Credit Suisse Asset Management LLC v Titan Europe 2006-1 PLC & Ors

This appeal is about the extent of the interest entitlement of the Class X Notes issued by the first respondent (“Titan”) as part of a commercial mortgage-backed securitisation (“CMBS”). The Class X Notes are one of a series of ten classes of Notes consisting of Classes A to H, Class X and Class V. The aggregate nominal amount of the Notes exceeds €723m. The appeal involves the interpretation of the terms and conditions (“Ts & Cs”) applying to all classes of the Notes and setting out the rights of each class. The right of the Class X Notes to interest is different from that of other classes of the Notes and, as it has priority for payment of interest and capital over all other classes of the Notes other than Class A, the extent of its entitlement will affect other classes of Notes. We are not concerned with the Class V Notes, nor are we concerned with the actions which have been heard with the first action as the issues in this case will decide the issues in those cases also.

Titan is a special purpose corporate vehicle (a “SPV”) which was set up to acquire a portfolio of commercial loans (“underlying loans”), secured on property, from Credit Suisse International (“the originator”). They carry a fixed rate of interest save for one loan on which ordinarily interest is payable at Euribor plus 1.7% p.a.. Titan bought the portfolio out of the monies raised by the issue of the Notes in 2006. The originator issued a prospectus (“the Offering Circular”), and the subscribers of the original Notes made their decision to invest in the Notes in the light of this document. Classes A to H of the Notes have a fixed rate coupon. That coupon is less than interest payable on the underlying loans, so on paper at least Titan makes a profit. The Class X Notes enable the originator to retain the right to a share of that profit. Consistently with this purpose, the nominal amount of the Class X Notes is small: the originator subscribed a mere €50,000 for the Class X Notes. The current holder of the Class X notes is Credit Suisse Securitised Products Master Fund Limited, (the “Fund”) a Cayman entity which is the sole or partial holder of the Class X Notes in each of the Appeals. The appellant, Credit Suisse Asset Management LLC (“CSAM”), is the investment manager for, and acts on behalf of, the Fund.

So the Class X Notes essentially entitle the holders to the payment by Titan, subject to the payment of certain administrative expenses, of the difference between the rate of interest payable by the borrowers to Titan and the interest payable on the Class A to H Notes. This structure is not uncommon, and the difference is known as the “excess spread,” but there is no established formula for the entitlement of Class X Notes: see generally Nassar Hussain, Legacy of European CRE Lending, The Lessons Learned During The Downturn and CMBS 2.0 Commercial Mortgage Loans and CMBS: Developments in the European Market (second edition, Sweet & Maxwell, 2012) ed. AV Peterson at pages 90 to 91, and K. Betz-Vais, The Loan Origination Process in the third edition (Sweet & Maxwell, 2016) at pages 80 to 81. The issue on this appeal is, put simply, whether, in calculating the rate of interest payable by the borrowers to Titan for this purpose, account is taken only of the interest rate (“the ordinary interest rate”) ordinarily payable by the borrower or whether it includes the additional interest (“default interest”) payable under the terms of the underlying loans because of some breach of their terms. I will call the first interpretation the “ordinary interest only interpretation” and the latter interpretation “the default interest interpretation”. If the latter interpretation is correct, CSAM receives more than it otherwise would, and less will be available for distribution to the holders of the other classes of Notes than under the ordinary interest only interpretation because the funds available to the Class A to H Noteholders are reduced by making a larger payment to CSAM.

For the reasons given below, I conclude that the ordinary interest only interpretation is correct on the natural meaning of the language used, and that that result is compatible with the commercial logic of the transaction. I have reached the same conclusion as the Chancellor did in his judgment dated 28 April 2016, from which CSAM now appeals, though in part using different reasoning as I shall explain below. The judgment proceeds by summarising the background (the documentation used for the CMBS, explaining the significance of Titan being an “orphan” vehicle, summarising the relevant provisions about the Class X Interest Rate), and the principal points made by the Chancellor, and then by discussing the key reasons for my conclusion.

While the borrowers were not in default at the date the Notes were issued, there was substantial default by the borrowers following the global financial crisis in 2008. Titan now has insufficient funds to pay all the interest due on the Notes. Where borrowers have defaulted or become insolvent, Titan’s funds also stand to be further reduced by extra fees it has to pay for servicing the underlying loans, and liquidation fees.

I have summarised this in Appendix 1 to this judgment.

The originator set Titan up to be totally independent of it: as the term goes, it is an “orphan” vehicle. It is ultimately owned by charitable trusts. This is not unusual in a CMBS. It is commonly done so that the originator does not have to show the loans in its financial statements with implications for its capital ratios.

This means that any surplus remaining in Titan after it has paid all the payments which it needs to make on the Notes, and its other liabilities, goes to charity.

CSAM contends that as a commercial matter an interpretation which avoids this result is to be preferred.

I stated at the outset of this judgment that the Class X Notes essentially entitled the holders, subject to the payment of certain administrative expenses, to interest representing the difference between the rate of interest payable by the borrowers to Titan on the underlying loans, and the interest payable on the Class A to H Notes, i.e. the Notes other than the Class X and Class V Notes. The machinery that achieves this purpose is in condition 5 of the Ts & Cs, and it is complex. Under condition 5(c) of the Ts & Cs, the Class X Notes are entitled to interest at “the Class X Interest Rate”. This has to be calculated by the Agent Bank for every Payment Date. The Class X Interest Rate for any Payment Date is a “per annum interest rate” to be determined by a particular fraction. Not all the details of the fraction need to be considered on this appeal. The important feature of the fraction for present purposes is its numerator, which is the product of (i) the principal due on the underlying loans at the end of the interest period on the loans next before the payment of interest on the Class X Notes and (ii) “the Class X Net Weighted Average Strip Rate” (“the Strip Rate”). The denominator was the nominal amount of the Class X Notes.

The relevant provision reads:

The “Class X Interest Rate” for any Payment Date is a per annum rate expressed as a percentage calculated as follows: (a) the product of: (i) the aggregate outstanding principal balance of the Loans as at the beginning of the related Interest Accrual Period expiring immediately before such Payment Date and (ii) the Class X Net Weighted Average Strip Rate, divided by (b) the Principal Amount Outstanding on the Class X Notes immediately before such Payment Date.

