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Supreme Court

Tael’s appeal, which was heard in the Supreme Court on 17 November 2014, raised a question of contractual interpretation in respect of the Loan Market Association standard terms and conditions for par trade transactions (“LMA Terms“) [1].  As the current LMA standard terms and conditions for par or distressed trades adopt similar drafting, the decision has current relevance.

This case concerned a debt trade between Tael (as transferor) and Morgan Stanley (as transferee) on LMA Terms.  The traded loan facility included the payment of a “payment premium” (referable to a fixed IRR) which was payable when the loan came to be repaid or prepaid.  The issue was whether Morgan Stanley had to account to Tael for that part of the payment premium which related to the period before the date of the transfer.

The factual background to this appeal, including a summary of the decisions at first instance and the Court of Appeal, is set out in further detail in the Case Preview.

Lord Reed gave the lead judgment, with which there was unanimous judicial consent.

Interpretation of the LMA Terms

The starting point was condition 11.9(a) of the LMA Terms:

“Unless these conditions otherwise provide…

(a)  Any interest or fees (other than PIK interest) which are payable under the Credit Agreement in respect of the Purchased Assets and which are expressed to accrue by reference to the lapse of time shall, to the extent that they accrue in respect of the period before (and not including) the Settlement Date, be for the account of the Seller and, to the extent they accrue in respect of the period after (and including) the Settlement Date, be for the account of the Buyer.

(b)  All other fees shall, to the extent attributable to the Purchased Assets and payable after the Trade Date, be for the account of the Buyer.”

This condition broadly distinguishes between the treatment of interest and recurring fees other than PIK interest (dealt with in sub-paragraph (a)) and non-recurring fees (dealt with in sub-paragraph (b)).  The simple question was whether a payment premium is a “recurring” fee (as found at first instance in a surprising decision) [2].

Lord Reed said that although there is room for argument as to whether the payment premium would naturally be described as interest or fees, or fall within the definition of PIK interest, it is clear that it is not “expressed to accrue by reference to the lapse of time“.  Counsel for Tael had argued that this should be understood as meaning “calculated by reference to the lapse of time“, but Lord Reed said that “that is not what the condition says; and it is not the natural meaning of what it says“.

Although interest and time were taken into account when calculating the payment premium, this did not mean that it could be regarded, retrospectively, as having notionally accrued over that period – as Lord Reed said, “the method of calculation of the payment premium should not be confused with the accrual of the right to the premium“.

Lord Reed drew support for this conclusion from the commercial context, whereby an exit payment could become due long after a debt trade takes place.  The LMA terms do not provide the seller with the ability to determine the vesting of any right to payment which might later accrue.

While these considerations determined the appeal such that it was dismissed, Lord Reed continued to consider whether that meant that condition 11.9(a) was redundant or provided for an additional payment right.  The Court of Appeal, obiter, had considered the clause most likely to be redundant.

Both these possibilities were rejected.  Condition 11.9 and the distinction it draws between recurring fees and non-recurring fees is relevant to the payment provisions set out in clause 11.2 and 11.3 (those clauses both cross-referencing clause 11.9(a) when setting out amounts payable by the buyer).  So, for example, the practical effect of condition 11.3(a) is to require the buyer to pay the seller on the settlement date, an amount equal to interest or fees accruing prior to the settlement date, but not PIK interest and non–recurring fees payable after the trade date (i.e. those fees not falling within condition 11.9(a)).  Condition 11.9 thus determines which fees fall within those payable under the payment provisions, but does not contain a separate payment obligation [3].

Comment

While IRR based exit fees for lenders became somewhat fashionable for a time, they nevertheless are not standard fees in the context of term lending.  If they are included in the credit agreement, the ultimate amount the lender will receive on repayment or prepayment will, by definition, be uncertain at the outset of the loan and so will the appropriate transfer price if the loan is sold on.

 

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[1] The standard terms and conditions considered were those applicable to a par trade and transaction in respect of which the Trade Date occurs on or after 5 January 2009.  The equivalent condition (15.9) in the present terms and conditions for par and distressed trade transactions is materially the same.

[2] The term “recurring fee” was not used in the applicable LMA Terms for par trades, but was used in the then applicable terms for distressed trades and is used in the current LMA Terms to mean fees that are expressed to accrue by reference to time elapsed.

[3] The current terms and conditions have standalone definitions of Recurring Fees and Non-recurring Fees which are cross referenced in the relevant equivalent clauses and thus there would be a better argument that Condition 15.9(a) and (b) (the equivalent to the conditions 11.9 (a) and (b) being considered in this judgment) adds little to the drafting in Conditions 15.2 and 15.3.