High Court considers enforcement of security by way of appropriation under the Financial Collateral Arrangements (No 2) Regulations 2003 (FCARs)

The High Court has dismissed a claim made by a borrower that a lender’s appropriation of certain shares secured by a charge, upon default in a loan arrangement, was invalid and that the valuation of the appropriated shares was commercially unreasonable: ABT Auto Investments Ltd v Aapico Investment PTE Ltd & Ors [2022] EWHC 2839 (Comm).

The decision is interesting for two reasons:

  • It considers the validity of the appropriation of shares in a private company under the Financial Collateral Arrangements (No 2) Regulations 2003 (the FCARs) and their valuation; and
  • It is an addition to the growing body of case law considering the threshold to be satisfied when exercising contractual discretions in the context of a borrower’s default. You can find our previous blog posts considering similar issues here.

The FCARs introduced the concept of a “security financial collateral arrangement” into UK law, which in the context of security arrangements disapplies various formalities and provisions of UK insolvency law in relation to the taking and enforcing of security over cash, financial instruments and credit claims, where such arrangements are made between entities other than individuals. They also provide for remedies on security enforcement which are different from those usually seen in UK law, including, most notably, the enforcement technique of appropriation.  They are most frequently used in the financial markets, and there are relatively few cases on their application. There is some long-running academic debate on various aspects of the FCARs, including their scope of application to certain categories of parties and assets.

In the present case, the court considered the validity of the appropriation of the shares by the lender (which is a relatively novel self-help remedy in UK law), and their valuation in a “commercially reasonable manner” as required by Regulations 17 and 18 (respectively) of the FCARs.  The court was satisfied both that the appropriation was valid, and that the valuation of the appropriated shares had been made in accordance with the FCARs.

The court underlined that the FCARs imported an objective standard in valuing the shares. In the current context, the word “commercially” indicated that the standard to be applied was that of reasonable participants in the relevant financial market. In other contexts, the manner of valuation must be one which conforms in that context to “the reasonable expectations of sensible businessmen”.  However, it specifically did not have to consider the effect of the special value that the shares in a joint venture (JV) company would have to one of the JV partners as part of the overall valuation.

We consider the decision in more detail below.

Background

In 2017, the claimant company (ABT), through one of its subsidiaries, set up a JV with the defendant companies (Aapico). The JV was funded by Aapico and the arrangements between the parties were set out in a suite of documents which included loan agreements made in 2017 and 2018 (the Loan Agreements). As security for the loans, ABT gave guarantees and a charge over its shares in the JV (the Share Charge).

In 2019, the JV defaulted on certain payments due under the Loan Agreements. Aapico sent four notices of default to the JV and notices of acceleration to ABT declaring both loans to be repayable on demand. Aapico then made further demands to the JV for immediate repayment of the loans and to ABT for repayment of the debt under its guarantees. No payments were made by either the JV or ABT. Aapico consequently gave notice purporting to exercise the power under a specific clause in the Share Charge to appropriate the charged shares. In that notice, Aapico ascribed a value of USD 27 million to the charged shares. That figure was based on a valuation carried out in 2019 of ABT’s shareholding in the JV (the FTI Valuation) at Aapico’s request by FTI Consulting (FTI).

ABT subsequently brought proceedings against Aapico challenging the validity of Aapico’s appropriation of the charged shares and of the value which Aapico had subscribed to them. ABT’s case was that the specific clause relied on in the Share Charge was not effective to confer a legally valid power of appropriation since the method of valuation for which it provided was not commercially reasonable. Further, the appropriation which Aapico purported to carry out was in any event legally ineffective because the valuation of the charged shares had not been carried out in a commercially reasonable manner.

Aapico denied the claim.

Decision

The High Court found in favour of Aapico and dismissed the claim. The key issues of interest are examined below.

(1) The validity of the appropriation

The court held that there had been a legally valid appropriation by Aapico. The specific clause of the Share Charge relied on by Aapico was effective to confer on Aapico a legally valid power of appropriation.  Appropriation is a relatively novel but very useful self-help remedy in English law: it allows a collateral taker to effectively acquire the financial collateral itself without an order from the courts, when self-dealing by a mortgagee is usually prohibited, and on that acquisition, the equity of redemption of the collateral provider is extinguished (as per Çukurova Finance International Limited v Alfa Telecom Turkey Limited [2009] UKPC 19).  The court held here that appropriation would therefore only be available in accordance with the FCARs, that is where there is a security financial collateral arrangement that includes a power of appropriation and there is a provision for valuation.

Regulation 18 of the FCARs

The court noted that the specific clause of the Share Charge relied on by Aapico expressly stated that Aapico’s right to appropriate the charged shares was subject always to Regulation 18 of the FCARs, which requires that the methods of valuation are “commercially reasonable”. However, the FCARs do not contain any description of what constitutes a “commercially reasonable manner” of realisation or valuation. Nor is there any express indication in the FCARs about whether a “commercially reasonable manner” of valuation should reflect any special value of the collateral to the collateral taker.

The drafting of the Share Charge

The court commented that the specific clause of the Share Charge relied on by Aapico on its face gave the collateral taker a discretion as to the method of valuation if no public index or independent valuation was “available or reasonably practicable given the then current circumstances”. However, it did not follow that the collateral taker was thereby permitted to act in an arbitrary or unreasonable manner. In the court’s view, when the clause was read as a whole it was implicit that the valuation methods permitted in this case, were methods conforming to the requirements of Regulation 18(1). On that basis, no further restrictive implication was necessary.

Even if the court was wrong on that point, then on the true interpretation of the clause the collateral taker’s contractual discretion as to the method of valuation would be “limited, as a matter of necessary implication, by…the need for the absence of arbitrariness, capriciousness, perversity and irrationality” (as per Socimer International Bank Ltd (In Liquidation) v Standard Bank London Ltd (No.2) [2008] EWCA Civ 116).

(2) Were the charged shares valued in a commercially reasonable manner?

The court held that the valuation had been made in accordance with the terms of the arrangement and in any event in a commercially reasonable manner. It was satisfied that both Aapico and FTI complied with the requirements of the specific clause relied upon by Aapico in the Share Charge and of Regulation 18(1).

Commercially reasonable manner

The court highlighted the following key legal principles from the authorities:

In the court’s view, each case emphasised the need to consider the particular words of the relevant provision in the particular context (both contextual and commercial) in which they are used, and the danger of interpreting one provision in a particular context by reference to a different provision in a different context.

The FCARs context

The court noted that the relevant context in this case was that of the FCARs. In giving effect to Regulation 18(1), the court’s task was to review, after the event, a valuation of financial collateral carried out by the collateral taker in the context of the “rapid and non-formalistic enforcement procedures” provided for in the FCARs, in order to ensure for “the protection of the collateral provider and third parties” and that the valuation has been conducted in a commercially reasonable manner.