The Strip Rate is separately defined. It also refers to the interest rate as a “per annum rate”. The definition goes on to refer to the Net WAC Rate which is also separately defined. That definition uses the expression “Net Mortgage Rate”, which is also separately defined and also refers to the “per annum interest rate”. The three definitions (referred to below as “the three definitions”), in the order in which they appear in the Ts & Cs, are as follows:

The “Class X Net Weighed Average Strip Rate” with respect to any Payment Date will be a per annum rate equal to the excess, if any, of (x) the Net WAC Rate for the related Interest Accrual Period over (y) the weighted average of the Rates of Interest of the Notes (other than Class X Notes and the Class V Notes) (weighted on the basis of the respective Principal Amount Outstanding of such Classes immediately prior to such Payment Date).

The “Net Mortgage Rate” for any Loan, with respect to any Payment Date is equal to (a) the related per annum interest rate due on such Loan (which, with respect to each Loan, is the interest after giving effect to the related Interest Rate Swap Transaction) less (b) the Administrative Cost Rate.

The “Net WAC Rate” with respect to any Payment Date is equal to the weighted average of the Net Mortgage Rates for the Loans weighted on the basis of their respective principal balances as at the preceding Payment Date (after deducting any losses realised on the Loans during the Collection Period immediately preceding such Payment Date upon a Final Recoverability Determination by the Special Servicer) or in the case of the first Payment Date, the first day of the related Interest Accrual Period.

Thus the Strip Rate is again a “per annum rate” equal to the excess of the “Net WAC Rate” (WAC stands for “weighted average coupon”) over the weighted average of the rates of interest on the Notes. We are not concerned with that calculation. 

The definition of Net Mortgage Rate ends with a reference to the “Administrative Cost Rate”. There are detailed provisions which enable the lender’s expenses related to the underlying loans to be allocated to a particular period. Administrative expenses attributable to the loans are worked out by dividing the expenses by the principal of the loans.

The Chancellor began with a number of preliminary points with which I agree. The Chancellor held that the decision turned on the meaning of the words “the related per annum interest rate due on such loan” in the definition of “Net Mortgage Rate”. He accepted that default interest is “interest” and that the words “interest rate” includes the default interest rate. He also accepted that it is possible to calculate a per annum interest rate taking into account default interest on unpaid periodic interest with capital repayments. He also accepted that the parties could have made it clear that the interest rate due on the loan did not include an additional default rate by incorporating the definition of Loan Interest Rate. The expression “Loan Interest Rate” is defined in the Master Definitions Schedule as meaning “the per annum rate at which interest accrues on a Loan without giving effect to its Default Rate.” I agree with all these points.

Against those matters, however, the Chancellor considered that several matters would have reasonably led the informed reader to understand that, giving the words their natural and ordinary meaning, the expression “per annum interest rate” was not intended to include default interest. Those matters were:

The Chancellor then considered which interpretation was most likely to carry the commercial outcome intended by the parties in the light of the admissible background facts, the overall scheme of the Notes and the particular provisions contained in them and the documents forming part of the same structure.

CSAM argued that the effect of the ordinary interest only interpretation could lead to substantial sums remaining with the SPV and thus going to charity, and that this was never intended. The Chancellor considered that this was a powerful argument but he concluded that it was outweighed by the fact that, if CSAM was right, then

the worse the Loans perform the higher proportion of the Loan income is payable to the Class X Noteholder. That is counter-intuitive bearing in the mind that the Class X Notes represent the financial reward to the Originator of the structured note offering, which was intended to attract investors on the basis that the Loans were sound and shown to be such by favourable Moody’s ratings for the Notes. ([55])

That point was underscored by its non-disclosure in the Offering Circular. The Class X Interest Rate was fixed by reference to interest that was due to Titan under the terms of the underlying loans, and that supported the view that the Offering Circular proceeded on the basis that the loans would be performed.

It was common ground that no-one envisaged default on the scale that had occurred. The existence of the priority in the waterfall for payments to different classes of noteholder demonstrated merely that the parties were aware of the possibility of some default.

The Chancellor considered that the provision was sufficiently clear without the need for a specific exclusion of default interest as in the case of the definition of Loan Interest Rate. He also gave a number of subsidiary reasons which I have summarised in Appendix 2 below.

There are two elements to this discussion: the principles to be applied to the issue on this appeal and then my application of those principles to the documentation we have to interpret on this appeal.

The principles of interpretation to be applied to the issue on this appeal

Courts, when interpreting contracts, must do so in accordance with established principles. Even though counsel did not spend time on these principles when making their oral submissions, I propose to state the principles that I have applied in reaching my conclusions.

The general approach that courts should adopt when called on to interpret a document was described most recently by Lord Neuberger in Arnold v Britton [2015] AC 1619. This case concerned the calculation of service charges payable under leases for holiday chalets. At paragraph 15, Lord Neuberger said:

When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”, to quote Lord Hoffmann in Chartbrook , para 14. And it does so by focussing on the meaning of the relevant words … in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions.

Paragraph 15 of Lord Neuberger’s judgment set out above was set out by the Chancellor in his judgment. It reaffirms the need to find the contextual meaning of the parties’ words. In other words, the meaning of a word is not necessarily restricted to its dictionary meaning. The context may for instance indicate that the meaning given to a word by the parties may be more focussed than its dictionary meaning.

Lord Neuberger elucidated this principle by articulating a number of further factors relevant to the leases in issue in that case, but, as neither party relied on these factors, it is sufficient for me to summarise only those that might apply here. Lord Neuberger emphasised the importance of the language of the provision and stated that commercial common sense could not be used to “undervalue the importance of the language” which the parties had chosen ([17]). He described commercial common sense as a “very important factor” but stressed that it had to be considered as it would have been perceived by the parties or a reasonable person at the date of the contract, not with the benefit of hindsight. So the court should be cautious about departing from the natural meaning of a provision simply because it produced a very imprudent bargain for the parties ([19], [20]).

