COURT OF APPEAL FOR ONTARIO

CITATION: Barclays Bank PLC v. Devonshire Trust, 2013 ONCA
494

DATE: 20130726

DOCKET: C54400

Goudge, Sharpe and Simmons JJ.A.

BETWEEN

Barclays Bank PLC

Plaintiff (Appellant)

and

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)

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

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

Heard: March 4-7, 2013

On appeal from the judgment of Justice Frank J. C. Newbould
of the Superior Court of Justice dated September 7, 2011, with reasons reported
at 2011 ONSC 5008, 93 B.L.R. (4th) 205.

By the
Court:

I. INTRODUCTION

[1]

This case arises from a complex 2006 transaction involving asset-backed
commercial paper (ABCP) based on two credit default swaps (CDSs). The financial
arrangements between the parties became economically untenable by 2007. Protracted
efforts to salvage the situation ultimately failed. At issue is which party was
entitled to terminate the arrangement and on what terms.

II. FACTS

A) The Third-Party ABCP Market in Canada

[2]

The parties in this case are in the business of assessing risk in the financial
market at a very high level, arranging transactions to allocate that risk, and
profiting from arbitrage opportunities between the anticipated and actual risk.

[3]

To facilitate our analysis of the issues, we begin by explaining in
simple terms the design of the type of transaction that gives rise to this
appeal.

[4]

ABCP is a form of secured note. It is generally short-term commercial
paper, meaning that it is debt that reaches maturity in less than one year,
typically 30 to 90 days.

[5]

The ABCP at issue in this case was issued by the respondent Metcalfe
& Mansfield Alternative Investments VII Corp., in its capacity as Trustee
of Devonshire Trust (Metcalfe). Devonshire Trust (Devonshire) is a special
purpose trust, established to acquire income-producing assets funded through
the issuance of ABCP. Devonshires role in this transaction is typically
referred to as that of a conduit.

[6]

The conduit sells the ABCP to investors and pays the ABCP investors, or
noteholders, interest on the notes at a spread over the Canadian Dealer Offered
Rate.

[7]

The conduit typically acquires assets from an asset provider. Here the
asset provider was the appellant Barclays Bank PLC (Barclays), a global
investment bank, headquartered in London, England. The transaction at issue was
undertaken by a Barclays deal team in New York City but involved senior
management and traders in other Barclays offices worldwide. Barclays was
active in the ABCP market internationally, but this transaction was its only
Canadian ACBP transaction.

[8]

Quanto Financial Corporation (Quanto) was the financial services
agent, or sponsor, for Devonshire. In the Canadian industry, Quanto falls into
the category of what is known as a third-party, a term used to describe sponsors
other than the major Canadian banks.

[9]

The conduit earns a return from the income produced by the assets and uses
the income earned to pay interest on the ABCP. The conduit profits from the
spread between the return it earns on the underlying asset and the cost of the
interest it must pay to the ABCP investors.

[10]

Traditionally,
relatively tangible assets were used as security to support the ABCP, including
receivables such as mortgages, loans, leases, and credit card debts. The ACBP
is said to be asset backed because the conduits obligation to repay the
purchaser of the ABCP is supported by the collateral of the conduits assets.

[11]

In
more esoteric arrangements, such as the transaction involved in this case, the
assets involved are called structured financial assets, including CDSs. A CDS
is a form of credit protection contract between two parties whereby one party
buys from the other protection against the risk of loss in an investment such
as a portfolio of corporate bonds.

[12]

In
this case, the CDSs were synthetic. Barclays, the buyer of protection, did
not own the bonds for which it had purchased protection. The CDSs were a
sophisticated form of derivative contract based on allocation of risk in two reference
portfolios comprised of two lists of corporate bonds.

[13]

The
reference portfolio in a CDS is valued each day. The asset provider pays a
premium to the conduit on an ongoing basis and, in exchange, the conduit agrees
to pay the asset provider a certain amount if the credit losses in the
reference portfolio reach defined points. The conduit is required to post
collateral as security against this eventuality. However, when the transaction
is leveraged, the amount of credit protection sold by the conduit is greater
than the amount of collateral pledged by the conduit, the credit protection
seller. If the credit losses reach certain agreed points, the conduit may be
required to post additional collateral.

[14]

When
a CDS is used as the underlying asset to secure ABCP, the ABCP will generally mature
many times within the life of the CDS. To sustain the structure of the
transaction, either the holders of the ABCP have to reinvest  roll  their
notes many times, or new investors must be found to fund the conduits payment
obligations on the ABCP as it matures. This arrangement works as long as the
notes keep rolling, but without that liquidity, the pyramid collapses.

[15]

To
alleviate the risk flowing from the timing mismatch between the conduits
obligation to repay its ABCP investors and the cash flow from the longer-term
assets securing the notes, conduits typically purchase liquidity protection, similar
to a form of insurance contract. Liquidity protection gives the conduit access
to funds required to repay the ABCP on maturity if the ABCP holders do not roll
their notes and repayment cannot be funded by selling new ABCP. Asset providers
are sometimes, but not always, the parties who provide liquidity protection to
the conduits.

B) The Barclays-Devonshire ABCP  CDS transaction

[16]

In
the transaction at issue on this appeal, Barclays was Devonshires exclusive
asset provider. Barclays was the credit protection buyer and Devonshire was the
credit protection seller with respect to the two CDSs acquired by Devonshire from
Barclays. As part of this transaction, Barclays was also Devonshires liquidity
provider.

[17]

Devonshire
was established as a special purpose trust to acquire and hold income-producing
assets financed through the issuance of ABCP. It did not have any existence or
purpose outside of the transaction at issue in this case. Devonshires sponsor,
Quanto, was formed by former National Bank executives. Devonshire retained Quanto
as its financial services agent and Metcalfe & Mansfield Capital
Corporation (MMCC) as its administrative agent. Metcalfe is the named
defendant and respondent (in its capacity as Issuer Trustee of Devonshire
Trust), but for the purposes of this appeal we will refer to the defendant and
respondent as Devonshire, as did the parties.

[18]

The
classes of notes issued by Devonshire to its ABCP investors were $209 million liquidity-backed
notes (Class A), $279 million extendible notes (Class E), and $190 million floating
rate notes (Class FRN). Claims by noteholders of all three classes of notes ranked
pari passu
.

[19]

The
Devonshire noteholders with the most notes were financial institutions. The small
Devonshire noteholders included universities, a municipality and others. When
the noteholders purchased the notes from Devonshire, the notes were viewed as
relatively risk-free investments. In the course of the events to be described
below, Barclays eventually became a noteholder of Devonshire notes as well.

[20]

Originally
the parties intended this to be the first of many such transactions, but given
what happened in the larger market, this ended up being their only transaction.

[21]

Devonshire
entered into the two CDSs or swaps with Barclays in August 2006. The swaps
were structured and sold in one transaction. The transaction was governed by several
agreements, including a 1992 ISDA Master Agreement (a standard-form contract now
published by the International Swaps and Derivatives Association) and a number
of other standard-form documents (collectively the Agreements). The term of
the two swaps was ten years. The ISDA Master Agreement and the other standard-form
documents were modified by the parties and tailored to their needs and
objectives. In particular, the terms reflected the fact that they provided
protection on two customized  bespoke  portfolios of corporate bonds.

[22]

The
CDS transaction was structured to produce income to Devonshire by putting
Barclays in the role of credit protection buyer and Devonshire as credit
protection seller. Barclays paid Devonshire monthly premiums in exchange for
Devonshires commitment to pay Barclays if credit losses in the reference
portfolios reached certain pre-determined levels. If the credit losses occurred,
the transaction would (subject to a threshold referred to as the attachment
point, expressed as a percentage of the total size of the portfolio), require
a protection payment from Devonshire to Barclays for a portion of those losses.

[23]

Liquidity
protection was an important factor in Devonshires Class A notes being rated as
low risk. These short-term notes matured within 30 to 90 days and were either
rolled on maturity by the noteholders or cashed in with new notes being issued
by Devonshire to other investors. The Liquidity Facility signed by the
parties required Barclays to provide liquidity to Devonshire when the Class A
notes matured if a Market Disruption Event (MDE) occurred. The Class E
(extendible) notes and Class FRN (floating rate) notes did not benefit from
liquidity support in the event of an MDE.

[24]

The
precise definition of an MDE need not be decided now, but essentially it means
an event that caused the market for Devonshires ABCP to freeze. As we explain
below, as a result of an order bifurcating the trial, the trial judge was bound
to assume that an MDE occurred in August 2007, triggering Barclays obligation
to provide Devonshire with liquidity protection.

[25]

For
its part, Devonshire agreed to pay Barclays if losses exceeded the attachment
point, being 15 per cent and 16 per cent of the notional amount of the respective
reference portfolios. The risk that losses would exceed the attachment point
and require a protection payment by Devonshire was viewed as remote in 2006 because
of the high attachment points and the perceived quality of the assets underlying
the reference portfolio. The credit protection afforded to Barclays by
Devonshire was in respect of the super senior tranche of the portfolio, in
other words highly-rated debt. If the losses on the CDSs exceeded attachment
points, Devonshire also became responsible for losses on an agreed notional
portfolio of asset-backed securities. This was an additional form of credit
protection that was never engaged.

[26]

The
swaps in this transaction, called leveraged super senior credit default swaps,
were highly leveraged. The combined effect of highly-rated debt and highly-leveraged
protection meant that the risk assumed by Devonshire under the CDSs was very
low but that the extent of Devonshires liability was very high if the risk
materialized.

[27]

Devonshire
was required to pre-pay Barclays $600 million as collateral to secure its
obligation when entering into the swaps but, because of the leveraged nature of
the transaction, Devonshire was exposed to potential credit default losses that
were ten times higher  $6 billion. To fund its initial $600 million collateral
payment, Devonshire raised money by issuing and selling ABCP.

[28]

The
terms of the transaction required Barclays to post $600 million with the
Custodian (Bank of New York) as collateral in favour of Devonshire to secure
Barclays obligation to return the collateral owed to Devonshire at the end of
the term or upon the termination of the transaction. In other words, it was
contemplated that at the end of the term of the transaction, Barclays would
repay the $600 million CDS collateral to Devonshire. Devonshire would use that
money to repay the holders of the outstanding ABCP notes. Barclays would be entitled
to the return of the $600 million collateral held by the Custodian.

[29]

Barclays
was entitled under the Agreements to call for more collateral under certain specified
conditions of increased risk of default in the reference portfolios because the
transaction was so highly leveraged.

[30]

In
a worst case scenario, if the risk of default increased and the CDS market
became significantly unfavourable to Devonshire, it could decline to post
additional collateral and terminate the transaction. This stop-loss option
built into the terms of the transaction allowed Devonshire, in such
circumstances, to preserve a substantial proportion of its assets for the
benefit of its noteholders.

C) Events of Default and Early Termination

[31]

The
Agreements specify various events that constitute Events of Default that entitle
one party or the other to terminate the Agreements prior to the end of the
ten-year period. The Agreements provide for the consequences of default and Early
Termination in various scenarios.

[32]

Section
6(a) of the ISDA Master Agreement provides that if an Event of Default occurs
with respect to one party, the other party is entitled to designate an Early
Termination Date:

6. Early
Termination

(a)

Right to Terminate Following Event of Default
.
If at any
time an Event of Default with respect to a party (the Defaulting Party) has
occurred and is then continuing, the other party (the Non-defaulting Party)
may, by not more than 20 days notice to the Defaulting Party specifying the
relevant Event of Default, designate a day not earlier than the day such notice
is effective as an Early Termination Date in respect of all outstanding
Transactions.

[33]

Devonshire
alleges that Barclays breached s. 5(a)(i) of the ISDA Master Agreement by
failing to provide liquidity when the market became illiquid, as will be
explained below. Section 5(a)(i) provides that a failure to make a required
payment is an Event of Default if not cured within three days:

5.
Events of Default and Termination Events

(a)

Events of Default.
The occurrence at any
time with respect to a party  of any of the following events constitutes an
event of default (an Event of Default) with respect to such party:─

(i)

Failure to Pay or Deliver.
Failure by
the party to make, when due, any payment under this Agreement or delivery under
Section 2(a)(i) or 2(e) required to be made by it if such failure is not
remedied on or before the third Local Business Day after notice of such failure
is given to the party[.]

[34]

In
turn, Barclays denies that it was under an obligation to pay the liquidity
payments. However, as a result of a bifurcation order discussed below, it must
be assumed at this point that Barclays did breach that obligation in August
2007.

[35]

For
its part, Barclays alleges that Devonshire breached the Agreements by being
insolvent, contrary to s. 5(a)(vii)(2) of the ISDA Master Agreement, which
provides:

5. Events of Default and Termination Events

(a)

Events of Default.
The occurrence at any
time with respect to a party  of any of the following events constitutes an
event of default (an Event of Default) with respect to such party:─

(vii)

Bankruptcy.
The party ... (2) becomes
insolvent or is unable to pay its debts or fails or admits in writing its
inability generally to pay its debts as they become due[.]

[36]

In
January 2009, Devonshire notes were in default, although because of a temporary
standstill resolution not to take any steps to realize on the notes to
facilitate on-going restructuring, the noteholders had not demanded payment. The
trial judge, however, found that Devonshire was insolvent in January 2009 and
that finding is not challenged on this appeal.

D) Settlement Amount

[37]

The
Agreements specify a Settlement Amount to be determined by the Non-defaulting
Party upon Early Termination. Depending upon the circumstances, the Settlement
Amount can be positive or negative and thus the Defaulting Party could be
entitled to payment in some situations. Moreover, the Agreements provide that
if Barclays is in default, any amount payable to Barclays as a Defaulting Party
is subordinated to the claims of the noteholders.

E) The Turmoil in the ABCP Market Beginning in August 2007

[38]

The
Barclays-Devonshire transaction was caught up in wider problems with the ABCP market
in 2007. As it became apparent that many bonds were over-rated, particularly in
the United States, and that many ABCP transactions like this one were
under-collateralized, investors became unwilling to roll or to purchase ABCP
notes. As a result, the conduits did not have the money to continue paying its
ABCP noteholders as the short-term notes came due. The timing mismatch between
the maturity of the notes and the longer term of the underlying CDSs used to
securitize the notes became a fatal problem.

[39]

On
August 13, 2007, the third-party (i.e. non-Chartered bank-sponsored) ABCP
market froze in Canada.

[40]

Because
of the uncertainty in the marketplace and the lack of liquidity, the likelihood
of collateral calls being made on the conduits by the asset providers to
provide more collateral increased. Because noteholders were not rolling their
notes, liquidity calls were being made by conduits for cash to pay out the noteholders.

F) Devonshires Market Disruption Notices and Default Notice

[41]

Devonshire
sent market disruption notices to Barclays on August 13, 14 and 15, 2007, requesting
payments from Barclays under the Liquidity Facility. Devonshires position was
that given the illiquidity in the ABCP market, an MDE as contemplated in the
Liquidity Facility had occurred.

[42]

Barclays
took the position that an MDE had not occurred in the third-party ABCP market and
refused to provide any liquidity payments to Devonshire. On August 14, 2007,
Devonshire delivered a default notice to Barclays. There was no dispute, and
the trial judge found, that the effect of Devonshires default notice under the
Liquidity Facility was to give Barclays three days to cure the default.

G) The Montreal Accord

[43]

A
meeting of the major players in the third-party ABCP market was held in
Montreal on August 15 and into the early hours of August 16, 2007. It was
organized in large part by the Caisse de dépôt et placement du Québec (the Caisse),
a very large investor in ABCP, and by National Bank, a large dealer of ABCP. It
was attended by ABCP noteholders, dealers, and asset and liquidity providers.
Barclays attended the meeting. The conduits were not represented.

