Deutsche Trustee Company Ltd v Fleet Street Finance Three PLC & Anor

In this expedited Part 8 claim, the Claimant, Deutsche Trustee Company Limited (the “Trustee”) is the trustee under a Trust Deed dated 19^th June 2007 (the “Trust Deed”). The first Defendant is the issuer (the “Issuer”) of notes (the “Notes”) divided into various classes constituted by the Trust Deed. The Notes are a species of Commercial Mortgage-Backed Securities (“CMBS”), and are subject to various terms and conditions contained in schedule 2 to the Trust Deed (the “Conditions”). The second Defendant, Party A, whose identity was ordered by Proudman J on 4^th July 2011 under CPR 39.2(4) to be kept confidential and not to be disclosed (“Party A”), is the holder of €60 million of the Class A1 Notes.

Where I use capitalised terms that are not otherwise defined in this judgment, the definitions are to be found in the transaction documentation.

By its Claim Form, the Trustee sought directions in respect of three questions as follows:-

In the course of argument, it became apparent that there were really two issues (the “issues”) that divided the parties, that may be expressed simply as follows:-

The first of these issues is not reflected in the questions asked in the Claim Form, but has nevertheless been the subject of detailed argument, and it is common ground that I should decide it.

The Trustee is neutral as to the answers to these questions, but since there has been difficulty in finding anyone prepared to argue in favour of negative answers to the issues and, therefore, the application of the GSW Funds partly pro rata and partly by sequential payments, the Trustee, through its counsel, Mr Robert Miles Q.C. and Mr Richard Hill, has argued that case, so that the court has had the benefit of counsel putting both sides of the argument.

Party A has been represented before me by Mr Simon Mortimore QC and Mr Marcus Mander, who have argued in favour of positive answers to both issues, and, therefore, a fully sequential distribution.

The immediate effect of these proceedings is to determine the proper recipients of a prepayment of some €220 million made on 15^th February 2011 in respect of the GSW Senior Loan (which I have already described as the “GSW Funds”). The Trustee has distributed some €194.9 million in any event to the Class A1 noteholders, but the outcome of this dispute affects the distribution of the balance of some €27.47 million, and is likely also to affect the distribution of further funds in the future.

The Notes were issued in the classes with the following characteristics shown in the following Table 1:-

It will be observed, as is normal in issues of this kind, that the higher classes of Notes were structured to be lower risk and to pay less interest (see Philip R. Wood on Project Finance, Securitisations, Subordinated Debt, 2007, at paragraphs 7-008-7-011 explaining how issues of this kind are typically structured).

The Issuer applied the net proceeds of the issue to purchase interests (the “Senior Loans”) in five term loans (the “Whole Loans”) secured by portfolios of properties situated in Germany and the Netherlands. The originator of the Whole Loans was Goldman Sachs Credit Partners L.P. The repayment of principal and interest by the borrowers under the Senior Loans provided the Issuer with its principal source of funds to make payments under the Notes, and the Notes were subject to mandatory early redemption in the event that the Senior Loans were prepaid. Table 2 below gives details of the senior and junior loans in question.

As appears from Table 2, the Issuer acquired the Senior Loans only in relation to the Corleone, Blue Star, Orange and Saxony Whole Loans. In each of these cases: (a) there were also junior lenders whose rights were subordinated to those of the senior lenders pursuant to individual intercreditor agreements (together the “Intercreditor Agreements”); and (b) there was also a Facility Agreement governing the terms of the senior lenders’ arrangements.

In the case of the GSW loan, there were no junior lenders and, therefore, no intercreditor agreement, but the Issuer acquired a 25% share in the GSW Senior Loan, with the “GSW Co-Senior Lender” owning the remaining 75%. The relationship between the Issuer and the GSW Co-Senior Lender was governed by the GSW Facility Agreement.

In essence, it is the difference between the ways in which the GSW loan on the one hand and the other loans (Corleone, Blue Star, Orange and Saxony) on the other hand, were structured, that has given rise to the construction questions that have arisen as to the meaning of the definition of Sequential Payment Trigger in Condition 6.2.

The loan that is specifically in issue here is the Saxony Senior Loan, only because it is accepted that there have been defaults on the Orange and Blue Star Senior Loans, and the question is whether there has also been a default on the Saxony Senior Loan. If there has, then there will have been defaults on “three or more Senior Loans” within the provision of paragraph (iv) of the definition of Sequential Payment Trigger in Condition 6.2. If there has not been a default on the Saxony Senior Loans, there will only have been defaults under two senior loans, so that paragraph (iv) will not have been triggered. This question turns, in the broadest outline, on whether an amendment that was made to the Saxony Facility Agreement so as to postpone its Final Maturity Date is to be (a) taken into account, or (b) disregarded, when one comes to construe paragraphs (ii) and (iv) of the definition of Sequential Payment Trigger in Condition 6.2. Again, in the broadest outline, if paragraph (iv) has been triggered, fully sequential distributions are required, so that the highest class of Notes are paid in full first (the position advanced by Party A as a Class A1 noteholder). If paragraph (iv) has not been triggered, partially pari passu distributions are required, which benefit lower classes of noteholders.

