The Commercial Court has dismissed a challenge to the exercise of options contained in five extendable interest rate swaps which incorporated the 2000 ISDA Definitions: Alfred Street Properties Ltd v National Asset Management Agency [2020] EWHC 397. The challenge was brought on the basis that notice was either not given by a contractually prescribed method or at all, despite the resultant swap transactions having been performed to term without challenge by either party.

The decision provides some helpful guidance on the approach to contractual interpretation of the ISDA Master Agreement and the 2000 Definitions. The court noted that while a strict approach, favouring clarity, certainty and predictability is required in interpreting the terms of standard market agreements, any questions as to incorporation and variation of such provisions should be interpreted according to the recognised principles of general contractual interpretation as confirmed by the Supreme Court, e.g. in Wood (Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24 (see our litigation blog post).

Adopting a “unitary” approach, which involves an iterative process by which rival interpretations are checked against the provisions of the contract and the commercial consequences investigated, the court considered (in particular) Article 10 of the 2000 Definitions (which sets out the definitions of “Option Transaction” and “Swaption”). The court held that there is no requirement under Article 10 for parties to use the precise name or label “Option Transaction” or “Swaption” in the confirmation evidencing the swap transaction. It is sufficient for a transaction to be identifiable as such, e.g. by defining or describing either the transaction or its operation, in terms which “make it clear that it falls within the provisions dealing with those transactions”.

The key parts of the decision are considered below.

Background

Alfred Street Properties Limited (“ASPL”) entered into facilities totalling £111.5 million with Anglo Irish Banking Corporation, together with five extendable interest rate swaps to hedge its interest rate exposure under the facilities (the “Swaps”). The National Asset Management Agency (“NAMA”) subsequently acquired the bank’s interests in the loans and the Swaps. For convenience, in this blog post the bank’s rights and obligations under these documents are referred to as belonging to NAMA.

Each of the confirmations relating to the Swaps (each a “Confirmation”) incorporated the 2000 ISDA Definitions and was governed by the 1992 ISDA Master Agreement (Multicurrency-Cross Border) (the “ISDA MA”).

The Confirmations provided, amongst other things, that NAMA had the right, but not the obligation, to extend the Swaps by 11.00am (London time) on 2 April 2012 (the “Options”). In the event that NAMA exercised that right by the specified time and date, the Swaps would be extended on the same terms for a further three years, save that ASPL would pay an increased fixed rate.

NAMA sought to exercise the Options (via its agent) on 2 April 2012 at 9.15am by telephone (the “Notice Call”). Thereafter, ASPL made quarterly payments to NAMA on the assumption that the Swaps had been duly extended, totalling £4,778,289.56 (the “Swap Payments”).

The claim

A year after the term of the Swaps expired, ASPL alleged that NAMA’s exercise of the Options was invalid and sought restitution of the Swap Payments plus interest. Proceedings were commenced in January 2017 in which ASPL claimed that:

  1. NAMA was not entitled under the terms of the Confirmations to notify ASPL of the exercise of the Options by telephone. Whilst, s.12.2 of the 2000 Definitions allowed for notice of the exercise of Options to be provided orally, including by telephone, ASPL argued that the s.12.2 procedure was not engaged because the Confirmations did not expressly identify (using capitalised terms) that the transactions in question were “Option Transactions” or “Swaptions”. Instead, ASPL asserted that NAMA should have given notice in accordance with s.12(a) of the ISDA MA, which did not allow for notice by telephone. Alternatively, ASPL argued that, even if the s.12.2 procedure in the 2000 Definitions was engaged, exercise of the Options by telephone was not permissible as the Confirmations did not include a telephone contact number for ASPL, only a postal address (the “Notice Issue”); and
  2. NAMA’s agent did not actually exercise the Options on the Notice Call but merely indicated NAMA’s intention to exercise the Options (the “Intention Issue”).

Decision

The court dismissed the claim in its entirety.

