England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		14/11/2011

MR JUSTICE BURTON :

1. This has been the hearing of a Part 8 claim by the Claimant, Stornoway 2011 Ltd, as assignee of Cheyne Capital Management (UK) LLP ("the Manager"), against the Defendant SIV Portfolio plc (formerly Cheyne Finance plc), now in receivership, arising out of an Investment and Funding Management Agreement ("IFMA") dated 3 August 2005. There were originally five issues to be the subject matter of trial, but, as a result of agreement between the parties, there are now only three.
2. The dispute is as to the nature and effect of an Indemnity, provided by Clause 21.1 of the IFMA, to which the Manager was entitled in respect of its duties and obligations as Manager of the Investment Portfolio held by the Defendant, a structured investment vehicle, which, until its collapse in August 2007 as a result of the global financial crisis, invested in various asset-backed securities. It is now common ground (in respect of what were formerly the fourth and fifth issues) that:

i) The Indemnity will cover the legal costs incurred by the Claimant's delegate, Cheyne Capital International Ltd ("CCIL").

ii) All the costs claimed under the Indemnity (totalling US$3.5m, in respect of legal costs arising out of the Manager's involvement in legal proceedings brought by Abu Dhabi Commercial Bank in the United States) are reasonably incurred and fall prima facie within the Indemnity.

3. The IFMA was one of a series of agreements made between the Defendant and other parties involved with the portfolio, such as parties variously described as the Custodian, the Administrator, the Euro Paying Agents, the US Issuing and Paying Agents, the US Custodian, the Depository, the Security Trustee, the US Security Agent, and others (and it appears that the Bank of New York was acting in a number of these different capacities). I have not seen any other such agreement than the IFMA, save for a Security Trust Deed dated 3 August 2005. There is a document called the Common Terms Agreement, dated 3 August 2005 ("the CTA"), to which (inter alios) the Manager and the Defendant were parties, which provided agreed defined terminology for the purpose of all the Agreements then being entered into, set out in Clauses 1.4 and 1.5 of the CTA, and whose provisions were in particular expressly incorporated into the IFMA, by Clause 1.1.
4. Clause 21.1 of the IFMA has been in issue between the parties before me. It reads as follows:

"The Issuer undertakes with the Manager that if the Manager incurs any losses, Liabilities (other than the Excluded Liabilities), costs, claims, demands or proceedings (each a Loss) in any way arising from its appointment and the performance of the Manager's duties and obligations under any of the Relevant Non-Programme Documents, the Issuer will, by way of indemnity and on demand, pay to the Manager an amount equal to such Loss, subject, in each case, to the Indemnity Cap Excess Payment Rules. This indemnity shall not apply to Losses resulting from fraud, wilful default or negligence of the Manager."

5. The Indemnity Cap Excess Payment Rules ("ICEP Rules") there referred to are defined as part of the series of definitions in Clause 2 of the CTA, and I set out the three consecutive definitions, relating to Indemnity Cap, Indemnity Cap Excess and Indemnity Cap Excess Payment Rules:

"Indemnity Cap means, in respect of any indemnity payments [payable] by the Issuer to, or with regard to the US Senior Notes Issuer or the US Capital Notes Issuer, in respect of payments by the US Senior Notes issuer or the US Capital Notes Issuer, respectively, to, any of the Manager, the Custodian, the Euro Paying Agents, the US Issuing and Paying Agents, the US Custodian, the Depositary, the Bank, the Securities Intermediary, the Capital Note Placement Agents and the Senior Note Dealers within any twelve month period (such twelve-month period to be measured on a rolling basis), an amount equal to 0.25 per cent of the average Dollar Equivalent principal amount outstanding of the Euro Capital Notes Outstanding, subject to a maximum of US$1,000,000, during that period. ["Definition I".]

Indemnity Cap Excess means, in respect of any indemnity payments payable by the Issuer to, or with regard to the US Senior Notes Issuer or the US Capital Notes Issuer, in respect of payments by the US Senior Notes Issuer or the US Capital Notes Issuer, respectively, to, any of the Manager, the Custodian, the Euro Paying Agents, the US Issuing and Paying Agents, the US Custodian, the Depositary, the Bank, the Securities Intermediary, the Capital Note Placement Agents and the Senior Note Dealers, the amount (if any) by which such indemnity payments exceed the relevant Indemnity Cap for that period. ["Definition II".)

