It’s not often that the outcome of an entire case, and with it the potential recovery of millions of pounds, turns on the placement of just one word in a contract. And yet, this was precisely what happened in a recent case before the Court of Appeal. It acts as a cautionary tale of the need for careful drafting in a contract and is a reminder of some of the basic principles of contractual interpretation that will be employed by a court.

The case involved an agreement between Cantor Fitzgerald & Co (“Cantor”), a US broker-dealer, investment bank and financial adviser based in New York, and YES Bank Limited (“YES Bank”), an Indian commercial bank based in Mumbai. In 2019, YES Bank urgently needed capital and Cantor agreed to offer its assistance in return for a $500,000 retainer and 2% of the funds raised. The engagement letter set out the terms of Cantor’s appointment and provided as follows:

“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 (a “Financing”)”

YES Bank subsequently raised capital through a ‘Further Public Offer’ (“FPO”) in India which included investments by three investors with whom Cantor had been in discussion. Cantor therefore sought 2% of the amounts subscribed in the FPO by the three investors (which in total was $373.4 million, such that Cantor stood to earn over $7milllion). YES Bank refused to pay this amount, on the basis that the FPO did not fall within the definition of Financing in the Engagement Letter, namely the “… private placement, offering, or other sale of equity instruments in any form…”.

The dispute therefore turned on the effect of the word ‘private’ in the Engagement Letter. On YES Bank’s case, it qualified all forms of financing that were subsequently mentioned (i.e. private placements, private offerings, or private sales of equity instruments in any form). This meant that the agreement did not relate to public forms of financing such as the FPO and, as such, no fee was payable. In turn, Cantor argued that the word ‘private’ only qualified the word that immediately followed it, namely ‘placement’. Non-private ‘offerings’ or ‘other sales of equity instruments in any form’ (such as the FPO) were caught by the agreement, and thus the fee was owed.

The Court of Appeal began its analysis by summarising the well-rehearsed principles of construction that apply: “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 also reiterated Lord Neuberger’s caution in Arnold v Britton [2015] UKSC 36, [2015] AC 1619 not to invoke the concept of ‘commercial common sense’ if it meant undervaluing the importance of the language of the provision which is to be construed: “the exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.”

Turning to the construction of the relevant wording in the Engagement Letter, the Court held that “while…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, the nature of the list may well indicate that it does. At the least, unless something in the content of the list or another adjective or determiner within the list suggests otherwise, the reader will naturally tend to assume that an adjective or determiner at the start of a list qualifies the entirety of it.” In other words, the starting point from a grammatical perspective was that the Court agreed with the High Court’s view that the word ‘private’ qualified all that followed, meaning that the agreement between the parties applied only to private forms of financing. And, therefore, the FPO was not caught.

The Court then considered the contractual context and factual matrix and found that both supported YES Bank’s interpretation. In particular, it was clear that the focus of the arrangement between the parties was on non-public fundraising: “the language of the contract does not suggest that any form of public offer was contemplated as being in the mix of possibility for which the parties contracted”.

As a result, the Court dismissed Cantor’s appeal, concluding that that “the concept of “Financing” in the Engagement Letter referred to private forms of equity financing, and accordingly that the FPO carried out in July 2020 did not fall within that definition”.

The case acts as a reminder to exercise caution in drafting agreements, particularly where a number of items appear in a list. Rather than rely on “generic, boilerplate drafting” (which is how the Court described much of the Engagement Letter), care must be taken to ensure that any ambiguities are resolved before they become potentially very costly indeed.

To read the judgment in full, click here.