Before dealing in detail with the terms of the relevant documentation, I shall briefly set out the chronological background to the dispute.

On 19^th June 2007, a total of €1,105,373,819 floating rate Notes, due in 2016, were issued by the Issuer in the 6 classes I have mentioned pursuant to a prospectus dated 14^th June 2007 (the “Prospectus”). I shall refer to the holders of all classes of the Notes as the “Noteholders”.

By the end of 2009, all the rating agencies had downgraded even the Class A1 Notes.

On 15^th April 2010, the Saxony Facility Agreement was amended to extend the Final Maturity Date of the Saxony Senior Loan from 20^th January 2011 to 13^th July 2013.

On 15^th April 2010, the Saxony Intercreditor Agreement was also amended. The amendment recorded the consent of all the Saxony junior and senior lenders to the postponement of the Final Maturity Date under the amendment to the Saxony Facility Agreement.

On 21^st December 2010, a Material Senior Default occurred in respect of the Orange Senior Loan.

On 13^th January 2011, a Material Senior Default occurred in respect of the Blue Star Senior Loan.

On 20^th January 2011, the Saxony Whole Loan was originally due to mature, but was not repaid due to the amendment to the Saxony Facility Agreement

On 15^th February 2011, the outstanding principal amount of the GSW Senior Loan in the sum of about €220 million was prepaid in full.

On 15^th June 2011, the Trustee issued the Claim Form in these proceedings.

On 4^th July 2011, Proudman J ordered that the hearing of these proceedings be expedited.

The structure of the relevant documentation is complex, but it may be summarised for present purposes as follows:-

The recitals to the Conditions made clear that they contained summaries of, and were subject to the detailed provisions of, the Trust Deed, the Charge, the Servicing Agreement and other documents. In addition, the recitals to the Conditions recited that the Noteholders had notice of these documents and of the MDC, but did not refer in this regard to the Facility Agreements or the Intercreditor Agreements.

Condition 6.2 sets out how payments are to be made to Noteholders in the case of mandatory early redemption: “in part on each Payment Date from the Available Principal Collections available on that Payment Date”.

Condition 6.2(a) and 6(2)(b) explain how the Issuer will distribute the “Pro Rata Redemption Amount” and the “Sequential Redemption Amount” respectively before the happening of a “Sequential Payment Trigger”:-

Condition 6(2)(c) provides that the Issuer will apply all Available Principal Collections after a Sequential Payment Trigger in accordance with the ISPEPPP; i.e. sequentially.

Condition 6.2 then defines “Pro Rata Redemption Amount” and “Sequential Redemption Amount” and “Modified Redemption Amount”. The definitions of Pro Rata Redemption Amount and Modified Redemption Amount (which itself significantly affects the meaning of Sequential Redemption Amount) contain detailed provisos, which, slightly strangely, deal with minor adjustments to the distribution rules. One might have expected to find such adjustments in the waterfall provisions, but nothing turns on this drafting idiosyncrasy.

Condition 6.2 then identifies four categories of Sequential Payment Trigger. It is crucial to understand that this four part definition is taken from the definitions in the MDC:-

“(i)

in respect of the GSW Senior Loan, a Loan Event of Default (based on the terms of the GSW Facility Agreement as at the Issue Date and without regard to any subsequent amendments to the GSW Facility Agreement or waivers granted in respect thereof that have occurred), provided that a Loan Event of Default shall not be deemed to have occurred for the purposes of this definition if:

(A)

the Loan Event of Default is with respect to payment and such default has been remedied or cured within 5 Business Days of such default; and/or

(B)

the Loan Event of Default is other than a Loan Event of Default described in (A) above, and the Loan Event of Default is capable of being remedied or cured within 30 days of such default being notified in accordance with the terms of the GSW Facility Agreement;

(ii)

if, in respect of the Corleone Senior Loan, the Blue Star Senior Loan, the Orange Senior Loan or the Saxony Senior Loan, a Material Senior Default (as defined in the relevant Intercreditor Agreements based on the terms of such Intercreditor Agreements as at the Issue Date and without regard to any subsequent amendments to any such Intercreditor Agreements or waivers granted in respect thereof that have occurred), provided that a Material Senior Default shall not be deemed to have occurred for the purposes of this definition if:

