On 10 February 2016, the Singapore High Court in Tan Poh Leng Stanley v UBS AG [2016] SGHC 17 delivered a lengthy judgment on the topic of contractual interpretation. The case raised many issues and this note will consider only some of the issues discussed by the court.

Background

The case arose out of the aftermath of the financial crisis in 2008.

The plaintiff, Tan Poh Leng Stanley (“ST”) entered into a number of equity accumulators with UBS AG (“UBS”) on a leveraged basis between October 2007 and August 2008.

An accumulator is an equity derivative under which an investor agrees to buy shares at a strike price which is set at a discount to the spot price at the time the transaction is entered into. An accumulator has a fixed term and the investor will pay for the shares it purchases on a periodic basis.

ST purchased the accumulators on margin, i.e. he borrowed money from UBS to purchase the contracts. UBS required ST to post collateral to his account with UBS and the amount ST is required to post depends on the “loanable value” of the collateral and the amount of the mark-to-market losses from the accumulators.

As the share price fell, ST received a margin call notice from UBS on 22 October 2008 and, as ST failed to post the requisite margin, UBS liquidated ST’s account by selling the collateral shares and unwinding the accumulators. Following the liquidation of ST’s account, there was still a shortfall of US$6.7 million and ST was also liable to UBS for unwind costs of approximately US$25.5 million. ST and UBS subsequently entered into a work out agreement on 21 March 2009 to settle ST’s outstanding liabilities to UBS and ST paid off his total liabilities to UBS in April 2011.

In this action, ST disputed UBS’s entitlement to unwind the accumulators. In particular, he disputed the ability of UBS to unwind the accumulators without issuing a notice as contemplated by Section 6(a) of the ISDA Master Agreement. ST argued that he would have had sufficient assets to make good the shortfall in his account had UBS given notice to him as required by the ISDA Master Agreement.

Was UBS entitled to unwind the accumulators without notice?

This was the central issue of the case and the answer turned on whether there was an oral agreement between the parties to liquidate the entire account outside of the ISDA Master Agreement.

The court held that, on the evidence before it:

• ST did not have sufficient liquid assets to continue to meet the margin calls;
• ST had in fact stopped posting margin and had started to sell the collateral shares; and
• ST’s lawyer had consented to UBS liquidating the entire account at a meeting with ST’s relationship manager.

Accordingly, the court held that there was an oral agreement between the parties to unwind the accumulators outside of the ISDA Master Agreement and the requirement to give notice of the unwind under Section 6(a) of the ISDA Master Agreement was not applicable.

Interaction between ISDA Master Agreement and other documentation

Given that the court found a mutual agreement between the parties to unwind the accumulators outside of the ISDA Master Agreement, it did not strictly speaking have to consider whether the Credit Services Notification Letter (“CSNL”) between the parties gave UBS the right to terminate the accumulators without notice.

By way of background, ST entered into an account agreement (the “Account Agreement”) when he opened his wealth management account (the “Account”) with UBS in 2006. ST also accepted credit facilities from UBS and entered into the CSNL in relation to the Account. The Account Agreement was revised in 2008 (the “2008 Revision”) by way of a letter from UBS to ST (the “2008 Revision Letter”) and the CSNL was also revised through to 2008.

Incorporation by reference

First, there was a question as to whether the Confirmations documenting the accumulators incorporated by reference the provision in the CSNL which gave UBS the right to terminate the transactions without notice (the “Without Notice Clause”).

The court held that this is a matter of contractual interpretation and, in undertaking this exercise, the court should have regard to the context and the objective circumstances attending the entry into the contract.

Each of the Confirmations provides as follows:

“Collateral

[ST] shall provide to [UBS] on or before the Trade Date such collateral to secure [ST’s] obligations under the Transaction as set out in the [CSNL] as amended from time to time, the Transaction being within the OTC equity and index options trading facility granted pursuant to the CSNL”.

The CSNL in turn gave UBS the right to sell the collateral shares and close out any Transaction if collateral was not posted.

The court attached significance to the fact that both the Confirmations and the CSNL required ST to post collateral. The Confirmation also expressly stated that the accumulator was a Transaction within the OTC facility under the CSNL. The court was of the view that the cross referencing showed very clearly that UBS’s right to terminate the accumulator without notice was incorporated into the Confirmation. It would make “absolutely no commercial sense” for the parties to incorporate the obligation to provide collateral without incorporating the corresponding right of termination.

