Landesbank Hessen-Thuringen Girozentrale & Ors v Bayerische Landesbank, London Branch & Anor

This is the judgment on a Part 8 claim concerned with the construction of a Facility Agreement under which the claimant banks and the defendant were Lenders under a £396 million loan facility in relation to the financing of the purchase of 30 St Mary Axe London EC3 (better known as “the Gherkin”) by the Borrowers from Swiss Re. The Borrowers are various entities representing a joint venture between IVG Immobilien, a German real estate group and Evans Randall, a UK investment banking and private equity group.

The Facility Agreement was originally dated 21 February 2007 but amended and restated on 29 June 2007. Prior to syndication of the loan in July 2007, the parties to the Facility Agreement were 30 St Mary Axe Limited Partnership and others as Borrowers, 30 St Mary Axe Limited Partnership as Guarantors, Bayerische Landesbank (to which I will refer as “BLB”) in its capacity as Arranger, BLB in its capacity as Facility Agent, BLB in its capacity as Security Agent and, because at that stage BLB was the only Lender, BLB in its capacity as Lender. Thus, although at that stage BLB was the only Lender, by its terms the Facility Agreement drew a clear distinction between the various capacities in which BLB was acting.

The claimants are members of the Sub-Syndicate who became Lenders under the Facility Agreement upon syndication effective on 16 July 2007. The Facility Agreement required the Borrowers to enter into a series of interest rate swaps (“the Hedging Agreements”) to manage interest rate risk during the term of the loan with the Hedging Lender defined as BLB or any other Lender which became a Hedging Lender. Although BLB as Hedging Lender was not a separate party to the Facility Agreement, at various places the Facility Agreement recognises that it was also acting in the capacity of Hedging Lender.

There are six Hedging Agreements between the Borrowers and BLB as Hedging Lender entered on 16 February 2007 which incorporated, as is usual, the terms of the ISDA Master Agreement. Because of the significant fall in interest rates since February 2007, the Borrowers are significantly “out of the money” under the Hedging Agreements, to the extent that if early termination occurred now, the Borrowers would be liable to pay the Hedging Lender some £138 million as break gains. This is not a matter which has troubled the parties until the recent past, since the Borrowers were performing their obligations under the Facility Agreement satisfactorily, meaning that no question of early termination of the Hedging Agreements arose.

However, during the course of last year the Borrowers have encountered financial difficulty and various restructuring and enforcement options have been under consideration by the Lenders, which might well involve early termination of the Hedging Agreements. In that context, the dispute which has arisen concerns the manner in which BLB as Facility Agent would be required to distribute amongst the Finance Parties (defined as the Arranger, each Agent, each Lender and the Hedging Lender) such sum as might be paid by the Borrowers pursuant to their liability under the Hedging Agreements in circumstances where it is likely that the sums received will be less than the amount the Borrowers are liable to pay.

In such circumstances, the distribution of monies will be governed by the so-called payment waterfall in clause 9.7 of the Facility Agreement which provides as follows:

“Application of Moneys

If any amount paid or recovered in relation to the liabilities of an Obligor under any Finance Document is less than the amount then due, the Facility Agent shall apply that amount against amounts outstanding under the Finance Documents in the following order:

(a)

first, to any unpaid fees and reimbursement of unpaid expenses or costs (including break costs and hedging break costs) of the Facility Agent;

(b)

second, to any unpaid fees and reimbursement of unpaid expenses of the Lenders;

A dispute having arisen as to the interpretation of that provision, the present proceedings were commenced by way of a Part 8 Claim Form on 10 December 2013. The claimants sued BLB London Branch in its capacity as Facility Agent as first defendant and BLB in its capacity as Hedging Lender as second defendant. Although BLB is one corporate entity, because it was sued in two capacities, there was separate representation. On behalf of BLB in its capacity as Facility Agent, its solicitors Olswang LLP indicated that it took a neutral stance, so that counsel was not instructed to attend at trial. BLB’s participation and representation at trial has been in its capacity as Hedging Lender.

