State Street Bank and Trust Company v Sompo Japan Insurance Inc & Ors

A court may correct an obvious mistake in contractual language as part of construction where it is clear that something has gone wrong and clear what a reasonable person would have understood the parties to mean. The court may consider all relevant documents and the surrounding context, not merely the face of one instrument. There is no fixed limit to the verbal correction permitted, provided the intended meaning is clear. Commercial coherence is relevant to identifying the mistake. A trustee seeking the court’s assistance must draw attention to relevant arguments affecting unrepresented beneficiaries or parties.

These Part 8 proceedings concerned the construction of documents governing floating-rate notes issued by Cheyne CLO Investments Ltd. Following an event of default, the swap counterparty claimed a termination amount, which Sompo Japan Insurance Inc paid under its guarantee. Sompo sought reimbursement from the issuer.

The definition of the reimbursement amount in the Conditions appeared to exclude termination payments, although other transaction documents suggested that such payments were intended to rank ahead of payments to noteholders and be reimbursed from the collateral. The central issues were whether the wording could be corrected by construction and, alternatively, whether rectification was available.

1. The court granted a declaration as to the true construction of the relevant documents. The issue of rectification therefore did not arise.

2. Following East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61, correction by construction requires a clear mistake and a clear correction capable of curing it. The approach is part of the ordinary task of interpreting the agreement in its context, rather than a separate branch of rectification.

3. Applying Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, the court was not confined to the face of a single instrument. It could consider the Trust Deed, Conditions, Reimbursement Agreement, Guarantee Agreement and Offering Circular. No fixed amount of verbal rearrangement or correction was prescribed. The question was whether it was clear that something had gone wrong and what a reasonable person would have understood the parties to mean.

4. The documents showed that reimbursement of amounts paid by the guarantor on termination of the swaps was intended to rank within the post-enforcement priority of payments. Excluding the termination amount produced no commercial sense and treated a total return swap inconsistently with a liquidity swap. The definition of Financial Guarantee Reimbursement Amount in the Conditions was therefore construed as including the Total Return Swap Termination Amount.

5. As a postscript, the Chancellor stated that a trustee applying for the court’s assistance must bring to the court’s attention relevant legal propositions or arguments affecting unrepresented beneficiaries or parties. This duty was amply performed in the present case.

First-instance decision. No earlier decision or appeal is stated in the judgment.