FML Timeline: Decura IM Investments LLP (and others) v UBS AG London Branch

To print a complete version of this article, click the PDF on the top right. Facts

This action arose pursuant to one of the terms of the Agreement that the Defendant (UBS) would cease developing on its own behalf, or source from other businesses, financial products and services that were defined in the Agreement as “Exclusive Business Services” (EBS). Instead, UBS would purchase such products for its investment bank (IB) solely from the Claimant entities (Decura).

Certain termination events were defined under the Agreement. Clause 20.3 of the Agreement defined a termination event where UBS “… ceases to carry on a material part of its UBS IB business at any time” and “… such cessation… has a material adverse effect on UBS IB’s ability to market the Exclusive Business Services”.

After both parties had signed the Agreement, UBS announced “Project Accelerate”, a programme designed to speed up the restructuring of its investment banking business. The question for the Court therefore, was whether the commencement of “Project Accelerate” would fall within the definition of a termination event under the Agreement.

Decision

In order to decide whether the termination event had occurred, Burton J summarised the case into three issues:

1. What was the effect and meaning of the word “material” in the provision?
2. Did Project Accelerate have the effect that UBS ceased to “carry on a material part” of its business?
3. If a cessation of a material part of the business had taken place, did that have a “material adverse effect” on whether UBS were able to effectively market the EBS?

Issue 1

Neither party adduced expert evidence as to what was “material”, although it was common ground that this needed to be judged objectively. The Court agreed with both parties’ submissions that the term “material” meant “significant” or “substantial”, applying the decisions in Pan Atlantic Insurance Company Ltd v Pine Top Insurance Company [1994] HL 27 and Grupo Hotelero (Grupo Hotelero).

The court accepted UBS’ argument that what was material had to be judged in the context of the factual matrix of the Agreement, for example, that the Agreement was of unlimited duration, that there was no guarantee of any revenue or profit and the high standard of other termination events.

UBS submitted that, on the facts of the case, the word “material” should be interpreted to mean “very high threshold”, that is, “very significant” or “very substantial���. Burton J suggested that the word “very” did not need to be inserted, but that he would still interpret the meaning of materiality within the factual context of the case.

Issue 2

This issue was whether Project Accelerate caused UBS to cease continuing “a material part” of its business. Burton J found that whilst Project Accelerate had indeed served to accelerate the restructuring and diminution of certain areas of UBS IB, “the clause must be construed by reference to the identification of a specific part of the business, and none such is identified”. As no one area of the IB operations had been ceased entirely, then material cessation requirement of the termination clause had not been fulfilled. UBS had not closed its fixed income division (FICC) and its FICC operations continued under a new division, so no specific part of the business had been decommission.

Issue 3

This point was dealt with by the judge purely in the hypothetical, with the above decision (in favour of UBS) as to Issue 2 rendering the issue moot. On the facts, the Court said that the onus was on Decura to show an actual, rather than a likely, material impairment of UBS’ ability to market the EBS products, and it was not a question of an adverse effect on sales.

Both parties agreed that “material adverse effect” amounted to an objective test. The “material” diminution of UBS IB’s ability to market the EBS (including, but not restricted to, the decision to exit from certain complex structured products sales) under the Agreement was found to have taken place before the commencement of the Agreement, not as a result of Project Accelerate. Thus, on the facts, Decura had failed to show that Project Accelerate had caused a “material adverse change” on UBS IB’s ability to market the EBS. No termination event had therefore occurred.

This welcome decision illustrates a robust and common sense approach to interpreting the meaning of “materiality” within the factual matrix of a commercial contract.

Noteworthy/ Novel points

In the case, the court was asked to consider whether the Claimant entities were entitled to terminate an exclusivity agreement entered into with the Defendant in May 2012.

Burton J was required to assess the meaning of “material” and “material adverse effect” to decide whether a termination event had occurred. Decura sought a declaration from the court entitling them to terminate the Agreement.

This case represents a rare instance where the court has attempted to define key terms on the subject of materiality. Burton J made a number of comments on the meaning of the word “material”. Firstly, that it was accepted that materiality is an objective term. Secondly, it was accepted that materiality must be assessed at the relevant time (when the requisite term of the contract is attempted to be relied upon). Thirdly, Burton J confirmed that there are degrees of materiality, applying Grupo Hotelero. In assessing materiality, therefore, one should determine the degree of materiality required from the relevant factual matrix.

Burton J decided (and the parties agreed) that “material adverse effect” in the context of the case was an objective test. The burden therefore lay with Decura to prove that there had been an actual (and not merely likely) material impairment of UBS’ ability to fulfil its obligations under the Agreement.

Whilst there obviously will remain some fluidity as to the meaning of “material”, “material adverse effect” and “material adverse change” clauses (owing to the fact that interpretation will depend largely on the facts of the individual case), the case of Decura builds on the guidance given in Grupo Hotelero and should provide greater clarity in future agreements.