Having regard to that context and to the wording of the FCARs, the court drew a number of conclusions about what Regulation 18(1) requires. In particular:

  • The clear words of Regulation 18(1) place the duty of valuation on the collateral-taker, even if it has used a third-party valuer.
  • It is the way in which the valuation is made which must be commercially reasonable. It does not necessarily follow that the result itself must be a commercially reasonable one. Nevertheless, if the value produced is less than what could reasonably be expected, that may of itself be evidence that the manner of valuation has not been commercially reasonable.
  • The requirement for the valuation to be made in a commercially reasonable manner imports an objective standard. The subjective view of the collateral taker (or of its third party valuer) about what is commercially reasonable is irrelevant. The word “commercially” indicates that the standard to be applied is that of reasonable participants in the relevant financial market. In other contexts, the manner of valuation must be one which conforms in that context to “the reasonable expectations of sensible businessmen” (as per G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25 and First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194).
  • The question of what, in any given case, is commercially reasonable is fact-sensitive. Depending upon the nature of the collateral and the circumstances of the case, there may perhaps be only one commercially reasonable manner of valuation.
  • In the context of the valuation required to be made on appropriation, there is no separate and independent requirement for the collateral taker to act in good faith, and no room for the implication of any of the equitable or other duties associated with the law of mortgage in English law.
  • The process of valuation is not one in which it will normally be commercially reasonable for the valuing party to have primary regard to its own commercial interests. The valuation of financial collateral for these purposes is essentially an objective exercise.

The present case

Failure to provide information

The court noted that there was simply no evidence that anyone at Aapico had placed any limits on the information and documents which FTI could request, and no suggestion in the FTI Valuation itself that any important requests for information made by FTI were refused. There was, however, positive evidence that certain employees at Aapico were instructed to provide FTI with whatever they asked for.

The court also said that Aapico’s omission to provide FTI with certain financial statements, or the supporting documents, or with particular DCF valuations, did not either establish or indicate that the valuation was not done in a commercially reasonable manner. Further, the court stated that Aapico’s omission to make arrangements for FTI to have discussions with the management of certain companies did not itself establish or indicate that the valuation was not done in a commercially reasonable manner.

Instructing and/or encouraging FTI to arrive at the lowest possible result

In the court’s view, FTI were keen to produce a valuation which was as well reasoned and as well supported as possible. The court concluded that there was nothing in Aapico’s conduct in relation to the valuation exercise which would properly be characterised as commercially unreasonable.

FTI’s valuation methodology

The court accepted that the information that FTI had was sufficient to perform a valuation of the charged shares. None of the documents identified by ABT Auto that were not provided to FTI included new information that a reasonable valuer would have considered to have a material impact on the valuation FTI undertook.

Special value of the collateral to a collateral taker

For various procedural reasons, the court specifically did not have to consider the effect on the valuation of the special value that shares in a JV company might have to one of the JV partners.  Accordingly, for all the reasons above, the court found in favour of Aapico and dismissed the claim.

Nick May
Nick May
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Ceri Morgan
Ceri Morgan
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Emily Barry
Emily Barry
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Nihar Lovell
Nihar Lovell
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High Court finds lender’s exercise of absolute contractual right is not subject to implied Braganza duty

The High Court (Chancery Appeals Division) has allowed a lender’s appeal of a District Judge’s decision to set aside statutory demands made against two guarantors, following a borrower’s default under a loan facility: Sibner Capital Ltd v Jarvis [2022] EWHC 3273 (Ch).

This decision will be of interest to financial institutions seeking to exercise a contractual discretion or right following an event of default. The decision highlights that a financial institution’s exercise of its discretion/right will not necessarily be subject to an implied duty to act in good faith or to refrain from acting in a way which was arbitrary, capricious or irrational (as per Braganza v BP Shipping Ltd [2015] UKSC 17), particularly where the documentation confers an absolute contractual right in favour of the financial institution. This is the latest in a recent line of decisions considering the exercise of contractual discretions in a financial services context (see our previous blog posts here).

In the present case, the court was satisfied that there was no realistic prospect of the guarantors establishing that the lender was under some sort of duty of good faith or other Braganza style duty in deciding whether or not to accept payment of less than the full amount of a tranche on the due date. The court underlined that the relevant clause in the facility agreement contained no qualification, and indeed went out of its way to say that the lender had an absolute right whether or not to accept less than it was entitled to.

We consider the decision in more detail below.

Background

The claimant lender agreed to provide loans to the borrower company in relation to the development of a property. The loan facility was guaranteed by two individuals. A joint venture agreement (the JV Agreement) was also entered into on the same day by the lender, the borrower, the guarantors and the owner of the property which was to be developed.

The loan facility agreement provided that “The lender may in its absolute discretion accept a sum less than the Tranche A commitment plus interest on the Tranche A Repayment Date in satisfaction of the Borrower’s obligation to repay the Tranche A Facility on that Date…”.

The JV Agreement required the parties to act in good faith. However, the JV Agreement also provided that this requirement did not prejudice or restrict the lender’s rights under the finance documents including any rights which may arise following an event of default.

In 2020, the lender and the guarantors agreed that a certain sum would be accepted as part settlement of Tranche A on the following basis: (a) the agreed sum would be paid by 22 December 2020; (b) the lender would release its security over property when the repayment was made; and (c) the balance of the amount due would be paid by 31 January 2021. The agreement also included an undertaking by the guarantors that their guarantees would remain in force and that they would not object to any enforcement action in respect of the outstanding amount, including any statutory demand or bankruptcy petition. The part repayment was made on 22 December 2020, but the balance was not paid by 31 January 2021. Consequently, the lender served statutory demands on the guarantors.

The guarantors denied the claim and made an application to set aside the statutory demands.

District Judge’s decision

The District Judge found in favour of the guarantors and set aside the statutory demands.

The District Judge said the guarantors had a realistic prospect of demonstrating that there was an implied duty to act in good faith or to refrain from acting in a way which was arbitrary, capricious or irrational (as per Braganza). The District Judge also said that the lender had failed to exclude extraneous considerations in exercising its discretion under the facility agreement and had therefore called in the loan and called on the guarantees in reliance on its breach of duty.

The lender appealed, on the basis that its discretion under the facility agreement was absolute and was not restricted by the Braganza duty or any implied duty of good faith.

High Court (Chancery Appeals Division) decision

The court found in favour of the lender and upheld the statutory demands. The key issues which may be of interest to financial institutions are examined below.

The facility agreement

The court said that on the face of the facility agreement, the lender had an absolute discretion whether to agree to accept less than full repayment of Tranche A. The discretion was not expressly qualified in any way. Given that the lender would, in exercising the discretion, be accepting less than it would otherwise be entitled to, it might perhaps be surprising if it were under any obligation to consider anything other than its own interests.