[44]

The
goal of this meeting was to get the asset providers to agree on a moratorium
against any collateral calls being made for more security, and to have the
conduits agree to a moratorium from making liquidity calls for funds to pay noteholders
who were not rolling their notes. In the words of trial judge, the purpose of
the meeting was to prevent a blow-up of the market and to have everyone put
their weapons down and take a pause: at para. 26.

[45]

The
Montreal Accord was reached on August 16, 2007, before the opening of the
markets. It contained an interim agreement (the Standstill Agreement) precluding
calls by the conduits for liquidity payments and calls by the asset providers
for collateral to be posted by the conduits (the Standstill) for an initial
period of 60 days (the Standstill Period). The Montreal Accord also contained
a proposal with a framework of principles to be used in restructuring each of
the conduits. It was later extended to March 14, 2008.

[46]

Barclays,
as asset and liquidity provider to Devonshire and no other conduit, was a signatory
to the Montreal Accord. Other major noteholders of Devonshire who signed the
Montreal Accord were the Caisse, National Bank and Desjardins Group
(Desjardins). Not all of the 22 conduits in the third-party ABCP market were
initial signatories. However, on October 15, 2007 Devonshire and all other
affected conduits signed the Accord as well.

[47]

The
Montreal Accord contained an explicit reference to good faith as the parties
undertook to work together in good faith with the other participants in the
discussions to bring about the timely implementation of these arrangements.

[48]

Following
the Montreal Accord, the Pan-Canadian Third Party Asset-Backed Commercial
Paper Investors Committee was formed by investors of ABCP notes to negotiate
for investors in the restructuring of the ABCP market (the Investors
Committee). Purdy Crawford, Q.C. was appointed its chairman. The Investors
Committee and its advisors led the negotiations on behalf of the conduits,
including Devonshire.

[49]

A
Framework Agreement was made on December 23, 2007, covering 20 of the trusts,
but not Devonshire. This was an agreement in principle as to how those conduits
were to be restructured and it eventually led to a restructuring under the
Companies Creditors Arrangement Act
,
R.S.C. 1985, c. C-36 (the
CCAA
).
Barclays was not prepared to make the
concessions required by the Framework Agreement and refused to sign it.

[50]

The
signatories to the Framework Agreement ultimately came to a negotiated
resolution. A
CCAA
filing took
place in March 2008 covering the restructuring of the 20 conduits that were
parties to the Framework Agreement. The
CCAA
plan was later approved by Campbell J. and then by this court in August 2008:
ATB Financial v. Metcalfe & Mansfield Alternative
Investments II Corp.
, 2008 ONCA 587, 92 O.R. (3d) 513. After that,
because of dramatic market changes that took place in the fall of 2008 (such as
the collapse of the investment bank Lehman Brothers), the plan was twice
renegotiated in December 2008 at the insistence of the Investors Committee.
This larger restructuring closed in January 2009.

H) Devonshires Suspension Notice and its Extension by
Barclays

[51]

On
August 16, 2007, the same day the Montreal Accord was reached, Devonshire
delivered a suspension notice to Barclays (the Suspension Notice), in light of
the Accord and the anticipated negotiations to restructure Devonshire. Devonshire
thereby suspended its default notice (without prejudice) and agreed not to take
any further steps to enforce its rights under that notice until the end of the
Standstill Period. There is no dispute that at this point, one of Barclays
three days in which to make timely liquidity payments had passed. Barclays
wanted Devonshire to simply rescind the default notice, but Devonshire refused
unless further assurances were provided, which Barclays did not provide.

[52]

The
attempts to restructure Devonshire were carried on outside the provisions of
the Montreal Accord following Barclays withdrawal in December 2007 from the
negotiations leading to the Framework Agreement. Most of the discussions to
restructure Devonshire were held without the direct participation of
Devonshire. Barclays negotiated directly with the major noteholders of
Devonshire, in particular the Caisse.

[53]

To
facilitate these negotiations, the Standstill Period was extended by agreement
between Barclays and Devonshire for fixed periods of time until February 22,
2008, then daily until March 14, 2008, then for a fixed period until April 16,
2008, and thereafter on a daily basis until January 12, 2009.

[54]

The
daily extensions of the Standstill Period were made by identical e-mail
messages from Barclays to a principal of Quanto, Devonshires sponsor, stating:

There are still a number of issues being worked out regarding
the proposed restructuring of Devonshire Trust. Accordingly, for the sake of
good order we are confirming that, as between Barclays and Devonshire, the
Montreal Accord standstills and the related suspension of default notices have
and will continue through [the next business day] to allow for these negotiations
to continue. If anyone takes a different position, please let us know ASAP.

I) Termination of the Transaction: January 13, 2009

[55]

The
events of January 2009 lie at the heart of this appeal. We review those events
in detail in the Analysis portion of these reasons. Essentially, what occurred
was as follows.

[56]

The
negotiations to restructure Devonshire collapsed in January 2009 when Barclays
delivered an ultimatum to the Caisse insisting that the Caisse accept a term
sheet for Devonshires proposed restructuring that Barclays had made in April
2008 and that the Caisse had not accepted. Barclays combined the ultimatum with
an intricate series of steps that it claims cured its default as liquidity
provider, entitling it to terminate the swaps on the ground of Devonshires
insolvency and to claim $1.2 billion as a termination payment under the Agreements.

[57]

On
Friday, January 9, 2009, Barclays sent the usual e-mail to Devonshire to ask
for an extension to the close of business on January 12, 2009 without disclosing
to Devonshire the ultimatum it had delivered to the Caisse. On January 13,
Barclays wired funds to Devonshires bank, in the amount of the requested
liquidity payments and interest. Within minutes of the transfer and two hours
before the funds were actually credited to Devonshires account, Barclays
delivered a Notice of Early Termination, citing s. 5(a)(vii) of the ISDA Master
Agreement, which provides that bankruptcy of a party is an Event of Default. No
particulars were provided in the Notice. After making the transfer, Barclays
asserted a security interest over the funds and any other funds held by the
bank on Devonshires account. Later that same day, Devonshire delivered its own
Notice of Early Termination.

[58]

Barclays
asserts that its January 13, 2009 payment cured any default under the Liquidity
Facility and put it in a position to terminate the Agreements on the ground
that Devonshire was insolvent. Devonshire asserts that the payment did not have
that effect and that as Barclays was in default, Devonshires Notice of Early
Termination is valid.

J) This Action

[59]

Barclays
commenced this action the day it purported to cure its default, seeking,
inter
alia
, declarations that it had properly designated January 13, 2009 as an
Early Termination Date and was entitled to the return of the $600 million
collateral held by the Custodian. It also asserted a security interest over
Devonshires assets to secure the Settlement Amount.

[60]

Devonshire
counterclaimed for,
inter alia
, declarations that an Event of Default
had occurred with respect to Barclays and that Devonshires designation of
Early Termination was valid. It also sought judgment in the amount of approximately
$725 million and a declaration that Barclays claim for the Settlement Amount
was subordinated to the repayment of the noteholders.

K) The Bifurcation Order

[61]

Prior
to the trial, a bifurcation order was made by C. L. Campbell J. on consent, in
which it was agreed that a number of issues would be bifurcated and deemed to
be decided for the purposes of the first trial. The bifurcated issues were: (i)
whether there was a MDE in August 2007; (ii) whether Devonshires market
disruption notices and notice of default were valid; (iii) whether Barclays was
in default under the notices sent by Devonshire up to August 16, 2007; and (iv)
whether Devonshire was precluded from asserting the occurrence of an MDE. It
was agreed that for the purposes of the first trial, now before us on appeal, that
these issues would be determined in Devonshires favour without prejudice to Barclays
position that its payment on January 13, 2009 cured any default.

[62]

Phase
one of the trial was expedited.

III. THE TRIAL JUDGMENT

[63]

The
crucial issues at the 51-day trial were focussed on the events that took place
in January 2009. The record was extensive and included the testimony of a
number of fact witnesses and several experts, and thousands of pages of
documents. The trial judge had the benefit of lengthy oral and written
submissions.

[64]

He
provided detailed reasons, making findings of fact largely adverse to Barclays.
He also found that the evidence of the Barclays fact witnesses, while helpful
in some respects, was self-serving, unreliable and incredible in several other
respects. He did not have the same reservations with respect to the Devonshire
witnesses and generally preferred their evidence.

A) The Trial Judges Findings: Summary

[65]

To
introduce the issues that arise on this appeal and to provide a road map for
the analysis that follows, we provide at this point a brief summary of the
trial judges principal findings and conclusions. We will provide a more
detailed review of the evidence and the trial judges findings on an issue-by-issue
basis in the analysis portion of these reasons.

B) Misrepresentation

[66]

The
trial judge found that Barclays had misrepresented to Devonshire the state of
its negotiations with the noteholders when it requested and obtained extensions
of the Standstill on January 8 and 9, 2009. The trial judge found that
Devonshire had agreed to those extensions in reliance on Barclays representation
that the negotiations were proceeding towards a possible resolution. That
representation was untrue. Barclays had decided to terminate the swaps and it
knew that its ultimatum to the Caisse would be refused. He held that the
misrepresentation was not only negligent, but fraudulent.

[67]

The
trial judge found that as the extensions of the Standstill had been agreed to
on the basis of misrepresentation, the extensions should be set aside. That
meant that the two days that remained when the Standstill Period began for
Barclays to make timely liquidity payments had expired by January 13, 2009.
Barclays was therefore in default on that date. However, the trial judge also
found that while the three-day cure period had expired, Barclays was still
entitled to cure its default until such time as Devonshire terminated the
swaps.

C) Timing of Barclays Cure Payment

[68]

On
January 13, 2009, Barclays made a payment which it argued cured its default
under the Liquidity Facility, thereby entitling it to serve its Notice of Early
Termination that day. The trial judge dismissed this argument because he found
that the payment was not effected by the time Barclays delivered its Notice of
Early Termination. Barclays therefore had failed to make timely payment when it
delivered that notice and as a result did not have the right to terminate the
ISDA Master Agreement.

D) Breach of Duty of Good Faith

[69]

Barclays
purported to cure its default by making the liquidity payments on the morning
of January 13, 2009. The trial judge found that in doing so Barclays breached its
duty of good faith which arose from the wording and operation of the Suspension
Notice and the agreements to extend the Standstill. The breach of good faith was
the design and execution of Barclays strategy to terminate the swaps,
including its ultimatum to the Caisse. The payment Barclays made was not a
genuine effort to cure its liquidity default but a thinly-veiled move to
terminate the swaps on terms favourable to Barclays. Accordingly, because it
acted in bad faith, Barclays could not rely on the payment to cure its default.
The trial judge found that this also meant Barclays did not have the right to
terminate the ISDA Master Agreement.

E) Benefit from Own Wrong

[70]

Devonshire
also argued that Barclays failure to make the liquidity payments was the cause
of its insolvency and, therefore, that Barclays should be prevented by its own
wrongdoing from relying on Devonshires insolvency as an Event of Default and a
ground for termination. The trial judge found that while a term should be
implied to prevent Barclays from relying on the insolvency of Devonshire, this
could assist Devonshire only with respect to the Class A notes but not the
Class E and Class FRN notes, as the liquidity obligation did not extend to them.
Moreover, the trial judge concluded that it was Devonshires decision not to
pay the interest on the Class E and Class FRN notes. Thus, with respect to the
latter two classes, the trial judge found that Barclays was not prevented from
relying on Devonshires insolvency on the basis of the principle that a party
cannot benefit from its own wrongdoing.

F) Waiver and Election

[71]

The
trial judge rejected Devonshires argument that by insisting that it had no
obligation to make the liquidity payments demanded of it by Devonshire on
August 13, 14 and 15, 2007, Barclays had waived its right to later cure its
default.

[72]

However,
the trial judge found that in continuing to make protection payments to
Devonshire during the Standstill Period when it alleged Devonshire was
insolvent, Barclays had elected to affirm the contract and lost the right to
rely on Devonshires insolvency as a ground of default. The trial judge
concluded that this was another reason why Barclays did not have the right to
deliver its Notice of Early Termination.

G) Repudiation

[73]

Before
dealing with repudiation, the trial judge briefly summarized his conclusions
concerning why Barclays was not entitled to rely on its Notice of Early
Termination: (i) it had elected not to rely on Devonshires insolvency; (ii) it
failed to make a timely payment of its liquidity obligation before delivering
its Notice of Early Termination; and (iii) it could not rely on its conditional
payment of its liquidity obligation because it had breached its good faith
obligations.

[74]

Following
this summary, the trial judge went on to find that Barclays delivery of its
Notice of Early Termination together with related steps constituted a
repudiation of the parties Agreements. He stated that a partys intention not
to be bound by a contract may be evinced by a refusal to perform, even though
the party refusing mistakenly thinks he is exercising a contractual right: at
para. 318.

[75]

The
trial judge found that because Barclays had elected to waive Devonshires
insolvency, Devonshire must be treated as a Non-defaulting Party and entitled
to deliver its Notice of Early Termination on January 13, 2009. Devonshire was
entitled to terminate the CDSs on the ground that Barclays was in default under
the Liquidity Facility. The trial judge went on to find, however, that if
Devonshire were not able to deliver its Notice of Early Termination as a Non-defaulting
Party, by doing so, it accepted Barclays repudiation of the contract and thus
brought the contract to an end.

H) Devonshires Notice of Early Termination

[76]

The
trial judge found that Devonshires Notice of Early Termination delivered on
the afternoon of January 13, 2009 was valid and effective.

[77]

Although
the trial judge concluded that Devonshire was insolvent as of January 13, 2009
and that, under s. 6(a) of the ISDA Master Agreement, only a Non-defaulting
Party could deliver a valid Notice of Early Termination, he found that Barclays
could not rely on Devonshires insolvency as a bar to Devonshires right to
deliver a Notice of Early Termination. This was because he concluded that
Barclays had elected to waive reliance on Devonshires insolvency.

I) Settlement Amount

[78]

The
trial judge found that Devonshire was entitled to the return of its $600
million in collateral, minus the liquidity call payment and interest it had
received, and other Unpaid Amounts, as defined in the Agreements, for a total
of $532.7 million.

[79]

The
trial judge went on to consider what Barclays Loss as defined in the
Agreements would have been if it had been the Non-defaulting Party and Devonshire
was the Defaulting Party. The parties asked the trial judge to include this
finding in his judgment, presumably because it has significance for the second
part of the bifurcated trial, depending on the outcome of this appeal.

[80]

The
trial judge rejected the Barclays experts valuation of its Loss at $1.2
billion. He found that the model used by the expert, while used on a day-to-day
basis to estimate the value of the swaps, was not the appropriate model in this
situation and that it improperly excluded certain key features of the
Agreements. He preferred the model used by the Devonshire expert, a cash flow
model, which he concluded resulted in a valuation of the Loss at a mere $12,000,
reduced to $0 because of mitigation. In reaching this conclusion, he disagreed
with the Devonshire expert that Barclays should receive a risk premium of $264
million, the difference between the real-world estimate of loss and the market
implied estimate of loss.

J) Limited-recourse, Priorities and Subordination

[81]

Finally,
the trial judge found that the issue of which assets Barclays had recourse to
(other than the collateral) was moot, and that Barclays interests were
subordinated to those of the other noteholders in light of the Intercreditor Agreement
between Barclays, Devonshire, and CIBC Mellon Trust Company.

IV. ISSUES

[82]

There
are four broad questions raised by this appeal:

i.

Was the trial judge correct in finding that Barclays Notice of Early
Termination was invalid?

ii.

Was the trial judge correct in finding that Devonshires Notice of Early
Termination was valid?

iii.

Was the trial judge correct in his determination of the Settlement
Amount?

iv.

