Black Diamond Offshore Ltd v Fomento de Construcciones y Contratas SA

The Court of Appeal considered the proper construction of clause 10(f) of a €450 million convertible note to determine whether an Event of Default had occurred. The court applied established principles of contractual interpretation, reading the clause in its commercial and contractual context and preferring a construction that gave effect to the language used. It held that clause 10(f) was directed to insolvency-type arrangements and that an arrangement or composition "with or for the benefit of the relevant creditors in respect of any such debts" could relate to the creditors of the relevant issuer or material subsidiary in respect of their debts, and did not require an arrangement with every creditor. The court therefore upheld the judge's conclusion that the proposed restructuring constituted an Event of Default and dismissed the appeal.

The appellant, Fomento de Construcciones y Contratas S.A. (FCC), issued €450 million unsecured convertible notes governed by English law. Clause 10 set out Events of Default of which sub-clause (f) addressed insolvency-type events, including a provision that the Issuer or a Material Subsidiary "proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any such debts."

The claimants (noteholders) sought a declaration that an Event of Default had occurred following FCC's proposed restructuring of indebtedness under a Spanish Syndicated Finance Agreement. At first instance the English court (Barling J) found there had been an Event of Default under clause 10(f). FCC appealed.

The principal issue before the Court of Appeal was the meaning of "relevant creditors" and whether clause 10(f) required an arrangement with all the issuer's creditors (or all the material subsidiary's creditors) before an Event of Default could arise, or whether a proposal to make an arrangement with some creditors could suffice.

The Court of Appeal reviewed the applicable principles of contractual construction. It analysed clause 10 as a whole, compared the provision to other sub-clauses (including the €100,000,000 thresholds in clauses 10(c)–(e)), and considered commercial consequences. The court rejected FCC's submission that the clause should be read as limited to arrangements involving all creditors. It concluded that the language, read in context, supported a broader meaning: the "relevant creditors" are those in respect of whose debts the arrangement or composition is made, namely the creditors of the Issuer or the relevant Material Subsidiary. The court emphasised that the clause was aimed at insolvency-type arrangements under any relevant law and that the parties had accepted a wide-ranging definition of events that might justify noteholder acceleration.

The court also noted checks on the use of the Event of Default (for example, the ability of the Syndicate of Noteholders to pass resolutions) and considered the provision not unduly irrational or commercially unacceptable. For these reasons the appeal was dismissed and the judge's declaration that an Event of Default had occurred under clause 10(f) was upheld.

The appeal is dismissed. The Court of Appeal held that clause 10(f) is to be read in its commercial context and that "an arrangement or composition with or for the benefit of the relevant creditors in respect of any such debts" refers to arrangements affecting the creditors of the Issuer or of the relevant Material Subsidiary in respect of their debts; it is not restricted to an arrangement with all creditors. Accordingly the judge was entitled to find an Event of Default on the facts.

The proceedings commenced in the Chancery Division (HC2015000148). Asplin J dismissed FCC's jurisdiction challenge on 9 March 2015. Barling J gave summary judgment for the claimants, finding an Event of Default under clause 10(f) (judgment 16 April 2015). FCC appealed to the Court of Appeal, which delivered judgment on 22 November 2016 ([2016] EWCA Civ 1141) dismissing the appeal.