Implied duty of good faith/Braganza duty

The court reviewed the authorities and highlighted the following key legal principles:

  • A contractual discretion does not involve a simple decision whether or not to exercise an absolute right. Rather, a discretion involves making an assessment or choosing from a range of options, taking into account the interest of both parties (as per Mid-Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200).
  • When a contract gives one of the parties an absolute right, a court will not usually imply any restrictions on it, even restrictions preventing the right from being exercised in an arbitrary, capricious or irrational manner (as per Greenclose Limited v National Westminster Bank Plc [2014] EWHC 1156 (Ch)).
  • The court will refuse to imply a term that an unqualified right to terminate a contract should be exercised in good faith, even where there is an express clause requiring the parties to work together in a spirit of trust, fairness, and mutual co-operation (as per TSG Building Services v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)).
  • The expression “absolute contractual right” is the result of a process of construction which takes account of the characteristics of the parties, the terms of the contract as whole and the contractual context. It is only possible to say whether a term conferring a contractual choice on one party represents an absolute contractual right after that process of construction has been undertaken (as per Equitas Insurance Ltd v Municipal Mutual Insurance Ltd [2019] EWCA 718).
  • Absolute rights conferred by professionally drawn or standard form contracts (including but not limited to absolute rights to terminate relationships and roles within relationships) are an everyday feature of the contracts that govern commercial relationships. Extending Braganza to such provisions would be an unwarranted interference in the freedom of parties to contract on the terms they choose (as per TAQA Bratani Ltd v Rockrose [2020] EWHC 58 (Comm)).
  • Even if a contracting party has a discretion to bring the contract to an end, and that such discretion should not be exercised capriciously or arbitrarily, it by no means follows that the same considerations apply to allowing the contract to continue, which does not require any positive act on the part of the non-defaulting party (as per Lomas v JFB Firth Rixson [2012] EWCA 419).

The present case

The court concluded that there was no realistic prospect of the guarantors establishing that the lender was under some sort of duty of good faith or other Braganza style duty in exercising its discretion whether or not to accept payment of less than the full amount of Tranche A on the due date in accordance with the facility agreement.

In the court’s view, this was a commercial contract drawn up with legal assistance between experienced commercial parties. On the face of it, the relevant clause contained no qualification and indeed went out of its way to say that the lender had an absolute discretion whether or not to accept less than it was entitled to even though it was known that a new mortgage was being discussed and that a decision, in principle, had been made by the lender.

The court said that it was also relevant that the JV Agreement, whilst containing an obligation for the parties to act in good faith, specifically provided that this obligation should not affect the lender’s rights under the finance agreement. Another important consideration was that the documents were clear that Tranche A was to be repaid in full before any other steps were to take place.

In the court’s view, looking at the characteristics of the parties, the terms of the contract as a whole, and the contractual context, there was no doubt that this was not the sort of provision where it would be appropriate to imply an obligation of good faith. Accordingly, there were no substantial grounds for disputing the debt on this basis.

For all the reasons set out above, the court found in favour of the lender and upheld the statutory demands.

Ceri Morgan
Ceri Morgan
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Contractual duties of good faith: Court of Appeal confirms context is king

The Court of Appeal has allowed an appeal in a case which provides important clarification around the scope and construction of contractual provisions obliging the parties to act in good faith: Re Compound Photonics Group Ltd; Faulkner v Vollin Holdings Ltd [2022] EWCA Civ 1371.

Although set in a non-financial context, the decision will be of interest to financial institutions as it emphasises that good faith clauses must be interpreted by close reference to the particular context in which they appear, and that authorities interpreting similar clauses in other legal or commercial contexts cannot be straightforwardly applied to other situations.

In particular, the Court of Appeal rejected the proposition that it was possible or appropriate to divine from the case law a set of minimum standards that would apply in every case in which a duty of good faith is inserted into a contract, beyond the “very obvious” point that the core meaning of an obligation of good faith is an obligation to act honestly – though it also rejected the argument that a good faith obligation cannot be breached other than by acting dishonestly.

On a practical level, this case serves as a reminder that parties proposing to include an express duty of good faith should define the scope of the duty as clearly as possible within the agreement, including, where feasible to do so, identifying actions that are (or are not) required to satisfy it.

For more information on the decision, see our Litigation Notes blog.

High Court finds that bank’s notice of event of default under section 5(a)(i) of the 2002 ISDA Master Agreement is valid

The High Court has summarily determined that a bank’s default notice of an event of default to an energy company, for failure to pay monies due under a foreign exchange (FX) swap, was valid under the terms of the 2002 ISDA Master Agreement governing the transaction: Macquarie Bank Limited v Phelan Energy Group Limited [2022] EWHC 2616 (Comm).

The decision will be of interest to financial institutions trading in derivatives based on standard form ISDA documentation. It provides guidance on what constitutes a valid notice of an event of default by a non-defaulting party under section 5(a)(i) of the 2002 ISDA Master Agreement. The decision is also a reassuring one for financial institutions as it highlights that where there is a dispute over the terms of a transaction, such as the amount or currency of a swap, this does not necessarily mean that the default notice is automatically invalid, as long as it complies with the contractual provision in the transaction documentation requiring the notice.

In the present case, the court was satisfied that it was not necessary for the amount stated in the bank’s default notice to be correct for it to be valid. The court emphasised that it was clear that the default notice served by the bank met the requirements of section 5(a)(i) of the 2002 Master Agreement. It would have been immediately and unambiguously clear to the company that: (i) the bank was complaining of a failure to make the payment due to it under the FX swap; (ii) the company had made no payment under the FX swap; and (iii) on the face of the documents, it was obliged to pay a certain sum to cure the default to remedy that failure.

We consider the decision in more detail below.

Background

On 14 May 2021, a bank (Bank) and an energy company (Company), entered into a USD / ZAR FX swap with payment being due by the Company on 28 May 2021 (the FX Swap). The FX Swap was governed by an ISDA 2002 Master Agreement agreed between the Bank and Company in 2019 (the Master Agreement). On 28 May 2021, the Bank emailed the Company stating that it had not yet received the amount due. The Bank used the strike price of ZAR 22.16 to estimate the amount due in its email. The Company disputed that the amount included in the Bank’s email was due or was correct. On 31 May 2021, the Bank served a default notice on the Company requiring it to make a payment of the amount it had estimated (the Default Notice). The Default Notice stated that a failure to make the payment in the time period set out would amount to an event of default under section 5(a)(i) of the Master Agreement. The Company again disputed that the amount was due or correct.

On 3 June 2021, the Bank sent a letter designating 4 June 2021 as the early termination date pursuant to section 6(a) of the Master Agreement (the Early Termination Date Notice). The Company contended that it was not open to the Bank to designate an early termination date as the Company had disputed the Default Notice. Subsequently, on 9 June 2021, the Bank sent the Company a notice of the early termination amount (again determined based on the strike price of ZAR 22.16) (the Early Termination Amount Notice).

