Clifford Chance

Case: GSO Credit, Barclays and HCC International – Construction of LMA terms and conditions for secondary debt trading. When purchasing assets, obligations follow.

10 February 2016

The second ever case to come before the Financial List (a specialist list set up to handle cases related to the financial markets and which would benefit from being heard by judges with particular expertise in the financial markets) concerns a dispute over the construction of the terms of a secondary debt trade carried out on the May 2012 version of the LMA Standard Terms and Conditions for Par and Distressed Trade Transactions ("2012 LMA Standard Terms").  Although specific to its facts, the case is interesting for its analysis of what is bought and sold when trading on LMA standard terms and conditions.  The case involved a sale of "a position" under a surety bonds facility and focused on whether (a) the seller's contingent obligations under surety bonds issued at the time of trade formed part of the "Purchased Assets" and (b) those surety bonds constituted a "funded" or "unfunded" portion of the "Purchased Assets" for the purposes of the calculation of the "Settlement Amount".  The decision was crucial to both seller and buyer as it determined whether a "Settlement Amount" payment was due from the seller or buyer.  Mr Justice Knowles CBE ruled that the trade was a sale of the seller's "interest" in the surety bonds facility, which included not only rights to reimbursement from the borrower under the facility agreement but also the obligations of the seller under the issued surety bonds.  The case highlights the need for users of the LMA standard terms and conditions to be familiar with their terms, particularly when the subject matter of the trade is not a plain vanilla loan with a drawn and/or undrawn commitment.

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