The Notice Issue

The court noted that while a strict approach, favouring clarity, certainty and predictability is required in interpreting the terms of standard market agreements such as the ISDA MA or 2000 Definitions, any question as to incorporation and variation of such provisions should be interpreted according to the recognised principles of general contractual interpretation. It cited the Supreme Court’s decisions in Rainy Sky SA v Kookmin Bank [2011] 1 UKSC 50, Arnold v Britton [2015] UKSC 36 and Wood v Capita. The court emphasised the “unitary” approach to contractual interpretation in Rainy Sky and Arnold, which involves an iterative process by which rival interpretations are checked against the provisions of the contract and the commercial consequences investigated.

Applying this approach, the court rejected ASPL’s arguments, finding that NAMA was entitled to give notice to ASPL by telephone under s.12.2 of the 2000 Definitions. The key reasons given by the court were as follows:

  1. The court held that Article 10 of the 2000 Definitions, which sets out the definitions of “Option Transaction” and “Swaption”, simply requires that a transaction be identifiable as such in the confirmation evidencing the swap transaction (e.g. by defining or describing either the transaction or its operation, in terms which “make it clear that it falls within the provisions dealing with those transactions”). It said there was no requirement to use the precise name or label “Option Transaction” or “Swaption”. The court found that the terms of the Swaps set out in the Confirmations “clearly and obviously” showed the transactions were “Option Transactions” because of how they were described – even though the defined (capitalised) terms were not used. Accordingly, s.12.2 of the 2000 Definitions was the correct procedure for NAMA’s exercise of the Options.
  2. The court considered, obiter, the alternative scenario if its conclusion at point (1) above was wrong, namely whether the s.12.2 procedure could still apply, or whether notice had to be given in accordance with s.12(a) of the ISDA MA which did not allow for notice to be given orally. The court commented that a textual analysis of the Confirmations suggested the s.12.2 procedure could still apply because:
    1. Even if the Options were not identified as “Option Transactions”, the s.12.2 procedure had been incorporated into the Confirmations – in particular because the Options and their terms were structured solely by reference to terms defined in Articles 11 and 12 of the 2000 Definitions.
    2. For the s.12(a) ISDA MA method to apply, the parties would need to have set out contact details in a Schedule to the Confirmations which they had not done. In the absence of contact details, only the s.12.2 procedure was workable.
    3. The broader business context of the Confirmations also supported the conclusion that the parties had chosen to adopt the s.12.2 procedure. The decision to exercise an option by 11am on a particular day, would be highly sensitive to market movements and may be made at the last minute; that meant NAMA’s ability to exercise the Options orally made far more business sense than the alternative which would have required notice by post.
  3. The court also rejected ASPL’s argument that, as the Confirmations only specified a postal address and not a telephone number, notice by post was the only method permitted under the s.12.2 procedure. The parties could use the s.12.2 procedure irrespective of whether telephone contact details had been provided. S.12.2 expressly permitted oral notification, so the inclusion of a postal address did not implicitly exclude the other notice methods to which s.12.2 referred. In any event, the court found that the postal address had been included as an address for the Confirmation to be sent, rather than as an address for notice under s.12.2.

The Intention Issue

The court considered that, to decide whether the Options had actually been exercised on the Notice Call, the test was whether a reasonable person in the position of ASPL’s Head of Finance (ASPL’s representative on the Notice Call), with knowledge of the relevant circumstances, would have understood during the Notice Call, that NAMA was exercising the Options.

As the transcript of the Notice Call showed, NAMA’s agent stated that NAMA would be exercising the Options; identified the Swaps in question (but not discussed the terms relevant to the extension); and stated that he would follow up with a formal confirmation.

The court found that NAMA’s agent’s words were “exactly what would be expected of a party…exercising an option in a trade…”. The context, including the fact that the call took place during the limited window when the Options could be exercised, and the wording of a confirmation email sent by NAMA’s agent to ASPL’s Head of Finance after the Notice Call, also supported the argument that a reasonable person in the position of ASPL’s Head of Finance would have understood that the Options were being exercised.

Conclusion

Accordingly, the court found that the Options had been validly exercised and the Swaps extended. The court further found on an obiter basis that – in the absence of the Options having been validly exercised – NAMA would have had defences of estoppel by convention or by conduct, or change of position, given the parties’ performance of the Swaps to term.

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