An important point made by Lord Neuberger is that the court should not attempt to rewrite a contract simply to avoid a party being bound by an unwise bargain. So it is not open to this Court in this case to interpret the terms simply to prevent (say) the Noteholders other than the Class X Noteholders being tied into terms that greatly prejudice their position under the waterfall.

Indeed, it is a fundamental principle of English contract law, known as the principle of party autonomy, that in general parties are free to make the contract which they choose to make.  It follows from this that the court will not rewrite the parties' bargain. The task of the court is true construction of what they have expressed in their contract, though (and this is a point I make, not Lord Neuberger), because of the imperfections of language, there may on occasions be “obvious interstices in what is expressed which have to be filled up” (per Lord Wright, Luxor (Eastbourne) v Cooper [1941] AC 108, 138).

Furthermore, no-one has suggested in this case that there is some surrounding circumstance apart from the other documentation involved in the CMBS that falls to be taken into account, so I need not consider to what extent such circumstances are admissible in the interpretation of the contract between Titan and the trustee on behalf of the Noteholders. The Offering Circular is not a mere “surrounding circumstance” because the Notes were issued on the basis of it. Moreover, it would be available for reference by subsequent purchasers of Notes.

There are some special considerations applying to the Offering Circular. A purchaser of the Notes was entitled to expect that the statements in the Offering Circular were prepared with care since it is a prospectus for the purposes of Directive 2003/71/EC. Titan expressly accepted responsibility for the information contained in it, stating that to the best of its knowledge and belief the information in the Offering Circular was “in accordance with the facts and does not omit anything likely to affect the import of such information.”

However, the Offering Circular states that any purchaser of the Notes acknowledges that the transaction will be governed by the documents described in the Offering Circular and that the statements and information given in the Offering Circular are qualified by those documents. So in general a Noteholder cannot rely on any conflict between a statement in the Offering Circular and a statement made or information given in a document available for inspection. (Documents stated in the Offering Circular to be available for inspection were stated to be so available as long as the Notes were listed). The Offering Circular is nonetheless an aid to construction provided the effect of the acknowledgement is borne in mind.

The process of interpretation is a unitary exercise (per Lord Clarke in Rainy Sky v Kookmin [2011] 1 WLR 2900 at [21], cited in Arnold v Britton by Lord Hodge JSC, who agreed with Lord Neuberger PSC)). It is appropriate as part of the process of interpretation to perform a cross-check of the natural meaning of any provision in issue against the commercial common sense of the provision. This may lead to some refinement although that commercial common sense must not lightly be given precedence over the natural, that is, the contextual, meaning of the language which the parties used.

Application of the principles of interpretation to the particular documentation in this appeal

I have come to the same conclusion as the Chancellor but in part by a different route. I propose to set out my reasons separately in relation to the language of the relevant provisions and their commercial logic.

Language used in the relevant provisions

Mr Benjamin Strong QC, for CSAM, submits that the Chancellor gave too little weight to the meaning of “interest rate” and too much weight to the commercial considerations which he identified.

His first argument is that the word “interest rate” is not limited to ordinary interest and on its natural meaning it means all interest, irrespective of source or type. Where default interest is payable, there is on his submission a single rate of interest containing ordinary and default rate, and there is no mandate for splitting that interest into its two elements.

Both Mr Jeremy Goldring QC, for Elavon Financial Services DAC, the cash manager and agent bank, and Ms Sue Prevezer QC, for Attestor Value Master Fund LP, a holder of Class B Notes, seek to uphold the decision of the Chancellor for the reasons that he gave.

I accept that ordinary and default rate interest can be expressed as a single rate expressed as a percentage. However I reject the rest of Mr Strong’s first argument. His wide meaning of “interest” is not in my judgment the contextual meaning of “interest”. In my judgment, the default interest interpretation fails primarily because the documentation treats “per annum interest” as being ordinary interest or as associated with ordinary interest. I amplify those reasons below. I also have subsidiary reasons for my conclusion which I have set out in Appendix 3.

The relevant words are not just “interest” or “interest rate” but “related per annum interest rate due on such Loan”. This is the full phrase appearing in the definition of Net Mortgage Rate (paragraph 12 above). The ambiguous words are “per annum interest”. The word “related” clearly means related to the relevant Payment Date. The words “due on such Loan” likewise cause no difficulty, and are wide enough to include default interest where that is due.

But the words “per annum”, which qualify interest, are clearly words of limitation. The drafter is saying that the relevant interest rate is not any interest rate payable on the underlying loans but only the “per annum interest rate”. There are three possible meanings of the expression “per annum interest rate”:

In my judgment, the right meaning of “per annum interest rate” is (iii), and that applying that meaning the ordinary interest only interpretation prevails. I reach that conclusion for four reasons.

First, tellingly, in the particulars of the underlying loans on pages 85 to 163 of the Offering Circular, each of the underlying loans is described as bearing a specified rate of interest “p.a.” (per annum). For example, on page 121, there is a chart showing the loan to Jenfeld Center Gmbh & Co. KG which was the borrower in respect of a loan called the Kronos loan. The chart states that the Loan Interest Rate is 4.4300% p.a.. This is clearly an annualised percentage as interest is payable monthly. There is no statement as to any Default Rate. This pattern is repeated for all the other underlying loans.

Secondly, there is a conspicuous absence of directions for making calculations which include default interest. When parties to a financial document like the Ts & Cs intend a calculation to be made, the reasonable reader will assume that the documents contain the relevant directions to make that calculation. Indeed, as Appendix 4 shows there are detailed directions in the three definitions, for example as to the date, principal amount and the weighting of rates. There is no direction about adding in default interest where that is also due. Nor is there any direction as to how default rate is to be calculated. This is relevant because, unlike ordinary interest, default rate interest does not necessarily accrue continuously following default, as where a borrower fails to make a payment on time because of an internal error or because it was reliant on funds which it had not received in time but does pay a few days late and so remedies the default. A reasonable reader of the Ts & Cs would not exclude the possibility that default might be a short-term default of this kind. It would be odd if default interest was taken into account at its full rate simply because the default had happened on the Payment Date even though it did not exist throughout the period for which interest on the Strip Rate was being calculated. A reasonable reader might well also expect the rate in those circumstances to be adjusted (by taking the days of default divided by the days in the measurement period) to take account of the short period of default. But there is no such direction in any of the three definitions. Moreover, the parties clearly contemplated that default might have occurred at the Payment Date: see, for example, the reference to the deduction of realised losses on the Loans in the definition of Net WAC Rate. Losses are certain to involve default.

