Tael One Partners Ltd v Morgan Stanley & Co International PLC [2015] UKSC 12

Tael transferred part of its participation in a syndicated loan to Morgan Stanley under LMA standard terms. When the loan was later repaid with a payment premium, Tael claimed the portion attributable to the pre-transfer period. The Supreme Court dismissed Tael's appeal, holding the premium did not accrue by reference to lapse of time.

Facts

Under a 2009 facility agreement, Tael participated in a US$100m syndicated loan to Finspace SA. The loan carried interest at 11.25% per annum payable quarterly, but also provided for a ‘Payment Premium’ payable on repayment or prepayment, which enhanced the lender’s total internal rate of return to 17% or 20% per annum depending on circumstances.

In January 2010, Tael transferred US$11m of its US$32m participation to Morgan Stanley under a contract incorporating the Loan Market Association’s standard terms and conditions for par trade transactions (‘the LMA terms’). The purchase price letter provided for payment of US$11m plus accrued interest of US$309,375 for the period 16 October 2009 to 14 January 2010, but made no provision for any payment in respect of the payment premium.

Morgan Stanley subsequently sold its participation to Spinnaker. In December 2010 the borrower refinanced and prepaid the loan in full, paying the payment premium to the lenders of record (which included Tael in respect of its retained participation, and Spinnaker, but not Morgan Stanley). Tael claimed Morgan Stanley was required by the LMA terms to pay it the portion of the payment premium attributable to its US$11m transferred participation, to the extent accrued as at 14 January 2010.

Issues

The appeal raised a question of contractual interpretation: whether, on the proper construction of the LMA terms (and in particular condition 11.9(a)), the payment premium was ‘interest or fees… which are expressed to accrue by reference to the lapse of time’ such that, to the extent attributable to the period before the settlement date, it was ‘for the account of’ Tael as seller, and recoverable from Morgan Stanley as buyer.

Arguments

Tael’s case

Tael argued that the payment premium functioned as part of the consideration for the lender’s provision of money over time, that ‘expressed to accrue by reference to the lapse of time’ should be read as meaning ‘calculated by reference to the lapse of time’, and that the portion of the premium attributable to the period before 14 January 2010 fell within condition 11.9(a) as being ‘for the account of the Seller’.

Morgan Stanley’s case

Morgan Stanley argued that the payment premium did not accrue by reference to the lapse of time but on the occurrence of a defined event (repayment or prepayment); that condition 11.9(a) was concerned with allocation rather than the creation of independent rights to payment; and that the construction urged by Tael would produce commercial inconvenience in a market in which loans are traded many times.

Judgment

The Supreme Court (Lord Reed giving the judgment with which Lord Neuberger, Lord Kerr, Lord Toulson and Lord Hodge agreed) dismissed the appeal and upheld the decision of the Court of Appeal, though for somewhat different reasons.

Meaning of ‘accrue by reference to the lapse of time’

Lord Reed held that the payment premium was not ‘expressed to accrue by reference to the lapse of time’ within condition 11.9(a). The word ‘accrue’ is generally used to describe the coming into being of a right or obligation. Although time entered into the calculation of the premium, that was not the same as the right to the premium accruing over time. An entitlement to the payment premium under the facility agreement accrued on a defined event (repayment or prepayment), not from day to day. The method of calculation of the premium should not be confused with the accrual of the right to the premium.

Commercial context

This textual conclusion was reinforced by the commercial context. The LMA terms are intended for a market in which loans are traded many times between many parties over years. One would not readily infer that such a contract was intended to create continuing rights and obligations in respect of payment over substantial periods. Significantly, the LMA terms contain no mechanism enabling a former holder to know when its putative right to a payment premium had vested or in what amount. It was more natural to expect the potential value of any such right to be reflected in the consideration paid for the transfer of the loan.

Role of condition 11.9(a)

Lord Reed clarified that condition 11.9(a) is not redundant on this construction: it operates together with conditions 11.2, 11.3 and 11.9(b) to allocate interest and fees as between seller and buyer, providing an exhaustive allocation (other than for PIK interest). However, condition 11.9(a) does not itself confer a right to payment additional to that conferred by the other provisions of condition 11. It allocates amounts as being ‘for the account of’ one party, while the obligation to ‘pay’ is imposed by other conditions. The absence in condition 11.9 of any provision for payment, and of any provisions addressing borrower default analogous to conditions 11.2(b) and 11.3(c), confirmed that it was not intended to impose an independent payment obligation.

Implications

The decision provides important guidance on the construction of the widely used LMA standard terms for par trade transactions in the secondary loan market. The Supreme Court has confirmed that a ‘payment premium’ of the kind in issue here, whose entitlement crystallises on a defined repayment event and whose amount cannot be ascertained until that event occurs, does not accrue by reference to the lapse of time within condition 11.9(a), even if time enters into its calculation.

The judgment draws a clear distinction between the accrual of a right and the method by which a sum is calculated. It also clarifies that condition 11.9(a) is an allocation provision operating alongside the payment provisions in conditions 11.2, 11.3, 11.5 and 11.6, rather than an independent source of payment obligations.

Practically, the decision is significant for participants in the secondary loan market: where lenders sell their participations, any value attributable to a contingent payment premium will not, absent specific contractual provision, be recoverable from the buyer after the loan is repaid. Sellers wishing to preserve such value should reflect it in the consideration for the transfer or make express contractual provision. The decision underscores the importance, in standardised market documentation, of certainty and finality of allocation at the point of trade, and the courts’ reluctance to construe such standard terms as creating continuing post-sale obligations between parties in a market characterised by frequent onward trading.

Verdict: Appeal dismissed. The Supreme Court upheld the decision of the Court of Appeal, holding that the payment premium was not ‘expressed to accrue by reference to the lapse of time’ within condition 11.9(a) of the LMA terms, and that Morgan Stanley was not liable to pay Tael any portion of the payment premium.

Source: Tael One Partners Ltd v Morgan Stanley & Co International PLC [2015] UKSC 12