Home > Selected Cases > Barclays Bank v. Devonshire Trust
Canadian ABCP Crisis | Synthetic CDS Valuation | Liquidity Provision Dispute | Ontario Courts
When the Canadian asset-backed commercial paper market froze in August 2007, a single dispute stood apart from the broader restructuring: Barclays Bank versus Devonshire Trust. Unlike the 20 other conduits that joined the Montreal Accord, Devonshire pursued its claims independently — ultimately prevailing at trial and on appeal and recovering approximately $300 million. CMRA served as expert witness for Devonshire Trust throughout the proceedings.
Case at a Glance
| Case | Barclays Bank PLC v. Metcalfe & Mansfield Alternative Investments VII Corp. (Devonshire Trust) |
| Jurisdiction | Ontario Superior Court of Justice; Ontario Court of Appeal |
| Trial | September 2010 – June 2011 (Justice Newbould) |
| Appeal Decision | 2013 (unanimous dismissal of Barclays' appeal) |
| Amount in Dispute | Barclays claimed loss of $1.2 billion; collateral priority over $600 million |
| Outcome | Devonshire Trust prevailed at trial and on appeal; recovered approximately $300 million |
| CMRA Role | Expert witness for Devonshire Trust; Leslie Rahl testified (1 full day + 2 half days); 2 expert reports submitted; rebutted 3 Barclays experts |
Background: The Canadian ABCP Crisis
In 2006, Barclays Bank entered into a structured transaction with Devonshire Trust, a special-purpose conduit managed by Metcalfe & Mansfield. Devonshire issued approximately $660 million in short-term asset-backed commercial paper (ABCP) to investors and used the proceeds to purchase two leveraged synthetic credit default swap (CDS) contracts from Barclays, referencing a super-senior tranche of a corporate bond portfolio. Barclays simultaneously agreed to serve as liquidity provider — committing to fund repayment of maturing ABCP notes in the event of a "Market Disruption Event" (MDE).
The deal reflected the financial engineering of the mid-2000s: AAA-rated on the surface, leveraged and complex underneath. The transaction took nine months to negotiate and involved extensive legal documentation that, as Justice Newbould observed, would challenge even the most seasoned contract lawyer.
On August 13, 2007, the Canadian non-bank ABCP market froze. Subprime-related contagion made it impossible for conduits to roll maturing notes. Devonshire sent disruption notices to Barclays, triggering its liquidity obligations. Barclays refused to pay, disputing whether the market conditions constituted a contractually defined MDE. On August 14, 2007, Devonshire declared Barclays in default.
What followed was the Montreal Accord — a standstill and restructuring process that resolved the ABCP crisis for 20 of the 22 affected conduits. Barclays declined to participate. Devonshire, its largest investor being the Caisse de dépôt et placement du Québec, was left outside the restructuring framework and became the only conduit that remained in dispute.
The Litigation
On January 13, 2009 — the same day the Montreal Accord restructuring was finalized — Barclays purported to terminate its swap agreements with Devonshire, claiming Devonshire was insolvent and that an Event of Default had occurred. Barclays simultaneously launched suit, asserting losses of $1.2 billion and claiming priority over $600 million in collateral held by the Bank of New York.
Devonshire counterclaimed, arguing that Barclays had itself defaulted by refusing to provide liquidity, and that noteholders — not Barclays — had priority to the collateral.
The trial was bifurcated. The first phase, before Justice Frank Newbould of the Ontario Superior Court, ran from September 2010 to June 2011 — a major commercial litigation by any measure. It addressed liability, good faith obligations, and the proper termination of the swaps.
Key Legal Issues
• Whether the August 2007 ABCP market freeze constituted a "Market Disruption Event" under the transaction documents, triggering Barclays' liquidity obligations
• Whether Barclays breached its duty of good faith in the manner in which it communicated with Devonshire during the standstill negotiations in January 2009
• Whether Barclays' misrepresentations about the state of negotiations with the Caisse entitled Devonshire to rescind the final two standstill extensions and terminate the swaps
• Whether Barclays or Devonshire's noteholders had priority to the $600 million in collateral
• Valuation of Barclays' claimed loss on the synthetic CDS positions
The Judgments
Justice Newbould found comprehensively for Devonshire. He held that Barclays had committed to pay Devonshire's liquidity demands and had fraudulently misrepresented the state of its negotiations with the Caisse — specifically, that internal Barclays communications showed the bank had already decided to terminate and litigate even as its representatives told Devonshire that talks were continuing. Barclays' cure period, extended by regular standstill agreements, was rescinded on grounds of misrepresentation.
On the critical damages question, Justice Newbould rejected Barclays' loss calculation entirely. Against Barclays' claimed loss of $1.2 billion, he assessed Barclays' actual loss at $12,000 — and then reduced that to nil on mitigation grounds. He also held that Devonshire's noteholders had priority to the $600 million in collateral over Barclays.
The Ontario Court of Appeal dismissed Barclays' appeal in a unanimous decision by Justices Goudge, Sharpe, and Simmons. The Court upheld both the misrepresentation finding and the good faith ruling, affirming that Barclays' conduct in terminating the transaction had breached its contractual obligations to Devonshire. The case became a significant precedent in Canadian commercial law on good faith performance of contractual obligations.
CMRA's Role
CMRA served as expert witness for Devonshire Trust throughout the litigation. Leslie Rahl testified for one full day and two half days at trial — a substantial engagement reflecting the complexity of the valuation questions at issue.
CMRA submitted two expert reports addressing the valuation of the synthetic CDS positions and rebutted the expert reports of all three of Barclays' witnesses. The court's rejection of Barclays' $1.2 billion loss claim in favor of Devonshire's position reflected the effectiveness of CMRA's expert analysis.
The case drew on CMRA's core expertise: structured finance instruments, CDS valuation methodology, and the quantitative analysis of complex derivatives in a litigation context. With $600 million in collateral priority at stake alongside the loss calculation, the financial stakes were among the largest in any derivatives matter in which CMRA has served.
Significance
Barclays v. Devonshire Trust is one of the landmark derivatives disputes of the post-financial crisis era and the most consequential ABCP litigation in Canadian legal history. Its significance spans multiple dimensions:
• It established important precedent on the good faith performance of derivatives contracts under Canadian law — specifically on the duty of candor between counterparties during cure and standstill periods.
• It demonstrated that courts would scrutinize — and reject — inflated loss calculations by sophisticated bank counterparties when those calculations were not grounded in credible valuation methodology.
• It resolved one of the most complex structured finance disputes arising from the 2007 credit market dislocation, involving leveraged synthetic super-senior CDS instruments that had resisted restructuring for years.
• It confirmed that noteholders in a structured conduit can hold priority over a swap counterparty even in an Event of Default scenario, with significant implications for ABCP and related structured vehicle documentation.
For CMRA, the case exemplifies the firm's ability to provide authoritative, court-tested expert testimony at the intersection of structured finance, derivatives valuation, and complex commercial litigation.