Originally published in Butterworth's.

Two recent (and closely-related) cases, the first instance decisions in Law Debenture Trust Corporation plc v Acciona SA [2004] EWHC 270 (Ch) (‘Acciona’) and Concord Trust v Law Debenture Trust Corporation plc [2004] EWHC 1216 (Ch) (‘Concord’), have both clarified and reaffirmed certain concepts and principles regularly employed in the trust deeds used to constitute English law bonds and reminded us of some of the protections available to trustees under English law. The first of these decisions also raises some issues with regard to the construction of contracts, consideration of which leads to an important insight with regard to trustee exemption clauses.

(Note: The decision in Concord was reversed by the Court of Appeal in Concord Trust v The Law Debenture Trust Corporation plc [2004]EWCA Civ 1001 – see "An Update on Ineffective Acceleration" (2004) 10 JIBFL 411.)

Both cases arose out of circumstances affecting Law Debenture Trust Corporation plc (‘the Trustee’) as the trustee for an issue of €510m 2 per cent bonds due 2005 issued by Elektrim BV and guaranteed by Elektrim SA (‘Elektrim’), a Polish company.

In the first of these proceedings, the Trustee, which was under pressure from bondholders to accelerate the bonds, sought directions as to the construction of the expression ‘materially prejudicial to the interests of the bondholders’. The court held that the events which had occurred – essentially the removal by Elektrim, in breach of a condition of the bonds, of the bondholders’ nominee director who had been appointed as part of an earlier restructuring of the bonds – were self-evidently materially prejudicial to the interests of the bondholders and that accordingly the Trustee could so certify, as it was required to do by the trust deed as a precondition to its accelerating the bonds, without further investigation.

The second action was commenced by one of a group of bondholders who wanted the Trustee to accept indemnities from them with regard to the possible consequences of the Trustee’s demanding repayment of the bonds. Under the trust deed, to which Elektrim and the Trustee were party, the Trustee was entitled to decline to declare the bonds due and payable – even where it would otherwise be obliged to do so – unless it was indemnified to its satisfaction against all liabilities which it might incur by doing so.

The court – the High Court, not the Court of Appeal as it was incorrectly stated to have been when this piece was first published - held that because the Trustee’s decision (that the indemnities which it was offered were inadequate) was not unreasonable in the sense that it was not so unreasonable that no reasonable person could ever have come to that conclusion, the court would not interfere with that decision. Unreasonableness of this kind is known as ‘Wednesbury unreasonableness’ after the Court of Appeal decision, Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, which established the principle that the courts will overturn the decisions of decision makers which are unreasonable in this sense.

It is interesting to see how firmly established a principle which was developed in the context of local authorities exercising statutorily conferred discretions has become in relation to the exercise of contractual discretions. As Sir Andrew Morritt V-C put it (Concord, para 30): ‘It was common ground that if it could be established that the conclusion reached by the Trustee that the indemnity offered was not to "its satisfaction" was unreasonable in the Wednesbury sense then the Trustee could not rely on it as a defence to the relief sought’ – a statement which achieves precision if not immediate clarity.


This hallowed phrase is often, but by no means always, found in bond documentation, particularly as a condition to be satisfied if a consent is to be given, or the bonds are to be accelerated, by the trustee. The judgment in Acconia is of interest both because of what it tells us about the meaning of the phrase and as an illustration of the contemporary approach to the construction of contracts.

A Digression

Firstly, however, a digression in two parts: is a trust deed a contract; and, if it is, what are the implications of this for trustee exemption clauses?

In December 2002, it was the provisional opinion of the Law Commission that a trust deed is almost certainly not a contract. See para 2.60 of the Law Commission’s Consultation Paper No 171 (Trustee Exemption Clauses), where the observation is made that it ‘seems that a trustee exemption clause is not a contract [term] because it is extremely unlikely that an English court would consider a trust instrument containing a trustee exemption clause to be a ‘contract’.’.

My own view, as expressed on pp 178 and 183 of Selected Legal Issues for Finance Lawyers (Butterworths, 2003), is that a trust deed is a contract in, for example, the context of the Contract (Rights of Third Parties) Act 1999 – see also Underhill and Hayton, Law of Trusts and Trustees, 16th edition, pp 168–9. It is also the case, it seems to me, that a trust deed of the kind in question is both a trust instrument and a contract. The trust is created by the vesting in the trustee of the benefit of the issuer’s covenant to pay, which it holds on trust for the bondholders, but at the same time the parties to the trust deed, the issuer and the trustee, exchange a variety of promises which causes a contract to exist.

