In this article, we survey recent litigation in capital markets featuring issues of contractual interpretation, drawing out some of the most interesting current issues and identifying key practice points.

The principles of construction of contracts in English law are now well established. The courts determine the intention of the parties objectively, asking not what their actual subjective intentions were, but rather what a reasonable person would have understood the common intention to be. The court uses the written terms of the contract as the primary source, reads the contract as a whole, takes into account the background facts and, in cases of ambiguity, is entitled to prefer the interpretation most consistent with business common sense.

However, what is of particular interest is how these general principles have been applied in recent capital markets cases.

Greenclose Ltd v National Westminster Bank plc[2014] EWHC 1156 (Ch)

In 2007, a family hotel business called Greenclose entered into an interest rate collar with the NatWest bank under a 1992 ISDA Master Agreement (the ‘1992 ISDA’). The bank had the right to extend the term of the collar. But, to do so, it had to give notice of the extension before 11 am on December 30, 2011.

The bank made various attempts to give notice on that date. An employee faxed the extension notice to Greenclose but this resulted in a failed transmission. The notice was sent by email but an out of office message was received in response. When the bank tried to telephone, there was no response from Greenclose’s office, it being closed for the Christmas period. Eventually, an employee resorted to leaving a message on the Managing Director’s mobile phone. A dispute ensued as to whether the bank had validly given notice to extend. This turned on the correct interpretation of the notice provisions found in Section 12 of the 1992 ISDA and the Schedule to the 1992 ISDA.

Section 12 of the 1992 ISDA states that:

‘12. Notices:

  1. Effectiveness. Any notice … in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated:


  1. if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form …;


  1. if sent by electronic messaging system, on the date that electronic message is received …’

The High Court found that the ways in which an effective notice could be given were limited to those permitted by Section 12 as supplemented by the Schedule. In other words, it was a mandatory, not a permissive provision. At first glance, this may seem surprising, given the use of the word ‘may’ in Section 12. But importantly, what drove the Court to this conclusion was reading the contract as a whole – one of the key general principles of contractual interpretation.

So, for example, the Court noted that the ISDA prohibits default and closeout notices being given by fax or electronic messaging system. It then reasoned that to apply a permissive construction to Section 12 would mean that such notices could be given verbally, which would make no sense because it would introduce uncertainty where certainty was paramount.

On the basis that Section 12 is a mandatory provision, the Court further concluded that:

  • neither fax nor email notices were permitted, because no fax or email notice details were contained in the parties’ ISDA Schedule
  • the ‘Electronic Messaging System’ provision in Section 12 did not provide for email notices but for SWIFT notices and the like
  • as Section 12 did not permit notices by telephone either, the bank’s notice was invalid and did not extend the collar.

This case thus provides a powerful example of the importance of following contractual notice provisions to the letter and a valuable demonstration of how English courts approach the interpretation of major standard form commercial contracts.

In particular, the Court noted that the ISDA Master Agreement is probably the most important standard market agreement in the financial world and that, as far as possible, it should be interpreted in a way that serves the objectives of clarity, certainty and predictability, so that the very large numbers of parties using it should know where they stand. In short, an English court should not be expected to creatively interpret major standard form contracts such as the ISDA Master Agreement.

The Court also noted that, because the ISDA Master Agreement is a standard form, it is permissible to take into account published explanatory notes such as the ISDA User’s Guide. Indeed, it drew support for its mandatory construction from phrases used in the ISDA User’s Guides. The Court also relied upon provisions of the 2002 ISDA Master Agreement (the ‘2002 ISDA’) in coming to the conclusion that the words ‘Electronic Messaging System’ in the 1992 ISDA are not intended to include email. For example, Section 12(a) of the 2002 ISDA provides separately for notices being sent by email and by electronic messaging system. Even though the 2002 ISDA was drafted long after the 1992 ISDA, the Court considered the 2002 ISDA and 2002 User’s Guide to be relevant, saying that it would be wrong to ignore any evidence that sheds light on how ISDA or the market interpreted the 1992 ISDA before the collar was entered into.