Thirdly, the particulars of the underlying loans in the Offering Circular state that “Default Rate” means, with respect to any Loan, the excess of (i) the interest rate on such Loan that accrues upon a Loan Event of Default over (ii) the “Loan Interest Rate”; and “Loan Interest Rate” is stated to mean “the per annum rate at which interest accrues on a Loan without giving effect to its Default Rate”. These definitions of Default Rate and Loan Interest Rate are repeated in the Master Definitions Schedule, to which the Ts & Cs are stated to be subject. Mr Strong fastens on these definitions and submits that they show that ordinary interest rate and default interest rate (where there has been a default) both constitute interest and together form the interest rate. But, in my judgment, it is more significant that in these definitions the words “per annum” are associated with the ordinary interest rate, and not the default rate.

Mr Strong relies on clause 3.2 of the Servicing Agreement which requires notice to the borrower of “the rate of interest” on each underlying loan. He submits that this is a single rate of interest. But the context is different and the expression is simply “the rate of interest” not the “per annum interest rate”. What has to be shown is that the qualified expression, “per annum interest rate”, in the definition of the “Net Mortgage Rate” includes default interest. Moreover, when (as in clause 3.2 of the Servicing Agreement) the words are simply “the rate of interest”, there is no reason why the words should not be read in the plural where the context so requires.

Fourthly, references to default interest in the Ts & Cs are also conspicuous by their absence. The Ts & Cs do not contain any express reference to default rate interest. A reasonable reader of the Ts & Cs (who would also read the Offering Circular and Master Definitions Schedule) would know that it was possible that there would be default and that it was likely that default rate interest was payable. In those circumstances the reasonable reader would conclude that default interest rate was not included in the expression “per annum interest rate” because it was not mentioned. Because of the qualifying words “per annum”, words to show that default interest is to be included are needed.

As interpretation is a unitary exercise, I must next consider whether or not this interpretation is compatible with the commercial logic of the situation, remembering always the points made by Lord Neuberger in Arnold v Britton that the courts should be very cautious about departing from the natural meaning of a contract for commercial common sense reasons, and that it should not do so simply to avoid the consequence of an imprudent bargain. In addition, the court must assess commercial common sense as at the date of the bargain and not with the benefit of hindsight. In the context of this case, where the transaction was undoubtedly commercial (as opposed to that in Arnold v Britton which was about holiday chalet sites let to individual lessees), I consider that the expression “commercial logic” more nearly describes the category of consideration here since the exercise involves seeing whether a particular interpretation achieves what the reasonable reader of the Ts & Cs would consider to be the objective of the three definitions.

Commercial Logic

The effect of the ordinary interest only interpretation is, in the event of the borrower’s default, to increase the amount of funds payable to Titan and the flow of those funds down the waterfall and hence to charity. Mr Strong submits that the key commercial argument is that this result is unlikely to have been the parties’ intention. The default interest interpretation ensures a larger entitlement for the Class X Noteholders and thus reduces the amount that would ultimately flow to charity. I accept that it is likely that at the time the Notes were issued, holders of the Notes only intended charitable giving if that was unavoidable as a result of the structure the originator had had to adopt. If significant amounts of charitable giving had been intended, no doubt the Offering Circular would have disclosed that fact.

Mr Strong also submits that there is nothing in the point that the Offering Circular did not disclose the position about default interest (if he is right) because the Offering Circular did set out the rights attached to the Class X Notes, so purchasers of Notes could work out the position for themselves. But this does not meet the Chancellor’s point that the unusual and prejudicial implications of the rights, as CSAM contends them to be, of the Class X Noteholders were not spelt out.

I would reject Mr Strong’s argument for the powerful reason that the Chancellor gave and which I have set out at paragraph 18 above. By “counter-intuitive”, the Chancellor in my view meant what I have termed lack of commercial logic. It is difficult to think of any commercial transaction when parties would intend to reward a person (or his successors in title) by reference to the default of a third person. Yet, what happens on the default interest interpretation is that the entitlement of the Class X Notes to a share of Titan’s revenue increases at exactly the time that revenue decreases because of the default. Moreover it is difficult to see why the Class X Noteholders should have the benefit of default interest payable under the terms of the underlying loans free of any of the expense related to default, such as the Special Servicing Fees, when provision for the deduction of other expenses is made through the Administrative Cost Factor. Those down the waterfall are in a riskier position anyway once a default occurs and Titan’s revenue is reduced (and clearly they knew and accepted that), but the default interest interpretation magnifies that risk still further. That is contrary to the commercial logic of the Class X Interest Rate which, as Mr Goldring and Ms Prevezer submit, was a reward or profit for the originator for its (historic) contribution to the issue of the Notes (other than the Class X Notes).

An important question remains: does the ordinary interest only interpretation fall foul of the principle that the court must not adopt an interpretation simply because it will save certain parties (here the Class B to H Noteholders) from the consequences of an improvident bargain? I do not consider so. I accept that, at the time of the bargain, as I have demonstrated with some examples above and as is further illustrated by the provisions for the waterfall, the liquidity facility and so on, the parties were aware that there might be some default. That was an obvious risk factor. In addition, the parties were prepared to accept that some surplus at least might have to be applied for charitable purposes: the Cash Management Agreement (which was available for inspection) clearly provided for such a surplus. Because of the dramatic events of 2008, the risk factors have been increased beyond what any party could have foreseen but they were always there.

However, the principle I mentioned at the start of paragraph 50 is not infringed because, in the first section of this Discussion, I reached the conclusion that the language of the relevant provisions supports the ordinary interest only interpretation. The relevant principle applies only where the court interprets a provision simply to avoid the consequence of an improvident bargain. So, there is no need to be concerned about the exclusion of default interest rate on that account.