This is also the view taken by the Vice-Chancellor who, at para 39 of his judgment in Concord – in the context of considering whether the Trustee was entitled to an indemnity which would cover claims Elektrim SA might have for a wrongful acceleration of the bonds – observed that: ‘The starting point is to recognise that the relationship between the Trustee and Elektrim is contractual. The contract is to be found in the terms of Trust Deed and of the bonds.’ He went on to note (but the Court of Appeal did not agree) that any notice requiring immediate repayment where there is no event of default would constitute a breach of contract in respect of which Elektrim would have a claim for damages and that, as a result, ‘it is necessary to consider what level of award might be made against the Trustee in the event of Elektrim successfully alleging that there was no event of default entitling the trustee to accelerate the bonds’.

The Vice-Chancellor also stressed (see for example para 56 of his judgment) – and, again, the Court of Appeal disagreed – that certain provisions of the trust deed, in particular provisions entitling the trustee to an indemnity from the issuer for liabilities properly incurred and a provision giving the trustee absolute discretion with regard to the exercises of its discretions, would not necessarily prevent the issuer from seeking damages from the trustee if the trustee were to cause loss to the issuer by wrongfully demanding repayment of the bonds.

His reason for reaching this conclusion was that ‘the liability envisaged is not the consequence of either the exercise or non-exercise of any trust power, authority or discretion … but a breach of contract committed by the Trustee’ and, he added, it ‘ is by no means clear that any of these clauses provide a defence to liability which is beyond reasoned argument’.

This view contributes to the conclusion that it was not unreasonable – not unreasonable, I would suggest, in an ordinary sense, let alone in a Wednesbury sense – for the Trustee to insist on a satisfactory indemnity from other interested parties (and see also the ‘worst case scenario’ conclusion below).

Trustee Exemption Clauses

Of course, bondholders, the persons against whom a trustee exemption clause – a clause seeking to limit a trustee’s liability – in a bond issue trust deed is intended to operate, are not, in any conventionally documented transaction, parties to the trust deed. So how is it that bondholders are bound by trustee exemption clauses? The answer is, of course, that a trustee holds the trust property on the terms set out in the trust deed and the beneficiaries – the bondholders – have only those rights and interests that the trust deed, and English law, confer on them. The bondholders are also on notice of the terms of the trust deed from the summary of its terms in the offering circular and subscribe for the bonds on this basis.

However, if the trust deed is a contract, it would seem that, contrary to the suggestion in the Law Commission’s consultation paper, the provisions of the Unfair Contract Terms Act 1977 (‘UCTA’) might well apply to trust deeds of the kind we are concerned with. If this were so, it would be necessary to consider whether the effect of UCTA is to cause the requirement of reasonableness it imposes, with regard to provisions excluding negligence for loss or damage (not being death or personal injury), applies not only as between the parties to the contract but also as regards third parties, such as bondholders.

Consideration of these issues might lead us to conclude that the reasonableness requirements of s2(2) of UCTA apply to bond issue trust deeds – and indeed to CDO or securitisation trust deeds – and to the relationship between the trustee and the bondholders. However, those requirements do not apply to such arrangements for two very different reasons.

The first reason is that s7(2) of the Contracts (Rights of Third Parties) Act 1999 provides that those reasonableness requirements "shall not apply where the negligence consists of the breach of an obligation arising from a term of a contract and the person seeking to enforce it is a third party acting in reliance on section 1" of the Act. The second reason is that para 1 of Sch 1 to UCTA provides that s2 of that Act does not extend to ‘(e) any contract so far as it relates to the creation or transfer of securities or of any right or interest in securities’.

It is to be hoped, from a bond trustee’s perspective that, irrespective of the provisions of the third party rights legislation, the same, clear policy – to exclude capital markets activities from the scope of consumer-driven legislation such as UCTA – is applied if and when the law relating to trustee exemption clauses is amended by statute. If there were overriding policy reasons for leaving capital markets practices untouched in 1977, there must surely be similar and more compelling reasons over 25 years later when the capital markets play a much greater role in the world’s economy than they did in the heady days of the 1970s boom in syndicated bank lending.

(See also the excellent Financial Markets Law Committee paper ‘Trustee Exemption Clauses’, May 2004, particularly pp 1, 6 and 20–21. It is interesting to note that in this paper the Financial Markets Law Committee departs from its usual policy of considering only matters which may give rise to legal uncertainty in order to mount a full blown defence of the status quo with regard to trustee exemption clauses in the capital markets. This is a very welcome development – there is a real need for this type of contribution to the slow and uncertain process that goes by the name of English law reform.)

It is a relief that this brief digression has yielded the result it did. Knowing that there is such a strong argument to be made for the retention of bond trustees’ ability to rely on the traditional forms of trustee exemption clause, I can confidently move on to tackle the substance of the Acciona proceedings. As I said, this case tells us both about the meaning of the phrase ‘materially prejudicial to the interests of the bondholders’ and about the current approach to the construction of contracts.