Indemnity Cap Excess Payment Rules means the following rules specifying the conditions for payment of any Indemnity Cap Excess by the Issuer to, or with regard to the US Senior Notes Issuer or the US Capital Notes Issuer, in respect of payments by the US Senior Notes Issuer or the US Capital Notes Issuer, respectively, to any of the Manager, the Custodian, the Euro Paying Agents, the US Issuing and Paying Agents, the US Custodian, the Depositary, the Bank, the Securities Intermediary, the Capital Note Placement Agents and the Senior Note Dealers:

(a) during a period of Normal Operations, the Issuer shall not pay any Indemnity Cap Excess if such payment would (regardless of any applicable cure periods) give rise to a Restricted Investment Event, a Restricted Funding Event or an Enforcement Event, until all outstanding Prior Ranking Obligations have been paid and/or provisioned for in full;

(b) during a period of Restricted Investments, the Issuer shall not pay any Indemnity Cap Excess unless the Issuer is (regardless of any applicable cure periods) in Restricted Investments solely as a result of its failure to redeem Euro Capital Notes Outstanding by their Expected Maturity Date and/or as a result of a breach of the Capital Note Maturity Test and such payment shall not lead to the occurrence of a Restricted Investments Event, a Restricted Funding Event or an Enforcement Event (other than solely as a result of any such aforementioned failure or breach, and regardless of any applicable cure period) until all outstanding Prior Ranking Obligations have been paid and/or provisioned for in full;

(c) during a period of Restricted Funding, the Issuer shall not pay any Indemnity Cap Excess until all outstanding Prior Ranking Obligations have been paid and/or provisioned for in full; and

(d) following the occurrence of an Enforcement Event, the Issuer shall pay any Indemnity Cap Excess in accordance with the Payment Priority." ["Definition III".]

6. Suffice it so say at this stage of my judgment that an Enforcement Event did, it is common ground, occur, which in the event brought the operation of the portfolio to an end (and led to the appointment of a Receiver). It is also common ground that there are insufficient funds left with the Defendant to pay all its obligations, and the issue is whether the Manager is able pursuant to its Indemnity to recover all the legal costs incurred of more than US$3.5m.
7. The issues as agreed between the parties are:

i) Whether the Indemnity is capped in the sum of US$1m for the relevant periods ("the Indemnity Cap Issue").

In simple terms this involves whether the Indemnity provided for by Clause 21.1 is unlimited, or whether it is subject to the Indemnity Cap of US$1m referred to in the extracted definitions section of the CTA set out above, such that, insofar as the sum claimed exceeds that US$1m, the balance is an Indemnity Cap Excess.

ii) If the Indemnity is capped, at what point does the initial twelve-month period commence for the purposes of the Indemnity ("the Commencement Issue").

iii) If the Indemnity is capped, whether the Indemnity covers one twelve-month period or more than one twelve-month period ("the Rolling Period Issue").

The second and third issues very much inter-relate, and of course only arise if the Claimant fails on the first issue.

8. As set out above, an Enforcement Event having occurred, the provisions of Clause 12 of the Security Trust Deed apply, so as to provide for the Payment Priority (referred to in Definition III at (d), set out in paragraph 5 above). Clause 12 is headed up "Application of Proceeds", and it reads, in material part, as follows:

"12.1 Any moneys received by the Security Trustee or a Receiver after the occurrence of an Enforcement Event shall, subject to the payment of any claims having priority to the security constituted by this Security Trust Deed and to subclause 11.11, be applied in the following order of priority (the "Payment Priority"):

(a) first, in satisfaction of or provision for all Senior Expenses accrued and/or payable, including all remuneration due to the Security Trustee, the US Security Agent or any Receiver, according to the priority specified in the definition of Senior Expenses;

