Yieldpoint Stable Value Fund, LP v Kimura Commodity Trade Finance Fund Limited

On 30 March 2021 the respondent (“Yieldpoint”) agreed to pay US$5m to the appellant (“Kimura”) to participate in Kimura’s 50% share of an existing loan facility (“the Facility”) extended to Minera Tre Valles SPA (“MTV”), a mining company incorporated in Chile. Yieldpoint was to receive interest quarterly at the rate of 3-month LIBOR plus 7.5% (0.5% less than Kimura’s entitlement under the Facility) and a pro-rata share of Kimura’s monthly price participation entitlement under the Facility (based on the price of copper).

That agreement (“the MTV Participation”) was made pursuant to and expressly incorporated (subject to necessary modifications) the terms of a Master Participation Agreement for Trade Transactions (“the MPA”) made between Kimura and Yieldpoint on 19 February 2021. The MTV Participation was in the form of a template for an agreement made pursuant to the MPA as set out in Appendix 1 of the MPA, albeit with modifications.

It was common ground that the terms of the MPA anticipated and were intended to govern agreements under which Yieldpoint would be a sub-participant in Kimura’s trade-finance transactions (“Participated Transactions”) by way of pari passu participation as an economic stakeholder or co-venturer to the extent of its participation. Yieldpoint would not have recourse to Kimura, and so would expose its capital investment (as well as its rights to interest and income) to the risk of default by Kimura’s counterparty in the Participated Transaction. Yieldpoint’s sole remedy in the case of a default would be to enforce rights of recourse against the counterparty, rights which Kimura agreed to transfer to Yieldpoint in proportion to its participation.

The issue at trial, and on this appeal, was whether that position was altered by the addition in the MTV Participation (absent from the template appended to the MPA) of a “Maturity Date of the Participation” of 31 March 2022, and Special Conditions providing for Yieldpoint to give 45 days prior notice if it intended to renew its participation. Yieldpoint contended that the MTV Participation therefore, properly interpreted, was a fixed term loan from Yieldpoint to Kimura, repayable in full by Kimura on the Maturity Date regardless of any default in the meantime by MTV.

In the event, MTV had defaulted on its obligations under the Facility by 31 March 2022. Kimura and Anglo American Marketing Limited, the Senior Lenders, had granted MTV a forbearance in November 2021 in respect of the capital instalment due on 31 March 2022, but as at that date MTV was in default as to interest and price participation payments. It made no further capital repayment to Kimura and was declared bankrupt by the Civil Court of Santiago in February 2023.

On 26 July 2022 Yieldpoint commenced these proceedings claiming repayment of the principal sum of US$5m together with what it claimed to be unpaid interest and monthly price participations.

On 24 May 2023, following a trial under the Shorter Trials Scheme in the Commercial Court and a reserved judgment handed down on 22 May 2023, Stephen Houseman KC, sitting as a judge of the High Court (“the Judge”), ordered that judgment be entered for Yieldpoint against Kimura in the principal sum of US$5m, with interest to be determined. The Judge held in his judgment that the MTV Participation was indeed a fixed term loan and not a true sub-participation in the Facility, stating that he did so “not without some discomfort”.

Kimura appealed that finding, contending that the Judge’s interpretation was wrong. In particular, Kimura submitted, the Judge had overridden the entire contractual scheme without justification and had wrongly rejected Kimura’s case (explained below) that incorporation of a “Maturity Date” was workable in the context of that scheme. Further, the Judge had wrongly relied on pre-contractual assurances, negotiations and drafts and subjective expectations when interpreting the MTV Participation.

The Facility was a structured loan dated 10 December 2019 (re-stated on 5 November 2020 with a term expiring on 31 December 2024) under which Kimura and a company named Anglo American Marketing Limited were the Senior Lenders, each providing US$22.5m to MTV for pre-export commodity finance. Citicorp was the Facility Agent and the Security Agent.

Repayments were due in tranches, the first tranche of 8.33% being payable on 31 March 2022. MTV gave security over its assets and operational output. As stated above, interest was payable quarterly at the rate of 8% above 3-month LIBOR and MTV was also obliged to make monthly payments to the Senior Lenders when the price of copper was above a specified level. The loan was fully funded.

