(2) gives credit for amounts paid, in reduction of arrears, after the date as at which arrears are calculated.
42 For the reasons that follow, I do not think that the plaintiffs' approach to construction should be accepted.
43 The plaintiffs submitted that there was no definition, in the Series Supplement, or elsewhere, of the noun "arrears" or the phrase "in arrears". That is correct. It follows that the noun and the phrase should be given their ordinary English meaning unless, construed in context and against what it is convenient to call the factual matrix, some other meaning should be given.
44 The Australian Oxford Dictionary (2nd edition, 2004) defines the noun "arrears" to mean "an amount still outstanding or uncompleted, especially… a debt unpaid". The same source defines the phrase "in arrears" to mean "behindhand, especially in payment". Those definitions are readily capable to application both to the noun "arrears" and to the phrase "in arrears" in the definition of Amortisation Event. Applying them, a loan would be in arrears if an amount due and payable is not paid; and would be in arrears for greater than (ie, more than) 90 days if that default in payment continues (ie, if the amount is not paid) for more than 90 days from the due date.
45 There is nothing in the Series Supplement, or for that matter in the other documents, to indicate that the phrase "in arrears" should be given anything other than its ordinary English meaning. On the contrary, I think, the contractual context is consistent with its having that meaning. An Amortisation Event can occur at any time. It will occur if the relevant percentage exceeds 1%. That percentage is ascertained by comparing the aggregate of the "Outstanding Loan Balance" of loans in arrears for more than 90 days with the aggregate of all Outstanding Loan Balances. The expression "Outstanding Loan Balance" is defined (not in the Series Supplement but in a "Master Definitions Schedule" dated 8 December 2004) to mean "on any day and in respect of a Loan which has been acquired or sold by RMS, the outstanding balance of the Loan taking into account all interest, fees and other charges which have accrued or have been debited to the relevant Borrower's accounts in respect of that Loan at the end of the previous day". Thus, the concept of a loan being "in arrears" is linked, as on its ordinary English meaning it should be, to amounts "which have accrued or which have been debited to" the loan account. Once a loan is in arrears for more than 90 days then its Outstanding Loan Balance is added to the numerator of the fraction by which the relevant percentage is to be calculated.
46 It follows, both from the fact that an Amortisation Event may occur "at any time" and from the fact that the Outstanding Loan Balance can be ascertained "on any day", that the calculation, for the purpose of seeing whether an Amortisation Event has occurred, is to be carried out having regard to debits and credits up until the day as at which the calculation is carried out.
47 In any event, I think, there is a logical flaw in the plaintiffs' submissions. The premise of their submission is that, because there is more than one means of calculating arrears, there is an ambiguity in the phrase "in arrears for greater than 90 days". The submission that there is more than one method for calculating arrears depends upon the proposition that both the duration method (which the plaintiffs do not use) and the adjusted quantum method (which they do use) are valid ways of calculating the time for which a loan has been in arrears. Accepting, for the sake of argument, that proposition, it does not follow that there is ambiguity either in the noun "arrears" or in the phrase "in arrears for greater than 90 days". There is, no doubt, more than one way of ascertaining the height of a building. It does not follow that there is ambiguity in the phrase "height of a building". At most, assuming that there is more than one appropriate way of calculating the length of time for which a loan has been in arrears, it might follow that a calculation properly performed according to one method could be relied upon even though the answer given conflicts with the result of a calculation properly performed according to another method.
48 The real issue, it seems to me, is not one of the proper construction of the phrase "in arrears for greater than 90 days". It is whether, in determining the amount of "arrears" at any time, post period adjustments should be made. I accept that the first category of adjustments made by the plaintiffs - reversing capitalised interest - is appropriate. As a matter of language, interest that has been debited to a loan account may form part of the Outstanding Loan Balance (as defined) on the day when it is debited, even though it is not payable until the following day. That is because the definition refers disjunctively to amounts that have accrued or amounts that have been debited to the account. But it does not follow that interest debited in advance to the account should be regarded as being in arrears on the day it is debited. There is no obligation to pay an amount that is not due and owing. A failure to pay an amount that is not due and owing cannot create an arrear in respect of that amount.
49 The second category of adjustments is more problematic. It does not follow, from what I have just said, that credit fees and charges that have become due and payable should be disregarded for the purpose of calculating arrears. Such credit fees and charges form part of the Outstanding Loan Balance. That is so both because they have accrued and (assuming it to be the case) because they have been debited to the account. It is very difficult to understand why amounts that have become contractually due and payable, but have not been paid, should be regarded as anything but "in arrears". Whatever the commercial justification for excluding accrued credit fees and charges from the calculation of arrears may be, those commercial reasons afford no real basis for concluding that an amount due and payable, but not paid, is anything other than "in arrears". In this context, it may be noted that the plaintiffs asserted no case of estoppel, conventional or otherwise. They said only that the meaning to be given to the phrase "in arrears" should be informed by their practice, said to have been known to the defendants, of excluding certain overdue payments from the calculation of arrears.