(b) secondly, in satisfaction of or provision for all Senior Obligations as and when the same become payable and, if more than one such Senior Obligation is payable at the relevant time, pari passu and in proportion to the amounts payable in respect thereof;

(c) thirdly, in satisfaction of or provision for the Base Fee, the fees, costs and expenses of the Administrator under the Administrative Advisory Services Agreement and any costs and expenses of the Chargor, the US Senior Notes Issuer or the US Capital Notes Issuer not covered by Senior Expenses, pari passu and in proportion to the amounts payable in respect thereof;

…

(f) sixthly, in satisfaction of or provision for all Euro Mezzanine Capital Notes Subordinated Payments pari passu and in proportion to the amounts payable."

9. Senior Expenses and Senior Obligations are defined by the CTA, and the only material definition is that of Senior Expenses, as set out below:

"Senior Expenses means:

(a) any fees, expenses and other remuneration of the Receivables Trustee, the Security Trustee and/or any of their respective Appointees and Receivers and any amounts payable by or on behalf of the US Senior Notes Issuer or the US Capital Notes Issuer in respect of fees, expenses and other remuneration of the US Security Agent and/or any of the agents, accountants and advisers any of them appoints under the US Security Documents;

(b) any fees and expenses of the Euro Paying Agents and the Custodian and any amounts payable by or on behalf of the US Senior Notes Issuer or the US Capital Notes Issuer in respect of fees and expenses of the US Issuing and Paying Agents, the Bank, the Depositary, the Securities Intermediary and the US Custodian and any costs and expenses properly incurred by the Issuer, the US Senior Notes Issuer and the US Capital Notes Issuer for the purpose of maintaining their corporate or limited liability company existence or authority to engage in the transactions contemplated by the Transaction Documents and any outstanding Incremental Structuring Fee or Residual Fee;

(c) any indemnity payments to, or with regard to the US Senior Notes Issuer or the US Capital Notes Issuer in respect of indemnity payments by the US Senior Notes Issuer or the US Capital Notes Issuer to the Receivables Trustee, the Security Trustee, the US Security Agent and/or any of their respective Appointees and Receivers; and

(d) any indemnity payments to, or with regard to the US Senior Notes Issuer or the US Capital Notes Issuer in respect of payments by the US Senior Notes Issuer or the US Capital Notes Issuer to, any of the Manager, the Administrator, the Custodian, the Euro Paying Agents, the US Issuing and Paying Agents, the US Custodian, the Depositary, the Bank, the Securities Intermediary, the Capital Note Placement Agents or the Senior Note Dealers up to an amount not exceeding any relevant Indemnity Cap."

10. I shall refer to these clauses as Senior Expenses (a), (b), (c) and (d). It is common ground that, there having been an Enforcement Event, the periods of Normal Operations, Restrictive Investments and Restrictive Funding, no longer apply, and that Senior Expenses include prima facie any expenses incurred by the Manager, such that if there is an indemnity cap, the US$1m will be paid, in accordance with the Payment Priority, as part of Senior Expenses (d): and the excess (in this case some US$2.5m) would have to fall within Clause 12.1(c) as being "not covered by Senior Expenses", or possibly within (f), because there is a definition in the CTA of "Euro Mezzanine Capital Notes Subordinated Payments", which includes reference to "payment of any Indemnity Cap Excess".
11. If there is no applicable Indemnity Cap, as Mr Dominic Chambers QC for the Claimant asserts, then Definition III(d) will not apply, and the whole of the Indemnity sum will fall to be paid as Senior Expenses, because it will fall within Senior Expenses (d), namely being "any indemnity payments to … any of the Manager, the Administrator, the Custodian … [etc] … up to an amount not exceeding any relevant Indemnity Cap", and he submits payable in full since there is no relevant Indemnity Cap applicable to the Manager.
12. Mr Chambers' submissions are as follows:

i) Not all indemnity payments are subject to the Cap. This is clear from the wording of Senior Expenses (d) "… not exceeding any relevant Indemnity Cap", and, he submits, that that means that there are those – and the Manager is one – to whom a Cap does not apply.

