Supreme Court clarifies rights from trading of debt under LMA terms

Banking & Finance analysis: Craig Pollack, global head of litigation at King & Wood Mallesons, advises that the Supreme Court’s decision in Tael One v Morgan Stanley will no doubt come as a relief to those who frequently trade debt in the secondary debt markets and provide clarity to buyers and sellers of secondary debt on the proper interpretation of the Loan Market Association (LMA) terms.

Original news

Tael One Partners Ltd v Morgan Stanley & Co International plc [2015] UKSC 12, [2015] All ER (D) 112 (Mar)

The Supreme Court considered the interpretation of a contractual condition forming part of LMA standard terms and conditions for par trade transactions, in circumstances where the claimant claimed that it was entitled to be paid part of a payment premium which related to the amount of a loan which had been transferred to the defendant, to that extent that it pertained to the period prior to the transfer. The court held that the payment premium was not expressed to accrue by the reference to the lapse of time. The payment premium could not be regarded retrospectively, as having notionally accrued over the period in question.

What is the background to this case?

This case concerned a contention that a party that sold part of its participation in a loan under the Loan Market Association Standard Terms and Conditions for Par Trade Transactions (the LMA terms) trade nevertheless retained, without any express provision in the trade documentation, the right to receive a share of a payment premium that was ultimately paid by the borrower on prepayment of the loan.

Tael had transferred to Morgan Stanley part of its share in a syndicated loan in 2010. Tael claimed that Morgan Stanley was obliged, under the LMA terms, to pay over a sum equivalent to the part of the payment premium that Tael said was referable to the share of the loan that Tael had transferred to Morgan Stanley, even though Morgan Stanley had itself subsequently transferred on that share of the loan to a third party. The parties disagreed as to the proper construction of the LMA terms, in particular Condition 11.9 (which allocates interest and fees between the buyer and seller of the debt being sold).

Tael’s claim was upheld in the Commercial Court at first instance and subsequently overturned by the Court of Appeal.

What issues was the Supreme Court asked to consider?

The Supreme Court was asked to consider a question of contractual interpretation of the LMA terms, namely whether contractual Condition 11.9 provided for the return to the seller of its referable share of the payment premium ultimately paid by the borrower.

What did the Supreme Court decide, and to what extent is the court’s judgment helpful in clarifying the law?

The Supreme Court rejected Tael’s appeal on the basis that the premium payment did not fall within contractual Condition 11.9, as it was not a sum that accrued ‘by reference to the lapse of time’. The court also agreed with the Court of Appeal that the construction argued for by Tael did not reflect the commercial reality of parties trading loans in the secondary debt market.

The Supreme Court was particularly keen to emphasise that it had reached its decision in part based on a construction of Condition 11.9(a) that made commercial sense, noting in particular that the ‘LMA terms are intended for use in a market in which the loans are traded’ and ‘One would not readily infer that a contract for the sale of a loan was intended to create continuing rights and obligations between the parties to the contract, in respect of payment, which might exist over a substantial period of time’.

Is the court’s ruling likely to have an impact on future cases?

The parties were not in dispute over the proper approach to the construction of contract terms under English law, and so this ruling is likely to be of more practical significance to those who trade debt in the secondary debt market, rather than providing any fresh insight into the application of the law by the English courts.

What are the implications for lawyers and what can they take away from this judgment?

This decision saw the Supreme Court consider the obligations and rights that flowed from the trading of debt according to the LMA’s standard terms and conditions. It therefore underlined the importance for parties who undertake such trades (and their advisors) to look closely at the nature of the debt being transferred and the terms of the proposed transaction, and to consider whether any additional terms need to be negotiated to reflect the parties’ aspirations.

How does this case fit in with other developments in this area? Do you have any predictions for future developments?

This ruling reaffirms the consistent approach taken by the English courts in recent years to the construction of contracts, namely that the courts are very reluctant to construe commercial contracts in a manner that ignores the underlying commercial realities of the parties’ relationship.

This decision will no doubt come as a relief to those who frequently trade debt in the secondary debt markets and provide clarity to buyers and sellers of secondary debt on the proper interpretation of the LMA terms.

Craig Pollack acts for major investment banks, hedge funds, public companies and high net worth individuals and has particular expertise in complex commercial litigation, international arbitration, multi-jurisdictional disputes, regulatory investigations and banking and financial markets disputes. In Tael One v Morgan Stanley, King & Wood Mallesons represented Morgan Stanley and Craig was lead partner on the case.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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