The case of “Frankenstein’s Slip”

24/05/23

The Commercial Court has handed down judgment in Yieldpoint Stable Value Fund LP v Kimura Commodity Trade Finance Fund Ltd [2023] EWHC 1212 (Comm), which involved the construction of what the Court dubbed “Frankenstein’s Slip”.

The Claimant and the Defendant entered into a framework “Master Participation Agreement”, which anticipated the parties entering into further, individual participation agreements, by the agreement of specific “Offer” and “Acceptance” documents (in, or substantially in, a prescribed form). The prescribed form of the “Offer” document made clear that ‘all relevant terms of the [Master Participation Agreement] as at the date of this Offer will apply to the Participation Agreement concluded pursuant to this Offer as if those terms were set out here in full, with the necessary changes’, but also made clear (reflecting the Master Participation Agreement itself) that ‘for the avoidance of doubt, the express terms of this Offer will override or modify any conflicting or inconsistent terms in the [Master Participation Agreement]’.

In due course, the parties entered into a specific transaction which was inherently inconsistent with the sub-participations contemplated by the Master Participation Agreement. The Claimant “participated” for one year only in an ongoing, fully-funded 4-year facility operated by the Defendant. That raised the question of what the parties had intended to happen at the end of the one-year fixed term: for the Defendant to be obliged to repay the Claimant its capital (making the arrangement to that extent more akin to a fixed-term loan than a true participation); or for the Claimant to be left with ongoing equitable rights against the underlying borrower, coupled with the potential that those rights might be purchased from him pursuant to an (unspecified) fair market value mechanism (which was antithetical to the expressly-agreed fixed-term nature of the arrangement).

The judgment considers the nature of sub-participations generally, as well as the unusual circumstances of the individual transaction. The Court ultimately accepted the Claimant’s submission that what the parties had in fact agreed was clear, and that the parties, despite using the template documentation provided by the Master Participation Agreement, had agreed a unique, hybrid transaction which was in effect partially a fixed-term loan (as to capital) and partially a participation (as to the interest and “price participation” payments to be received from the underlying borrower) – hence “Frankenstein’s Slip”.

The judgment is here.