Napier Park European Credit Opportunities Fund Lt v Harbourmaster Pro-Rata Clo 2 B.V. & Ors

Contractual interpretation begins with the ordinary, natural and grammatical meaning of the words, read in their documentary and commercial context. Where the language is ambiguous, the meaning most consistent with business common sense is preferred. Clear language must be applied even if it produces a poor bargain. Documents creating tradable financial instruments require particular caution before departing from their natural meaning.

A condition stating that notes “have not been downgraded” addresses whether a downgrade has occurred in the past. It is not a continuing condition that is restored by a later upgrade. The condition therefore remains unsatisfied once the notes have been downgraded below their initial ratings.

The claimant, a junior noteholder, sought a declaration concerning the meaning of paragraph 4(i) of the Reinvestment Criteria in the collateral management agreement governing a collateralised loan obligation. The provision concerned whether the Class A1 Notes had been downgraded below their Initial Ratings before unscheduled principal proceeds could be reinvested.

The notes had been downgraded from AAA to AA and later upgraded to AAA. The claimant contended that the later upgrade restored compliance. The trustee and collateral administrator contended that the earlier downgrade permanently prevented reinvestment. The central issue was whether paragraph 4(i) imposed a continuing condition or recorded a past event.

1. Claim dismissed. Paragraph 4(i) was clear and unambiguous. It was not satisfied because the Senior Notes had previously been downgraded below their Initial Ratings.
2. The court applied the ordinary principles of contractual interpretation. The objective was to identify the meaning conveyed to a reasonable person with the relevant background knowledge. The starting point was the ordinary, natural and grammatical meaning of the language in the context of the documentation and transaction as a whole. An ambiguous provision should be given the meaning most consistent with business common sense. Clear language must be applied even if it produces a commercially unattractive result.
3. Those principles applied with particular force to documentation governing tradable financial instruments. The parties could reasonably be taken to have been especially concerned with clarity and certainty.
4. The words “have not been downgraded” used the present perfect tense. They indicated that a downgrade had occurred at some unspecified time in the past. They did not express a continuing state of affairs. Elsewhere in the documentation, the drafter expressly used language such as “continuing” and referred to the confirmation or restoration of Initial Ratings. The contrast supported a deliberate distinction between past events and continuing conditions.
5. The provisions concerning Events of Default and Effective Date Rating Events did not alter that conclusion. They expressly contemplated the consequences of a downgrade being reversed. Paragraph 4(i) used materially different language and operated during a later period in which reinvestment was more restricted. The court could not treat the provision as uncommercial merely because it imposed a permanent restriction following a downgrade.
6. Market opinion evidence and witnesses’ views on the meaning or commercial effect of paragraph 4(i) were inadmissible or of no assistance without appropriate expert evidence and cross-examination. The court also rejected any basis for implying words restoring compliance after a later upgrade.

First-instance decision. No prior appellate decision is stated in the judgment.