By Order of Andrew Smith J dated 10 February 2014, the trial of the claim was expedited and was heard by me on 30 April 2014. In fact, by the time of the trial, the matter had assumed a greater urgency, because two weeks ago Deloitte were appointed receivers of the property, so that there may be an imminent Event of Default which could lead BLB to terminate the Hedging Agreements, crystallising the obligations of the Borrowers under those Agreements.

The dispute concerns, specifically, the interpretation of clause 9.7(a) and the penultimate sentence of the clause. As originally formulated, BLB’s case was that, in the event that the Borrowers made a payment in partial discharge of their obligations under the Hedging Agreements upon early termination, that would constitute reimbursement of “hedging break costs” under clause 9.7(a) and so, by virtue of the penultimate sentence would rank ahead of the debt due by way of principal and interest from the Borrowers to the Lenders under the Facility Agreement. By the time of the trial, Mr Mark Phillips QC for BLB essentially accepted that this contention was not sustainable. Even if his argument that the reference to the Facility Agent in clause 9.7(a) encompasses BLB in its capacity as Hedging Lender is correct (as to which see further below), the sums paid by the Borrowers to BLB as Hedging Lender in such circumstances would not be “hedging break costs” of BLB but hedging break gains. The Facility Agreement clearly distinguishes between hedging break costs and hedging break gains, as can be seen from the definition of Net Proceeds set out below.

Accordingly, at the trial, submissions were focused on BLB’s alternative case which was that “hedging break costs” of the Facility Agent encompassed the costs and expenses which BLB as Hedging Lender would incur upon early termination of the Hedging Agreements under the various market hedging arrangements which BLB has in place or may put in place to manage its risk exposure under the Hedging Agreements and which might require restructuring or rebalancing upon such early termination.

The “Parties” provision at the outset of the Facility Agreement identifies the Parties as referred to at [2] above including BLB in its various separate capacities. So far as relevant to the present dispute, this includes at (5) “[BLB] in its capacity as facility agent for the Lenders under the Finance Documents (the “Facility Agent”)”.

The following other Definitions in clause 1.1 are relevant to the present dispute:

“Currency Hedge”

means the £12,000,000 currency hedge assigned by the Vendor to the Facility Agent on or before the date hereof;

“Derivative Instrument”

means any forward rate agreement, option, swap, cap, floor, any combination or hybrid of the foregoing and any other financial derivative agreement;

“Finance Documents”

means this agreement, each Security Document, the Hedging Agreements, each Transfer Certificate, Accession Document, the Fees Letter, the Forex Agreement, the Deed of Subordination, each Duty of Care Agreement and any other document designated as a Finance Document by the Borrowers and the Facility Agent;

“Forex Agreement”

means the foreign exchange transaction agreement to be entered into between the Property Owner, the Partnership and the Facility Agent as counterparty;

“Forex Counterparty”

means Bayerische Landesbank, Munich;

“Hedging Agreements”

means the Derivative Instruments entered into by each Borrower with the Hedging Lender for the purpose of managing or hedging interest rate risk in relation to the Facility, in the agreed form;

“Hedging Lender”

means Bayerische Landesbank, Munich or any other Lender which becomes a Hedging Lender in this capacity as provider of interest rate hedging under any Hedging Agreements;

“Net Proceeds”

means the aggregate consideration received by or on behalf of any Obligor in relation to the disposal of the Property (including any associated break gains in relation to the Hedging Agreements) but after deducting all Taxes and other reasonable costs and expenses incurred by the Partnership or the Property Owner in connection with that disposal (except any associated break costs in relation to the Hedging Agreements);”

The other provisions of the Facility Agreement which are relevant for present purposes other than clause 9.7 quoted already are as follows:

“3 PARTICIPATION OF LENDERS

3.2.2

If any Lender changes its Facility Office for the purpose of the Facility, that Lender will, as soon as reasonably practicable after that change, notify it to the Facility Agent and the Borrowers and, until it does so, the Agent and the Borrowers will be entitled to assume that no such change hastaken place.

