Fomento De Construcciones Y Contratas S.A. v Black Diamond Offshore Ltd & Ors (Rev 1)

An event-of-default clause in a commercial loan note must be construed objectively, in its contractual and commercial context, without remaking the parties’ bargain. The words “the relevant creditors in respect of any such debts” in a provision concerning an arrangement or composition did not mean all creditors or all debts of the issuer or material subsidiary. They referred to the creditors whose debts were the subject of the arrangement.

Accordingly, a proposed restructuring affecting a defined class of creditors could constitute an event of default, even though it did not concern every debt of the issuer. That outcome was not sufficiently irrational or commercially senseless to justify a contrary construction.

FCC had issued €450 million convertible loan notes governed principally by English law. It later proposed a restructuring of Tranche B debt under a separate syndicated finance agreement. The restructuring reduced or altered the rights of Tranche B creditors but did not affect the notes or Tranche A debt.

The respondents claimed that the proposal was an event of default under clause 10(f) of the notes. Barling J gave summary judgment for the claimants on 16 April 2015, holding that there had been an arrangement, or proposed arrangement, with or for the benefit of the relevant creditors. FCC appealed.

The central issue was whether clause 10(f) required an arrangement or composition with all creditors of FCC or of a material subsidiary before an event of default could arise.

1. Appeal dismissed unanimously. Lord Justice Christopher Clarke held, with whom Lord Justice Hamblen and the Senior President of Tribunals agreed, that the proposed Tranche B restructuring was an event of default under clause 10(f).

2. The objective of contractual construction was to ascertain what reasonable persons in the parties’ position, with the available knowledge, would understand the language to mean. The court had to consider the wording, the contract as a whole, its context and commercial purpose. It could prefer the commercially sensible of two available constructions, but could not improve an improvident bargain.

3. The phrase concerning a proposed general assignment, arrangement or composition did not impose a requirement that the arrangement concern all creditors or all debts. Had that been intended, the drafter could readily have repeated the earlier words “all its debts”. The subsequent use of “all or any” also showed that the drafter recognised the distinction.

4. “Any such debts” referred to the debts of the issuer or relevant material subsidiary. “The relevant creditors” were the creditors in relation to whose debts the arrangement or composition was made. The indefinite article in “an arrangement or composition” supported the conclusion that “general” did not qualify those alternatives.

5. The competing construction would produce the less plausible consequence that an arrangement concerning €1 billion of debt was not an event of default unless it affected every debt. Clause 10(f) addressed insolvency and insolvency-type arrangements, which commonly concern a significant body of debt but not all debts. Its broad and potentially draconian drafting was also mitigated by the syndicate’s power to prevent an individual noteholder from acting on an asserted event of default.

• Court of Appeal (Civil Division): FCC’s appeal was dismissed unanimously in [2016] EWCA Civ 1141.
• Chancery Division: Barling J gave summary judgment for the claimants on 16 April 2015, holding that the proposed Tranche B restructuring was an event of default under clause 10(f) of the notes.