The Bank brought a debt claim against the Company. The Bank’s case was that the Company was required under the FX Swap to make certain payments on the settlement dates prescribed in the FX Swap. The Company’s failure to make the payment due in May 2021 constituted an event of default under the Master Agreement. This was a continuing event of default which triggered the early termination provisions under the Master Agreement. The Bank had followed the applicable provisions for early termination, pursuant to which the Company became liable to pay the early termination amount due. The Company denied the claim. The Company contended that it was not liable to pay the sums due given that it disputed the terms of the FX Swap, in particular the strike price for the trade.

The Bank subsequently brought an application for summary judgment on the termination issue, pending the resolution of the issue as to what was the correct strike-out price.

Decision

The High Court found in favour of the Bank on the termination issue.

The court held that it was clear that the Default Notice served by the Bank met the requirements of section 5(a)(i) of the Master Agreement. It would have been immediately and unambiguously clear to the Company that: (i) the Bank was complaining of a failure to make the payment due to it under the FX Swap; (ii) the Company had made no payment under the FX Swap; and (iii) on the face of the documents, it was obliged to pay a certain sum to cure the default to remedy that failure.

The key issues which may be of broader interest to financial institutions are examined below.

1. Was there an Event of Default within section 5(a)(i) of the Master Agreement?

Key terms of the Master Agreement

The court noted that for an event of default to occur under section 5(a)(i) of the Master Agreement, there must be a failure by a party to make payment, which has not been remedied in the grace period after notice of the failure has been given.

Construction of the Master Agreement

The court highlighted that it had regard to the following legal principles when interpreting the Master Agreement:

  • the Master Agreement should as far as possible be interpreted in a way that serves the objectives of clarity, certainty and predictability so that the very large number of parties using it should know where they stand (as per Lomas v JFB Firth Rixson Inc [2010] EWHC 3372).
  • the focus is ultimately on the words used, which should be taken to have been selected after considerable thought and with the benefit of the input and continuing review of users of the standard forms and of the knowledge of the market (as per Lehman Brothers International (Europe) [2016] EWHC 2417 (Ch)).

Requirements for a valid notice under sections 5(a)(i) and 5(a)(ii) of the Master Agreement

The court emphasised that the issue of whether the notice under section 5(a)(i) needed to specify the outstanding amount of payment at all, and what the consequence of including an incorrect figure would be, was ultimately a matter of construction of two documents:

The court also noted that the grace period which service of a valid notice triggers is a relevant consideration when determining what is necessary for a notice to be effective. As per Deutsche Bank AG v Sebastian Holdings Inc [2013] EWHC 3463 (Comm) and Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch), the whole point of section 5 (a)(ii) and section 2(a)(iii) is to provide an opportunity to remedy the failure which gave rise to the event of default or potential event of default.

The court then underlined that a valid notice under section 5(a)(i) must be such as to:

  • communicate clearly, readily, and unambiguously to the reasonable recipient in the context in which it is received the failure to pay or deliver in question, such that the recipient will clearly understand the trade under which the obligation to pay or deliver has arisen and the particular obligation which it is said has not been performed; and
  • thereby enable the recipient to identify what the relevant trade requires it to do in order to cure the alleged failure within the applicable grace period.

The court rejected the Company’s contention that a valid notice required the notice to set out: (i) identification of the confirmation for the relevant transaction, (ii) a precise and accurate statement of the amount due, and (iii) the currency of the payment. In the court’s opinion, this would result in a number of improbable consequences such as very minor mistakes (e.g., in relation to the reference number of the relevant trade or other typing errors) invalidating the notice. The court did not agree that the language or nature of the Master Agreement required such an interpretation.

The court also highlighted that, as per Mannai, the issue of whether the required information had been communicated unambiguously does not solely rely on the language used, and that there can be an unambiguous communication of information even if the communication involves a mistake. This is because the context in which the notice is received will also be relevant to what information the notice communicates to the recipient.

Did the disputed Default Notice meet the requirements of section 5(a)(i)?

The court considered the context in which a reasonable person would have received and read the Default Notice. In the circumstances of the present case, the court highlighted, amongst others, the following factors:

  1. the Default Notice referred to the Company’s failure to make a payment on 28 May 2021 in respect of the FX Swap.
  2. the 28 May 2021 settlement date and the Master Agreement were expressly referred to in the Default Notice.
  3. the transaction reference included in the Default Notice was the same as that included on the confirmation sent by the Bank regarding a trade done on 14 May 2021 for settlement on 28 May 2021.

The court concluded that the Default Notice was valid because it would have been immediately and unambiguously clear to the Company on reading the Default Notice that: (i) the Bank was complaining that the Company had failed to make payment due by the 28 May 2021 settlement date under the FX Swap; (ii) the Company had indeed made no payment under the FX Swap; and (iii) on the face of the documents, it was obliged to pay a certain sum to cure the default to remedy that failure.

2. Was the Early Termination Date Notice valid?

The court said that given it had concluded that the Default Notice was valid (and consequently that there was an event of default as the failure to pay was not remedied in the grace period after the Default Notice was served), the Company’s argument that the Early Termination Date Notice was invalid because there was no event of default failed.

The court then confirmed that the FX Swap had been terminated and that the termination date was 4 June 2021.

Accordingly, the court found in favour of the Bank on the termination issue.

Simon Clarke
Simon Clarke
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Mannat Sabhikhi
Mannat Sabhikhi
Associate
+44 20 7466 2859

High Court considers contractual construction of irrevocable letter of credit incorporating UCP 600

In the context of a trade finance dispute, the High Court has considered the contractual interpretation of an irrevocable letter of credit incorporating the commonly used code in the Uniform Customs and Practice for Documentary Credits 600 (UCP 600), published by the International Chamber of Commerce (ICC).  In particular, the court held that the issuer’s interpretation of the letter of credit would, in practice, render the instrument revocable, which was inconsistent with the UCP and therefore not the proper construction. Finding that there was no real or substantial dispute that the issuer of the credit was liable, the court held that a winding up petition presented by the beneficiary succeeded against the issuer: Heytex Bramsche GmbH v Unity Trade Capital Ltd [2022] EWHC 2488 (Ch).

One of the key issues considered in this case was whether or not the documents presented as part of the demand were compliant with the terms of the letter of credit, which required the documents to be signed by “all sides of [the letter of credit]”. The court roundly rejected the issuer’s contention that its own signature was required, emphasising the need to consider letters of credit as a whole and – as far as possible – to read the contractual terms consistently with the UCP. In the court’s view, the issuer’s construction would have resulted in the letter of credit becoming revocable, because the issuer could have chosen simply to withhold its signature from the demand. This would have created a fundamental internal inconsistency in the terms of the letter of credit and a very significant departure from the UCP 600.