Was the trial judge correct in his determination of the issues of
priorities, subordination and limited-recourse?

[83]

On
the first question, Barclays attacks the trial judges findings as to:

i.

Misrepresentation;

ii.

Bad faith;

iii.

Timing of the cure payment; and

iv.

Election not to rely on Devonshires insolvency.

[84]

By
way of cross-appeal on this question, Devonshire attacks the following findings
of the trial judge:

i.

In delivering its Notice of Early Termination, Barclays was not barred
by the principle that it should not be permitted to benefit from its own wrong.

ii.

Barclays had a right to make the liquidity payments after the cure
period expired, provided Devonshire had not terminated the contract.

iii.

Barclays had not waived its right to cure the default by failing to make
the liquidity payments demanded by Devonshire in August 2007.

[85]

On
the second question, Barclays attacks the trial judges finding that even if
Devonshire was not able to deliver a Notice of Early Termination under the Agreements,
by doing so it accepted Barclays repudiation and thereby brought the contract
to an end. Barclays argues that as the Agreements spelled out the consequences
of terminating the swaps, the parties contracted out of the common law of
repudiation. Barclays also argues that, in any event, by serving its Notice of
Early Termination and relying on the terms that spelled out the consequences of
default, Devonshire affirmed the Agreements rather than accepted Barclays
repudiation.

[86]

On
the third question, Barclays position is that the trial judge erred in
rejecting Barclays estimate of its own Loss and in fashioning his own
unprecedented valuation methodology.

[87]

On
the fourth question, Barclays argues that the trial judge erred in his
interpretation of the priority provisions in the Agreements and contends that
it has priority over the noteholders. Further, it argues that if the Agreements
were terminated by an Event of Default affecting Barclays as asset provider, subordination
to the noteholders does not apply to fees due to Barclays in its other
capacities: liquidity provider; holder of Series A notes; or recipient of the Unpaid
Amounts portion of any Early Termination payment. Barclays also submits that
the trial judge erred in finding that Barclays did not have recourse to assets
of Devonshire beyond the $600 million in collateral.

[88]

As
will be explained below, given our findings, it is not necessary to address all
of these issues.

V. ANALYSIS

A) Issue 1. Is Barclays Notice of Early Termination valid?

[89]

We
begin our analysis of this issue by noting two important points that are not in
dispute and that considerably narrow the scope of this appeal. First, as we
have already pointed out, as a result of the bifurcation order, it is an
assumed fact that (i) there was an MDE in August 2007, (ii) Devonshires market
disruption notices and notice of default were valid, and (iii) Barclays was in
default under the notices sent by Devonshire up to August 16, 2007 when the
Standstill Agreement was entered into.

[90]

Second,
findings of fact by the trial judge attract deference on appeal and are only
reviewable by this court if they reveal palpable and overriding error:
Waxman
v. Waxman
(2004), 186 O.A.C. 201 (C.A.), at para. 291. This standard
applies to all factual findings, whether based on credibility assessments, the
weighing of competing evidence, expert evidence, or the drawing of inferences
from primary facts: see
Waxman
,
at paras. 359-60. Findings of fact grounded in credibility assessments are
particularly difficult to disturb on appeal: see
Housen v. Nikolaisen
,
2002 SCC 33, 2 S.C.R. 235, at para. 24. The trial judge was free to accept
some, none, or all of the evidence of the Barclays witnesses, and he gave adequate
reasons for rejecting much of it.

[91]

As
will become clear, it is our view that Barclays attack on the trial judgment
essentially relates to findings of fact that attract significant deference
before this court.

(1)

Misrepresentation

[92]

The
trial judge found that Barclays e-mail requests for extensions of the
Standstill sent on January 8 and 9, 2009 amounted to a fraudulent
misrepresentation and that Devonshires acceptance of the extensions should be
rescinded. Barclays attacks the trial judges finding of misrepresentation
essentially on three grounds.

[93]

First,
Barclays submits that the trial judge erred in his interpretation of the
ultimatum delivered to the Caisse that triggered the end of negotiations to
restructure Devonshire. Barclays contends that the ultimatum was a legitimate
negotiating strategy and that it was not open to the trial judge to find that
Barclays did anything misleading when it asked for an extension of the
Standstill on a business as usual basis even though it had already sent the
ultimatum knowing that it would be refused.

[94]

Second,
Barclays submits that the trial judge erred by focusing on Devonshire rather
than on the Caisse. The restructuring negotiations were largely being conducted
between Barclays and the Caisse with no involvement from Devonshire. The Caisse
knew the state of the negotiations and was not misled by the ultimatum and, even
if it had known the state of negotiations, Devonshire would have acted as
directed by the Caisse.

[95]

Third,
Barclays argues that even if there was a misrepresentation, the trial judge
erred in law and in fact in finding that Devonshire relied to its detriment in
agreeing to the extension of the Standstill.

[96]

For
the following reasons, we reject these arguments.

(a)

The
trial judges finding of misrepresentation

[97]

We
begin our analysis of these issues with a review of the evidence and the finding
that Barclays was guilty of fraudulent misrepresentation.

[98]

The
trial judge found that from early April 2008, Barclays was considering
terminating the Devonshire swaps if it could not come to an agreement with the
largest Devonshire noteholders.

[99]

A
meeting took place in New York City on April 8, 2008 between Barclays, the
Caisse, National Bank and the Investors Committee to discuss the Devonshire
restructuring.

[100]

On April 9,
2008, Barclays sent a revised term sheet to the Caisse, National Bank,
Desjardins and Citibank, the four largest Devonshire noteholders. It contained
terms which were not discussed or agreed to at the April 8 meeting. Desjardins
and Citibank declined to participate, and later that month, Barclays acquired
their notes at a small fraction of their face value. In October 2008, Barclays
and National Bank signed a framework agreement under which Barclays also acquired
the Devonshire notes held by National Bank.

[101]

After the
agreement was made between Barclays and National Bank, the Caisse, which still held
Devonshire notes with a face value of $385 million, remained the only large noteholder
which had not come to an agreement. The only other noteholders with which an
agreement had not been reached were the small noteholders, which together held
about $75 million in notes.

[102]

Barclays and the
Caisse continued negotiations in the second half of 2008 as the ABCP market
continued to deteriorate. Lehman Brothers and other financial institutions
failed in the fall of 2008 and the world markets became more illiquid. Debt
previously considered investment grade was now trading as junk.

[103]

In early
November 2008, the Caisse began asking for revised terms to reflect market
changes, along the lines of those obtained by the Investors Committee in the
CCAA
restructuring. Barclays was not happy
with the requested changes, but did make some concessions during the ongoing
negotiations. Then, in December 2008, Barclays took the position that it had already
reached an agreement with the Caisse in April 2008. The Caisse denied the
existence of any agreement and demanded even more favourable terms, since the
market was moving in its favour.

[104]

On January 8,
2009, a Barclays executive sent an e-mail to his counterparts at the Caisse,
enclosing a term sheet that reflected what Barclays claimed the parties had
agreed to in April 2008. It did not reflect the concessions that Barclays had
subsequently made in November, much less the additional demands the Caisse had
made in December 2008. This e-mail requested that a meeting be called for the
Caisse board of directors to ratify our previous agreement on the
restructuring of the Caisses holdings. The e-mail concluded by stating that
Barclays was looking forward to receiving a copy of the term sheet, signed
back, no later than the end of the business day on January 12, 2009.

[105]

A senior officer
of Barclays admitted on cross-examination that the deadline Barclays gave the
Caisse in this e-mail could fairly be called an ultimatum. Barclays knew that
it was unlikely that the Caisse executives could deal with the e-mail by
January 12, 2009 because they were in Toronto, working on the closing of the
CCAA
restructuring deal involving the
other conduits. The trial judge found that the timing was not coincidental. Not
only did Barclays know that the Montreal Caisse executives were preoccupied
that week, but Barclays did not want to risk being exposed to the Caisse after
the
CCAA
restructuring, when the
Caisse would have incentive to walk away from the trades.

[106]

A Barclays representative
spoke to a Caisse representative by telephone on Friday, January 9, 2009, to
say that January 12 was a real deadline. The Caisse said it would respond to
Barclays e-mail that afternoon. However, there was no further communication
between Barclays and the Caisse before Barclays sent its final daily extension
of the Standstill Period with Devonshire at the end of the day on January 9.

[107]

The trial judge
found that Barclays never expected the Caisse to agree to the terms of the
ultimatum and that Barclays real intention in delivering the ultimatum was to
terminate the swaps.

[108]

Barclays sent
the last of the e-mails extending the Standstill to Quanto (effectively to
Devonshire) on January 8 and 9, 2009, the second to be effective through the
close of business on Monday, January 12, 2009. It repeated the same language
that it had used for months, stating that [t]here are still a number of issues
being worked out regarding the proposed restructuring of Devonshire Trust and
asking for a further extension to allow for these negotiations to continue. The
trial judge found that, as these same statements had been made on a daily basis
for over eight months, they gave the impression that it was business as usual
so far as negotiations were concerned: at para. 114. The trial judge found
clearly:
It was not
 (emphasis added).

[109]

The trial judge
found that Barclays did not believe that negotiations were continuing when it
sent the e-mail requesting an extension. Rather, Barclays had already decided
upon a carefully choreographed set of steps purporting to cure its default in
meeting Devonshires call for liquidity support but in fact designed to
extricate Barclays from the transaction and to maximize recovery of a
Settlement Amount under the terms of the Agreements. The trial judge found that
the e-mails extending the Standstill were part of that strategy.

[110]

Barclays did not
tell Devonshire about the ultimatum to the Caisse. The trial judge found that
Barclays did not want Devonshire to know the state of its negotiations with the
Caisse because Barclays wanted the strategic advantage of being able to
terminate the swaps first.

[111]

Senior
representatives of Barclays testified at trial that the ultimatum e-mail to the
Caisse was an attempt to continue negotiations that they hoped would result in some
acceptable restructuring of Devonshire. The trial judge explicitly rejected
that evidence and found that Barclays knew that the Caisses position was that
there had not been an agreement in April 2008 and that the April 9 term sheet
drafted by Barclays contained items not discussed in the meeting in New York City
the day before and never agreed to afterward. He also found that the April 9 term
sheet, sent by Barclays on January 8, 2009 as part of its ultimatum e-mail, was
materially worse to the Caisse than the proposal Barclays had made on December
18, 2008, and that it would have been completely against the Caisses economic
interests to agree to the terms Barclays proposed in the January 8 e-mail.

[112]

The trial judge
found that no one at Barclays expected the Caisse to agree to these terms. A
Caisse witness testified that he was insulted by the proposed terms and had no
intention of recommending them to his Board of Directors. The trial judge
concluded that Barclays was posturing and positioning itself to exit the
Devonshire trades and to deliberately end negotiations with the Caisse: at
para. 120. In the words of one Barclays witness, if the Caisse did not agree to
the ultimatum e-mail, Barclays intended to blow up the box, meaning to terminate
the Devonshire swaps.

[113]

The trial judge
further held that the misrepresentation in the e-mails had been amplified by
the failure of Barclays executives to respond to direct inquiries by counsel
for the Indenture Trustee on December 30, 2008, as to the status of Barclays
negotiations on the restructuring of Devonshire. This, he found, compounded
the misleading nature of the extensions e-mails: at para. 178.

[114]

While it was not
strictly necessary for him do so, the trial judge went on to find that
Barclays misrepresentations amounted to fraudulent misrepresentations. He
found that the members of the Barclays team responsible for the e-mails knew
full well that statements in the extension e-mails were false.

(b)

Did
the trial judge err in his interpretation of the ultimatum delivered to the
Caisse?

[115]

We see no basis
for holding that the trial judge erred in his interpretation of the ultimatum. No
doubt, there are circumstances in which the delivery of an ultimatum can be a
legitimate strategy aimed at moving the negotiations forward. But whether
this
ultimatum was consistent with an intention to continue negotiations or rather
a ploy to bring negotiations to an end was a matter of fact, not law, and the
assessment of Barclays knowledge and intentions in delivering the ultimatum
was very much a factual issue for the trial judge to decide.

[116]

The trial judge
supported his findings regarding the ultimatum with a thorough review of the
evolution of these negotiations. In our view, that evidence, the essentials of
which we have just reviewed, is clearly capable of supporting the trial judges
finding that Barclays asked Devonshire to extend the Standstill Period to
facilitate further negotiations even though it had already made the decision to
terminate those negotiations by delivering an ultimatum to the Caisse that
Barclays knew would be refused. The misrepresentation so found was, in the
trial judges view, part and parcel of Barclays carefully conceived strategy
to terminate the swaps to its own advantage before Devonshire was able to do so.

[117]

As the trial
judge put it, [s]ometimes actions speak louder than words: at para. 150.
Barclays took several steps that were simply inconsistent with the prospect or
expectation of further negotiations to restructure Devonshire. Those steps
reveal that the ultimatum was part of a scheme designed by Barclays to blow up
the Devonshire swaps. On January 8, 2009, Barclays began to gather relevant
information on profit and loss that it would need once the trade was
terminated. On January 9, Barclays arranged for the liquidity payments to be
made. On January 8 and 10, it made trades, in the words of a Barclays trader
in anticipation of [the] Devonshire unwind and to deal with the potential
Devonshire impact next week. Barclays also contacted government authorities
and initiated a planned public relations response to protect its franchise from
the fallout of terminating the Devonshire transaction.

[118]

We conclude that
there is no merit to Barclays submission that the trial judge erred in his
interpretation of the ultimatum delivered to the Caisse that triggered the end
of negotiations to restructure Devonshire. It was open to him on the evidence
to reject Barclays contention that the ultimatum was a legitimate negotiating
strategy and to find that the e-mails to Devonshire requesting extensions of
the Standstill were inaccurate and misleading.

(c)

Did
the trial judge err by focusing his misrepresentation analysis on Devonshire
rather than on the Caisse?

[119]

Barclays argues
that the trial judge erred by focussing his analysis of the effect of the
misrepresentation on Devonshire rather than the Caisse. Barclays submits that
Devonshire was not involved in the restructuring negotiations and that
Devonshire would have taken direction from the Caisse as the noteholder with
the most significant stake in the restructuring negotiations.

[120]

We disagree. Simply
put, Barclays could not and did not ignore the structure and essential terms of
the Agreements. The Agreements clearly required Barclays to deal with
Devonshire (through its sponsor Quanto) with respect to extensions of the
Standstill and all issues concerning Events of Default and Early Termination. Barclays
did precisely that and, indeed, it was a vital component of Barclays strategy
to deal separately with the Caisse and with Devonshire.

[121]

Devonshire and
the Caisse were distinct parties with distinct roles under the Agreements and
in the restructuring negotiations. While their interests may have overlapped on
many or even most issues, they did not stand in each others shoes with respect
to the provisions in the Agreements relating to Events of Default and Early
Termination. Communication with the Caisse, which was not a party to the
Agreements, could not, in law, be a substitute for communication with
Devonshire for those purposes.

(d)

Did
the trial judge err in finding that Devonshire had reasonably relied to its
detriment on Barclays misrepresentation?

[122]

Barclays argues
that the trial judge erred in finding that Devonshire relied on the extension
e-mails to its detriment and suggests that Devonshire was not worse off than if
it had known about the ultimatum. According to Barclays, if Devonshire had
known that the negotiations to restructure were effectively at an end, it would
not and could not have done anything differently.

[123]

Barclays
contends that even if it had wanted to, Devonshire would not have been able to
do anything that made a difference to the outcome. Barclays position is that Devonshire
would have done as the Caisse directed, and the Caisse was fully aware of the
status of the negotiations. There was evidence that the Caisse thought that
Barclays was acting in good faith, but no evidence that the Caisse told Devonshire
that it intended to respond to the ultimatum before the January 12 deadline. If
the Caisse had told Devonshire that, Devonshire would not have objected to the extension
of the Standstill. Moreover, even if Devonshire had objected to the extension,
it could not have terminated the swaps.

