The Purchase Agreement: Interpretation


In earlier posts, I blogged about the structure of a typical private company purchase and sale agreement and discussed the preamble to such a contract.  In this entry, I address what generally follows the preamble and serves as the first substantive article of the purchase and sale agreement — definitions and other interpretation-related provisions.

While some drafters prefer to include defined contract terms at the end of or in an appendix to the purchase and sale agreement, they are more often than not included at the outset.  The defined terms serve as a glossary for words and phrases that will be used later in the agreement and which do not have obvious or commonly understood meanings.

Perhaps one of the most critical terms in need of defining in a purchase and sale agreement is “knowledge”.  In most purchase and sale agreements, certain of the parties’ representations and warranties will be knowledge-qualified.  This begs the question — does “knowledge” mean (i) actual knowledge, (ii) actual knowledge together with knowledge that a party would have or ought to have had if he, she or it made reasonable investigations into the relevant subject matter or (iii) something else or in between?  It is, as you might imagine, not uncommon for negotiation over the “knowledge” definition to be extensive.

There is much more, however, to the “interpretation” section of a purchase and sale agreement than definitions.  Though in some cases they will be contained in a “miscellaneous” or “general” article at the end of an agreement (stay tuned for my future post on this concluding “boilerplate” section of the purchase and sale agreement), these provisions may include the following:

  1. Schedules and Exhibits.  Typically, the disclosure schedules (which serve to qualify representations and warranties of the parties) and exhibits (which generally represent forms of ancillary documents that will need to be delivered as a condition to closing) to the purchase and sale agreement will be listed.  In some cases, the agreement will also contemplate circumstances where disclosure schedules can be updated in between the signing of the agreement and the closing of the transaction and also address the application of disclosures that are made on one schedule to other relevant schedules (even if such disclosures are not reproduced in both places).
  2. Headings and Table of Contents.  The parties will usually agree that the division of the purchase and sale agreement into various articles, sections and other subcomponents and the insertion of headings and tables of contents will be for convenience only and not impact the interpretation of the substantive text that follows.
  3. Number, Gender and Other Terms.  Under this broad heading, the parties will typically confirm that references to gender will include both genders and the neutral pronoun “it” and that singular terms will also include plural terms (and vice versa).  They may also clarify if the word “or” is to be inclusive or exclusive, if “including” will be limiting or without limitation and if references to “persons” will include heirs, executors, successors, assigns and other legal representatives.
  4. References to Statutes.  In many cases, it is necessary to clarify if references to statutes in the purchase and sale agreement are intended to sweep in regulations that have been enacted thereunder (as well as any other applicable guidelines, bulletins or policies) and whether or not such references are intended to be to such legislation as of the date of the agreement or as such legislation may be amended from time to time.
  5. Calculation of Time Periods and Business Days. Purchase and sale agreements will invariably contain  numerous provisions that refer to deadlines and other time periods.  Do time periods include or exclude the first day or the last day?  Do time periods refer to all days or just business days?  In this section of the contract, those questions, among others, ought to be answered.
  6. Currency.  It will oftentimes be necessary to confirm the currency of dollar figures that are expressed in the purchase and sale agreement, particularly in the case of cross-border transactions or target companies whose operations straddle, or revenues are generated from, multiple jurisdictions.
  7. Governing Law.  One of the more important “boilerplate” provisions of the purchase and sale agreement is that which pertains to the operative law of the contract.  Parties can often have very different views on which jurisdiction’s laws ought to govern.
  8. Entire Agreement.  Virtually every purchase and sale agreement (and every other material contract for that matter) will contain a clause of this nature, which provides that the purchase and sale agreement contains all agreements, representations, warranties, covenants and other understandings, whether oral or written, express or implied, with respect to the subject matter of the agreement.  The idea is to restrict the subject matter of the purchase and sale agreement to the four corners of that agreement and not intentionally or unintentionally sweep in collateral agreements, representations, warranties, covenants or other understandings (and in particular assurances that may have been made by a party prior to execution of the purchase and sale agreement).
  9. Other Boilerplate.  Other interpretation-related provisions that may be contained in the purchase agreement include confirmation that time is to be of the essence with respect to compliance with relevant deadlines and other timing-related obligations, an acknowledgement that if any provisions of the contract are held to be invalid or unenforceable then such provisons will be severed from the agreement and all other provisions will remain in full force and effect and an agreement that the parties jointly negotiated and drafted the purchase and sale agreement such that any rule of construction to the effect that any ambiguity is to be resolved against the drafting party will not be applicable (no contra preferentum).

While there is no “one size fits all” solution to purchase and sale agreements, and though in many jurisdictions there are generally applicable interpretation statutes that govern in the absence of some of the matters referred to above (see, for example, the British Columbia Interpretation Act), it is prudent for parties to turn their minds to these seemingly innocuous issues in the course of negotiating and drafting the purchase and sale agreement.  The intention of the contract, after all, is to clearly evidence the parties’ intentions and to avoid future disputes.

In my next post, I will enter the meat of the purchase and sale agreement — the purchase and sale provisions themselves.