(A)

the Material Senior Default is with respect to payment and such default has been remedied or cured within 5 Business Days of such default; and/or

(B)

the Material Senior Default is other than a Material Senior Default described in (A) above, and the Material Senior Default is capable of being remedied or cured within 30 days of such default being notified in accordance with the terms of the relevant Intercreditor Agreement;

(iii)

there has been a failure to pay interest when due on any Note (other than the Most Senior Class of Notes then outstanding); or

(iv)

a Loan Event of Default (in respect of the GSW Senior Loan) or a Material Senior Default (in respect of the other Senior Loans) occurs in respect of three or more Senior Loans or with respect to thirty per cent. or more of the aggregate initial principal amount outstanding of the Whole Loans”.

Condition 6.2 then explains the consequences in the event that a Sequential Payment Trigger occurs. This passage is taken directly from clause 5.12 of the Charge, but juxtaposed in the Conditions as if it is part of the Sequential Payment Trigger, which it is definitely not:-

“Following a Sequential Payment Trigger as a result of the circumstances described in:

(a)

paragraph (i) of that definition, all Pro Rata Redemption Amounts and Sequential Redemption Amounts received in respect of the GSW Senior Loan shall be applied according to the Issuer Sequential Pre-Enforcement Principal Priority of Payments, as applicable;

(b)

paragraph (ii) of that definition, all Pro Rata Redemption Amounts and Sequential Redemption Amounts received in respect of the Corleone Senior Loan, the Blue Star Senior Loan, the Orange Senior Loan or the Saxony Senior Loan, as applicable, shall be applied in accordance with the Issuer Sequential Pre-Enforcement Principal Priority of Payments or the Post-Enforcement Priority of Payments, as applicable; and

(c)

paragraph (iii) or paragraph (iv) of the definition, all Pro Rata Redemption Amounts and Sequential Redemption Amounts shall be applied according to the Sequential Pre-Enforcement Principal Priority of Payments or the Post-Enforcement Priority of Payments, as applicable”.

Condition 6.2 is, therefore, adjusting the waterfall of distributions depending on the type of Sequential Payment Trigger:-

It is, as I have said, not disputed that there had been two Material Senior Defaults prior to prepayment of the GSW Senior Loan, one in respect of the Blue Star Senior Loan and one in respect of the Orange Senior Loan. It is also not disputed that, if the Final Maturity Date of the Saxony Senior Loan had not been extended, there would also have been a Material Senior Default in respect of the Saxony Senior Loan on 20 January 2011.

To understand the definition of Sequential Payment Trigger, it is necessary to track through the meaning of the terms “Loan Event of Default” and “Material Senior Default” in the other documentation. But it can be seen from the definition of Sequential Payment Trigger that, in that definition, the term “Loan Event of Default” is used only in relation to the GSW Senior Loan, and the term “Material Senior Default” is used in relation to the other loans including the Saxony Senior Loan.

There are discrepancies between the agreements as to grace periods and cure periods, but none of these discrepancies is relevant to the issues I have to decide.

The MDC contains the following relevant provisions:-

Clause 1.2(e) of the Saxony Intercreditor Agreement provided that “[a] reference in this Deed to a Finance Document [including the Saxony Facility Agreement] is a reference to that Finance Document as amended only if the amendment is expressly allowed by this Deed”.

Clause 3.2 of the Servicing Agreement provided that the “Servicing Standard” meant that: “in performing the Services, the Servicer … will act in the best interests of and for the benefit of the Issuer, the Noteholders, … and the Junior Lenders as a collective whole but taking into account the subordination (in accordance with the terms of the Intercreditor Agreements) of the Junior Loans …”. Mr Mortimore relied on this provision as demonstrating that the Servicer might have agreed to the postponement of the Final Maturity Date under the Saxony Facility Agreement in the interests of the junior lenders or the Noteholders as a whole, rather than in the interests of the Class A1 Noteholders. There was, however, no evidence before me as to the circumstances in which this postponement was agreed, so all I can do is take the provisions of the documents at their face value.

As the case developed in oral argument, it became apparent that the construction issues that I needed to determine would be significantly affected by the correct approach to the construction of a document in which it was alleged that there was an obvious mistake that ought to be cured by the process of construction, rather than by rectification. The authorities on this point have been developing rapidly in recent years, so before turning to the competing arguments, I will try to set out a brief summary of the most relevant dicta to which I was referred. I shall not seek to explain the facts of these cases that are mostly too well known to need extensive explanation.