[124]

We are not
persuaded that the trial judge erred in finding that Devonshire had reasonably
relied on the misrepresentation to its detriment, for the following reasons.

[125]

One of the Devonshire
witnesses, found to be reliable by the trial judge, testified that the only
reason Devonshire did not terminate the swaps in 2007 was Barclays agreement
to negotiate with the investors in good faith arising out of the Montreal
Accord. The trial judge accepted evidence that if Devonshire had known the
negotiations were effectively at an end in January 2009, then the only option
would have been to protect the assets of Devonshire and take steps to terminate
the swaps: at para. 163.

[126]

The trial judge
found that it was quite evident that this was why Barclays had not disclosed
the true state of affairs to Devonshire: Barclays did not want Devonshire to
terminate the trades before Barclays did: at para. 175. Indeed, a Barclays
witness admitted as much at trial.

[127]

We see no basis
to interfere with the trial judges finding of detrimental reliance. It is well-grounded
in the evidence and it reveals no error of law. It was, in our view,
essentially a factual finding that was amply supported in the evidence and is
entitled to deference.

(e)

Misrepresentation:
Conclusion

[128]

We are not
persuaded that the trial judge erred in finding that the Barclays e-mails of January
8 and 9, 2009 requesting extensions of the Standstill contained material
misrepresentations as to the state of the negotiations with the Caisse, that
Devonshire relied upon those misrepresentations to its detriment in agreeing to
the extensions, and that it follows that the extensions were properly
rescinded.

(2)

Breach of Duty of
Good Faith

[129]

The trial judge
found that Barclays was not entitled to rely on its purported cure of its
default on the Liquidity Facility because it had breached its good faith
obligations in January 2009. Barclays submits the trial judges finding that it
had breached its duty of good faith, if such an obligation even existed, constitutes
an error warranting appellate intervention.

[130]

The breach of
good faith issue is closely linked with the issue of misrepresentation.

[131]

The trial
judges findings as to good faith clearly do not rest on the imposition of a
general or stand-alone duty to bargain in good faith. It is well-established
that a party to a commercial agreement is entitled to enforce the agreement to
its own advantage according to its terms, including rights of termination:
Agribrands
Purina Canada Inc. v. Kasamekas
, 2011 ONCA 460, 106 O.R. (3d) 427, at
paras. 50-51.

[132]

However, there
are two features of the relationship between Barclays and Devonshire that
support the duty of good faith found by the trial judge.

[133]

First, as we
have already noted, as a signatory to the Montreal Accord, Barclays expressly agreed
to engage in good faith negotiations to restructure the Devonshire notes. While
the parties were outside the framework of the Montreal Accord by January 2009,
the trial judge did not err in concluding that just as the effort to negotiate
a restructuring continued, so too did the obligation to do so in good faith. Contrary
to Barclays submission, the Montreal Accord was not merely an agreement to
agree. It was a framework designed to allow the parties to deal with complex
restructuring arrangements in turbulent times that imposed contractual good
faith obligation on Barclays. The trial judge made no error in finding that both
the Suspension Notice, which was explicitly conditioned on Barclays compliance
with its obligations under the Montreal Accord, and the agreements to extend
the Standstill, imported Barclays duty to Devonshire to carry out the
negotiations with the Devonshire noteholders in good faith. As the trial judge
pointed out, it would not have made commercial sense to Devonshire to agree to
the extension of the Standstill if Barclays was not dealing with the noteholders
in good faith.

[134]

Second, as the
trial judge noted, this court has endorsed as an established principle that a
duty of good faith arises when necessary to ensure that the parties do not act
in a way that defeats the objects of the very contract the parties have entered.
As OConnor A.C.J.O. explained in
Transamerica Life Canada Inc. v. ING
Canada Inc.
(2003),
68 O.R. (3d)
457, at para. 53:

[C]
ourts have implied a duty of good
faith with a view to securing the performance and enforcement of the contract
made by the parties, or as it is sometimes put, to ensure that parties do not
act in a way that eviscerates or defeats the objectives of the agreement that
they have entered into. [Citations omitted.]

Similarly,
in
Nareerux
Import Co. Ltd. v.

Canadian Imperial Bank of Commerce,
2009 ONCA 764, 97 O.R. (3d) 481, at para. 69, Blair J.A. wrote
:

[T]he jurisprudence establishes that there is an implied contractual
duty of good faith not to act in a way that defeats or eviscerates the very
purpose and objective of the agreement. [Citations omitted.]

[135]

Barclays was
entitled to act in its own self-interest. In doing so, however, it had to be
honest and candid with Devonshire and had to act in a way that would not defeat
or eviscerate the very purpose of the Agreements. Barclays did neither.

[136]

Barclays breached
its duty of good faith in two ways. First, Barclays misrepresentation induced
Devonshire to agree to the extension of the Standstill and thereby precluded
Devonshire from taking the steps it would otherwise have taken to enforce its
rights. The trial judge found that Devonshire was entitled to the true facts
from Barclays, which it did not receive: at para. 309. While Barclays was not
required to disclose its litigation strategy in advance, the trial judge found
that when making statements of fact to Devonshire, it was obligated to ensure
that those facts were not misleading, either directly or by omission.

[137]

Second,
Barclays purported cure payment and the manner in which Barclays purported to
terminate the Agreements defeated and eviscerated the very purpose of the
agreement. The crucial facts relating to the liquidity payments support that
conclusion.

[138]

Just prior to
9:00 a.m. on January 13, 2009, Barclays wired $71 million plus interest to
Devonshires bank, representing the amount of the liquidity payments it had refused
to pay in August 2007. The payment was made in a manner that would take
Devonshire completely by surprise. Although Barclays arranged to make the
payment on January 9, 2009, Barclays staff had been instructed, contrary to
the usual practice, not to tell Devonshire that Barclays was planning to wire
funds.

[139]

Within minutes
of transferring the funds to Devonshires bank and before the funds had been
credited to Devonshires account, Barclays delivered notices to Devonshire stating
it had made arrangements for the liquidity payments and purporting to designate
an Early Termination Date under the ISDA Master Agreement and to name
Devonshire as the Defaulting Party. The liquidity payment notice asserted that
the payment was made without admission that Devonshires Event of Default notice
of August 2007 was proper.

[140]

Before the funds
had been credited to Devonshires account and approximately 30 minutes after
the transfer, Barclays advised Devonshires bank that it had security over the
funds it had just transferred.

[141]

Within hours of
making the payment, Barclays issued and served its statement of claim
commencing this action, and claiming,
inter alia
, injunctive relief
and payment in relation to the collateral and the return of the liquidity funds
it had just transferred.

[142]

The funds were
not actually credited to Devonshire's bank account until around 11:00 a.m. that
same morning. On the same day, at 2:22 p.m., Devonshire delivered a Notice of
Early Termination to Barclays, itself purporting to designate an Early
Termination Date under the ISDA Master Agreement and to name Barclays as the Defaulting
Party because of Barclays failure to pay the liquidity calls made by
Devonshire. Devonshire subsequently filed a statement of defence and
counterclaim in this action, alleging that Barclays, not Devonshire, had
breached the Agreements.

[143]

The trial judge
found that as the payment purporting to provide liquidity was immediately
followed by the termination of the swaps and litigation, Barclays payment
could not possibly achieve the purpose for which it was designed.

[144]

The liquidity
payments were not made for the stated purpose of curing Barclays liquidity
default, but rather in furtherance of Barclays strategy to grab the
collateral. The trial judge found that [t]he payment was not a good faith
exercise with a view to securing the performance and enforcement of the
contract made by the parties, but rather one that defeated the objectives of
the agreement: at para. 313.

[145]

In our view, the
evidence fully supports that finding. The purpose of the Liquidity Facility was
to provide Devonshire with the funds it required to pay the noteholders in the
event of a market disruption. The manner in which Barclays made the payment is
entirely inconsistent with that purpose. The payment was combined with a
refusal to admit responsibility to make the payment, an assertion of security
over the payment, a demand in the form of a lawsuit for their immediate return,
and a notice terminating the Agreements on the basis of the very insolvency the
payment was supposed to cure. To accept Barclays payment as a cure in these
circumstances would gut a fundamental part of the Agreements of its meaning and
purpose. Barclays payment was simply meaningless as a cure for its default and
served as part of Barclays strategy to set itself up to terminate the swaps.
Recognizing the liquidity payments as curing Barclays default would undermine
the very purpose for which the right to cure was granted.

[146]

As with the
misrepresentation findings, the trial judges findings as to Barclays
intentions and the strategy it developed to terminate the Devonshire swaps on
the most favourable terms possible are essentially factual in nature. There was
ample evidence to support those findings which were only made after a careful
and detailed review of the evidence. Those findings bring the case within a
well-recognized legal principle that justified the trial judges conclusion
that Barclays Notice of Early Termination was fatally infected by a breach of
duty of good faith. We see no basis for appellate intervention.

(3)

Benefit from Own
Wrong

[147]

As an
alternative basis for upholding the trial judges finding that Barclays Notice
of Early Termination was ineffective, Devonshire argues that Barclays should
not be able to rely on Devonshires insolvency to terminate the swaps since it
would allow Barclays to benefit from its own wrong. Insofar as the Class A
notes are concerned, the trial judge agreed and found that Barclays could not
terminate the swaps on the ground that Devonshire was insolvent when Barclays
caused that insolvency by failing to make the liquidity payments, since it
would allow Barclays to take advantage of its own wrongdoing. He restricted his
finding, however, to the Class A notes because Barclays did not have a
liquidity obligation with respect to the Class E and Class FRN notes.

[148]

As we have
already noted, it must be assumed that Barclays was in breach of its obligation
to make the liquidity payments from August 2007 as a consequence of the
bifurcation order.

[149]

It is a widely-recognized
principle that a party is precluded from taking advantage of and benefitting
from a state of affairs produced by its own wrong. As this court put it in
Southcott
Estates Inc. v. Toronto Catholic District School Board
, 2010 ONCA 310, 104
O.R. (3d) 784, at para. 13:

It is a well-established principle of contract law that a party
cannot use its own breach or default in satisfying a condition precedent as a
basis for being relieved of its contractual obligations. [Citations omitted.]

As the House of Lords explained in
Alghussein
Establishment v. Eton College,
[1991] 1 W.L.R. 587 H.L. (Eng.), at p. 594:

[N]o man can take advantage of his own wrong. A party who
seeks to obtain a benefit under a continuing contract on account of his breach
is just as much taking advantage of his own wrong as is a party who relies on
his breach to avoid a contract and thereby escape his obligations.

[150]

Barclays
default put Devonshire in the position that it could not pay the noteholders. That,
in turn, caused Devonshire to take steps to protect the interests of its noteholders
by agreeing to the Standstill and later the Montreal Accord. Insofar as the
Class A notes are concerned, the trial judge held that because Barclays was
assumed to be in default in failing to make the liquidity payments, Barclays
would impermissibly benefit by its own breach or wrong by relying on
Devonshires insolvency as an Event of Default.

[151]

We see no reason
to interfere with that finding.

[152]

We reject
Barclays characterization of its own actions as simply achieving its
legitimate self-interest as contemplated by the Agreements. We agree with the
trial judges finding that it was appropriate to imply a term prohibiting
Barclays from relying upon its own failure to respond to Devonshires market disruption
notice in order to give business efficacy to the contract. This finding, in our
view, bears close relation to the matter of good faith that we have just
canvassed. Both findings rest on the need to interpret and apply the Agreements
in a manner that ensures they are carried out in manner that corresponds to
their terms and objectives.

[153]

We do not agree
with Barclays submission that because the Standstill Agreement postponed
Devonshires liquidity claim, Barclays failure to make the liquidity payments
cannot be regarded as a wrong. In our view, that submission ignores the fact
that the Standstill Agreement was explicitly without prejudice to Devonshires
position that Barclays was in default.

[154]

The trial judge restricted
his finding to the Class A notes having a value of $209 million, as it was only
in relation to those notes that Barclays liquidity obligation extended. He
found that as Barclays did not have a liquidity obligation with respect to the
Class E and Class FRN notes, it was Devonshires failure to pay, not Barclays
liquidity default, which led to those notes not being paid and Devonshires
insolvency as a consequence.

[155]

Devonshire
cross-appeals that finding and argues that the trial judge erred by refusing to
hold that Barclays was precluded from relying on the insolvency that flowed
from Barclays failure to live up to its liquidity obligation.

[156]

Barclays knew
that the Class A notes (which were protected by the liquidity line and started
to come due first) were ranked
pari passu
with the Class E and Class FRN notes. Interest became payable on one group of Class
FRN notes on August 16, 2007. Although Devonshire had the funds to make the
interest payment on those Class FRN notes on August 16, it did not pay the
interest because it decided that it could not treat one class of noteholders
differently from the others. The Class E notes that came to maturity were
extended, and when the interest became payable on them, it was not paid for the
same reason.

[157]

We agree with
Devonshires submission that the failure to pay interest on the Class E and
Class FRN notes is properly seen as part of a series of inter-connected events closely
related to Barclays failure to pay its liquidity obligations. Because the
notes were ranked
pari passu
, Devonshires
Issuer Trustee could not pay one class of notes while not paying another. Devonshires
default in paying interest on the Class E and Class FRN notes was a direct
consequence of Barclays failure to make the liquidity payments.

[158]

The trial judge
rejected Devonshires argument that the principle that a party should not be
entitled to benefit from its own wrong should operate as a bar to Barclays
relying on Devonshires insolvency with respect to the Class E and Class FRN
notes because he found that it was Devonshires decision not to pay the
interest on the Class E and Class FRN notes. He wrote, at para. 246:

The liquidity obligation did not apply to those notes.
Also,
it was a decision by Devonshire, not Barclays, which led to those notes
initially not being paid because they ranked pari passu with the Class A notes
.
[Emphasis added.]

[159]

Respectfully, in
our view, this finding ignores the obligation on Devonshire to honour the
pari
passu
ranking. As the trial judge noted, this ranking was established by
the Series A Supplemental Indenture, which was the subject of negotiations with
Barclays. In these circumstances, Barclays must have known that its failure to
make the liquidity payments would result in Devonshire withholding interest
payments on all classes of notes.

[160]

In our view,
Barclays failure to make the liquidity payments was a material contributing
cause of Devonshires insolvency in relation to all three classes of notes.
Accordingly, Barclays is barred by its own wrong from relying on Devonshires
insolvency as a basis for terminating the transaction.

[161]

Given our
conclusion with respect to misrepresentation and bad faith, this is simply an
additional basis for holding that Barclays Notice of Early Termination was
invalid.

(4)

Timing of the Cure Payment

[162]

The trial judge
provided detailed reasons for finding that Barclays Notice of Early
Termination was invalid because it was delivered before the funds were actually
credited to Devonshires account. Barclays submits that he erred in so holding.

[163]

In our view, it
is not necessary for this court to decide this issue given our conclusion with
respect to Barclays breach of good faith. We have concluded that given the
manner and timing of Barclays purported cure payment, it could not possibly
achieve the purpose for which it was designed. That conclusion would not be
altered were we to find that Devonshire should be deemed to have received funds
shortly after 9:00 a.m. before those funds were credited to its account at
about 11:00 a.m. Indeed, Barclays submission on this point  that Devonshire
should be deemed to have received the payment before the funds had found their
way into Devonshires account  demonstrates the highly artificial nature of
its overall position on the cure payment.

(5)

Waiver and Election

(a)

Did
Barclays waive its right to remedy its default?

