Contract construction – adjective at the start of a list found to qualify the entire list

The question

How will the courts approach the question of whether an adjective or determiner at the start of a list qualifies the entire list?

The key takeaway

An adjective or determiner at the start of a list may be found to qualify the entire list in circumstances where the ordinary meaning of the words, used in the context of the contract as a whole and the relevant factual and commercial background, supports such an interpretation.  

The background

The claimant, Cantor Fitzgerald & Co (Cantor), is a US broker-dealer, investment bank and financial adviser, and the defendant YES Bank Limited (Yes Bank), is an Indian commercial bank.

Cantor was engaged by Yes Bank to help with a "Financing" in light of the Indian bank's need of additional capital to deal with its financial difficulties. In return, Cantor could receive a $500,000 retainer and 2% of funds raised from the investors listed in a schedule to the engagement letter.

The key clause in the engagement letter stated:

"1. We have been advised by the Company [Yes Bank] 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") The Company hereby engages CF&CO [Cantor] to act as the Company's financial advisor, placement agent and arranger in connection with any Financing with any Investor (as defined in Annex A and Schedule I) other than a Qualified Institutional Placement ("QIP"). In the event a Financing is structured as a Qualified Institutional Placement, the Company acknowledges that CF&CO shall not be engaged to act as a placement agent or arranger in connection with such transaction, but rather an offshore financial advisor to the Company, and that in such capacity, CF&CO may provide Investor referrals to the Company. In the event any such Investors participate in the QIP, CF&CO shall be entitled to a referral fee with respect to amounts contributed by such Investors in the QIP equal to the fees set forth in 3(b) below, payable in accordance there with." [emphasis added]

Yes Bank received a sizable capital injection and later, additional funds by a further public offer (FPO).  Certain investors that Cantor had been in discussion with participated in the FPO.

Cantor was paid the retainer fee, but not the 2% fee. Cantor's claim was that it was entitled to 2% of the amounts subscribed in the FPO by three investors listed in the schedule. It was Yes Bank's position that the FPO did not come under the concept of a Financing because the use of the word "private" qualified all the forms of financing covered by the engagement to private forms of equity financing, limiting Cantor's entitlement to its retainer. 

In the High Court, the judge found in favour of Yes Bank – Cantor appealed. The basis of Cantor's appeal was that the judge should have held that the ordinary meaning of the words used in the definition of Financing covered all forms of equity financing and in concluding that the wider contractual context did not substantially affect the construction. 

The decision

The Court of Appeal dismissed the appeal, deciding the word "private" qualified all forms of financing and therefore Cantor was not entitled to the 2% fee, as the FPO was not a "private placement, offering or other sale of equity instruments" since it was public by nature.

In coming to its decision, the court:

• considered the ordinary meaning of the words used in the context of the contract as a whole and the relevant factual and commercial background
• excluded prior negotiations
• identified the intention of the parties (judged objectively) to ascertain 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

On the ordinary meaning of the words, the court acknowledged that while there is no firm grammatical rule that an adjective or determiner at the start of a list of nouns qualifies all within it, the nature of the list may well indicate that it does. Here the parties had chosen to start the description of the kinds of equity fundraising covered by the engagement with the word "private" and not "public" and a reader would naturally tend to assume that an adjective or determiner at the start of a list qualifies the entirety of it. There was no authority of law needed to support this, the court relied on the ordinary meaning of the words. In contrast to the words in issue, the parties did go to the trouble of making clear in the same sentence both that all kinds of equity instrument were covered and that the arrangement would cover both a single and a series of financings. They did this with the reference to "equity instruments in any form, including without limitation…", and with the references to "one or more financing(s)" and (later on in the sentence) "in one or a series of transactions".

On the wider contractual context, Cantor was only appointed as a "financial advisor, placement agent and arranger" for Financing that was not a "Qualified Institutional Placement" (QIP). This is because a QIP needed a Securities and Exchange Board of India-registered merchant bank's involvement, which Cantor was not as they were only an advisory bank and were there to provide referrals. Therefore, the contractual context also supported Yes Bank's case.

On the factual matrix, it was clear that Cantor was approached for its potential access to new sources of capital through its client list and also that an FPO was not a realistic possibility when the contract was agreed and therefore not in reasonable contemplation of the parties. These facts strengthened Yes Bank's argument.

Why is this important?

Lists with an adjective or determiner at the start are commonplace in commercial contracts – this judgment provides a reminder of the approach the courts will take in interpreting the contractual language, in this case whether an adjective or determiner at the start of a list qualifies the entire list. 

Any practical tips?

Clauses should be clearly and specifically drafted using the ordinary meaning of the words.  If there is particular contractual context and/or the factual matrix, consider including in recitals or acknowledgments within the agreement.  

Ensure that contract clauses are consistent. In this case, other clauses in the engagement letter used concepts and terms with the aim of qualifying the entire list. If the same approach is not adopted consistently, the court may assume a different approach was intended. 

Consider breaking up lengthy clauses into sub clauses and, when drafting a list, considering using additional determiners before key terms or reordering the list, to keep clauses clear and unambiguous.

Autumn 2024