3.4

Syndication

3.4.1

The Facility is being made available by the Lenders with the intention (but not the obligation) that the Facility Agent should co-ordinate syndication. Each Obligor undertakes to assist and co-operate with the Facility Agent in any primary syndication in such a manner and to such extent as the Facility Agent may reasonably request, (including but not limited to assisting in the preparation and approval of a syndication information memorandum (the "Syndication Memorandum")):

8

REPAYMENT AND PREPAYMENT OF THE ADVANCE

8.9

Order of Application of Prepayments

Any amount to be applied in prepayment of the Facility shall be applied in the order set out in clause 9.7 in prepayment of the Advances, accrued interest, break costs and in payment of any hedging break costs associated with the relevant prepayment, in each case until the Advances or other liabilities have been satisfied in full.

9

PAYMENTS

9.2

By Obligors

9.2.1

On each date on which any amount is due from an Obligor under the Finance Documents, the relevant Obligor shall (unless a contrary intention appears in a Finance Document) pay that amount to the Facility Agent on that date at the time specified by the Facility Agent as being customary for the settlement of transactions in the relevant currency in the place of payment in immediately available cleared funds to the account specified by the Facility Agent for that purpose.

9.2.5

The Facility Agent shall, on the date of receipt, pay to the Finance Party to which the relevant amount is due its pro rata share (if any) of any amounts so paid to the Facility Agent to the account specified by that party to the Facility Agent. If any amount is paid to the Facility Agent later than required by clause 9.2.1 (By Obligors), the Facility Agent shall make that party's share available to it as soon as practicable following receipt.

16

BANK ACCOUNTS

16.1

Designation of Accounts

30 St Mary Axe Limited Partnership as general partner of the Partnership (and for the purposes of this clause 16 only the "GP") will open and maintain in its name on behalf of the Partnership with the Account Bank the following interest bearing bank accounts:

16.1.1

a deposit account designated the "Rent Account";

16.2

Payments into the Rent Accounts

16.2.1

The GP shall pay or procure that the relevant Property Manager (with responsibility for collection of Rental Income) pays all Net Rental Income received by the GP or, as the case may be, the relevant Property Manager into the Rent Accounts (Net Rental Income paid in Swiss Francs to the CHF Rent Account and Net Rental Income paid in sterling to the Rent Account).

16.2.2

The Borrowers shall ensure that any amounts received by it under the Hedging Agreements are paid into the Rent Account and all monies received by it under the Currency Hedge are paid into the CHF Rent Account.

16.6

Withdrawals from the Rent Accounts

16.6.2

On each Interest Payment Date, the Facility Agent may (and is hereby irrevocably authorised by the Obligors to) withdraw from, and apply amounts standing to the credit of, the Rent Accounts in the following order and apply where reasonably practicable amounts in the relevant currency against obligations in the relevant currency:

(a)

first, payment pro rata of any unpaid fees, costs and expenses of the Facility Agent and the Security Agent under the Finance Documents;

(b)

secondly, payment to the Facility Agent for the relevant Finance Parties of any accrued interest and fees due but unpaid under the Finance Documents and payment of any amount due but unpaid under the Hedging Agreements in relation to any Advance (other than termination payments and premiums but including break gains payable to the Hedging Lender, pari passu);

(c)

thirdly, payment of rent due under any Head Lease;

(d)

fourthly, payment of any capital repayments due in accordance with clause 8.1.1 (Repayment); and…

18

THE AGENT AND THE OTHER FINANCE PARTIES

18.1

Agent's Appointment

18.1.1

Each Lender:

(a)

appoints [BLB] as Facility Agent to act as its agent under and in connection with the Finance Documents and as Security Agent to act as its security agent for the purposes of the Security Documents; and

(b)

irrevocably authorises each Agent for and on its behalf to exercise the rights, powers and discretions which are specifically delegated to it by the terms of the Finance Documents, together with all rights, powers and discretions which are incidental thereto and to give a good discharge for any monies payable under the Finance Documents.