In Mannai Investment Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749, which concerned the construction of notices to determine a lease containing an obviously wrong date, Lord Steyn said at page 767 that the question was not how the landlord understood the notices: “[t]he construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant contextual scene”.

In Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 W.L.R. 896, Lord Hoffmann said this at page 913:-

“(4)

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.

(5)

The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:

'… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.'”

In Chartbrook Ltd. v. Persimmon Homes Ltd. [2009] 1 A.C. 1101, Lord Hoffmann reverted to his speech in Investors Compensation Scheme and said this at paragraphs 22-25:-

“[22] In East v Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111, 263 EG 61 Brightman J stated the conditions for what he called “correction of mistakes by construction”:

“Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”

[23] Subject to two qualifications, both of which are explained by Carnwath LJ in his admirable judgment in KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363, [2008] 1 P & CR 187, [2007] Bus LR 1336, I would accept this statement, which is in my opinion no more than an expression of the common sense view that we do not readily accept that people have made mistakes in formal documents. The first qualification is that “correction of mistakes by construction” is not a separate branch of the law, a summary version of an action for rectification. As Carnwath LJ said (at p 1351, para 50):

“Both in the judgment, and in the arguments before us, there was a tendency to deal separately with correction of mistakes and construing the paragraph 'as it stands', as though they were distinct exercises. In my view, they are simply aspects of the single task of interpreting the agreement in its context, in order to get as close as possible to the meaning which the parties intended.”

In Re Sigma Finance Corp (in administrative receivership) [2010] 1 All ER 571, a case which concerned the construction of complex financial instruments:-

In Kookmin Bank v. Rainy Sky SA & Others [2010] 1 CLC 829, the Court of Appeal was divided with strong judgments on either side from Patten LJ and Sir Simon Tuckey as to the proper construction of on demand advance payment bonds. Thorpe LJ ultimately concurred with Patten LJ, who held that, since paragraph 2 of the bonds did not refer to sums being payable on the shipbuilder’s insolvency, such an eventuality was not covered by the wording. Patten LJ said this at paragraphs 35-36, 38, 42, and 51:-

“35.

Before I turn to the language of the bond and the judge's construction of paragraph (3) it is necessary to say something about the principles to be applied. In paragraph 18(iii) of his judgment Simon J describes the Bank's construction of the bond as having the surprising and uncommercial result of the guarantee not being available to meet the shipbuilders' repayment obligations in the event of insolvency. He appears to have taken this factor into account as an indication in favour of the Buyer's construction of paragraph (3) and Sir Simon Tuckey has adopted the same approach in paragraph 19 of his judgment in deciding between the alternative constructions which are advanced.

36.

I will come in a moment to the question whether there is any real ambiguity in the language of the bond and how evenly balanced the alternative constructions are, but the circumstances in which the Court can confidently declare that one or other possible meaning of the words used is uncommercial needs to be defined with some care. In a commercial contract (like any other contract) the parties have chosen to define the limits of the obligations which they have undertaken by the language they have used. The purpose of the contract is to provide an objective record of what has been agreed so as to regulate the legal relationship between them. The Court's function is to give effect to those obligations by respecting the terms in which they are cast. When a dispute arises as to the meaning and scope of the contract the Court can only resolve it by construing the words used in a way which gives them the meaning which the document would convey to a reasonable person knowing all the background knowledge which would have been available to the parties in the situation they were in at the time of the contract: see ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896 per Lord Hoffmann at page 912H.

…

38.

In some cases this reference back to the matrix of fact may enable the Court to make sense of language which, as written in the contract, is either misused or ungrammatical. Most of the recent cases in which the House of Lords has re-stated the principles of contractual interpretation have been ones in which there has been some detectable error in the drafting of the document which has required the Court to ignore the precise language used in order to arrive at the meaning which the parties appear to have intended: see Mannai Investments Company Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.

…

42.

In this case (as in most others) the Court is not privy to the negotiations between the parties or to the commercial and other pressures which may have dictated the balance of interests which the contract strikes. Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the Court has no alternative but to give effect to its terms. To do otherwise would be to risk imposing obligations on one or other party which they were never willing to assume and in circumstances which amount to no more than guesswork on the part of the Court.

…

51.

For the reasons which I have given, I do not regard the alternative constructions of paragraph (3) advanced on this appeal as being in any way evenly balanced. I also agree with Mr Philips that it is impermissible to speculate on the reasons for omitting repayments in the event of insolvency from the bond. Although the judge is right to say that cover for such event was, objectively speaking, desirable, that is not sufficient in itself to justify a departure from what would otherwise be the natural and obvious construction of the bond. There may be any number of reasons why the Builder was unable or unwilling to provide bank cover in the event of its insolvency and why the Buyer was prepared to take the risk. This is not a case in which the construction contended for would produce an absurd or irrational result in the sense described in the cases I have referred to and merely to say that no credible commercial reason has been advanced for the limited scope of the bond does, in my view, put us in real danger of substituting our own judgment of the commerciality of the transaction for that of those who were actually party to it”.

