The Court of Appeal has ruled against the Republic of Argentina (the Republic) in a claim brought by investors in respect of Euro-denominated sovereign bonds issued in 2005 and 2010 seeking payment of an associated coupon valued, in total, at approximately EUR 1.33 billion: Palladian Partners LP & Ors v The Republic of Argentina & Anor [2024] EWCA Civ 641.
The decision will be of interest to issuers and investors in the bond markets as the judgment reaffirms the well-known principles of contractual interpretation in the context of a bond instrument. In particular, the court reiterated that the focus of any analysis should be based in the language used in the contract, that the context referred to had to be the context applicable to any investor in the bond instrument (including those on the secondary market) and that the aim of contractual interpretation is to determine the meaning of the language used by the parties, not what they intended to say.
The bond instruments in question were GDP-linked, which the court noted were not in common use and were therefore not standard instruments issued against a history of established practical experience or subject to standard wordings. The terms of the bond instruments, in summary and so far as relevant, provided for payment of an annual coupon only if GDP growth in the Republic for the year exceeded a "base case" set out in the terms of the bonds.
In 2014, the Republic "rebased" its measurement of GDP, so that it used 2004 prices rather than 1993 prices (as it had done at the time the bonds were issued). The effect of any such rebasing was dealt with by the terms of the bond instruments. However, the parties disagreed as to the effect of the relevant term. The Republic's position was that following rebasing the base case was not met from 2013 onwards such that no coupon payment was due; the claimants argued that the base case was met.
The Court of Appeal concluded that the claimants' interpretation was correct as it reflected the clear meaning of the words used in the bond instrument. While the commercial and economic consequences of the Republic’s interpretation were in some respects preferable to those that followed from the claimants' interpretation, that did not support a conclusion that the provision was to be interpreted contrary to the plain meaning of the language used in the bond instrument.
We consider the decision in more detail below.
Background
The background to this case is more fully set out in our blog post on the High Court decision, here.
In summary, in 2005 and 2010 the Republic of Argentina (the Republic) issued bonds as part of a major sovereign debt restructuring. This followed a national financial crisis and sovereign debt default. The bonds, which mature in 2035, contained terms by which an annual coupon would be payable only if (i) Gross Domestic Product (GDP) for the calendar year in question (a Reference Year) exceeded that set out in a table of base case figures for each Reference Year up to 2034; and (ii) the growth in the GDP from the previous year exceeded the growth in the base case table (the Growth Condition). At the time the bonds were issued, the Republic used 1993 as the "base year" for measuring GDP. However, in 2014, the Republic rebased its measurement of GDP, replacing the 1993 prices with 2004 prices.
A dispute subsequently arose between the claimant investors and the Republic as to the proper construction of a provision in the bonds which adjusted the base case figures in the event of a rebasing of GDP by the Republic (the Adjustment Provision).
The Adjustment Provision was in the following terms: "provided that, if the Year of Base Prices employed by INDEC for determining Actual Real GDP shall at any time be a calendar year other than the year 1993, then the Base Case GDP for each Reference Year shall be adjusted to reflect any such change in the Year of Base Prices by multiplying the Base Case GDP for such Reference Year (as set forth in chart above) by a fraction, the numerator of which shall be the Actual Real GDP for such Reference Year measured in constant prices of the Year of Base Prices, and the denominator of which shall be the Actual Real GDP for such Reference Year measured in constant 1993 prices."
The claimants asserted that the Adjustment Provision required an annual adjustment to the base case figures, arguing that this interpretation was economically logical and preserved the original bargain between the parties (the Annual Adjustment Construction). This would produce a different set of figures upon each annual adjustment. The Republic argued against this that the Adjustment Provision required a one-off adjustment to the base case figures, stating that this interpretation provided greater certainty and was more in line with the intended commercial and economic consequences of the parties' bargain (the One-Off Construction). Alternatively, the Republic argued for a correction of the words in the Adjustment Provision to convey this meaning.
High Court decision
The High Court's reasoning is discussed in our previous blog post, here.
In summary, the High Court found in favour of the claimants. It held that the claimants were correct that, following a rebasing of GDP, the base case was subject to an annual adjustment using the ratio between GDP measured in the new and old prices for each year, rather than a one-off adjustment using a fixed fraction derived from a single year (as the Republic had argued).
The Republic appealed to the Court of Appeal.
Court of Appeal decision
The Court of Appeal found in favour of the claimants and dismissed the appeal.
The law: principles of construction
The Court of Appeal emphasised that contractual construction involves determining the meaning of what the parties have said, not what they meant to say (as per Wickman Machine Tool Sales Ltd v L.Schuler AG [1973] UKHL 2). In particular, while the iterative process that a court should follow involves testing rival meanings of the language used against their commercial and economic consequences (as per In re Sigma Finance Corpn [2009] UKSC 2), against the background of admissible contextual material, this must not be permitted to undervalue the importance of the language used (as per Arnold v Britton & Ors [2015] UKSC 36).
