LSREF III Wight Ltd v Millvalley Ltd3

Summary: The case concerned a restructured swap agreement that had mistakenly referred to the wrong version of the International Swaps and Derivatives Association (ISDA) Master Agreement. The High Court held that the drafting had not gone so wrong that there was a clear mistake that required correction. However, the agreement could be rectified as the parties had a continuing common intention about which version of the Master Agreement applied.

The Defendant was Millvalley Ltd, a private property development company based in the Isle of Man. The Claimant was LSREF III Wight Limited, a successor in title to the Irish Bank Resolution Corporation Ltd (IBRC).4

The Defendant wished to acquire property in Glasgow and, in order to finance this venture, the Defendant obtained a loan facility and an accompanying swap from the IBRC on 10 November 2006 (the Original Swap).

The Original Swap was subsequently confirmed in a long form swap confirmation on 2 January 2007 incorporating the terms of a 1992 ISDA Master Agreement.

The parties agreed to extend the Original Swap, following partial repayment of the loan by the Defendant, and executed a finalised 2002 ISDA Master Agreement and Schedule on 13 December 2011.

The key difference between the 1992 ISDA Master Agreement and 2002 ISDA Master Agreement was that the latter included additional termination events which gave rise to an entitlement on the part of the Claimant to terminate in the event of repayment of the loan.

Almost a year later, on 14 December 2012, IBRC and the Defendant entered into a restructured swap on the same commercial terms as the Original Swap (the Restructured Swap). The Restructured Swap was, like the Original Swap, a long form confirmation containing wording referring to the 1992 ISDA Master Agreement.

In June 2014, Millvalley repaid the loan in full earlier than agreed. IBRC was in liquidation and, relying on the additional termination events in the 2002 ISDA Master Agreement, terminated the Restructured Swap and assigned its claim to the Claimant.

In response, the Defendant asserted that the Restructured Swap was governed by the 1992 ISDA Master Agreement and, therefore, no early termination events were available to the Claimant.

Subsequently, the Claimant brought a claim seeking a declaration from the Court that, whether by way of construction or rectification, the Restructured Swap incorporated the 2002 ISDA Master Agreement and, consequently, the early termination amount was due and payable to the Claimant by the Defendant.

In summary, the issues before the court were whether:

  • the Restructured Swap was governed by the 1992 or 2002 ISDA Master Agreement
  • the Restructured Swap should be rectified so as to be subject to the 2002 ISDA Master  Agreement.

Construction

The judge made clear that the reference to the 1992 ISDA Master Agreement as part of the Restructured Swap was, on the facts, a mistake. He stated that there was no possible reason for changing the terms on which the extension of the swap had been agreed in 2011 and pointed to the fact that its inclusion was merely an administrative error on the part of IBRC.

The judge ultimately held that, as a matter of construction:

  • it could not be concluded that the parties’ objectively expressed intention had been for the Restructured Swap to be governed by the 2002 ISDA Master Agreement
  • it could not be said that something had gone so wrong with the language that there was a clear mistake that required correction
  • on the face of the documents, there was no ambiguity or difficulty in construing the language used and the reference to the 1992 ISDA Master Agreement could not be said to be such a commercial nonsense as to make it absurd for the parties to refer to it.

As a result, the court could not construe the Restructured Swap in such a way as to incorporate the 2002 ISDA Master Agreement.

Rectification

The judge highlighted that the requirements a party must show for rectification are those set out in Daventry District Council v Daventry & District Housing5, namely that:

  • the parties have a common continuing intention in respect of a particular matter in the instrument to be rectified
  • there was an outward expression of accord
  • the intention continued at the time of execution of the instrument
  • by mistake, the instrument did not reflect that common intention.

The parties’ common intention was to be ascertained objectively, by reference to what a hypothetical reasonable observer, aware of all the relevant facts known to both parties, would conclude the intentions of the parties to be.

The judge held that it was clear from the parties’ exchanges leading up to entry into the Restructured Swap that there was a common continuing intention and an outward expression of accord that the Restructured Swap should be governed by the 2002 ISDA Master Agreement.

As a result, the Restructured Swap was rectified to include express reference to the 2002 ISDA Master Agreement and the early termination amount was due and payable to the Claimant by the Defendant under the Restructured Swap with costs and interest.

It should be noted that the evidence demonstrating the intention of the parties to rely on the 2002 ISDA Master Agreement was overwhelming and that, as a result, this case should not encourage readers to rely on rectification to fix faulty drafting. By way of example, the Defendant and its solicitors actually relied on the 2002 ISDA Master Agreement in correspondence prior to the termination and the parties accepted that the 1992 ISDA Master Agreement was only referred to in the Restructured Swap due to an administrative error of IBRC.

Finally, the case highlights the importance of correctly wording swap confirmations. If parties fail to do so it can lead to costly litigation or, at worst, can bind them to an incorrect contract.