This is creating unique challenges for international deals. Let's take a closer look at those cases and see how they impact SPAs.
A Tale of Two Approaches
"When I use a word, it means just what I choose it to mean—neither more nor less." - Humpty Dumpty in Lewis Carroll's Through the Looking Glass.
Arnold v Britton
In
Arnold v Britton, the UK Supreme Court examined a dispute over service charges in a long-term (99-year) lease agreement for holiday chalets. Under leases signed in 1974, the service charge began at £90 and was subject to a 10% annual increase.
Here's the kicker:
The key controversy was whether that 10% escalation should be calculated
on a simple basis (yielding around £485 per year by 2013) or
on a compound basis (around £4,560 per year)—a nearly tenfold difference.
Despite acknowledging the potentially harsh financial impact of compounding, the Supreme Court ultimately sided with the landlord. The Court stressed that it must give effect to the
plain, ordinary meaning of the contractual language—even if it produces an onerous outcome. This decision reinforced the principle in English law that
“what is written” takes precedence over what later appears fair or equitable.
Lundiform
By contrast,
civil law jurisdictions (such as those in the EU) often adopt a different interpretive approach. Under Dutch law, for instance, the
Haviltex principles—reaffirmed in the
Lundiform case—require courts to interpret contracts by looking beyond the text to:
- What the parties could reasonably have understood each provision to mean, considering both wording and context;
- What they could reasonably have expected from each other, based on the agreement’s broader circumstances, such as negotiations, the transaction’s nature, and the parties’ conduct.
The Haviltex approach focuses on the intent and mutual expectations of the contracting parties in light of their dealings.
Unlike the strict “plain meaning” rule seen in Arnold v Britton, courts applying Haviltex can consider the entire factual matrix; negotiations, purpose, and the relative sophistication of each party, thus ensuring the agreement is interpreted in a manner that aligns with good faith and genuine mutual understanding.
The Universal Challenge of Interpretation
The interpretation of SPAs isn't merely an academic exercise; it's a practical challenge that can make or break a deal's intended outcome. While the UK Supreme Court in Arnold v Britton champions literal interpretation, civil law jurisdictions across Europe adopt a more contextual approach through the Haviltex principles restated in the Lundiform case in Holland.
This divergence creates particular challenges in cross-border transactions.
But there's more to it:
When Numbers Aren't Just Numbers: Critical SPA Definitions
One of the most contentious areas in
sales and purchase agreements is the definitions of
Net Debt and
Working Capital in reconciling the
equity bridge.
Lawyers (and indeed accountants and M&A advisors too) often struggle to agree on the component of those definitions or, in some cases, to understand how failing to understand the nuances can have a material impact on the final price and can cause lengthy and costly disputes. Worse still, it can prove highly disruptive to the buyer and the target’s management as they attempt to drive the business forward.
For example, the simplistic definition of “Debt-like items” covers three distinct categories. First, obvious debt items such as bank loans; second, “Grey” debt which covers delayed capex or pension deficits (this is jurisdictional specific!), and last, Hybrid items which could be either debt or working capital (e.g. deferred revenue which is invariably one of the most contentious areas).
The definition of “Working Capital” also includes many items of dispute that can lead to disagreements about adjustments, especially if parties differ on what constitutes normalised levels.
How to Master Sales & Purchase Agreements
In today’s high-stakes environment, the power and potential pitfalls of contract language are vital in
drafting legal documents. As business and tax laws evolve, so do the risks within SPAs.
If you're looking to deepen your expertise in crafting effective SPAs, consider joining our
Sale & Purchase Agreements course. This comprehensive course covers everything you need to know about drafting, reviewing, and negotiating SPAs. Learn from experienced practitioners who understand both UK and EU approaches to SPA interpretation.
FAQ
What is the Haviltex rule?
The Haviltex rule, from a 1981 Dutch Supreme Court case (HR 13 March 1981, NJ 1981, 635), states that contract interpretation depends not only on its literal wording but also on the parties' intent and reasonable expectations. Courts consider context, negotiations, and industry practices rather than applying a purely textual approach. This principle contrasts with stricter textual interpretations in common law jurisdictions and emphasises fairness over strict wording, particularly in Dutch contract law.