Facts
Decision
Comment


In a recent judgment,(1) the High Court found in favour of four investors who sued over the construction and application of a single provision in securities' documentation, which resulted in the Republic of Argentina being obliged to pay €1.33 billion to the bondholders plus interest.

Facts

The underlying dispute centred on a claim brought by four institutional and corporate investors against the Republic of Argentina (the Republic). The claim related to certain Euro-dominated securities issued by the Republic in two tranches, in 2005 and 2010 respectively, which are linked to its gross domestic product (GDP) (the securities) and whether an obligation to make a payment under the securities arose for the 2013 reference year (reference year 2013), and all the years after it.

The securities were first issued as part of a major sovereign debt restructuring in 2005, in the wake of a national financial crisis. Together, the 2005 and later 2010 debt exchanges represented the largest sovereign debt restructuring in history. Approximately 76% of the aggregate value of eligible securities were exchanged under the 2005 debt exchange, and the 2010 debt exchange raised the participation rate to over 91%. Since their issuance in 2005, the Republic has made payments under the securities totalling US$10 billion.

The Republic had introduced the concept of GDP-linked securities, which would provide bondholders with additional payments if the Republic grew at a higher than projected rate. Payment under the securities would only be triggered if certain payment conditions relating to the level and growth of GDP, compared to a base case for GDP (the base case GDP), were met.

This particular case turned on the construction of a single provision (the adjustment provision) on what was a complex contractual framework.

The securities contained a series of terms which linked payment to GDP. The securities called for a payment to be made annually in respect of each "reference year", but only if three conditions were met which were linked to the level and growth of the country's economy (the payment conditions). The base case GDP was critical for the first two of the conditions, namely the "level condition" and the "performance condition". The particular context in which the dispute arose concerned something known as "rebasing" from base year 1993 to base year 2004. The prices in each of these years (each known as a "base year") was known as a "year of base prices" (YOBP).

In the Republic, the base year for real GDP at the time the securities were issued was 1993. The Republic then engaged in a rebasing process which saw 1993 YOBP replaced by 2004 YOBP. That was because it was considered appropriate to periodically update the YOBP by which real GDP is measured in order to achieve a better measurement of the real economy through the making of adjustments for price, product and quality changes. It was common ground between the experts that a rebased measure of GDP is likely to be a closer estimate of true GDP than an older measure.

The dispute which gave rise to these proceedings concerned reference year 2013. The Republic concluded that, following the rebasing, the payment conditions had not been met for reference year 2013 and that no payment was due to the bondholders. In contrast, the claimants maintained that the payment conditions had been satisfied if the adjustment provision in the securities,(2) where there had been a rebasing, had been properly applied.

The claimants argued that the adjustment provision was clear: following a rebasing, base case GDP for each reference year was adjusted by a ratio, being the ratio of actual real GDP(3) in such reference year measured in the new YOBP, and actual real GDP in such reference year measured in 1993 YOBP.(4) The claimants said the adjustment provision was clear both in its terms and effect and that the Republic had failed to adjust the base case GDP by the fraction set out in the adjustment provision.(5) The claimants submitted that the wording was so clear that the claimants' construction did not entail a construction at all, but merely a reading of words which should be afforded their plain and natural meaning.

On the other hand, the Republic's case entailed a one-off adjustment to the levels of base case GDP, rescaling the entire series into the new year of base prices. Specifically, base case GDP for each reference year should be adjusted using a single fixed fraction applied to every year going forward. The Court found , in short, that the Republic took the position that the adjustment provision should be regarded as though it contained additional wording.(6)

Decision

During the course of the trial, the claimants and defendants advanced submissions by reference to a wealth of authority dealing with contractual construction. The Court summarised these extensively at paragraphs 127 to 151 of the judgment.

In regard to contractual interpretation, the Court held a unitary and iterative process should be adopted, even where there is no ambiguity in the words under consideration, which involves checking rival meanings against the provisions of the contract and considering the commercial consequences of competing interpretations.(7)

It was with those principles in mind that the Court endeavoured to carry out the iterative or unitary process. In conjunction, the Court also had regard to the factual matrix:(8)

  • the GDP-related concepts outlined in the judgment;
  • the fact the securities were issued against the background of a major economic crisis in the Republic which had been caused by an inability to keep up with debt repayments and that the fundamental purpose of the securities was to ensure the sustainability of payments for the Republic to stabilise its financial position and prevent another default; and
  • the fact that the intention behind the securities was that payments would only be made when the Argentine economy was growing at a sufficiently healthy rate and, conversely, they would not be made if the economy was not growing.

The Court ultimately agreed with the claimants' construction, for what was a simple reason: the Republic's interpretation required the adjustment provision to be read as though it contained additional wording which simply was not there. The Court held that even if it was satisfied there was a clear mistake in the parties' use of language, unless it was also clear what correction ought to be made to the provision, it could not correct that mistake.(9)

As the Court found in favour of the claimants, the Court found it was unnecessary to go on to consider an alternative case advanced by the claimants, which was that the Republic had acted in bad faith in producing certain GDP data in March 2014.

Finally, the Court found the trustee (the second defendant) was entitled to payment on behalf of all bondholders, but the claimants were entitled to an order for payment directly to them. If the Republic paid the claimants directly, it would also not be required to pay their proportionate share to the trustee.

Comment

This decision is a high-profile addition to the body of case law on contractual construction and interpretation. It is also a significant judgment for the Republic, which continues to face economic challenges. The Republic has indicated its intention to apply for permission to appeal the judgment.

For further information on this topic please contact Sinead Westaway or Simon Hart at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) Palladian Partners LP v Argentina [2023] EWHC 711 (Comm).

(2) Adjustment provision:

if the Year of Base Prices employed by INDEC for determining Actual Real GDP shall at any time be a calendar year other than the year 1993, then the Base Case GDP for each Reference Year shall be adjusted to reflect any such change in the Year of Base Prices by multiplying the Base Case GDP for such Reference Year (as set forth in chart above) by a fraction, the numerator of which shall be the Actual Real GDP for such Reference Year measured in constant prices of the Year of Base Prices, and the denominator of which shall be the Actual Real GDP for such Reference Year measured in constant 1993 prices.

(3) "Actual real GDP" meaning, for any reference year, "the gross domestic product of Argentina for such Reference Year measured in constant prices for the Year of Base Prices, as published by INDEC" (see [72]).

(4) See [199].

(5) See [199].

(6) See [121] – [126].

(7) See [129] – [137]. See also In re Sigma Finance Corpn [200] UKSC 2 [2010] All ER at [12] per Lord Mance.

(8) See [154] – [155].

(9) See [150] – [151].