18 March 2016

Debt trading - a missing term? Case of Tael One Partners -v- Morgan Stanley

This article was written by Annie Williams (associate).

It would be wrong to imagine that because LMA terms are “standard” that they won’t be litigated (or that the English courts will “infer” a provision which is missing from them). 

In the case of Tael One Partners v Morgan Stanley & Co [2015], the Supreme Court looked at the LMA’s standard terms and conditions for par trade transactions. Tael sold a loan participation to Morgan Stanley. The underlying loan agreement provided for a “Payment Premium” to be paid upon full repayment or prepayment of the principal. Tael thought that it should be entitled to a proportion of the premium but  the purchase documentation entered into between Tael and Morgan Stanley (based on the LMA terms) did not specifically state which party should retain it. 

Tael argued that condition 11.9 (a) of the LMA terms entitled them to a share of the prepayment premium. This condition stipulated that interest or fees which “accrued… by reference to the lapse of time” would be for the account of the seller (Tael) to the extent they accrued before the Settlement Date. Was the Payment Premium covered by this provision?

At first instance, the High Court ruled in favour of Tael. The Payment Premium was, the judges thought, rather like interest and had “accrued” before the Settlement Date.  However, the Court of Appeal and, subsequently, the Supreme Court disagreed with the High Court’s approach. On a proper construction of the LMA terms, the Payment Premium had not “accrued” – it was instead a payment which was triggered by defined events, such as prepayment. Condition 11.9 therefore didn’t apply.

The Supreme Court was not willing to infer or “read in” an additional payment obligation regarding the premium. The LMA terms were a set of standard provisions designed to facilitate debt trading – it wasn’t appropriate for the court to imply new rights and obligations into those terms, especially where those rights and obligations would continue for a substantial period of time.

This case will come as something of a relief.  Prepayment premia are not included in all transactions but they are not unusual and market participants will have assumed that they were for the account of the buyer.

The LMA response

The LMA has published revised versions of its secondary debt trading documents, including amended terms and conditions and an updated User’s Guide. The new suite of documents went “live” on 16 December 2015. Some of the key changes to the terms and conditions include:

(i) a clarification as to allocation of responsibility for paying notarial fees and

(ii) confirmation that the buyer and seller do not act as trustee, fiduciary, agent or custodian for each other.

Further changes have been made in response to the Tael case. Condition 15.9  (the successor to condition 11.9) states, as previously, that interest and Recurring Fees are for the Seller’s account if they accrue before the Settlement Date and that Non-Recurring Fees are for the Buyer’s Account if they arise after the Trade Date. However, amendments have been made which highlight that this is subject to anything different agreed by the parties in the terms and conditions or the Agreed Terms.

Condition 15.9 also now includes provisions which clarify that interest and fees received by one party but which belong to the other party must be paid to the other party within two Business Days (subject to any clawback by the Agent). A further provision deals with Non-Cash Distributions, requiring the parties to re-transfer any receipt to which they are not entitled.

In the User’s Guide, the LMA has added a warning that if the underlying loan documentation includes unusual interest or fee arrangements which do not readily fit with the definitions used in the LMA’s standard terms, or if the parties want a different allocation to that proposed by the LMA, then it’s vital that the parties agree those alternative terms at the outset and record them on the trade confirmation. In other words, an unusual payment may not be catered for automatically by the LMA’s standard terms and it would be dangerous for any party to assume that those terms, however detailed and well drafted, necessarily reflect its intentions.

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