Napier Park v Harbourmaster Pro-Rata CLO 2 BV [2014] EWCA Civ 984

In this case, the High Court and Court of Appeal came to diametrically opposed conclusions, providing a powerful demonstration of the unpredictability of some interpretation cases.

The case concerned a collateralised loan obligation (CLO) in which some of the underlying loan obligations had matured early. The key issue in dispute was what should be done with the resulting cash proceeds. The transaction documents provided that they should be reinvested in further loan obligations, if the ratings of the Class A1 Notes (issued as part of the CLO) had not been downgraded below their Initial Ratings. Otherwise the proceeds were to be applied towards redemption of the Notes. The Class A1 Notes had initially been rated AAA; they were then downgraded to AA but were later upgraded back to AAA.

At first instance, the Chancellor of the High Court emphasised that, where contracts contemplate that rights and obligations may pass to persons other than the original contracting parties, such as with tradable financial instruments, certainty and clarity are key and that the Court should be particularly cautious about departing from the ordinary meaning of the words used. Against this background, the conclusion he reached was that the reinvestment criteria could no longer be satisfied, essentially because the ordinary meaning of the clause referred to a past event, not a continuing state of affairs. He drew further support for this conclusion by reference to other provisions in the transaction documents and expressed the view that there was simply insufficient admissible evidence to persuade him that his construction was contrary to the commercial purpose of the provision (which on one view could be argued to be the protection of senior noteholders at times when their notes were no longer rated AAA).

On appeal, the Court of Appeal disagreed that the reinvestment criteria unambiguously referred to a past event. It formed this view both on a grammatical basis and taking into account commercial considerations, which it emphasised were relevant to determining whether or not language is ambiguous. Instead, it considered that another potential interpretation was that the reinvestment criteria referred to something which is continuing (i.e. the language was ambiguous). Having reached this conclusion, the Court of Appeal was then able to determine which of the possible interpretations was most consistent with business common sense, which in its view favoured the continuing state of affairs interpretation. If, at the date on which the proceeds arose, the rating agencies had the highest level of confidence that the senior noteholders would be paid in full and on time (as conveyed by a AAA rating), the Court could not see why reinvestment would be absolutely prohibited due to an event which might have taken place years ago.

This outcome arguably appears to be more consistent with the likely commercial purpose of the provision. It also reflects a theme evident in some other contractual interpretation cases, namely that, at times, the appeal courts can appear more open to commercial purpose-type considerations. However, one of the consequences of this can be a sacrifice of predictability. Gone from the appeal judgment were the Chancellor’s words of caution about departing from the ordinary meaning of the words used.

US Bank Trustees Ltd v Titan Europe 2007-1 (NHP) Ltd [2014] EWHC 1189 (Ch)

US Bank v Titan concerned a securitisation transaction and raised the interesting question of what happens when provisions in the transaction documents conflict with the offering circular.

Under one of the transaction documents, what was defined as the ‘Controlling Party’ had the right to require the trustee to terminate the appointment of another party, the ‘Special Servicer’. The dispute arose when the junior noteholder sought to exercise this right, directing the trustee to terminate the appointment. This was opposed by other noteholders and so the trustee sought directions from the court via an expedited Part 8 claim. Like Napier Park, the dispute was effectively between different classes of noteholder.

One of the key questions the court had to determine was ‘who was the Controlling Party?’ The servicing agreement clearly provided that the Controlling Party was the issuer, whereas the offering circular indicated it was the junior noteholder. The court applied the definition contained in the servicing agreement, not the offering circular. It agreed that the offering circular was an important part of the factual matrix, against which the servicing agreement was to be construed, but it pointed out that the offering circular was not itself a contractual document. It also considered that the offering circular’s force as an aid to construction of the servicing agreement was minimised by a disclaimer in it that, in the event of a conflict, the terms of the contractual documents take precedence. The court was mindful of the importance of the offering circular to investors, but indicated that noteholders might have claims in respect of the offering circular instead (presumably under Section 90 of the Financial Services and Markets Act 2000).

