The Commercial Court has granted declaratory relief concerning a bank’s rights under an interest rate hedging arrangement governed by the 1992 ISDA Master Agreement: BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA  EWHC 2436 (Comm).
This is the substantive English trial judgment in the long-running (and cross-jurisdictional) dispute between BNP Paribas S.A. (the Bank) and the Italian public-private partnership, Trattamento Rifiuti Metropolitani S.p.A. (TRM). The dispute relates to a 2008 loan provided by a syndicate of banks (led by the claimant Bank) to TRM, and the associated hedging arrangements, which TRM says the Bank negligently advised it to enter into.
The decision will be welcomed by market participants for providing an abundance of detailed and helpful commentary on key provisions of the ISDA Master Agreement, and more broadly by financial institutions for its analysis of non-reliance clauses, together with guidance for parties seeking declaratory relief. The key takeaways are as follows:
1. Non-reliance clauses in a financial services context
One of the declarations considered by the court tracked the Non-Reliance provisions at Part 5(d)(i) of the Schedule to the ISDA Master Agreement, and asked for a declaration that TRM had “made its own independent decision” to enter into the hedging transaction and was not relying on communications from the Bank as investment advice or as a recommendation to enter into the hedging transaction. A further declaration sought provided that these provisions gave rise to a contractual estoppel, so that TRM was estopped by the ISDA Master Agreement from contending, for example, that it had relied on any representations given by the Bank as investment advice or a recommendation to enter into the hedging transaction.
The court swiftly agreed to grant the declarations tracking the parts of the Schedule, but the question of contractual estoppel gave rise to more detailed analysis. Following Springwell Navigation Corpn v JP Morgan Chase Bank  EWCA Civ 1221, the court confirmed that there is no distinction between: (a) warranties and undertakings (each of which TRM accepted could give rise to an estoppel); and (b) an acknowledgement or a representation (each of which TRM argued could not). The court referred to Leggatt LJ’s commentary suggesting otherwise in First Tower Trustees and another v CDS (Superstores International) Ltd  EWCA Civ 1396, noting that this was obiter. The court also noted that the factual situation in First Tower was very different (since the case concerned the effect of an exclusion clause in a commercial lease and its effect vis à vis pre-contractual enquiries which misrepresented the position as regards asbestos on site). The court specifically noted that Leggatt LJ was not purporting to consider the effect of representations typically made in a financial services context.
The court also rejected TRM’s argument that the Non-Reliance provisions sought to exclude liability for misrepresentation under the Misrepresentation Act 1967, and so were subject to the requirement of reasonableness under section 11(5) of the Unfair Contract Terms Act 1977 (UCTA). This can be contrasted again with the decision in First Tower (which, interestingly, was not cited in the judgment on this point), as considered in our blog post: Court of Appeal finds non-reliance clause sought to exclude liability for misrepresentation and was therefore subject to UCTA reasonableness test.
Although the court considered these arguments in the context of the 1992 ISDA Master Agreement, its findings would also be relevant for a bank relying on the non-reliance language in the 2002 ISDA Master Agreement.
2. Entire Agreement clause in the ISDA Master Agreement
The court rejected TRM’s argument that the standard ISDA entire agreement clause was not effective and that TRM was able to rely on separately negotiated terms of the Financing Agreement as prevailing over the ISDA terms. The court said that the meaning of the entire agreement clause in the ISDA Master Agreement is “clear and unambiguous” on its face, and that TRM’s approach would sit uneasily with, while the Bank’s argument was harmonious with, the dicta in the authorities as to the importance of certainty and clarity in interpreting the ISDA Master Agreement (see for example Lomas v Firth Rixson  EWHC 3372).
3. Guidance for applications for negative declaratory relief
The court provided helpful guidance on the correct approach to applications for negative declaratory relief, which are common in these types of cross-border disputes. As set out in more detail below, the court found that the Bank in this case met the threshold requirements for such relief. In particular, the court noted that in such applications, the touchstone will be whether there is any utility in the claimant obtaining the negative declarations sought. It also noted a number of specific limitations on the grant of declaratory relief, including that the court should not entertain purely hypothetical questions and there must be a real and present dispute between the parties as to the existence or extent of a legal right between them (which need not fall within the jurisdiction of the English court).
A more detailed analysis of these issues and further questions of more general application for financial services institutions, is set out below.
In 2008, a syndicate of banks led by the claimant Bank, entered into a loan agreement (the Financing Agreement) with TRM, an Italian public-private partnership, to fund the building of an energy plant. The Financing Agreement was governed by Italian law and contained a jurisdiction clause in favour of the Italian court.
