An important treatment of modified standard form agreements

Kimura held a 50% share of a loan facility agreement with a Chilean mining company. Yieldpoint paid Kimura to participate in Kimura’s share of the facility. The participation occurred under a standard form sub-participation agreement that was modified before signing. The mining company went bust. In a conventional sub-participation, Yieldpoint would have assumed the risk of the ultimate borrower’s default. However, Yieldpoint argued that this arrangement was a “hybrid form of sub-participation” whereby Yieldpoint had effectively lent a sum to Kimura under a fixed term loan agreement bearing no risk of the mining company’s default.  

The High Court, albeit with “some discomfort”, had accepted Yieldpoint’s contention that the modifications were sufficient to render the agreement a “hybrid sub-participation” involving a fixed term loan element and a sub-participation element. The Court of Appeal disagreed. 

Yieldpoint said that the standard form was simply a starting point from which the parties intended to craft an entirely different type of deal. “This may be put the other way round”, the Court of Appeal observed, “had the parties intended to make an entirely different type of deal, such as a simple unsecured fixed-term loan, they would surely have abandoned the [standard form] structure and template and executed a separate loan agreement with terms and conditions to be expected in such an agreement”. Therefore, parties need to take care when selecting standard form agreements as a starting point, given the likely inference that creates in favour of adopting the deal-type envisaged by those terms—even if parties make modifications.  

The question then became – and it was at this point that the Court of Appeal departed from the High Court’s judgment – whether the modifying language was “sufficiently strong and clear to depart from the pre-ordained sub-participation structure”. One of the key operative modified clauses was a “Maturity Date” provision, which Yieldpoint argued showed that the participation was (at least in part) a conventional loan with a maturity date – maturity dates not being a standard provision in sub-participation deals. The Court of Appeal concluded however that “that single term…cannot be read as indicating an intention to overturn the entire structure and effect of the umbrella agreement”.  

This conclusion was based on four points of wider relevance to parties negotiating agreements in this context. 

First, Yieldpoint had argued that pre-contractual negotiations showed that the “genesis” of the participation was a conventional loan. This was a “classic case” of parole evidence and so inadmissible; and even had these discussions been admissible, the fact remained that when the parties went on to put their agreement into writing, it did not reflect what Yieldpoint argued those discussions had included. 

Second, the High Court had viewed the template and the additional modifications as essentially competing and that the countervailing wording in the additional provisions had to be “surmounted” to say the template prevailed. The Court of Appeal found this to be an “error of principle”. The right approach was “first to seek to read all the contractual provisions together, in order to reach a coherent interpretation of the entire contract which confirms with commercial sense”. Only if this first step was not possible, would it be necessary to give individual provisions priority and possibly override wider provisions.  

Third, the Court of Appeal accepted Yieldpoint’s argument that there were potential difficulties with the mechanism of the sub-participation that Kimura argued were created by the agreement. But difficulties with a smaller part of a contract “did not justify”, in the Court of Appeal’s view, “overturning everything else in the parties’ carefully structured deal”.  

Fourth, the Court of Appeal found that the High Court was wrong to discount the fact that Yieldpoint’s proposed interpretation was “highly uncommercial”. On Yieldpoint’s proposed construction of the deal, “Kimura would have agreed to transfer most of its benefit … without Yieldpoint exposing its capital”. The Court of Appeal pointed to the “commercial sense” of the underlying template and could not conclude that the parties had indeed intended to depart from the commercial dynamics necessitated by the architecture of that template.  

Judgment: Yieldpoint v Kimura