As the junior noteholder was not therefore entitled to direct the termination of the Special Servicer’s appointment, in practice the remaining contractual interpretation issues fell away. However, the court nevertheless expressed its view on a further issue of interest. This related to a requirement in the servicing agreement to the effect that any termination of the Special Servicer’s appointment would only take effect if its successor had experience in servicing commercial property mortgages on similar terms and was approved by the issuer and the trustee.

The question for the court was whether, as the trustee submitted, the exercise of the trustee’s discretion here was limited to considering the experience of the proposed successor in servicing mortgages of commercial property or whether it ought also to take into account wider considerations. In view of the language of the provision in question, particularly the use of the word ‘and’, the court considered that it was clear that the clause involved two separate and distinct requirements. The role of the issuer and trustee was not limited to an assessment of the experience of the proposed successor. The court also considered this made good commercial sense, there being every reason why the parties should have intended that there should be a proper check on the suitability of the Special Servicer. Past experience was one factor that might be relevant, but there may be others such as whether it was subject to current financial or regulatory difficulties.

It is therefore clear for trustees and issuers faced with this type of provision that it is no rubber stamping exercise; a qualitative judgment has to be exercised. This may be a cause of disquiet to some trustees, not least because the court felt it inappropriate to provide a list of the issues to consider in all scenarios. The decision is currently the subject of an appeal.

Barclays Bank plc v Unicredit Bank AG [2014] EWCA Civ 302

Where a bank is granted a discretion which is required to be exercised ‘reasonably’, a debate sometimes arises as to the standard of reasonableness that applies: is the standard an objective one or, for example, is the bank required only to refrain from acting in a way that no reasonable bank would act (akin to a Wednesbury standard)? The Court of Appeal’s most recent pronouncements on the subject in Barclays v Unicredit suggest that, in practice, this debate may sometimes be somewhat academic.

Unicredit and Barclays entered into certain synthetic securitisation transactions. Unicredit had an optional termination right if a regulatory change occurred, provided that Barclays consented to the early termination. Such consent was to be determined in a commercially reasonable manner.

Two years later a regulatory change occurred and Unicredit sought Barclays’ consent to early termination. The court found that Barclays decided not to consent unless it was paid the balance of five years fees under the transactions, a substantial sum. So had Barclays exercised its discretion in a commercially reasonable manner?

At first instance, the Commercial Court essentially held ‘commercially reasonable’ meant reasonable in an objective sense and that Barclays had complied.

In contrast, the Court of Appeal found it unhelpful to debate whether the standard was objective, subjective or otherwise. Instead it preferred to look simply at the meaning of the particular clause in its particular context. Applying that approach, it considered the test to be whether Barclays demanded a price which was way above what it could reasonably have anticipated would have been a reasonable return from the contract. It also confirmed that Barclays was entitled to take into account its own interests in preference to Unicredit. If anything, the Court of Appeal thought its test accorded more with a Wednesbury standard. In any case, applying the test, it again found that Barclays had acted in a commercially reasonable manner.

The Court of Appeal’s conclusion on the meaning of ‘commercially reasonable’ was reached in a few brief paragraphs. While it noted that the words ‘commercially reasonable’ were used in many commercial contexts, it emphasised that the same interpretation would not necessarily apply elsewhere. Some may see this as a missed opportunity to have general Court of Appeal guidance on the meaning of this commercially significant phrase. However, it can also be seen as an indication that the debate as to whether an objective or Wednesbury standard of reasonableness applies may often be of less significance than might sometimes be assumed.

In any event, the judgment is likely to be welcome news to parties exercising these types of discretion, particularly given the Court of Appeal’s express indication that this is not intended to be a rigorous control and that the determining party can take into account its own commercial interests. Unicredit has lodged an application to appeal to the Supreme Court so the debate may yet continue.


Questions of contractual interpretation continue to provide the source of many disputes involving banks and financial institutions. The financial crisis and subsequent events have led to transaction documentation being tested in ways that may not have originally been envisaged. While the courts continue to apply the general principles outlined above and the creative interpretation of capital markets contracts is certainly not the norm, it is not always easy to predict how they will construe a particular provision.