The issues here centred on rights attaching to a particular class of loan note in a Commercial Mortgage-Backed Securities transaction. The structure involved the acquisition of loans secured upon income-generating commercial real estate by an SPV, which funded the acquisition of the loans through the issue of loan notes.

In this instance, the issuer issued eight series of notes, the proceeds of which were used to purchase a number of commercial European mortgage loans. One such loan was the ‘Nordostpark Mortgage Loan’ which was split into a senior loan and a junior loan. The senior loan was sold to the issuer and the junior loan was sold to other entities. The relationship between the issuer and the junior lender was governed by an intercreditor agreement.

Issues arose concerning a class of note (the Class X Note) and the correct computation of payments to be made to the holder of that note. In particular, the claimants contended that there was a mistake in certain definitions in the intercreditor agreement which should be corrected by construction or by necessary implication (adding further words).

The court also considered the issue of the penalty doctrine (albeit obiter) on the basis of the defendant’s argument that if underpayment of interest of the note triggered an obligation to pay Class X interest on the underpaid amount, such provision would be void as a penalty.



Snowden J re-examined the authorities on correction by construction and on implication and found there to be certain features common to both lines of authority:

  • the test that must be satisfied is a strict one;
  • “the court will not supply additional words or terms simply because it is reasonable to do so…”;
  • the court will only add words to the express terms of an agreement if the agreement is “incomplete or commercially incoherent” without them, and only if the court is certain “both that the absence of missing words was inadvertent, and that if the omission had been drawn to the attention of the parties at the time of contracting they would have agreed what additional provision should be made”.

Snowden J took the view that the definitions in question in the intercreditor agreement were not “mere boilerplate”, but instead were carefully constructed and central to the commercial deal being struck. He saw no obvious basis on which the court could conclude that the contracting parties might simply have failed to foresee the situation that had arisen. In other words, there had been no simple oversight or mistake.

It was judged impossible to reach a clear conclusion that the parties would, if asked at the time of contract, have adopted the additional wording suggested by Hayfin. On the authorities considered by the court, this uncertainty was deemed fatal to the contention that the alleged mistake could be corrected by construction, or that the claimant’s additional wording could be implied.


Snowden J expressed his views on the arguments surrounding penalties by way of obiter.

It was argued that the Class X interest rate should not be applied to unpaid amounts falling due under the loan notes, as the very large value of such rate would not give an appropriate level of compensation to the noteholder, but would instead give an “absurdly high” result, void and unenforceable as a penalty at common law.

The court referred to Cavendish Square Holdings v Makdessi, in which the Supreme Court affirmed that the penalty doctrine only applies to provisions of contracts that impose secondary obligations upon a party in the event of breach of his primary obligations. Snowden J, quoting Lord Neuberger and Lord Sumption, noted that “the real question…is whether it is penal, not whether it is a pre-estimate of loss”.

Snowden J concluded that if interest was payable at the Class X interest rate, the inevitable result which could have been anticipated at the time the contract was entered into would be a multiplication of the unpaid amount to reach a figure which would be many times the amount needed to adequately compensate the innocent party for being kept out of money. The focus here was solely on objective proportionality. The fact that the obligations of the issuer were imposed on a limited recourse basis provided no exception or defence.


This case is a useful reminder of the principles of interpretation summarised in M&S v BNP, as well as the detailed examination of the common law penalty doctrine in Cavendish Square.

Parties should be careful in their commercial negotiations as to what one might consider obvious, and wording should be placed into the contract to deal with any uncertainty which could potentially arise. Foresight in this instance will likely be the axe that deals the final blow to any argument on interpretation.