ii) This makes good commercial sense, as the Manager is of considerable importance to the Scheme, and there should be no assumption that its expenses and outlays are to be capped when there is an Enforcement Event.

iii) Crucially, the words of Clause 21.1 make the Manager subject to the ICEP Rules, but do not thereby impose a Cap. If it was intended that the Manager's Indemnity be subject to a Cap, the Clause would have said so. What it provides is that payment of the Indemnity to the Manager is subject to the ICEP Rules.

iv) The purpose of the ICEP Rules and in particular Definition III (a) to (d) is to ensure that no Indemnity Cap Excess is paid during the period of Normal Operations, or Restrictive Investments or Restricted Funding, if the payment of such excess would give rise to or lead on to an Enforcement Event, and then to deal with Payment Priority in the eventuality of an Enforcement Event. But that does not apply, because there is no applicable Excess, since there is no Cap applicable to the Manager.

13. Mr Chambers referred – as did Barry Isaacs QC for the Defendant if (contrary to his submissions) it should become necessary to do so – to the familiar principles of construction, and in particular:

i) to the well-known approach of Lord Diplock in The Antaios [1985] 1 AC 191, whereby a court should not adopt a construction if it flouted business common sense;

ii) that, if there were ambiguity, and two alternative constructions were available, the court should choose the more commercially sensible of the two: see for example Barclays Bank v HHY Luxembourg [2011] 1 BCLC 336, [2010] EEWCA Civ 1248, per Longmore LJ at paragraph 26.

Mr Chambers' reliance on Patten LJ in Kookmin Bank v Rainy Sky SA [2010] EWCA 582 was overtaken, as he himself helpfully informed me after the hearing, by the disapproval of it by the Supreme Court, published on 2 November 2011 UKSC 50.

14. Mr Chambers submits that this is an agreement which was very carefully drafted by experienced lawyers, and that, by reference to the words of Moore-Bick LJ in Ravennivi SpA v New Century Shipbuilding Co Ltd [2007] 2 Lloyd's Rep 24 at para 12, approved by the Supreme Court in Multi-Link Leisure Developments v North Lanarkshire Council [2010] UKSC 47, where there is a "detailed document of a complex nature that can properly be assumed to have been carefully drafted to ensure that its provisions dovetail neatly", the wording, and in this case the absence of an express provision that the Manager's Indemnity is subject to a Cap, should not be disturbed or second-guessed.
15. Mr Isaacs firmly submits that there is no need for any assistance from authority in construing the interlocking clauses. He submits as follows:

i) The cross-reference in Clause 21.1 to the ICEP Rules makes it plain that the Indemnity is subject to the Cap (and the concomitant, and resulting, Excess if the Indemnity sought exceeds the Cap). Definitions I, II and III, cited in paragraph 5 above, are easy to follow and self-explanatory and each expressly refers to the Manager:

a) First comes, in Definition I, the definition of an Indemnity Cap ("in respect of any indemnity payments to … the Manager"). As is apparent from the provision the Indemnity Cap may not actually be, in any given case, US$1m, because that is a maximum, and it falls to be calculated by reference to 0.25% of the average dollar equivalent, as there provided. Hence the reference to the "relevant Indemnity Cap" in Definition II.

b) Where there is a Cap, and depending what the relevant Cap is, there may well be an Excess, dependent upon whether the sums sought to be indemnified exceed that Cap. The longer phrase "the amount (if any) by which such indemnity payments exceed the relevant Cap" is the obvious source for the wording in the following clause (Definition III) dealing with the ICEP Rules themselves, namely "specifying the conditions for payment of any Indemnity Cap Excess" i.e. such Excess (if any). The Rules thus govern any excess over the relevant Cap in respect of any Indemnity payments payable to the Manager (among others).

ii) Some of the entities which contracted with the Defendant and whose agreements are governed by the CTA were not subjected to a Cap, as is apparent from the terms of the CTA itself. Thus, in Senior Expenses (c) (cited in paragraph 9 above) there is reference to Indemnity payments to the "Receivables Trustee, the Security Trustee, the U.S. Security Agent and/or any of their respective Appointees and Receivers", without mention of any Cap, which only arises in Senior Expenses (d). There is also an (unlimited) Currency Indemnity given to the "Security Trustee and every Receiver" in Clause 13.1 of a Security Trust Deed dated 3 August 2005 between the Defendant and the Bank of New York, which is also governed by the CTA.

