Keep under review options for terminating contracts which are no longer needed or pay the price. We discuss an interesting approach from the High Court to the well-known principles of contractual interpretation in Macquarie Capital v Nordsee.(1)

Background to the Dispute

Macquarie Capital (Europe) Ltd (Macquarie) had been engaged by Nordsee Offshore MEG I GmbH (NOMEG), a subsidiary of the Windreich Group, 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.

The 2013 Engagement Agreement made reference to the "Project" (the windfarm development) and termed the raising of the finance for the Project as the "Transaction". Under the terms of the Engagement Agreement, NOMEG had to pay completion and debt advisory fees to Macquarie if the Transaction was completed, irrespective of whether Macquarie had been responsible for raising the financing, provided that the Engagement Agreement had not been terminated more than 12 months before completion of the Transaction.

A number of difficulties occurred and various aspects of the windfarm development changed, including the timing and structure of the finance, and details of the windfarm development itself, such as the turbines to be used and the identity of the plant supplier. However, the Engagement Agreement was never terminated. The finance raising process was completed in 2016 and although it had contributed little to the final form of the development and finance raising process, Macquarie sought payment of fees under the Engagement Agreement. NOMEG denied any liability.

The Dispute

The key point of dispute between the parties was whether the windfarm development and associated financing which had ultimately been concluded fell within the definition of "Transaction" as defined in the Engagement Agreement.

NOMEG argued that the definitions of "Project" and "Transaction" in the Engagement Agreement should be construed narrowly, such that the financial close in August 2016 did not fall within the scope of the "Transaction". This was on the basis thatthere had been such substantial changes to both the windfarm development and the finance structurethat it no longer fell within the definition of "Project". The judge disagreed and found that, although there were "numerous aspects of the potential windfarm project under consideration" at the time the Engagement Agreement was entered into, the Engagement Agreement did not specify any particular aspects as being necessary constituents of the windfarm development for the purpose of the Agreement.

On the opposite side of the fence, Macquarie argued that the changes to the windfarm development did not take it beyond the contemplation of the parties upon entering into the Engagement Agreement and thus the development and associated financing as completed did still fall within the scope of the "Transaction", as defined.

The High Court Decision

The High Court found that, at the time of the Engagement Agreement, there had been flexibility in relation to the raising of finance (including the timing and structure of that finance), the capital structure and corporate structure, and the windfarm development itself. This corresponded with Macquarie's position that various aspects of theintended development had not been "set in stone" at the time of the contract and "were capable of significant change".

The court criticised the definitions for "Project" and "Transaction" as being "unclear" and "unhelpful". Adopting a textual approach to the language used to define the terms, and considering the Engagement Agreement as a whole, the term "Project" meant the windfarm project in which NOMEG was involved at the time of entry into the Engagement Agreement. The term "Transaction" was intended to refer to an equity and debt raising process in relation to the "Project" in broad terms.

In reaching its decision, the High Court set out the well-known principles of contractual interpretation under English law as summarised in Lukoil Asia Pacific PTE Ltd v Ocean Tankers (PTE) Ltd. (2)

  • the court must ascertain the "objective meaning" of the language used in the agreement;
  • the court must consider the contract as a whole, as well as the wider context; and
  • If there are two possible constructions, the court should adopt the construction consistent with business common sense.

In this case, commercial common sense favoured an interpretation of the Engagement Agreement which entitled Macquarie to its fees, notwithstanding the significant changes to the way in which the proposed windfarm development had been brought about. The court held that, without such an interpretation, Macquarie might be incentivised to advise in a way that would ensure it would be entitled to its fees.

For these reasons, the High Court held that Macquarie's wider interpretation of the defined terms in the Engagement Agreement was the correct approach. As a result, the High Court held that NOMEG was liable for Macquarie's fees (amounting to EUR 16 million plus interest).

Comment

Had NOMEG terminated the Engagement Agreement earlier, it might have avoided payment to Macquarie. It goes without saying that clearer drafting could also have helped.

The application of the now well-established principles of contractual interpretation in any given case remains tricky, particularly in cases where defined terms provide for flexibility. As a result, while parties should of course strive for clarity in drafting, they should also give particular consideration to possible options for terminating contracts when they are no longer needed.