This case considers the ability of a buyer of a loan participation to insist upon unwinding the transaction where the deadline for meeting a condition to the sale expires. The case examines the extent of the buyer’s obligation to act in good faith and assist the other parties in meeting the deadline.
Why is the case of interest?
The case considered the ability of a buyer to trigger a provision to unwind a trade where:
- a deadline for obtaining a registration certificate from a central bank had passed, and
- the market had moved against the traded portion of the debt making it commercially advantageous for the buyer to exit the trade
VR Global Partners, L.P. v Exotix Partners LLP discusses the extent to which one party to a trade can insist that a deadline is extended or force another party to take steps leading to the satisfaction of condition precedent to the sale.
The case also considered how the Loan Market Association’s (LMA) standard terms which applied to the trade interacted with the special conditions agreed between the parties.
What were the facts?
CVI sold a $US 10m portion of its participation in a loan to Exotix. Exotix sold this on to VR Global (VR).
The sale was made subject to a condition that the National Bank of Ukraine issued an amendment or supplement to a registration certificate relating to the transfer (the NBU Registration Condition).
The parties agreed conditions to cover this situation which were as follows:
14(6) The parties agree and acknowledge that if proof of NBU Registration has not been received by 30th November 2014 then this trade may be unwound at [VR’s] option in the manner set out in the following paragraph. [CVI, Exotix and VR] may, on or before 30th November 2014, review the situation and may agree that a further review period be set.
14(7) If [VR] elects to unwind the trade in accordance with the preceding paragraph, then (1) [CVI, Exotix and VR] shall enter into a multilateral netting agreement with the intention of returning the parties, to the extent possible, to the positions they were in prior to the Trade Date, and (2) [CVI and VR] shall enter into an agreement whereby the Traded Portion (or the amount thereof outstanding at that date) shall be transferred directly between the two parties. [CVI and Exotix] shall, and [Exotix] shall procure that [VR] shall, act in good faith towards each other in relation to any unwinding of this transaction.
14(8) [VR] will in good faith take all reasonable actions open to it to assist in obtaining NBU Registration.
In addition the LMA’s standard terms contain this provision:
Condition 28 [Exotix agreed with CVI and VR agreed with Exotix]… to take any further action and to execute any further documents and/or instruments as [CVI in the CVI/ Exotix trade; Exotix in the Exotix/VR trade] may reasonably request to give effect to the transaction”.
The NBU Registration Condition was not satisfied by 30th November. By that date the market had moved against the traded portion making it commercially advantageous for VR to exit the trade. VR triggered an unwinding of the trade as contemplated by condition 14(6).
Issues before the court
- Did VR have to take reasonable steps to agree a further review period ie extend the deadline for satisfying the NBU Registration Condition?
- Did VR have to act in good faith in the sense that it could use the failure to meet the NBU Registration Condition to unwind the trade only if it considered, acting in good faith, that the regulatory approval required would never materialise? Or could it also use the condition where the market had moved making the trade less economically appealing to VR?
- CVI argued that it was not possible for the parties to be returned to the position they were in prior to the trade because of the movement in the market. In particular CVI considered that the words “to the extent possible” in condition 14(7) suggested there was a risk to be allocated of loss arising due to movements in the market and the only sensible construction of the terms of the trade was to allocate that risk to VR
The judge thought the meaning of condition 14(6) was clear. VR was not obliged to agree a new review period. The use of the word “may” in the contract term made this plain.
It was not possible to imply any term into the contract that VR would take steps to agree a new review period. Such an implication was neither obvious or necessary for business efficacy.
CVI’s argument that condition 14(7) imposed upon VR a faithfulness to an agreed common purpose, and fair dealing and that the purpose of VR’s option to unwind was to provide it only with a protection against the regulatory risk of non-registration and not the economic risk of the market moving against its purchase was rejected by the court.
VR was entitled to take the view that the failure to satisfy the NBU Registration Condition by 30th November heightened the regulatory risk and that alone was sufficient to allow a proper exercise of the option. The fact it was also in VR’s economic interest to exercise that option could not turn a valid exercise of the right to unwind the trade into an invalid exercise of that right.
The judge went further and held that the good faith required by condition 14(7) was directed towards any process of unwinding the trade rather than the actual exercise of the option to unwind or taking steps to satisfy the NBU Registration Condition.
Finally, neither condition 14(8) nor Condition 28 of the LMA’s standard terms applicable to the trade had been breached. There was nothing VR could do to acquire the NBU registration that it had not done and VR had in no way hindered attempts to obtain it.
There are a number of points which can be derived from the judgment.
- CVI could have better protected itself by imposing an obligation upon VR to agree one or more extensions to the deadline perhaps with the proviso that the option to unwind could only be triggered if it was manifestly clear no NBU registration would be forthcoming
- if a party is to act in good faith it should be made clear which respects of the relevant counterparties behaviour that obligation is designed to regulate—here it was imposed on VR in relation to the wrong matter ie unwinding the trade rather than ensuring it completed in the first place
- if an obligation to take steps is imposed on a party then it might help to identify a non exclusive list of the type of steps that might need to be taken; and
- if a deadline condition is agreed it behoves the party arguing for an extension of the deadline to lead by example and show it is trying to satisfy the condition—simply allowing a deadline to expire without chasing up the relevant parties is unlikely to impress a court and might make it less sympathetic towards construing the contract in a way which obliges the parties to grant more time for conditions to be fulfilled
- Court: High Court, Queen’s Bench Division, Commercial Court
- Judge: Robin Knowles J
- Date of judgment: 20 October 2017