It appears that an appeal from the Court of Appeal’s decision in Kookmin Bank was argued in the Supreme Court on Wednesday 27^th July 2011, but I have not, unfortunately, had the benefit of seeing the Supreme Court’s decision prior to concluding my own judgment in this case.

In ING Bank NV v. Ros Roca SA [2011] EWCA Civ 353, the question was whether the calculation of a fee for financing services which was agreed to be based on “EV/EBITDA 06” should be construed as referring to “EV/EBBITDA 07” as more time had elapsed by the time the fee came to be calculated than had been originally expected when the contract was drafted. The Court of Appeal had to consider an argument on estoppel by convention which ultimately succeeded, but on the construction issue the Court was unanimous that the contract could not be construed as referring to the 2007 figures. Carnwath LJ said this at paragraphs 22 and 24-5:-

“[22] Like the judge I would start from Lord Hoffmann's guidance in Chartbrook. That requires that it should be clear (a) that something has gone wrong with the language and (b) what a reasonable person would have understood the parties to have meant.

…

[24] I am not convinced that this is sufficient to bring Lord Hoffmann's two-stage test into play. On this view nothing has gone wrong with the language as such. The reference to EBITDA 2006 was intentional. The mistake was not in the language, but in failing to anticipate its consequences.

[25] In any event, I think the interpretation also falls down at stage 2. The question is not whether the judge's approach produces a fairer result, but whether it represents the clear alternative interpretation. The underlying assumption of this part of the judgment seems to be that, at whatever time the transaction might eventually take place, it would be possible objectively to identify “the current EBITDA”, which could thus be said to be “implicit” in the transaction. This view does not appear to be supported by the evidence”.

Rix LJ said this at paragraph 80-83:-

“[80] It is impossible in my judgment to ignore and rewrite, or delete, the reference to EBITDA 2006, or to turn it into a reference to a current and different EBITDA. The parties had a choice as to how to express the reference to EBITDA as part of their formula, and they deliberately chose to refer to EBITDA 2006. They did so at a time when that figure was itself a forecast figure, since the financial year 2006 was not yet at an end, and when there existed further forecasts, such as for 2007. It is impossible to regard the inclusion of EBITDA 2006 as done “by oversight” (the judge's para 49). As it happened, the transaction was not closed until December 2007, over a year after the October 2006 contract between Ros Roca and ING, by which time EBITDA 2006 had become historic and Ros Roca was prospering to an extent greater than had been anticipated in the previous year. The error was in not anticipating these facts or providing for them in the formula. That might have been done in a number of ways, including by the imposition of a cap. Or the error could be expressed in another way, as the failure to re-address the formula in the light of the new events as the fulfilment of the transaction approached (as to which more below). Ros Roca was not obliged to close the deal, and it could have raised the question of the appropriate formula for renegotiation. However, these are errors of negotiation or commercial intuition, not errors of language in the expression of an agreement.

[81] The fact that these commercial errors occurred does not mean that the original contract on ING's construction of it was a “commercial nonsense”, or that it is to be concluded that “something must have gone wrong with the language”. Since the contract would have operated perfectly well if it had gone ahead on a timetable as originally contemplated, it is hard to see why a straightforward application of its language should be castigated as nonsense. On any view, moreover, an entry multiple was “implicit” in the transaction whichever EBITDA was used. And on any view it might be difficult to say, as of any particular time, which was the “current” EBITDA by reference to which an entry ratio might be calculated. Hence the contract's adoption of a fixed reference point.

[82] I therefore agree that neither of Lord Hoffmann's conditions for the application of the doctrine in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101, [2009] 4 All ER 677 are here to be found fulfilled. It will be recalled that Lord Hoffmann adopted those conditions (see at 1114) from the judgment of Brightman LJ in East v Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111, 263 EG 61, as qualified by Carnwath LJ in KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363, [2007] Bus LR 1336, [2008] 1 P & CR 187.

[83] In this case, however, neither condition was met. Time and circumstance may always test the flaws in a contract. Whereas the error in Chartbrook always existed. In such a case as this, I would respectfully refer to the observations of Patten LJ in Kookmin Bank v Rainy Sky SA [2010] EWCA Civ 582 at paras 41/42, [2011] 1 Lloyd's Rep 233, 130 ConLR 19”.