Taking first things first, what does ‘materially prejudicial to the interests of the bondholders’ mean? In this judgment, Peter Smith J indicated (at para 40) that his starting point (my phrase) was that the Trustee ‘must be satisfied that [a present breach] is prejudicial to the interests of the Bondholders in a material way’ – nothing revolutionary so far.

Then, after a confusing passage – at least it confuses me – in which he deals with submissions from counsel for the defendants and the Trustee, he states (at para 50) that he regards an investigation by the trustee of the circumstances and consequences of various acts on the part of the issuer as being ‘in relation to a total repudiation [of the relevant condition] … an unnecessary exercise’ because, in the light of the evidence given on behalf of the defendant bondholders, ‘it seems to me that it is self evident that there is present prejudice of a material nature to the interests of the Bondholders … The mere act of the exclusion of the [Bondholders’ nominee director] is a breach materially prejudicial to their interests in my opinion … They have been excluded from the Board and deprived of their veto rights’ … and given ‘the factual background, it was plainly of vital significance that the Bondholders would have this representation and blocking power at all times’.

So far, so good. The judge has decided that it is self evident on the evidence that there is material prejudice to the interests of the bondholders: ‘it is to my mind clear, that there has been material prejudice to the Bondholders’ interests. The economic interests and the rights ancillary to the economic interests of the bonds have been prejudiced. It is difficult to see a more clear case of prejudice.’ I think we saw that coming.

The Construction of Contracts

Having said this, Peter Smith J turns to a different aspect of the, clearly lively, debate which took place during the arguments before him. He mentions that he was referred to various definitions in the Oxford English Dictionary, as well as to authorities under s 459 of the Companies Act 1985 and to other parts of the Trust Deed, but ‘to my mind none of these references assists me’. I have in mind, he says (in para 55), ‘the Court of Appeal decision in The Football Association Premier League Limited and others v Panini UK Limited [2002] EWCA CIV 995, in particular para 39 where Mummery LJ said ….’.

The substance of what Mummery LJ said in para 39 of his judgment (in what I will call the ‘football stickers case’) was as follows, although the words in italics were not set out in the judgment in Acciona.

‘As to the "Incidental inclusion" point I agree with Chadwick LJ’s full argument on it. The question whether the inclusion of copyright material in artistic work is incidental is not answered by rushing to dictionaries or by searching the internet for substitute words and expressions; or by enquiring into the subjective intentions, motives, views or state of mind of the makers, distributors or collectors of the stickers and albums; or by the use of a non statutory checklist of possible indicators … "Incidental" is an ordinary English word. Parliament chose not to give it any special meaning. There is no need for the courts to define it. The range of circumstances in which the word "incidental" is commonly used to describe a state of affairs is sufficiently clear to enable the courts to apply it to the ascertainable objective context of the particular infringing act in question.’

I find this astonishing. My children think I am obscure, and I probably am – sometimes – but this passage, and the last sentence in particular, defies belief. Leaving aside the obscurity – which is in itself undesirable – what is, I think, being said is that if there is a dispute about what a particular word, a particularly important word in a given context, means, you don’t refer to what people generally or the compilers of respected dictionaries think it means, instead, you say to yourself: ‘I know what this word means, it’s obvious, it’s self-evident’!


A close reading of the football stickers case suggests – and Acciona does not contradict this view – that what we are seeing is a question as to the meaning of an imprecise word or phrase being turned into a different, but much simpler, question to which the answer is obvious. Thus, the difficulty of construing a word or phrase is being avoided. In the football sticker case, the meaning of the word ‘incidental’ is reduced to the motive for the inclusion of relevant material: ‘If’, said Chadwick LJ, ‘as I would hold, the relevant question, for the purposes of testing "incidentally" … is why has work "A" been included in work "B", the answer, in the present case, is indeed (as the judge below thought) self-evident. The objective, when creating the image of the player as it appears on the sticker or in the album, was to produce something which would be attractive to a collector. That conclusion does not depend on any enquiry … it depends on an objective assessment of the circumstances …’.

Compare this with the following statement from Peter Smith J – the ‘judge below’ in the football stickers case – in Acciona: ‘the purported suspension of [the bondholders’ nominee director], which is a total repudiation of this fundamental provision, is not only a material breach, it is also self-evidently materially prejudicial to the interest of the bondholders. I do not see it requires an investigation as to the transactions that have taken place.’

Here, the question which replaces the difficult to construe phrase, materially prejudicial to the interests of the bondholders – how do you establish materiality, must there be actual loss or damage to economic interests? – would seem to be: has a right which the bondholders value been impaired? In such circumstances, it is easy to see why dictionaries are unpopular – they would complicate the process. If you are confronted with a difficult question, find a simpler one – and provide the answer. This is a much easier task than the one you started with.