[164]

At trial,
Devonshire argued that Barclays had waived its right to remedy its default by
failing to meet Devonshires demands to provide liquidity on August 13, 14 and
15, 2007. Devonshires position was that Barclays, by its failure, waived the
right to cure that default by making the payment on January 13, 2009. Devonshire
says that this waiver is another reason why Barclays was in default on January
13, 2009 and had no right to deliver a Notice of Early Termination.

[165]

The trial judge
rejected this argument. He concluded that Barclays had no intention to make the
liquidity payments demanded by Devonshire in August 2007 because Barclays did
not believe that an MDE had occurred. Consequently, Barclays did not consider
itself obliged to make the liquidity payments. However, the trial judge
concluded that the evidence could not sustain the conclusion that Barclays
intention would have remained the same even if its position regarding the
occurrence of an MDE were wrong. The trial judge went on to conclude that while
Barclays communicated its intention not to pay in August 2007, it did not
communicate to Devonshire that it waived its right to remedy its default later
on.

[166]

Devonshire renews
its argument in this court. In our opinion, it is simply disposed of. Both
conclusions of the trial judge referred to are findings of fact for which there
was ample evidence. There is no basis for us to interfere with them. We agree
with the trial judge that these findings create an insuperable obstacle for
Devonshires argument. Barclays did not have the unequivocal intention to
relinquish its right to meet Devonshires liquidity demands in the future. Nor
did it communicate such an intention to Devonshire. These two elements of
waiver were missing: see
Saskatchewan River Bungalows Ltd. v. Maritime Life
Assurance Co.
, [1994] 2 S.C.R. 490, at pp. 499-500.

(b)

Did
Barclays elect to abandon its right to rely on the insolvency of Devonshire?

[167]

At trial,
Barclays position was that Devonshire was insolvent on January 13, 2009 and
that, under the ISDA Master Agreement, the insolvency constituted an Event of
Default, which entitled Barclays to deliver a Notice of Early Termination on
that day.

[168]

Barclays did not
rely on any Event of Default prior to that date. However, as the trial judge
described it, Barclays case at trial was that Devonshires insolvency
commenced in August 2007 and continued throughout the Standstill Period.

[169]

At the outset of
the trial, the trial judge ruled that because of the scope of the bifurcation
order, Barclays could not lead evidence on the issue of Devonshires insolvency
prior to August 16, 2007, the date of the Suspension Notice. However, the
evidence left no doubt that Devonshire was insolvent on January 13, 2009. In
addition, throughout the Standstill Period, Barclays continued to pay premiums
to Devonshire for credit protection. Barclays did so despite saying Devonshire
was insolvent during the Standstill Period and despite the provision in the
ISDA Master Agreement that its obligation to make these payments was subject to
the condition precedent that no Event of Default or Potential Event of Default
(such as insolvency) had occurred with respect to Devonshire.

[170]

In these
circumstances, the trial judge concluded that, by continuing to make these
payments during the Standstill Period, Barclays elected not to exercise its
right to refuse to make these payments and thereby elected to keep the swap
contracts in effect. He held that Barclays was thus estopped from relying on
Devonshires insolvency as grounds for terminating the swap contracts. The
trial judge concluded that Barclays therefore did not have the right on January
13, 2009 to terminate the swap contracts on the basis of Devonshires
insolvency on that date.

[171]

In addition, the
trial judge held that the non-waiver provisions in the ISDA Master Agreement
were not strong enough to preclude his conclusion that Barclays had elected to
waive the right to rely on Devonshires insolvency as an Event of Default. These
provisions include s. 9(b), which requires that a waiver be in writing and
executed by the parties, and s. 9(f), which provides that a failure or delay in
exercising any right under the ISDA Master Agreement will not be presumed to
operate as a waiver.

[172]

Barclays attacks
that conclusion in this court. Its principal argument is that, while the trial
judge correctly articulated the legal principles of election, he erred in their
application. Barclays argues that trial judge committed a legal error when he
found that, because Barclays had paid premiums to Devonshire during the
Standstill Period, Barclays had elected not to terminate the swap contracts on
the basis of Devonshires insolvency after the Standstill Period came to an
end. Barclays says that there is no inconsistency between making payments
during the Standstill Period and eventually relying on an Event of Default
after the conclusion of that Period. Barclays also argues that the trial judge
erred in failing to apply the non-waiver provisions in the ISDA Master
Agreement. Finally, Barclays argues that Devonshire failed to raise the
election issue in its pleadings and should therefore not have been permitted to
advance it at trial. Devonshire joins issue with Barclays on all of these
arguments.

[173]

Our analysis
begins with the relevant legal principle, on which both parties agree. They
cite and rely on this courts decision in
Charter Building Company v.
1540957 Ontario Inc. (Mademoiselle Womens Fitness & Day Spa)
, 2011
ONCA 487, 107 O.R. (3d) 133, where Epstein J.A. put it this way, at para. 19:

Election at common law takes place where a party is faced with
a choice between two inconsistent courses of action that affect another partys
rights or obligations, and knowing that the two courses of action are
inconsistent and that he or she has the right to choose between them, makes an
unequivocal choice and communicates that choice to the other party. The
doctrine provides that the party making the election is afterwards precluded
from resorting to the course of action that he has rejected. The election is
effective at the point of communication on the basis that the parties to an
ongoing relationship are entitled to know where they stand . [Citation
omitted.].

[174]

Two provisions
of the ISDA Master Agreement are also germane to this issue. Section 5(a)(vii)
describes events that constitute an Event of Default, one of which is the
insolvency of a party. The relevant provision, repeated for ease of reference, reads
as follows:

5. Events of Default and Termination Events

(a)
Events of Default.
The occurrence at any time
with respect to a party  of any of the following events constitutes an event
of default (an Event of Default) with respect to such party:─

(vii)
Bankruptcy.
The party  (2) becomes
insolvent or is unable to pay its debts or fails or admits in writing its
inability generally to pay its debts as they become due.

[175]

Section 2(a)
sets out provisions regarding the requirement to pay money. The relevant part
of the section is this:

2.
Obligations

(a)

General Conditions
.

(i) Each party will make each payment or delivery specified
in each Confirmation to be made by it.

(iii)Each obligation of each party under Section 2(a)(i) is
subject to (1) the condition precedent that no Event of Default or Potential
Event of Default with respect to the other party has occurred and is continuing.

[176]

The consequence
of this provision is, as the trial judge found, that Barclays obligation to
make payments to Devonshire for credit protection was subject to the condition
precedent that there was no insolvency Event of Default on the part of
Devonshire.

[177]

We agree with
the trial judge that during the Standstill Period, Barclays could have refused
to make the premium payments on the basis of Devonshires insolvency. By making
the payments, however, Barclays chose a course of action inconsistent with its
option not to pay. Each payment constituted evidence of an election by Barclays
to waive its right not to pay due to Devonshires insolvency at that point in
time.

[178]

However, we
disagree with the trial judge that Barclays payments during the Standstill
Period constituted its election to waive its right to rely on Devonshires
insolvency forever, including after the conclusion of the Standstill Period. At
each point in time, Barclays choice was between, on the one hand, making the
credit protection payments and, on the other, relying on Devonshires
insolvency at that point and refusing to pay.

[179]

It was not
inconsistent for Barclays to make those payments during the Standstill Period
and yet, when the Standstill Period ended, to rely on Devonshires insolvency
then. As a matter of law, Barclays retained that right. Barclays could not have
used Devonshires insolvency
after
the Standstill Period ended to
excuse its payment obligations
during
the Standstill Period. By making
the credit protection premium payments during the Standstill Period, Barclays
did waive its right not to do so because of Devonshires insolvency at the time
those payments were made. However, making the payments during the Standstill
Period was not inconsistent with the right Barclays later acquired, to act on
the Event of Default and issue a Notice of Early Termination on the basis of
Devonshires insolvency after the Standstill Period ended.

[180]

We therefore
conclude that the trial judge erred in finding that Barclays had elected to
waive its right to rely on Devonshires insolvency on January 13, 2009, after
the Standstill Period had ended, as the Event of Default to justify the Notice
of Early Termination it delivered that day.

[181]

In light of this
conclusion, it is unnecessary to address Barclays arguments concerning the
non-waiver provisions in the ISDA Master Agreement and Devonshires failure to
plead the election issue.

(6)

Barclays Notice of
Early Termination: Conclusions

[182]

The issues of
misrepresentation, bad faith and benefiting from ones own wrong are closely
linked on the facts of this case. On the trial judges findings, the January 8
and 9 extensions of the Standstill were rescinded because of Barclays
fraudulent misrepresentation arising from the ultimatum. Whether Barclays
purported cure payment of January 13 was timely or not, it was invalid because
of Barclays breach of its duty of good faith. The breach of that duty, in
turn, was closely tied to the misrepresentation.

[183]

As we have
explained, it is our view that the findings as to misrepresentation and bad
faith are unassailable on this appeal. While we conclude that Devonshire gets
no help from its arguments that Barclays waived its right to cure its failure
to make the liquidity payments demanded in August and that Barclays elected to
waive its right to rely on Devonshires insolvency as an Event of Default, the
findings we view as unassailable render Barclays Notice of Early Termination
invalid.

[184]

Simply put,
Barclays was not a Non-defaulting Party within the meaning of s. 6(a) of the
ISDA Master Agreement with respect to Devonshires insolvency. Barclays
failure to make the liquidity payments was directly related to Devonshires
insolvency, the very Event of Default that Barclays relied on. Indeed,
Barclays entire strategy in purporting to cure its default prior to
delivering the Notice of Early Termination amounts to an admission that if it
did not make the promised liquidity payments it could not rely on Devonshires
insolvency as an Event of Default.

[185]

This conclusion
is related to and fortified by the principle that a party cannot benefit from
its own wrong. Barclays failure to make the liquidity payments was an Event of
Default and a significant cause of Devonshires insolvency. From both the
perspective of the common law and the language of s. 6(a), that precluded
Barclays from delivering a valid Notice of Early Termination.

[186]

We conclude,
accordingly, that the trial judge did not err in finding that Barclays' Notice
of Early Termination was invalid.

B) Issue 2. Is Devonshire's Notice of Early Termination valid?

(1) The Validity of Devonshires
Notice of Early Termination

[187]

We begin our
discussion in this section by noting once again that, as a result of the
bifurcation order, the following facts are assumed: (i) there was an MDE in August
2007; (ii) Devonshires market disruption notices and notice of default were
valid; and (iii) Barclays was in default under the notices sent by Devonshire
up to August 16, 2007 when the Standstill Agreement was entered into.

[188]

The trial judge
found that Devonshires Notice of Early Termination with respect to Barclays
failure to make the liquidity payments was valid. Although he concluded that
Devonshire was insolvent and that, under s. 6(a) of the ISDA Master Agreement,
only a Non-defaulting Party can deliver a valid Notice of Early Termination,
the trial judge found that Barclays had elected to waive reliance on
Devonshires insolvency. He therefore concluded that, for the purposes of s.
6(a) of the ISDA Master Agreement, Devonshire was a Non-defaulting Party and
entitled to deliver a valid Notice of Early Termination.

[189]

On appeal, we
have rejected the trial judges finding that Barclays elected to waive reliance
on Devonshires insolvency. Barclays adopts the trial judges implicit
conclusion that, under s. 6(a) of the ISDA Master Agreement, only a Non-defaulting
Party can deliver a valid Notice of Early Termination. As the trial judge held
that Devonshire was insolvent on January 13, 2009, Barclays submits that
Devonshires Notice of Early Termination is invalid.

[190]

We do not accept
Barclays submission or the trial judges apparent assumption that, but for
waiver, Devonshires insolvency would have precluded Devonshire from delivering
a valid Notice of Early Termination. In our view, that submission cannot be
sustained in the face of the wording of the relevant portions of s. 6(a) of the
ISDA Master Agreement, repeated for ease of reference:

6. Early
Termination

(a)

Right to Terminate Following Event of Default
.
If at any
time an Event of Default with respect to a party (the Defaulting Party) has
occurred and is then continuing, the other party (the Non-defaulting Party)
may, by not more than 20 days notice to the Defaulting Party specifying the
relevant Event of Default, designate a day not earlier than the day such notice
is effective as an Early Termination Date in respect of all outstanding
Transactions.

[191]

A party becomes
a Defaulting Party when an Event of Default occurs in respect to that party,
but an Event of Default does not automatically entail a termination. A Non-defaulting
Party may deliver a Notice of Early Termination, but need not. If no valid
Notice of Early Termination is delivered, by their terms, the Agreements are
not terminated.

[192]

As Firth puts
it: Where an Event of Default takes place, the party with respect to which it
has occurred is referred to as the Defaulting Party and the other as the
Non-defaulting Party: Simon Firth,
Derivatives
Law and Practice
, loose-leaf (London: Sweet & Maxwell, 2012),
at para. 11.044. The Event of Default is a condition precedent which gives the Non-defaulting
Party the option to serve a Notice of Early Termination.

[193]

As we read the
words of s. 6(a), the terms Defaulting Party and Non-defaulting Party refer to
a specific Event of Default. At issue on this appeal are two Events of Default:
Barclays failure to make the liquidity payments and Devonshires insolvency.
We are not persuaded that Devonshires insolvency made it ineligible to serve a
valid Notice of Early Termination under s. 6(a) of the ISDA Master Agreement
based on Barclays failure to make the liquidity payments.

[194]

As a practical
matter, there can be more than one Event of Default at any given time so that
each party can be both a Defaulting Party and a Non-defaulting Party with
respect to different Events of Default. If they are both non-defaulting parties
with respect to different purported Events of Default, each party has the right
to serve a Notice of Early Termination on the other. Firth refers to
simultaneous default and provides the following illustration: If neither
party performed on the due date, both would be in breach of contract. Either
could then give notice of the failure to pay or deliver to the other and, if
the default is not cured by the end of the grace period, close out the
outstanding transactions: at para. 11.049.

[195]

In our view, it
follows that there is nothing in the Agreements that precludes a party in
default under some other obligation from delivering a valid Notice of Early
Termination if it is a Non-defaulting Party with respect to the specified Event
of Default. Devonshire is a Non-defaulting Party with respect to Barclays
failure to make the liquidity payments. It follows that under the ISDA Master
Agreement, even if Devonshires insolvency made it a Defaulting Party with
respect to the Event of Default of insolvency, its insolvency did not preclude
it from delivering an effective Notice of Early Termination to Barclays under
s. 6(a) of the ISDA Master Agreement with respect to Barclays failure to make
the liquidity payments.

[196]

Indeed, as we
pointed out in our analysis of the validity of Barclays Notice of Early
Termination, Barclays failure to make the liquidity payments was a material
contributing cause of Devonshires insolvency in relation to all three classes
of notes. It follows, in our view, that both as a matter of strict
interpretation of the language of s. 6(a) and as a matter of interpreting the
Agreements to give their terms commercial efficacy consistent with established
common law principles, Devonshires insolvency did not preclude it from
delivering a valid Notice of Early Termination.

(2)

Repudiation

[199]

The trial judge
concluded his discussion of whether Devonshires Notice of Early Termination of
January 13, 2009 was valid by addressing the issue of repudiation. He found that
even if Devonshire was not able to deliver a Notice of Early Termination under
s. 6(a) of the ISDA Master Agreement, the doctrine of repudiation brought the
contract to an end on that day. Barclays conduct, including delivering its own
Notice and immediately commencing litigation following delivery, constituted a
firm refusal to perform its obligations under the contract. Such conduct
evinced Barclays clear intention not to be bound by the contract. Devonshire,
by its Notice of Early Termination, indicated that it too regarded the contract
as at an end and thus accepted Barclays repudiation.