Accordingly, I conclude the ordinary interest only interpretation is not incompatible with the commercial logic of the three definitions, and indeed is supported by it for the powerful reason which the Chancellor gave.

In summary, I conclude that the “per annum interest rate” in the definition in the Ts & Cs of “Net Mortgage Rate” is the ordinary rate of interest payable on the underlying loans exclusive of any element of default interest. So default interest payable on the underlying loans is not to be taken into account in calculating the Class X Interest Rate. There was also commercial logic in excluding default interest.

I have come to the same conclusion as the Chancellor though in part by a different route. In particular, I have attached more weight to the meaning of “per annum interest rate”. It is to be expected that different judges will have different reasons for finding a particular interpretation persuasive.

For these reasons, I would dismiss this appeal. Since writing this judgment I have read the judgments of Underhill and Briggs LJJ and, for the reasons given in this judgment, I agree with the judgment of Underhill LJ but respectfully disagree with the judgment of Briggs LJ.

I agree that this appeal should be dismissed.  I agree with Arden LJ that the phrase “per annum interest rate”, in the context in which it appears, most naturally reads as a reference to the ordinary interest rate applicable to the Loans and specified in the Offering Circular, essentially for the reason that she gives at para. 41; although I also agree with the further reasons that she gives at paras. 42-45, I regard them as more secondary.    I would base my conclusion primarily on this point rather than on a determination of which of the two possible interpretations is more commercially logical, since that is a rather artificial exercise in circumstances which it is clear that the parties did not contemplate at the time that the notes were issued.  Having said that, I agree with Arden LJ and the Chancellor that the result which I believe follows from a contextual construction of the words used does not produce a result which is objectively unacceptable in the events which have happened.  No doubt it was not part of the commercial purpose of the parties that substantial sums might end up going to charity; but that does not mean that that result is inconsistent with the logic of the structure which they set up, albeit applying in circumstances that no-one expected.  By contrast, the result contended for by CSAM is truly inconsistent with that structure, for the reasons given by Arden LJ at para. 49 of her judgment.

Since writing the foregoing I have seen the draft judgment of Briggs LJ. Cogent though it is, I remain of my original view. There appears to be no difference between us to the correct approach. It is simply that the crucial words, read in their context, strike us differently. I would only add that the characterisation of the general purpose of the Class X Note which he adopts from the judgment of Snowden J in the Windermere case see para. 61 does not seem to me to cast any light on the parties’ “intention” as regards this particular issue.

I have, on balance, reached the opposite conclusion, and would have allowed the appeal. In summary, I regard the natural meaning, in its context, of the critical phrase “the related per annum interest rate due on such Loan” as meaning the per annum rate which includes all the interest contractually due as at the relevant Payment Date under the relevant loan agreement, so that it includes what may loosely be called default interest whenever that is, or is part of, the interest rate due as at that date. Although that outcome produces a result in the context of a serious default which bears harshly on noteholders lower in the waterfall than the Class X noteholders, that factor is insufficient to require the critical phrase to be given some restricted meaning contrary to its contextual meaning. Nor in my view do any of the other supposedly un-commercial aspects relied upon by the respondents, or by the Chancellor. Furthermore an interpretation which includes default interest broadly accords with the general purpose of the Class X interest rate formula, of which the critical phrase forms part. I will briefly describe each element in that summary of my reasoning and, in so doing, explain why the contrary analysis upon which my Lady and my Lord are agreed has not persuaded me.

I make it clear at the outset that my conclusion derives from no measurable difference between us as to the principles to be applied to this difficult question of interpretation. This is a case where, as my Lady says at paragraph 54, different judges applying the same principles will not always agree as to the reasoning or, I would add, as to the outcome. English law assumes that every question of construction has a right and a wrong answer. In reality there can often be as much scope for reasonable differences of view as there is in many questions about the exercise of a discretion.

I also agree that the conclusion which my Lady and my Lord derive from their analysis of the language in its context produces no objectively unacceptable result, in the sense that the parties cannot have intended it. But nor in my view does the alternative construction contended for by the appellants, although the harsh results for other noteholders described by my Lady in paragraph 49 only fall short of that categorisation by a narrow margin.

It is appropriate to start with an appreciation of the general purpose of the interest formula for the Class X Notes, because that forms a central part of the context against which the critical phrase must be construed. Class X Notes of this kind are becoming a familiar feature of Commercial Mortgage-Backed Securitisation (“CMBS”) structures. The general purpose of the interest formula by which their coupon is defined was well summarised by Snowden J in Hayfin Opal Luxco 3 SARL and another v Windermere VII CMBS plc and others [2016] EWHC 782 (Ch) at paragraph 9, as follows:

“In contrast to the Regular Notes, the Class X Note has a principal amount of only €50,000 and does not pay a rate of interest in any conventional sense. In general terms it is designed to pay out to its holder the excess interest (if any) which is expected to arise in the hands of the Issuer from the underlying commercial mortgage loans in the relevant interest period, over and above the amounts that the Issuer is obliged to pay in respect of certain fees and costs of the CMBS structure and the amounts of interest payable on the Regular Notes.”

An appeal from that case was to have been heard in October 2016 had it not been settled. I recognize that each securitization structure must be examined as to its general purpose by reference to its own terms, which may differ form those examined in another case. But there is nothing controversial about this general description, and it is in my view fully applicable to the Class X Notes in this case. The general purpose of the formula for calculating the Class X Note interest rate is to identify, strip out and pay that excess to the Class X noteholders.

The experienced reader would therefore expect to find, in the part of the formula directed to defining the interest expected to arise in the hands of the Issuer from the underlying commercial mortgage loans in the relevant interest period a defining phrase which captured the whole of the Issuer’s interest entitlement, rather than only some part of it. I say ‘entitlement’ because it is clear that this formula uses entitlement to, rather than receipt of, interest as the governing criterion. It speaks of interest due rather than interest received, and leaves any shortfall in actual receipts to be dealt with by the priority provisions of the waterfall. In the language of Mr Petersen’s excellent book, it is one of those structures which permits “ongoing revenue extraction even when the underlying loans are stressed or distressed and there are significant shortfalls to noteholders”.

