FAI award addressing the principles of contract interpretation under Finnish law

Background

An international arbitral tribunal constituted under the FAI Rules recently rendered a final award in a post-M&A dispute between Finnish company A and German company B. The dispute concerned the calculation of purchase price in an M&A transaction: Claimant (seller) A contended that the wording of the Sale and Purchase Agreement (“SPA”) concluded between A and B was accidentally formulated in a way that did not correctly reflect the parties’ mutual intention, with the result that Respondent (buyer) B had paid millions of euros less purchase price than it ought to have paid. Respondent B denied all claims raised against it, mainly relying on the unambiguous wording of the contract document.

The arbitral tribunal was composed of three members: two Finnish attorneys as co-arbitrators nominated by the parties and an Austrian attorney as presiding arbitrator appointed by the FAI Board. According to the SPA, the seat of arbitration was Helsinki and the SPA was governed by Finnish substantive law.

The arbitral tribunal ultimately ruled in favour of A, declaring that B had breached the SPA by failing to pay the full purchase price and ordering B to pay the sum requested by A. In the award, the arbitral tribunal addressed in detail various principles of contract interpretation under Finnish law. Below is a sample of key findings by the arbitral tribunal (directly quoted from the award, with only the names of the parties anonymized – and certain dates and figures deleted – for confidentiality reasons).

Key findings of the arbitral tribunal

“Under Finnish contract law, the prevailing objective of contract interpretation is to determine the common intent of the parties. A demonstrable common intent of the parties determines the contents of a contract and can supersede the wording of a contract if that wording stands in contrast to the proven intent of the parties.

When determining the common intent of the parties to a business contract, however, the starting point is the wording of the contractual document, followed by the parties’ behavior before and after conclusion of the contract and their evidenced commercial objective. Particular attention is to be given to the contractual purpose the parties intended for under their specific arrangement. When interpreting a contract, individual terms are not to be taken out of context. Rather, individual phrases are to be assessed in accordance with the overall content of the contract, including annexes, and its purpose and (commercial) logic.

While the unambiguous wording of the contract justifies an assumption that the parties had an intent to be bound accordingly, other factors may evidence that the contract wording or a part thereof does not correspond to the parties’ common intent, in which case the common intent takes precedence. Under Finnish law, the parties’ common intent even prevails over unambiguous language that indicates the contrary. However, the threshold for disregarding unequivocal wording is high, especially in cases where the wording of the contract is drafted as a result of detailed negotiations between competent parties with expert advisers. The party alleging that the wording does not reflect the common intention of the parties bears the burden of proof for establishing all facts relating to the divergent intent.

The Finnish Supreme Court has in a number of rulings deviated from the explicit wording of a contract and given effect to the parties’ actual intent. Case KKO 2001:34 is, together with other decisions of the Supreme Court, a central precedent relating to contract interpretation and applicable to the case at hand. (…) The case concerns the correct interpretation of a contract price clause in a contract. The parties had agreed on the renovation and painting of a building’s facade and balconies. After the contractor had already started its works, it was discovered that the parties had dissenting views on whether the contract price was intended to include VAT or not. In its reasoning, the Supreme Court held: “When interpreting a contract, one needs to take into account, however, alongside with the wording of the contract all other relevant interpretative material that has significance when determining the contents of a contract. Such interpretative material includes, inter alia, the contract negotiations. (…) Consequently, notwithstanding the wording of the works contract, the interpretation of the works contract must result in the conclusion that the housing company and the contractor have agreed on a contract price of 3,120,000 Finnish marks excluding VAT.”

The Tribunal, applying these principles to the case at hand, concludes that the Claimant has met the high threshold and has established that the wording of Sections 3.2 (c) and (d) is to be disregarded as it does not reflect the common intent of both Parties. The Parties’ behavior in connection with the documents relating to the SPA can only be interpreted in such a way that the Parties intended for the Claimant to be entitled to the Available Cash in the Target Companies at Economic Closing (…)”

“The Claimant has argued that the edits made by its legal advisor on the evening of [date] were “an unfortunate mistake” and did not reflect the Parties’ common intent. They now need to be disregarded. The original understanding that the Available Cash [in the Target Companies at Economic Closing] would benefit the Claimant had never been changed during the negotiations. After careful consideration, the Tribunal ultimately agrees with this assessment.

