We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
26 May 2020
English law's flexible, rational, yet stable approach to contractual interpretation has been demonstrated again in Clark Street Associates v Norsk Titanium – a decision concerning commission payments.(1)
Under a consulting agreement, Clark Street Associates (CSA) provided consultancy services to Norsk Titanium, 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. The agreement provided that the state would provide FSMC with funding of up to:
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. FMSC ordered almost the entire $75 million worth of manufacturing equipment from Norsk Equipment, another wholly owned subsidiary of Norsk. The full $50 million is expected to have been spent on building a permanent manufacturing facility by the end of 2020.
The consulting agreement provided that, in addition to the 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 any:
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 argued that the $125 million did not constitute an award within the wording of Category B and that CSA was thus not entitled to said commission.
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 consider 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.
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 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 (eg, Norsk's wholly owned subsidiary, Norsk US) but still give rise to commission if they benefited Norsk.
Did leasing the manufacturing facility and equipment to Norsk US at a discount constitute 'services'?
The court held that context was key here, with regard to both:
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 A award, the monetary grant received by FSMC had to be exactly equal to the value of any services that FSMC in turn provided for Norsk's benefit. In this way, the monetary grant 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 that it received (under one of the other award categories) and not the total funds received by the direct grantee. Norsk stated that the value of the manufacturing facility and equipment which FSMC had purchased using the $125 million grant far outweighed the benefit that 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 of Category B focused on the 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 more naturally complemented the contract's wording.
While the consulting agreement's drafting certainly left room for argument, the court ultimately held that CSA was entitled to commission calculated at $12.05 million.
Although the parties were incorporated and operating in other countries, they chose English law to govern their contract. The court's decision is logical and sensible by reference both to the case's commercial context and the contract's wording and exemplifies the benefit of choosing English law as the forum for resolving contractual disputes. 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 drafting clear and comprehensive commercial contracts from 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 to provide clearly for the circumstances which led to the parties' dispute. Had it done so, the parties might have saved the considerable time and cost of litigation.
For further information on this topic please contact Geraldine Elliott or Ben Harris at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.