The High Court’s recent judgment in Palladian Partners LP & Ors v The Republic of Argentina & Anor [2020] EWHC 1946 (Comm) is an interesting and high profile addition to the body of case law on the interpretation of complex financial instruments, here the terms and conditions applicable to euro-denominated government bonds issued by the Republic of Argentina in 2005 and 2010, as part of a restructuring which gave creditors of the Republic 25-35% of what they were originally owed.

The underlying dispute centres on a claim brought by three investment funds against the Republic on the basis that the Argentinian government allegedly improperly changed the baseline of the securities (referenced to the Republic’s GDP) used to calculate the amount due to the holders of the securities and declared that the relevant performance condition for payment was not met.

Applying established principles of contractual construction, the court refused to grant the Republic reverse summary judgment on the effect of two payment provisions in the terms and conditions applicable to the securities. The Republic contended that these clauses meant that the holders of the securities were bound by all calculations performed by the Argentinian Ministry of Economy in determining payment, and the claimants were therefore bound by its determination that the relevant performance condition for payment was not met.

The court did not accept that the Republic had the better of the arguments on the merits of the simple construction exercise, and stated that – in any event – this was not a case where the court could grasp the nettle and grant judgment in the Republic’s favour. It is a reminder that, while the court is willing to consider questions of contractual interpretation without the need for a full trial in an appropriate case; certain factors will make cases less likely to be suitable for summary determination, such as where the construction argument is hinged on commercial purpose for success.

Background

The claimants are holders of the Republic’s euro-denominated securities. As per the terms and conditions applicable to the securities, the Republic is required to pay to the holders annually an amount linked to the Republic’s GDP, subject to certain conditions being satisfied. The claimants brought a claim against the Republic alleging that in 2013 the Republic had incorrectly decided that no payment was due to the holders because one of the conditions for payment under the terms and conditions, that the actual GDP growth in that year is higher than the base case GDP growth (the “Performance Condition”), had not been satisfied.

The claimants allege that when the Republic rebased the securities in 2013 and changed the baseline of the securities from 1993 to 2004, it failed to adjust the base case GDP (calculated based on 1993 prices and a factor in determining if the Performance Condition is met) by the fraction set out in the terms and conditions (the “Adjustment Provision”). The claimants’ case is that if the Republic had applied the Adjustment Provision to the base case GDP, then the Performance Condition would have been satisfied, which consequently would have required the Republic to calculate the amount due to the holders of the securities (the “Payment Amount”). The claimants allege that this would have resulted in a payment of €525-€645 million to them.

In connection with the above litigation, the Republic made the following two applications –

  1. For summary judgment – the Republic’s contention was that on the proper construction of the terms and conditions, the Ministry of Economy’s determination that no payment was due to the holders of the securities in 2013 is binding on the claimants, unless they have properly pleaded and can prove bad faith, wilful misconduct or manifest error on the part of the Ministry of Economy. Therefore, if the court agreed with the Republic that under the terms and conditions the claimants were bound by the determination made by the Ministry of Economy that the Performance Condition was not met, then the claimants’ underlying claim (including in relation to the application of the Adjustment Provision to the base case GDP) falls away.
  2. To strike out the claim – the Republic’s argument was that the claimants’ secondary allegation of bad faith, wilful misconduct and / or manifest error is not properly pleaded and is therefore defective.

Decision

The High Court (Cockerill J) dismissed both applications.

(1) Application for summary judgment

The Republic’s application for summary judgment turned on the proper construction of two instances of what were termed as the “Binding Effect Provisions” in the terms and conditions. The first instance is in the definition of Payment Amount (emphasis added):

All calculations made by the Ministry of Economy hereunder shall be binding on … all Holders absent bad faith, wilful misconduct or manifest error on the part of the Ministry of Economy”.

The other instance is in the definition of Excess GDP (a form of GDP used in the calculation of the Payment Amount) which provides that:

All calculations necessary to determine Excess GDP … will be performed by the Ministry of Economy … and such calculations shall be binding on … all Holders of this Security, absent bad faith, wilful misconduct or manifest error on the part of the Ministry of Economy”.

The Republic argued that the Binding Effect Provisions applied to all the calculations made by the Ministry of Economy in determining the Payment Amount (including the base case GDP and the Performance Condition) and not just the calculations found in the definitions of Payment Amount and Excess GDP.

The court did not accept that the Republic had the better of the arguments on the merits of the construction exercise, and stated that – in any event – this was not a case where the court could grasp the nettle and grant judgment in the Republic’s favour. In refusing summary judgment, the key observations made by the court on the question of contractual construction of the terms and conditions of the securities were as follows:

  • The court held that on a simple reading of the Binding Effect Provisions, they are intended to cover only the calculations described in the Payment Amount and Excess GDP provisions as they are not free-standing provisions but tail-end the respective definitions. The court noted that if sophisticated legally-advised parties intended the Binding Effect Provisions to have general effect, they would have included them as a separate provision. This was further bolstered by the fact that the terms and conditions included provisions that were meant to have general effect as stand-alone provisions, for instance, general limitation of liability provisions.
  • In terms of the wider context, the court considered there to be a real distinction between the wording in relation to the satisfaction of the conditions and the calculation of the Payment Amount, which further weakened the Republic’s argument. The Payment Amount is expressly stated to be subject to the conditions. The conditions are then presented separately and are expressed in terms of entitlement and conditionality, not calculation.
  • Further, though not considered in detail given the conclusions reached in the previous paragraphs, the court preferred the claimants’ argument that the Binding Effect Provisions used classical words of exception, and would therefore need to be subject to a strict approach to construction.
  • The court also considered that the Republic’s commercial purpose argument, that a comprehensive Binding Effect Provision was required to promote certainty against a background where many of the holders had bought the securities long after they were issued and where the determination of the Payment Amount requires a number of calculations, was not one which was suitable for a summary determination.

Accordingly, the court found that the claimants had the better of the arguments in relation to the interpretation of the Binding Effect Provisions and dismissed the Republic’s summary judgment application.

(2) Application to strike out the claim

The Republic’s strike out application fell away as it was contingent on the court’s ruling on the summary judgment application. However, the court still considered the application briefly. In summary, the court did not accept the Republic’s contention that at the pleading stage, reference to a specific person who made an error or acted in bad faith or engaged in wilful misconduct is necessary. In the context of fraud, the court relied on the authorities to state that at the pleading stage what is required is not a pleaded set of facts which lacks any other possible explanation than fraud, but rather the pleading of facts which, if proved at trial, tilt the balance towards justifying a plea of fraud.

Simon Clarke
Simon Clarke
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Ceri Morgan
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Mannat Sabhikhi
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