FML Timeline: Metlife Seguros De Retiro SA v JP Morgan Chase Bank

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

JP Morgan issued structured loan notes to Metlife through its USD $3bn Structured Euro Medium Term Note Programme (the Notes). The terms of the Notes stated that the final redemption amount payable by JP Morgan was to be calculated in accordance with the Argentinian CER inflation index. The terms of the Notes further provided that this method of calculation would change if a “CER Event” had occurred. A CER Event was defined at clause 22 of the Notes and included a number of scenarios including where:

“[t]he Republic of Argentina, or any of its agencies, instrumentalities or entities… by means of any law, regulation, ruling, directive or construction, whether or not having the force of law, takes any action which legally or de facto prevents or has the effect of restricting or limiting (i) the calculation or (ii) announcement of the CER or any of the values used to determine the CER.”

JP Morgan calculated the final redemption amount using the CER inflation index and paid out USD $176,541,651.36 to Metlife. Metlife claimed that the Argentinian government had manipulated the CER inflation index for political reasons and that it was therefore inaccurate. Metlife claimed that a a CER Event had in fact occurred and that, as a consequence, a different method of calculation should be adopted on the basis of which it was entitled to a further USD $75.2m from JP Morgan.

At first instance Metlife argued that clause 22 of the Notes should be construed as requiring the CER index to be a reliable statement of the rate of inflation in Argentina. If it was not a reliable statement, a CER Event would occur. The Court found that the natural meaning of the definition of a CER Event (as extracted above) concerned the availability / non-availability of the index and that CER Event would only occur if the government had ceased to make the CER index available. The Court also added that even if Metlife’s interpretation were correct there was no test to determine the “reliability” of the index. Metlife appealed the decision.

Decision

The Court of Appeal upheld the decision in the first instance and rejected Metlife’s appeal. On appeal Metlife had amended its original argument and stated that the CER index had to be a “genuine measurement of inflation” or a CER Event would occur.

Hamblen LJ provided the leading judgment and applied the principles of construction found in Arnold v Britton [2015] UKSC 36, namely that construction must involve “considering the language used and ascertaining what a reasonable informed person would have understood the parties to mean”. If there are multiple possible interpretations the one which makes the most commercial and common sense should be used.

Hamblen LJ found that the “availability” construction adopted by the court in the first instance made the most commercial sense and agreed with expert evidence of both parties which indicated that complex financial instruments were not linked to concepts such a “true” or “genuine” inflation.

In his judgment Hamblen LJ also emphasised the significance of commercial context when interpreting financial instruments as these contracts can be traded. Hamblen LJ cited Re Sigma Finance Corp [2009] UKSC 2, [2010] which provides that a financial instrument must be interpreted in light of the commercial intention of the parties “which may be inferred from the face of the instrument and from the nature of the debtor’s business”.

Lewison LJ (Black LJ concurring) also concluded that the “availability” construction was the most appropriate. In his view the “availability” construction was most appropriate as it resulted in a “more coherent and workable scheme”. Lewison LJ also noted that he did not consider that the principles found in Arnold v Britton had superseded those in Re Sigma Finance Corp.

Noteworthy/ Novel points

The Court continues to interpret the express provisions of a contract along with the commercial and factual context of the contract as a whole.