The court also rejected the issuer’s proposition that the letter of credit incorporated its own “credit norms”, modifying and prevailing over the UCP 600. Assuming the issuer’s interpretation of the effect of those credit norms was correct, incorporation would have resulted in a dramatic departure from the scheme of the UCP 600 and from the commercial essence of a letter of credit. The court said that to have successfully incorporated these provisions into the credit would have required very clear notice, the equivalent of Denning LJ’s “red hand” in J Spurling Ltd v Bradshaw [1956] 1 WLR 461 (CA) 466. Alternatively, even if the credit norms were incorporated, they did not have the effect argued for by the issuer, which undermined a number of characteristics fundamental to the function of credits.

The present decision continues the trend of decisions considering the UCP 600 in which the courts have consistently favoured an international focus on the question of interpretation. We considered recently the interpretation of ICC standardised rules in trade finance disputes across a number of commonly used codes, including UCP 600, in this article published in Butterworths Journal of International Banking and Financial LawInterpreting ICC standardised rules in trade finance disputes: courts take an international perspective.

We consider the decision in more detail below.

Background

In June 2020, Heytex Bramsche GMBH (Heytex, a German company) entered into a contract to sell fabric to Jibran Technical Services LLC (Jibran, a company in the UAE). In order to facilitate this purchase, UTC Trade Capital Limited (UTC, an English trade finance company), issued an expressly irrevocable letter of credit (LC) in the sum of around €200,000 in favour of Heytex, as beneficiary. The LC incorporated the standard terms contained in the UCP 600.

Following agreed payment deferrals between Heytex and Jibran, Heytex presented various documents to UTC seeking payment from UTC as the issuer (as per the terms of the LC). These documents were sent to UTC by Heytex’s own bank, Sparkasse Osnabruck (Sparkasse), via SWIFT message. However, nothing was paid to Heytex, whether by UTC or Jibran, and Heytex was left without payment, or documents, or goods.

On 25 November 2021, Heytex petitioned to wind up UTC on the basis of a statutory demand claiming payment under the LC, alleging that UTC was insolvent within the meaning of ss. 122(1)(f) and 123 of the Insolvency Act 1986, as it had failed to make payment pursuant to the irrevocable LC.

UTC disputed its liability under the LC, and opposed the petition on the following bases:

  1. Firstly, it argued that it was not the issuer, and that the LC was issued by its parent company (rejected by the court and not considered further in this blog post).
  2. Secondly, that the documents presented by Heytex to UTC demanding payment under the LC were discrepant because they were not signed by UTC and Sparkasse. UTC relied on a term of the LC, which stated that the documents presented had to be signed by “all sides of LC”.
  3. Thirdly, that UTC’s “Credit Norms” were incorporated into the LC and prevailed over the terms of the UCP 600. UTC argued that the effect of the Credit Norms was to permit it to release the discrepant documents to Jibran, whilst at the same time making the credit void and releasing UTC from any further liability to Heytex.
  4. Finally, under the Credit Norms, that the LC was rendered “void” by virtue of the variations to the payment schedule agreed between Heytex and Jibran.

The judgment relates to the final hearing of the winding up petition.

Decision

The court held that there was no real or substantial dispute in respect of the debt upon which the petition was based and the petition succeeded accordingly. We consider the key issues arising from the judgment in respect of letters of credit, which are likely to be of broader interest to financial institutions.

Construction of letters of credit

The court emphasised that the idea of a letter of credit is straightforward: an issuer commits itself to a financial undertaking that it will fulfil against presentation of stipulated documents. Letters of credit afford the buyer the protection of payment against documents and provide the seller with protection against buyer default by substituting a bank as the party to which the seller looks for payment, regardless of any dispute which the buyer might raise in respect of the underlying sale contract.

The court also noted that, in addition to these inherent features, letters of credit are useful because they benefit from a “remarkable degree of international standardisation”, because of the worldwide adoption of the UCP. It was noted that a court will hesitate before concluding that the parties to a letter of credit genuinely intended to depart from such an internationally accepted regime, and it is likely to require the clearest wording to evidence that intention. The court considered Fortis Bank SA/NV v Indian Overseas Bank [2011] EWCA Civ 58, where Thomas LJ said that “a court must recognise the international nature of the UCP and approach its construction in that spirit”. The court also considered a similar point made in Taurus Petroleum Ltd v State Oil Marketing Co of the Ministry of Oil, Iraq [2017] UKSC 64.

Were the documents presented to the issuer compliant with the terms of the LC?

The court held that the documents presented by Heytex (via Sparkasse) to UTC, seeking payment under the LC, were compliant with the terms of the LC.

As noted above, UTC argued that the documents were discrepant because they were not signed by UTC and Sparkasse, contrary to the terms of the LC, which stated that the documents presented had to be signed by “all sides of LC”.

The court noted that when approaching the issues of construction of the LC “… the instrument must be construed as a whole” and “must as far as possible be read consistently with the UCP”. In the court’s view, the expression “all sides of LC” meant Heytex and Jibran only (excluding Sparkasse and UTC), for the following reasons:

  1. Firstly, the LC was described as “irrevocable” by an express term. The UCP 600 also describes credits as irrevocable. There was nothing to suggest that a revocable credit would have been commercially acceptable to the parties or was genuinely intended. However, if UTC’s suggested construction (that the documents requesting payment had to be signed by UTC) was correct, then the credit would have been revocable, because UTC could have chosen to withhold its signature. This would have been a fundamental internal inconsistency in the terms of the LC and a very significant departure from the UCP 600.
  2. Secondly, the sale contract between Heytex and Jibran was the contract underlying the LC, which was only required and brought into existence because of that contract, to facilitate payment under it and reconcile the interests of the parties to it. The two sides of the transaction were Heytex and Jibran. In that context, UTC’s suggested meaning of the provision served no obvious commercial purpose.

Given the above, the court found that Heytex’s presentation of the documents to request payment was compliant and crystallised UTC’s liability to Heytex under Articles 7 and 15 of the UCP 600. UTC was not entitled to give notice of rejection under Article 16, and owed the debt stated in the petition.

Assuming the Credit Norms were incorporated into the LC, what was the effect?

Turning to UTC’s argument that its Credit Norms were incorporated into the LC and relieved UTC of liability to Heytex, the court first considered the effect of the relevant clauses of the Credit Norms, on the assumption that they were indeed incorporated.

