Asset Sales: Interpreting Related Contracts

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Asset Sales: Interpreting Related Contracts

Asset Sales: Interpreting Related Contracts

Contracts are often linked together, but when does the chain break?

As a general rule, a contract is interpreted based on its language and, for context, the factual background known or reasonably available to the parties when entering into it. If the parties enter into two or more contracts as part of a single transaction, those contracts can be read together.

However, in the recent case of Kason Kek-Gardner Ltd v Process Components Ltd [2017] EWCA Civ 2132, the Civil Division of the Court of Appeal held that two asset sale and purchase agreements were not linked contracts. The contracts had been entered into between different parties and the second agreement could not, therefore, be used to interpret the first agreement.

On 30 June 2009, Kemutec Powder Technologies Ltd went into administration. The administrators sold part of its assets to the claimant and, ten days later, sold the remaining assets to the defendant. Each sale included the intellectual property rights of the business.

The issue later arose over whether the claimant had purchased all, or only some, of the intellectual property rights. The defendant argued it had acquired the intellectual property rights relating to the part of the business it had purchased and the claimant had only acquired limited intellectual property rights (i.e. those relating to the part of the business purchased by the claimant). The court held that use of some intellectual property rights by the defendant was essential, but ownership of those rights was not. The parties could contemplate that the claimant would own the rights and grant to the defendant a licence over them, as in fact it had done.

The court determined that the interpretation of the first agreement did not support the defendant’s submission that the intellectual property rights had been divided, stating “Reliance on commercial common sense and background should not be used to devalue the importance of the language of the provisions to be interpreted”. The claimant had, on the language of the first agreement, purchased all of the intellectual property rights. This meant, at the time of the second agreement, there were no intellectual property rights left for the defendant to buy.

In reaching its decision, the court also presented a rare example of its willingness to uphold the principle that “a plain misdescription does no harm”, as it upheld the finding that an incorrect trademark reference in the first agreement could be interpreted as the correct trademark reference. The court was keen to stress this was an aide to its interpretation of the first agreement and not a correction of the mistake (a process known as ‘rectification’).

This case is a helpful reminder of the importance of carefully agreeing, and accurately recording, commercial terms. It illustrates the risks associated with the division of a business and its assets. If you would like further information on this topic, please contact Ross Hayward or you can call us on 0345 070 6000.