18.1.2

Each Agent will act solely as agent for the Lenders in carrying out its functions as agent under the Finance Documents and will exercise the same care as it would in dealing with a credit for its own account.

18.1.3

The relationship between the Lenders and each Agent is that of principal and agent only. No Agent shall have, nor be deemed to have, assumed any obligations to, or trust or fiduciary relationship with, the other Finance Parties or an Obligor, other than those for which specific provision is made by the Finance Documents.

18.8

Agent's Indemnity

18.8.1

Each Lender shall on demand indemnify each Agent (in proportion to that Lender's participation in the Advance (or the Total Commitments if the Advance has not been utilised) at the relevant time) against any loss incurred by the relevant Agent in complying with any instructions from the Lenders or the Majority Lenders (as the case may be) or otherwise sustained or incurred in connection with the Finance Documents or its duties, obligations and responsibilities under the Finance Documents, except to the extent that it is incurred as a result of the gross negligence or wilful misconduct of the relevant Agent or any of its personnel.

18.9

Termination and Resignation of Agency

18.9.1

An Agent (a “Retiring Agent”) may resign its appointment at any time by giving notice to the Lenders and the Borrowers.

18.9.2

A successor Agent (a "Successor Agent") shall be selected…

18.9.3

The Majority Lenders may at any time with the consent of the Borrowers, such consent not to be unreasonably withheld or delayed, by 30 days' prior notice to the relevantAgent and the Borrowers terminate the appointment of an Agent and appoint a SuccessorAgent.

25

INDEMNITIES

25.1

General Indemnity and Breakage Costs

25.1.1

The Borrowers will indemnify each Finance Party on demand against any loss which it incurs as a result of:

(a)

the occurrence of any Default;

(b)

any failure by an Obligor to pay any amount due under a Finance Document on its due date;

(c)

the Advance not being made for any reason (other than as a result of a default by a Finance Party) on the Drawdown Date specified in the Drawdown Request;

(d)

the Advance or overdue amount under a Finance Document being repaid or prepaid otherwise than on the last day of an Interest Period relating to the Advance or overdue amount; or

(e)

any amount being prepaid earlier than its due date (including, but not limited to, any breakage costs in relation to any Hedging Agreements).

25.1.2

The Borrowers' liability in each case set out in clause 25.1.1 above includes any loss of Margin up to the next Interest Payment Date any other loss or expense on account of funds borrowed, contracted for or utilised to fund any amount payable under any Finance Document, any amount repaid or prepaid or the Advance and includes any costs incurred as a result of the Finance Party terminating all or any part of its fixed rate swap or other hedging arrangements.

25.3

Hedge Indemnity

The Borrowers irrevocably agree to indemnify the Finance Parties in respect of and against:

25.3.1

any sum payable by a Finance Party to the Hedging Lender under the Hedging Agreements or the Forex Counterparty under the Forex Agreement upon complete or partial termination for any reason of the Hedging Agreements and the Forex Agreement;

and

25.3.2

any cost, claim, loss, expense, or liability incurred by a Finance Party in respect of the Hedging Agreements or the Forex Counterparty under the Forex Agreement occurring as a result of the Borrowers repaying the Advances or any part of them (or any other Secured Obligation) on any date other than its scheduled date for repayment.”

At the heart of the submissions of Mr Mark Phillips QC on behalf of BLB was the proposition that because BLB was the Hedging Lender and thus (unlike the other Lenders) had a risk exposure under the Hedging Agreements which it managed with its market hedging arrangements, it was commercially sensible and reasonable that any sums paid by the Borrowers or Guarantors upon which there was a shortfall (and a fortiori any sum paid upon early termination of the Hedging Agreements) should inure to the benefit of BLB as Hedging Lender, in priority to the other Lenders and without BLB having to prorate any such payment with the other Lenders pursuant to the penultimate sentence of clause 9.7.