That said, there was a question as to whether the Confirmations in fact incorporated by reference the obligation to provide collateral in the first place, as opposed to merely stating that ST was required to post collateral under the CSNL. However, this may not have made a difference to the outcome because it could be argued that even if the obligation to provide collateral and the right of termination were not incorporated by reference, the Confirmations and the ISDA Master Agreement should be read together with the CSNL given that the entire agreement clause in the ISDA Master Agreement was amended in the Schedule to expressly provide that it was without prejudice to the Account Agreement and “all other documents executed ancillary or in connection thereto”, which would include the CSNL.

Nonetheless, on the basis that the Without Notice Clause had been incorporated by reference, how would such termination work within the framework of the ISDA Master Agreement? The point did not need to be decided on this occasion given that the court found a mutual agreement to terminate outside of the ISDA Master Agreement. However, it is worth considering the point further.

Before we do so, it is pertinent to note that there are two versions of the ISDA Master Agreement which govern the accumulators, the version entered into by the parties in 2006 (the “2006 version”) and another version (the “2008 version”) which came into effect as a result of the 2008 Revision. There was a question as to which version governed which accumulators (see below) but for present purposes, it can be assumed that some accumulators are governed by the 2006 version and some are governed by the 2008 version.

The 2006 version contained an Additional Termination Event (“ATE”) clause which appeared to permit UBS to terminate any Transaction at any time by giving notice. The court treated the ATE clause as superseding the requirement in Section 6(b)(i) of the ISDA Master Agreement (which obliges an Affected Party to notify the other party promptly upon becoming aware of the occurrence of a Termination Event) but it was not clear why Section 6(b)(i) was relevant.

What was more pertinent is the ATE clause contained in the 2008 version. That ATE clause provided that termination by UBS without notice of any Transaction will be an ATE and the Early Termination Date will be deemed to have occurred immediately upon the termination by UBS of the relevant Transactions. Again, the court examined this ATE clause in the context of Section 6(b)(i) of the ISDA Master Agreement and it is not clear why Section 6(b)(i) was relevant.

On the basis of the foregoing, if UBS had terminated the accumulators by relying on the Without Notice Clause, there are two scenarios.

Under the 2006 version, it is not clear how the termination should have operated because the 2006 version appears to lack an ATE clause linked to UBS’s right to terminate without notice under the CSNL.

The court discussed the fact that under the CSNL, ST had charged all the securities deposited with UBS as collateral and UBS was entitled to enforce the charge upon the occurrence of a “Default Event”. Although ST’s expert witness made the point that the enforcement of the charge under the CSNL is not a complete termination framework (as compared to the close-out procedure under the ISDA Master Agreement), he accepted that terms may be implied in fact to deal with post-termination matters such as valuation method.

In practice, it is likely that UBS would be relying on Section 6 of the ISDA Master Agreement to determine the termination values of the accumulators and net the amounts (as opposed to relying solely on the CSNL). The court could conceivably have reached the same outcome by reading the CSNL together with the ISDA Master Agreement, rather than implying terms into the CSNL. This would also be consistent with the entire agreement clause in the ISDA Master Agreement which, as amended by the Schedule, suggests that all the documents should be read together as a whole. However, the absence of a “Iinking” ATE clause in the 2006 version remains a difficulty.

Under the 2008 version, although the court did not comment on the point, the position is arguably clearer.  It is submitted that the real significance of the ATE clause in the 2008 version is the fact that it was intended to reflect UBS’s right to terminate without notice under the CSNL. Although the drafting is not entirely clear, the effect of the ATE clause appears to be that if UBS exercises its right to terminate without notice under the CSNL, this would trigger the ATE and Section 6 of the ISDA Master Agreement would apply. Normally, UBS would be required to give a notice pursuant to Section 6(b)(iv) of the ISDA Master Agreement to trigger the ATE. Although the ATE clause did not expressly state that no notice under Section 6(b)(iv) is required, the deemed occurrence of the Early Termination Date suggests that no such notice is required.

Was there any inconsistency between UBS’s right to terminate without notice and the ISDA Master Agreement?

