Royal Bank of Scotland Plc v Highland Financial Partners LP & Ors

In construing interlocking commercial agreements, the court must read the documents together and give effect to their commercial purpose. A limited-recourse provision protecting an issuer does not necessarily limit separate, direct obligations undertaken by commercial counterparties to bear the transaction’s losses. Contractual machinery should not be construed to produce an absurd or unworkable result. Where the language has plainly gone wrong, the court may adopt a corrected construction if the intended meaning is sufficiently clear. Technical departures from contractual realisation procedures do not necessarily prevent a realisation from occurring where there has been no material non-compliance. A guarantee is construed by reference to the substance of the guaranteed payment obligation, rather than an artificial construction of notice provisions.

The claimant bank advanced approximately €240 million for a proposed collateralised debt obligation transaction. The defendants were members of the Highland group, with the first defendant also guaranteeing the second defendant’s obligations. The transaction never closed, and the bank sought summary judgment for liability under interlocking mandate, funding, servicing, collateral and guarantee agreements.

The court considered five issues: whether the defendants’ liability was limited by the issuer’s limited-recourse obligations; whether the ISD had been validly terminated; whether a final realisation date had occurred; whether collateral advances had to be returned; and whether the guarantee had been triggered.

1. Summary judgment. The issues were suitable for determination under Part 24 because there was no material factual dispute and the dispute principally concerned contractual construction.
2. Liability under clause 5.6. Reading the agreements together, the defendants had undertaken to bear their agreed shares of any shortfall. The issuer’s limited recourse to its own assets did not limit the separate direct and primary obligations of the second and third defendants. That construction gave effect to the commercial allocation of risk and avoided an absurd result.
3. Termination. Termination of the mandate letter triggered the ISD termination provision. Later amendments removing a market-value termination event did not remove the separate right arising from termination of the mandate letter. The Termination Date had therefore occurred.
4. Final realisation. The bank was entitled to waive the requirement that sale proceeds pass through the issuer’s account before repayment. The use of a sub-participation for one group of loans was not a material non-compliance. Even if technical breaches had occurred, they would not prevent a final realisation where the loans had otherwise been properly realised and accounted for.
5. Collateral. Clause 3 of the First Loss Deed was unworkable if its second reference to the Termination Date meant the contractual longstop date. Applying the principles in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, the court construed that reference as the Final Realisation Date. The collateral could therefore be applied against the VFN Payment Amount.
6. Guarantee. The first defendant’s guarantee was triggered because the second defendant’s share was unpaid on the Final Realisation Date. The notice deeming provision did not defeat the guarantee. Judgment was accordingly entered for the claimant on all five issues.