English High Court rules on early loan repayment issues
22 December 2022
22 December 2022
The Commercial Court recently considered whether it could substitute its own calculation of sums payable on early termination/repayment of a loan, whether relevant pricing data could be retrospectively obtained and applied, and also analysed the implications of failing to certify a sum due within a prescribed time limit. The Court applied authorities in relation to ISDA transactions by analogy to the lending arrangements.
The defendant, Uro, sought summary judgment and to strike out proceedings brought by the claimant, BNPP, which was seeking to recover €251 million that BNPP alleged was due to it under a Loan Agreement between an SPV (called Silverback) and Uro. BNPP was the assignee of Silverback. BNPP alleged that Uro was liable to make this payment under the terms of the Loan Agreement in respect of a "Bond Make Whole Premium" (BMWP). The reason for the obligation was that Uro had lost a particular tax status, which meant that the loan had to be repaid many years prior to its full term. There was no dispute that this event had occurred.
Expert evidence served by BNPP indicated that provision was made to provide compensation for the early termination of the Loan Agreement and thus the early repayment of the loan. The compensation was to be calculated by reference to the interest that BNPP (as assignee of Silverback) would have received – but in reality which the bondholders who had financed the loan under the overall transaction structure would have received – if the Loan Agreement had run its full term. Accordingly, the BMWP was essentially immediate compensation for the premature termination of the contract and loss of the benefits that would have been received by the lender (and in turn the bondholders) if the contract had been fully performed.
The concept of a party to a financial instrument receiving compensation for loss suffered in consequence of early termination was familiar from the many ISDA cases which have been litigated over the past 10–15 years.
For the BMWP to be payable, the tax status event had to have been caused by an act or omission of Uro. There was a substantial dispute as to whether or not the loss of tax status here was caused by any act or omission of Uro. That dispute raised issues which could not be resolved in the context of a summary judgment or a strike-out application.
However, Uro contended that there was a failure by Silverback to follow certain procedures, which were preconditions to any liability to pay the BMWP. There were two aspects to the argument: (i) the calculation of the BMWP; and (ii) the certification of the BMWP.
In relation to calculation, the issue was Silverback's failure to obtain, at the relevant time, price quotations from certain dealers in German "Bunds" (German government bonds). Uro contended that, in order for there to be an effective calculation of the BMWP, such written price quotations had to be obtained at a specific time on 7 February 2022. It was common ground that this was not done at that time. However, BNPP contended that it was not essential to do so at that time, and that quotations could be (and were in fact) obtained retrospectively. Such retrospective quotations were, BNPP submitted, sufficient for the purposes of calculating the BMWP and, in any event, even if the retrospective process is not contractually effective, this did not mean that no BMWP is payable: the court can step in and ascertain and fix the appropriate pricing for the purposes of calculating the BMWP.
The second issue concerned the BMWP being "certified" by or on behalf of the Issuer to the Borrower at least five Business Days prior to the specified date of prepayment. The relevant clause provided "…..the Borrower must pay to the Issuer, on the Loan Payment Date specified for prepayment, an amount equal to the Bond Make Whole Premium applicable to such prepayment (as certified by or on behalf of the Issuer to the Borrower..…at least five Business Days prior to the specified date of prepayment)". It was common ground that the specified date of prepayment was 21 February 2022, and accordingly the certificate should have been provided by 14 February 2022. There was no dispute that it was not so provided. Uro contended that the provision of a certificate no later than that date was a condition precedent to any obligation to pay the BMWP. Accordingly, if it was not provided by that time, it could never be provided subsequently. BNPP argued that this construction is wrong.
Uro contended that BNPP and Silverback had failed to comply with the contractual terms they were seeking to enforce. Since the sum claimed by way of the BMWP was not calculated (including obtaining live bid and offered prices) nor certified at the required time in accordance with the detailed and contractually binding mechanism for doing so in the applicable contracts, Uro contended that there was no contractual amount due from Uro and that BNPP's claim had no real prospect of success.
BNPP submitted that Uro, should its construction be deemed correct, would receive a windfall of €250 million at the expense of the Bondholders and that its arguments were opportunistic and should be rejected by the Court. The argument was not supported by any express term of the contractual documents; it was not consistent with the nature and commercial purpose of the BMWP; and it was contrary to business common sense and had absurd consequences for the contract as a whole.
Each side referred to a number of cases concerning the interpretation of the ISDA Master Agreement. Uro relied upon the decision in Lehman Brothers Finance SA (in liquidation) -v- SAL Oppenheim Jr & Cie. KGAA  EWHC 2627 (Comm) (Oppenheim) in support of the proposition that the calculation mechanism for the BMWP required "live" quotations from each Reference German Bund Dealer, which had been applied in a number of other cases.
BNPP sought to distinguish between those cases and relied in particular upon the decision of the Court of Appeal in Videocon Global Ltd -v- Goldman Sachs International  EWCA Civ 130 in support of its argument that certification of the BMWP by 14 February 2022 was not a condition precedent to its recoverability. BNPP also relied upon the decision of Foxton J in Macquarie Bank Ltd -v- Phelan Energy Group  EWHC 2616 (Comm) (Macquarie) in support of the argument that the Court could step in if the retrospective quotations sought in the present case were non-contractual.
