpose' or a similar phrase. Instead, parties should look to narrow down what that phrase (in this case the 'purpose') is referring to - is it the 'sole' purpose or the 'dominant' purpose? Ambiguity in contracts can cost time and money later, so take the time and narrow down the detail at an early stage.

For more information, please contact Laura Barrell on 01923 919 313.

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