Cheyne Capital (Management) UK (LLP) v Deutsche Trustee Company Ltd

A contractual condition requiring rating agencies to confirm that the appointment of a successor servicer will not cause an adverse rating event must be given its natural and ordinary meaning. A rating agency’s policy of refusing to issue confirmations does not dispense with that condition.

The result is not commercially absurd where the contract provides an alternative mechanism based on approval by every class of noteholders. Difficulty in obtaining that approval does not justify rewriting the bargain, particularly where the contractual structure deliberately gives priority to senior noteholders.

This appeal concerned the interpretation of clause 26.4(b) of an issuer servicing agreement forming part of a commercial mortgage-backed securitisation transaction. Arnold J had determined the issue in the Chancery Division in [2015] EWHC 2282 (Ch).

The clause required rating agencies to confirm that appointing a successor issuer servicer or special servicer would not result in an adverse rating event. Alternatively, every class of noteholders could approve the successor by extraordinary resolution. The central issue was whether confirmation could be treated as unnecessary when a rating agency declined, as a matter of policy, to provide confirmations.

1. Appeal dismissed. The Chancellor, with whom Macur LJ and Bean LJ agreed, held that the natural and ordinary meaning of clause 26.4(b) was clear. The clause required the specified confirmation from the rating agencies. A failure to provide confirmation could not be ignored merely because an agency did not issue such confirmations as a matter of principle.

2. A condition requiring positive confirmation that no adverse rating event would result was commercially different from a condition satisfied either by confirmation or by an agency’s general unwillingness to give an answer. The agreed facts and the other transaction documents, including clause 29.13 and the proviso to clause 26.3, neither displaced the clause’s ordinary meaning nor supported an inference that the parties would have dispensed with confirmation in that situation.

3. The ordinary meaning was neither commercially absurd nor inconsistent with commercial common sense. The alternative limb permitted every class of noteholders to approve the successor by extraordinary resolution. It applied both when an agency refused a particular confirmation and when its policy was never to provide confirmations.

4. The alternative mechanism was not irrelevant merely because it might be difficult to operate. The evidence did not establish that it was incapable of practical operation. Difficulty in obtaining senior noteholders’ approval, or the possibility that one class might block a change desired by the controlling class, reflected the transaction’s deliberate priority for senior noteholders rather than commercial absurdity.

5. US Bank Trustees Ltd v Titan Europe 2007-1 (NHP) Ltd [2014] EWHC 1189 (Ch) was distinguished. Its documents lacked the alternative noteholder-approval mechanism and contained materially different wording in the provision corresponding to clause 29.13.

1. Court of Appeal (Civil Division): The appeal was dismissed in [2016] EWCA Civ 743. The court upheld the natural and ordinary interpretation of clause 26.4(b).

2. High Court, Chancery Division: Arnold J determined the contractual interpretation issue by an order and judgment dated 31 July 2015, reported as [2015] EWHC 2282 (Ch).