[200]

Barclays
contests the trial judges conclusion. It argues that, by its actions, it
sought to affirm the contract, rather than to resile from it. In addition,
Barclays argues that Devonshire did not accept the repudiation, but instead
attempted to keep the contract alive. Finally, Barclays says that, in any
event, the express terms of the ISDA Master Agreement exclude the common law
doctrine of repudiation.

[201]

Devonshire, on
the other hand, says that Barclays conduct made clear that the bank would no
longer perform. Barclays mistaken belief that it was enforcing its rights
under the contract does not negate the finding of repudiation. Moreover,
Devonshires reliance on the termination provisions of the contract in its own
Notice of Early Termination is not inconsistent with its acceptance of
Barclays repudiation. Although the repudiation and its acceptance bring the
contract to an end, these termination provisions survive. Finally, Devonshire
says that the ISDA Master Agreement clearly contemplates common law remedies.
It does not exclude them.

[202]

We agree with
Devonshires position. We see no basis to disturb the trial judges conclusion.

[203]

In finding that
Barclays conduct constituted a repudiation of the contract, the trial judge
applied the proper legal analysis. He assessed whether that conduct, viewed
objectively, evinced an intention not to be bound by the contract. He correctly
set aside as immaterial Barclays mistaken belief that it was exercising its
contractual right. We agree with the trial judge that Barclays actions on
January 13, 2009 constituted a clear refusal to perform and that this conduct
demonstrated Barclays intention no longer to be bound by the contract. The
record fully supports these findings and they deserve deference in this court. We
would not interfere with them.

[204]

We would apply
the same analysis to the trial judges conclusion that Devonshire accepted
Barclays repudiation, and would not interfere with it. There was ample
evidence to sustain the finding that, by its conduct, Devonshire clearly and
unequivocally signalled that it accepted the repudiation. Devonshire did not
assert that it rejected the repudiation nor did it elect to have the contract
continue. Devonshires reliance on the termination provisions of the contract
is not inconsistent with that conclusion. While the accepted repudiation
discharged future obligations, it did not eliminate the provisions that deal
with the breach or termination of the contract. They survive, and it is those
provisions that Devonshire sought to rely on when it accepted the repudiation.

[205]

Finally, we
disagree with Barclays that the contract ousts the common law of repudiation. Plain
language would be required to do so: see
Modern
Engineering (Bristol) Ltd. v. Gilbert Ash (Northern)
,
[1974] A.C. 689 H.L. (Eng.),
at pp. 716-17. Not only is this contract devoid of any such language, but
we may draw an inference the other way. Section 9(d) of the ISDA Master
Agreement provides that the rights given in the contract do not exclude any
rights provided by law.

[206]

In summary, we
conclude that the trial judge was correct that, even if Devonshire was not able
to deliver a valid Notice of Early Termination, the common law principle of
repudiation resulted in the termination of the contract, thereby discharging
the parties from their future obligations under it.

C) Issue 3. Did the trial judge err in his determination of Barclays
Settlement Amount?

(1)

Introduction

[207]

As we have said,
the trial judge found that Barclays Notice of Early Termination was invalid;
that Devonshires Notice of Early Termination was valid; and that, in these
circumstances, under the Intercreditor Agreement, any amount payable to
Barclays on Early Termination was subordinated to the amount owing to
Devonshire noteholders for principal and interest.

[208]

Because of these
findings, it was not strictly necessary that the trial judge determine the
amount, if any, that would have been payable to Barclays under its Early
Termination Notice had it been the Non-defaulting Party.

[209]

Nonetheless,
because determination of the issue could be important for the second part of
the bifurcated trial, the trial judge chose to address it.

[210]

Under the terms
of the ISDA Master Agreement, the parties had the option of choosing various
methods of determining the amount payable on Early Termination of the CDSs.
They chose a method called Second Method and Market Quotation.

[211]

Under the Second
Method and Market Quotation formula, the amount payable on Early Termination is
the sum of the Settlement Amount (as determined by the Non-defaulting Party)
plus net Unpaid Amounts (the difference between Unpaid Amounts owing to the Non-defaulting
Party and Unpaid Amounts owing to the Defaulting Party). As the net Unpaid
Amounts were not disputed, in the event Barclays was the Non-defaulting Party,
the amount payable on Early Termination turned on Barclays determination of
the Settlement Amount.

[212]

Where the
Settlement Amount plus net Unpaid Amounts is a positive figure, the Defaulting Party
pays that amount to the Non-defaulting Party; if the Settlement Amount plus net
Unpaid Amounts is a negative figure, the Non-defaulting Party pays the Defaulting
Party that figure.

[213]

Under the ISDA
Master Agreement, the Settlement Amount is the Market Quotation amount for the terminated
transaction, so long as a Market Quotation amount can be determined and
produces a commercially reasonable result. To determine a Market Quotation
amount, a Non-defaulting Party must obtain at least three market quotations of
the amount that would have to be paid essentially to replace the terminated
transaction.

[214]

Where a Market
Quotation amount cannot be obtained or would not produce a commercially
reasonable result, the Settlement Amount is deemed to be the Non-defaulting
Partys Loss in relation to a terminated transaction.

[215]

Under the ISDA
Master Agreement, Loss is defined to include the amount a party reasonably
determines in good faith to be its total losses and costs  including any loss
of bargain.

[216]

In this case,
Barclays was unable to obtain
any
firm market quotations for the
terminated CDSs. Accordingly, using a model it had used to value the CDSs on a
daily basis prior to August 2007, Barclays calculated its Loss at $1.2 billion.

[217]

The trial judge
rejected Barclays calculation. He found that Barclays model did not value the
CDSs taking account of all their relevant features. In addition, he concluded
that Barclays had not established that $1.2 billion was a commercially
reasonable figure or that it reflected a value the market would have placed on
the CDSs.

[218]

Instead, the
trial judge accepted Devonshires experts opinion that a discounted cash flow
method of valuation was reasonable in the circumstances. Relying on this model,
the trial judge valued Barclays Loss at $12,000 but reduced it to $0 based on
mitigation. In arriving at this value, the trial judge declined to adopt
Devonshires experts view that the $12,000 figure should be increased by a
$264 million risk premium. Nor did he adopt her view that additional liquidity
payments Barclays would have had to make but for the Standstill Agreement
should be deducted from the calculation.

[219]

In its appeal of
this aspect of the trial judges decision, Barclays raises multiple issues. In
our view, these issues boil down to three basic questions:

i.

Did the trial judge err in rejecting Barclays determination of the
Settlement Amount?

ii.

Did the trial judge err in valuing Barclays Loss at $12,000?

iii.

Did the trial judge err in his treatment of mitigation?

(2)

Background

(a)

Contractual
provisions relevant to determining Barclays Settlement Amount

[220]

Section 6(e) of
the ISDA Master Agreement sets out alternate formulae contracting parties may
choose for determining the amounts to be paid on Early Termination of a
transaction. For termination involving an Event of Default, s. 6(e) gives
parties the option of choosing a payment method (either the First Method or
the Second Method) and also a payment measure (either Market Quotation or Loss).

[221]

When they
entered into the CDS transaction, Barclays and Devonshire selected Second
Method and Market Quotation as the formula that would apply for determining the
payment to be made on Early Termination.

[222]

Section
6(e)(i)(3) of the ISDA Master Agreement sets out the Second Method and Market
Quotation formula for an Early Termination payment, being the sum of the
Settlement Amount and the net Unpaid Amounts:

6. Early Termination

(e)
Payments on Early Termination.

(i)
Events of Default.
If the Early
Termination Date results from an Event of Default  (3)
Second Method and
Market Quotation
. If the Second Method and Market Quotation apply, an
amount will be payable equal to (A) the sum of the Settlement Amount
(determined by the Non-defaulting Party) in respect of the Terminated Transactions
and [the net Unpaid Amounts]. If that amount is a positive number, the
Defaulting Party will pay it to the Non-defaulting Party; if it is a negative
number, the Non-defaulting Party will pay the absolute value of that amount to
the Defaulting Party.

[223]

As we have said,
the net Unpaid Amounts are not in dispute. The quantum of the Early Termination
payment in the event Barclays is the Non-defaulting party therefore turns on
the calculation of the Settlement Amount.

[224]

Settlement
Amount, Market Quotation and Loss are defined in s. 14 of the ISDA Master
Agreement. The definition of Settlement Amount is important because it makes it
clear that where a Market Quotation amount cannot be determined or would not
produce a commercially reasonable result, the Settlement Amount is the amount
of the Non-defaulting partys Loss in relation to that transaction:

Settlement Amount
means, with respect to a
party and any Early Termination Date, the sum of:

(a) the Termination Currency Equivalent of the Market Quotations
(whether positive or negative) for each Terminated Transaction or group of
Terminated Transactions for which a Market Quotation is determined; and

(b) such partys Loss (whether positive or negative and without
reference to any Unpaid Amounts) for each Terminated Transaction or group of
Terminated Transactions for which a Market Quotation cannot be determined or
would not (in the reasonable belief of the party making the determination)
produce a commercially reasonable result.

[225]

The definition
of Market Quotation is also important because it makes clear Market Quotation
is a replacement value concept and that it will apply only where at least three
market quotations can be obtained. The definition stipulates that the Non-defaulting
Party is to request quotations from third-party market participants for an
amount to be paid to or by such party for a transaction that would have the
effect of preserving the economic equivalent of any payment or delivery that,
but for the Early Termination of the CDSs, would have been required after the
date of termination. If fewer than three quotations are provided, it will be
deemed that the Market Quotation amount cannot be determined. The definition of
Market Quotation, found in s. 14 of the ISDA Master Agreement, reads in part as
follows:

Market Quotation

means
, with respect to
one or more Terminated Transactions and a party making the determination,
an
amount determined on the basis of quotations from Reference Market-makers
.
Each
quotation will be for an amount, if any, that would be paid to such party
(expressed
as a negative number)
or by such party
(expressed as a positive number)
in consideration of an agreement between such party  and the quoting Reference
Market-maker
to enter into a transaction
(the Replacement Transaction)
that would have the effect of preserving for such party the economic
equivalent of any payment or delivery
(whether the underlying obligation
was absolute or contingent and assuming the satisfaction of each applicable
condition precedent)
by the parties
under s. 2(a)(i) in respect of such
Terminated Transaction or group of Terminated Transactions
that would, but
for the occurrence of the relevant Early Termination Date, have been required
after that date
. For this purpose, Unpaid Amounts in respect of the
Terminated Transaction or group of Terminated Transactions are to be excluded
but, without limitation, any payment or delivery that would, but for the
relevant Early Termination Date, have been required (assuming satisfaction of
each applicable condition precedent) after that Early Termination Date is to be
included.
If fewer than three quotations are provided, it will be deemed
that the Market Quotation
in respect of such Terminated Transaction or group
of Terminated Transactions
cannot be determined
. [Emphasis added.]

[226]

As noted above,
where Market Quotation cannot be determined, the Settlement Amount is the
amount of the Non-defaulting Partys Loss. The definition makes it clear that a
Non-defaulting Partys Loss in connection with a terminated transaction
includes any loss of bargain and that a party may, but need not, determine its
Loss by reference to market quotations. The relevant portions of the definition,
also in s. 14 of the ISDA Master Agreement, reads as follows:

Loss
means
, with respect to this
Agreement or one or more Terminated Transactions, as the case may be, and a
party, the Termination Currency Equivalent of
an amount that party
reasonably determines in good faith to be its total losses and costs (or gain,
in which case expressed as a negative number) in connection with this Agreement
or that Terminated Transaction or group of Terminated Transactions, as the case
may be,
including any loss of bargain, cost of funding
or, at the election
of such party but without duplication, loss or cost incurred as a result of its
terminating, liquidating, obtaining or re-establishing any hedge or related
trading position (or any gain resulting from any of them). Loss includes losses
and costs (or gains) in respect of any payment or delivery required to have
been made (assuming satisfaction of each applicable condition precedent) on or before
the relevant Early Termination Date and not made.
A party will determine
its Loss as of the relevant Early Termination Date or, if that is not
reasonably practicable, as of the earliest date thereafter as is reasonably
practicable
.
A party may (but need not) determine its Loss by reference
to quotations of relevant rates or prices from one or more leading dealers in
the relevant markets
. [Emphasis added.]

(b)

Barclays
evidence relating to the Settlement Amount

[227]

Mr. James Lee of
Barclays was responsible for calculating Barclays Loss as of the Early
Termination Date, January 13, 2009. Barclays claimed $1.2 billion as a Loss,
including $1.02 billion representing a model-based estimate of the mid-market
price of the CDSs. Mid-market price refers to the theoretical price at which
a credit protection buyer would offer to purchase the CDSs and offer price
refers to the price at which a credit protection seller would offer to replace
the CDSs. The remaining Loss consisted of hypothetical hedging costs and the
value of credit protection related to an asset-backed securities portion of the
transaction that would provide additional protection if the attachment points
were reached.

[228]

According to the
trial judge, Mr. Lee testified that, in order to determine the $1.02 billion
figure, Barclays proxied the Market Quotation process, meaning that Barclays
attempted to determine the replacement cost of the CDSs, assuming that Barclays
stood in the place of one of the dealers that it had asked to bid.

[229]

Barclays
calculated the $1.02 billion figure using a proprietary model it had developed
to determine what it calls a mark-to-market value of the CDSs on a daily basis
during the life of the CDSs. The Barclays model is referred to as a Gaussian
copula model because it uses assumptions about credit default spreads and
applies correlations (copula) between corporate swaps using a Gaussian (normal)
distribution. According to the trial judge, Mr. Lee testified that the mark-to-market
value derived from the model is a representation of the market value of a
derivative at a point in time using mid-market values.

[230]

Barclays called
two expert witnesses at trial to support Mr. Lees calculation of Loss: Dr.
John Hull, a professor of derivatives and risk management at the University of
Torontos Joseph L. Rotman School of Management, and Miles Draycott, a
consultant and former derivatives trader.

[231]

According to the
trial judge, Professor Hull testified that assets can be valued in two broad
ways: first, by using the valuations of related assets; or, second, by estimating
expected cash flows and discounting them to the present. Professor Hull
indicated that market practice is normally to use the first approach and, in
particular, a Gaussian copula model. Mr. Draycott testified that the only way
to value the CDSs in question here is to use a mark-to-market model.

(c)

Devonshires
evidence relating to the Settlement Amount

[232]

Ms. Leslie Rahl
testified as an expert witness for Devonshire concerning the quantum of the
Settlement Amount. Her primary position was that the CDSs should be valued as
of August 2007 rather than January 13, 2009. If August 2007 was rejected as the
valuation date, November 2007 was an appropriate alternative. In the absence of
the Standstill Agreement, November 2007 was when Barclays would have made
additional collateral calls and, presumably, the point at which the CDSs would
have terminated. If January 13, 2009 was chosen as the valuation date, she
opined that the CDSs should be valued using projected real-world losses and by
adding a normalized risk premium.

[233]

As the trial
judge selected January 13, 2009 as the valuation date and as that finding has
not been appealed, we will restrict our discussion of Ms. Rahls evidence to
her valuation evidence using that date and to her critique of Barclays
valuation.

[234]

Ms. Rahl
calculated the Settlement Amount in three steps. First, she estimated the
credit protection payments Barclays would have received from Devonshire over
the remaining life of the CDSs by calculating the projected losses in the two reference
portfolios during that period and discounting that amount to the present. This
step yielded expected losses of $12,347. Second, she added a normalized risk
premium in the amount of $264 million. Finally, she deducted the liquidity
payments she believed Barclays would have been required to make had the Standstill
Agreement not been in place.

