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Napier Park v Harbourmaster Pro- Rata CLO and others.

Posted on 10/06/2015 · Posted in Expert Witness, Financial Litigation, Structured Products

This case, principally about the interpretation of clauses in a contract, concerns a Collateral Loan Obligation (‘CLO‘), the terms of which were viewed in diametrically opposed ways by the High Court and subsequently the Court of Appeal.

Some of the underlying loan obligations in the CLO had matured early, and the key issue in dispute was what should be done with the resulting cash proceeds. The transaction documents provided that they should be reinvested in further loan obligations, if the ratings of the Class A1 Notes had not been downgraded below their Initial Ratings. The Class A1 Notes were rated AAA but had then been downgraded to AA before being upgraded back to AAA.

The High Court held that the moneys could not be reinvested. The reasoning being that certainty and clarity of rights and obligations under a contract were paramount, particularly where they could pass to others (as in the case of traded financial instruments), and that they should therefore be cautious about departing from the ordinary meaning of the words used. The phrase ‘have not been downgraded’ refers to something that has happened at an unspecified time in the past and the reinvestment criteria could never be satisfied.


The single biggest problem in communication is the illusion that it has taken place. .”

George Bernard Shaw

On appeal, however, the Court of Appeal took an opposing view. It felt that this phrase was ambiguous and could be interpreted in more than one way – it could mean ‘not presently downgraded‘ (even though they might have been in the past). A historic downgrade which was no longer continuing should not be dominant. Further, the Court used an iterative process to interpret the CLO – testing each interpretation and investigating its commercial consequences, adopting the interpretation which was most sensible (following the Supreme Court in Re Sigma Corp). Senior noteholders would not need protecting (by preventing reinvestment) if the notes were AAA-rated at the relevant time. Having regard to the overall structure, the Court felt that this ’continuing state of affairs’ interpretation was most consistent with business common sense. The appeal was allowed.

This case serves to illustrate the importance of accurate drafting and how the lawyer should always have in mind everyone who is affected by the contract, and a pragmatic approach to its effect. The English courts will look beyond the words on the page and explore the commercial effects of the contract.

Link: Court of Appeal: Napier Park v Harbourmaster Pro-Rata CLO 2 BV [2014] EWCA Civ 984

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