Mr Mark Phillips QC contended that the reference to the Facility Agent in clause 9.7(a) was shorthand for BLB generally (including in its capacity as Hedging Lender) and not limited to BLB acting in its capacity of Facility Agent as such, as was contended by Mr Guy Philipps QC on behalf of the claimants. However, Mr Mark Phillips QC very fairly accepted that in the recital of the Parties at the beginning of the Facility Agreement, the party described as the Facility Agent was BLB “in its capacity as facility agent for the Lenders”. Nonetheless, he contended that clause 9.7(a) was not limited to the unpaid fees, expenses and costs of BLB in its capacity of Facility Agent, essentially for two reasons. First, he submitted that by definition BLB as Facility Agent was only an agent and hence did not enter into any hedging arrangements or other arrangements in that capacity, so it would not incur break costs or hedging break costs. On that basis, if the claimants’ construction of clause 9.7(a) were correct, the words in brackets in that provision were meaningless and the court should strain against a construction which rendered any part of the contract meaningless.

Second, he submitted that if the claimants’ construction were correct and clause 9.7(a) were limited to the unpaid fees and expenses and costs of BLB as Facility Agent, then if the Obligors made a payment upon early termination of the Hedging Agreements which was less than was due, that payment would not inure to the benefit of BLB but would have to be pro-rated with the other Lenders, notwithstanding that it was BLB which had borne the commercial risk of the Hedging Agreements and the market hedging arrangements it had put in place and notwithstanding that the payment made by the Obligors was made under the Hedging Agreements. Given the amount of outstanding principal and interest under the loan, the practical effect of this construction would be that BLB recovered nothing in respect of the hedging break costs it would incur. Mr Mark Phillips QC submitted that this was an uncommercial construction of the provision.

He also highlighted the difference, on the claimants’ construction, between the payment waterfall under clause 9.7(a) in the event of a shortfall in payment of what is due by the Obligors and the payment waterfall in respect of withdrawals from the Rent Accounts where under clause 16.6.2(b) the Hedging Lender would be entitled to be paid break gains ahead of any payment of outstanding capital (i.e. principal outstanding under the Facility agreement due to the Lenders). He submitted that it was curious that, on the claimants’ case there should be completely different payment waterfalls, although he accepted that this was a point which could only be taken so far.

The principal submission advanced by Mr Guy Philipps QC on behalf of the claimants was that the words Facility Agent in clause 9.7(a) connoted BLB acting in its capacity as Facility Agent, not acting in any other capacity, whether as Hedging Lender or otherwise. This was clear not only from recital (5) of the Parties to the Facility Agreement but from the careful way in which at a number of places, the draftsman of the Facility Agreement distinguished between the different capacities and roles of Facility Agent, Security Agent, Hedging Lender and Lender even though at the time the Agreement was made, a single corporate entity, BLB, fulfilled all those roles.

One particular example of this was clause 16.6.2 dealing with withdrawals from the Rent Accounts, which referred to payment by the Facility Agent from those Accounts, including of break gains payable to the Hedging Lender. This demonstrated that, in that clause, the phrase Facility Agent could not also encompass Hedging Lender, given that the two capacities were expressly distinguished. It was inherently unlikely in the extreme that the same phrase Facility Agent should have a wider different meaning encompassing Hedging Lender elsewhere in the Facility Agreement, specifically in clause 9.7(a).

Furthermore, Mr Guy Philipps QC submitted that if, as BLB contends, the phrase Facility Agent in clause 9.7(a) is shorthand for BLB, it must follow logically that the phrase encompasses not only BLB qua Hedging Lender but in all its other capacities as well, including as Lender. The effect of that would be that BLB had priority over the other Lenders as regards any of its fees and expenses as Lender. This would be a construction which is inconsistent with the other sub-clauses of clause 9.7, specifically (b), and with the penultimate sentence of the clause, which contemplate that all the Lenders (including BLB) will only recover their fees and expenses on a pro rata basis.

