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The commission omission? English High Court balances text and context in contractual interpretation

28 May 2020. Published by Geraldine Elliott, Partner and Ben Harris, Associate

English law's flexible, rational, yet stable approach to contractual interpretation has been demonstrated again in Clark Street Associates v Norsk Titanium(1), a decision concerning commission payments.

Background

Under a consulting agreement, Clark Street Associates (CSA) provided consultancy services to Norsk Titanium (Norsk), which carries out 3D printing of titanium components for the aerospace industry.  CSA was to help Norsk obtain federal, state or other funding to establish a manufacturing facility in the United States.

During the first 18 months of the contract, one of Norsk's wholly-owned subsidiaries, Norsk US, concluded an alliance agreement with FSMC, an agency associated with the State of New York.   That agreement provided that FSMC would receive funding from the State of: (a) up to $50 million to construct a manufacturing facility, and (b) $75 million to purchase manufacturing equipment.  FSMC would then lease to Norsk US the manufacturing facility and equipment, each at a nominal yearly rate for 10 years, and the two parties would enter into joint manufacturing operations. 

Following conclusion of the alliance agreement, the State approved $125 million for release to FSMC.  FSMC ordered almost the entire $75 million-worth of manufacturing equipment from Norsk Equipment, another wholly-owned subsidiary of Norsk.  It is expected that the full $50 million will have been spent to build a permanent manufacturing facility by the end of 2020.

The consulting agreement provided that, in addition to consultancy fees, Norsk would pay CSA commission calculated as a percentage of any "Award" received by Norsk as a result of CSA's services.  The consulting agreement defined six different categories of "Award", including:

  1. "any monetary grant… actually received by or granted to [Norsk]";
  2. "any… monetary grant… actually received by or granted to any other Entity that, in connection with or as a result of an Award, provides any services for [Norsk's] benefit to a monetary value equal to the grant";
  3. any "non-monetary grant awarded to [Norsk]… that… provides any services for [Norsk's] benefit…";
  4. any "non-monetary grant awarded to any other Entity that… provides any services for [Norsk's] benefit…";
  5. any loan or other form of debt financing; and
  6. any tax credits.

CSA claimed that the $125 million approved for release to FSMC was an Award under category (B), and that it was therefore entitled to commission.  Norsk denied that the $125 million constituted an Award within the wording of category (B), so CSA was not owed the commission it claimed.

Approach to contractual interpretation

The Court summarised English law's approach to contractual interpretation, referring to the leading Supreme Court case of Wood v Capita(2). The Court must use the complementary "tools [of textualism and contextualism] to ascertain the objective meaning of the language which the parties have chosen to express their agreement" and adopt an "iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated".

As well as considering "the possibility that one side may have agreed to something which with hindsight did not serve his interest", the Court's analysis will take into account the sophistication, complexity and other circumstances affecting the quality of drafting. 

Overall, the Court will balance a "close examination of the relevant language" with the factual background and the commercial consequences of competing constructions, to determine objectively what the parties agreed.

Judgment

The Court considered the following key questions in interpreting the definition of a category (B) Award under the consulting agreement:

  • Was the economic support provided by FSMC to Norsk US, rather than to Norsk directly, "for Norsk's benefit"?

    The consulting agreement was clear on this question.  Whereas the grants defined in Award categories (A) and (C), for example, were narrowly required to be awarded "to Norsk", the services included within category (B) only had to be "for Norsk's benefit", contemplating that services could be received by another entity (such as Norsk's wholly-owned subsidiary, Norsk US) but still give rise to commission if they benefitted Norsk.

  • Did leasing the manufacturing facility and equipment to Norsk US at a discount constitute "services"?

    The Court held that context was key here, both: (a) the context of the word "services" itself, which was preceded with the word "any" and not used in a narrow sense (such as in strict contrast to "goods"), and (b) the context of the consulting agreement itself, which specifically concerned arrangements that provided economic support to Norsk to establish its US facility.  The discounted leasing arrangements under the alliance agreement fell within that broad definition of "services".

  • Did the services provided have to be of a monetary value "equal to the grant"?
    Norsk argued that, under a category (B) Award, the monetary grant received by FSMC had to be exactly equal to the value of any services FSMC in turn provided for Norsk's benefit.  In this way, the monetary grant actually received by FSMC could be "deemed" to have been received by Norsk.  However, if the benefit received by Norsk was less than the value of the monetary grant, Norsk should pay commission only on the value of services it received (under one of the other Award categories), not the total funds received by the direct grantee.  In the present case, Norsk said, the value of the manufacturing facility and equipment which FSMC purchased using the $125 million grant far outweighed the benefit Norsk US had received by leasing the facility and equipment at a discount for only 10 years, so Norsk should not pay commission on the full value of the grant.

The Court observed that Norsk's argument was a "careful construct, but not one that is suggested by the language used by the parties".  The definition in category (B) focused on benefit to Norsk, not to Norsk US, as was central to Norsk's argument.  Further, while Norsk had presented persuasive reasoning based on commercial context relating to the parties and the consulting agreement, the Court preferred CSA's competing evidence about the commercial context, which also more naturally complemented the contract's wording.

While the drafting of the consulting agreement had certainly left room for argument, the Court ultimately held that CSA was entitled to commission calculated at $12.05 million.

Comment

Although the parties are companies incorporated and operating in other countries, they chose English law to govern their contract.  The Court's decision is logical and sensible, both by reference to the commercial context of the case and the wording of the contract, and exemplifies the benefit of choosing England as the forum for resolution of disputes under the contract.  As the Court commented: "One of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation."

However, the case also serves as a lesson in the importance of clear and comprehensive drafting of commercial contracts at the outset, to avoid disputes arising later.  The consulting agreement contained more than 12 different sections of terms and conditions as well as a statement of services, where the six different categories of Award were defined.  Despite all of that, the drafting failed clearly to provide for the circumstances which led to the dispute between the parties.  Had it done so, the parties might have saved the considerable time and cost of litigation.

(1) Clark Street Associates LLC v Norsk Titanium AS [2020] EWHC 1038 (Comm)

(2) Wood v Capita Insurance Services Ltd [2017] UKSC 24