The court commented that the clauses of the Credit Norms relied upon, if given the meaning attributed by UTC, would be unusual in the context of a letter of credit and would entail a dramatic departure from the scheme of the UCP 600, and from the commercial essence of a letter of credit, in a number of key respects. In particular:

  • Process following receipt of discrepant documents demanding payment under the LC. Article 16 of the UCP 600 requires either the return of discrepant documents by the issuer to the beneficiary, or a waiver and acceptance of the issuer’s liability to the beneficiary. In either case, the beneficiary’s interests are protected. However, UTC argued that the Credit Norms modified Article 16, and allowed for the release of discrepant documents by the issuer/UTC to the applicant/Jibran, whilst at the same time making the credit “void” and “releasing” UTC from any further liability to the beneficiary/Heytex.
  • Impact of negotiations relating to the underlying sale contract. UTC submitted that the Credit Norms provided for termination and avoidance of the credit on the basis that the beneficiary/Heytex and applicant/Jibran renegotiated the terms of the underlying sale contract (i.e. by varying the payment schedule). The court said this construction would be surprising because: (a) it would tend to undermine the “autonomy principle” (that the credit is separate from the sale on which it is based and also from the facility between the buyer and issuing bank), which is one of the characteristics fundamental to the function of credits; and (b) it would require the issuer to consider matters beyond questions of narrow documentary compliance.

The court proceeded to construe the relevant clauses of the Credit Norms, finding that they should not be construed as having the effect contended by UTC.

Were the Credit Norms in fact incorporated?

The court held that UTC’s Credit Norms were not incorporated into the LC and did not prevail over the terms of the UCP 600. Accordingly, even if the court’s contractual interpretation of the Credit Norms was incorrect (and the clauses should be understood as UTC submitted) the petition nonetheless succeeded.

There was no real dispute about the general test governing the incorporation of terms into a contract by reference, which is that all that was reasonably necessary as a matter of ordinary practice should have been done to bring to [the party’s] notice” the terms: Thompson v London Midland & Scottish Railway Co [1930] 1 KB 41 (CA) 52 (per Lawrence LJ). The question of what satisfies that notice requirement turns on three factors:

  1. The nature of the document and whether it is objectively intended to have contractual force: Parker v South Eastern Railway Co (1877) 2 CPD 416 (CA) 422 (Mellish LJ).
  2. The timing of the notice. The terms must be made available before or at the time of contracting, and not after contracting: Olley v Marlborough Court Ltd [1949] 1 KB 532 (CA).
  3. The nature of the terms being incorporated. If the purported terms are onerous or commercially unusual, they may need to satisfy Denning LJ’s “red hand test” from Spurling v Bradshaw, i.e. to be printed in red ink on the face of the document with a red hand pointing to it”.

In its reasoning as to why the Credit Norms were not incorporated into the LC, the court said their incorporation would entail a dramatic departure from the scheme of the UCP 600 and from the commercial essence of a letter of credit. In consequence, to have incorporated these provisions into the credit would have required very clear notice, the equivalent of Denning LJ’s “red hand”.

However, the terms and degree of notice relied upon by UTC were nowhere near enough.

Given that the LC was made expressly on the terms of the UCP 600, UTC therefore could not establish an arguable case that it gave sufficient notice to incorporate the terms of the Credit Norms into the LC and/or to modify the operation of the UCP 600 to such a significant and highly unusual extent.

Outcome

Accordingly, the court concluded that there was no real or substantial dispute in respect of the debt upon which the petition was based and the petition succeeded accordingly.

Ajay Malhotra
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High Court confirms interest rate swaps entered into with Italian municipal authority were valid, lawful and binding on the parties

The High Court has allowed a summary judgment application by an Italian bank seeking declarations to the effect that certain interest rate swaps entered into with an Italian municipal authority were valid, lawful and binding on the parties: Dexia Crediop SPA v Provincia Di Pesaro E Urbino [2022] EWHC 2410 (Comm).

This is an interesting decision for financial institutions trading in derivatives based on standard form ISDA documentation, particularly given the summary determination. It is the latest in a line of authorities relating to interest rate swap transactions entered into by foreign municipal authorities, in which parties have sought to unwind or set aside the transactions on the basis that they were invalid under certain foreign laws alleged to be applicable to the transactions. The English court has, once again, taken a robust approach to granting declaratory relief and the decision is likely to be welcomed as further evidence of the English court’s emphasis on construing commercial contracts, and in particular standard form ISDA documentation, in order to achieve market certainty and predictability.

In the present case, the court was satisfied that the transactions were governed by English law notwithstanding Article 3(3) of the Rome Convention, which provides that where a law is chosen to govern a contract but all the other elements relevant to the situation are connected with another country, the choice of law will not prejudice the application of the mandatory rules of that other country. Further, the court held that there was no real prospect of the municipal authority successfully contending that the transactions did not comply with certain Italian laws on the basis that they: (i) were a form of indebtedness; (ii) had not been authorised by the relevant provincial authority; or (iii) did not meet the economic convenience (i.e. they were not “economically advantageous”) requirement.

We consider the decision in more detail below.

Background

In 2003 and 2004, the claimant Italian bank (Bank) entered into two interest rate swap transactions with an Italian municipal authority (Authority). Each of the transactions was subject to a 1992 ISDA Master Agreement, Multi-Currency-Cross Border (the Master Agreement) and associated schedule (Schedule) (together, with the 2003 and 2004 swaps, the Transaction Documents).

In June 2021, the Authority commenced proceedings in Italy seeking to unwind or set aside the transactions (the Transactions), following the Banca Nazionale Del Lavoro SpA v Municipality of Cattolica decision of the Italian Supreme Court, which declared an Italian law governed swap between a bank and local authority invalid. The Bank, in response, commenced proceedings in England seeking a number of declarations to the effect that the Transactions were valid, lawful and binding. The Authority acknowledged service of the English proceedings but subsequently took no active part in the English proceedings.

The Bank applied for summary judgment on its claims for declaratory relief.

Decision

The High Court found in favour of the Bank and allowed the summary judgment application. The key issues which may be of broader interest to financial institutions are examined below.

Governing law of the Transactions

The court held that the Transaction Documents were plainly governed by English law in accordance with Article 3(1) of the EEC Convention on the Law Applicable to Contractual Obligations (the Rome Convention).

In the court’s view, the issue of identifying the applicable law was a matter for the Rome Convention, which was incorporated into UK law by the Contracts (Applicable Law) Act 1990.

The court noted that Article 3 of the Rome Convention provides:

“(1) A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.

(2) The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice under this Article or of other provisions of this Convention. Any variation by the parties of the law to be applied made after the conclusion of the contract shall not prejudice its formal validity under Article 9 or adversely affect the rights of third parties.

(3) The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law at the country which cannot be derogated from by contract, hereinafter called ‘mandatory rules’.”