Mr Guy Philipps QC also relied upon the indemnity provision in clause 25.1 which obliges the Borrowers to indemnify each Finance Party (i.e. in the present context all the Lenders, not just BLB) in any one of five scenarios for loss it suffers, including under clause 25.1.2 any costs incurred as a result of the Finance Party terminating “all or any part of its fixed rate swap or other hedging arrangements”. Mr Guy Philipps QC submitted that this contemplated that other Lenders than BLB as Hedging Lender might enter hedging arrangements and incur break costs in one or more of the scenarios where an indemnity would be provided. Given that this indemnity covered all the Lenders including BLB, he submitted that was a further reason why the priority under clause 9.7(a) was intended to be limited to BLB in its capacity as Facility Agent.

On the basis that Facility Agent in clause 9.7(a) meant BLB acting in its capacity of Facility Agent as such, Mr Guy Philipps QC submitted that BLB was not entitled to be paid any hedging break costs it incurred as Hedging Lender under its market hedging arrangements in priority to the other Lenders pursuant to clause 9.7(a). Nor, if the Borrowers made a payment under the Hedging Agreements upon early termination was BLB entitled to receive all that payment in priority to the other Lenders. Rather that payment would fall to be distributed under clause 9.7(e) on a pro rata basis after (i) BLB as Facility Agent had received any unpaid fees and expenses under (a) and (ii) there had been appropriate pro rata distributions in respect of Lenders’ expenses, principal and interest under (b) (c) and (d).

Mr Guy Philipps QC submitted that BLB was wrong to suggest that it could never incur break costs or hedging break costs in its capacity of Facility Agent because it was only acting as an agent. He pointed out that, as agent, it might enter contractual arrangements on behalf of the Lenders as principals where it was the contractual counterparty and so assumed contractual obligations to the third party under that contract, even though it would be entitled to an indemnity in respect of those obligations from the Lenders under clause 18.8.

Mr Guy Philipps QC pointed out that there is some confusion as to whether the Forex Agreement was ever entered into. The definition of Forex Agreement in the Facility Agreement is prospective, in the sense that, as at the date of the Facility Agreement, it was yet to be entered into. Having at one stage said that the Forex Agreement was not in fact entered into, more recently BLB has suggested that this was a reference to two spot forex transactions entered into on 16 February 2007 and executed on 20 February 2007. It is impossible to resolve any disputed areas of fact on this Part 8 claim, but Mr Philipps submitted that whether there was a Forex Agreement or not does not matter: what matters is that the Facility Agreement contemplates that there would be such a Forex Agreement made with the Facility Agent and that the Facility Agent might incur costs and expenses under it (see clause 25.3).

Mr Guy Philipps QC also relied upon the reference in the Facility Agreement to a £12 million Currency Hedge. It would appear from clause 16.2.2 of the Facility Agreement that the Borrowers were party to the Currency Hedge and the definition of it in clause 1.1 indicates that the other party to it was originally Swiss Re, the Vendor, but that it had been assigned by the Vendor to the Facility Agent. BLB has not been able to locate the assignment. The document relied upon as being the Currency Hedge, although dated 21 February 2007 (the same date as the Facility Agreement) and between the Borrowers and the Vendor, does not seem to relate to £12 million. Once again it seems there is an issue of fact the court cannot resolve on this Part 8 claim. However, as with the Forex Agreement, Mr Guy Philipps QC submitted that the detail of what Currency Hedge was or was not entered does not matter. What matters is what was contemplated by the Facility Agreement, which was a currency hedging agreement assigned by the Vendor to the Facility Agent under which the Borrowers were expected to receive payments (see clause 16.2.2) and under which BLB as Facility Agent might incur break costs or hedging break costs, in respect of which it would be entitled to an indemnity under clause 25.1.

