Contractual interpretation of adjectives: guidance from the Court of Appeal

November 2024 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

November 2024 Issue

In Cantor Fitzgerald & Co v YES Bank Limited (2024), the UK Court of Appeal dismissed an appeal by Cantor Fitzgerald & Co, a US financial services firm, challenging a High Court decision that denied Cantor recovery of a fee for its role in raising capital by way of a further public offer by YES Bank Limited.

The case turned on the contractual interpretation of the engagement letter between the parties, and, in particular, on the positioning of a single adjective: ‘private’. The Court of Appeal had to decide whether the adjective qualified only the noun immediately following it – ‘placement’ – or the entire subsequent list, which included offerings and the sale of other equity instruments and other types of financing transactions.

The Court of Appeal found that the qualification applied to the full list of financings and the fee was therefore not payable.

Background

In December 2019, YES Bank was experiencing severe financial difficulties and engaged Cantor to act as its financial adviser, placement agent and arranger in relation to ‘financing’, which was defined as: “We have been advised by the company that it contemplates one or more financing(s) through the private placement, offering or other sale of equity instruments in any form, including, without limitation, preferred or common equity, or instruments convertible into preferred or common equity or other related forms of interests or capital of the company in one or a series of transactions.”

In return for its assistance, Cantor was entitled to a retainer fee and, on the closing of any financing, a payment equal to 2 percent of any funds raised from certain listed investors.

Following intervention by the Reserve Bank of India, YES Bank had stabilised its position by July 2020, enabling it to launch a further public offer of its shares in India, through which it raised around INR150bn (equivalent to approximately $373.4m), which included investments by three investors that had been expressly listed in the engagement letter with Cantor.

The dispute

Cantor claimed that it was entitled to a payment equal to 2 percent of the amounts subscribed by the three named investors. YES Bank disputed this, arguing that the further public offer did not fall within the definition of ‘financing’ in the engagement letter because the word ‘private’ qualified all forms of financing contemplated in the list and not just a ‘placement’.

At first instance, the High Court agreed with YES Bank, holding that the engagement letter was limited to private forms of financing. Cantor appealed to the Court of Appeal.

The Court of Appeal decision

The Court of Appeal considered the ordinary meaning of the words, the contractual context and the surrounding circumstances: “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, which will exclude prior negotiations. The objective is to identify the intention of the parties, but in an objective sense, namely what 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 to mean. Interpretation is an iterative process in which rival interpretations should be tested against the provisions of the contract and its commercial consequences.”

The Court of Appeal dismissed the appeal, upholding the High Court’s decision.

Ordinary meaning of the words

The Court of Appeal agreed that the use of the word ‘private’ in the definition of ‘financing’ was of undoubted significance, and that the natural assumption is that an adjective or determiner at the start of a list of nouns modifies the entire list of nouns that follows it, unless something in the content of the list or another adjective or determiner within the list suggested otherwise.

Although this is not a firm grammatical rule, the court found that nothing in the list or elsewhere in the engagement letter countered that natural assumption. The parties could have achieved a broader scope of financing by using simpler and clearer language if that was their intention, e.g., by: (i) omitting the word ‘private’; (ii) including the word ‘public’; and (iii) changing the order of the list or otherwise.

In contrast, the drafting was developed in the sentence so that all kinds of equity instrument were included and that the arrangement would include both a single and a series of financings, referring to: “equity instruments in any form, including without limitation…”, and to “one or more financing(s)” and “in one or a series of transactions”.

While the concept of ‘private placement’ may be a term of art, either under Indian law or more broadly, the Court of Appeal found no indication that the words were being used in that sense rather than their more generally understood use internationally. The court referred, in contrast, to the concept of ‘qualified institutional placement’ which was used in the same clause of the engagement letter, but was clearly used in an Indian legal sense, as emphasised by the capitalisation of those words.

As an aside, the Court of Appeal disagreed with the High Court’s finding that one of the investors was a relevant investor for the purposes of the engagement letter because even though that entity’s group had been specifically included in the list of named investors, the relevant definition specifically excluded Indian-resident entities and the entity which had participated in the further public offering was based in India.

Contractual context

The Court of Appeal agreed that the contractual context provided material support for YES Bank’s interpretation. In particular, the court noted that the parties had made specific provision for Cantor’s role in relation to any ‘qualified institutional placements’ in the engagement letter, which reflected the fact that Cantor’s role and fee arrangement were limited by applicable Indian regulations, but the same was not done in respect of a further public offer. The court observed that this was a strong indicator of the parties’ intention.

Factual matrix

Finally, the Court of Appeal found that the surrounding circumstances made it unlikely that the parties intended Cantor to be involved in a further public offer as the further public offer had not been a realistic possibility when the engagement letter was agreed. The focus in engaging Cantor was for non-public fundraising from new sources, and specifically Cantor’s client investors which had been listed in the engagement letter.

The court accepted that the focus could change during the time of engagement and that the letter contemplated a series of financings, but considered that this argument was insufficient to outweigh the arguments that the parties intended to limit the scope of ‘financing’ to private, rather than public, issues.

Key takeaways

This decision is a clear application of the standard principles of contractual interpretation and a reminder of the importance of careful, clear, precise drafting, especially where the parties intend to cover a range of possible scenarios and outcomes.

Ambiguities and misinterpretation in drafting often only become apparent once it is too late. A ‘cold’ proofread of a document by someone other than those involved in drafting and negotiating the document may assist in testing interpretation of drafting. Even ‘boilerplate drafting’ should be checked to ensure that these provisions accurately reflect what all parties are seeking to achieve.

The main tips which can be taken from this case are to, first, be consistent in drafting style and techniques, particularly when using defined and non-defined terms. Second, be careful when using a ‘term of art’ and consider whether this needs to be defined to ensure correct interpretation. Third, when documenting any list, consider the application of any adjectives to items in the list and ensure that the adjective is clearly positioned to apply as narrowly or as broadly as intended to the items listed. Re-order or expressly categorise items in the list for accuracy. Lastly, ensure any specific examples included in a definition or a provision themselves comply with any requirements set out in the relevant definition or provisions.

Kushal Gandhi and Simon Johnston are partners and Marianne Mudd is senior knowledge counsel at CMS. Mr Gandhi can be contacted on +44 (0)20 7367 2664 or by email: kushal.gandhi@cms-cmno.com. Mr Johnston can be contacted on +44 (0)20 7367 2008 or by email: simon.johnston@cms-cmno.com. Ms Mudd can be contacted on +44 (0)20 7367 3239 or by email: marianne.mudd@cms-cmno.com.

Kushal Gandhi, Simon Johnston and Marianne Mudd

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