Credit Suisse Asset Management LLC v Titan Europe 2006-1 PLC & Ors

In construing a commercial mortgage-backed securitisation formula, “the related per annum interest rate due on such Loan” meant the ordinary annual interest rate specified for the underlying loan, excluding default interest. The phrase had to be read in its documentary and commercial context. The words “per annum” were a limiting qualification, and the absence of directions for incorporating default interest supported exclusion. Commercial logic confirmed that construction: it would be counter-intuitive for Class X entitlements to increase when borrower default reduced issuer revenue, particularly without accounting for default-related costs. Commercial common sense could not override the contractual language or authorise rewriting an improvident bargain.

Credit Suisse Asset Management LLC, acting as investment manager for the holder of Class X Notes, appealed the Chancery Division judgment of the Chancellor dated 28 April 2016. The dispute concerned the formula determining interest payable on Class X Notes issued as part of Titan’s commercial mortgage-backed securitisation. The parties accepted that default interest was interest and could be expressed as an annual rate. They disputed whether it formed part of the related per annum interest rate due on the underlying loans for calculating the Net Mortgage Rate and the Class X Interest Rate. The result affected the Class X priority and distributions to other noteholders. The central issue was whether the formula required ordinary interest only or ordinary interest together with default interest.

Majority: Arden LJ and Underhill LJ. The appeal was dismissed. The majority held that the relevant phrase in the definition of Net Mortgage Rate referred to the ordinary interest rate payable on the underlying loans and excluded default interest.

1. Contractual interpretation. The court’s task was to identify the meaning which a reasonable person, with the background knowledge available to the parties, would have given the language. The process was contextual and unitary. It required consideration of the natural and ordinary meaning, other contractual provisions, the overall purpose, relevant facts and circumstances, and commercial common sense, while disregarding subjective intention: Arnold v Britton [2015] AC 1619; Rainy Sky v Kookmin [2011] 1 WLR 2900 at [21].
2. Language. The full phrase was “the related per annum interest rate due on such Loan”. Although “interest” and “interest rate” could in principle include default interest, “per annum” qualified the expression. The Offering Circular described the ordinary loan rates as annualised rates, while the documentation contained no definition, calculation method or express reference directing the inclusion of default interest. Those features supported the ordinary interest only interpretation.
3. Commercial logic. The default interest interpretation would increase the Class X entitlement precisely when borrower default reduced Titan’s revenue. It would also give the Class X holders the benefit of default interest without corresponding default-related servicing and liquidation expenses. That result was inconsistent with the commercial logic of the Class X entitlement. The possibility that surplus funds might ultimately pass to charity did not justify departing from the language used.
4. Party autonomy and the Offering Circular. The court could not rewrite the parties’ bargain merely to avoid an improvident consequence. The Offering Circular was an aid to construction because the Notes were issued on its basis, but its statements were qualified by the governing documents and could not contradict their clear meaning. An occasional obvious interstice could be filled as part of true construction: Luxor (Eastbourne) v Cooper [1941] AC 108 at 138.
5. Dissent. Briggs LJ would have allowed the appeal. He considered that the phrase captured the whole interest rate contractually due at the relevant Payment Date, including default interest. He treated “per annum” as a denomination rather than a limitation and relied on the general purpose of Class X Notes, drawing on Hayfin Opal Luxco 3 SARL and another v Windermere VII CMBS plc and others [2016] EWHC 782 (Ch) at para 9. The harsh effect on lower-ranking noteholders did not justify departing from the contextual meaning.

1. Court of Appeal (Civil Division) ([2016] EWCA Civ 1293): by a majority, Arden LJ and Underhill LJ dismissed the appeal. Briggs LJ dissented and would have allowed it.
2. Chancery Division: the Chancellor’s judgment dated 28 April 2016 adopted the ordinary interest only interpretation. CSAM appealed that decision.