Palladian Partners LP & Ors v The Republic of Argentina & Anor

Contractual construction is a unitary and iterative exercise. The court must read the disputed wording in the context of the contract as a whole, test rival meanings against their commercial consequences, and give appropriate weight to the language chosen by the parties. Commercial common sense cannot be used retrospectively to rewrite an unwise bargain.

Where a party alleges a drafting mistake, correction by construction requires both a clear mistake and a clear correction. A court cannot select one possible commercial solution where more than one correction is available. A contractual adjustment referring to each relevant year must be applied by reference to that year, rather than replaced by an unstated fixed-factor mechanism.

The claim concerned Euro-denominated GDP-linked securities issued by the Republic of Argentina and governed by English law. The securities contained payment conditions linked to Real GDP and an Adjustment Provision dealing with a change in the year of base prices used by Argentina’s statistical authority.

Argentina rebased its GDP series from 1993 to 2004 prices and determined that no payment was due for Reference Year 2013. The claimants contended that the Adjustment Provision required an annual adjustment for each Reference Year. Argentina relied principally on a one-off overlap-year adjustment and alternatively on an inflation-deflator approach. The claim also raised the amount payable, interest, specific performance and whether the claimants could recover directly under the securities’ enforcement provisions.

1. The claimants succeeded on construction. The Adjustment Provision required the Base Case GDP for each Reference Year to be multiplied by a fraction using Actual Real GDP for that Reference Year in the new and 1993 years of base prices. The One-Off Overlap Construction required substantial additional wording, including an unstated overlap year, a fixed fraction and a different treatment of later rebasings. It was therefore inconsistent with the contractual language.

2. The court applied the unitary and iterative approach described in Rainy Sky SA v Kookmin Bank, In re Sigma Finance Corpn and Wood v Capita. The contractual and commercial context could be considered even without strict linguistic ambiguity. The relevant commercial considerations included the possibility of repeated rebasings, the non-linear relationship between GDP series, the allocation of economic risk and the need to preserve the agreed payment thresholds.

3. The Annual Adjustment Construction also produced a commercially coherent result. It preserved the contractual benchmark despite changes in statistical measurement. The Republic’s fixed-factor construction could alter the likelihood of payment according to the selected overlap year and introduced risks which were not expressed in the securities.

4. The Chartbrook principle did not justify correction. The court was not satisfied that something had gone wrong with the language or that the Republic’s proposed correction was the only clear solution. The alternative Hubbard Deflator Construction likewise required words which the parties had not used and was rejected.

5. The Republic was required to procure the continued production or publication of GDP data in 1993 year-of-base prices where necessary to operate the contractual mechanism. Specific performance was appropriate because damages would not provide a straightforward remedy for later Reference Years.

6. The claimants were entitled to payment for Reference Year 2013, amounting to approximately €643 million for their holdings and approximately €1.330 billion for all securities, with simple interest at 2% above Euribor from 15 December 2014. The claimants could also enforce their personal payment rights under section 4.9 of the Indenture. Those rights were additional to, and not pre-empted by, the collective enforcement provisions in section 4.8 and paragraph 11 of the securities.

7. Declarations and orders for payment and specific performance were made in accordance with the Annual Adjustment Construction.

The judgment records that Cockerill J dismissed the Republic’s summary judgment application on 21 July 2020: [2020] EWHC 1946 (Comm) . The present court determined the substantive claim at first instance.