Barclays Bank plc v. Metcalfe & Mansfield Alternative Investments VII Corp. et al., 2013 ONCA 494

• Judge: Goudge, Sharpe and Simmons, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: July 26, 2013
• Jurisdiction: Ontario
• Citations: 2013 ONCA 494;(2013), 308 O.A.C. 17 (CA)

Barclays Bk. v. Metcalfe & Mansfield (2013), 308 O.A.C. 17 (CA)

MLB headnote and full text

Temp. Cite: [2013] O.A.C. TBEd. JL.026

Barclays Bank PLC (plaintiff/appellant) v. Metcalfe & Mansfield Alternative Investments VII Corp., in its capacity as Trustee of Devonshire Trust , The Bank of New York, as Custodian and CIBC Mellon Trust Company, in its capacity as Indenture Trustee (defendants/respondent)

(C54400; 2013 ONCA 494)

Indexed As: Barclays Bank plc v. Metcalfe & Mansfield Alternative Investments VII Corp. et al.

Ontario Court of Appeal

Goudge, Sharpe and Simmons, JJ.A.

July 26, 2013.

Summary:

The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps. The transaction was governed by several agreements. Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period. The agreements specified a settlement amount to be determined by the non-defaulting party on early termination. Both parties delivered notices of early termination on January 13, 2009. At issue was which notice was valid.

The Ontario Superior Court, in a decision reported at [2011] O.T.C. Uned. 5008, found in favour of Devonshire. Barclays appealed.

The Ontario Court of Appeal dismissed the appeal.

Contracts - Topic 2525

Variation or alteration - By parties - Waiver - By conduct - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps - The transaction was governed by several agreements - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - While the trial judge ultimately found in favour of Devonshire, he rejected Devonshire's argument that Barclays had waived its right to a remedy by failing to meet Devonshire's demands to provide liquidity in August 2007 and that this was another reason why Barclays was in default in January 2009 such that it had no right to deliver a notice of early termination - The Ontario Court of Appeal agreed with the trial judge - Barclays did not have the unequivocal intention to relinquish its right to meet Devonshire's liquidity demands in the future - Nor had it communicated such an intention to Devonshire - Those two elements of waiver were missing - See paragraphs 164 to 166.

Contracts - Topic 2525

Variation or alteration - By parties - Waiver - By conduct - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps (the swaps) - The transaction was governed by several agreements - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - The Ontario Court of Appeal held that the trial judge had erred in finding that, because Barclays had paid premiums to Devonshire during a standstill period, Barclays had elected not to terminate the swaps based on Devonshire's insolvency when the standstill period came to an end - While each payment constituted evidence that Barclays had waived its right not to pay due to Devonshire's insolvency at that point in time, the payments did not constitute an election by Barclays to waive its right to rely on Devonshire's insolvency forever - At a matter of law, Barclays retained that right - See paragraphs 167 to 181.

Contracts - Topic 3502

Performance or breach - Obligation to perform - Good faith - Exercise of - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps (the swaps) - The transaction was governed by several agreements - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - The Ontario Court of Appeal dismissed Barclays' appeal - There was no basis on which to interfere with the trial judge's finding that Barclays had breached its duty of good faith - There was a duty of good faith here because (1) the parties had expressly agreed to engage in good faith negotiations to restructure Devonshire's notes and (2) the duty arose when necessary to ensure that the parties did not act in a way that defeated the objects of the contract that they had entered - Barclays was entitled to act in its own self-interest - However, it had to be honest and candid with Devonshire and had to act in a way that did not defeat or eviscerate the very purpose of the agreements - Barclays breached its duty (1) by inducing Devonshire to extend a standstill agreement through misrepresentations and (2) by the manner in which Barclays purported to cure its earlier default and to terminate the agreements - Barclays' attempt to cure its default was meaningless and was part of Barclays' strategy to set itself up to terminate the swaps - Barclays' notice of early termination was "fatally infected by a breach of duty of good faith" - See paragraphs 129 to 146.

