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What is the meaning of 'purpose' in a contract?

In the recent decision of Starbev GP Ltd v Interbrew Central European Holdings BV [2016], the Court of Appeal decided that the  term 'purpose' in a commercial context meant the 'dominant purpose'.

Background 

The dispute concerned the provisions for deferred consideration on the sale of a brewing business. The deferred consideration depended, in part, on the price obtained on the subsequent sale of the business to a third party. The contract contained an anti-avoidance provision that kicked in if any transaction was structured ‘with the purpose of reducing payments’ for the deferred consideration.  

The seller argued that the subsequent sale by the buyer was structured with the purpose of reducing the payments due to the seller.  The issue that the Court of Appeal therefore had to consider was whether the term 'purpose' meant the sole purpose, the dominant purpose or a substantial purpose.

Decision 

The Court of Appeal approved the High Court judgment and confirmed that the relevant purpose is the dominant one. 

The court referred to the Supreme Court's statement in Hayes v Willoughby that 'a person's purposes are almost always to some extent mixed, and the ordinary principle is that the relevant purpose is the dominant one'.  In this case, it was determined that the dominant purpose of the transaction was indeed to reduce the payments due to the seller, even though there were subsidiary purposes.

Implications

Although this judgment provides helpful clarification that the term 'purpose' is likely to be interpreted as the 'dominant' purpose, it nevertheless flags the importance of clarity when drafting commercial contracts.  

It is advisable to consider whether the phrase 'for the purpose of' can be made more specific, for example adding the use of the words 'sole' or 'dominant' so that the intention of the parties is made clear.  


This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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