SNCB Holding v UBS AG
| Jurisdiction | England & Wales |
| Judge | The Hon Mr Justice Cooke,MR JUSTICE COOKE |
| Judgment Date | 20 July 2012 |
| Neutral Citation | [2012] EWHC 2044 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2011 Folio 45 |
| Date | 20 July 2012 |
[2012] EWHC 2044 (Comm)
The Honourable Mr Justice Cooke
Case No: 2011 Folio 45
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Jasbir Dhillon and Craig Morrison (instructed by Quinn Emmanuel Urquhart & Sullivan UK LLP) for the Claimant
Adrian Beltrami QC and Richard Hanke (instructed by Linklaters LLP) for the Defendant
Hearing dates: 3 rd, 4 th,5 th, 6 th,11 th and 12 th July 2012
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
INTRODUCTION
The Claimant (SNCB) seeks damages from the Defendant (UBS) for breach of contract. There is an issue as to the contractual documentation, since SNCB maintains that this includes a Term Sheet sent to it by UBS on the 19 November 2001 and the 7 December 2001. An Amended Deposit Agreement dated as of 19 November 2001 (the ADA), which was, on the evidence, executed in January 2003, and Security Agreements dated 17 January 2003 and 15 January 2009 (which are not materially different), are agreed to be part of the contractual documentation.
The claim arises out of the ADA by which SNCB paid UBS a sum of $39.75M in 2001 in return for payments made by UBS to SNCB of approximately $12.86M dollars in January 2003-January 2005 and a further sum of approximately $165M to be paid in 2031. The payments due to SNCB under the Agreement were intended to enable it to pay its obligations under a cross border lease in respect of Belgian railway infrastructure, where SNCB had entered into a sale and lease back with an option of repurchase at the end of the 30 year term. The critical features of the ADA, for current purposes, were that UBS was obliged to make the repayments set out in Annex 1 subject to the occurrence of a Credit Event in respect of any specified Reference Entity, as those terms were defined in the ADA. Should such a Credit Event occur, UBS' future repayment obligations would be terminated in respect of the portion of the Deposit linked to that Reference Entity and UBS would be bound, instead of making that repayment, to deliver to SNCB, bonds of that Reference Entity with a face value equivalent to an Accreted Amount to be calculated in accordance with the terms of the ADA. The ADA also provided that UBS was to set up a Collateral Account, being a segregated account, which would constitute security for its repayment obligations. In SNCB's submission, it was also security for the obligation of UBS to deliver the Reference Entity bonds on the happening of a Credit Event. The Collateral Account was to consist of bonds of Reference Entities and/or cash in US dollars. The essential points of construction and implied terms at issue between the parties concern the link (if any) between the Collateral provisions and the Credit Event provisions of the ADA.
In March and July 2010 Credit Events are said to have occurred in respect of one of the Reference Entities, Ambac Assurance Corporation. SNCB now accepts that all three were Credit Events within the meaning of the ADA, though it did not do so at the time. At the end of March, the Collateral Account contained Ambac bonds (in fact Municipal Bonds, guaranteed by Ambac) which had a market value of around $9M. SNCB maintains that under the ADA, UBS was required to deliver to it those Ambac Municipal bonds in the Collateral Account at the time of the Credit Event, whereas what in fact happened was that, over a three and a half month period, UBS replaced the Ambac Muncipal bonds in the Collateral with cash and then subsequently substituted other Ambac guaranteed bonds (Ambac Terwin Bonds) of much lesser value (about $2m), served a Credit Event Notice on July 12 and delivered them to SNCB on the 12 August 2010.
Of the three relevant Credit Events, the first, as determined by ISDA on 26 March, took place on 24 March 2010, and was the subject of contest in correspondence between the parties thereafter. No Credit Event Notice was served in respect of it. The second took place on 25 March but did not come to the attention of UBS until 9 June 2010. The third occurred on 1 July. UBS relied only on the latter two in its Credit Event Notice on 12 July. No issue arises as to the timeliness of that Notice in respect of those two events. The question is whether or not UBS was entitled to take this course of action, which gives rise to arguments about the composition of the contractual documentation and its construction, about implied terms and about the exercise of contractual discretion.