iii) The ICEP Rules do not apply to all the entities listed in Senior Expenses (d). The Administrator is another important entity party to the CTA (being QSR Management Ltd), which has apparently agreed (Recital E of the CTA) "under the Administrative Advisory Services Agreement … to provide certain operational support services and technology support services". The Administrator is not listed as being subject to the ICEP Rules, and yet the Administrator is included in Senior Expenses (d). This, submits Mr Isaacs, explains the use of the words in that subparagraph "not exceeding any relevant Indemnity Cap". At least one party, the Administrator, has no relevant Indemnity Cap. The Manager, however, does.

16. Mr Chambers attempts to address the inescapable fact that the ICEP Rules do apply (by virtue of Clause 21.1) to the Manager by a crafted submission that, the purpose of the Rules being, as he submits, simply to avoid, so far as possible, the operation of an Enforcement Event, what is thereby created is a notional excess. The Manager's Indemnity in fact has no Cap when it comes to an Enforcement Event. However the ICEP Rules apply so as to prevent payment to the Manager of any (notional) Excess over the (notional) Cap which would bring about an Enforcement Event during the earlier periods the subject matter of Definitions (a), (b) and (c), yet do not prevent payment of the full amount of a Manager's Indemnity once an Enforcement Event otherwise arrives.
17. This seems to me a tortuous way of arriving at the same submission which was made originally by the Manager's General Counsel in letters of 15 May and 29 June 2010 (but no longer pursued) that the US$1m would not apply to the Manager's claims for indemnification, because an Enforcement Event had occurred. As was pointed out in argument, it would make no commercial sense whatever if monies were not payable by way of indemnity to the Manager while the scheme was solvent, but were payable (despite the carefully constructed Payment Priority), if and when the scheme were no longer solvent.
18. Mr Chambers' submission requires that the ICEP Rules impose such notional Cap and Excess by reference to Definition III(a) to (c). It then remains a notional Excess for the purposes of Rule (d), with regard to its being dealt with in accordance with the Payment Priority, but then when it comes to the Payment Priority and the operation of Senior Expenses (d), the notional Cap/Excess falls away and Senior Expenses (d) does not limit recovery by the Manager, because its Indemnity is not, by Clause 21.1, made subject to "any relevant Indemnity Cap".
19. It would obviously have been clearer if Clause 21.1 had simply said that the Indemnity was subject to the Indemnity Cap, rather than to the Indemnity Cap Excess Payment Rules. But I am quite satisfied that I do not need to resort to any of the tools of construction in order to be satisfied that that is in fact what it means:

i) Mr Chambers' abstruse and metaphysical suggestion as to how he could reconcile the Manager being subject to the ICEP Rules but not subject to the Indemnity Cap makes it clear that Mr Isaacs' careful explanation is beyond doubt correct. The Manager is expressly made subject to the Rules, and thereby, by reference to Definition I, II and III, made subject to the Cap and, consequently, to the provisions for payment of any Excess over the Cap.

ii) At the end of the day, Mr Chambers' case boiled down to a reliance on the word "any" in Senior Expenses (d) – "any relevant Indemnity Cap". I am satisfied that, as Mr Isaacs submits, the use of the word any is because there are other entities covered by the CTA which do not have such a Cap or are not subject to such Rules. The Manager however does and is.

