The recent decision of the Court of Appeal in Credit Suisse Asset Management LLC v Titan Europe 2006-1 Plc [2016] EWCA Civ 1293 will be of interest both to finance lawyers and banking litigators whose practices touch on issues relating to commercial mortgage backed securitisation (CMBS”).

The majority of the Court of Appeal dismissed an appeal brought by the holder of so-called Class X notes in a CMBS structure (acting through its investment manager), upholding the High Court’s decision that the interest payable under such notes should be calculated by reference to the ordinary interest payable under the underlying loans, not by reference to any default interest triggered by a breach of the terms of those loans. The decision, whilst turning on the meaning of the terms and conditions of the particular CMBS, is also consistent with Hayfin Opal Luxco 3 S.A.R.L. v Windermere VII CMBS Plc [2016] EWHC 782 (Ch), which also dealt with (among other things) the issue of to whom default interest under a separate CMBS was to be paid. An appeal from that case was to have been heard in October 2016 had it not been settled.

In reaching its decision, the Court illustrated once again in the context of complex structured finance documentation that it will be reluctant to depart from the plain meaning of the language used by the parties, particularly in a bespoke agreement of this sort, unless the wording is ambiguous, in which case the more commercially likely outcome is to be preferred. However, the fact that the Court of Appeal was divided on the outcome shows how difficult this approach can be to apply in practice.

Factual Background

Titan Europe 2006-1 Plc (Titan”) was established as a special purpose corporate vehicle (SPV”) to acquire a portfolio of commercial loans from Credit Suisse International (the Originator”) and to issue the notes under the CMBS. Titan issued ten different classes of notes (A to H, X and V) for an aggregate nominal amount of approximately €723m. As is common in CMBS structures, Titan was established independently from the Originator so that the underlying loans would not impact on the regulatory capital ratios of the Originator. This structure meant that, if Titan was able to pay all of its noteholders the interest they were due, as well as extinguish any other liabilities, any surplus remaining would be paid to charity.

Under the CMBS documentation, the holders of the Class A to H notes were to receive a fixed rate coupon, based on a spread over the relevant reference rate reflecting their priority in the payment waterfall. The deal structure was premised on the basis that the total interest payments which would be payable on the Class A to H notes would be less than the interest payable on the underlying portfolio of loans. This meant that, if the entire underlying portfolio performed, there would be an excess of cash. The Class X notes enabled the Originator to retain the right to a share of these excess proceeds by entitling the holder to the payment by Titan of the difference between the rate of interest payable by the borrowers to Titan and the interest payable on the Class A to H notes. This payment structure is known as the “excess spread”. The claim was brought by Credit Suisse Asset Management LLC.

The terms and conditions of the notes provided that Class X notes would receive a “per annum interest rate” and the issue of interpretation was whether, in calculating the rate of interest payable by the borrowers to Titan for the purpose of determining the amount payable to Class X noteholders, account was to be taken only of the interest rate ordinarily payable by a borrower (the ordinary interest interpretation) or whether it included the additional interest payable under the terms of the underlying loans because of some breach of their terms (the default interest interpretation).

In his first instance decision, the Chancellor of the High Court considered that there were a number of contextual arguments which pointed in favour of the ordinary interest interpretation. He accepted as a powerful point that the consequence of this interpretation was that, in theory, a substantial sum might remain with the SPV (and therefore pass to charity) in the event that the default interest was not payable to the Class X noteholders. However, this was outweighed by the fact that, if a substantial proportion of the underlying loans performed badly and generated default interest payments, the Originator would receive the windfall which would be counter-intuitive in circumstances where the Class X note proceeds were the financial reward for its originating loans which were sound and produced the returns to support the structured note offering.


In her leading judgment, Her Honour Lady Justice Arden dismissed the appeal and agreed with the then Chancellor of the High Court. As a starting point, Arden LJ reiterated the correct approach to contractual interpretation, which was concerned with identifying the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”. To answer that question, the Court is to focus on the meaning of the relevant words in their documentary, factual and commercial context, in light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the contract, (iii) the overall purpose of the clause and the contract, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intention.

In common with the recent leading cases on the interpretation of complex financial documentation, Arden LJ emphasised the importance of the Court not to interfere with the ordinary meaning of the words used in an attempt to rewrite what might appear to be an unwise bargain. It was more appropriate to perform a cross-check of the natural meaning of any provision in issue against the commercial common sense of the provision but this must not lightly be given precedence over the natural, contextual meaning of the language which the parties used.

Arden LJ concluded that the per annum interest rate was a term which referred to an interest rate which had already been annualised, and which was referred to as such expressly or by implication elsewhere in the documentation (i.e. account was to be taken only of the interest rate ordinarily payable by a borrower). She reached this conclusion for four reasons:

  1. The underlying loans described in the Offering Circular were described as bearing a specified rate of interest “p.a.” (per annum).
  2. There was a conspicuous absence of directions for making calculations which included default interest.
  3. The use of the words per annum in the Offering Circular was associated with the ordinary interest rate rather than the default rate. The particulars of the underlying loans in the Offering Circular stated that “Default Rate” meant the excess of (i) the interest rate of such Loan that accrues upon a Loan Event of Default over (ii) the “Loan Interest Rate”; and “Loan Interest Rate”is stated to mean “the per annum rate at which interest accrues on a Loan without giving effect to its Default Rate”.
  4. A reasonable reader of the terms and conditions of the notes would know that it was possible that there would be default and that it was likely that default rate interest was payable. In those circumstances the reasonable reader would conclude that default interest rate was not included in the expression “per annum interest rate” because it was not mentioned.

Arden LJ cross-checked this against commercial logic and concluded that it was difficult to think of any commercial transaction when parties would intend to reward a person by reference to the default of a third person. Moreover she agreed with the Chancellor in finding that the counter-intuitive consequence of the default interest interpretation pointed strongly against that result. It was difficult to see why the Class X noteholders should have the benefit of default interest payable under the terms of the underlying loans free of any of the expenses related to the default, particularly where the proceeds from the Class X notes were the reward for the Originator’s historical contribution to the issue of the notes.

His Honour Lord Justice Briggs delivered the dissenting judgment. Whilst he did not dissent from the applicable principles, he concluded that the natural meaning of the critical phrase “the related per annum interest rate due on such Loan” was the per annum rate which included all of the interest contractually due as at the relevant payment date under the relevant loan agreement. As such, this amount included what could loosely be called “default interest” whenever that was, or was part of, the interest rate due as at that date.


This appeal provides an interesting application of what are now well-established principles of contractual interpretation to a relatively complicated formula in financial documentation. It is not the first such example (nor will it be the last), and it does not develop those principles to any great extent. However, the contrast between the outcomes of the application of those principles by two of our leading judges is a stark reminder of the risk which litigants face in finely balanced contractual interpretation cases. In his dissenting judgment, Lord Justice Briggs observed that, whilst English law assumes that every question of construction has a right and a wrong answer, in reality the question of interpretation provides as much room for reasonable differences of view as there are in questions about the exercise of discretion.

Harry Edwards
Harry Edwards
+44 20 7466 2221
Ben Steed
Ben Steed
Senior Associate
+44 20 7466 2647