Chalabi & Ors v Agha-Jaffar & Anor

Where a commercial agreement admits two possible constructions, the court should prefer the more commercially sensible result, particularly where it accords with the Commercial Judge’s view. A genuine payment under a tax indemnity for increased liabilities arising from the structure of a sale is not necessarily part of the sale price. The court must consider the commercial context, including whether the parties understood that the payment would indemnify a liability rather than increase the agreed consideration. Treating an indemnity as sale consideration may create a windfall for one party and impose an uncovenanted burden on the other.

The appellants had sold their interests in five Card Tech Group companies to the respondents under back-to-back agreements. The respondents subsequently sold shares and assets in the group to Total Systems Services Inc. for $54.5 million and received a further $3.17 million under tax indemnity deeds. Clause 6 of the agreements warranted that the consideration price received by the respondents would be apportioned so that the appellants received at least three-fifths.

Gloster J held that the tax indemnity payments were not consideration for the sale and therefore did not breach clause 6: [2011] EWHC 203 (Comm). The central issue on appeal was whether the indemnity payments formed part of the consideration price.

The appeal was dismissed. Longmore LJ held that the question was one of contractual construction. The relevant commercial context included the parties’ prior recognition that an asset sale would create increased tax liabilities and that TSYS would indemnify the sellers for those liabilities.

1. The tax indemnity payments were genuine payments calculated to discharge increased tax liabilities caused by the structure of the transaction. They were not part of the price paid for the sale.
2. To treat the indemnity as sale consideration would allow the appellants to claim three-fifths of the payment while leaving the respondents to bear nearly all of the corresponding tax liability. That would produce an unfair windfall and an unreasonable commercial result.
3. The alternative submission that the indemnity represented an increase in the sale price was inconsistent with the way the transaction had been structured. The agreed price had remained $54.5 million, while the additional liability was independently verified, quantified and indemnified.
4. The appellants’ failure to seek the benefit of the indemnity supported the conclusion that they had not treated it as part of the price. Their lack of concern about their comparatively small additional liability could not be converted into a right to share in the respondents’ indemnity.
5. Where two constructions of a commercial document are available, the more commercially sensible construction is preferred, particularly where it has commended itself to the Commercial Judge, applying Rainy Sky S.A. v Kookmin [2011] 1 WLR 2900. On the proper construction, there was no breach of clause 6. Black LJ and Keene LJ agreed.

1. Court of Appeal (Civil Division): The appeal was dismissed. The court upheld the construction that the tax indemnity payments were not part of the contractual consideration price.
2. High Court of Justice, Queen’s Bench Division, Commercial Court: Gloster J held that the tax indemnity payments were received to indemnify increased tax liabilities and were not consideration for the sale: [2011] EWHC 203 (Comm).