Attractively though Mr Mark Phillips QC put his submissions for BLB, I cannot accept them. It seems to me that they founder on the rock of the reference to Facility Agent in clause 9.7(a). It is quite clear from the recital of the Parties and from the careful way in which the Facility Agreement distinguishes between the different roles or capacities in which BLB was acting, that when the phrase Facility Agent is used, it means BLB in its capacity as Facility Agent, and is not shorthand for BLB acting in any other capacity. I agree with Mr Guy Philipps QC that clause 16.6.2, which draws a clear distinction between the roles of Facility Agent, of Security Agent and of Hedging Lender is fatal to BLB’s argument. Given that, in that clause the phrase Facility Agent can only mean BLB in its capacity of Facility Agent and not also in its capacity of Hedging Lender, it is inconceivable that the phrase Facility Agent in clause 9.7(a) had some other, more extended meaning.

Furthermore, it was contemplated by the Facility Agreement in the definition of Hedging Lender that another Lender other than BLB might become Hedging Lender. In that event, a construction of clause 9.7(a) which interpreted Facility Agent as encompassing Hedging Lender as well would be unworkable and nonsensical. Equally, it is clear from the terms of clause 18.9 that it was contemplated by the terms of the Facility Agreement that the other Lenders could terminate the agency of BLB and appoint another bank as Facility Agent. In that event also, a construction of clause 9.7(a) which interpreted Facility Agent (by definition on this hypothesis another bank than BLB) as encompassing BLB as Hedging Lender would be obviously unsustainable.

In my judgment, clause 9.7(a) is concerned with giving priority to the reimbursement of the fees, expenses and costs which the Facility Agent has incurred in carrying out its role as an agent of the Lenders and it makes perfect commercial sense that the agent should recover its fees, expenses and costs in priority to the other Lenders, without having to pro-rate them as occurs under the other sub-clauses of clause 9.7, because it has acted as their agent and they have undertaken to indemnify it under clause 18.8. However, I was unimpressed by BLB’s submission that its construction of the reference to Facility Agent in clause 9.7(a) as shorthand for BLB was to be preferred because it was commercially sensible for BLB as Hedging Lender to recover any hedging break costs it incurred in priority to recoveries by other Lenders under the other sub-clauses, because only BLB as Hedging Lender was taking the risk of the Hedging Agreements and the market hedging arrangements.

Quite apart from the fact that there does not seem to me to be any compelling reason for giving priority to BLB for having taken commercial risks as Hedging Lender when all the Lenders are taking a much more substantial risk by making the loan, BLB’s submission overlooks that once Facility Agent in clause 9.7(a) means more than BLB in its capacity of Facility Agent, there is no basis for limiting it to being also a reference to BLB as Hedging Lender. Rather BLB’s construction must mean that the reference to Facility Agent is to BLB in all its other capacities, including as Lender. The effect of that construction would be that clause 9.7(a) gave BLB priority over the other Lenders as regards its fees and expenses as a Lender, which is flatly inconsistent with clause 9.7(b) and the penultimate sentence of the clause, which clearly provide that the fees and expenses of all the Lenders including BLB are pro rated and none of the Lenders receives priority. It seems to me that BLB’s submissions did not really grapple with this difficulty in the way of its construction.

It also seems to me that the fact that the indemnity in clause 25.1.2 is provided by the Borrowers to all the Lenders in respect of any break costs any of them (not just BLB) might incur in terminating fixed rate swap or other hedging arrangements, without giving priority to BLB as Hedging Lender is another factor militating against BLB’s suggestion that clause 9.7(a) was giving it priority other than in its capacity as Facility Agent.

I was not impressed by the distinction Mr Mark Phillips QC sought to highlight, on the claimants’ construction, between the payment waterfalls under clause 16.6.2 on the one hand and clause 9.7 on the other. It seems to me that they are dealing with completely different situations. Clause 16.6.2 is addressing how the Facility Agent can apply any sums in credit in the Rent Accounts on each quarterly interest payment date. It is dealing with how the monies in the Rent Accounts are to be disbursed. The clause is supplemental to and not in replacement of the Obligors’ obligations to repay principal and interest under clauses 8 and 9.2. In other words, the clause is dealing with the situation where the Facility Agreement is running what might be described as its usual course. I agree with Mr Guy Philipps QC that it is difficult to see how hedging break gains could arise, since they would only apply on early termination of the Hedging Agreements, for example where there has been a prepayment or an Event of Default.