The Financing Agreement included an obligation for TRM to enter into an interest rate swap with the Bank to hedge the interest rate risks associated with the loan. In 2010, pursuant to that obligation, the parties executed a swap pursuant to a 1992 ISDA Master Agreement (the ISDA Master Agreement). The ISDA Master Agreement contained an exclusive jurisdiction clause in favour of the English court.
In correspondence in July 2016, TRM alleged that the Bank negligently advised TRM to enter into the hedging transactions, which (among other things) TRM said were mismatched with its real hedging requirements, generated a significant negative cash flow, and had a negative mark-to-market value.
In September 2016, the Bank issued proceedings in the English Commercial Court against TRM seeking declarations of non-liability in relation to the hedging transaction, in most cases tracking the wording of the ISDA Master Agreement. In April 2017, TRM sued the Bank before the Italian court and then issued an application in the Commercial Court to challenge its jurisdiction.
The Commercial Court found that the proceedings for declaratory relief brought before the English court were governed by the jurisdiction clause in the ISDA Master Agreement, finding that this clause was not displaced or restricted by the apparently competing Italian jurisdiction clause in the Financing Agreement (see the first instance decision). This was despite a provision in the Schedule to the Master Agreement that, in the case of conflict between the terms of the ISDA Master Agreement and those of the Financing Agreement, the latter should “prevail as appropriate”. See our blog post for more detail: High Court holds ISDA jurisdiction clause trumps competing jurisdiction clause in separate but related agreement.
The Court of Appeal agreed (see the Court of Appeal decision), finding that there was no conflict between the jurisdiction clauses, which were found to govern different legal relationships and were therefore complementary, rather than conflicting (such that the conflicts provision was not in fact engaged). The Court of Appeal emphasised that factual overlap between potential claims under the ISDA Master Agreement and the related Financing Agreement did not alter the legal reality that claims under the two agreements related to separate legal relationships. See our blog post for more detail: Court of Appeal finds ISDA jurisdiction clause trumps competing clause in related contract.
The Bank succeeded on the majority of its claim for declaratory relief, with the court (Mrs Justice Cockerill DBE) granting a significant number of the declarations sought. This blog post provides a summary of the court’s analysis below, focusing on the key points for financial institutions seeking negative declaratory relief and the points of interest in relation to the ISDA Master Agreement.
Preliminary issue: correct approach to applications for negative declaratory relief
Before turning to the substantive issues in dispute, the court considered a preliminary point on the correct approach to applications for negative declaratory relief.
The court noted that its power to grant such relief lay in section 19 of the Senior Courts Act 1981, which appears to be unfettered, but said that the grant of a declaration remains a discretionary remedy (see Zamir & Woolf, The Declaratory Judgment, Fourth Edition at 4-01). While the court acknowledged the authorities indicating that a court should be cautious when asked to grant negative declaratory relief, it was not persuaded by TRM that there should be a reluctance in cases involving foreign proceedings. The court confirmed the following general principles to be applied when considering negative declarations:
- The touchstone is whether there is any utility in the claimant obtaining the negative declarations sought.
- Negative declarations should be scrutinised by the court and rejected where they would serve no useful purpose.
- The prime purpose is to do justice in the particular case, which includes justice to both the claimant and defendant.
- The court must consider whether the grant of declaratory relief is the most effective way of resolving the issues raised and consider the alternatives (as per Rolls Royce v Unite the Union  1 WLR 318).
- Limitations on the court include: (i) it should not entertain purely hypothetical questions (see Regina (Al Rawi) v Sec State Foreign & Commonwealth Affairs  QB 289); (ii) there must be a real and present dispute between the parties as to the existence or extent of a legal right between them (see Rolls Royce); and (iii) if the issue in dispute is not based on concrete facts the issue can still be treated as hypothetical. This can be characterised as “the missing element which makes a case hypothetical”.
- Factors such as absence of positive evidence of utility and absence of concrete facts to ground the declarations may not be determinative. However, where there is such a lack (in whole or in part) the court should be particularly alert to the dangers of producing something which is not useful and may create confusion.
The court confirmed that it would apply these general principles when considering each of the declarations sought.
Application of general principles for negative declaratory relief
TRM made the overarching submission that the general principles applicable to negative declaratory relief (as outlined above), precluded such relief from being granted in this case. The court found that the application met the threshold requirements for declaratory relief, considering the following two key principles, in particular:
No hypothetical questions / real and present dispute between the parties
TRM argued that the “dispute” on which the Bank relied to bring the claim for negative declarations did not arise in the English court, pointing out that no claims had been brought or intimated by TRM in this jurisdiction, and that the Bank was not able to identify what claims TRM might bring before the English court. Accordingly, it said the “dispute” was purely hypothetical.