On the facts, the court said the Master Agreement and Schedule expressly and without any qualification provided that the Master Agreement was to be governed and construed in accordance with English law. Also, the factors relied by the Authority, such as references to certain provisions of Italian law in the Authority’s proposals, were not sufficient to displace the express choice of English law as they were either: (i) not concerned with the terms and performance of the Transaction Documents themselves, but with the circumstances leading up to the conclusion of the relevant contractual arrangements; or (ii) not located in the Transaction Documents at all. Further, even if these references could be said to be concerned with the terms and performance of the Transaction Documents they were not sufficient either to demonstrate with reasonable certainty that Italian law was being chosen as the governing law and they were not sufficient to lead to the conclusion that the parties had overridden their stated choice of English law either expressly or in any other way demonstrable with reasonable certainty.

In addition, if the parties’ intention had been to choose Italian law in the Transactions as the new governing law to replace the choice of English law in the Master Agreement and Schedule, in accordance with Article 3(2) of the Rome Convention, the parties would have used language which was far more explicit to that end, for example by stating that the choice of law in the Master Agreement and Schedule was replaced by the choice of Italian law in the 2004 transaction. However, there was no such provision nor indeed a provision that came arguably close to such a provision. The court underlined that the Master Agreement contemplated – and the Transactions both provided – that the Transactions were entered into under/and or in accordance with the terms of the Master Agreement and Schedule. There was no suggestion of the Transactions being subject to a governing law other than English law.

The court also highlighted that, as per Dexia Crediop SpA v Comune di Prato [2017] EWCA Civ 428, given the nature of the Transaction Documents being based on the ISDA Master Agreement, there was no scope for allowing any mandatory rules of Italian law – should there be such laws – to displace under Article 3(3), the express choice of English law made by the parties in the Master Agreement and Schedule,

Compliance with Italian law

The court held that there was no real prospect of the Authority successfully contending that the Transactions did not comply with certain Italian laws.

Form of indebtedness

For the purpose of the summary judgment application, the court assumed that the Italian Supreme Court’s decision in Cattolica represented the correct position under Italian law. In Cattolica, the Italian Supreme Court held that, although derivative contracts in general do not constitute indebtedness, certain types of derivatives may have the effect of creating indebtedness if they: (i) provide for an upfront payment; (ii) extinguish pre-existing underlying loans; or (iii) significantly modify existing loans.

However, in the court’s view, there was no evidence that the Transactions had any factors which would have rendered them as forms of indebtedness as identified in Cattolica. There was therefore no real prospect of the Transactions being treated as void on this ground.

Authorisation by a provincial council

The court noted, as per Cattolica, that certain interest rate swaps required authorisation by a provincial council under certain Italian legislation if their characteristics were such as to constitute indebtedness.

However, in the court’s opinion, the Transactions were not of the type which required the approval of the provincial council and even if they were, such approval had been obtained by certain resolutions. There was therefore no real prospect of the Transactions being treated as contravening certain Italian legislation.

Economic advantage

The court firmly rejected the Authority’s suggestion that the Transactions did not comply with certain Italian legislation in that they did not meet the economic convenience requirement (i.e. they were not “economically advantageous”) due to the fact that the Transactions included certain “implicit costs” to the Authority.

The court agreed with the Bank that the Transactions did not constitute a refinancing or restructuring of any existing indebtedness, and were therefore not subject to the economic convenience test under certain Italian legislation.

Validity of the Transactions

The court held that the appropriate approvals had been provided. The Authority did not lack capacity and there was no issue undermining the material validity of the Transactions under English law.

The court noted that if this were a matter of English law, being the governing law of the Transactions in accordance with Article 3(1) of the Rome Convention, there was no identified reason why the Transactions or the Transaction Documents should be regarded as invalid.

Accordingly, for all the reasons above, the court found in favour of the Bank and allowed the summary judgment application.

John Corrie
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Ceri Morgan
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Nihar Lovell
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High Court finds no continuing event of default under ISDA Master Agreements once administration of counterparty terminates

The High Court has allowed an application for directions made by the administrators of an investment bank concerning the construction and effect of various standard form events of default provisions which were included in the 1992 and 2002 versions of the ISDA Master Agreements (multi-currency cross border versions) in relation to certain swaps entered into between the bank and a group of companies: Grant & Ors v FR Acquisitions Corporation (Europe) Ltd & Anor (Re Lehman Brothers International (Europe)) [2022] EWHC 2532 (Ch).

This decision will be of interest to financial institutions trading in derivatives based on standard form ISDA documentation. It appears to be the first case where the court has been involved in a contextual interpretation as to whether there was a continuing event of default under section 2(a)(iii) of the 1992 and 2002 ISDA Master Agreements. The decision is likely to be reassuring for financial institutions as it highlights the court’s willingness to uphold contractual obligations to make payments due under swap agreements where there is no longer any continuing event of default which suspends such contractual obligations, such as the termination of an administration.

In the present case, the court was satisfied that under section 2(a)(iii) the test to be adopted is whether the identified event or state of affairs which constituted the event of default is continuing, rather than whether creditors’ rights have been significantly and permanently altered or continue to be affected. In the court’s view, none of the events of defaults or alleged events of defaults relied on by the group companies were such that it had a substantive adverse effect on them or their rights in relation to the swaps. Further, their credit risk was not increased or adversely affected by any of them, nor would it be.

We consider the decision in more detail below.

Background

In 2007, the claimant group companies entered into two interest rate swap transactions (the Swaps) with an investment bank (the Bank). These Swaps were governed respectively by the 1992 and 2002 ISDA Master Agreements.

In 2008, the Bank entered into administration. The claimants opted against the early termination of the Swaps. The claimants instead relied on section 2(a)(iii) of the ISDA Master Agreements to suspend their payment obligations under the Swaps to the Bank. Section 2(a)(iii) provided that any payment obligations arising under the Swaps were subject to the condition precedent that: “no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing”. There was no dispute that the making of the administration order triggered that suspensory condition.

By 2018, the administration of the Bank was highly successful. Substantial assets remained available in the estate. The administrators’ intention was to bring the Bank’s administration to an end by terminating their appointments and returning the Bank to the control of its directors.

In 2020, the administrators applied to the High Court for directions concerning the construction and effect of various standard form events of default provisions which were included in the 1992 and 2002 versions of the ISDA Master Agreements (multi-currency cross border versions) in relation to the Swaps. The administrators contended that no event of default or potential event of default would be continuing once their appointment terminated and the Bank was placed under the control of its directors. Therefore the suspensory condition provided for by section 2(a)(iii) of the ISDA Master Agreements would fall away and the claimants would become liable to make payment to the Bank of certain sums due under the Swaps.

Decision

The High Court found in favour of the administrators and allowed the application.

The High Court held that if and when all the relevant steps had been taken, no event of default would be continuing under section 2(a)(iii) of the ISDA Master Agreements and the claimants would have a contractual obligation to pay the sums owing to the Bank under the Swaps.

The key issues which may be of broader interest to financial institutions are examined below.

Interpretation

The court noted that, as per Lehman Brothers Finance SA v SAL Oppenheim JR & CIE. KGAA [2014] EWHC 2627, the ISDA Master Agreement is intended to be normative, and to apply in as many situations and with as much straightforward application as possible.

