Exclusivity

Introduction
Exclusivity arrangements are relatively common in commercial contracts, particularly financing and advisory mandates. Similar arrangements such as rights of first refusal or price matching can also be used. Usually, these clauses clearly specify the type of goods or services which are covered and the period of time during which the exclusivity applies. A recent decision of the Supreme Court of Victoria demonstrates the importance of clarity and consistency when drafting these clauses. If they are too vague they won’t be enforced by the courts.

Who needs to know?
People who draft and negotiate exclusivity clauses, particularly in the context of corporate finance and advisory mandates.

Background
The case of Chimera Capital Markets Pte Ltd v Kangaroo Resources Limited [2014] VSC 419 involved the engagement of a corporate advisor (Chimera) to provide particular services to Kangaroo Resources Limited (KRL) in connection with the financing and acquisition of assets and debt securities relating to coal mines in Indonesia. The assets and debt securities were held or issued by entities that were loosely related to KRL and were experiencing financial distress.

KRL and Chimera entered into an Advisory Agreement which describe the scope of services to be provided by Chimera. The agreement stated that Chimera was appointed as KRL’s “exclusive provider” of various services. The services included acting as the ratings advisor for a proposed US$150 million bond issue, acting as lead manager and sole bookrunner for the bond issue and arranging a US$15 million bridging loan facility. A separate section of the agreement went on to describe the services in greater detail. The services to be provided were defined as “the Services”.

Towards the back of the Advisory Agreement was a paragraph headed “Clear Window”. It stated:

“The Company grants the Advisors a clear window of exclusivity of 180 days from the date of this letter in respect of the provision of the Services and a right of first offer in respect of any other financing, capital raising or advisory service.”

The Advisory Agreement was also accompanied by Chimera’s standard terms and conditions. These included clause 1.6 as follows:

“Should the Company require any external funding or valuation support, including but not limited to Capital Raisings, Underwritings or Debt Funding (collectively “Funding Services”) the Company undertakes that it will provide Chimera with a right of first offer for the provision by Chimera of any such Funding Services (to be agreed or refused within 21 days), should it elect to proceed with any transaction and it will only negotiate provision of Funding Services with other parties if Chimera fails to accept such first offer.”

It appears that a large part of the Advisory Agreement was devoted to describing Chimera’s fees. This included a termination fee if KRL terminated the Advisory Agreement and subsequently completed the bond issue with other advisers within 12 months of the termination date.

As it eventuated, KRL was not happy with the service provided by Chimera. KRL ultimately proceeded to undertake a transaction but its structure and financing was different from that which was envisaged by the Advisory Agreement. In particular, it did not involve Chimera and nor did it involve a note issue, a rating or a bridge facility. Additionally, the Court held that KRL did not use “different advisers” to undertake the transaction (which in many respects was an internal restructure).

Chimera claimed that KRL had breached the exclusivity and right of first offer provisions. It claimed $28 million in damages.

In response, KRL argued that the “clear window” exclusivity clause was illusory and unenforceable because the scope of advisory services was so broad and indefinite.

What did the Court say?
The Court agreed with KRL.

The Court described the exclusivity clauses in the Advisory Agreement as:

“a collection of terms cobbled together from different sources, without regard to their coordinated operation. A superficial review would have alerted a reader to uncertainty and confusion … There is conflicting and vague terminology. There are different time periods; and the unusual concept of a right of first offer. Thus, to attempt to discern the intention of the parties in relation to those rights seems artificial, even speculative.”

The Court nevertheless tried to determine what the parties had intended by their chosen words. In doing so, the court applied the principle of “contra proferentum”. This basically means that any ambiguity in a document is construed against the party who drafted the agreement. In this case, it was Chimera who drafted the Advisory Agreement, so the ambiguities were generally resolved against it.

The Court concluded that the exclusivity provisions relating to the “Services” were not breached because KRL did not in fact obtain those services from any one else.

The Court also held that the “right of first offer” contained in the clear window paragraph was unenforceable insofar as it related to “any other financing, capital raising or advisory service”. The Court reached this conclusion because this phrase lacked the “necessary clarity and definition”. The Court’s reasoning was only briefly stated, but it appears that the breadth of the phrase was a concern. What was actually meant by an “advisory service” or a “financing service”? The Court summed up its concern as follows:

“Rights such as those which [Chimera] sought to enforce against [KRL] must have sufficient clarity and certainty to enable the party bound to know exactly what it must do in order to satisfy the requirement.”

The Court picked apart how the “right of first offer” (as contained in the clear window paragraph and in clause 1.6) might work at a practical level. This left many questions hanging. For example, would KRL be able to modify an offer, once rejected by Chimera, and then negotiate with an alternate adviser? Would KRL be required to put the modified offer to Chimera before engaging an alternate adviser? What if KRL made an offer which Chimera rejected as unreasonable? The contract did not specify or qualify any of the terms required for an offer to be made by KRL. The Court also pointed out internal inconsistencies in the way in which Chimera’s services were described in the agreement. For example, the “Funding Services” described in clause 1.6 did not align with the range of services mentioned in the “clear window” paragraph. Nor was there any mention of the 21 day period in the clear window paragraph or for that matter any other time period. Likewise, the 180 day period in the clear window paragraph was not mentioned in clause 1.6.

Even if Chimera had proved a breach of the exclusivity / right of first offer provisions, there was no evidence before the Court to establish the basis upon which an assessment of damages (i.e. lost opportunity) could be made. Moreover, the Court was of the view that Chimera could not have provided some of the ‘services’ provided by others to KRL, so even if there was a breach of the exclusivity clause, the damages would have been nominal because no real opportunity was lost as a consequence of the breach.

Practical Points to Take Away

• Reduce the risk of inconsistencies by including the exclusivity type provisions in a single clause, rather than dotted throughout the contract in different locations and using different terminology.
• Be as clear as possible about the goods or services to which the exclusivity type provisions apply. Using general or broad wording is usually acceptable, but the risk is you end up being too vague.
• A “right of first offer” is less than ideal for a variety of reasons. If a right of this type is to be used, consider being more, rather than less, prescriptive about the offers and the process involved.
• Be careful using the expression “financing arrangement”. Chimera argued it included equity financing, but the Court interpreted the phrase narrowly by limiting it to debt financing mechanisms (being the type of service Chimera was generally engaged to assist with). References in the contract to “draw down” also led the court to interpret the phrase as being confined to debt financings (the court expressly stated that equity subscription arrangements did not involve any draw down). Relatedly, the Court interpreted the phrase “capital raising” as being limited to debt financing arrangements. The context and wording of the contract will of course affect the meaning of these phrases on a case by case basis, but caution should be applied and clarifcatory wording added to the contract as needed.
• As with any claim for breach of contract, you will only recover if you can prove you suffered loss or damage as a consequence of the breach. In the context of exclusivity type provisions, you would need to prove a loss of opportunity. If you could not have provided the services that were obtained from another service provider in breach of the exclusivity, then you are unlikely to recover any damages.