Tael One Partners Limited v Morgan Stanley & Co International PLC

A contractual payment calculated partly by reference to elapsed time does not necessarily accrue by reference to time. Accrual ordinarily concerns the coming into being of a right or obligation. The method used to calculate a payment must therefore be distinguished from the event upon which the entitlement arises.

Under standard loan-trading terms, a clause allocating interest and fees between seller and buyer does not itself impose an additional payment obligation where other conditions specify the payments to be made. The contractual text must be read as a whole and in its commercial setting, including the absence of machinery for enforcing continuing obligations after successive transfers.

Tael participated in a syndicated loan which provided for interest and, upon repayment or prepayment, a payment premium calculated to produce a specified internal rate of return. Tael transferred part of its participation to Morgan Stanley under a contract incorporating the Loan Market Association standard terms. Morgan Stanley later transferred that participation to another investor. When the borrower prepaid the loan, Tael claimed from Morgan Stanley the part of the premium said to relate to the period before the original transfer.

Popplewell J granted summary judgment for Tael: [2012] EWHC 1858 (Comm); [2013] 1 CLC 879. The Court of Appeal allowed Morgan Stanley’s appeal: [2013] EWCA Civ 473; [2013] 1 CLC 879. The central issue was whether condition 11.9(a) of the standard terms allocated part of the payment premium to Tael and conferred a corresponding right to payment.

1. The appeal was dismissed unanimously. Lord Reed delivered the judgment, with which Lord Neuberger, Lord Kerr, Lord Toulson and Lord Hodge agreed. The payment premium was not expressed to accrue by reference to the lapse of time and therefore did not fall within condition 11.9(a).

2. Accrual ordinarily describes the coming into being of a right or obligation. A sum may accrue before it becomes payable. Interest and recurring fees can accordingly accrue from day to day even though payment occurs at longer intervals. An entitlement to the payment premium under the facility agreement, however, arose only upon a defined repayment or prepayment event.

3. The fact that elapsed time formed part of the premium’s calculation did not mean that the right accrued over that period. The premium was the difference between specified amounts and the sum needed to produce the contractual internal rate of return. The calculation of its amount had to be distinguished from accrual of the right to receive it.

4. The commercial context reinforced that construction. The standard terms were designed for a market in which loans might be transferred repeatedly. The court would not readily infer continuing payment obligations between former seller and buyer over a substantial period, particularly where the terms contained no mechanism by which a former holder could discover when a premium vested or its amount. The potential value of the premium could more naturally be reflected in the transfer price.

5. Condition 11.9 was an exhaustive allocation of interest and fees between seller and buyer, apart from PIK interest. It operated together with conditions 11.2, 11.3 and the other payment provisions. Condition 11.9 did not itself create an additional right to payment: its language allocated sums as being “for the account of” a party, while other conditions imposed payment obligations and addressed risks such as borrower default.

1. United Kingdom Supreme Court: The court upheld the Court of Appeal’s decision, although for somewhat different reasons, and unanimously dismissed Tael’s appeal: [2015] UKSC 12.

2. Court of Appeal: Longmore LJ, with whom Rimer and Tomlinson LJJ agreed, allowed Morgan Stanley’s appeal from Popplewell J: [2013] EWCA Civ 473; [2013] 1 CLC 879.

3. High Court, Commercial Court: Popplewell J granted Tael’s application for summary judgment and dismissed Morgan Stanley’s cross-application: [2012] EWHC 1858 (Comm); [2013] 1 CLC 879.