The Supreme Court has unanimously rejected, in Tael One Partners Limited v Morgan Stanley & Co International PLC (11 March 2015), the contention that a party that sold part of its participation in a loan under the LMA Standard Terms and Conditions for Par Trade Transactions 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.
The Supreme Court’s decision affirms (albeit on slightly different grounds) the Court of Appeal’s judgment of 1 May 2013 (reported at  EWCA Civ 473).
Craig Pollack, Global Head of Litigation & Dispute Resolution at King & Wood Mallesons (who advised Morgan Stanley), commented:
“This decision will no doubt come as a relief to those who frequently trade debt in the secondary debt markets. Buyers and sellers of secondary debt now have more clarity on the proper interpretation of the LMA Standard Terms for Par Trade Transactions, and the Supreme Court has reaffirmed that the Courts of England and Wales will not approach the construction of standard contract terms in a manner that ignores the commercial realities of the parties’ relationship."
In 2010, Tael One Partners Limited (“Tael”) transferred part of its share in a syndicated loan to Morgan Stanley & Co International PLC (“Morgan Stanley”) in a transaction that incorporated the LMA Terms and Conditions for Par Trade Transactions (the “LMA Terms”). The original terms of the loan provided for payment of interest at a rate of 11.25% per annum, as well as payment of a payment premium by the borrower on prepayment or repayment of the loan. This payment premium enhanced the rate of return to lenders to a total of either 17% or 20%, depending on the circumstances of repayment or prepayment.
Following prepayment of the loan by the borrower, 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 in 2010. This was despite Morgan Stanley having itself subsequently transferred on that share of the loan to a third party and, as it was no longer a lender of record, had not received any part of the payment premium. 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 originally upheld by the Commercial Court (Popplewell J) at first instance, on the basis that the payment premium was “similar” to interest and performed an analogous function. The Court concluded that the payment premium fell within the category of “fees….which are expressed to accrue by reference to the lapse of time". On appeal by Morgan Stanley, the Court of Appeal agreed that the payment premium was an amount which accrued by reference to time elapsed. However, it overturned the first instance judgment on the basis that it required an interpretation of the LMA Terms that was commercially unrealistic (including the lack of a “clean break” between the buyer and seller of the debt and the need to imply significant terms into the sale agreement and each sub-sale).
Supreme Court judgment
The Supreme Court went one stage further than the Court of Appeal and rejected Tael’s appeal on the basis that the premium payment was not a sum that accrued “by reference to the lapse of time”.
It 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. Lord Reed, delivering the judgment of the Supreme Court, commented that it is "significant" that the LMA Terms do not make provision for any mechanism enabling the alleged holder of a right to a payment premium, following the sale of their interest in the underlying loan, to know when the loan has been repaid, and therefore when and what amount they are entitled to receive (unless, as was the case with Tael, they happen to have retained ownership of part of the loan).
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. It noted 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”.
Those who have been monitoring the case will no doubt appreciate the clarity that the Supreme Court’s judgment has now provided as to the proper interpretation of the LMA Terms.