Edgeworth Capital (Luxembourg) SARL & Anor v Ramblas Investments BV

A contractual fee may become payable when repayment falls due, even if no repayment has occurred, where the agreement defines the triggering event alternatively. The natural meaning of the words and the commercial context govern construction. A fee remunerating the provision of finance is not a penalty merely because default causes repayment to fall due, where it is payable on a specified event rather than as damages for breach. For internal-rate-of-return calculations, capitalised interest that has not been paid produces offsetting cash inflows and outflows and is not treated as an annual cash payment.

RBS provided financing for the purchase of the Ciudad Financiera in Madrid under several agreements, including a Junior Loan Agreement, a Personal Loan Agreement and an Upside Fee Agreement. RBS assigned its interests to the respondents.

Defaults under the Personal Loan Agreement constituted events of default under the Junior Loan Agreement. RBS accelerated repayment of the junior loan, which remained unpaid. Hamblen J gave judgment for the respondents in the sum of €105,201,095.89 under the Upside Fee Agreement: [2015] EWHC 150 (Comm). The appeal concerned construction of the Payment Event definition, penalty doctrine and calculation of the fee.

1. Disposition. The appeal was allowed in part. The judge’s order was varied because the correct fee was €91,513,066.92.
2. Payment Event. The agreement defined a Payment Event as repayment of the junior loan or, if earlier, the date on which repayment fell to be made. Those were alternative events. The wording did not require actual repayment before a Payment Event could occur. Applying its natural meaning in the commercial context, a Payment Event occurred on 30 December 2010 when repayment fell due following acceleration.
3. Penalty. The fee was remuneration for RBS providing essential finance, as shown by the recitals and clause 3.3 of the agreement. It was payable on a specified date when repayment fell due and was not damages for breach. The default causing acceleration arose from breach of the Personal Loan Agreement, rather than breach of the Junior Loan Agreement itself. The fee therefore did not fall within the rules against penalties. The Court referred to Cavendish Square Holding BV v Makdessi [2015] UKSC 67 at paragraphs 12–15.
4. Calculation. The fee was to produce an internal rate of return of 20 per cent, calculated by reference to cash flows. Because annual interest was capitalised and not paid, the interest represented a cash inflow balanced by an equivalent addition to the loan as a cash outflow. The net cash flow during each year was therefore zero, and the relevant amount became due when the whole loan and interest fell due at the Payment Event.

• Court of Appeal (Civil Division) allowed the appeal to the limited extent necessary to vary the judgment and substitute the fee of €91,513,066.92: [2016] EWCA Civ 412.
• High Court of Justice, Queen’s Bench Division, Commercial Court (Hamblen J) gave judgment for the respondents in the sum of €105,201,095.89: [2015] EWHC 150 (Comm).