UK: Court Of Appeal Upholds Literal Reading Of Contract

Last Updated: 26 April 2011
Article by Mark Alsop

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 the parties to wish to define EBITDA by reference to a particular year – and if so, it was understandable that they should have adopted the year 2006. The fact that no one may have contemplated the actual transaction being delayed beyond that time was not in itself a reason for rewriting the agreed formula. Overall, the Court acknowledged that ING's interpretation sat uneasily with the word order, but disregarding the awkwardness of the word order did significantly less violence to the language of the clause than ignoring altogether a specific reference to 2006.

  • Estoppel

The Court held that, even though a contractual interpretation of the formula favoured a calculation by reference to EBITDA 2006, ING were estopped from claiming on that basis and were only entitled to a fee calculated on the basis of EBITDA 2007. ING had agreed a fee estimate of €4 million which Ros Roca used in finalising the details of the Transaction with the third party investor. That estimate implied a mutual understanding that fees would be based on EBITDA 2007, and was wholly inconsistent with the much higher figure it would have resulted from use of EBITDA 2006. Furthermore, ING's internal documents showed that they had done their own calculations using EBITDA 2006, but had persisted in the use of the lower figure, and acquiesced in Ros Roca doing the same. ING had argued that the €4 million figure was the basis of a shared assumption, but that it was an estimate only. That argument was rejected - at the relevant time, all the elements needed to make an accurate estimate of ING's fees were available and the assumed amount of the fees was irredeemably inconsistent with the calculation of fees based on EBITDA 2006. The Court considered that it would be unjust or unconscionable to allow ING to go back on the assumption. ING and Ros Roca were engaged in a joint project, in which each was entitled to assume that the other would act consistently, and would not knowingly conceal information of significance. A reasonable man, in Ros Roca's position, would have expected its financial adviser to have taken steps to make its position known. ING had been surprised by Ros Roca's calculation, but had decided to ignore it to avoid "potential disruption". There was no challenge to Ros Roca's evidence that it would have looked to renegotiate the fee if ING had raised the issue.

This case follows the recent trend of cases on construction where the Court of Appeal has given a literal interpretation to the meaning of words – only for the judgment of some of those cases to be overturned by the House of Lords/Supreme Court who have applied a more purposive meaning.

Note also the decision on estoppel – this is not the first case where a party has been prejudiced by failing to point out a mistake made by the other side. If ING had pressed for its fee on the basis of EBITDA 2006, it might have received it, or at least have been able to negotiate a figure in the middle.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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