The clause 9.7 payment waterfall on the other hand is dealing with two situations which could be said to be outside the usual course. Clause 9.7 addresses what is to happen if notwithstanding payments by the Obligors and recoveries (for example from the Rent Accounts) there is still a shortfall in what is due. The same payment waterfall also applies, by virtue of clause 8.9, where there has been a prepayment of the Facility. In the circumstances, it is perhaps not surprising that the payment waterfalls are not identical but it is noteworthy that under both provisions, the unpaid fees, costs and expenses of the Facility Agent do get paid out first.

Whatever the vagaries of the drafting of the Facility Agreement, BLB’s case involves the distinct oddity that whereas the reference to Facility Agent in clause 16.6.2 can only be to BLB in its capacity of Facility Agent, given the express reference elsewhere in the clause to the Security Agent and to the Hedging Lender, the reference to Facility Agent in clause 9.7(a) is shorthand for BLB generally. This is an irreconcilable inconsistency which, as I have said, is fatal to BLB’s case.

I also agree with Mr Guy Philipps QC that the suggestion, as regards the words in parenthesis in clause 9.7(a), that the Facility Agent would never enter into any hedging or other arrangement which might involve break costs or hedging break costs, because it was only acting as an agent, is misconceived. It might very well enter such an arrangement acting as agent for the other Lenders but in circumstances where it assumed obligations as the contractual counterparty to the agreement with a third party (albeit that it was entitled to be indemnified by the other Lenders as its principals). Whatever the agreement was that the draftsman was referring to as the “Forex Agreement” is a good example of exactly that: the Facility Agent, BLB, was identified as the contractual counterparty.

It seems to me that it matters not whether there was in fact a Forex Agreement or any other agreement made with BLB as Facility Agent under which it did or might incur break costs or hedging break costs. What matters is that the draftsman contemplated that there might be such agreements under which the Facility Agent might incur break costs or hedging break costs; hence his inclusion of the words in parenthesis, whether out of an abundance of caution or otherwise and also his inclusion of the Hedge Indemnity in clause 25.3 which contemplates that BLB as Forex Counterparty might incur costs or expenses under the Forex Agreement in respect of which it would be entitled to an indemnity from the Borrowers.

However, even if that analysis were wrong and the words in parenthesis have no real meaning because, as BLB contends, there never could be a situation where the Facility Agent incurred break costs or hedging break costs, that would not be a reason for giving the phrase Facility Agent an extended meaning it simply will not bear on the correct construction of the Facility Agreement as a whole. In lengthy commercial contracts of this kind there will often be words or phrases which are surplusage or which have no obvious meaning.

Furthermore, whilst the court will strain against a construction the effect of which is to render an entire clause meaningless or to render an obligation no more than a statement of intent, this is not such a case. Clause 9.7(a) still has a clear meaning and effect, giving priority to the fees, costs and expenses incurred by BLB in its capacity of Facility Agent as such, even if on the correct construction of the clause, it does not get priority in respect of break costs or hedging break costs because it only incurred those in its capacity as Hedging Lender. I agree with Mr Guy Philipps QC that to interpret Facility Agent as shorthand for BLB in whatever capacity it was acting, in order to give some meaning and effect to the words in parenthesis would be allowing the tail in the parenthesis to wag the dog of the clause as a whole, never a permissible approach to construction.

For all the above reasons, the claimants’ construction of clause 9.7 is the correct one. In the event of a shortfall in the amount paid or recovered, the Facility Agent is obliged to apply that amount to unpaid interest and principal due to the Lenders under the Facility Agreement in priority to sums due to the Hedging Lender under the Hedging Agreements or costs and expenses incurred by the Hedging Lender in relation to its market hedging arrangements.