Standard ISDA documentation continues to throw up disputes | Fieldfisher
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Standard ISDA documentation continues to throw up disputes


United Kingdom

It is interesting to reflect on the fact that the ISDA Master Agreement, which is the most commonly used master agreement for OTC derivatives transactions

It is interesting to reflect on the fact that the ISDA Master Agreement, which is the most commonly used master agreement for OTC derivatives transactions, continues to generate disagreements over interpretation and use, which have to be resolved by the courts.

This note looks at three areas where the English courts have recently given decisions which are highly relevant for ISDA users and lawyers working with OTC documentation.  

The three areas include (i) deciding whether, upon early termination, the obligation of the non-defaulting party to provide in timely fashion to the defaulting party reasonable details of the calculation of the sum due under section 6(d)(i) of a 1992 ISDA was a condition to payment of that sum; (ii) determining whether the parties' agreed choice of law could be 'trumped' by the application of local law and (iii) construing whether a "deemed" 1992 ISDA or a fully negotiated 2002 ISDA applied to a particular interest rate swap.


Case 1: A sum due on early termination becomes payable immediately the non-defaulting party gives the defaulting party notice of its amount; the right to payment is not conditional upon the timely giving of reasonable details showing the calculation of the sum due, which can follow (much) later. In Videocon Global Ltd v Goldman Sachs International [2016] EWCA Civ 130, the court of appeal decided that the obligation to pay was not conditional upon the notice of the amount payable (i) setting out reasonable details of the calculation, and/or (ii) being served as soon as reasonably practicable after the Early Termination Date. The only requirement was that the notice should stipulate the correct amount. A long delay in providing calculation details did not excuse non-payment.

The Facts

Goldman terminated a currency swap, governed by a 1992 ISDA, following Videocon's failure to pay a margin call. In the first case before the court, the judge refused to enter judgment against Videocon because Goldman had not provided details of its calculation, as it was contractually bound to do by section 6(d)(i) of the 1992 ISDA. Two years after the Early Termination Date, Goldman served detailed calculations. In a subsequent case before the court, Videocon defended on grounds that the detailed calculation statement had not been served as soon as reasonably practicable after the Early Termination Date.

The Decision

The court of appeal held that, despite Goldman's initial failure to provide calculations, and the subsequent two year delay in sending them, the Early Termination Amount became due on the Early Termination Date, and payable once the notice of its amount was served in accordance with section 6(d)(ii) of the 1992 ISDA.  The same result would have arisen in the case of a 2002 ISDA and, we suggest, of a 2011 GMRA, which contains broadly similar provisions.


While it is no doubt good practice to provide detailed calculations of close-out amounts in a timely fashion (and at the same time as giving notice of the amount due), a failure by the non-defaulting party to do so will not enable a defaulting party to run technical defences or to escape liability altogether.  It is nevertheless incumbent upon the non-defaulting party to get the calculation right, whenever it is served, as providing an incorrect calculation will not trigger the payment obligation under section 6(d)(ii) (it will not be the "amount payable").  The case also highlights that interest runs on the amount due from the Early Termination Date, regardless of when notice of the amount due is given.

It is arguable that a delay in providing a detailed calculation statement as soon as reasonably practicable may put the defaulting party at a disadvantage if it has reason to doubt the correctness of the amount claimed, but is not shown the calculations. Whilst the figures can be disputed by the defaulting party once the calculations are provided by the non-defaulting party, the defaulting party may suffer in the meantime if the non-defaulting party claims a high rate of Default interest. The defaulting party has no, or very limited ability to challenge the rate of Default interest certified by the non-defaulting party as being payable. And the period for Default interest starts to run from the date of the notice stipulating the amount due, and not from any later date when the detailed calculation in support is provided. 

However, as the court affirmed, where the defaulting party suffers a loss of this nature as a result of the non-defaulting party's contractual breach of not providing calculations as soon as reasonably practicable, the defaulting party could make a contractual damages claim for its loss caused by the delay.