Contracts - Topic 3524

Performance or breach - Breach - Bad faith - [See Contracts - Topic 3502 ].

Contracts - Topic 3664

Performance or breach - Repudiation - What constitutes repudiation - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps - The transaction was governed by several agreements, including a 1992 master agreement - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - The Ontario Court of Appeal dismissed Barclays' appeal - The court agreed with the trial judge that the common law principle of repudiation had resulted in the contract's termination - Barclays' conduct, including delivering its own (invalid) notice of early termination and immediately commencing litigation constituted a firm refusal to perform its obligations under the contract - Devonshire, by its notice of early termination, had accepted Barclays' repudiation - The contract had not ousted the common law of repudiation - Plain language would have been required to do so - Not only was the contract devoid of such language, but s. 9(d) of the master agreement provided that the rights given in the contract did not exclude any rights provided by law - See paragraphs 197 to 204.

Contracts - Topic 3666

Performance or breach - Repudiation - What constitutes acceptance of repudiation - [See Contracts - Topic 3664 ].

Contracts - Topic 3798

Performance - Continuing performance - Breach - Election by promisee - [See second Contracts - Topic 2525 ].

Contracts - Topic 4511

Discharge and termination - General - Damages - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps (CDSs) - The transaction was governed by several agreements, including a 1992 master agreement - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - Although it was not strictly necessary to do so, the trial judge determined the amount that would have been payable to Barclays under its early termination notice - The Ontario Court of Appeal dismissed Barclays' appeal - The court rejected Barclays' argument that the trial judge had erred in rejecting its calculation of its own loss - While the trial judge might have disregarded the apparently well-established practice of using Gaussian copula models to value bespoke CDSs in an illiquid market and did not take into account the English authorities regarding valuing loss "clean" rather than "dirty", even if had erred in either or both respects, he had not erred in rejecting the loss valuation produced by Barklays' mark-to-model loss valuation - See paragraphs 255 to 275.

Contracts - Topic 4511

Discharge and termination - General - Damages - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps (CDSs) - The transaction was governed by several agreements, including a 1992 master agreement - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - Although it was not strictly necessary to do so, the trial judge determined the amount that would have been payable to Barclays under its early termination notice - The Ontario Court of Appeal accepted Barklays' argument on appeal that the trial judge had erred in calculating Barclays' loss at $12,000 and substituted a figure of $264 million - The $12,000 figure arrived at by the trial judge clearly ignored Barclays' loss of bargain in losing the benefit of the CDSs - It also ignored the evidence of all of the experts that a risk premium constituted a significant component of the price of a CDS - See paragraphs 276 to 287.

Contracts - Topic 4654

Discharge and termination - By breach - Acceptance of repudiation of contract - [See Contracts - Topic 3664 ].

Contracts - Topic 4703

Discharge and termination - By notice - Interpretation of notice clause - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps - The transaction was governed by several agreements, including a 1992 master agreement - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - The Ontario Court of Appeal dismissed Barclays' appeal - The court rejected Barclays' argument that Devonshire's insolvency precluded Devonshire from delivering a valid notice of early termination - Barclays' failure to make certain liquidity payments was a material contributing cause of Devonshire's insolvency - Therefore, under a strict interpretation of the terms of the 1992 master agreement and as a matter of interpreting the agreements to give their terms commercial efficacy consistent with established common law principles, Devonshire's insolvency did not preclude it from delivering a valid notice of early termination - See paragraphs 187 to 196.

Contracts - Topic 7415.1

Interpretation - General principles - Good faith - [See Contracts - Topic 3502 ].

