This Court of Appeal decision highlights conflicting interpretations of the meaning of "payable" and illustrates how a court will go about resolving the conflict.
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.
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 meanings in different contexts. As a matter of ordinary language, the word "payable" was capable of being used in either of the two senses for which the parties respectively contended. In deciding what the word meant in the context of the indemnity, it was therefore of no assistance to cite cases showing how the word had been interpreted in other documents and contexts. Nor was any assistance to be derived from examining how the word "payable" had been used elsewhere in the documentation in question.
The Court of Appeal agreed with the Sellers that, in the setting of the indemnity, the word meant that there was an enforceable obligation to pay an amount of tax and not merely that a liability to pay an amount of tax had been established. It gave two reasons. First, an indemnity is a promise to prevent the indemnified person from suffering loss. If the existence and amount of a debt have been established but the indemnified person has not yet come under an enforceable obligation to pay the debt, the indemnified person has not yet suffered any loss. Secondly, and related, it did not make commercial sense to require the Sellers to pay an amount of money to the Buyers which might never be needed.
The Court of Appeal's reasoning as to when an indemnity in respect of an amount "payable" bites is of general interest although, as the court made clear, every provision will always be interpreted in the context in which it appears and by reference to the relevant factual matrix. The case offers a reminder that the parties to an indemnity should consider exactly when they intend that provision to come into play.
Minera Las Bambas SA v. Glencore Queensland Ltd  EWCA Civ 972
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