[235]

In her report,
Ms. Rahl explained that, when valuing CDSs, it is common and permitted to
revert to a Loss calculation when poor liquidity makes it impossible to find a
valid market price. She explained that a Loss calculation involves, among other
things, finding a value of the bargain and that Barclays mark-to-model
method is intended to find the mid-market theoretical valuation. She confirmed
that a Loss calculation also requires finding the costs of re-hedging the
bargain in the market  and that such hedging costs are similar to moving
from a mid-market valuation to a bid-side market valuation.

[236]

Although Ms.
Rahl acknowledged that using a mark-to-model method (her terminology for
Barclays mark-to-market method) for valuation had become standard practice,
she opined that Barclays Loss calculation was unreasonable for two primary reasons.
First, it ignored elements of the transaction that reduced the value of the
bargain. Second, it relied exclusively on a mark-to-model method of valuation
at a time when other valuation methods were being used and yielding radically
different results.

[237]

According to Ms.
Rahl, the following features of the CDSs were customized features, not forming
part of a standard ISDA transaction, that ought to have been considered in
determining the value of the CDSs: (i) the liquidity feature requiring the swap
buyer to provide liquidity in some circumstances; (ii) the stop-loss
provision effectively requiring the credit protection provider to either
provide additional collateral or terminate the transaction if the 50 per cent collateral
trigger value was reached; and (iii) the limited-recourse provision, which
gave no recourse to Barclays to Devonshires assets once the collateral was
exhausted.

[238]

Concerning the
appropriate valuation method, Ms. Rahl was of the view that a number of events
leading up to January 2009 had changed the economics of the CDSs and created
what she viewed as temporarily aberrant risk premiums for CDSs in general: (i) the
17-month Standstill Agreement, an unprecedented factor in addressing issues surrounding
the calculation of Early Termination payments under an ISDA Master Agreement; (ii)
the 2008 financial crisis, which led to extreme illiquidity in the market; and (iii)
the temporary, but extraordinary, illiquidity in the market around January
2009.

[239]

Ms. Rahl
explained that market spreads for CDSs imply a loss that is generally much
higher than the real-world loss market participants actually expect. A risk
premium reflects the difference between the real-world estimate of loss and the
market implied estimate of loss. Because the reference portfolios in the
Devonshire CDSs consisted of super senior tranches that carried little risk of
default (credit risk), ordinarily, the market implied risk premium would make
up virtually the entire market value of the CDSs.

[240]

According to Ms.
Rahl, [c]onsensus opinion about the appropriateness of various valuation
techniques was being debated and reassessed in 2008 and 2009. As of April 2009,
the American Financial Accounting Standards Board (FASB) altered its previous
preference for a uniform method of finding a market valuation even in a liquid
market. Ms. Rahl stated: In view of a lack of robust market pricing and very
high risk premiums, FASB permitted corporations to use alternative methods,
such as mark-to-model or discounted cash flow analysis, in valuing certain
financial instruments.

[241]

In light of the aberrant
market conditions in January 2009, in Ms. Rahls view, it was appropriate to
consider other recognized valuation methods apart from a mark-to-model
valuation. Unlike a mark-to-model valuation in which credit risk and risk
premium are combined, a cash flow-based valuation separates out the credit risk
and risk premium features of a mark-to-model valuation. In her view, [t]he
potential dispersion between these approaches was very large in January 2009
and the subject of much debate.

[242]

In calculating
Barclays Loss, Ms. Rahl stated: [W]e do not dispute that there should be a
risk premium. However, she added what she referred to as a normalized risk
premium to her discounted cash flow credit risk figure because, in her opinion,
the unusual events of late 2008 and early 2009 resulted in extraordinarily high
and temporary risk premiums. She arrived at a normalized risk premium of $264
million by averaging risk premiums in the CDSs markets for August and November
2007, which she calculated using a Gaussian copula model. She also looked at
the risk premium in the CDSs market in April 2010 calculated in the same way
and determined it was at the same level as her average for August and November
2007.

(3)

The Trial Judges Reasons

[243]

After reviewing
Barclays evidence concerning its calculation of Loss, the trial judge stated
that the key difference between the experts is whether, in the circumstances
of this case, a mark to model or cash flow-based valuation is justifiable as of
January 13, 2009: at para. 393.

[244]

The trial judge
rejected the mark-to-model method as being appropriate in this case for three
main reasons.

[245]

First, he
rejected Barclays argument that Loss must be calculated by using a proxy for
Market Quotation because various English decisions have held that the Market
Quotation measure and the Loss measure are intended to lead broadly to the same
result.

[246]

In this regard,
the trial judge referred specifically to one of the English cases,
Peregrine Fixed Income Ltd. v. Robinson Department Store Public Co. Ltd.,
[2000] C.L.C. 1328 (Comm.), at para. 30, in which the court commented that the
Market Quotation measure and the Loss measure are intended to lead to broadly
the same result. He noted that, in that case, the court concluded that the
Market Quotation method led to a commercially unreasonable result and that it
was agreed that the figure for Loss was the present value of the future stream
of payments that would not have to be made by the Non-defaulting Party. The
trial judge concluded that, at least in that case, the method of valuing Loss
was not at all an attempt to use some model to proxy the Market Quotation
method of valuing the gain: at para. 400.

[247]

The trial judge
also noted that the definitions of Market Quotation and Loss are quite
different. In particular, unlike the definition of Market Quotation, the
definition of Loss does not prescribe any method to calculate it other than
that it must be reasonable. The trial judge observed that for the Market
Quotation method to work there must be a liquid market in the particular swap
product. Where there is no functioning market, he questioned the logic of
attempting to value Loss based on an artificially constructed market.

[248]

Second, the
trial judge found that Barclays model failed to value the CDSs based on all
the features laid out in the Agreements, including the collateral triggers, the
limited-recourse provision, and the stop-loss feature.

[249]

Third, the trial
judge reasoned that, without a Market Quotation determination of the Settlement
Amount, Barclays would have to establish that the market would be prepared to
replace Devonshire in the CDSs on the terms proposed by Barclays as
representing its Loss. If Barclays could not establish that, then Loss should
be determined on some other basis. The trial judge concluded that Barclays
could not establish that the market would replace the CDSs on the terms
Barclays proposed for several reasons:

·

he accepted Ms. Rahls evidence that the market for products such
as the Devonshire CDSs was highly illiquid as of January 13, 2009 because of
longstanding turmoil in the ABCP market and the 2008 financial crisis;

·

he rejected Mr. Draycotts evidence that there was a market for
the Devonshire CDSs in January 2009 and that there were observable market
inputs capable of supporting the model;

·

taking account of the fact that the Caisse, the largest investor
in the Canadian ABCP market, would no longer accept the terms of the original
Devonshire CDSs, the trial judge found it unlikely that any other investor
would have agreed to those terms; and

·

he accepted Ms. Rahls opinion that Barclays would not have
entered into a replacement transaction on the terms it proposed. While Barclays
maintained it would do so provided the collateral triggers were paid on
closing, the trial judge was not satisfied any evidence existed to support the
likelihood that such a transaction would occur.

[250]

In the result,
the trial judge concluded that the Barclays valuation was not commercially
reasonable. He then turned to Ms. Rahls cash flow-based valuation.

[251]

The trial judge
accepted Ms. Rahls evidence that the discounted value of expected losses in
the underlying bond portfolios over the life of the CDSs was $12,347. However,
he rejected her evidence that a normalized risk premium should be added to this
figure to determine Barclays Loss. He wrote, at paras. 431-32:

I have some difficulty with this theory. If a reasonable
forecast on a cash flow basis of what Barclays has lost by the termination of
the swaps is the key, I do not understand why the loss is not the present value
of the expected loss of $12,347. Dr. Hull agrees that the alternative cash flow
method of valuing an asset is to estimate the cash flow and then discount that
cash flow at an appropriate discount rate. He said nothing of adding some risk
premium. Ms. Rahl herself said in her report that one could argue that the cash
flow projection is the one. She went on to say, however, that to be
conservative, she would add a normalized risk premium to the cash flow.

However, the theory of what Barclays actual loss is would not
lead one to add a risk premium to an expected cash flow loss, based on a mark
to model basis, which Ms. Rahl says is not an appropriate way to value in
January 2009, let alone a premium of $264 million on $12,247. I do not
understand the conceptual basis for doing so. In my view, the loss to Barclays
is the present value of $12,347, which I will call $12,000 as it is not known
when the expected losses of the underlying portfolio would exceed the
attachment point of 16 and 15% on the two swaps.

[252]

Concerning
mitigation, the trial judge found that Barclays Loss should be reduced by the
value of any recovery it might receive on Devonshire notes it had purchased
from other investors for nominal consideration after the Early Termination Date.

[253]

The trial judge
agreed with Barclays that, to the extent that the ISDA Master Agreement contemplates
payments by a Non-defaulting Party to a Defaulting Party, the common law
position that only the party that breaches a contract is liable to pay has been
modified by the contract. Nonetheless the trial judge found that the
modification does not necessarily mean that common law contractual principles
are entirely abrogated: at para. 442.

[254]

In this regard,
the trial judge noted that, in 2008, Barclays purchased approximately $220
million in face value of Devonshire notes for nominal consideration from
Citibank, Desjardins and National Bank.

[255]

The trial judge
held, at para. 462:

[I]t seems to me that if Barclays were entitled to

payment
from Devonshire collateral
on a settlement on a Devonshire default for its
Loss,
and were able as well to recoup payment on the notes it acquired in
Devonshire
because Devonshire had more collateral than the settlement
amount to be paid to Barclays,
it would amount to Barclays obtaining double

recovery for its loss
.
To this extent, if Barclays Loss is less than
the available collateral plus Devonshires cash, there should be a deduction
from Barclays Loss calculation of the amount it will receive from its
Devonshire notes
so that the Loss payable to Barclays is net of the amount
it will receive on its Devonshire notes. [Emphasis added.]

[256]

Accordingly, the
trial judge reduced Barclays Loss to $0, as he was satisfied that Barclays
would receive full compensation for its Loss from its recovery on the
Devonshire notes it had purchased for nominal consideration.

(4)

Analysis

(a)

Did
the trial judge err in rejecting Barclays valuation of its Loss?

[257]

Barclays argues
that the trial judge made multiple errors in rejecting Barclays valuation of
its Loss.

[258]

First, Barclays
submits that the trial judge erred in holding that Loss is not a proxy for
Market Quotation. Barclays argues that the trial judge erred in rejecting the
interpretation of the English courts that Loss and Market Quotation are broadly
intended to achieve the same result: see
Anthracite Rated Investments
(Jersey) Ltd. v. Lehman Brothers Finance S.A.
, [2011] EWHC 1822 (Comm.), at
para. 116;
Australia & New Zealand Banking Group Ltd. v. Société Générale
,
[2000] C.L.C. 833 (C.A.), at para. 15;
Peregrine Fixed Income Ltd.
,

at para. 30;
Britannia Bulk Plc v. Pioneer Navigation Ltd.,
[2011]
EWHC 692 (Comm.), at paras. 44-45; and
Pioneer Freight Futures Company Limited
v. TMT Asia Limited,
[2011] EWHC 778 (Comm.), at para. 98.

[259]

For example in
Anthracite
,
at para. 116, after referring to the foregoing authorities, the court stated
the following:

Those authorities establish the following broad propositions:

(1) Loss and Market Quotation are, although different formulae,
aimed at achieving broadly the same result, so that outcomes derived from one
may be usefully tested by way of cross-check by reference to the other: see per
Mance LJ in the
Australia
case at paragraph 2, 15 and 22. This derives
from a concession in that case, but has subsequently been reaffirmed after
adversarial argument in the
Peregrine
case at paragraph 30, in the
Britannia
Bulk
case at paragraphs 44 to 46 and 51 and in the
Pioneer
case at
paragraphs 98 and 105. It is one of those sensible concessions which has
hardened into hornbook law.

[260]

Barclays
contends that the Market Quotation payment measure is plainly a replacement
cost calculation and that English jurisprudence has correctly determined that
the Loss payment measure is also a replacement cost calculation.

[261]

Barclays argues
that the trial judge erred by failing to accept Barclays mark-to-market model
as an appropriate method of valuing Loss. This is because mark-to-market models
are routinely used to value bespoke CDSs, since bespoke CDSs do not trade
regularly and thus must always be valued in the context of an illiquid market.
The trial judge also erred in treating the inability to obtain three firm
quotations as evidence of illiquidity in the market. Barclays submits that the
trial judges references in his reasons to specific terms of the ISDA Master
Agreement as demonstrating that Market Quotation and Loss are not the same
reflect a basic misunderstanding of the concept of Loss as a replacement cost
approach.

[262]

Second, Barclays
argues that the trial judge erred in holding that Barclays calculation was
flawed because it failed to value the CDSs based on all the features laid out
in the Agreements, including the collateral triggers, the limited-recourse
provision, and the stop-loss feature.

[263]

Barclays
contends that the trial judge ignored the requirement in the ISDA Master
Agreement and the suggestion in the English case law that Loss should be
calculated assuming that the transaction would have proceeded to a conclusion
and that the parties would have complied with all payment obligations. The
English authorities have referred to this method of valuation as valuing
clean: see e.g.
Anthracite
, at
para. 116. Expressed another way, Barclays argues that the trial judge erred by
valuing the transaction dirty rather than clean, as disapproved of in
Anthracite
,
at para. 129, i.e. by reference to the real world following default, rather
than the hypothetical world called for by the authorities on Section 6 of the
[ISDA] Master Agreement.

[264]

Finally,
Barclays submits that the trial judge erred in holding that, absent a Market
Quotation determination, Barclays must show on a balance of probabilities that
the market in fact would have been prepared to enter into a replacement
transaction on the terms asserted by Barclays in its Loss claim, failing which
Loss must be determined on some other basis. Once again, Barclays submits that
this conclusion violates the principle that Loss must be valued clean rather
than dirty, that is, by assuming that all necessary conditions for fulfilment
of the contract will be satisfied.

[265]

In support of
its second and third arguments, Barclays relies, for example, on the following
statement in
Anthracite
, at para. 116, which continues the quotation
set out earlier in these reasons:

(2) The identification of the non-defaulting partys loss of
bargain arising from the termination of the Derivative Transaction requires a
clean rather than dirty market valuation of the lost transaction. This
means that the loss of bargain must be valued on an assumption that, but for
termination, the transaction would have proceeded to a conclusion, and that all
conditions to its full performance by both sides would have been satisfied,
however improbable that assumption may be in the real world: see in the
Australia
case at paragraphs 5, 22 to 27 and 30-31, the
Britannia Bulk
case at
paragraphs 11 to 14 and 34-35, and in the
Pioneer
case at paragraphs 112
to 117.

[266]

We acknowledge
that in some parts of his reasons, the trial judge may have disregarded the
apparently well-established practice of using Gaussian copula models to value
bespoke CDSs in an illiquid market. We also acknowledge that the trial judge
did not take the broad pronouncements of the English authorities concerning
valuing Loss clean rather than dirty into account. Those cases suggest that
a Non-defaulting Partys loss of bargain must be valued on an assumption that,
but for termination, the transaction would have proceeded to a conclusion, and
that all conditions to its full performance by both sides would have been
satisfied:
Anthracite
, at para. 116.

[267]

However, even
assuming that the trial judge erred in either or both respects, we are not
persuaded that he erred in rejecting the Loss valuation produced by Barclays model.

[268]

As the trial
judge observed, the ISDA Master Agreement requires a Non-Defaulting Partys
calculation of Loss to be reasonable and made in good faith. It must also
produce a commercially reasonable result: see e.g. Firth, at para. 11.140.

[269]

In this case, as
Ms. Rahl noted in her report, the 17-month Standstill pending the effort at
restructuring created a unique and unprecedented challenge to valuing the Non-defaulting
Partys Loss.

