Tael One Partners Ltd v Morgan Stanley & Co International Plc

In loan trading, the allocation of interest and fees between seller and buyer depends on the payment obligations created by the applicable standard terms. A provision stating that amounts are “for the account of” the seller allocates sums already payable; it does not, without clearer language, create a new entitlement to a payment premium that had not accrued by settlement. References to accrual by elapsed time may be descriptive rather than limiting. The proposed construction may be rejected where it requires several implied notification or enforcement terms, could require payment of sums never received, or conflicts with a purchase-price document that itemises what is payable. A possible windfall to the buyer does not justify rewriting the bargain.

Tael One Partners Ltd v Morgan Stanley & Co International Plc concerned the sale of part of a lender’s participation in a syndicated loan. The transfer incorporated the Loan Market Association’s Standard Terms and Conditions for Par Trade Transactions.

The underlying loan agreement provided for a Payment Premium on repayment. After repayment, the borrower paid the premium to lenders then recorded as participants, but not to the appellant buyer, which had sold its participation onward. The respondent seller claimed that the buyer owed it the proportion attributable to the period before settlement.

Popplewell J accepted the seller’s construction and gave permission to appeal. The central issue was whether the LMA Terms entitled the seller to recover a Payment Premium which had not accrued by the settlement date.

1. Disposition. The Court of Appeal unanimously allowed the appeal, set aside the order of Popplewell J and dismissed the seller’s claim.
2. Construction of the LMA Terms. Condition 11.9(a), headed “Allocation of interest and fees”, did not impose an additional requirement limiting Condition 11.3(a). Nor did it create a separate entitlement to sums not payable under Condition 11.3(a). The words “for the account of” were apt to allocate sums already made payable by other provisions, rather than to impose a payment obligation.
3. The reference to amounts “expressed to accrue by reference to the lapse of time” was descriptive and echoed Condition 11.1. In any event, the Payment Premium was calculated by reference to the internal rate of return from disbursement to repayment and therefore involved elapsed time. The wording did not exclude the premium from the relevant provisions.
4. The seller’s wider construction created substantial difficulties. It required implied terms concerning notification of repayment and, where the buyer had sold onward, enforcement of corresponding obligations in the sub-sale. It could also make the buyer liable for a premium which it had never received. Those implications supported the more natural construction that Condition 11.9(a) added little or nothing to Condition 11.3(a). The separate provisions for PIK Interest also militated against the seller’s construction.
5. A possible windfall to a buyer or downstream purchaser did not justify implying a right to the premium. The seller could take the risk of non-recovery into account when negotiating the sale price. The Purchase Price Letter itemised the loan and accrued interest but made no provision for the Payment Premium. That documentation reinforced the conclusion that the seller could not recover a more extensive price through the incorporated LMA Terms.

• Court of Appeal (Civil Division) — The appeal was allowed, the order was set aside and the seller’s claim was dismissed: [2013] EWCA Civ 473.
• High Court of Justice, Queen’s Bench Division, Commercial Court — Popplewell J held that the LMA Terms entitled the seller to recover an appropriate part of the Payment Premium and granted permission to appeal. The proceedings were numbered 2011 Folio 1426.