10 N.Y.3d 26 (2007)

When interpreting contracts, especially those involving sophisticated parties and broad definitions, courts must give effect to the plain meaning of the language used, and extrinsic evidence should only be considered if the agreement is ambiguous.

Summary

Innophos, Inc. sued Rhodia S.A. for breach of contract, seeking indemnification for water usage fees assessed by the Mexican government (CNA) after Innophos acquired Rhodia’s Mexican subsidiary. The purchase agreement contained indemnification clauses for “Taxes” and “Losses,” with different limitations. The central issue was whether the CNA fees constituted “Taxes,” which were fully indemnifiable, or “Losses,” subject to a deductible and a cap. The New York Court of Appeals held that the CNA fees were “Taxes” based on the agreement’s broad definition and the nature of the fees as a governmental charge for exploiting a natural resource. The court emphasized the importance of adhering to the contract’s plain language when the parties are sophisticated and the language is sweeping.

Facts

In early 2004, the CNA audited Rhodia Fosfatados de Mexico, S.A. de C.V., a Mexican subsidiary of Rhodia S.A., for water usage. In June 2004, Innophos acquired Rhodia Fosfatados. The purchase agreement included indemnification clauses for “Taxes” and “Losses.” The definition of “Taxes” was very broad, including various governmental charges. After the acquisition, the CNA assessed Rhodia Fosfatados for pre-closing unpaid water usage fees. Innophos sought indemnification from Rhodia under the “Taxes” clause.

Procedural History

Innophos sued Rhodia for breach of contract in New York State court. Innophos moved for partial summary judgment, seeking a declaration that the CNA fees were “Taxes” under the purchase agreement. The Supreme Court granted Innophos’s motion. The Appellate Division affirmed, finding the definition of “Taxes” broad enough to cover the fees. The Court of Appeals granted leave to appeal.

Issue(s)

Whether the water usage fees assessed by the CNA constitute “Taxes” as defined in the purchase and sale agreement between Innophos and Rhodia, thereby requiring Rhodia to indemnify Innophos fully for such fees, or whether they constitute “Losses,” subject to the agreement’s deductible and cap provisions.

Holding

Yes, the CNA water usage fees are “Taxes” as defined in the agreement, because the fees are a “similar governmental charge” to a severance tax, assessed by the Mexican government in its sovereign capacity for the exploitation of a natural resource.

Court’s Reasoning

The Court of Appeals emphasized that contract interpretation begins with the plain language of the agreement. “The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent[, and that t]he best evidence of what parties to a written agreement intend is what they say in their writing.” The court found the definition of “Taxes” in the purchase agreement to be broad and sweeping. The court rejected Rhodia’s argument that the CNA fees were merely a “water bill” for the purchase of a commodity. The court reasoned that the fees were more akin to a severance tax, which is a tax imposed on the value of natural resources extracted from the earth. Since the Mexican Constitution vests ownership of natural resources in the Mexican State, the CNA fees were assessed by the government in its sovereign capacity for the exploitation of a natural resource, water. The court stated, “[W]ater is an asset of the public domain of the Nation . . . [and i]f a private person desires to use or exploit such . . . resources, it must secure a concession . . . [, the fees for which are] calculated in accordance with the volume of water used.” Because no ambiguity existed in the contract, resorting to extrinsic evidence was unnecessary. The court affirmed the lower courts’ decisions granting summary judgment to Innophos.