The Parties are agreed that the edits inserted into the SPA draft by Counsel for Claimant on [date] can only be interpreted as a fundamental change to the economic outcome of the transaction. As already stated above, the Tribunal is unable to find any evidence that the Parties had ever explicitly discussed changing the economic bargain of the transaction. On the contrary, Mr X, the Claimant’s General Counsel, and in fact all of the witness heard have testified that “a price reduction was not discussed or negotiated between the parties” and the premise of a cash-and-debt-free transaction “was also never questioned or even discussed in the negotiations (…)” The Respondent has explicitly conceded that the insertions made by Counsel for Claimant were not repudiated by the Respondent. Equally, Mr Y, as the person inserting the edits, has testified that “the edits were not based on any discussions with [the buyer’s] representatives.” Accordingly, the edits made by Mr Y on late [date] had no basis in the Parties’ shared understanding or an agreement between them.

The Tribunal has found the witness statements of Mr Y to be credible in regard to his intentions to edit Sections 3.2 (c) and (d) of the SPA and reasons that the inclusion of those edits simply was a mistake. As Mr Y has testified: “Looking back, it is obvious that the [edits] were made by mistake. (…) I did not mean to alter any fundamental elements of the transaction or the cash-and-debt-free nature of the deal. When making the edits, I also was not thinking about which party should benefit from the cash of the Target Companies, although it was clear to the parties that the cash should benefit the seller.” (…)

“The Tribunal finds that, under Finnish law, the Respondent was not entitled to exploit the Claimant’s mistake to its own advantage. On the contrary, it would have been the Respondent’s responsibility to query the correctness of the new wording in order to ensure that the language of the SPA reflects the Parties’ negotiated agreement so that the transaction is carried out in accordance with the Parties’ common intent.

This responsibility derives firstly out of the Respondent’s general duty of loyalty towards its contracting party, in this case the Claimant. Secondly, such responsibility results from various elements of Finnish contract law. Within the sphere of section 32 (1) of the Contracts Act, a contract is invalid, as a general rule, if one party knows or ought to have known that the other party has made a mistake. The contract can, however, still be binding in a form that matches the parties’ common intent. Further, according to section 33 of the Contracts Act a contract can be found to be invalid if it was concluded under circumstances incompatible with honor and good faith of one of the parties aware of these circumstances. Even outside their primary scope of application, both provisions have been found to establish general principles regarding appropriate contractual behavior. These principles directly apply to the case at hand. (…)”

“In the Tribunal’s view, [the Respondent’s internal emails submitted as evidence in the arbitration] clearly show that the Respondent recognized that the Claimant had included the edits by mistake (…) It is also undisputed, if unfortunate, that the Respondent did not point out this mistake made by the Claimant’s lawyer. [Respondent’s representative Dr. Z] has stated in his testimony at the oral hearing that he had erroneously taken a German law perspective and had been of the opinion that under German law the Respondent would be entitled to keep any windfall profit, even if this windfall profit is based on a mistake made by its contracting party. The Tribunal, which is guided here by Finnish law alone, does not need to consider whether this assertion is correct under German law. It is also not necessary for the Tribunal to assess whether and to what extent the Respondent’s actions, or omissions, amounted to bad faith within the meaning of [the Finnish Contracts Act] – as explained, this case can and must be adequately resolved under Finnish rules relating to contract interpretation, the parties’ common intent, and a mistake of expression. (…)”

“The Respondent’s primary defence in this arbitration is that the wording of the SPA clearly stipulates that the Available Cash in the Target Companies “shall be calculated towards the Estimated Purchase Price.” As the Tribunal has found that, while the SPA’s wording seems to indicate that the Available Cash in the Target Companies reduces the Purchase Price payable by the Respondent, the common intent of the Parties was that the Available Cash should benefit the Claimant. Thus, the common intent of the Parties supersedes the wording of the SPA. (…)”

“The Respondent has further alleged that the Claimant’s claim regarding the Available Cash essentially aims to alter the negotiated and signed SPA even though the Parties had intentionally agreed on an entire agreement clause in Section 12.5 of the SPA. The Arbitral Tribunal disagrees with this assertion. Under Finnish law, an entire agreement clause such as the one included in the SPA does not preclude the Tribunal from interpreting the Parties’ agreement and considering all relevant evidence relating to the SPA negotiations. In spite of the entire agreement clause, the Parties’ common intent can still supersede the explicit wording of a contract if this wording does not correspond to the Parties’ actual intention. As the Tribunal has found the common intent of the Parties to be that the Claimant was to benefit from the Available Cash in the Target Companies, the wording of the SPA clause is to be disregarded even though the SPA contained an entire agreement clause. (…)”

 

Reported by Mika Savola
Chair, FAI Board

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