The court was not persuaded that it would be appropriate to shut the Bank out from the possibility of declarations based on this ground. In particular, it noted the Bank’s intention to use the declarations sought by way of defence to the Italian claim. Although TRM had brought no claim under the ISDA Master Agreement in the Italian proceedings, the court considered that there was plainly scope for overlap. Moreover, the Bank had specifically pleaded the contractual rights under the ISDA Master Agreement as defences to the Italian claim.
In the court’s view, this was a case that was comfortably on the right side of the hypothetical/actual divide, noting as follows:
“The bottom line is that regardless of where the parts of the debate take place, there is a dispute between the parties as to whether the picture as to TRM’s rights is one which is framed within the [ISDA Master Agreement], or whether, despite the existence of the [ISDA Master Agreement], those rights are different. That is a dispute as to the existence of the rights which the Bank asserts, which is an actual existing dispute. That dispute is not divorced from the facts or based on hypothetical facts. It is plainly not one which has ceased to be of practical significance.”
Utility in obtaining the declarations sought
The court found that at least some of the declarations met the utility threshold requirement. In particular, the court noted that a judgment in England as to the meaning and legal effect as a matter of English law of specific clauses within the ISDA Master Agreement would be enforceable against TRM in Italy under the Brussels Regulation. Given that the ISDA Master Agreement was governed by English law, to the extent the Italian court had to grapple with what the agreement meant, the English court was best placed to decide and the Italian court was likely to be assisted by that determination.
Contractual construction of the ISDA entire agreement clause
Before considering the individual negative declarations sought by the Bank, the court ruled on a question of contractual interpretation of the standard entire agreement clause found in the ISDA Master Agreement.
TRM argued that the Entire Agreement clause was not effective and that it was able to rely on separately negotiated terms of the Financing Agreement prevailing over ISDA Master Agreement (relying on the comments of Lord Millett in The Starsin  1 AC 715).
The court rejected TRM’s approach, making the following observations, in particular:
- On its face, the meaning of the ISDA entire agreement clause is “clear and unambiguous”. This was reflected by the decision in Deutsche Bank v Commune di Savona  EWCA Civ 1740 (see our blog post), which said that the ISDA Master Agreement is a “self-contained” agreement, exclusive of prior dealings.
- The court was not persuaded that TRM’s approach successfully undermined this simple reading of the clause, in particular because it did not identify the specific provisions in the ISDA Master Agreement which were allegedly offensive and which provisions of the Financing Agreement overrode them.
- While TRM was a party to both the ISDA Master Agreement and to the Financing Agreement, the Bank was a party to the latter as Mandated Lead Arranger (and other roles), not in its capacity as the “Hedging Bank” (even though the Bank was separately defined in the Financing Agreement as fulfilling this role). The court said it would be something of an oddity if the terms of a separate agreement in which the Bank participated with a different hat on, could impact the ISDA Master Agreement.
- The hedging transaction was entered into “in connection with” the Financing Agreement, highlighting the fact that there were two distinct, albeit connected, agreements.
- TRM’s approach would sit uneasily with, while the Bank’s argument was harmonious with, the dicta in various authorities as to the importance of certainty and clarity in interpreting the ISDA Master Agreement (most famously in Lomas v Firth Rixson).
Analysis of the individual negative declarations sought
The court then turned to consider the individual negative declarations, granting the majority of them, particularly where those declarations simply tracked the wording of the ISDA Master Agreement, Schedule or Confirmation.
Of the declarations considered by the court, there is one category which has particular significance for financial services contracts. This is the court’s analysis of the effect of the ISDA versions of “no representation” clauses and “non-reliance on representation” clauses, and the application of contractual estoppel to those clauses.
No representation / non-reliance on representation / contractual estoppel
The Bank sought a number of declarations which simply tracked the ISDA documentation:
- That TRM had “made its own independent decision” to enter into the hedging transaction and was not relying on communications from the Bank as investment advice or as a recommendation to enter into the hedging transaction (the Non-Reliance provisions at Part 5(d)(i) of the Schedule).
- That TRM was capable of evaluating and understanding the terms, risks etc. of the hedging transaction (Evaluations and Understanding at Part 5(d)(ii) of the Schedule).
- That TRM was acting as principal and not as agent or in any other capacity, fiduciary or otherwise (Acting as Principal at Part 5(d)(iv) of the Schedule).
- That TRM had specific competence and expertise to enter into the hedging transaction and in connection with financial instruments (Competence and Expertise at Part 5(e)(i) of the Schedule).
- That TRM entered into the hedging transaction for hedging purposes and not for speculative purposes (Hedging Purposes at Part 5(e)(ii) of the Schedule).
- That TRM had full capacity to undertake the obligations under the hedging transaction, the execution of which fell within its institutional functions (Capacity at Part 5(e)(iii) of the Schedule).
