Court of Appeal dismisses US investment bank's success fee claim in connection with the public offer of shares in Indian bank

The Court of Appeal has dismissed a claim by a US investment bank seeking to recover a success fee in relation to the public offering of shares of one of India's largest private commercial banks, finding that the scope of the engagement letter was limited to private capital financings: Cantor Fitzgerald & Co v YES Bank Ltd [2024] EWCA Civ 695. In doing so, the Court of Appeal upheld the High Court's decision, considered here.

The exercise of contractual interpretation can create tension between the natural meaning of the words used in the contract (Arnold v Britton [2015] UKSC 36) and the application of commercial common sense (Rainy Sky SA & Orsd v Kookmin Bank [2011] UKSC 50). However, the leading case on contractual interpretation, Wood v Capita Insurance Services Ltd [2017] UKSC 24 (see our blog post here), confirmed that interpretation is a unitary exercise in which a balance must be struck between the indications given by the language used (in both the clause under scrutiny and the remainder of the contract) and the implications of rival constructions (which is usually thought of as the business common sense approach). The weight to be given to each tool of interpretation will depend on the circumstances.

In the present case, the central dispute between the parties revolved around the correct interpretation of the investment bank's engagement letter. The court was tasked with determining whether the scope of the engagement extended to public financing, or was limited to private financing only. Concluding that the investment bank had been engaged only in respect of private financing, the Court of Appeal thought the express use of the word "private" at the start of a list of types of fundraisings in the relevant definition of the financing in the engagement letter was significant and qualified the entirety of the list. In the Court of Appeal's view, if the intention of the parties was to capture all kinds of financing, public and private, the most obvious way to do so would be to use a broader description. Another strong indicator, was that a wider interpretation of financing would have created an internal conflict within the engagement letter. Extending the bank's engagement to cover public financing would have required the investment bank, under the terms of the engagement letter, to take on the role of placement agent and arranger for public offers, despite not being licenced to do so under Indian law.

The decision is an important reminder to financial institutions to take care when using boilerplate language in engagement letters, especially where the language involves the use of technical or business terms to define the scope of work and the consideration. 

We consider the decision in more detail below.

Background

The background to the dispute is more fully set out in our blog post on the High Court decision, here.

In summary, the claimant (Cantor) agreed to assist Yes Bank (the Issuer) with "one or more financing(s) through the private placement, offering, or other sale of equity instruments" (the Financing Definition). In return, Cantor would receive a USD 500,000 retainer and 2% of funds raised from the investors listed in a schedule to the engagement letter.

Despite Cantor's efforts the amounts offered by investors to the Issuer were insufficient and were subject to significant conditions. As the Issuer's financial situation worsened, the Reserve Bank of India intervened with a reconstruction scheme, resulting a consortium of investors led by the State Bank of India acquiring 49% shareholding of the Issuer. After the acquisition, the Issuer raised USD 2 billion through a further public offering of its shares (FPO). Although Cantor had no direct involvement with the FPO, certain investors with whom Cantor had been in discussions and listed in the engagement letter had participated in the FPO.

A dispute subsequently arose between the parties as to whether Cantor was entitled to a 2% success fee under the engagement letter. Cantor claimed that it was entitled to this fee in respect of the investments made by three investors listed in the engagement letter who had participated in the FPO, as this fell within the Financing Definition. The Issuer disagreed, arguing that the FPO did not fall within the Financing Definition because the use of the word "private" qualified all forms of financing covered by the engagement, so that Cantor's entitlement was limited to its retainer.

High Court decision

The High Court's reasoning is discussed in our previous blog post here.

The High Court found in favour of the Issuer and dismissed the claim. It held that the Financing Definition in the engagement letter did not include the FPO, because "private" qualified the words "placement offering or other sale".

Cantor appealed to the Court of Appeal.

Court of Appeal decision

The Court of Appeal found in favour of the Issuer and dismissed the appeal. The key issues which will be of interest to financial institutions are set out below.

Principles of contractual construction

The Court of Appeal applied the established principles of contractual construction, stating that it was 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), in order to identify the intention of the parties (judged objectively).