Having held that UBS’s right to terminate without notice was incorporated into the Confirmations, it was clear that the hierarchy of the documents in the ISDA framework meant that if there were any inconsistency, the Confirmation would prevail.

However, the court in fact held that there was no such inconsistency.

The court recognised that to reject a clause as inconsistent with another involves rewriting the contract, which can only be justified in circumstances where the two clauses are in truth irreconcilable. Where a contract has been drafted as a coherent whole, it should be read to support that intention. The overwhelming probability is that an apparent inconsistency will be resolved by the ordinary processes of construction.

The court held that UBS’s right to terminate all outstanding Transactions under Section 6(a) of the ISDA Master Agreement is framed permissively, as with UBS’s right to terminate without notice under the CSNL. These rights can therefore exist in parallel and the court noted that the entire agreement clause supported the same conclusion, as it expressly provided that the terms of the ISDA Master Agreement were without prejudice to the Account Agreement and “all other documents executed ancillary or in connection thereto”, which would include the CSNL.

Which ISDA Master Agreement governs?

There was also an issue regarding the fact that the accumulators were potentially governed by two versions of the ISDA Master Agreement between the parties. The point arose because the 2008 Revision Letter stated that a new version of the ISDA Master Agreement would replace the existing one and would apply to transactions entered into after 23 July 2008. The 2008 Revision Letter was a notice from UBS which was not executed by ST. However, the Account Agreement provided that UBS might amend or supplement the terms and conditions by notice to ST. In addition, Section 9(b) of the ISDA Master Agreement which required all amendments to be executed by each of the parties did not apply because the application of the new ISDA Master Agreement to future transactions was not an amendment to the existing ISDA Master Agreement. As a matter of contract, the parties can agree that an agreement in an identified form will come into effect between them without the need for formal execution.

Breach of Section 6(d)(i)?

ST also alleged that UBS breached Section 6(d)(i) of the ISDA Master Agreement because it sent details of the unwind of the accumulators to ST by email. Section 6(d)(i) provides that UBS is required to provide a statement showing in reasonable detail the calculations it made following the occurrence of an Early Termination Date and Section 12(a) provides that such statement may not be given by facsimile transmission or electronic messaging system.

As the court held that the unwind of the accumulators was pursuant to a mutual agreement outside of the ISDA Master Agreement, Section 6(d)(i) and the notice provisions in the ISDA Master Agreement did not strictly speaking apply. That said, it was interesting to note that the court readily implied a term that UBS was obliged to notify ST of the unwind costs and the price at which the accumulators were unwound. This was so notwithstanding ST’s expert witness conceding that there was no “necessity” to do so and the court endorsing the “necessity” test for implied terms as set out in Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] 4 SLR 193. However, the court was of the view that there was no reason why such information could not have been sent by email.

Conclusions

As it can be seen, the case threw up numerous issues but the key issue was the mutual agreement to unwind the accumulators. Having concluded that the parties agreed to unwind the accumulators outside of the ISDA Master Agreement, the court did not strictly speaking have to decide the points relating to the provisions of the ISDA Master Agreement and the other documents. However, it is interesting to note that the court did not focus on the terms of the unwind beyond implying an obligation on UBS to provide a statement of calculations. For example, the court did not address whether UBS was obliged to determine the termination amount in connection with the unwind on the basis of Section 6(e) of the ISDA Master Agreement.

Although the case suggests that there may be merit in conducting an unwind by agreement if multiple and potentially inconsistent documentation is involved, it should be noted that if the counterparty is in financial difficulties, such agreement may be subject to challenge by a liquidator.

The manner in which the court dealt with the ‘incorporation by reference’ point is also not without difficulty. It appeared to overlook the importance of having to consider all the documents as a whole and the commentary in certain parts of the judgment suggested that the significance of certain provisions was not considered. This lack of clarity might have resulted from the multiplicity of documents between the parties but we hope that the point can be considered more directly on another occasion, even if it would not have affected the outcome of this case.

* This blog entry may be cited as Loh Kai Loon, “Case Comment: Tan Poh Leng Stanley v UBS AG [2016] SGHC 17”, Singapore Law Blog (24 February 2016) (https://www.singaporelawblog.sg/blog/article/151)

** A PDF version of this entry may be downloaded here

*** This entry is adapted from a client bulletin published by Linklaters Singapore. For the full version of the client bulletin, please contact the author at [email protected]