The court said this affected its approach to interpretation. Rather than, as per Wood v Capita Insurance Services Ltd [2017] UKSC 24, ascertaining the objective meaning of the language which the parties have chosen to express their agreement and following the iterative process which each suggested interpretation was checked against the provisions of the contract and its commercial consequences investigated, the court underlined that in the context of a standard form developed by reference to, and to meet the needs of disparate users in a great variety of circumstances, the process must be, in seeking to achieve that objective, ascribe even more than usual deference to the words used, and take as the context not the specific position as between the parties, but its anticipated use by such a variety of intended users in such a variety of circumstances.

Commercial purpose of section 2(a)(iii) of the ISDA Master Agreements

The court highlighted that, as per Pioneer Freight Futures Co Ltd v TMT Asia Ltd [2011] EWHC 778 (Comm) and Lomas v Firth Rixson Inc [2012] 1 CLC 713, the commercial function or purpose of the condition precedent to payment as set out in Section 2(a)(iii) is to mitigate counterparty credit risk during the currency of what may be numerous swap transactions under the umbrella of the 1992 ISDA Master Agreement and while they remain open. It ensures that a non-defaulting party does not have to pay a defaulting party, who may be of doubtful solvency, in circumstances where, under ongoing open swap transactions, a defaulting party may subsequently owe sums to the non-defaulting party. In other words, it prevents any increase in credit risk that might occur if actual payments were made. Its effect is to substitute an accounting procedure whereby debits and credits build up or accrue in an account between the parties, but suspending the obligation of the non-defaulting party to pay any amounts which it may for the time being owe.

Continuing event of default

The court noted that the circumstances in which events of default are continuing, or should be treated as continuing, were not expressly defined or addressed by the ISDA Master Agreements.

The court then highlighted that an admission in writing of a party’s inability generally to pay its debts as they become due is not in the nature of a one-off event: the notice speaks to a continuing ability in that regard unless and until it is corrected. However, the court said that the administrator’s reports and surrounding publicity in the case of the Bank’s administrations, have almost certainly been sufficient to ensure that no creditor would any longer have any regard to the original notice. In the court’s view, the administrators would be justified in publishing or causing the Bank to publish a notice to the effect that the Bank had a surplus of assets over liabilities and now is able to pay its debts as they fall due.

The court also agreed with administrators that in section 2(a)(iii) the test to be adopted is whether the identified event or state of affairs which constituted the event of default is continuing, rather than whether creditors’ rights have been significantly and permanently altered or continue to be affected by the administration. The focus was on the state of coming to be and continuing to be in administration and that state of affairs would no longer be continuing when the administration terminated, whether or not the administration at some earlier point became a distributing administration.

In the court’s view, none of the events of defaults or alleged events of defaults relied on by the claimants were such that it had a substantive adverse effect on them or their rights in relation to the Swaps. Further, their credit risk was not increased or adversely affected by any of them, nor would it be. The claimants were not exposed to any risk of the Bank failing to perform its obligations: the Bank had no such obligations to the claimants.

Accordingly, for all the reasons above, the court found in favour of the administrators and allowed the application.

Andrew Cooke
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John Mathew
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Court of Appeal finds party was required to accept non-contractual performance in exercising reasonable endeavours to “overcome” force majeure event

The Court of Appeal has held, by a majority, that a shipowner was not entitled to rely on a force majeure clause in a shipping contract where its charterer’s parent company became subject to US sanctions: MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406.

Although set in a non-financial context, the decision will be of interest to financial institutions as it turned on the wording of the force majeure clause, which required that the force majeure event could not be “overcome by reasonable endeavors” on the part of the affected party. The High Court had held that, in exercising reasonable endeavours, the shipowner was not obliged to accept anything other than contractual performance (see our post on that decision).

The Court of Appeal disagreed, finding that the clause required the shipowner to accept a proposal involving payment in an alternative currency, which did not extend to full contractual performance, but which achieved precisely the same result as it: (i) fulfilled the underlying purpose of the relevant obligation; and (ii) caused no detriment to the shipowner. However, it was clear that, had these criteria not been met, the shipowner would have been entitled to rely on the force majeure clause.

The court emphasised that each case will turn on the drafting of the relevant clause as applied to the factual matrix. Parties must therefore be cautious in seeking to rely on previous decisions regarding the interpretation of a force majeure clause.

For a more detailed discussion of the decision, please see our litigation blog post.

Interpreting ICC standardised rules in trade finance disputes: courts take an international perspective

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on interpreting International Chamber of Commerce (ICC) standardised rules in trade finance disputes.

Banking practice in areas of trade finance such as demand guarantees and letters of credit is standardised by a collection of contractual rules published by the ICC. The application of domestic contractual interpretation principles may risk inconsistency in the way such rules are construed between jurisdictions. However, in relation to the most commonly used rules (the UCP 600, which apply to letters of credit), several courts (including the English courts) have tried to ensure that the rules are interpreted consistently with reference to their international consequences, as opposed to strictly in accordance with the governing law of the contract.

In our article we examine a number of decisions demonstrating a trend towards construing other sets of ICC standardised rules in the same way as the UCP 600 and the broader implications for ICC standardised rules.

The article can be found here: Interpreting ICC standardised rules in trade finance disputes: courts take an international perspective. This article first appeared in the September 2022 edition of JIBFL.

Ajay Malhotra
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Ceri Morgan
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Zoe Diepstraten
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Court of Appeal upholds summary judgment for rent accrued during Covid closures of commercial premises, rejecting arguments based on implied terms and “failure of basis”

The Court of Appeal has dismissed appeals against the grant of summary judgment to commercial landlords for payment of accrued rent in two cases where the relevant premises (in each case operated as cinemas) had to be closed for extended periods due to Covid restrictions: Bank of New York Mellon (International) Ltd v Cine-UK LtdLondon Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2022] EWCA Civ 1021.

Although set in a non-financial context, this decision will be of interest to financial institutions considering the ongoing impact of the pandemic. The decision serves as a reminder of the high threshold for implying contractual terms, namely where it is necessary to give business efficacy or so obvious as to go without saying. As the court commented, the scope for implication is particularly limited where the contracts in question are detailed documents prepared by lawyers.

It also illustrates that a claim based on unjust enrichment (such as here for total failure of consideration, or “failure of basis”) will not be available where this is inconsistent with the express terms of the contract.

The court rejected an argument that, as the restrictive legislation introduced to address the Covid pandemic was “unprecedented”, it was appropriate for the court to consider applying the law in a fresh light. Even if the legislation were unprecedented (which the court said was debateable) that was no reason to disregard or disapply fundamental principles of the law of contract or to extend the law of unjust enrichment beyond its proper bounds.

For a more detailed analysis of this decision, please see our Litigation Notes blog post.