Case 2: Where parties to an ISDA Master Agreement agree choice of law, but one party later argues that local law can additionally impose its 'mandatory rules' under Article 3(3) of the Rome Convention, the court will consider relevant international elements to determine whether those mandatory rules are applicable or not. In Banco Santander Totta S.A. v. Companhia de Carris de Ferro de Lisbao S.A. and others [2016] EWHC 465 (Comm), a group of interest rate swap counterparties (Portuguese transport companies) tried to invoke Portuguese law mandatory rules (relating to 'abnormal change of circumstances' and 'games of chance') so as to avoid the adverse financial consequences of the swaps. They relied upon Article 3(3) of the Rome Convention, which provides that where all the "elements relevant to the situation" at the time of the choice of law are connected with one particular country only, the choice of another country's governing law does not prevent the application of mandatory rules of the law of that country with which all elements are connected which cannot be derogated from by contract ("mandatory rules").

The Facts

Prior to the 2008 crisis, the Portuguese transport companies had entered into exotic interest rate swaps with unusual features (described as "snowball" swaps) which had become very expensive and heavily out of the money since 2009. The transport companies ceased paying the bank and looked for legal reasons to walk away from the contracts. The parties had selected English law in the relevant ISDA Master Agreements. Amongst other things, the transport companies argued that Portuguese mandatory rules applied under Article 3(3) of the Rome Convention such that the swaps were void for being unlawful 'games of chance' and/or could be terminated owing to an 'abnormal change of circumstances', namely that the reference interest rates had been close to zero since 2009.

The Decision

Unsurprisingly, the transport companies relied heavily on the previous decision in Dexia Crediop SpA v. Commune di Prato [2015] EWHC 1746 (Comm) in which an Italian local authority successfully argued that Article 3(3) led to the application of Italian mandatory rules where an English law governed ISDA Master Agreement had been selected.  On the relevant facts, the transport companies' case was almost identical to that in Dexia. In that case, the Judge rejected the argument that the internationally used standard form of the ISDA Master Agreement was an "element in the situation" which is connected to a country other than Italy, and nor was the significance and global nature of ISDA itself. The Judge in Banco Santander disagreed with the Dexia decision and stated that in determining whether (choice of law aside) all the other "elements relevant to the situation" are connected with one country only, the enquiry is not limited to elements that are local to another country, but includes elements that point directly from a purely domestic to an "international" situation (i.e. not specific to another country).

Applying the above reasoning to the facts, there were a number of international "elements relevant to the situation":

  • The bank could assign its interest to its non-Portuguese affiliates. Whilst assignability outside the domestic jurisdiction is not  determinative, in context it showed the contract could not be viewed as purely domestic.
  • The use of the international "Multicurrency–Cross Border" form of the 1992 ISDA Master Agreement

  • The existence of back to back swaps with banks outside Portugal

  • The OTC swaps market is an international one, and international banks competed for the business


Particularly in a Multicurrency-Cross Border context, parties can now be fairly confident that local 'mandatory rules' will not be sprung on them at a later stage pursuant to Article 3(3) of the Rome Convention or its successor the Rome I Regulation where choice of another country's law has been agreed. The position may not be quite so secure, however, if the parties use the 'Local Currency–Single Jurisdiction' version, although that is a rarely used document.  It is also worth mentioning that, had the transport companies succeeded in their Rome Convention defence, the court would have held that, under the Portuguese Civil Code, the swaps were not void bets but that the profound downward turn in the markets in 2008/9 would have constituted an "abnormal change of circumstances" entitling the transport companies to terminate the majority of the swaps in question, subject to the discretion of the court to rewrite their terms. 


Case 3: Drafting mistakes lead to court's rectification of ISDA confirmation to incorporate a fully negotiated 2002 ISDA. In LSREF III Wight Limited v. Millvalley Limited [2016] EWHC 466 the court found strong evidence that a contractual provision had been incorporated into a contract by mistake. The court rectified the contract and substituted alternative language because, looking at the parties' communications and conduct, this was clearly what the parties intended.   Rectification is not an easy remedy to obtain but this was a case where the evidence made it obvious that there had been a mistake.  The decision of the court was critical as, had rectification not been ordered, the claimant (itself in liquidation) would have had no rights to terminate the transaction or enforce its claims against the defendant.