Of course the designers of the structure would be free to depart from that overall general purpose, by starting with something less than the whole of such interest, but the reader would I think expect to see any such departure spelt out in clear terms, and provision made for the ultimate destination of the part left out, other than (as here) to charity. But the critical phrase simply refers to the “per annum interest rate due” rather than to some lesser part of it. I will return to the implication (if any) to be derived from “per annum”. Prima facie, the reference to “interest” means all interest of the qualifying kind. By the same token, reference to the “interest rate” due also means the whole rather than only part of the rate contractually due under the terms of the loan agreement as at the Payment Date.

Where a contract speaks of something by using a general definition, such as interest, rent, royalties, commission or any other kind of income, I would have thought it axiomatic that everything falling fairly within that definitive word is prima facie intended to be included, unless the context requires some more restricted meaning. The interpreter does not start as an agnostic on the question whether all or some undefined part is intended to be included.

The argument in the present case has I think been distorted by treating ‘default interest’ as if it were some separate “interest due on the Loan” distinct from ‘ordinary interest’. In the relevant context, the formula refers to the interest rate due with respect to a particular Payment Date, rather than to the interest rate due under the Loan throughout its life, or even for a whole calendar year. As at that date (or during the immediately preceding Interest Accrual Period, which will usually be a quarter), the loan will either be in default or it will not. Default may consist of a failure to pay interest or capital on time, or it may include other events of default, such as a breach of warranties or covenants. If the Loan is not in default then the ‘ordinary’ fixed or floating rate provided for in the loan agreement will be the interest rate due. If it is in default then the higher default rate, also specified in the loan agreement, will be the rate due. In either case it will be a single rate, although it may be a fixed rate or (in the case of at least one of these Loans) a floating rate, but capable of being expressed (so as to be capable of being used in this formula) as a specific percentage rate at any particular Payment Date. The language of a particular loan agreement may either specify two different rates (e.g. 7% ordinary and 9% default) or an ordinary rate and a default supplement (e.g. 7% and 2%), but the effect is the same. If there is a default the higher rate (e.g. 9%) will be the rate due as at the relevant Payment Date.

I must now directly address the “per annum” point which features so decisively in my Lady and my Lord’s judgments (although not in the Chancellor’s analysis). My Lady describes the words “per annum” as words of limitation (at paragraph 39), which call for a search for a rate which meets that description, and for the exclusion of any rate which does not. For my part I have been unable to treat the use of “per annum” in that way, or to attribute to those words any significant weight in the resolution of the issue before the court. They are not in my view words of limitation at all, but rather words of denomination.

Interest rates are usually denominated in percentage terms as rates per annum. If for some reason they are expressed by reference to any shorter period (such as per quarter, per week or even per day) they may easily be converted for comparison purposes to a rate per annum by applying the appropriate multiplier (such as 4, 52 or 365.25). This is as true for floating rates as it is for fixed rates. The periodicity of payment dates and the frequency of the occasions when the rate (if a floating rate) may rise or fall has nothing at all to do with the period by reference to which the percentage rate is denominated. A rate per annum may typically be payable quarterly or monthly, and a rate per day payable weekly or quarterly. Floating rates may change at any time, but still be expressed as rates per annum.

In the present case the critical phrase “related per annum interest rate due on such Loan” is but one part of a complex formula designed to produce the “Class X Interest Rate” for each relevant (usually quarterly) Payment Date which is itself a rate per annum. The purpose of the formula, viewed as a whole, is to identify (A) the rate payable by the Issuer on the A to H Notes (called “the weighted average of the Rates of Interest of the Notes”), then (B) the weighted average of the rates payable by the borrowers to the Issuer under the Loans, adjusted for Swaps and Administrative Costs (called “the Net WAC Rate”), and then to identify the amount by which B exceeds A, again expressed as a rate (called “the Class X Net Weighted Average Strip Rate”), which then serves as the basis for the calculation of the interest rate payable on the Class X Notes. For the formula to work, every element in it needs to be denominated in the same rate currency, i.e. as a rate per annum.

The input items for the formula, starting at the bottom, are (i) the related per annum interest rate due on each Loan, (ii) the adjustment to it caused by giving effect to the related Interest Rate Swap Transaction, (iii) the Administrative Cost Rate, (iv) the Net Mortgage Rate, (v) the Net WAC Rate, (vi) the weighted average of the Rates of Interest of the Notes, and (vii) the Class X Net Weighted Average Strip Rate. All of them are, and must be, if the formula is to work, denominated by the same period, in this case rates per annum. This is so stated expressly for the Class X Interest Rate and for items (i), (iii) and (vii). It must be so for item (ii) because it is used to adjust item (i). It is true for item (iv) because it is the aggregate of items (i) to (iii). It is true for item (v) because it is a weighted average of item (iv) for all the relevant Loans. It is in fact true for item (vi) by reference to other parts of the Ts & Cs.

It is reasonable to suppose therefore that the express use of “per annum” in the critical phrase, which is used to define the applicable interest rate at the bottom of the pyramid established by the formula, is there not for the purpose of identifying only some particular rate or some part of the interest rate contractually due on the Payment Date under each Loan, but rather for the purpose of ensuring that whatever rate is contractually due as at that date is expressed (and if necessary recalculated) by reference to a per annum denominator, which is the common currency of the formula as a whole.

The actual terms of the Loans are not admissible for construction, because they were not known to the investors in the Notes (beyond the incomplete summaries in the Offering Circular). It is just about conceivable that default rates in one or more Loans could have been expressed other than as rates per annum, so that, unless excluded, they would need to be converted into rates per annum to produce a calculation of the rate per annum at each relevant Payment Date. If, as seems to me to be very likely, the default rate is stated in the loan agreement as a rate per annum there would be no difficulty, because the default rate would be the “per annum interest rate due on the Loan” on any Payment Date when it was in default. If (say) the default rates provided for in half the loan agreements were rates per annum, and the other half were rates per quarter, it would be bizarre if, merely because of the use of “per annum” in the critical phrase, the former were included but the latter excluded.

