Neutral Citation Number: [2016] EWCA Civ 412
Case No: A3/2015/0582
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
Mr. Justice Hamblen
[2015] EWHC 150 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 28 April 2016
Before :

LORD JUSTICE MOORE-BICK
Vice-President of the Court of Appeal, Civil Division
LADY JUSTICE KING
and
LORD JUSTICE SALES
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Between :

	(1) EDGEWORTH CAPITAL (LUXEMBOURG) S.Á.R.L
(2) AABAR BLOCK S.Á.R.L 	Claimants/
Respondents 
	
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RAMBLAS INVESTMENTS B.V.	Defendant/
Appellant 	

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Mr. George Bompas Q.C. and Mr. Christopher Howitt (instructed by Kobre & Kim (UK) LLP) for the appellant
Mr. Antony Zacaroli Q.C. and Mr. William Willson (instructed by Linklaters LLP) for the respondents

Hearing date: 13th April 2016
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Judgment
Lord Justice Moore-Bick: 
1.	This is an appeal against the order of Hamblen J. dated 30th January 2015 giving judgment for the respondents in the sum of €105,201,095.89. It ultimately turns on the construction of three terms of an agreement called an “Upside Fee Agreement” (“UFA”) made between The Royal Bank of Scotland Plc (“RBS”) and the appellant, Ramblas Investments B.V. (“Ramblas”). The appeal raises no point of law of general importance and no one other than the parties to the proceedings are likely to be interested in its outcome. The parties themselves are familiar with the terms of the agreement, the context in which it came to be made and the issues to which the proceedings have given rise. I therefore think it is possible to give the reasons for my decision rather more shortly than might otherwise have been the case and I am confident that it is possible to do so without doing any injustice to the parties’ arguments.
2.	The facts giving rise to the dispute are set out in the judgment of Hamblen J. [2015] EWHC 150 (Comm), as are the principal terms of the UFA which bear on the present dispute. The UFA represented one element of a suite of financing agreements supporting the purchase by Marme Inversiones 2007 S.L., a subsidiary of Ramblas, of a group of buildings in Madrid known as the Ciudad Financiera. It provided for the payment of certain fees to RBS as consideration for providing funds that were essential to the completion of the financing arrangements at a time when it was very difficult to raise money in the markets. They comprised a loan of €200 million to Ramblas under a ‘Junior Loan Agreement’ (“JLA”) and a further loan of €75 million to the two businessmen behind the purchase, Mr. Glenn Maud and Mr. Derek Quinlan, under a ‘Personal Loan Agreement’ (“PLA”). RBS subsequently assigned its interest in the JLA, the PLA and the UFA to the respondents, Edgeworth Capital (Luxembourg) S.Á.R.l. and Aabar Block S.Á.R.l.
3.	By clause 2.1 of the UFA a fee was payable to RBS upon the occurrence of a ‘Payment Event’. A Payment Event was defined as including:
“(a) . . . the repayment of the Loan . . . (including any repayment made following acceleration or from the proceeds of any security realisation) or, if earlier, the date on which any such . . . repayment falls to be made pursuant to the Junior Credit Agreement”.
The Junior Credit Agreement was simply another name for the JLA.
4.	The JLA contained a cross-default provision, under which a failure to make a payment under the PLA when it fell due constituted an Event of Default under the JLA. In June and September 2010 the borrowers failed to make payments of interest due under the PLA. They also failed to repay the whole amount of the Personal Loan which fell due on 29th September 2010 as a result of those defaults. These failures constituted Events of Default under the JLA and as a result, on 30th December 2010 RBS gave notice to accelerate the obligation to repay the Junior Loan. However, the Junior Loan has not yet been repaid.