It is common ground that the purpose of sequential triggers is, broadly, to confer priority upon the most senior Noteholders in distress situations. I have already referred to Professor Wood’s book, which explains the rationale for the kind of arrangement that was established by the documentation in this case. Since these Notes were issued in increasingly difficult economic circumstances the amount of the cushion provided by the junior notes was a rather greater percentage of the whole than Professor Wood describes as normal.

Likewise, it is not in dispute that clause 5 of the Charge sets out waterfall provisions in situations other than those in Condition 6.2, including in particular (in simple terms): (a) before a Note Acceleration Notice has been served and before the occurrence of a Sequential Payment Trigger; (b) before a Note Acceleration Notice has been served, but after the occurrence of a Sequential Payment Trigger; and (c) after a Note Acceleration Notice has been served. In broad terms, the distributions become more sequential and less pari passu, to the benefit of the senior Noteholders and to the detriment of the junior Noteholders, as the defaults become more serious. The details of the precise terms of the waterfalls do not matter.

It should be noted, however, that the precise terms of the progression of the waterfall from partially pari passu distribution to almost wholly sequential distribution is complex. That is illustrated by the detailed terms of clause 5 of the Charge and by the provisos to the definitions of Pro Rata Redemption Amount and Modified Redemption Amount, to which I have already referred.

With this introduction, I turn to considering the competing arguments on the two construction points I have to decide. I should, however, make clear that the two points overlap to some extent and that I have considered them both together as well as separately notwithstanding that I have, for clarity’s sake, expressed my conclusions on each issue separately.

I should mention first that it is common ground that the first word of trigger “(ii)”, namely “if” is accepted on all sides to be redundant and surplus, so that it should be ignored.

If the Class A1 Noteholders are to succeed in showing that paragraph (iv) of the definition of Sequential Payment Trigger in Condition 6.2 (what I shall call “trigger (iv)”) has been activated, resulting in the sequential distributions they seek, they must first show that paragraph (ii) of the definition of Sequential Payment Trigger in Condition 6.2 (what I shall call “trigger (ii)”) has been activated. That is because if it is accepted that if there has not been a Material Senior Default in the Saxony Senior Loan under trigger (ii), it would follow if the term “Material Senior Default” had the same meaning throughout the definition of “Sequential Payment Trigger” that there has not been Material Senior Default in the Saxony Senior Loan under trigger (iv).

Mr Mortimore submitted that there had been a Material Senior Default of the Saxony Senior Loan under trigger (ii) because, even though the words in brackets in trigger (ii) did not refer expressly to the Saxony Facility Agreement, but only to the Saxony Intercreditor Agreement, they must be taken as meaning that the question of whether there has been a Material Senior Default should be judged under trigger (ii) by reference to the state of affairs at the date of the issue.

Mr Mortimore referred to the need for the definition of Sequential Payment Trigger to be read consistently and as one whole. It is a single sentence, and he argued (primarily in relation to the second issue) that there could not be two meanings of the term “Material Senior Default” in the single definition and the single sentence.

Mr Mortimore also submitted that the structure of the definition could be seen from trigger (i) which referred to the GSW Senior Loan, in respect of which, of course, there was no GSW Intercreditor Agreement, because there were no GSW junior lenders. Trigger (i) makes it clear that a relevant Loan Event of Default must be “based on the terms of the GSW Facility Agreement as at the Issue Date and without regard to any subsequent amendments to the GSW Facility Agreement or waivers granted in respect thereof that have occurred”. That would clearly rule out reliance on any amendment to the GSW Facility Agreement. Thus, if the Final Maturity Date of the GSW Senior Loan had been postponed (as the Final Maturity Date of the Saxony Senior Loan was postponed), it is clear that trigger (i) would still be activated if payment were not made by the original unamended Final Maturity Date.

In these circumstances, Mr Mortimore submitted that it is obvious that the same fixed trigger was intended for trigger (ii) as for trigger (i). The Noteholders ought to be able to know precisely what they were letting themselves in for at the outset. They did not even have access to the Facility and Intercreditor Agreements, but only had summaries of the main provisions in the Prospectus.

In addition, Mr Mortimore submitted that the words “based on” were important in the bracketed words in trigger (ii): “as defined in the relevant Intercreditor Agreements based on the terms of such Intercreditor Agreements as at the Issue Date and without regard to any subsequent amendments to any such Intercreditor Agreements or waivers granted in respect thereof that have occurred”. The words “based on” introduced the second of three provisions as follows:-

Thus, said Mr Mortimore, the second of these provisions gave the whole parantheses a broader meaning than simply referring to the Intercreditor Agreement, and required reference to the “terms” of such Intercreditor Agreements as at the Issue Date, including the underlying Facility Agreements as they stood at that time. That lead into Mr Mortimore’s argument that Saxony Intercreditor Agreement referred extensively to the Saxony Facility Agreement and the references to the former must, therefore, be taken as including a reference to the latter.