50 It follows that overdue credit fees and charges should be taken into account in assessing whether a loan has been in arrears for more than 90 days. It is unlikely to matter (unless one calculates the duration of arrears by using the adjusted quantum method). That is because, in the ordinary way, a default charge (which is really the kind of credit fee or charge with which I am presently concerned) would not normally be levied until some period of time following delay in payment of another monetary obligation. A default charge would be relevant, to the calculation of the duration of arrears, only if the default in payment for which it was levied were rectified, but the credit charge itself were not paid. In any event, having regard to the evidence summarised at [70] below, nothing of practical significance flows from this aspect of the plaintiffs' methodology.
51 Whatever may be the commercial or other justification for excluding overdue credit fees and charges from the calculation of arrears, it does not extend to post period adjustments. The essence of the calculation is that it may be carried out "at any time". Those words suggest that the calculation is to be carried out on, as at, or effective for, a particular day. A calculation carried out accordingly should not take account of payments received (or, for that matter, amounts debited) after that day. A calculation that does take account of post period adjustments is not a calculation of arrears at a date prior to the post period receipts. Thus, even if the end of the month should be taken as a proxy for the preceding Payment Date (and putting aside the question of credit fees and charges), a calculation that includes post period adjustments is not a true calculation of arrears: at the Payment Date or otherwise.
52 It might be thought that, if an Amortisation Event occurs, the plaintiffs could act under cl 5.4 of the Series Supplement. The availability of that theoretical course of action has limited practical significance. It is not until about the middle of a month that the plaintiffs, through UCS, are able to produce a report showing the position of the Series as at the end of the preceding month. Thus, even if it is assumed that such a report is capable of demonstrating the position not only at month's end but also at the immediately preceding Payment Date, by the time the plaintiffs become aware (through the report) of the occurrence of an Amortisation Event, the time for action under cl 5.4 would have passed. That is because, if the Amortisation Event were subsisting at the Payment Date, the payments required to be made by cl 8.8(o) of the Series Supplement must be made within three business days thereafter: well before the time when the plaintiffs would receive the report.
53 I note however that the evidence of Mr Warren Gareth Williams, who is the treasurer (and earlier was the deputy treasurer) of the third plaintiff, and who is a director of the Manager, is that from time to time the Manager has directed RMS to redesignate loans in arrears, thus in effect removing the redesignated loans from the pool of non-performing loans. Mr Williams said that this was part of the process of management of the pool of loans comprised in the Series UniCredit (1).
54 Another reason for rejecting the plaintiffs' methodology as the definition of "in arrears" is that, although the phrase is an essential element of the definition of an Amortisation Event which may occur "at any time", the plaintiffs' methodology includes, as an element, the calculation of arrears on a monthly basis at the end of each month.
55 Paragraph 12 of the plaintiffs' Further Amended List Statement asserts that there was no Amortisation Event subsisting at any relevant Payment Date. The particulars to that paragraph assert that "the meaning and content of the term "90 day arrears" in the definition of "Amortisation Event"… should be construed by reference to the plaintiffs' practice in calculating arrears… in existence at the time of entry into the Series Supplement". That methodology is defined as the "RHG Methodology". Thus, the plaintiffs say, the term "arrears" means the amount calculated by RMS as arrears in accordance with the RHG Methodology.
56 The particulars assert that the RHG Methodology is described in paras 21 to 29 of Mr Williams' affidavit affirmed 4 November 2009. The methodology described in those paragraphs (particularly, in para 25) is one performed after the end of each calendar month, that produces, among other things, a calculation of the Outstanding Loan Balances of all loans in default for more than 90 days as at the end of the month, and of all loans in the Series as at the end of the month.
57 A methodology that includes, as an element, calculation of relevant balances only as at the end of each calendar month is not of itself capable of being used to determine if an Amortisation Event has occurred at some other time. (And, for the reasons given at [51] above, that is so a fortiori if the methodology takes into account post period adjustments.) This is a significant defect. RMS is obliged to make payments of Total Available Income in accordance with the "waterfall" described in cl 8.8 of the Series Supplement. If an Amortisation Event subsists at any relevant Payment Date then, from subpara (o) onwards, whatever remains in that waterfall is diverted to Total Available Principal. It is RMS's obligation to make payments in accordance with the Series Supplement. Its methodology does not enable it to do so, because it does not calculate the position of the Series at a Payment Date. (Indeed, because it makes post period adjustments, it does not truly calculate arrears at all). It is unlikely, looking at the matter objectively, that the parties - in particular, the defendants - would have agreed that the phrase "in arrears" should be determined by reference to a methodology the use of which would mean that RMS could not monitor, and therefore could not perform, its obligation as at each Payment Date. There was no case of conventional or other estoppel, to the effect that the parties had agreed to use the end of the month as a substitute, or proxy, for the immediately preceding Payment Date.
58 There are other defects with the plaintiffs' methodology (and, as foreshadowed, this is relevant also to the second issue):