In addition, the Bank sought a further declaration that these clauses gave rise to a contractual estoppel, which prevented TRM from contending, for example, that it had relied on any representations given by the Bank as investment advice or a recommendation to enter into the hedging transaction).
The Bank argued that applying accepted principles of contractual interpretation, it was clear that TRM agreed that the Bank did not make any actionable representations to TRM, and that TRM did not rely on any representations in connection with the hedging transaction.
The court swiftly agreed to grant the declarations tracking the parts of the Schedule listed above, but the question of contractual estoppel gave rise to more detailed analysis.
Existence of a contractual estoppel
The court noted that Springwell broadly supported the finding of contractual estoppels arising from such clauses, citing the following comments from Aikens LJ in that case:
“…there is no legal principle that states that parties cannot agree to assume that a certain state of affairs is the case at the time the contract is concluded or has been so in the past, even if that is not the case, so that the contract is made upon the basis that the present or past facts are as stated and agreed by the parties.”
TRM argued that there was a distinction between warranties and undertakings on the one hand (which it accepted could give rise to a contractual estoppel), and an acknowledgement or a representation on the other. In relation to the latter, it said that there was no “agreement”, and therefore an acknowledgement/representation could not create a contractual estoppel. TRM pointed to the judgment of Leggatt LJ in First Tower, in which he questioned whether a clause which simply said that a party “acknowledges” that it has not entered into the contract in reliance on any representation could give rise to a contractual estoppel.
However, the court noted that Springwell itself disagreed with this proposition, with the Court of Appeal finding in that case that Springwell was bound contractually to its statement, or acknowledgement, that no representation or warranty had been made by Chase Manhattan. The court emphasised that Leggatt LJ’s commentary in First Tower was obiter, and did not think he was intending to overrule or qualify Springwell. The court noted that the factual situation in First Tower was very different (since the case concerned the effect of an exclusion clause in a commercial lease and its effect vis à vis pre-contractual enquiries which misrepresented the position as regards asbestos on site). Leggatt LJ was not purporting to consider the effect of representations typically made in a financial services context.
The court also considered obiter comments in Credit Suisse International v Stichting Vestia Groep  EWHC 3103 (Comm), a case concerning the ISDA Master agreement, which TRM suggested drew a distinction generally between warranties and mere representations. Again the court was not persuaded that this authority took matters any further forward, as it was bound by Springwell.
Even if not bound by Springwell, the court considered that the question was whether it could “objectively conclude that by the relevant contractual materials the parties did intend to agree” to the contractual estoppel. It said the question was not dependent on the precise wording (representation vs warranty), but was a question of substance (per Hamblen J in Cassa Di Risparmio Della Repubblica Di San Marino Spa v Barclays Bank Ltd  EWHC 484 (Comm)). This would require the court to discern the intention of the parties, taking into consideration the relevant factual background, including the nature and status of the ISDA Master Agreement. On that basis, even if it had not been bound by Springwell, the court said it would have reached the same conclusion, namely that a contractual estoppel existed.
Effect of the Misrepresentation Act 1967
The court also considered TRM’s argument that the Non-Reliance provisions sought to exclude liability for misrepresentation under the Misrepresentation Act 1967, and so were subject to the requirement of reasonableness under section 11(5) of the Unfair Contract Terms Act 1977 (UCTA).
The court was “entirely unpersuaded” of the merits of this argument. In particular, the court specifically endorsed the decision in Barclays Bank plc v Svizera Holdings BV  EWHC 1020 (Comm), which held that a clause in a mandate letter gave rise to a contractual estoppel against reliance on alleged representations. In that case, the court referred to the consistent judicial recognition of the effectiveness of such clauses giving rise to a contractual estoppel, and said the suggestion that the clause should be struck down as unreasonable under UCTA was “hopeless”. In the present case, the court commented that this conclusion might very well apply here.
The court was critical of TRM’s approach to the argument on the Misrepresentation Act, in particular because it had failed to put its argument formally in issue in the proceedings, cautioning as follows:
“It cannot be acceptable for a party to (as TRM did here) stay absolutely quiet on the subject until the door of the court, and then play their joker in the form of the [Misrepresentation Act], asserting that the burden of proving reasonableness has not been discharged by its opponent.”
The court was also critical of the fact that TRM failed to identify clearly which clauses were said to be exclusion clauses, and the absence of any factual evidence to suggest that the provision should be struck down as unreasonable.
In fact, the court pointed to a number of factors suggesting that the clause was in any event reasonable, including that: this was not a case of a consumer transaction or where there was an inequality of bargaining power; the terms were contained within an ISDA Master Agreement which contains effectively market standard terms; and the bespoke Schedule was agreed between two commercial parties.
The court was therefore prepared to grant the declarations sought relating to representations and contractual estoppel.