A Step too Far?

This approach to construction takes us from the memorable (for me at least – see p 219 of Selected Legal Issues for Finance Lawyers) statement of Lord Hoffman in Investors’ Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 913 to the effect that: ‘The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of a document is what the parties using these words against the relevant background would reasonably have been understood to mean’ to a world in which dictionaries have no place at all and in which words mean what the speaker thinks – or wants – them to mean. I find Lord Hoffman’s utterance very convincing – I find the views of Lords Chadwick and Mummery troubling.

Words (and phrases) mean what we want them to mean – see p 70 of Selected Legal Issues for Finance Lawyers – in the sense that they have the meaning that usage establishes, but this is not to say that a learned individual’s take on the meaning of a particular word or phrase is a satisfactory basis for the resolution of important disputes or the creation of judicial precedent.


In the course of his judgment in Concord, the Vice-Chancellor made a number of points which, while not telling us things we do not already know, remind us that many of the established principles of English trust law are favourable to bond trustees.

Having indicated that it was agreed between the parties that the Wednesbury principle was applicable, the Vice-Chancellor referred to Ludgate Insurance Company Ltd v Citibank NA [1998] Ll. L. R. 221, in which the authorities relating to the exercise of contractual discretion were, as he put it, ‘helpfully summarised (by Brooke LJ at para 35) in the following terms’:

‘It is well established that the circumstances in which a court will interfere with the exercise by a party to a contract of a contractual discretion given to it by another party are extremely limited … [the] cases show that provided that the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene.’

In other words – and it is clear that in this context a trust deed is to be regarded as a contract – if the parties to a contract agree that one of the parties shall have an absolute or unfettered discretion to determine an issue, the English courts take the view that the parties meant what they said and, to quote Lord Green in Wednesbury (at p 228): ‘When discretion of this kind is granted the law recognises certain principles upon which that discretion must be exercised but within the four corners of those principles the discretion, in my opinion, is an absolute one and cannot be questioned in any court of law.’ He was speaking about statutorily granted discretions, but as Concord makes clear, the same principles apply to contractual discretions.

It would be quite difficult for a professional trustee to fall foul of the criteria specified by Brooke LJ. Perhaps the easiest way in which such a trustee might go wrong would be to misunderstand what is meant by the statement that the exercise of a discretion must not be capricious or arbitrary. In my old dictionary, the primary meanings – and I do consider these to be relevant – of these terms are ‘guided by whim’ and ‘derived from mere opinion or random choice’. What I think they are meant to capture is the requirement, which is made explicit in Wednesbury, by Lord Green at pp 228 and 229, that the decision maker must take into account all relevant factors and disregard irrelevant factors.

To the principles described by Brooke LJ, the Vice-Chancellor added, as he put it, two riders. Firstly, the onus is on the party who seeks to impugn the trustee’s determination to prove that it was unreasonable in the Wednesbury sense. Secondly, a trustee is not required to accept any personal liability for acting in accordance with the terms of the trust; the right to an indemnity is a right conferred on a trustee for its own benefit and protection and in priority to the interests of the beneficiaries.

A Worst Case Scenario

As a result of this last principle, said the Vice-Chancellor (at para 34), the interests of the trustee and the beneficiaries may conflict, because where the maximum amount of a liability of the trustee is not known, the amount of trust property the trustee may retain, or the amount it may require by way of indemnity, against that liability is to be calculated on the basis of what is, on reasonable but not fanciful assumptions in favour of the trustee, the worst case. Thus for the Trustee in Concord, the ‘issue of Wednesbury unreasonableness alleged by [the plaintiff] must be considered on "a worst case scenario"‘ from the point of view of the Trustee.

This reminds us that a trustee’s right to ‘sit on its hands’ in the absence of a satisfactory indemnity – invariably an express term of any bond issue trust deed – provides real protection to the trustee. Of course, from the bondholders’ perspective this is not such good news, but a well-advised and prudent trustee would simply not take on the role without the benefit of such a provision.


I have said before that for important points to be established we have ‘to wait for the right facts to present themselves and for the right arguments to be run’ (Selected Legal Issues for Finance Lawyers, p 97). In the football stickers case – a case decided just over a year ago, Chadwick LJ found it necessary to observe (at para 37), with regard to a point of law which the successful respondents’ counsel had been instructed not to run, ‘The position is far from satisfactory’ because it was the only ‘substantive point [of law] raised for the decision in the proceedings’ but ‘for their own undisclosed reasons the parties wish to limit the scope of the court’s decision’. Some things don’t change.

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