Court of Appeal rules on bank's engagement letter with commission of $7.5 million at stake

The Court of Appeal has held that the word "private" in the phrase "private placement, offering or other sale of equity instruments" in an engagement meant that Cantor Fitzgerald was not entitled to commission on funds raised under a public offer¹.

The facts

YES Bank, an Indian commercial bank, had engaged Cantor Fitzgerald ("Cantor") to assist with raising urgently needed capital by introducing potential investors. Under the engagement letter Cantor would receive a retainer plus commission of 2% on all funds raised from certain investors which were listed in a schedule to the letter. The investors were to be introduced for the purposes of a “private placement, offering or other sale of equity instruments”.

After the engagement letter was signed the Reserve Bank of India imposed a moratorium on YES Bank followed by a reconstruction scheme under which the State Bank of India acquired a 49% shareholding in YES Bank. A capital injection from a consortium followed and YES Bank's board were replaced. The new board resolved to raise further funds by way of a public offer which was possible because YES Bank was listed. Certain investors with whom Cantor had been in discussions and who were listed in the engagement letter participated in this public offer.

The equivalent of $373.4 million was raised from such investors. Cantor claimed commission was due on this sum, arguing that "private" only applied to "placement". YES Bank countered that the commission was only applicable to funds raised through a private offer whereas these funds were raised through a public offer.

The decision

The High Court initially ruled in favour of YES Bank. Cantor appealed but the Court of Appeal upheld the first instance decision, affirming that "private" described all the funding structures in the list and therefore commission was not due on a public fundraise.

Legal points

The Court made the following legal points.

There is no firm grammatical rule that an adjective at the start of a list of nouns qualifies everything that follows but the nature of the list may indicate that it does. The reader will naturally assume this to be the case. No specific legal authority is required.
The parties did nothing in the engagement letter to counter this assumption. For example, they could have omitted the word "private" or included the word "public" or referred to "any form of equity finance".
The fact that "private" often couples with "placing" in financing terminology did not prevent it also being applied to "offering" and "other sale".
Elsewhere in the engagement letter the parties used wide drafting such as "..equity instruments in any form, including without limitation..". The fact that they did not do so in the definition of financing (to which the commission clause referred) suggested they intended the fundraising categories to be limited.
The court reminded itself of the rules it should apply when required to interpret unclear or ambiguous wording in a contract. The court will seek to identify what the parties intended by the wording in question. In doing so it will apply an objective test to consider the ordinary meaning of the words to establish what a reasonable person with all the relevant context available to the parties would have understood by them. It will consider rival interpretations of the language, test them against the language elsewhere in the contract and the factual background.

Lessons

The case underscores the critical nature of clear and unambiguous contract language. The Court of Appeal's decision highlights the potential for a single adjective to influence the interpretation of a list of terms, potentially affecting the entitlement to significant financial reward.

The careful legal analysis undertaken by the Court of Appeal led to the understandable result that followed. However, one might wonder whether investment banks and similar firms, when drafting engagement letters in similar circumstances, would anticipate and intend that the expression "or other sale of equity instruments" would be construed narrowly so as to exclude participation in a public offer. Such engagement letters often contain the investment bank's own standard drafting and their commercial interest may be to cast the net wide in terms of the scope of transactions that may generate fees.

In light of this decision, firms may wish to revisit the drafting of their engagement terms.

¹ Cantor Fitzgerald & Co. v YES Bank Ltd [2024] EWCA 695

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