The recent High Court decision in Landesbank HessenThüringen Girozentrale and Others v Bayerische Landesbank London Branch is a helpful reminder of the need to take care when drafting loan agreements in which it is intended that one party play multiple roles, and of the need to express clearly where each creditor is intended to rank in the payment waterfall.


The case concerned the construction of a £400m facility agreement relating to the purchase of 30 St Mary Axe in London (more commonly known as ‘the Gherkin’).

As with many syndicated loan facilities, the loan facility started life with a single bank (Bayerische Landesbank, London Branch or BLB) adopting a number of roles in addition to that of lender including arranger; facility agent; security agent and hedging bank. As one would expect from a syndicated loan facility, the facility agreement’s terms drew a clear distinction between the various capacities in which BLB was acting. The facility agreement also required the borrowers to enter into a series of interest rate swaps (the hedging agreements) with BLB as hedging counterparty (defined in the facility documents as hedging lender). Although BLB as hedging lender was not a separate party to the facility agreement, at various places, the facility agreement recognised that it was also acting in that capacity.

Landesbank Hessen‑Thüringen Girozentrale (more commonly known as Helaba) and the other claimant banks became lenders under the facility agreement on its syndication in 2007. After the borrowers encountered financial difficulties, discussions took place between the syndicate members as to the lenders’ various restructuring and enforcement options. The borrowers were significantly out of the money under the swaps such that, if they were terminated around the date of the hearing, they would be liable to pay in the region of £138m to BLB under the swaps.

The Waterfall provision

The dispute concerned the manner in which BLB (as facility agent) would be required to distribute sums received from the borrowers or guarantors among the finance parties under the loan facility’s so‑called “payment waterfall”. The payment waterfall would apply in circumstances where the sums received from the borrowers would be insufficient to repay the finance parties in full. The clause in question (which was not in the standard Loan Market Association form) provided:

ʺ9.7: Application of Moneys

If any amount paid or recovered in relation to the liabilities of an Obligor under any Finance Document is less than the amount then due, the Facility Agent shall apply that amount against amounts outstanding under the Finance Documents in the following order:

  1. first, to any unpaid fees and reimbursement of unpaid expenses or costs (including break costs and hedging break costs) of the Facility Agent;
  2. second, to any unpaid fees and reimbursement of unpaid expenses of the Lenders;
  3. third, to unpaid interest;
  4. fourth, to unpaid principal; and
  5. fifth, to other amounts due under the Finance Documents.

In each case (other than (a)), pro rata to the outstanding amounts owing to the relevant Finance Parties under the Finance Documents taking into account any applications under this clause 9.7. Any such application by the Facility Agent will override any appropriation made by an Obligor.ʺ

The dispute concerned, specifically, the interpretation of clause 9.7(a) and the penultimate sentence of the clause.

The competing arguments

Having entered into various hedging arrangements of its own to manage its swap exposure, BLB sought to argue that “hedging break costs” in clause 9.7(a) would encompass its costs and expenses of restructuring or rebalancing those swap arrangements in the event of early termination of the borrowers’ hedging agreements. BLB further argued that, by virtue of the penultimate sentence in clause 9.7, reimbursement of those costs and expenses would rank ahead of principal and interest due to the lenders under the facility agreement.

At the heart of BLB’s submissions was the proposition that because BLB was the hedging lender and thus (unlike the other lenders) had a risk exposure under the hedging agreements, it was commercially sensible and reasonable that any sums paid by the borrowers or guarantors should inure to its benefit in priority to the other lenders and without BLB having to prorate any such sums with the other lenders pursuant to the penultimate sentence of clause 9.7.

BLB contended that the reference to the facility agent in clause 9.7(a) was shorthand for BLB generally (including in its capacity as hedging lender) and not limited to the costs or expenses incurred by BLB solely in its capacity as a facility agent for two reasons:

  • Firstly, by definition, the facility agent was only an agent and so it was suggested would not enter into any hedging arrangements or other arrangements in that capacity (a suggestion which the claimant banks denied) so would therefore not incur any “break costs and hedging break costs”. On that basis the words in brackets in clause 9.7(a) were meaningless and the court should resist a construction which rendered any part of the contract meaningless; and
  • Secondly, if the claimants banks’ construction was correct and clause 9.7(a) was limited to the unpaid fees, expenses and costs of BLB as facility agent, then if the borrowers or the guarantors made a payment upon early termination of the hedging agreements which was less than was due, that payment would not be for the benefit of BLB but would have to be pro‑rated with the other lenders, notwithstanding that:
    • it was BLB which had borne the commercial risk of the hedging agreements and the market hedging arrangements it had put in place to manage this risk; and
    • the payment was made under the hedging agreements.

BLB contended that the practical effect of the claimant banks’ construction (given the amount of principal and interest outstanding under the loan facility) would be that BLB would recover nothing in respect of the hedging break costs it would incur if it had to restructure its market hedging arrangements in the event of early termination of the borrowers’ swaps.

In contrast, the claimant banks submitted that the facility agreement clearly distinguished the different capacities and roles of the facility agent, security agent, hedging lender and lender even though at the time the agreement was made BLB fulfilled all of these roles. The claimant banks further submitted that BLB’s construction of clause 9.7(a) would encompass BLB as lender and, as such, BLB would have priority over the other lenders as regards any of its fees and expenses as lender, which was inconsistent with the other sub‑clauses of clause 9.7.


In a perhaps unsurprising judgment, Mr Justice Flaux favoured the claimant banks’ construction of the waterfall provision. In his opinion it was quite clear from the recitals and the other provisions in the facility agreement that BLB’s various capacities were clearly distinguished such that the phrase “facility agent” meant BLB in that capacity and not BLB in any wider capacity.

The facility agreement further contemplated that the identities of the facility agent and hedging lender might change during the life of the loan and BLB’s preferred construction of clause 9.7(a) would be unsustainable if this was to occur.

Clause 9.7(a) of the payment waterfall was concerned with giving priority to the reimbursement of the fees, costs and expenses incurred by the facility agent in carrying out this role as agent for the lenders. It made perfect commercial sense for the facility agent to recover these fees, costs and expenses in priority to the lenders, without having to pro‑rate them as it was acting as the lenders’ agent and they had undertaken to indemnify it under provisions elsewhere in the facility agreement.

Mr Justice Flaux rejected the suggestion that a facility agent could never incur liability for break costs under a hedging agreement. In any event, he held that in lengthy commercial contracts there will often be words or phrases which are superfluous or which have no obvious meaning. While the court will seek to avoid a construction which may render an entire clause meaningless or without effect, it will recognise the clear and obvious meaning of a clause despite the inclusion of some contingent or superfluous language.


Where the same entity is a party to a contract in more than one capacity, it is important that the contract expressly distinguishes between the various capacities in which that party is acting and accurately defines each capacity. In order to avoid ambiguity, any and all references to a party in a particular capacity should be by way of a defined term.

Waterfall provisions can often be contentious issues for syndicates especially in situations where a default has occurred and the loan transaction involves hedging arrangements. This case is a salutary reminder of the importance of clearly agreeing and documenting where payments relating to such hedging arrangements will rank in the payment waterfall, before or on early termination. While the English court has, in recent years, moved away from a literal interpretation approach towards a more contextual, or purposive approach to construing contracts, parties should be aware that the starting point for construction is still likely to be the literal approach.