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

Where sophisticated parties have used clear language in a traded financial instrument, contractual construction must give primacy to that language. Commercial consequences and admissible context inform the iterative process, but cannot supply a meaning the words cannot bear.

A GDP-linked security requiring adjustment whenever the base-price year differs from 1993 required an annual adjustment for each affected reference year. Its wording could not support a one-off adjustment based on an unstated overlap year. The strict power to correct an obvious drafting mistake did not apply: the annual construction was neither irrational nor absurd, and no single correction was plainly required.

The claimants held GDP-linked Euro securities issued by the Republic of Argentina as part of its sovereign-debt restructuring. The securities made payment conditional on GDP exceeding both a base-case level and a base-case growth rate.

Following a change in the GDP base-price year from 1993 to 2004, the Republic concluded that no payment was due for the 2013 reference year. It adopted a one-off adjustment to the base-case GDP figures. The claimants contended that the adjustment provision required annual adjustments and that a coupon was due.

Picken J upheld the claim and ordered payment of the coupon, about €1.3 billion for all holders: [2023] EWHC 711 (Comm). The Republic appealed solely on the construction of the adjustment provision, including alternative arguments for correction of mistake and use of a GDP deflator.

Appeal dismissed unanimously. Popplewell LJ gave the judgment, with which Falk and Lewison LJJ agreed.

1. The adjustment provision plainly required the base-case GDP figure to be adjusted for each reference year in which INDEC used a base-price year other than 1993. The phrase “at any time” described a continuing state of affairs, rather than a one-off trigger. The references to “such Reference Year” meant the affected reference year, not an unstated preceding overlap year.

2. The denominator’s reference to GDP measured in constant 1993 prices applied throughout the life of the securities. The Republic’s one-off construction would require both the insertion of an overlap-year mechanism and the replacement, on successive rebasings, of the express reference to 1993 prices. It was irreconcilable with the language used.

3. Commercial and economic consequences did not justify departing from that clear meaning. Although the one-off construction was commercially plausible, the annual construction also had coherent economic logic. It avoided a long-term reset determined by the Republic’s choice of when to rebase and maintained the proportional relationship between actual nominal GDP and the payment amount.

4. An implied obligation required the Republic to publish the data necessary to make the securities work according to their express terms. The possibility that GDP in constant 1993 prices would otherwise not be published did not drive construction. An implied term could not contradict the express requirement for that data.

5. The correction-of-mistake principle did not assist the Republic. The annual construction was neither arbitrary, irrational, nonsensical nor absurd. Further, even if a one-off adjustment had been intended, the document did not identify the particular year or combination of years by which it was to be made.

6. The alternative deflator argument failed. Within the securities, GDP in constant 1993 prices meant GDP measured using the whole scope and methodology of the 1993 series, not merely GDP in the 2004 series adjusted for price inflation. The proposed deflator did not perform the suggested task and the instrument provided no method for its use.

• Court of Appeal (Civil Division) — dismissed the Republic’s appeal and upheld the annual-adjustment construction: [2024] EWCA Civ 641.
• High Court, Financial List (KBD) — Picken J upheld the claimants’ construction and ordered payment of the 2013 coupon: [2023] EWHC 711 (Comm).