In my view, Mr Mortimore’s strongest point is this consistency one. But this argument is based upon the suggestion that the draftsman of the definition of Sequential Payment Trigger has, in effect, made an obvious mistake. He or she must, it is said, have intended to create the certainty of the triggers responding to defaults without regard to later amendments to the loan documentation. In other words, the triggers would have been fixed at the Issue Date, and any indulgences granted later were not to affect them. Such indulgences could easily, as one saw from the Servicing Agreement, be for the benefit of Noteholders as a whole or even for the junior lenders, whereas these triggers governed the relationship between junior and senior Noteholders. There would be great merit in fixing what the triggers were to be, effectively in stone.

In reaching my conclusion on this point, I am guided by the authorities I have set out above, and in particular by Lord Hoffmann’s two point test which is applicable in a case such as this:-

I can consider the background to the transaction in resolving these questions. But I also keep closely in mind the two recent powerful decisions of the Court of Appeal in Kookmin and in ING, and Lord Collins’s dictum in Sigma as bearing directly on a Eurobond construction case of this kind.

The problem here is that the wording of the brackets in trigger (ii) is quite clear – rather like the reference to EBITDA 2007 in the ING case. It is perhaps even clearer than the wording of the payment guarantee in Kookmin. Whatever the draftsman may have meant to convey in trigger (ii), he or she seems actually to have referred, not once, but three times, to the Intercreditor Agreements, not to the Facility Agreements. On the facts here, it was the Saxony Facility Agreement that was amended, not the Saxony Intercreditor Agreement. Moreover, the reference in the amendment to the Saxony Intercreditor Agreement approving the amendment to the Saxony Facility Agreement was not itself, in any sense, an “amendment” to the Saxony Intercreditor Agreement, so as to allow it to be disregarded.

Thus, in applying the first test, it does not seem to me, looking at the contractual documentation in the round, against the relevant factual matrix, that there has been a clear mistake on the face of the instrument. I can fully see and understand that the draftsman may indeed have made a mistake, and may have intended just what Mr Mortimore submits he or she must have intended. But I cannot see that this is by any means clear – let alone clear from the face of the document. The definition may have intended a partially fixed approach in trigger (i) and a more flexible one in trigger (ii). I do not know. There was no such evidence and it would not have been admissible even if there had been any. In addition, whilst the draftsman might have intended to say in three places: “Intercreditor Agreements and Facility Agreements”, he might just as easily have intended to say something else. What, for example if another one of the many transaction or finance documents had been amended, would it then be said that the draftsman had meant to a refer to wider range of documentation?

Although I see the force of Mr Mortimore’s argument that the ‘error’ came about because trigger (i) related to the GSW Senior Loan where there was no Intercreditor Agreement, I cannot say with any assurance, let alone conviction, that the draftsman did make that mistake, as opposed to any other, or indeed any mistake at all. The words he or she used were really very clear.

The submission that the words “based on” can expand the reference to the Intercreditor Agreements to a reference to the Facility Agreements as well does not, I am afraid to say, seem to me to have any foundation at all. The second and third provisions in the bracketed words seem to be more a belt and braces than anything else.

So, if there is no obvious mistake on the face of the definition of Sequential Payment Trigger, I do not need to address whether it would be clear what correction ought to be made in order to cure the mistake. But in my judgment, that question too would, anyway, have to be answered against the Class A1 Noteholders largely for the reasons I have already given. It is not clear what amendment should be made. It is only suggested that trigger (ii) should refer to the Facility Agreements as well as the Intercreditor Agreements, because it happens that on the facts of this case one of the Facility Agreements was in fact amended. It could just as easily have been submitted that other documentation should have been referred to, had it been amended. And even if trigger (i) does point in the direction of the amendment that Mr Mortimore seeks, that is not an irresistible pointer, it is just a soft indication. In my judgment, both limbs of the Chartbrook test are failed in this case. Indeed, the construction exercise in relation to trigger (ii) does not seem to me to be a difficult one. The waterfalls provided for in these complex financial instruments are neither uniform nor entirely logical, at least without a detailed explanation as to the underlying negotiations and commercial intentions of the many parties including the Originator, the Issuer and their lawyers. I have had no such evidence (even if it would have been admissible, which I doubt). I should not, I think, in a case of this kind particularly, second guess the commercial intentions of the parties. I should instead be guided by the clear objective meaning of the words they used.

