A decision of the High Court of England and Wales in Macquarie Capital (Europe) Ltd v Nordsee Offshore MEG I GmbH [2019] EWHC 1655 has confirmed that defined terms in a contract will be interpreted on the basis of business common sense.

Macquarie Capital (Europe) Ltd (Macquarie) had been engaged by Nordsee Offshore MEG I GmbH (Nordsee) in 2013 as its exclusive financial adviser which included the raising of equity and debt financing (the Transaction) for the installation and operation of a windfarm (the Project) in the North Sea (together, the Agreement).

Under the Agreement, Nordsee was to pay completion and debt advisory fees to Macquarie if the Agreement had not been terminated more than 12 months before completion of the Transaction. Relevantly, Macquarie was entitled to be paid its fees whether or not it had been responsible for raising the finance in the Transaction.

Subsequently, multiple aspects of the Project changed, including the financing structure. However, the Agreement was not terminated.

The Transaction was completed in August 2016 and Macquarie sought payment of its fees, notwithstanding that it had not raised the finance. Nordsee denied liability to Macquarie on the basis that there had been substantial changes to the windfarm development and financing structure such that they no longer fell within the definitions of “Project” and “Transaction” in the Agreement.

Macquarie filed proceedings against Nordsee for payment of its fees. In holding that Macquarie was entitled to its fees under the Agreement, Butcher J held that:

•   although the defined terms ‘Transaction’ and ‘Project’ were “unclear” and “unhelpful“, the terms provided for flexibility with respect to both the raising of finance and the form of the windfarm development; they embraced arrangements which might be significantly altered or developed from those which were in the active contemplation of the parties at the time of entry into the Agreement;
•   the term ‘Project’ incorporated a windfarm in a particular area of the North Sea which constituted the economic opportunity, the existence of which provided the reason for raising finance and for engaging Macquarie;
•   in putting together complex financial arrangements as was the case here, there were bound to be modifications and changes to the windfarm development;
•   the changes to the windfarm development did not take the Project beyond the contemplation of the parties at the time of entry into the Agreement; and
•   the development and financing as at financial close still fell within the scope of the Transaction.

In reaching his decision, Butcher J also found that:

•   if the development and financing as completed were considered to fall outside the scope of the Transaction, Macquarie may have had an incentive to advise in favour of a particular or different mode of financing by which it would be entitled to its fees;
•   a broad interpretation of the terms ‘Project’ and ‘Transaction’ was counterbalanced by the fact that Nordsee was able to terminate the Agreement at any time, and thereafter would only be liable for fees if a ‘Transaction’ took place within 12 months after such termination; and
•   the court must ascertain the “objective meaning” of the language used in the Agreement, taking into account the wider context of the contract as a whole, and if there are two possible constructions, the court should adopt the construction which is consistent with business common sense. This approach favoured Macquarie’s position that it was entitled to its fees.

The principles of contractual interpretation applied by Butcher J are consistent with the approach adopted in Australia. Courts will construe defined terms taking into account the contract as a whole and in accordance with business common sense.1

This decision is a reminder that, notwithstanding significant changes to the subject matter of a contract, payment obligations may continue to apply, particularly where defined terms provide for flexibility.

The full decision can be found here.

1 See, eg, International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151, 160.