ISDA Force Majeure Provisions – competing notices
In light of recent events, attention has been focussed on whether or not force majeure Termination Events have been, or are close to being, triggered under 2002 ISDA Master Agreements.
We are all navigating unchartered waters as business and society faces up to the impact of COVID-19. We very much hope you and your loved ones remain in good health.
Please be assured that Fieldfisher is continuing to work with clients to navigate COVID-19 related issues and on business as usual needs. Do get in touch with us if you would like to chat anything through.
Whether or not a "Force Majeure Event" has actually occurred would need to be analysed on its individual facts and this could be complicated given that there is no generally applicable definition of "force majeure" (which is the term used in the 2002 ISDA Master Agreement) under English law. Even if a "force majeure or act of state" has occurred, it is also necessary that the party affected has used (and continues to use) all reasonable efforts to overcome the effect of that event in order for a Force Majeure Event to occur and subsist.
The underlying concern is whether or not the effective designation of an Early Termination Date due to a Failure to Pay or Deliver Event of Default can be thwarted by a counterparty counter-claiming that a Force Majeure Event had instead occurred.
The occurrence of a Force Majeure Event under Section 5(b)(ii) of the 2002 ISDA Master Agreement automatically triggers an 8 Local Business Day Waiting Period (which starts on the date on which the Force Majeure Event occurs) and no Failure to Pay or Deliver Event of Default would apply with respect to any related payment or delivery failure under Section 5(a)(i) during that Waiting Period if the Force Majeure Event is continuing. This is because Section 5(d) provides for the suspension of all payments and deliveries under any Affected Transaction (not just those of the party affected) until the day following the end of the Waiting Period (or until after the event ceases if sooner).
If a party is aware that a Force Majeure Event has occurred and proceeds to serve notice designating an Early Termination Date as a result of, say, the occurrence of a Failure to Pay or Deliver, such designation is likely to be held to be invalid. The position could be more nuanced, however, where the parties have come to different conclusions as to whether or not a Force Majeure Event has actually occurred or where neither party had given notice of it.
Under Section 6(b)(i) of the 2002 ISDA Master Agreement, each party must use reasonable efforts to notify the other party of the occurrence of a Force Majeure Event promptly upon becoming aware of it, and must also give the other party such other information about that Force Majeure Event as the other party may reasonably require. The obligation is not just on the party whose performance is affected by the Force Majeure Event.
The case of Nuovo Safim SpA v Sakura Bank Ltd [1999] 2 All ER (Comm) 526 suggests (albeit obiter) that a party who fails to give such notice may be estopped from designating an Early Termination Date relating to the occurrence of a Force Majeure Event. Nuovo Safim concerned the occurrence of an Illegality Termination Event under the 1992 ISDA Master Agreement but it is analogous to the Force Majeure Event in many respects. It is less clear whether or not Nuovo Safim could also be invoked against a counterparty who has rejected a related Early Termination Date designation (following a purported Failure to Pay or Deliver) on the basis that a Force Majeure Event had instead occurred and which event had not been notified. The Waiting Period for a Force Majeure Event is not expressly conditional on notice of the Force Majeure Event being given, nor therefore is the suspension of payment and delivery obligations, but the fact that both parties are obliged to give notice of the Force Majeure Event may well be sufficient to construe that, if you want to suspend your obligations, you have to give notice of the Force Majeure Event latest on the day of performance to allow the other party also to give notice to suspend its obligations. Further, the two-stage notice requirement for Failure to Pay or Deliver (notice of failure, triggering the grace period for remedy and then the notice designating the Early Termination Date) might be held to mean that a counterparty seeking to rely on a Force Majeure Event should, following that first notice, notify the other party of the claimed Force Majeure Event at that stage.
It should be noted that a Force Majeure Event, unlike a Failure to Pay or Deliver, is anticipatory in nature and so would occur whether or not performance is then due, and with the 8 Local Business Day Waiting Period starting from that day.
These issues also impact collateral calls under the English law Credit Support Annex arising during the Waiting Period. However, there is no applicable Waiting Period if the collateral obligation arises under a Credit Support Document (for instance, a New York law Credit Support Annex or an English law Credit Support Deed).
Having competing termination notices and a potentially ineffective designation of an Early Termination Date (with the related uncertainty of the mark-to-market position and close-out timings) would clearly be unsatisfactory for all market counterparties, and so it is important to consider carefully the implications of a Force Majeure Event even in circumstances where a party does not believe that Section 5(b)(ii) of the 2002 ISDA Master Agreement has been triggered and no notice has been given to that effect by either party. In particular, parties might wish to consider sending anticipatory 'non-Force Majeure Event' notices, expressly stating that they do not believe that particular events or circumstances (for example, staff shortages or market infrastructure plumbing closures due to Covid-19) would constitute a Force Majeure Event, to mitigate this concern.