I do not in this context mean that the calculation of the Class X Interest Rate for any Payment Date has to be “annualized” in the sense described by my Lady in paragraph 39 (ii) and Appendix 4. It is not that the calculation must account for interest payable over a whole year. Clearly the formula is to be applied separately for each Interest Accrual Period ending on a Payment Date. But the calculation is to be by reference to percentage rates, and there must therefore be a common (i.e. in this case per annum) denominator used throughout.

It may be that, viewed from a particular Payment Date, the borrower under a relevant Loan will have been in default for only part of the relevant Interest Accrual Period ending on that date, which may or may not have included the Payment Date itself. But the question what rate is due on that date by reason of the default will be a question of construction of the relevant loan agreement, and no one has suggested that this gives rise to any obstacle to having regard to default in deciding what interest rate per annum is due as at the relevant date. If for example the default rate only accrues under a particular loan agreement on any day when there is a default, then a default for half an Interest Accrual Period will lead to a rate due as at the Payment Date half way between the ordinary and default rates, if that is what the loan agreement provides.

My Lady derives assistance (at paragraph 42) from the fact that the voluminous documentation nowhere contains directions for the calculation of the effect of default rates, and (at paragraph 45) that no mention of default interest is made in the formula which contains the critical phrase, or elsewhere in the Ts & Cs. In the present context I do not find that surprising. The rate of interest due under a relevant Loan at any relevant Payment Date depends upon the terms of the relevant loan agreement, and will for reasons already stated be, or easily be capable of being, expressed as a single rate per annum, in which default may or may not have a part to play. Default is simply part of the contractual basis upon which a particular specified rate is due under the terms of the relevant loan agreement. The per annum rate for the purposes of the formula will in any event be the result of a calculation because of the need to factor in the effect of the related Interest Rate Swap Transaction, which will in general convert all or part of fixed rates into floating rates: see pages 25 and 180 of the Offering Circular.

For similar reasons I derive no significant assistance from the terminology used to describe Default Rate in the Offering Circular, or from the use of “p.a.” as part of the description therein of the so-called “ordinary” rates for each Loan. The non-default or ordinary rates were all in fact rates per annum, and the default rates probably were as well. In any event, even if not, a default rate denominated by some other period would easily be convertible into a rate per annum, regardless whether it was payable for a period of default as short as a quarter, a week or even a day.

The result is that my iterative review of the meaning of the critical phrase in its context leaves me where I started, namely thinking that, subject to questions as to overall purpose and commercial logic, the “per annum interest rate due” means whatever rate is contractually due from the borrower under the relevant loan agreement as at the relevant Payment Date, expressed as a rate per annum. If default by the borrower means that a higher rate is due, then that is the applicable rate.

I therefore approach the commercial logic part of the analysis from the opposite starting point from that of my Lady and my Lord. If the effect of default by the borrower upon the interest rate due is not prima facie excluded by the critical phrase read in context, then is that a result which conflicts with the overall purpose of the formula in which it is contained, or otherwise offends commercial common sense?

I have already described what I believe to be the undisputed overall general purpose of the formula for quantifying the interest payable to the holders of the Class X Notes, by reference to the pithy summary in the Windermere case. It will be apparent that my provisional conclusion about the contextual meaning of the critical phrase accords fully with that general purpose, and does so better than the interpretation which excludes so-called default interest. This is because the inclusion of default interest captures the whole of the excess of the Issuer’s entitlement over that of the Class A to H noteholders, whereas its exclusion captures only part of that excess. The point was put in argument as flowing from the unlikelihood that the hardened business people who constructed this structure really wanted anything of value to end up in the hands of the charitable shareholders of the Issuer. We heard (and read) elaborate submissions about whether in most default situations that would in any event be the result of excluding default interest. For my part I regard those arguments, depending inevitably upon a degree of hindsight about the typical default situation which might arise, as beside the point.

A whole range of submissions were advanced in support of, and against, the proposition that the effect of including default interest was contrary to commercial common sense. They were developed with consummate skill and sophistication, and some of them were adopted by the Chancellor in his judgment: see Appendix 2 below. For my part, the only one which carried real weight was the potentially harsh effect of the inclusion of default interest upon noteholders lower in the waterfall than the Class X Notes where, notwithstanding the substantial loan to value cushion built into the securitisation structure, a very serious and widespread default by numerous borrowers (as later occurred) gives rise to an overall shortfall. The point is in a sense aggravated by the arguable non-disclosure of this particular risk in the Offering Circular.

I have confined myself to this one point because it is of so much greater substance than the others that, if it is insufficient to compel the adoption of some construction of the critical phrase other than its ordinary contextual meaning, then the other points come nowhere near doing so, and add little by way of aggregation with this main point.

The task of the interpreter when considering questions of commercial logic or common sense is not just to resolve every ambiguity in the language by balancing the competing commercial factors and then choosing the interpretation which emerges from the balancing exercise. I consider that such an approach undervalues the continuing importance of the words used by the parties to express their bargain (or, here, to delineate the structure of the securitisation before marketing it) for the purpose of resolving ambiguity. The detection of ambiguity does not entitle the court to resolve it simply by reference to a balance of commercial considerations. Sometimes the words used, even if admitting some ambiguity, still point firmly towards a different answer to that which is to be derived from a balancing of commercial considerations. As Lord Neuberger put it in the Arnold v Britton case, at paragraphs 17 - 18:

“…the reliance placed in some cases on commercial common sense and surrounding circumstances… should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. …when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it.”

It will be apparent that I consider that the words used in the critical phrase point quite firmly toward the interpretation which includes default interest or, as I would prefer to put it, to a conclusion that the whole of the interest rate contractually due on the relevant Payment Date is included, even if attributable in whole or in part to the existence of a default. The harsh potential consequence to which I have referred is certainly a factor of real weight towards a contrary conclusion, although I would not describe it as a counter-intuitive reward to the Class X noteholders for a third party’s default. To my mind the coupon payable on the Class X Notes was that slice of the cake represented by the rights of the Issuer under the secured loans which Credit Suisse calculated that it could strip out of what was being marketed to the Class A to H Note investors and dispose of for its own benefit. It was simply the whole of the excess of the Issuer’s interest entitlement (adjusted for Swaps and Administrative Cost) above that distributable to the Class A to H noteholders. The fact that it included so-called default interest, coupled with the super-priority of the Class X notes in the waterfall, created a potentially nasty side-effect for other noteholders in certain circumstances, but this falls just short of the sort of outcome which could not have been intended in the commercial context. Equally it is insufficient in my view to displace the reasonably clear meaning of the words used, read in their context.