Damages - Topic 1001

Mitigation - General principles - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps (CDSs) - The transaction was governed by several agreements, including a 1992 master agreement - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - Although it was not strictly necessary to do so, the trial judge determined the amount that would have been payable to Barclays under its early termination notice - Regarding mitigation, the trial judge held that Barclays' loss was to be reduced by the value of any recovery it received on the $220 million face value of Devonshire notes that Barclays had purchased from other investors in 2008 for nominal consideration - The Ontario Court of Appeal dismissed Barclays' appeal - The court rejected Barklays' argument that the trial judge had erred in his treatment of mitigation - The trial judge correctly concluded that the parties had not contracted out of the necessity of mitigation - There was no merit in Barclays' argument that potential difficulties in calculating the amount to be deducted on account of mitigation should somehow affect the issue of mitigation - See paragraphs 288 to 297.

Equity - Topic 1483

Equitable principles respecting relief - Clean hands doctrine - Prohibition from profiting from own wrong - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps (the swaps) - The transaction was governed by several agreements - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - The Ontario Court of Appeal dismissed Barclays' appeal - The court agreed with the trial judge that Barclays could not terminate the swaps on the ground that Devonshire was insolvent where Barclays had caused Devonshire's insolvency by failing to make certain liquidity payments - To do so would allow Barclays to take advantage of its own wrongdoing - Given the court's earlier findings regarding Barclays' misrepresentations and bad faith, this was simply another basis on which to find that Barclays' notice of early termination was invalid - See paragraphs 147 to 161.

Fraud and Misrepresentation - Topic 6

Fraudulent misrepresentation (deceit) - General principles - What constitutes deceit or fraudulent misrepresentation - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps (the swaps) - The transaction was governed by several agreements - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - The Ontario Court of Appeal dismissed Barclays' appeal - The trial judge had not erred in finding that Barclays' emails to Devonshire on January 8 and 9, 2009 requesting extensions of a standstill agreement contained material misrepresentations of the state of negotiations with a Caisse that was Devonshire's largest noteholder - The emails were part of a strategy by Barclays to extricate itself from the transaction and maximize the recovery of its settlement amount - Barclays did not tell Devonshire about the state of its negotiations with the Caisse because Barclays wanted the strategic advantage of being able to terminate the swaps first - The emails were inaccurate and misleading - Further, as the members of the Barclays team knew that the statements in the extension emails were false, they constituted fraudulent misrepresentations - See paragraphs 97 to 118.

Fraud and Misrepresentation - Topic 141

Fraudulent misrepresentation (deceit) - Knowledge of falsity of representation - General - [See Fraud and Misrepresentation - Topic 6 ].

Fraud and Misrepresentation - Topic 224

Fraudulent misrepresentation (deceit) - Reliance and alteration of position - Materiality of false statements - The plaintiff Barclays and the defendant Devonshire were involved in a complex 2006 transaction involving asset backed commercial paper based on two credit default swaps (the swaps) - The transaction was governed by several agreements - Various events that constituted "events of default" entitled one party or the other to terminate the agreements prior to the end of the transaction's 10-year period - The agreements specified a settlement amount to be determined by the non-defaulting party on early termination - Both parties delivered notices of early termination on January 13, 2009 - At issue was which notice was valid - The trial judge found in favour of Devonshire - The Ontario Court of Appeal dismissed Barclays' appeal - The trial judge had not erred in finding that Barclays' emails to Devonshire on January 8 and 9, 2009 requesting extensions of a standstill agreement contained material misrepresentations of the state of negotiations with a Caisse that was Devonshire's largest noteholder and that Devonshire had reasonably relied on those misrepresentations to its detriment in agreeing to the extensions - If Devonshire had known that the negotiations with the Caisse were effectively at an end, its only option would have been to protect its assets and terminate the swaps - This was why Barclays had not disclosed the true state of affairs - There was no basis on which to interfere with the trial judge's finding of detrimental reliance - See paragraphs 119 to 128.

Fraud and Misrepresentation - Topic 2516

Misrepresentation - General principles - Contracts - [See Fraud and Misrepresentation - Topic 6 ].

Fraud and Misrepresentation - Topic 2535

Misrepresentation - Elements - Reliance - [See Fraud and Misrepresentation - Topic 224 ].