If you would like to discuss the implications of this alert or force majeure in derivatives documentation generally, please get in touch with your usual Fieldfisher contact.
We are all navigating unchartered waters as business and society faces up to the impact of COVID-19. We very much hope you and your loved ones remain in good health.
Please be assured that Fieldfisher is continuing to work with clients to navigate COVID-19 related issues and on business as usual needs. Do get in touch with us if you would like to chat anything through.
Whether or not a "Force Majeure Event" has actually occurred would need to be analysed on its individual facts and this could be complicated given that there is no generally applicable definition of "force majeure" (which is the term used in the 2002 ISDA Master Agreement) under English law. Even if a "force majeure or act of state" has occurred, it is also necessary that the party affected has used (and continues to use) all reasonable efforts to overcome the effect of that event in order for a Force Majeure Event to occur and subsist.
The underlying concern is whether or not the effective designation of an Early Termination Date due to a Failure to Pay or Deliver Event of Default can be thwarted by a counterparty counter-claiming that a Force Majeure Event had instead occurred.
The occurrence of a Force Majeure Event under Section 5(b)(ii) of the 2002 ISDA Master Agreement automatically triggers an 8 Local Business Day Waiting Period (which starts on the date on which the Force Majeure Event occurs) and no Failure to Pay or Deliver Event of Default would apply with respect to any related payment or delivery failure under Section 5(a)(i) during that Waiting Period if the Force Majeure Event is continuing. This is because Section 5(d) provides for the suspension of all payments and deliveries under any Affected Transaction (not just those of the party affected) until the day following the end of the Waiting Period (or until after the event ceases if sooner).
If a party is aware that a Force Majeure Event has occurred and proceeds to serve notice designating an Early Termination Date as a result of, say, the occurrence of a Failure to Pay or Deliver, such designation is likely to be held to be invalid. The position could be more nuanced, however, where the parties have come to different conclusions as to whether or not a Force Majeure Event has actually occurred or where neither party had given notice of it.
Under Section 6(b)(i) of the 2002 ISDA Master Agreement, each party must use reasonable efforts to notify the other party of the occurrence of a Force Majeure Event promptly upon becoming aware of it, and must also give the other party such other information about that Force Majeure Event as the other party may reasonably require. The obligation is not just on the party whose performance is affected by the Force Majeure Event.
The case of Nuovo Safim SpA v Sakura Bank Ltd [1999] 2 All ER (Comm) 526 suggests (albeit obiter) that a party who fails to give such notice may be estopped from designating an Early Termination Date relating to the occurrence of a Force Majeure Event. Nuovo Safim concerned the occurrence of an Illegality Termination Event under the 1992 ISDA Master Agreement but it is analogous to the Force Majeure Event in many respects. It is less clear whether or not Nuovo Safim could also be invoked against a counterparty who has rejected a related Early Termination Date designation (following a purported Failure to Pay or Deliver) on the basis that a Force Majeure Event had instead occurred and which event had not been notified. The Waiting Period for a Force Majeure Event is not expressly conditional on notice of the Force Majeure Event being given, nor therefore is the suspension of payment and delivery obligations, but the fact that both parties are obliged to give notice of the Force Majeure Event may well be sufficient to construe that, if you want to suspend your obligations, you have to give notice of the Force Majeure Event latest on the day of performance to allow the other party also to give notice to suspend its obligations. Further, the two-stage notice requirement for Failure to Pay or Deliver (notice of failure, triggering the grace period for remedy and then the notice designating the Early Termination Date) might be held to mean that a counterparty seeking to rely on a Force Majeure Event should, following that first notice, notify the other party of the claimed Force Majeure Event at that stage.
It should be noted that a Force Majeure Event, unlike a Failure to Pay or Deliver, is anticipatory in nature and so would occur whether or not performance is then due, and with the 8 Local Business Day Waiting Period starting from that day.
These issues also impact collateral calls under the English law Credit Support Annex arising during the Waiting Period. However, there is no applicable Waiting Period if the collateral obligation arises under a Credit Support Document (for instance, a New York law Credit Support Annex or an English law Credit Support Deed).
Having competing termination notices and a potentially ineffective designation of an Early Termination Date (with the related uncertainty of the mark-to-market position and close-out timings) would clearly be unsatisfactory for all market counterparties, and so it is important to consider carefully the implications of a Force Majeure Event even in circumstances where a party does not believe that Section 5(b)(ii) of the 2002 ISDA Master Agreement has been triggered and no notice has been given to that effect by either party. In particular, parties might wish to consider sending anticipatory 'non-Force Majeure Event' notices, expressly stating that they do not believe that particular events or circumstances (for example, staff shortages or market infrastructure plumbing closures due to Covid-19) would constitute a Force Majeure Event, to mitigate this concern.
If you would like to discuss the implications of this alert or force majeure in derivatives documentation generally, please get in touch with your usual Fieldfisher contact.