The high stakes of word placement: a $7.5 million lesson

Briefing

Summary

Was a US investment bank, Cantor Fitzgerald & Co (Cantor), entitled to a 2% financing fee on a portion of a fundraising completed by its Indian commercial bank client, YES Bank Limited (YES Bank)? A c$7.5 million fee that hinged on the placement of a single adjective within the parties' engagement letter and a matter that recently found itself before the Court of Appeal.

The 24 June 2024 judgment in Cantor Fitzgerald & CO v Yes Bank Limited [2024] EWCA Civ 695 upheld the first instance decision that the word "private" in the context of a: "private placement, offering or other sale of equity instruments", operated so as to qualify each "placement", "offering" or "other sale of equity instruments" as opposed to only qualifying any "placement". That interpretation ultimately set the scope of what constituted a "Financing" for the purposes of the engagement terms and meant that substantial funds raised by YES Bank by non-private offering were not subject to a financing fee under the parties' engagement terms.

Background

In 2019 YES Bank was experiencing severe financial difficulties with an urgent need to raise capital. Cantor was engaged to help broker a financing in exchange for a $500,000 retainer and 2% of the funds raised by certain specified investors (the Cantor Investors) by way of a financing fee to be payable upon closing.

In March 2020, shortly after revised engagement terms had been agreed between the parties, the Reserve Bank of India (RBI) imposed a moratorium on YES Bank and implemented a restructuring scheme whereby a 49% stake in YES Bank was acquired by the State Bank of India (SBI). SBI injected substantial capital, YES Bank's board was replaced and the new board resolved to raise funds by public offer. This was to be effected by a further public offer (FPO) reflecting that YES Bank had previously floated and the FPO completed in July 2020 with the Cantor Investors being substantial participants.

Cantor sought to claim its financing fee following conclusion of the FPO, however, YES Bank disputed that any such fee was due with the parties each having differing interpretations of what the word "private" was intended to qualify.

Principles to apply on interpretation

In the appeal judgment, Lady Justice Falk sets out a useful reminder of the principles to be applied in construing the engagement letter, noting that it is uncontroversial that the court is required to consider the ordinary meaning of the words used in the context of the contract as a whole and the relevant factual and commercial background, excluding prior negotiations, with the purpose of this process being to objectively identify the intention of the parties i.e. that which a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract. Lady Justice Falk further notes that "interpretation is an iterative process in which rival interpretations should be tested against the provisions of the contract and its commercial consequences".

The judgment also drew from Lord Neuberger's passage in Arnold v Britton [2015] UKSC 36 which had also set out as a matter of principle that: "save perhaps in a very unusual case, that meaning [of the provision to be construed] is most obviously to be gleaned from the language of the provision" with the rationale in part being that "the parties have control over the language they use in a contract".

Whilst the Court of Appeal accepted that there is no firm grammatical rule to the effect that an adjective or determiner at the start of a list of nouns qualifies them all, it will be the natural assumption of the reader unless otherwise qualified in the list. This was not considered to be a point of law on which prior authority would be determinative, but an aspect of the ordinary meaning of words used, including their position within a sentence. On that basis it was considered notable that neither Cantor nor YES Bank had sought to counter that assumption by omitting the word "private", inserting the word "public" or otherwise changing the list or order.

Cantor's argument that "private placement" is a term of art in and of itself (either under Indian law pursuant to the Companies Act 2013 or otherwise) was found not to prevent the qualifier from also being applied to "offering" or "other sale" if that is what the natural meaning indicates, which Lady Justice Falk considered it did.

A consideration of the contractual context was also found to provide material support for YES Bank's position. Whilst the context naturally turns on the specific fact pattern such that a detailed analysis here and extrapolation to any different fact pattern would be of limited merit, as an indication of the types of arguments adduced, these included the fact that: (1) Cantor was not registered as a merchant bank with the Securities and Exchange Board of India such that it could not alone advise YES-Bank on a non-private offering in India and (2) other provisions within the engagement letter had clear drafting to distinguish qualified terms, such as differing treatment to be applied on domestic and non-domestic transactions.

In considering the factual matrix, it was held that there was nothing to indicate that it may have been in the reasonable contemplation of the parties that the route by which the Cantor Investors might invest was by an FPO. This was only made possible by the RBI intervention which gave investors sufficient confidence to make the FPO viable plus the engagement terms preceded such intervention.

The principle to be applied to consideration of the factual matrix was similarly established and it was noted that, while previous negotiations and declarations of subjective intent are inadmissible, evidence may be adduced as to the genesis and aim of a contract as an aspect of the admissible factual matrix. This was drawing from Schofield v Smith [2022] EWCA Civ 824, [2023] 1 All ER 480 in turn citing Prenn v Simmonds [1971] 3 All ER 237 at 240-241, [1971] 1 WLR 1381 at 1385.

It had been explained in the first instance decision that the initial conversations between the parties were not recorded in any form and the representatives of each party did not provide evidence; Cantor's representative having unfortunately passed away and YES Bank's representative having been replaced at the time of the RBI intervention.

Lady Justice Falk concluded, on the basis of the above, that the appeal should be dismissed and that the High Court correctly decided that the concept of "Financing" in the engagement letter referred to private forms of equity financing, and accordingly the FPO carried out in July 2020 did not fall within that definition.

Summary

Exceptionally minor drafting tweaks could have been incorporated into the engagement terms to reflect Cantor's alleged intention that the financing fee would be payable in circumstances akin to the FPO.

This could have been achieved in the drafting of the engagement terms by:

reversing the word order if the intention was for "private placement" to be construed as a particular term of art distinct from other methods of raising finance
including the word "public" as a qualifier alongside, or in replacement of, the word "private" where such distinction was intended to be drawn or
splitting the three items into individual subparagraphs such that it would have been clear to what extent a qualifier applied to an individual subparagraph. Readers that are familiar will note that this is a drafting discipline well drilled throughout documentation produced by the Loan Market Association and one which this case proves is not without merit.

It is not clear whether such language would have been accepted by YES Bank, however, one would hope that it would have focussed the parties' attention to any potential misalignment as to the economics of the deal being struck. A failure to include such drafting was ultimately a matter that saw the placement of a single word result in Cantor not realising what it thought would be a substantial fee significantly in excess of its day one retainer.

Takeaway points

Contractual parties should have close regard to the tests likely to be applied by the courts in the case of any interpretation dispute and the significant weight that will be placed on the form of drafting (which the parties ultimately control).

Drafting should:

be clear, concise and consistent
have regard to the ordinary meaning of the words used and their potential interpretation particularly in the context of any potential dispute
accurately reflect any pre-contractual discussions on which the parties intend to rely.

As a practical matter, and in line with the aims above, the parties are likely to benefit from the following to ensure their intentions are clear: the use of structured clauses and subparagraphs, reversing the word order where there is potential for an alternative interpretation to be applied to that which the parties intend and/or adding additional qualifiers/determiners ahead of individual terms to avoid confusion.

Further, parties should maintain contemporaneous and detailed records of discussions throughout negotiations on the basis that these may be capable of being adduced as evidence in respect of the genesis and aim of a contract in the unfortunate event of a dispute.