Perhaps cry for me: Argentina’s bond appeal dismissed

Payment linked to GDP

Argentina issued Euro denominated debt following a national financial crisis and a sovereign debt default. Payment was linked to the Republic’s gross domestic product, GDP. The bondholders were to be paid if, and only if, Argentina’s GDP for the calendar year exceeded a “base case figure”. The idea was to act as a sweetener for those that had an optimistic view of Argentina’s likely recovery. The question for the court was whether the adjustment of this base case figure occurred on an annual basis, as argued by the bondholders, or as a one-off, as claimed by Argentina.

Argentina put its case both as a matter of classic—what the words mean—interpretation, and corrective—fixing a mistake—interpretation.

Corrective interpretation

For corrective interpretation, both the error and the solution must be obvious. The main issue for the Republic was the high threshold required to to show that there had been an obvious mistake. Argentina’s argument was that the bondholder’s interpretation had significant commercial consequences: the Republic would be required to pay when the economy was not growing and was in recession. The court said that this did not come close to being “arbitrary, absurd, irrational or nonsensical”, which it needed to be, to invoke the correction. In addition, Argentina’s solution, the one-off construction, was simply one of several alternatives which may have been chosen. 

Objective meaning of the words

The purpose of interpretation is to determine the meaning of what the parties have said, not what they meant to say. The iterative process involves testing rival meanings of the language used against their commercial and economic consequences, against the background of admissible contextual material, but this must not be permitted to undervalue the importance of the language used. In this context, the Court of Appeal made the following observations: 

1. A court should be wary of assuming that it knows what is or is not commercially sensible where the language used points to a clear answer. 
2. This is especially the case regarding provisions that are important to the operation of the document, such as the adjustment provision under scrutiny. Even more so when the provisions have been prepared with the assistance of skilled lawyers.
3. There may be a number of different outcomes which the parties might hypothetically have wanted to achieve, with differing degrees of attraction in terms of the commercial and economic consequences. However, where the language is unambiguous the court must apply it.
4. For bonds traded in the market, the provisions must have the same meaning for original bondholders, as for those who purchase the bonds many years after their issuance. The primacy of the words used in the instrument over commercial consequences, therefore, is particularly acute in these cases. 

Ultimately, while the court accepted that parties could sensibly have chosen the one-off interpretation, there were also coherent reasons for an annual adjustment and the language, in the eyes of the court, clearly showed that they had chosen the latter.

Judgment: Palladian Partners v Argentina