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COMMODITIES IN FOCUS

8

ISDA early termination payments

This is an abridged version of a webcast produced by

Sue Millar

and

Jeremy Livingston

of our Financial

Litigation team. To view the full webcast go to:

ISDA Master Agreements - a brief update webcast

The English courts have recently considered the termination and "close out" provisions in

section 6 of the ISDA Master Agreements, in particular, the mechanism for calculation and

payment on early termination following an event of default.

The amount due in respect of an early termination

must be communicated to the party required to pay it

by a "statement" showing "in reasonable detail" the

calculations undertaken and providing details of the

account into which payment is to be made (section

6(d)(i)). This should be done as soon as reasonably

practicable following the occurrence of an Early

Termination Date ("ETD"). Section 6(d)(ii) provides

that the amount due in respect of an ETD is "payable

on the day that notice of the amount payable is

effective".

Videocon Global Limited and another v

Goldman Sachs International [2016] EWCA

Civ 130

In Videocon Global v Goldman Sachs, the Court of

Appeal considered whether the defaulting party's

obligation to pay the sum due on early termination

was conditional on the notice being served as soon as

reasonably practicable after the ETD.

Videocon and Goldman Sachs entered into two

currency swap transactions under the umbrella of a

1992 Master Agreement. Goldman made a margin

call, which was not paid. Goldman delivered a notice

of potential event of default and a notice designating

an ETD. Several weeks later, Goldman delivered a

calculation statement. Videocon did not pay, so

Goldman started proceedings.

The judge held that Goldman had not provided proper

details of its calculations. Goldman served a new

notice, more than two years later. The new notice

set out the same sum but provided the further

information required. Goldman then reapplied for

summary judgment.

The judge ruled that service of the notice "on or as

soon as reasonably practicable" after the ETD was not

a condition precedent to the sum becoming payable.

Whilst Goldman might have been in breach of

contract for serving the notice late, the notice itself

was still valid.

The Court of Appeal then dismissed Videocon's

appeal, distinguishing between a sum becoming due

and its becoming payable. The Court held that:

It is clear that the debt obligation in respect of

an ETD accrues due on that date, prior to the

section 6(d)(i) statement. Therefore, the debt

cannot be subject to production of the statement

before it becomes due and cannot be discharged

simply by failure to serve a non-compliant

statement.

The amount due on an ETD is payable on the day

that notice of the amount payable is effective

(section 6(d)(ii)). The clause does not refer to

the section 6(d)(i) statement, merely to "notice

of the amount payable", a more general term.

On its natural reading, those words refer only to

a notice of the amount payable and not a

detailed statement of the supporting calculations

and quotations. Only the "effective" giving of

notice of the amount payable is required to

trigger the Payment Date.

Goldman's letter clearly set out the amount

payable and its calculations. Although the

calculations lacked detail, the letter was still

adequate notice of the amount payable.

This important decision indicates that whether the

sum is due on the early termination of transactions

does not depend on detailed calculations being

provided at all, or even within a reasonable time.

The ruling will apply to both ISDA 1992 and 2002

Master Agreements. However, the calculation still

needs to be correct, so we expect that parties will

continue to deliver just one statement containing

both payment amount and calculation methodology.

“This important decision indicates

that whether the sum is due on

the early termination of

transactions does not depend on

detailed calculations being

provided at all, or even within a

reasonable time”

The non-defaulting party could still be in breach of

contract if it does not provide the calculation details

promptly, even if the sum is due as a result of

notification of the sum. The defaulting party may be

able to prove that it has suffered loss as a result of

this failure, so prompt notification of the amount and

calculations is advisable.