Commercial Court adopts broad interpretation of investment bank fee clause in equity and debt finance raising

Applying a commercial approach to the fees payable under an engagement agreement, the Commercial Court recently decided in favour of the claimant investment bank in Macquarie Capital (Europe) Ltd v Nordsee Offshore MEG I GmbH [2019] EWHC 1655 (Comm). The engagement provided for the supply of financial advisory services including raising equity and debt finance in respect of the defendant's offshore windfarm development.

This decision is notable for financial institutions in respect of the high level of fees upheld by the court (c. €16m plus interest), which were payable by the defendant in circumstances where the claimant bank was no longer involved in raising finance for the project. However, the fees continued to be calculable by reference to the level of equity and debt raised at financial close, as provided for in the terms of the engagement.

The dispute related to the construction of two key defined terms – the "Project" and the "Transaction" – both of which were criticised by the court for lacking clarity. Although aspects of both the wind farm development and finance structure underwent significant changes after the parties entered into the engagement agreement, the court - taking a commercial approach under established principles of contractual construction - found that it had been in the contemplation of the parties that such changes were a possibility. This meant that the development remained within the scope of the "Project", and financial close of that "Project" fell within the "Transaction" as defined in the engagement, giving rise to the fees payable by the developer to the bank.

Ordinarily, a dispute of this nature would serve as a reminder to ensure clarity of drafting in engagement agreements. In this instance, however, it assisted the bank that the defined terms allowed flexibility. The court held that their flexibility in agreeing to a wide scope of what the development and financing might eventually entail, enabled the parties' continued engagement in whatever guise it subsequently took.

It will be of comfort to financial institutions that where terms have been negotiated to protect against a client completing an equity or debt raise with another institution after the original bank has already provided advisory services, the courts are likely to uphold such terms to ensure that the original bank's fees are paid. In the present case, it remained within the gift of the developer to avoid such fees by terminating the engagement at least 12 months prior to financial close of the ultimate transaction, but it chose not to do so.

Background

The claimant ("MCEL") is a subsidiary of the Macquarie group, an investment bank which provides financial advisory services. The defendant ("NOMEG") is a subsidiary of the Windreich group, involved in the development of offshore windfarms. The dispute related to the terms on which MCEL was engaged by NOMEG to raise equity and debt finance for the installation and operation of a proposed windfarm in the German Exclusive Economic Zone in the North Sea.

As part of NOMEG's efforts to secure finance for the development, following discussions and indicative terms, Windreich entered into an engagement agreement with MCEL on 18 January 2013 (the "Engagement Agreement"), which Windreich subsequently novated to NOMEG.

Under the Engagement Agreement an equity completion fee and a debt advisory fee were payable to MCEL in the event a "Transaction" was completed with respect to the "Project", irrespective of whether MCEL was responsible for raising the equity/debt financing. There was an exclusivity period until end-September 2013, and if MCEL's appointment was subsequently terminated, it was entitled to the full amount of any fees payable for the next year. Both the windfarm development and its proposed financing underwent a number of changes between the date of the Engagement Agreement and financial close of an equity and debt finance raising in August 2016. By that stage, MCEL had little to no involvement in raising the financing.

Neither party chose to terminate the Engagement Agreement and MCEL subsequently claimed for fees it said were payable by NOMEG on the proper construction of the terms of the Engagement Agreement.

The key point of dispute between the parties, was whether the transaction which reached financial close was a "Transaction" within the Engagement Agreement.

NOMEG argued that the definitions of "Project" and "Transaction" should be construed narrowly, such that financial close as occurred in August 2016 did not fall within the scope of the "Transaction" relating to the "Project". This was on the basis that there were substantial changes to both the wind farm development itself and the finance structure, and that it no longer fell within the definition of "Project".

MCEL effectively argued the opposite, that the changes to the project did not take it beyond the contemplation of the parties upon entering into the Engagement Agreement.

Decision

The court preferred MCEL's broad interpretation of the definitions of "Project" and "Transaction", and found that NOMEG was liable for MCEL's fees.

The court started its analysis by setting out the well-known principles of contractual construction, referring to the summary of those principles in Lukoil Asia Pacific PTE Ltd v Ocean Tankers (PTE) Ltd [2018] EWHC 163 (Comm).  It proceeded to carry out the interpretation exercise in stages, first noting the most relevant terms of the Engagement Agreement, then considering the factual matrix and considerations of common sense.  The key points from the court's judgment in this exercise were as follows:

• The court made a number of findings in relation to the factual matrix. Importantly, it concluded that there was flexibility, at the time of the Engagement Agreement, both in relation to raising finance (including the timing and structure of that finance) and the windfarm development itself (including the turbines to be used and the plant supplier).  This corresponded with MCEL's position that various aspects of the intended project were not "set in stone" at the time of the contract and were capable of significant change.
• The court was critical of the "unclear" and "unhelpfully" defined terms "Project" and "Transaction". However, adopting a textual approach to the language used, and considering the Engagement Agreement as a whole, the court considered that the term "Project" meant the windfarm project in which NOMEG was involved at the time of entry into the Engagement Agreement (noting that the parties did not specify in the Engagement Agreement any necessary constituents of a "Project"). It found the "Transaction" was intended to refer to an equity and debt raising process in relation to the "Project" in broad terms. The court noted various provisions within the Engagement Agreement providing flexibility, in particular in relation to the timescale of arranging finance, the capital structure and the corporate structure (e.g. with the flexibility to introduce an SPV).
• The court held that considerations of commercial common sense favoured an interpretation of the Engagement Agreement by which MCEL's entitlement to fees existed notwithstanding significant change to the way in which the proposed project was brought about. Otherwise, MCEL might be incentivised to advise in a way to ensure it would be entitled to its fees.

Taking all of this into account, the High Court preferred MCEL's wider interpretation of the definitions. It noted the terms of the Engagement Agreement themselves provided for broad definitions of both the "Project" and the "Transaction", and the flexible timescale implied the possibility of time for significant changes to and developments of the arrangements.  The considerations of commercial sense militated in favour of a comparatively wide meaning, and the factual matrix did not provide a basis for a narrower one.

The development at financial close in August 2016 was therefore held to fall within the scope of the "Project" and the "Transaction" contemplated by the parties at the time of the Engagement Agreement. As such, NOMEG was liable for MCEL's fees totalling approximately €16m plus interest.