After noting that the MPA was proffered by Kimura and was based on or comprised the Bankers Association for Finance and Trade standard form at the relevant time, the Judge summarised the terms and effect of the MPA as follows:

It is noteworthy that the Related Recourse Rights transferred to the Participant pursuant to clause 5.4 of the MPA, as identified by the Judge in paragraph 19 of his judgment, are defined as meaning, in relation to any Participation Payment that is referable to an amount that the Recourse Parties are liable to pay the Seller, all rights, title, benefit or interests of the Seller , including “all moneys owing to the Seller in respect of principal, Income Payment or otherwise” and “rights of the Seller…to demand payment, reimbursement or repayment of any amount from the Recourse Parties”.

In relation to the “non-recourse” structure referred to by the Judge in paragraph 21 of his judgment, it is worth setting out in full clause 22.6 of the MPA:

It is also relevant to note:

The Judge dealt with the negotiation of the MTV Participation in considerable detail, spanning [28] to [46] of his judgment. For present purposes the key points, as found by the Judge, can be summarised as follows:

After referring to the MPA and the Facility, the MTV Participation followed the template in providing that:

In tabular form, the MTV Participation confirmed that the Participation Amount was US$5m, and that the Participation Percentage was “22.22% of Overall USD 22,500,000 Facility”. The “Start Date of Transaction” was 5 November 2020 and the “Start Date of Participation” was 1 April 2021.

Additional lines of the table, not in the template, provided:

Special Conditions were inserted to provide for renewal of the investment as follows:

A line from the template stated that the “Retention Share” was “$17,500,000”.

The Offer contained in the MTV Participation was duly countersigned by Yieldpoint by way of acceptance.

The Privy Council considered a sub-participation agreement in Lloyds TSB Bank plc v Clarke [2002] UKPC 27, [2002] 2 All ER (Comm) 992, the issue in that case being whether the agreement gave rise to an equitable assignment of interest and capital payments in favour of the sub-participant. In that context, Lord Hoffmann stated as follows:

Lord Hoffmann referred to various turns of phrase which were consistent with an assignment of a beneficial interest in the proceeds of the bonds in question, but concluded at [25] that:

It is therefore plain that the MTV Participation must be interpreted according to usual principles. There was no dispute between the parties that the process of contractual interpretation is a unitary exercise involving an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences: see Lord Clarke JSC in Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at [21] and Lord Hodge in Wood v Capita [2017] AC 1173 at [11]. Lord Hodge went on to say in that paragraph that:

As for the relevance of the factual background, it is useful to note the dictum of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1385H, referred to in both Arnold v Britton [2015] AC 1619 and Wood v Capita, holding that while evidence of the parties’ intentions or their negotiations was inadmissible, “…evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction” was admissible.

After referring to Lloyds TSB Bank plc v Clarke, and pointing out in [57] that in the case of the MPA, clause 5.4-5.6 did effect an equitable assignment in favour of the Participant (the Judge considering it did not matter whether this represented the modern conventional form of sub-participation in international corporate finance), the Judge identified his starting point and approach as follows:

The Judge then identified that Yieldpoint’s proposed interpretation involved a significant alteration to and departure from the conventional model:

The Judge further noted the following difficulties in Yieldpoint’s interpretation:

Whilst recognising that these were not “small difficulties”, the Judge considered at [67] that they were surmountable. At [68] he explained that, if the language of the MTV Participation was clear enough to create a hybrid form of sub-participation, the terms of the MPA could and should be modified or overridden to make sense. In the case of each problem identified, the troubling reference (whether, for example, to “Retention Share” or “risk”) could be understood as referring only to the income rights or income default risk assumed by Yieldpoint, not any capital risk.

Turning to whether the difficulties should be surmounted, and why he concluded that they should (albeit not without the discomfort referred to above) the Judge started by referring to the negotiations between the parties as follows:

The Judge then made his key finding as to the interpretation of the MTV Participation at [72] and [73]:

The Judge next addressed the main difficulty he saw with Kimura’s proposed interpretation, namely, the unspecified mechanism for unwinding Yieldpoint’s participation on the Maturity Date. After explaining that Kimura was driven to formulate a ‘fair market value’ mechanism, and pointing out that it was not to be found in the contractual terms, at [74] the Judge highlighted the difficulties in ascertaining what this would entail in practice and the potential for delays and disputes. The Judge further emphasised that these were not merely possible problems, but would inevitably arise (absent complete default by MTV):

As for clauses 5.4 to 5.6 of the MPA, which on their face automatically transferred to Yieldpoint recourse rights covering capital as well as income, the Judge held at [82] that those provisions could be modified to accommodate and make sense of the specific terms agreed by way of the MTV Participation.