In this case, I have no doubt, therefore, that trigger (ii) requires only amendments to the Intercreditor Agreements and the Saxony Intercreditor Agreement in particular, to be disregarded. Accordingly, trigger (ii) has not been activated in respect of the Saxony Senior Loan since the amended Final Maturity date has not yet been reached.

This issue does not now strictly arise, in the light of my decision on the first issue. I will, nevertheless, address the arguments that were advanced. Mr Miles argued here that the defined term “Material Senior Default” was not qualified in trigger (iv) in the way it was in trigger (ii), and should therefore be given its ordinary defined meaning. In other words, said Mr Miles, the Material Senior Default referred to in trigger (iv) is only one that occurs under the Saxony Facility agreement as amended, and you cannot read the bracketed qualification in trigger (ii) as if it appeared also in trigger (iv). Mr Miles refers to the provisions of both the Saxony Facility Agreement and the MDC requiring reference to documents to be taken as referring to the documents as amended, and so he says, following through the meaning of Material Senior Default and Payment Default and a default under clause 23.2 of the Saxony Facility Agreement, one must read that as referring to the Saxony Facility Agreement (as amended). Mr Mortimore on the other hand, submits that the Saxony Facility Agreement is defined in the MDS as the agreement of 5^th December 2006, and that the unamended version is what must be taken to have been referred to in the train of definitions on which Mr Miles relied.

Mr Miles’s argument turns in effect on the term “Material Senior Default” having different meanings in the different parts of the single sentence of the definition of Sequential Payment Trigger. It seemed to me at first that there might be something in the point since such a result is always possible (see, for example, Lord Hoffmann at paragraph 27 in Oxfordshire County Council v. Oxford City Council and others [2006] 2 A.C. 674, where he decided that the word “locality” was singular where it first appeared in section 22(1A) of the Commons Registration Act 1965, and plural where it next appeared), despite the case of In Re Birks [1900] 1 Ch. 417 to contrary effect cited by Mr Mortimore.

On mature reflection, however, I do not think that Mr Miles’s submission can succeed. It is true that the words in brackets in trigger (i) and trigger (ii) and trigger (iv) could, in theory, be regarded as specific to the usage of the term the brackets qualify in each trigger. But, in my judgment, the definition must be given some internal consistency. The brackets in trigger (i) clarify that a “Loan Event of Default” in respect of the GSW Loan is to be judged on the basis of the unamended GSW Facility Agreement as at the Issue Date. Likewise, the brackets in trigger (ii) clarify that a “Material Senior Default” in respect of the other loans is to be judged on the basis of the unamended Intercreditor Agreements as at the Issue Date. When one comes to trigger (iv), the words in brackets are “in respect of the GSW Senior Loan” qualifying a Loan Event of Default, and “in respect of the other Senior Loans” qualifying a Material Senior Default. These words are not in place of the qualifications in triggers (i) and (ii), but rather direct the objective reader back to those qualifications. The definition would be inconsistent and illogical if it used the defined terms Loan Event of Default and Material Senior Default in different ways in different triggers. It is not what any objective reader familiar with the documentation as a whole would expect. The terms are each defined in the MDC and elsewhere, and then qualified for use in the definition of Sequential Payment Trigger. Thus all three triggers (i),(ii) and (iv) use the terms in their qualified form. I have considered whether this conclusion assists Mr Mortimore on the first issue, since I have effectively held that consistency requires a conclusion in his favour on the second issue and a conclusion against him on the first issue. But it seems to me that the points under each issue, though connected, are rather different. The construction question on the first issue boils down to a question of whether the draftsman has made a mistake of the kind that can properly be remedied by the properly applicable principles of construction I have set out in detail above. The construction question on the second issue is purely a process of understanding what, viewed objectively the words used by the draftsman must be taken to mean. I have no real doubt that the draftsman here was qualifying his or her usage of the defined terms Loan Event of Default and Material Senior Default in triggers (i) and (ii) respectively for use throughout the single definition of Sequential Payment Trigger.

The fact that triggers (i) and (ii) also contain provisos is not a reason for refusing to read the bracketed qualifications across to trigger (iv). The bracketed qualifications directly affect the defined terms and must for the reasons I have given be taken to be carried through the whole of the definition. I can see arguments for and against reading the provisos across as well, but I have not heard argument on the point and do not intend to decide it.

For the reasons I have tried shortly to express, I have reached the clear conclusions that the answers to the two issues are as follows:-

The directions sought in the Claim Form would be answered as follows:-

I will hear counsel on the appropriate form of order and as to costs.