Drawing on Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-rata CLO 2 BV [2014] EWCA Civ 984, the court stated that if the language pointed clearly to one construction, it should not readily conclude that the sophisticated parties involved in agreeing to it, with their understanding of GDP concepts and the benefit of advice on drafting from lawyers on both sides, would have considered that the economic and commercial consequences should be anything other than that which follow from the words used.
In considering what the relevant factual matrix is, the Court of Appeal noted that where the instrument in question is a bond which will be traded in the market, particular care needs to be taken to ensure that material which is to be considered part of the factual matrix was not only reasonably available to the original parties when the instrument came into existence, but also reasonably available to an investor when purchasing the instrument in the market. A provision which also binds those purchasing bond instruments on the secondary markets, such as the Adjustment Provision in these bond instruments, must mean the same for holders who purchase them many years after they were issued as for the original holders, and the relevant factual matrix is therefore limited to what it is reasonable to expect such investors to have taken into account.
In this context, the Court of Appeal emphasised that the additional material on which the Republic sought to rely as factual matrix, such as various presentations made to international investors at the time the bonds were being proposed, was not material of which an investor in the secondary market could reasonably have been expected to be aware when purchasing the bonds. Material of that type was accordingly not admissible or relevant to the construction of the bonds. Instead, the primary source of understanding available to purchasers in the secondary market was the words used in the bond instrument itself.
The Court of Appeal noted that this analysis was subject to the principle in Chartbrook Ltd v Persimmon Homes Ltd & Ors [2009] UKHL 38 that the court has the power to correct obvious mistakes where it is clear from the document itself and the background or context that something has gone wrong with the language. Nonetheless, this principle is subject to two stringent conditions which must be satisfied: (i) there must be a clear mistake on the face of the instrument; and (ii) it must be clear what correction ought to be made in order to cure the mistake. Further, it is only necessary to refer to the Chartbrook principle if the iterative process of construction cannot achieve the desired interpretation of the language used by the parties. Also, as per Monsolar IQ Ltd v Woden Park Ltd [2022] 2 P & CR 10, there is a distinction between a result which is commercially unattractive or even unreasonable, and the higher threshold to fulfil the condition of a clear mistake. What is required is that the result achieved by giving the words used their meaning in accordance with the normal iterative process of construction would be "arbitrary" or "irrational" or "nonsensical" or "absurd".
The language of the Adjustment Provision
In interpreting the Adjustment Provision, the Court of Appeal focused in particular on the words “at any time” which they considered described a state of affairs, not an event. This indicated that the Adjustment Provision was not concerned with a trigger event but what was to happen whenever GDP was no longer measured in 1993 Year Of Base Prices (YOBP), i.e., in every year in which the new YOBP was used. That was reinforced by the references in the numerator and denominator to “such” Reference Year, which naturally meant the year in which GDP was no longer being measured in 1993 YOBP. The Republic’s construction, however, treated “such” Reference Year as referring to an Overlap Year, a year which was not previously been mentioned in the Adjustment Provision, and which would in fact measure GDP in 1993 YOBP (rather than in the new YOBP).
According to the Court of Appeal, perhaps the clearest indication of all was the fact that at the end of the Adjustment Provision the denominator was expressed “in constant 1993 prices”. That was the case for the lifetime of the bonds and would apply in the case of a second and subsequent rebasing, which the parties would have contemplated during the lifetime of the bonds. By contrast, on a second and subsequent rebasing the One-Off Construction would require those words to be rewritten as a reference to the prices in the immediately preceding rebasing - so if a second rebasing from 2004 YOBP into 2015 YOBP occurred, “constant 1993 prices” would have to mean “constant 2004 prices”.
The Court of Appeal concluded that the meaning of the words was clear and that they bore the Annual Adjustment Construction meaning. In its view, the language was simply irreconcilable with the One-Off Construction.
The economic and commercial consequences
The Court of Appeal accepted that the Republic’s arguments on the economic and commercial consequences of the rival constructions provided a coherent body of reasons why the One-Off Construction was one which the parties could sensibly have chosen, and in fact those consequences in a number of respects might be preferable to those which followed from the Annual Adjustment Construction. It was, however, not persuaded that the consequences which flowed from the Annual Adjustment Construction were ones which the parties could not have intended because no sensible person would want to achieve that result. In the Court of Appeal's view, the economic and commercial consequences of the rival arguments did nothing to support a conclusion that the Adjustment Provision was to be interpreted in a way which was contrary to the plain meaning of the language used. The language in which the parties expressed their bargain clearly showed that they chose the construction contended for by the claimants.
Chartbrook principle
The Court of Appeal emphasised that the Republic's argument did not fulfil the first condition of the Chartbook principle of there having been an obvious mistake. The arguments about commercial and economic consequences did not come close to the threshold of rendering the claimants' construction arbitrary, absurd, irrational or nonsensical.
Accordingly, for all the reasons above, the Court of Appeal found in favour of the claimants' construction and dismissed the appeal.
Note: In October 2024, the Supreme Court refused the defendant's application for permission to appeal.
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