Uro sought to distinguish between these ISDA cases on various grounds. In relation to the possibility of the Court stepping in to perform the calculation itself, Uro argued that this was impermissible in circumstances where the contractual mechanism was essential and where the only reason that it had not so operated was the fault of Silverback.
The issues of construction were to be addressed in the context of an application for summary judgment, where the relevant question was whether BNPP's case for recovery of the BMWP had a real prospect of success. While in many cases involving issues of construction a court is willing to "grasp the nettle" by determining such issues on a summary basis, BNPP had adduced expert evidence on the commercial background to the loan and bond agreements, including the terminology used in those documents, and also on the commercial consequences of the construction, which Uro challenged. This expert evidence was of actual or at least potential relevance to the construction issues.
BNPP contended that the failure to provide a certificate on the contractual date was a breach of the Issuer's obligation under the Loan Agreement, for which a potential liability in damages might arise, but which did not, however, invalidate a claim for the BMWP based upon a certification which was late. Jacobs J agreed that there was nothing in the contractual language which suggested that timely certification was a condition precedent to the obligation that would otherwise exist to pay the BMWP, and indeed the wording indicated the contrary. BNPP had a realistic prospect of success on this point. There was nothing in the language which suggested that the accrual of the obligation was conditional on certification of the amount nor that time was of the essence when dealing with certificates and determinations. The Loan Agreement did not expressly state what will happen in the event that the Issuer certifies the BMWP at any time after the period of five business days prior to the specified date for prepayment. The proposition that BNPP's entitlement (as assignee) to the BMWP should fall away completely if the Issuer is late in certifying the amount of the BMWP lacks any commercial sense.
It also appeared unlikely that Uro could establish any damages claim resulting from late certification, because the evidence indicated that Uro was never going to make any payment of the BMWP anyway, given its argument that nothing at all was payable because, it argued, it was not responsible for losing the relevant tax status.
While Uro's argument promoted certainty, it resulted in "an entirely uncommercial cliff-edge approach" to the payment of the BMWP. The factual matrix also served to further illustrate the uncommercial consequences of Uro's proposed construction.
Uro contended that if prices were not obtained at the relevant time on 7 February 2022, then the BMWP fell away and could never become payable. BNPP argued that: (i) retrospective quotations could be obtained subsequent to that time and day, and that in any event (ii) the Court could "step in" and calculate the BMWP payable if (contrary to BNPP's primary argument) there had been a failure to follow the contractual mechanism.
If there was a realistic prospect of success of either argument, then summary judgment would not be appropriate. Dealing with the second argument, Jacobs J considered that it had a real prospect of success, and derived support for that view from two Commercial Court authorities in the ISDA context.
The judge referred to paragraphs 12.148–12.149 and 12.195 of the leading textbook, Firth, Derivatives Law and Practice, and in particular to Firth's comments that if a party's determination is invalid (for example, because it was based on a misinterpretation of the agreement), or is founded on a manifest numerical or mathematical error, then "unless the parties settle the dispute, the court will decide what the result would have been if the determining party had acted correctly". Firth relied on Lehman Brothers Special Financing Inc -v- National Power Corp  EWHC 487 (Comm) (National Power) and the Macquarie decision to support his argument.
Jacobs J first observed that, although distinguishable on other grounds, the Oppenheim case also illustrated that, in the ISDA context, there may be no real difficulty in the Court, with the benefit of expert evidence, carrying out the calculation itself.
In rejecting Uro's argument that National Power and Macquarie could be explained on the basis that the court was seeking to correct, for the benefit of a claimant, a breach of contract committed by a defendant in failing to follow the proper process, Jacobs J held that the court was recognising that, in the ISDA context, the court could put right an error in order to ensure that a party could recover a sum that would be payable pursuant to a proper calculation, even if the party's purported contractual calculation was infected by material error and was therefore invalid.
There was a sufficiently close analogy between the sum to be calculated under an ISDA contract (where the court can "step in" if the calculation has not been performed correctly) and the BMWP payable under the Loan Agreement to give BNPP a real prospect of succeeding in its argument on this point.
This issue turned upon the particular contractual term. As a matter of pure textual analysis of the definition of the words, when viewed in conjunction with the ISDA case law, Jacobs J accepted that Uro had a strong argument that dealers would be asked to provide "live" quotations. The definition contemplated that "bid and offered prices" will be "quoted in writing". This suggested that they would be seeking a "live" quotation, which could be either accepted or rejected. This was the approach taken in the context of "Market Quotation" in the ISDA cases (eg Oppenheim).
Nevertheless, the judge held that a case could be made for reading the words as permitting the use of quotes for bid and offered prices that were given subsequently, provided that such bid/offered prices refer to the specific time and date set out in the clause. It was accepted that this was not the most natural reading of the text. However, the process of interpretation required consideration of the factual matrix and the commercial consequences of the parties' respective arguments. There were a number of points which assisted BNPP's case in that regard. Most importantly, the expert evidence was that (because of the abundance of available data in the context of a highly liquid market) any differences between prices obtained in real time and retrospectively would be "immaterial". Overall, BNPP had a real prospect of success on the retrospectivity issue.
Author: David Capps