Construction Of A Series Of Agreements

In Royal Bank of Scotland PLC v Highland Financial Partners LP & Ors [2010] EWCA Civ 809, the Court of Appeal considered points of construction of agreements entered into in respect of a proposed collateralised debt obligation. The Court subsequently considered issues of quantum.

During the course of 2006 and 2007, Royal Bank of Scotland PLC ("the Bank") and Highland Financial Partners LP and/or associated entities ("Highland") had entered into a number of agreements in respect of a proposed Collateralised Debt Obligation transaction ("CDO"). The CDO failed to close by the issue of securities because of the collapse of the financial markets in the latter part of 2008. The agreements between the Bank and Highland included a mandate letter (the "Mandate Letter"), a variable funding note purchase agreement (the "Financing Agreement") and an interim servicing deed (the "Interim Servicing Deed"). By these agreements (as varied), two of the roles assumed by the Bank were adviser to Highland for the issue of securities and financier of the CDO assets for their initial purchase and during the warehousing period.

A few key points to note about the agreements are: (1) the Mandate Letter gave both the Bank and Highland the right to terminate the Mandate Letter by notice at any time; (2) one of the events leading to a Termination Date (as defined) in the Interim Servicing Deed was the termination of the Mandate Letter; (3) if the Termination Date under the Interim Servicing Deed occurred prior to the closing of the CDO, the Bank could call for full repayment of advances it had made under the Financing Agreement. The significance of (3) was that in order to repay the advances, Highland was obliged to realise the assets in the CDO warehousing facility and then make up any shortfall between the sums realised and the total amount due to the Bank under the Financing Agreement.

On 30 October 2008, the Bank gave notice to terminate the Mandate Letter. The Bank contended that this gave rise to a Termination Date under the Interim Servicing Deed and that as this date occurred prior to the closing of the CDO, under the terms of the Interim Servicing Deed it triggered the obligation for Highland to pay the Bank any shortfall in covering the amount due to it under the Financing Agreement. The Bank therefore claimed the shortfall in the sum of EUR 40 million from Highland.

The Court of Appeal approached the construction of the agreements in accordance with the...