I should finally mention the distinct point that, on this interpretation, there may well be at least a tension with the suggestion in the Offering Circular that work-out fees and liquidation fees might be off-set by default interest. While there will be cases where the construction of an ambiguous provision in the contractual documents may be enlightened by reference to the offering circular or similar document, the circular may not be used to contradict the clear meaning of the governing provisions, here in the Ts & Cs. This is because, as is usual, this Offering Circular so states in terms (at page 8):

“The obligations of the parties to the transactions contemplated herein are set forth in and will be governed by certain documents described herein, and all of the statements and information contained herein are qualified in their entirety by reference to such documents.”

For those reasons I would have allowed this appeal. I am by no means unhappy at being in a minority as to the outcome. It produces a result which, in the perhaps unexpected events which have happened, slightly mitigates the gravity of the disaster facing some of the noteholders towards the lower end of the waterfall, at the cost of depriving the Class X noteholders of an advantage which, although in my view conferred on them by the Ts & Cs, was probably unforeseen by them when they made their investment. In the heady days before the Lehman crash, they could hardly have banked on it.

There are a number of subsidiary arguments or points which in my judgment do not affect the conclusion I have reached, and/or are of no assistance. I do not propose to mention all of them.

First, Mr Strong disputes the notion that the Class X interest rate is a form of equity capital. On his submission, condition 5(i) of the Ts & Cs, under which the Class G and Class H Notes lose their entitlement to interest altogether if it cannot be paid because Titan has no available funds, is inconsistent with this notion. The point which is made is that the entitlement of the Class X Noteholders is an additional benefit or profit obtained by the originator. I do not see how that could be seriously denied.

Secondly, Mr Goldring relies on the inter-creditor deed. This was executed as an internal matter by companies in the Credit Suisse group to enhance the rating of the Notes. Mr Goldring points out that under this deed the interest assigned to Titan did not include any default interest. That does not seem to me to assist greatly as the inter-creditor deed was not available for inspection, and so is not an aid to interpreting the Ts & Cs. Nor was the trustee for the Noteholders a party to the inter-creditor deed.

Third, in the definition of “Net Mortgage Rate”, the “related per annum interest rate due on such Loan” is qualified by the words “(which, with respect to each Loan, is the interest rate after giving effect to the related Interest Rate Swap Transaction)” but in my judgment those words do not assist either party. As they stand, they can be read consistently with either party’s case. Moreover, the position might have been clarified if there had been, which there was not, a clear indication at the time of the issue of the Notes as to whether the Swap Agreement covered default interest.

Fourth, both parties relied on different parts of the following statement in the Offering Circular under “risk factors”:

Because Workout Fees and Liquidation Fees are not recoverable from the Borrowers under the Credit Agreements, payment of any such fees may reduce amounts payable to the Noteholders to the extent that they are not off-set by default interest payable on the related loan.

The respondents contend that the corollary of Mr Strong’s case is that, if he is right, the final clause of this sentence is inaccurate because there was no provision for liquidation fees to be set against default interest. Mr Strong seeks to blunt that point by submitting that the main clause is accurate because on the default interest interpretation the fees will reduce the funds that can be used to pay interest on Notes which are below the Class X Notes on the waterfall.

In my judgment, when the Offering Circular speaks of liquidation fees being offset against default interest, it refers to the impact of liquidation fees on the revenue to which Titan is entitled. On this basis the final clause is accurate, and the point made by the respondents is therefore not a good one. Nor on the other hand does this point either assist or prejudice CSAM’s case, because it refers to the impact on Noteholders generically. It does not focus on the impact on those at the bottom of the waterfall only. I have in the result placed no weight on this point beyond the fact that the default interest interpretation is undermined by the fact that the entitlement of the Class X Noteholders increases without the related expenditure being taken into account.

Fifthly, Mr Goldring argues that the liquidity facility in this case covers default interest, and that the Class X Noteholders can use the receipts under the liquidity facility to pay the amounts due to them whether or not paid in respect of default interest. I agree with him that this is a further manifestation of the lack of commercial logic in the default interest interpretation.

The limited purpose of this Appendix is to show that there appears to be no annualisation required by the calculation of interest at the Class X Interest Rate. It does not require significant investigation and I agree with Mr Strong that this calculation is not as complex as the Chancellor indicated (Appendix, (2)).

The Agent Bank has first to calculate the Net Mortgage Rate. To do this, it finds the per annum rate of interest due under the underlying loans, net of receipts under the Swap Agreement and the Administration Cost Rate, for that Payment Date. This calculation produces the Net Mortgage Rate for each loan.

The Agent Bank then works out the Net WAC Rate. Again the rate has to be determined on a particular date. It is a weighted average of all Net Mortgage Rates weighted by reference to the principal amounts as at the preceding Payment Date, less any realised losses on the underlying loans. Special provision is made for the first interest Payment Date. The Agent Bank now has a single figure as the Net WAC Rate.

Using the Net WAC Rate, the Agent Bank works out the Strip Rate. To do this it needs to work out the weighted average of the rates of interest on the Notes other than the Class X Notes and the Class V Notes, weighted on the basis of their respective nominal amounts immediately preceding the payment date. It then deducts this from the WAC Rate.

This produces the Strip Rate which is then applied to the aggregate balance of the underlying loans at the beginning of the related interest period immediately preceding the payment date. The final step is to divide the resulting figure by the principal amount outstanding of the Class X Notes in order to produce a Class X interest rate on each €1 of notes.

Note about interest upon interest: interest which became due on a previous Payment Date but which remains unpaid may, depending on the terms of the underlying loans, have to be treated as part of the principal and it may carry interest at the Payment Date. Whether it has to be taken into account in the above calculation may depend on whether it is ordinary interest or default interest, but either way the computation requires the identification of the rate on the relevant Payment Date and not annualisation, and identification of that rate is not obviously a complex matter.