[270]

According to Ms.
Rahl, the ISDA Master Agreement presumes the CDSs would be promptly unwound
upon an Event of Default at spreads consistent with the market conditions that
precipitated the default. Applying quite different market circumstances 17
months later, in circumstances where liquidity calls, collateral calls and stop-loss
features were suspended in the intervening period, departs from the original
intent of the ISDA Master Agreement. Particularly given the events that
occurred during the intervening 17-month period, including the 2008 financial
crisis, the extreme illiquidity in the market, and the temporarily aberrant
risk premiums that existed in January 2009, the operation of the Standstill Agreement
rendered Barclays model-based valuation of Loss commercially unreasonable.

[271]

In normal
circumstances, the special features of the swaps (including the liquidity
feature, the stop-loss feature, and the limited-recourse provision) effectively
capped the real value of the CDSs to Barclays on termination at the amount of
the posted collateral in place at any particular time. In effect, Barclays use
of its model-based valuation was an attempt to shift the entire consequences of
failing to achieve a restructuring during the Standstill on to Devonshire.

[272]

Moreover, as the
trial judge found, as of January 2009, there was simply no willing buyer and no
willing seller for the CDSs at any price approximating that produced by
Barclays model. The significant inflation in risk premiums during the Standstill
Period had caused the model-based value of the CDSs to increase beyond any
realistic estimate of their underlying real worth, taking account of their
special features.

[273]

None of the
English authorities relied on by Barclays address the proper approach to
valuation in circumstances involving the Standstill Agreement. Having regard to
the unique circumstances created by the Standstill Agreement, in our view, the
trial judge did not err in expressing the following conclusions, at paras. 422-23
of his reasons:

In my view, Barclays has not established that the model that it
used to value the Devonshire swaps with its conditions as they existed from the
time the swaps were agreed in 2006. What a different model might have
calculated is of course not before me.

Nor am I satisfied that Barclays has established on a balance
of probabilities that its claimed loss of $1.2 billion is a value that the
market in fact would have placed on the Devonshire swaps and that its loss
calculation is commercially reasonable. While its model indicated that its Devonshire
swaps were in the money, and that their value was $1.2 billion, the evidence
does not support such a real value. It is an artificial construct. Barclays has
not established that the swaps had the replacement value it claims they had at
the time it decided to terminate the Devonshire swaps in January, 2009.

[274]

Barclays argues
that the trial judge dismissed the effect of the Standstill Agreement as being
a consideration relevant to valuation when he rejected Ms. Rahls opinion that
Barclays Loss should be valued as of a date other than January 13, 2009. As
Devonshire did not appeal this finding, Barclays submits that the effect of the
Standstill Agreement is not a relevant consideration on appeal. We do not
accept that submission.

[275]

In concluding
that January 13, 2009 was the contractually required date for valuation, the
trial judge stated, at para. 374:

While there is a reasonableness requirement involved in
establishing a loss under an ISDA Master Agreement, I do not think that it is
permissible on that ground to change the valuation date to a date other than as
prescribed. The definition of Loss in the ISDA Master Agreement provides that
the party will determine its Loss as of the relevant Early Termination Date or,
if that is not reasonably practicable, as of the earliest date thereafter as is
reasonably practicable. If the loss calculation is determined to be
commercially unreasonable, that may require a different calculation of loss,
but it would not permit the valuation date to be changed.

[276]

In our view,
although the trial judge was satisfied that the valuation date could not be
changed because of the Standstill Agreement, he did not conclude that the Standstill
Agreement was irrelevant.

[277]

Accordingly, we
would not give effect to Barclays arguments that the trial judge erred in
rejecting its calculation of its own Loss.

(b)

Did
the trial judge err in valuing Barclays Loss at $12,000?

[278]

Barclays asserts
that the trial judge made three main errors in valuing its Loss at $12,000.

[279]

First, Barclays
relies on its submission that the Market Quotation payment measure is plainly a
replacement cost calculation and that English jurisprudence has correctly
determined that the Loss payment measure is also a replacement cost
calculation. Barclays submits that the trial judge erred in his attempt to
distinguish the English authorities and that his calculation of Loss results in
a figure that in no way approximates the replacement cost of the CDSs on the Early
Termination Date.

[280]

Second, Barclays
submits that the trial judge demonstrated a fundamental misunderstanding of the
loss of bargain component of Loss when he rejected Ms. Rahls opinion that a
risk premium should be added to her discounted cash flow figure.

[281]

Third, Barclays
disputes Ms. Rahls assertion that the risk premium to be added should be
normalized. According to Barclays, Ms. Rahls opinion that a normalized risk
premium should be added to her discounted cash flow figure is nothing more than
an attempt to change the valuation date from January 13, 2009 (the Early Termination
Date) to some other date.

[282]

We agree that
the trial judge demonstrated a misunderstanding of the loss of bargain
component of Loss when he rejected Ms. Rahls opinion that a normalized risk
premium should be added to her discounted cash flow figure.

[283]

According to Ms.
Rahl, her discounted cash flow figure represented the present value of the
projected losses that would occur in the two reference portfolios from the Early
Termination Date to maturity. However, that figure did not take account of the
market implied estimate of projected losses, or risk premium that is part of
the cost of purchasing credit protection. Put another way, Loss includes the Non-defaulting
Partys loss of bargain for the CDSs. Accordingly, by rejecting the normalized
risk premium component of Ms. Rahls opinion, the trial judge valued the likely
loss to be suffered in the underlying portfolios; he did not value the loss of
bargain in relation to the CDSs.

[284]

As of January
13, 2009, Barclays was paying Devonshire $3.6 million per year to obtain credit
default protection on the two reference portfolios. That was the price agreed
upon for credit default protection in 2006 when the CDSs were established  and
that was at a time that preceded the events that led to a dramatic increase in
the price of credit default protection. Considered in this context, the $12,000
figure arrived at by the trial judge clearly ignores Barclays loss of bargain
in losing the benefit of the CDSs. It also ignores the evidence of all the
experts that a risk premium constitutes a significant component of the price of
a CDS.

[285]

In our view, Ms.
Rahl did not err in adding a normalized risk premium to her discounted cash
flow figure. For the reasons we have already explained, Barclays use of its
model-based valuation as of January 13, 2009 produced a commercially
unreasonable result. That said, it was undisputed among the experts at trial
that use of a Gaussian copula model to value bespoke CDSs had become standard
practice.

[286]

As we have said,
Ms. Rahl arrived at a normalized risk premium of $264 million by averaging risk
premiums in the CDSs markets for August and November 2007, which were
calculated using a Gaussian copula model. She also looked at the risk premium
in the CDS market in April 2010 (calculated in the same way) and determined it
was at the same level as her average for August and November 2007.

[287]

In her report,
Ms. Rahl provided the following explanation for adding a normalized risk
premium to her discounted cash flow figure:

An estimate of loss that starts with projected real-world cash
flows but that is nonetheless consistent with market practice in normal times
should also, in our opinion, include a normalized risk premium. The events of
late 2008 and early 2009 resulted in extraordinarily high and temporary risk
premiums, as we have seen previously in this report. Adding losses projected
from cash-flows to a normalized risk premium results in a loss estimate that
is consistent with a mark-to-model or mark-to-market approach in normal times,
but that also discounts the extraordinarily and temporarily high risk premiums
of the financial crisis. Projected real-world losses before and after the
crisis are typically very small or deminimus for AAA-rated investments. The
swap value in question in normal times is therefore likely comprised entirely
of normalized risk premium as at all times the actual and expected real-world
loss projections are deminimus. Adding such a normalized swap value to the
real-world losses that are projected during the midst of a crisis results in a
loss estimate that is not inflated by temporary and aberrant illiquidity and
risk premiums.

[288]

In all the
circumstances, we agree that this reflects a reasonable approach to valuation.
Moreover, in our view, had the trial judge properly understood the need to
recognize the loss of bargain component relating to the credit protection
contract aspect of the CDSs, he would undoubtedly have accepted Ms. Rahls evidence
in this regard.

[289]

Accordingly, we
accept Barclays submission that the trial judge erred in calculating Barclays
Loss as $12,000 and we substitute a figure of $264 million.

(c)

Did
the trial judge err in his treatment of mitigation?

[290]

As we have said,
the trial judge held that Barclays Loss should be reduced by the value of any
recovery it receives on the $220 million face value of Devonshire notes it
purchased from other investors in 2008 for nominal consideration.

[291]

Barclays
contends that, in reaching this conclusion, the trial judge made multiple
errors. First, he erred in concluding that mitigation principles apply to a
Loss calculation. Second, he erred in failing to recognize that Barclays
entitlements under the CDSs and as a noteholder are separate and distinct.
Third, he erred in finding that steps taken by Barclays prior to the
termination date should be recognized as mitigation. Fourth, he erred in
failing to recognize that, if Barclays recovery on the CDSs is to be reduced
by the amount of its recovery on its notes, more collateral will be available
for distribution to the noteholders (including Barclays), which will further
reduce Barclays recovery on the CDSs, which will again make more collateral
available for distribution, and lead to an illogical
ad infinitum
calculation.

[292]

We do not accept
these submissions.

[293]

On our review of
his reasons, the trial judge carefully considered the definition of Loss and
other relevant contractual provisions together with the relevant case law and
commentary dealing with the question of the applicability of principles of
mitigation. While he agreed with Barclays that common law principles have been
modified to the extent that the ISDA Master Agreement contemplates payments by
a Non-defaulting Party to a Defaulting Party, he concluded that that does not
necessarily mean that common law contractual principles are entirely abrogated:
at para. 442.

[294]

We agree with
that conclusion. Moreover, like the trial judge, we consider that certain
aspects of the Agreements point to a duty to mitigate, or at least a duty to
take reasonable steps to avoid losses and costs:

·

Loss is defined to include an amount that a party reasonably
determines in good faith to be its total losses and costs
including any
loss of bargain
 (emphasis added)  as the trial judge noted, this
language may import common law principles because compensating a contracting
party for the loss of bargain on the termination of contract is precisely what
the common law measure of damages is meant to achieve; and

·

the party determining Loss is required to act reasonably and in
good faith  this is consistent with a contracting partys duty to mitigate,
and, as Firth points out, at
para. 11.148,
likely
requires the determining party to reflect costs or losses that have been
avoided in the Loss calculation.

[295]

We see no error
in the trial judges conclusion that the parties did not expressly contract out
of the necessity of mitigation. Further, we are not satisfied that the case law
relied on by Barclays does anything more than make it clear that the ISDA
Master Agreement departs from common law principles to the extent that it
contemplates payments by a Non-defaulting Party to a Defaulting Party.

[296]

As for Barclays
arguments that the trial judge failed to recognize that its entitlement under
the CDSs and as a noteholder are separate and distinct and that it purchased
the notes prior to the Early Termination Date, we agree with the trial judges assessment.
He concluded that if Barclays were entitled to payment from Devonshire
collateral  on a Devonshire default for its Loss, and were able as well to
recoup payment on the notes it acquired in Devonshire because Devonshire had
more collateral than the Settlement Amount to be paid to Barclays, it would
amount to Barclays obtaining double recovery for its Loss: at para. 462.

[297]

In this regard,
we note the trial judges observation that Mr. Lee of Barclays described the
purchase of these notes in different ways, including as buying back the risk,
being a hedge for our original $6 billion trade and being equivalent to a
sell of protection: at para. 460.

[298]

Although
Barclays maintains that its hedging strategies have nothing to do with the
replacement value of the CDSs and that its distinct capacities negate double
recovery, the circumstances of this case raise the irresistible inference that Barclays
was able to purchase the notes for nominal consideration because the notes were
perceived to be less valuable as a result of Barclays accumulating Loss. In
these circumstances, neither the timing of the purchase, nor the difference in
capacities, alters the fact that Barclays Loss will be offset by its recovery
on the notes.

[299]

We see 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. If the parties are unable to agree on an appropriate amount to be
deducted from Barclays Loss of $264 million on account of mitigation, and if
the issue becomes relevant, we refer it to the trial judge or the judge
conducting the second phase of the bifurcated trial, if it takes place, for
determination.

D) Issue 4: Did the trial judge err in his determination of
the issues of priorities, subordination and non-recourse?

(1)

Priorities and Subordination

[300]

Paragraph 1(c)
of the formal judgment provides that any Settlement Amount payable to Barclays
from Devonshire upon termination of the ISDA Master Agreement is subordinated
to the prior payment of certain amounts, including amounts payable to the
Devonshire noteholders for principal and interest.

[301]

Paragraph 1(c)
is premised on the trial judges findings that: Barclays Notice of Early
Termination was invalid; Devonshires Notice of Early Termination was valid;
and, in these circumstances, under the terms of s. 2.2(c) of the Intercreditor
Agreement, any Settlement Amount payable to Barclays is subordinated to the
prior payment of amounts owing to the Devonshire noteholders.

[302]

The relevant
portion of s. 2.2(c) of the Amended and Restated Intercreditor Agreement reads
as follows:

The parties hereto acknowledge and agree as follows:

(c) so long as any Series A Indenture Obligations are
outstanding, if an Early Termination Date is designated under the Devonshire
Financial Contract by reason of an Event of Default with respect to the Bank
any Settlement Amount payable to the Bank pursuant to Section 6(e) of the
Devonshire Financial Contract  shall be subordinated to the prior payment of
the amounts specified in paragraphs (a), (b), (c), (d) [which includes the
Devonshire noteholders] and (e) of Section 3.1 of the Series a Supplemental
Indenture.

[303]

Barclays does
not dispute that, if its Notice of Early Termination is invalid, and, if
Devonshire designated a valid Early Termination Date under a valid Notice of
Early Termination, s. 2.2 of the Intercreditor Agreement subordinates any
Settlement Amount owing to it to the prior payment of the Devonshire
noteholders. We agree.

[304]

As we have
reached the same conclusions as the trial judge concerning the validity of the
parties respective Notices of Early Termination (albeit for somewhat different
reasons), it is unnecessary to address the additional arguments raised by the
parties concerning priorities and subordination in the event we had reached
conclusions that differed from the trial judges conclusions.

(2)

Limited-recourse

[305]

At trial,
Barclays argued that if any Settlement Amount due to it from Devonshire
exceeded the initial payments of $600 million made by Devonshire, under the
terms of the parties Agreements, it was entitled to be paid any such excess from
the residual assets of Devonshire. Although it was not strictly necessary
that he address it, the trial judge rejected this argument.

[306]

Barclays renewed
this argument on appeal. In the light of our conclusion concerning the
Settlement Amount, it is unnecessary that we address it.

VI. CONCLUSION

[307]

In conclusion,
we dismiss the appeal for the following reasons:

·

Barclays Notice of Early Termination with respect to
Devonshires insolvency was invalid because of Barclays misrepresentation and
bad faith, and because Barclays cannot be permitted to benefit from its own
wrong.

·

Devonshires Notice of Early Termination with respect to
Barclays failure to make the liquidity payments was valid.

·

In any event, even if Devonshires Notice of Early Termination
was invalid, Barclays repudiated the Agreements and Devonshire accepted the
repudiation.

·

The trial judge erred in his determination of Barclays
Settlement Amount and we substitute a figure of $264 million for Barclays
Loss. If the parties are unable to agree on the amount that should be deducted
from the $264 million on account of mitigation, we refer this issue back to the
trial judge or to the judge conducting the second phase of the bifurcated trial,
if it takes place, for determination.

·

Given our conclusions on the first three questions, it is not
necessary for us to decide the issues of priorities, subordination, or whether
Barclays had limited recourse to Devonshires assets.

VII. COSTS

[308]

If the parties are
unable to agree as to the costs of the appeal, they may make brief submissions in
writing of not more than 10 pages within 45 days of the release of this
judgment.

Released: July 26, 2013 (S.T.G.)

S.T. Goudge J.A.

Robert J. Sharpe J.A.

Janet Simmons J.A.