13 August 2018 - Post by:Jason Rix
In Minera Las Bambas v Glencore, the court considered the meaning of the word “payable” in a tax indemnity. In doing so it emphasised the importance of the documentary context to interpretation and attached less weight to the factual matrix where the contract had been drafted by experienced lawyers.
The parties entered into a share purchase agreement. In it, the sellers indemnified the purchasers for certain taxes “payable” by the purchasers. Peruvian tax authorities subsequently concluded that VAT had become due for an aspect of the transaction and issued a resolution to that effect. The purchasers appealed the resolution. It was common ground that the purchasers were not required to pay the outstanding VAT pending the outcome of the appeal (expected in 2019).
The purchasers argued that the VAT had become “payable” under the terms of the indemnity because an actual liability to pay had arisen. The sellers argued that the VAT payment would only be “payable” if and when the appeal was finally determined and the purchasers were required to pay the VAT.
The judge recognised the line of authorities on the term “payable”, which distinguishes between debts which are “due” and debts which are “payable”. However, she found that the facts and context of the current case differed from those cited by the parties. She therefore considered the construction of the word “payable” in line with the principles set out by Lord Hodge in Wood v Capita.
The judge found that the meaning of “payable” was not clear from the language of the relevant clause and so she looked to the use of the word elsewhere in the contract, against the overall structure of the contract, against the factual matrix and the commercial consequences.
She concluded that the VAT would only be “payable” within the meaning of the indemnity clause if, following a final determination of the tax appeal, it became “coercively enforceable” under Peruvian law. In doing so, she was led primarily by the use of the term in sub-clauses of the relevant indemnity clause and clauses to which the indemnity cross-referred. These provisions referred to debts being “charged, paid or payable”, which suggested that “payable” alone had a narrower meaning. The judge then checked this meaning against the structure of the contract, factual matrix and commercial consequences, concluding that these either supported or did not assist in her interpretation of the clause.
Throughout her judgment, Moulder J reiterated that she would attribute less weight to the factual and commercial background where the relevant contract had been drafted by experienced law firms. In particular, she stressed that it was open to sophisticated parties to deal with any important factual or commercial points in the contract itself and that where this had not been done, the court could not jump to conclusions because it may be that the parties had not been able to reach agreement on this point at the time or that they considered it important only with hindsight.
The case reiterates the need for contracting parties to:
- ensure that any important factual or commercial points are dealt with in the contract itself (and to be specific in what is being referred to); and
- ensure that language is used consistently throughout a contract so that a word used in one clause has the same meaning when used elsewhere.
Update 14 June 2019: The judge’s decision on the point in time when tax was “payable” has been upheld by the Court of Appeal (ie it was the point at which it became enforceable). This was because:
- an indemnity is a promise to prevent the indemnified person from suffering loss and no loss could be suffered until the indemnified person was under an enforceable obligation to pay the debt; and
- it did not make commercial sense to require the sellers to pay an amount of money to the purchasers which was not at that time needed, and may never be needed, to satisfy a liability to pay tax.