20. I turn to the second and third issues, which arise in the event that, as I have found, the Manager's Indemnity is subject to the Cap. It is common ground that:

i) the relevant date to test the effect of the Cap is not the date when a payment is made, but when it is payable (both sides agree the correction I have made in paragraph 5 above to equate the wording in Definition I with that contained in Definition II): otherwise the Defendant could manipulate the Cap simply by bringing forward or delaying payment.

ii) There is capable of being more than one twelve-month period for the payment (in this case by reference to the continuation of the US proceedings, which are ongoing) of e.g. legal costs. Thus there were in this case bills rendered to the Manager on a number of occasions between September 2008 and November 2010.

iii) The only relevant further provision in the IFMA not set out above, is contained in Clause 21.2:

"The Manager agrees promptly upon becoming aware of a Loss as described in subclause 21.1 above to inform the Issuer in writing of any event which comes to its notice as a result of which the Issuer might become liable to pay any amount to the Manager under these provisions provided that any delay in so doing shall not in any way affect the obligation to indemnify."

This means, as is again common ground, that, just as the Defendant cannot manipulate the Cap by delaying payment, so the Manager cannot manipulate the Cap by delaying a demand.

21. Mr Chambers submits that:

i) the first twelve-month period for the calculation of the Cap starts from when demand is made under Clause 21.1. He submits that such a demand was made by the Manager's letter dated 28 August 2008, which read, in material part:

"We have become aware, through public news reports, of an action filed in the United States District Court for the Southern District of New York captioned Abu Dhabi Commercial Bank v Morgan Stanley … (the "Action"). A copy of the complaint in the Action has been forwarded to you previously. Although neither [the Manager] nor CCIL … has been named as a defendant in the Action, there are allegations in the Action concerning management services provided … To the extent [the Manager] CCIL … or any principals thereof … incur any loss (as defined in Clause 21.1 of [IFMA] arising from the Action, the Manager seeks indemnification for such loss, including legal fees and expenses."

ii) The one year period starts as above, runs for a year, and then restarts. There is thus one period from 28 August 2008 to 27 August 2009, and then a further twelve-month period with (up to) US$1m available in each period.

22. Mr Isaacs submits that:

i) the twelve-month period runs from the date when the first payment is payable, which means the first date when a quantified demand was made. In this case, the first such demand was for US$135,955.21, being in respect of a legal bill of 13 May 2010, demanded on 29 June 2010, and the Cap runs from that date.

ii) The twelve-month period is "rolling", so that no more than US$1m would be payable in respect of any twelve-month period. After the first claim on 29 June 2010 there was a further demand on 4 November 2010 in respect of a series of legal bills, totalling US$3,427,519. Taking into account the earlier demand, that means that only US$864,004.79 was available within the Cap. Neither the balance of the November 2010 demand, nor any of the small further demand of 2 December 2010 in the sum of US$19,517.93, in respect of two further bills, could be met without exceeding the rolling Cap, since otherwise more than US$1m would be paid within any twelve-month period.

23. I am in no doubt that the twelve-month period starts to run from when a quantified demand is made. This seems to me clearly to follow, as Mr Isaacs submitted, from the obligation of the Defendant (in Clause 21.1) that it "will … on demand pay to the Manager an amount equal to such Loss". Although the Manager's obligation is to give prompt notice under Clause 21.2 of any "event which comes to its notice as a result of which the Issuer might become liable to pay", what triggers the obligation can, in my judgment, only be the quantification of the Loss, which must be met on demand by payment of "an amount equal to such Loss". The demands in this case were made in those circumstances on 29 June, 4 November and 2 December 2010. The twelve-month period first started to run on 29 June 2010.
24. I am also quite satisfied that Mr Isaacs is correct in his interpretation of the rolling twelve-month period. Whereas there can be some circumstances, such as a provision in an employment contract for a rolling term, whereby employment is renewed on the anniversary of each twelve-month period, that is quite plainly not what is intended here. First there is the express provision for a Cap on US$1m "within any twelve-month period" [my underlining]. Even more clearly there is the express provision that "such twelve-month period [is] to be measured on a rolling basis" [again my underlining]. The use of this wording makes it quite clear that this is not a provision for consecutive twelve-month periods, but for measurement (retrospectively) on every date of the effect over a previous twelve-month period.
25. Accordingly I resolve all three issues in favour of the Defendant, and answer the three issues set out in paragraph 7 above as follows:

i) Yes.

ii) The first quantified demand.

iii) The Indemnity applies in respect of any twelve-month period, taking the twelve months prior to any fresh liquidated demand.