Fraud and Misrepresentation - Topic 2830

Misrepresentation - Defences - No detrimental reliance (damages) - [See Fraud and Misrepresentation - Topic 224 ].

Waiver - Topic 46

Essential elements - Intention to relinquish - [See first Contracts - Topic 2525 ].

Waiver - Topic 1002

Contracts - Acts constituting waiver - [See both Contracts - Topic 2525 ].

Waiver - Topic 1004

Contracts - Waiver by party of stipulation existing for its benefit - [See both Contracts - Topic 2525 ].

Cases Noticed:

Metcalfe & Mansfield Alternative Investments II Corp. et al., Re (2008), 240 O.A.C. 245; 92 O.R.(3d) 513; 2008 ONCA 587, refd to. [para. 50].

Waxman et al. v. Waxman et al. (2004), 186 O.A.C. 201; 44 B.L.R.(3d) 165 (C.A.), refd to. [para. 90].

Housen v. Nikolaisen et al., [2002] 2 S.C.R. 235; 286 N.R. 1; 219 Sask.R. 1; 272 W.A.C. 1; 2002 SCC 33, refd to. [para. 90].

Agribrands Purina Canada Inc. v. Kasamekas et al. (2011), 278 O.A.C. 363; 106 O.R.(3d) 427; 2011 ONCA 460, refd to. [para. 131].

Transamerica Life Canada Inc. et al. v. ING Canada Inc., [2003] O.A.C. Uned. 565; 68 O.R.(3d) 457 (C.A.), red to. [para. 134].

Nareerux Import Co. v. Canadian Imperial Bank of Commerce (2009), 255 O.A.C. 83; 97 O.R.(3d) 481; 2009 ONCA 764, refd to. [para. 134].

Southcott Estates Inc. v. Toronto Catholic District School Board (2010), 261 O.A.C. 108; 104 O.R.(3d) 784; 2010 ONCA 310, refd to. [para. 149].

Alghussein Establishment v. Eton College, [1991] W.L.R. 587 (H.L.), refd to. [para. 149].

Saskatchewan River Bungalows Ltd. and Fikowski v. Maritime Life Insurance Co., [1994] 2 S.C.R. 490; 168 N.R. 381; 155 A.R. 321; 73 W.A.C. 321, refd to. [para. 166].

Charter Building Co. v. 1540957 Ontario Inc. et al. (2011), 282 O.A.C. 126; 107 O.R.(3d) 133; 2011 ONCA 173, refd to. [para. 173].

Gilbert-Ash (Northern) Ltd. v. Modern Engineering (Bristol) Ltd., [1974] A.C. 689 (H.L.), refd to. [para. 203].

Peregrine Fixed Income Ltd. v. Robinson Department Store Public Co., [2000] C.L.C. 1328 (Comm.), refd to. [para. 244].

Anthracite Rated Investments (Jersey) Ltd. v. Lehman Bros. Finance S.A., [2011] EWHC 1822 (Comm.), refd to. [para. 256].

Australia & New Zealand Banking Group Ltd. v. Société Générale, [2000] C.L.C. 833 (C.A.), refd to. [para. 256].

Britannia Bulk PLC v. Pioneer Navigation Ltd., [2011] EWHC 692 (Comm.), refd to. [para. 256].

Pioneer Freight Futures Company Ltd. v. TMT Asia Ltd., [2011] EWHC 778 (Comm.), refd to. [para. 256].

Authors and Works Noticed:

Firth, Simon, Derivatives Law and Practice (2012), paras. 11.044 [para. 192]; 11.049 [para. 194]; 11.148 [para. 292].

Counsel:

Peter Howard, Eliot Kolers and James Wilson, for the appellant;

J. Thomas Curry, Monique Jilesen, Brendan Gray and Brian Kolenda, for the respondent.

This appeal was heard on March 4 to 7, 2013, by Goudge, Sharpe and Simmons, JJ.A., of the Ontario Court of Appeal. On July 26, 2013, the court released the following judgment.