Interviewer: Oliver, when there’s a dispute over a structured finance transaction; how you interpret that contract is absolutely vital.
Oliver: Yes that’s right. In the last sort of six or seven years against a backdrop of the difficult economic situation that we’ve had, structured financial transactions have been subjected to some stress that people didn’t expect they’d be subjected to when they were documented back in 2006/2007 so deals which have been constructed in a different environment now have themselves been subjected to the stresses of an unprecedented level of interest rate reduction, asset prices reduced very significantly to where they were before and so there is a real focus on those parts of the transactions which people weren’t really focused on in the good times and what that has meant is that they have had to go back to the documents to say, OK how are these provisions going to work and very often the courts have been asked to interpret those actual provisions just to come up with what they believe the proper interpretation would be.
Interviewer: And how have the courts been reacting in recent times?
Oliver: So, there is a body of case law that has been built up over the last 20 years or so, it started with a case called the Investors Compensation Scheme in West Bromwich Building Society and that was back in 1997, taking it through to Chartbrook v Persimmon the case in 2009 and then more recently the Rainy Sky decision in 2011 which everyone has heard an awful lot about and what the court has done in that body of case law is to develop an interpretation regime whereby they can interpret a way potential problems in contracts so, where there are these issues, where there is a genuine ambiguity and a problem with the contract, the courts say, well we can get through that problem by taking an interpretive approach to it but perhaps sometimes parties have been a little bit too willing to have recourse to these provisions and to rely on them to deal with concerns which exist in these transactions.
Interviewer: And what has that meant for the resolution of difficult issues in structured finance transactions?
Oliver: We have seen a lot of problems in these transactions and that has led a number of parties to resort to the court for other alternative dispute resolutions to be required so sometimes you have seen parties agree that for example a QC or a Queens Counsel will come to an opinion as to what the proper interpretation of the contract may be and parties are very keen and quick to rely on the Rainy Sky decision and say that, notwithstanding the fact that there may be some degree of clarity in the wording in the contract, they believe that the outcome that comes from that is one that wasn’t the commercial intention of the parties and they point to Rainy Sky to say well, this is the judgment that allows us to adopt the commercial intention that we think the parties had when they entered into the agreement. I think if you look at Rainy Sky and what that judgment said, its slightly different, the court is saying that in circumstances where there is a genuine ambiguity, so where the result of applying the strict wording of the contract is really patently absurd or totally ridiculous, then in those circumstances the court has the ability to interpret it away and to come up with what they thought was the commercial intention of the parties but there needs to be that absurdity there in order to get into that mechanism to allow that interpretation to take place.
Interviewer: And there have been other cases as well which have helped clarify the market?
Oliver: Yes, more recently this year we have seen the Supreme Court decision in Ireland and Britain which is a million miles away from the structured finance market. It dealt with a situation at a South Wales holiday home and so very different to the structured finance market but I think a case that will become very very important to contractual interpretation more widely, but certainly within the structured finance market as well. In that situation the court decided that a service charge provision for some holiday home owners at this South Wales holiday site was such that the interpretation meant that in 2070 the service charge would be something like over half a million pounds for a clause which had started back in 1970 so one which has a particularly draconian effect on those people who own the site but the importance of that for the structured finance market is that the Supreme Court took the opportunity to reassert the view that where there is very clear literal wording which doesn’t bring about a contractual absurdity, it might bring about a bad bargain for example but certainly not an absurdity, then the courts will say that the parties have to stick to the strict letter of the law of the contract and I think another important point to bear in mind for parties in structured finance transactions because, going forward, I think there will be less scope for people to argue that a particular commercial interpretation should apply when the wording is very clear.
Interviewer: Oliver – thank you.