Construction
5.	The first question which arises on this appeal is whether a Payment Event within the meaning of the UFA has occurred. If it has, it is common ground that a fee is payable in accordance with Clause 2.1(b)(iv)(B) of the Agreement. However, the appellant says that no fee was intended to become payable unless there had been repayment of the whole or part of the Junior Loan. Mr. Bompas Q.C. submitted that the UFA, as its name suggests, was intended to give RBS a share in any increase in the value of the property at the risk of receiving nothing if the property declined in value or if the Junior Loan were not repaid. He submitted that that conclusion was supported not only by the use of the word “Upside” to describe the fee agreement, but by the fee structure itself and by the definition of ‘Payment Event’ properly construed.  Mr. Bompas submitted that the words
“ . . . or, if earlier, the date on which any such . . . repayment falls to be made . . . ” (my emphasis)
were used only for the purposes of  identifying the date on which a Payment Event was to be treated as having occurred, but that a Payment Event as such could not occur unless a payment had actually been made. Since no part of the Junior Loan has been repaid, there has been no Payment Event and therefore no fee has become due.
6.	We are unable to accept that submission. It may well be that the parties hoped, and perhaps even expected, that the property would increase in value over the period of the loan and that RBS stipulated for a share in that increase, but the commercial background and the recitals to the UFA support the conclusion that RBS was able to, and did, demand a substantial fee for agreeing to provide essential missing elements of the financing arrangements. Fees became payable in different amounts at different dates depending on subsequent events, but the UFA provided for a fee whether the value of the property rose or fell. For present purposes it is sufficient to note that ‘Payment Event’ is defined as the repayment of the Junior Loan or, if earlier, the date on which any such repayment fell to be made. The natural meaning of those words, and one that reflects the commercial context in which the agreement was made, is that the two events are alternative. The construction put forward by Ramblas seeks to place more weight on the word “such” than it will bear and is strained. It does not reflect the natural meaning of the words used and there is nothing in the commercial background to the agreement that supports that construction. In my view a Payment Event therefore occurred on 30th December 2010 when the repayment of the Junior Loan fell to be made.
Penalty
7.	The second question is whether the provision for payment of the fee is unenforceable as a penalty. Mr. Bompas submitted that if on the true construction of Clause 2.1 of the UFA a fee did become payable, it was unenforceable as being a penalty, because it far exceeded any loss that RBS could suffer as a result of the breach of contract in failing to make repayment of the Junior Loan. I cannot accept that submission. As the recitals and Clause 3.3 of the UFA make clear, the fee was the remuneration payable to RBS for providing part of the finance necessary to complete the purchase of the Ciudad Financiera. It became payable on a specified date when the repayment of the Junior Loan fell due. The event which constituted an Event of Default under the JLA and caused the loan to fall due for repayment was not a breach of the JLA itself but a breach of the PLA by the borrowers. As the judge said, the fee had nothing to do with damages for breach of contract; it was payable on the happening of a specified event. Accordingly, it does not fall foul of the rules against penalties: see Cavendish Square Holding BV v Makdessi [2015] UKSC 67 per Lord Neuberger and Lord Sumption at paragraphs 12-15.   
Calculation of the fee
8.	It was common ground that if a fee is payable, it is to be calculated in accordance with Clause 2.1(b)(iv)(B) of the UFA, i.e. as an amount which generates an internal rate of return (“IRR”) of 20 per cent on the amount of the Junior Loan over the period from signing the agreement to the date of the Payment Event. It was common ground for the purposes of the appeal that interest was to be compounded with annual rests. It was not in fact paid annually, however, but was capitalised and added to the loan. No money therefore changed hands.
9.	IRR was defined as:
“the annualised discount rate that produces a Net Present Value of zero when applied to cash inflows and outflows representing principal lent or (p)repaid and interest paid in respect of the facility.”
10.	The only dispute between the parties, expressed in the form of rival worksheets helpfully produced by the appellant, was whether, for the purposes of the calculation, interest should be treated as having been paid at the end of each year and added to the loan. In our view it should not. The important aspect of IRR for present purposes is the adoption of cash flows as the basis of the calculation. The interest payable each year (a cash inflow to RBS) was capitalised and thus balanced by an addition to the loan (a cash outflow), giving a net cash flow of zero over that year. In cashflow terms nothing other than the advance itself had been paid either way until the whole amount of the loan plus interest fell due on the date of the Payment Event. On that basis it was agreed that the correct amount of the fee was €91,513,066.92. It will therefore be necessary to vary the judge’s order accordingly and to that limited extent I would allow the appeal.
Lady Justice King :
11.	I agree.
Lord Justice Sales :
12.	I also agree.