The Judge further rejected Kimura’s contention that interpreting the MTV Participation as a fixed term loan did not make commercial sense. Kimura asked why it would agree to pay over almost all of its interest entitlement and all of its price participation in respect of US$5m of the Facility if Yieldpoint was taking no risk in that regard. Kimura would simply be borrowing surplus funds at an extremely high rate. The Judge stated:

The Judge concluded at [87] that Kimura had an unconditional obligation to repay the sum of US$5m to Yieldpoint on 31 March 22.

In my judgment the Judge identified the right starting point at [59] of his judgment. The MTV Participation was a single trade made pursuant to and expressly governed by the terms of the MPA, an umbrella agreement designed to save the parties from having to re-negotiate and re-state the detailed terms of their trades on each and every occasion. Indeed the MTV Participation, made on the template annexed to the MPA, only made sense if read together with the MPA. As the Judge stated, it is inherently unlikely that the parties intended that the MTV Participation would not resemble or replicate a conventional sub-participation anticipated and provided for in the MPA. This may be put the other way round: had the parties intended to make an entirely different type of deal, such as a simple unsecured fixed-term loan, they would surely have abandoned the MPA structure and template and executed a separate loan agreement with terms and conditions to be expected in such an agreement.

Having expressed the view that clear language was needed to alter the “default structure” provided by the MPA, the Judge recognised at [64] that Yieldpoint’s case turned almost entirely upon the insertion of “Maturity Date of the Participation”. Despite recognising in that same paragraph that there was no positive obligation to repay the US$5m on the face of the MTV Participation (let alone in the MPA), and further recognising in [65] and [66] that there were significant countervailing provisions in the MTV Participation and in the Transaction Overview (which both parties accepted was admissible as an aid to interpretation), the Judge ultimately concluded at [72] that those additional words were sufficiently strong and clear to depart from the pre-ordained sub-participation structure: he found that an inherently unlikely outcome had eventuated.

I find it difficult to support that conclusion. I recognise the Judge’s point that the concept of a Maturity Date of the Participation, creating a “temporal disconnect” between the Facility and Yieldpoint’s investment, did not sit comfortably with the sub-participation structure and gives rise to unaddressed issues as to its practical and legal consequences. However, I consider that that single term, which itself contains the key term “Participation”, together with the Special Conditions as to the option to extend beyond the Maturity Date, cannot be read as indicating an intention to overturn the entire structure and effect of the umbrella agreement stated to govern the MTV Participation and to require modification of many of its terms and certain of the provisions in the MTV Participation itself (in particular, the Retention Share).

I consider that in reaching his conclusion, which he accepted caused him some discomfort, the Judge led himself into error in a number of respects.

First, the Judge interpreted the term “Maturity Date of Participation” in the immediate context of the parties’ negotiation of the MTV Participation. I have considerable doubts as to the admissibility and relevance of those matters, being a classic case of parole evidence. But even if aspects of the negotiation were admissible to show that the genesis or aim of the transaction was a “fixed term” deal and that Kimura would “pay back” Yieldpoint on 31 March 2022, I do not consider those oral exchanges add anything to the written agreement. There is no doubt that the parties agreed that the MTV Participation would end on 31 March 2022, and that Yieldpoint’s investment would be redeemed at that date (by an unidentified mechanism). But what was not discussed (as far as the evidence was recounted) was the key question what would happen if there was a default in the meantime, let alone an agreement reached that Yieldpoint would be paid in full in such circumstances. Parties discussing a trade often focus on what will occur if all goes to plan, without addressing what they no doubt consider to be the unlikely situation of default or non-performance, leaving that to the written terms. Their discussions in this case must also be considered against the backdrop of the MPA and, more specifically, the Transaction Overview, with its express warning that Yieldpoint’s capital was at risk.

