AIG Financial Products Corp & Ors v Gruber & Ors

In construing a deferred-compensation plan, the meaning of “losses” depends on the contract read as a whole. A broad reference to “any losses incurred” is not confined to realised losses on one class of transactions merely because instalments are linked to that portfolio or another plan defines certain realised losses. A restoration clause must also be read with its long-stop provision. Where restoration rights permanently lapse to the extent amounts are not restored by a specified date, that wording may be inconsistent with an immediate, unqualified duty to restore. On the proper construction here, restoration depended on the company becoming profitable and having Distributable Income. Restoration could not create a new loss producing a circular further reduction.

Twenty-three former London employees claimed balances under deferred-compensation plans operated by AIG Financial Products Corp. The plans were governed by Connecticut law. During the 2008 financial crisis, losses reduced the balances to nil. The High Court held that AIGFP had an unqualified obligation to restore and pay the balances by the end of 2013, despite remaining loss-making.

AIGFP appealed on the construction of “losses”, the timing and qualification of the restoration obligation, and the effect of the December 2008 amendment providing for permanent lapse of restoration rights. The central issue was whether restoration was required in the absence of profitability and Distributable Income.

1. Appeal allowed. Flaux LJ gave the judgment, with David Richards LJ and Patten LJ agreeing.
2. The plans had to be construed from their text, read as a whole. The wording of the Deferred Compensation Plan was not amended by the Employee Retention Plan except to the extent expressly stated. The expression “any losses incurred” was broad. It was not confined to realised transactional losses on the CDS portfolio or to the narrower categories in Schedule 2 to the Employee Retention Plan. The relevant provisions also contemplated losses arising from interest liabilities and from the debt created by restoration.
3. It was unnecessary finally to decide whether “current year income” meant gross or net income. If the issue had required determination, gross income was the preferable construction because the respondents’ proposed net figure was a hybrid which excluded transactional losses.
4. Read together, the reduction and restoration provisions formed a coherent scheme. Restoration was required only if and when AIGFP became profitable again and had Distributable Income from which restoration could be made. Otherwise, restoration would create a new debt and loss, producing a circular further reduction. The claim therefore failed on the proper construction of the plan.
5. The December 2008 amendment gave AIGFP a five-year period in which to recover. If amounts had not been restored by 31 December 2013, all restoration rights permanently lapsed. The words were inconsistent with an immediate, unqualified duty to restore or with an obligation to devise a restoration schedule at the time of deduction. The discretionary power to amend for tax compliance under the Internal Revenue Code section 409A did not weaken that conclusion.
6. The suggested unlawful-distribution issue could not be determined by applying English law or a universal common-law principle because Delaware law had not been proved. The court applied the principles in Tamil Nadu Electricity Board v ST-CMS Electric Company Pte Ltd [2007] EWHC 1713 (Comm); [2008] 1 Lloyd’s Rep 93. The issue was not determinative of the appeal.
7. It was unnecessary to decide whether a forward-looking restoration plan had to be adopted while AIGFP remained loss-making. Even if such an obligation existed, its breach caused no recoverable loss because restoration and payment could not have been required without profitability.

• Court of Appeal (Civil Division) allowed AIGFP’s appeal.
• High Court of Justice, Business & Property Courts of England and Wales (Andrew Baker J) held by judgment dated 9 November 2018 that AIGFP was obliged to restore and pay the deducted balances despite remaining loss-making.