Summary

A guarantor of obligations under a swap agreement securing the issue of floating notes was entitled to the reimbursement it claimed following the termination of the swap agreements. Where it was clear from consideration of all the relevant documents that a mistake had been made in the definition of "financial guarantee reimbursement amount", and clear what correction was needed to cure the mistake, the court made a declaration as to the true construction of the relevant documents and the guarantor's entitlement to reimbursement from the issuer of the notes.

Facts

The court was required to determine whether to grant a declaration that the first defendant guarantor (S) was entitled to the reimbursement it claimed following the termination of swap agreements. The second defendant issuer (C) had issued floating rate notes. The notes were constituted by a trust deed made between the claimant trustee (X), C and S and the conditions set out in a schedule to the agreement. The notes were secured by, inter alia, total return swaps made between C and a swap counterparty referencing collateralised loan obligations. The obligations of C to the swap counterparty were guaranteed by S on the terms of a guarantee agreement made between S, X and the swap counterparty. The obligations of C to S were set out in a reimbursement agreement made between C and S. A default event, as prescribed by the conditions, subsequently occurred with the consequence that the swap agreements terminated. Accordingly, the swap counterparty claimed a sum from C and, after allowing sundry set-offs, a sum from S. S paid the sum claimed and sought reimbursement of the like amount from C under the reimbursement agreement. An issue then arose as to whether, under the terms of the reimbursement agreement and the conditions, S was entitled to the reimbursement it claimed because, in the conditions and interpretation schedule of the reimbursement agreement, the "Financial Guarantee Floating Amount" was defined as the sum of the balance of two specified ledgers and the equivalent under the liquidity swap, but nowhere was any reference made to sums paid or payable by C to the swap counterparty on the termination of the total return swap and guaranteed by S under the guarantee agreement. X instituted proceedings under CPR Pt 8 for the purpose of resolving that doubt, and S also issued a Pt 20 claim. S contended that the definition of financial guarantee floating amount should be read as including "any total return swap termination amount owed by the issuer to the total return swap counterparty" pursuant to the definition of that term in the "Offering Circular" required by the relevant regulators. It submitted that the doubt had arisen from an obvious error which the court could and should correct either as part of the process of construction of the relevant documents or by their rectification. X contended that it was not clear from the face of the reimbursement agreement that there had been any mistake, and that whilst the circular was admissible on any issue of construction, it was not a contractual document and it was not clear what correction, if any, ought to be made.

Held

A mistake might be corrected as part of the process of construction in appropriate circumstances. They would occur where, firstly, the mistake was clear on the face of the instrument and, secondly, it was clear what correction ought to be made in order to cure the mistake, East v Pantiles (Plant Hire) (1982) 2 EGLR 111 CA (Civ Div) followed. Although the mistake had to be clear, it might, however, emerge from a consideration of all the relevant documents, not only on the face of one of them: nor was there a limit to the correction which might be made provided that it was clear to the reasonable person having regard to all the relevant documents what the parties meant, Chartbrook Ltd v Persimmon Homes Ltd (2009) UKHL 38, (2009) 1 AC 1101 followed. In the instant case, to exclude termination amounts from the relevant ledger balance made no commercial sense and it was clear from a consideration of all the relevant documents that a mistake had been made in the definition of financial guarantee reimbursement amount as defined in the conditions. The term ought to include the total return swap termination amount. If the appropriate construction was to read the definition of financial guarantee floating amount where it appeared in the conditions as being in the form set out in the circular, then the total return swap termination amount owed by S to the swap counterparty would be included. Consequently, S would be obliged to reimburse that amount to C. It was clear from consideration of the relevant documents what was the appropriate construction to adopt to correct the obvious mistake. Accordingly, C's submissions had to be accepted and the court would make the appropriate declaration as to the true construction of the relevant documents on that basis.

Declaration granted in favour of first defendant