Second, the Judge gave detailed consideration as to whether the problems caused by the many countervailing provisions in the MPA and the MTV Participant itself could be “surmounted”, given the weight he attributed to the additional wording “Maturity Date of Participation”. In my judgment this was an error of principle. The right approach was first to seek to read all the contractual provisions together, in order to reach a coherent interpretation of the entire contract which conforms with commercial sense. It is only if that is not possible that it is necessary to determine which provisions should be given priority and which given a modified reading or overridden altogether. If that approach had been adopted in this case, it is difficult to see that the MTV Participation, in the context of the MPA, would be read as anything other than a conventional sub-participation agreement with early redemption. Potential difficulties with the mechanism of redemption did not justify, in my view, overturning everything else in the parties’ carefully structured deal.

Third, and relevant to the second error above, the Judge was wrong in [72] in proceeding on the basis that the MPA did not provide for circumstances in which the Participation Agreement would end before the Participation Transaction. In fact, clause 13.4 provides that the Seller may acquire an option to terminate the Participation Agreement early, reimbursing the capital participation, and clause 7.1 also anticipates early termination of the Participation Agreement. To be fair to the Judge, it appears that these provisions were not drawn to his attention. Their presence, however, further undermines the conclusion that the addition of a Maturity Date brought about a complete change in the nature of the transaction.

Fourth, I consider the Judge was wrong to discount the fact that Yieldpoint’s proposed interpretation was highly uncommercial, postulating that Kimura would have agreed to transfer most of its benefit from US$5m of its part of the Facility without Yieldpoint exposing its capital. Whilst the Judge was right that it is generally wrong to consider the adequacy of consideration given by one party to a contract or to speculate on commercial motives for entering it, the position is different when considering competing interpretations, when the iterative process necessarily involves examining the commerciality of each of those interpretations. In this case it is a strong factor, in my view, that Yieldpoint’s interpretation undermines the commercial sense of the structure set out in the MPA.

Although it is not necessary to reach a concluded view, the question remains as to what the inclusion of a Maturity Date entailed in circumstances where there had been no default by MTV. The Judge was dismissive of Kimura’s proposed solution that Yieldpoint would be entitled to a redemption at fair market value, reflecting the payments due over the remaining term of the Facility and the then current creditworthiness of MTV. The Judge pointed out that there was no mechanism for determining such value and no dispute resolution provision for likely issues arising. A more sensible interpretation, in my view, arises from the fact that Yieldpoint’s participation on 1 April 2021 was at par: it paid US$5m to acquire an interest in that same amount of the Facility: there was no valuation exercise carried out. Given that clause 13.4 of the MPA also provides for the Participant to be repaid at par if the Seller opts to terminate, it would seem permissible and appropriate to interpret the inclusion of a Maturity Date as entitling Yieldpoint to be repaid on that date at par, absent a default in the preceding 12 months. That would of course be highly beneficial to Yieldpoint if MTV’s creditworthiness had declined and it was likely to, but had not yet, defaulted.

In the light of the above I am firmly of the view that the MTV Participation was a conventional sub-participation. As MTV had defaulted prior to the Maturity Date, Yieldpoint was not entitled to be repaid its US$5m investment.

I would allow the appeal.

On receipt of the draft of these judgments, Yieldpoint sought an order that it should retain a portion of the US$5m Kimura had paid pursuant to the judgment below, to be ascertained in some unspecified manner. Yieldpoint contended that, even if not entitled to the return of all its capital, it was entitled to be paid a sum to reflect the market value of its investment on 31 March 2022, taking into account that MTV was in default.

I see no basis for making such an order. Yieldpoint’s claim was solely based on the assertion that it was entitled to repayment of the full US$5m by way of repayment of a loan. There was no alternative claim at first instance for the market value of its investment by way of sub-participation (if it had any value), and, indeed, reliance on any such alternative claim was expressly disavowed by Yieldpoint. Further, there was (and remains) no application to add that claim by way of amendment, and that fall-back argument was not before this Court on the appeal. Yet further, it is unclear by what mechanism or on what evidence any entitlement of Yieldpoint could now be ascertained (absent agreement), other than by remitting the (unpleaded) alternative claim for trial on (as yet unavailable) fresh evidence.

I agree.

I also agree.