Contractual construction is an iterative process in which rival interpretations should be tested against the provisions of the contract and its commercial consequences. However, the Court of Appeal cautioned against undervaluing the importance of the contract's language by over-reliance on commercial common sense and the surrounding circumstances (as per Arnold).

Ordinary Meaning of Words

The Court of Appeal found that the ordinary meaning of the Financing Definition in the engagement letter between the parties referred to private forms of equity financing.

The Court of Appeal said that the use of the word "private" in the Financing Definition was of significance. If the intention of the parties, as Cantor argued, was to capture all kinds of financing, public and private, the most obvious way to do so would be by a reference to "any sale of equity instruments". Although the Court of Appeal agreed with Cantor's argument that there is no firm grammatical rule that an adjective or determiner at the start of a list necessarily qualifies the entirety of the list, it concluded that this would be the natural assumption where there was nothing else in the list to suggest otherwise. The Court of Appeal noted that the parties in the present case did not include any words (such as "public") to counter this natural assumption. It also contrasted the parties' approach in this regard with other express references agreed in the engagement letter, such as a reference to all kinds of equity instruments (“equity instruments in any form, including without limitation…”).

The Court of Appeal also concurred with the High Court that there was no indication that the phrase "private placement" was used as a term of art as defined in section 42 of the Indian Companies Act 2013 (in contrast to other legal references such as the capitalised term "Qualified Institutional Placement" (QIP)). In this instance, the Court of Appeal agreed that it was used in the more general sense.

The Court of Appeal disagreed with Cantor's argument that construing "private" as qualifying "offering or other sale" resulted in a redundancy because there were no clear examples of private equity financing that are not encompassed by "private placement". Although the Court of Appeal disagreed with the High Court's examples of hybrid financing that could be considered private offerings, the Court of Appeal said that the lack of clear examples did not carry much weight. 

Contractual Context

The Court of Appeal found that the contractual context supported the Issuer's interpretation of the engagement letter.

In particular, the Court of Appeal noted that the engagement letter distinguished the role and fee payable to Cantor, depending upon whether the placement was a QIP. In India, a QIP is a form of private placement where shares are offered to qualified institutional investors who fall into defined regulatory categories. The engagement letter provided that: (i) for a "Financing" that was not a QIP, the Issuer appointed Cantor as its financial advisor, placement agent and arranger; and (ii) for a QIP, Cantor's role would be limited to that of an offshore provider and it would be paid a referral fee. This distinction was significant as under Indian law, QIPs, public offerings and rights issues require the involvement of an appropriately licensed Indian merchant bank, which Cantor was not. If the Financing Definition extended to public offers, then under (i) above, Cantor would be acting as a placement agent and arranger despite not being licenced to do so under Indian law. The Court of Appeal said this was a strong indicator in support of the Issuer's contractual construction.

The Court of Appeal was sympathetic to Cantor's arguments that: (i) the length of the engagement indicated that the financial outlook of the Issuer could have evolved such that a public offer might have become viable during the course of the engagement; and (ii) that the High Court may have erred in concluding that the Issuer's dire financial position in December 2019, coupled with its pressing need for funds, entirely precluded the possibility of the parties having contemplated a "public offer" at the point of engagement. However, the Court of Appeal concluded that the fact that an FPO could have been a "reasonable possibility" over the length of the engagement was insufficient to outweigh all other indicators in the terms of the contract which pointed to the parties' intention to confine the Financing Definition to private, rather than public, forms of financing.

Factual Matrix

The Court of Appeal agreed that the factual matrix was consistent with the Issuer's interpretation – when the engagement letter was agreed, the Issuer was in dire need of funds and an FPO was not a realistic possibility. It also considered that there was nothing to indicate that it was in the reasonable contemplation of parties that the investors introduced by Cantor would invest via an FPO (the FPO was, in any event, only made possible by the Reserve Bank of India's intervening acts).

Accordingly, for all the reasons above, the Court of Appeal found in favour of the Issuer and dismissed the appeal.