SNCB's case is that UBS' decisions to replace the contents of the Collateral Account after the ISDA Credit Event and to deliver to it the cheapest bonds it could find had the purpose and effect of benefiting UBS' commercial interests at the expense of SNCB's interests. Those decisions are alleged to be contrary to SNCB's rights, its reasonable expectations and the purposes for which UBS' power to manage the Collateral was conferred, amounting to an abuse of UBS' contractual power and a breach of contract that has caused SNCB substantial loss.
THE PRINCIPAL ISSUES, AS DEFINED BY SNCB.
The principal issues, as set out in SNCB's skeleton argument are said to be as follows:—
i) Whether, on the true construction of the Deposit Agreement and/or by way of an implied term, SNCB was entitled to receive and UBS was obliged to deliver to SNCB the Ambac Municipal Bonds, contained in the Collateral Account at the time of or following a Credit Event in respect of Ambac as part of the Delivery Portfolio.
ii) Whether UBS's removal of the Ambac Municipal Bonds from the Collateral Account, replacement with cash, transfer of the Terwin Bonds into the Collateral Account and delivery of them to SNCB was an impermissible exercise of UBS's discretion amounting to a breach of the Deposit Agreement. This issue raises the following sub-issues:
a) Whether, on the true construction of the Deposit Agreement or by way of an implied term, it was an impermissible exercise of discretion for UBS to remove the Ambac Municipal Bonds from the Collateral Account and replace them with cash and subsequently the Terwin Bonds and deliver them to SNCB because that defeated the reasonable expectations of the parties.
b) Whether, on the true construction of the Deposit Agreement or by way of an implied term, it was an impermissible exercise of discretion for UBS to remove the Ambac Municipal Bonds from the Collateral Account and replace them with cash and subsequently the Terwin Bonds and deliver them to SNCB for the primary or substantial purpose of conferring a commercial benefit on UBS at the expense of SNCB.
c) If the implied term described at paragraph (b) above is established, whether UBS's discretion to replace the Ambac Municipal Bonds in the Collateral Account with cash and subsequently the Terwin Bonds and deliver them to SNCB was in fact exercised for the primary or substantial purpose of conferring a commercial benefit on UBS at the expense of SNCB.
d) Whether, by way of an implied term of the Deposit Agreement, UBS's discretion to transfer and hold cash in the Collateral Account cannot be exercised for any purpose other than ensuring that the mark to market value (MTMV) of the Collateral was at least 100% of the MTMV of the Deposit during any time when UBS was unable to transfer sufficient Obligations into the Collateral Account by the last business day of the month.
e) If the implied term described at paragraph (d) above is established, whether UBS's discretion to remove the Ambac Municipal Bonds from the Collateral Account, replace them with cash, and hold the cash until 9 August 2010 was in fact exercised other than for the proper purpose identified in paragraph (d) above.
iii) Whether UBS's breaches of the Deposit Agreement have caused SNCB any recoverable loss; and, what is the quantum of SNCB's loss.
Paragraph 9 of the Re- Amended Particulars of Claim, served a week before the trial, provides as follows:—
"On the true construction of the express terms of the Deposit Agreement, in particular, the terms set out in Schedule 2 in the light of the factual background to that agreement pleaded herein, and/or by way of an implied term:
(1) From 31 January 2003, UBS was required to ensure that on the last business day of each month the mark to market value of the Collateral held in the Collateral Account was at least 100 per cent of the mark to market value of the Deposit.
(2) UBS was required on the last business day of each month to transfer Collateral into the Collateral Account in an amount sufficient to satisfy its obligation described at paragraph 9 (1) above if on that day the mark to market value of the Collateral held in the Collateral Account was less than 100 per cent of the mark to value of the Deposit.
(3) UBS had a discretion to determine whether the Collateral which it was required to transfer into the Collateral Account as described in paragraph 9(2) above or which it was entitled to transfer into the Collateral Account would be in the form of Obligations of the Reference Entities ("Obligations") or cash in US Dollars ("cash").
(4) UBS's discretion described at paragraph 9(3) above cannot be exercised by UBS for any purpose other than the purposes for which that discretion was conferred. The purposes for which the aforesaid discretion was conferred on UBS was limited:
To transferring cash into the Collateral Account if on the last business day of each month the mark to market value of the Deposit was more than 100% of the mark to market value of the Collateral and UBS was unable to transfer sufficient Obligations into the Collateral Account by the last...
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