The Facts

Wight was an assignee of Irish Bank Resolution Corporation Ltd ("IBRC") a successor corporation to Allied Irish Banking Corporation plc ("AIB"). Millvalley was a property company, which, starting in 2007, had entered into loans and accompanying interest rate hedging swaps with AIB and its successors.  The swap (the "Original Swap") was documented under a confirmation containing standard ISDA deeming language, which incorporated a 1992 ISDA with no Schedule attached.  In the absence of a Schedule, the contract as a whole was silent about various Schedule electives and, more critically, issues such as whether prepayment of the related loan could trigger an early termination of the Original Swap.

A series of restructurings followed, in which Wight negotiated and entered into with IBRC a full 2002 ISDA and related Schedule.  This subjected the Original Swap to the new terms which included prepayment of the loan as an Additional Termination Event.  

In 2012 the Original Swap was partially torn up.  However, to document the new transaction (the "Restructured Swap"), IBRC mistakenly issued a confirmation that again incorporated standard deeming language and that again referenced a 1992 ISDA  with no Schedule, instead of referencing the executed 2002 ISDA and Schedule.

In 2014 Millvalley prepaid the loan. IBRC was by now in liquidation, but, relying on the Additional Termination Event which was set out in the Schedule to the 2002 ISDA, terminated the Restructured Swap and assigned its claim against Millvalley to Wight.

Wight issued a claim for the relevant Early Termination Amount arguing that, on its proper construction, or by way of rectification, the Restructured Swap was governed by the 2002 ISDA.  Millvalley disputed this and raised several defences, most importantly: (a) that it did not have to make scheduled payments under the Restructured Swap by virtue of section 2(a)(iii) of the 2002 ISDA – IBRC's liquidation was a continuing Event of Default that had no prospect of being cured (this argument appears not to have been disputed and in any event follows the now familiar line of cases involving section 2(a)(iii)); and (b) that IBRC had no termination right, because the swap was governed by an unadulterated 1992 ISDA.

The Decision

The court held that as a matter of construction the Restructured Swap was not governed by the 2002 ISDA and Schedule, but that it should be rectified to make it so.  The early termination of the Restructured Swap following the prepayment of the loan was therefore valid and Millvalley was ordered to pay the Early Termination Amount to Wight.

The court analysed in detail the various dealings between the parties and held that there was overwhelming evidence of a continuing common intention to execute and document the Restructured Swap on the basis of an already negotiated 2002 ISDA. Here, the evidence pointed strongly to the parties intending that the 2002 ISDA and related Schedule should apply - for example Millvalley and its solicitors actually relied on the 2002 ISDA  until fairly late in the story, and it seems to have been accepted by all parties that the cause was an administrative error on the part of IBRC. Consequently, the court gave effect to what the parties had intended to do, rather than what the offending confirmation actually said, ensuring the "Wight" result was achieved.

In reaching its decision, the court considered the difference between rectification and construction. The major difference between them is that construction deals with the meaning of the instrument which the parties have executed, whilst rectification looks at whether there was a continuing common intention which the instrument failed to give effect to, which should be assessed through the eyes of a hypothetical, objective, reasonable observer. For rectification to succeed there needs to be an outward expression of accord between the parties of that intention which must continue when the parties execute the document.


The case highlights the importance of getting the wording of confirmations absolutely right, otherwise at best it can lead to costly litigation and, at worst, can bind the parties to the wrong contract. It also shows the shortcomings of the "deemed ISDA" approach, especially in the context of loan-linked swap transactions where a degree of customisation through the Schedule (or via a long-form confirmation) is now market standard.


Final thoughts on all three cases

Given the millions of OTC transactions carried out under ISDA documentation it is perhaps not so surprising that, now and again, a handful of high value cases like these fight all the way to trial. The general theme of these decisions is that the English court  does try to give a purposive  interpretation of these contracts to ensure the right result in the majority of cases.