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02 Dec 2022

What should an ISDA notice of default include? Macquarie Bank v Phelan


You enter into a foreign exchange swap under an ISDA Master Agreement with a party who later fails to pay amounts when due. You then prepare a notice of default but turning to the Master Agreement for assistance, it does not address all of your questions regarding the specific form of that notice. So what should the notice of default include?

Mr Justice Foxton considered this question and provided some welcome guidance as to the content of notices of events of default under section 5(a)(i) of the 2002 ISDA Master Agreement in his judgment in Macquarie Bank Limited v Phelan Energy Group Limited [2022] EWHC 2616 (Comm).

Granting summary judgment to Macquarie Bank Limited ("Macquarie"), Foxton J held that the contents of such a default notice must be clear, unambiguous and include sufficient information to enable the reasonable recipient to understand the trade to which it relates, the particular obligation which has not been performed, and the necessary steps to cure any failure within the applicable grace period.

Provided those criteria are met, a notice will still be valid, even where there is a dispute about whether the transaction's underlying terms are accurately reflected in the default notice or where it is silent as to a particular term, such as currency or price.


In September 2019, Phelan Energy Group Limited ("Phelan") entered into a series of forex swaps with Macquarie under an ISDA Master Agreement. These were rolled over with an eventual expiration date of 14 May 2021.

On 13 and 14 May 2021, there were communications between the parties about the terms of a proposed new USD/ZAR swap. These included a trade recap email sent on 14 May 2021 which referenced the USD amount of the trade and its date of settlement but incorporated a ZAR strike price which was disputed. It was not in dispute that the swap was concluded on 14 May 2021 for settlement on 28 May 2021 (the "Trade").

On 28 May 2021, Macquarie emailed Phelan saying it was owed ZAR118 million that day (a figure arrived at using the disputed strike price). Phelan responded the same day disputing that settlement figure. On 31 May 2021, Macquarie sent a default notice notifying Phelan of its failure to make payment in the disputed amount in respect of the Trade (the "Default Notice"), which specified that if payment was not made on or before the first local business day after notice was given it would constitute an Event of Default under s5(a)(i) of the ISDA Master Agreement. Phelan again responded on the same day to dispute the sum claimed.

On 2 June 2021, Macquarie wrote reserving its right to designate an Early Termination Date as a result of the continuing Event of Default and, on 3 June 2021, served a notice designating 4 June 2021 as the Early Termination Date (pursuant to s6(a) of the ISDA Master Agreement).

On 4 June 2021, Phelan contended that in light of its notice of dispute, it was not open to Macquarie to call an Event of Default. Notwithstanding this disagreement, on 9 June 2021, Macquarie sent a notice designating an Early Termination Amount in respect of all open transactions under the ISDA Master Agreement, which, if valid, triggered substantial immediate repayment obligations.

Thereafter, Macquarie brought a debt claim and applied for summary judgment, seeking an order for an interim payment, acknowledging that the effective strike price remained a live issue and, in this regard, its claim was not suitable for determination summarily.

While Foxton J identified three key issues to be considered in determining Macquarie's application, it is the first of these which is of primary relevance, namely; was there an Event of Default by reason of Phelan's failure to pay?

Was there an Event of Default within s5(a)(i) of the ISDA Master Agreement?

Section 5 of the ISDA Master Agreement provides as follows:

"(a) Events of Default. The occurrence at any time … of any of the following events constitutes … an Event of Default (an 'Event of Default'):-

(i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement … if such failure is not remedied on or before the first Local Business Day in the case of any such payment … after … notice of such failure is given to the party."

It was not disputed that there had been a failure to pay or that such failure had not been remedied. However, Phelan contended that because the sum claimed in the Default Notice was based on an incorrect strike price, the Default Notice had no legal effect. Consequently, Macquarie had no right to designate an Early Termination Date.

Foxton J considered whether a default notice served in accordance with s5 of an ISDA Master Agreement needed to specify an outstanding amount at all and, further, what the consequence would be of including an incorrect figure. In addressing these questions, Foxton J analysed the construction both of: (i) the relevant contractual provision in the ISDA Master Agreement providing for the notice to be served; and (ii) the Default Notice itself.

Given the ubiquity and importance of ISDA Master Agreements, Foxton J noted prior authorities which emphasised core principles applicable to their interpretation, namely:

  • The ISDA 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" (per Briggs J in Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch) at [53]); and
  • 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 knowledge of the market" (per Hildyard J in Lehman Brothers International (Europe) [2016] EWHC 2417 (Ch) at [48(3)]).

As to the content of default notices, Foxton J referred to the judgment of Lord Goff in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 755, which made clear that identifying whether a notice of default complies with relevant contractual requirements engages an assessment of "whether the key represented by the notice fits the lock constituted by the contractual provision requiring the service of a notice to achieve a particular legal effect".

Foxton J found that the language of s5(a)(i) of the ISDA Master Agreement offered only limited guidance regarding the content required for a default notice to be effective thereunder, but did express a more general view regarding the requirements in this regard, which he considered gave rise to an obligation that a default notice should:

  • Communicate clearly, readily and unambiguously to the reasonable recipient in the context in which it is received the failure to pay (such that the reasonable recipient will clearly understand the trade to which it relates, and the particular obligation which it is said has not been performed); and
  • Thereby enable the reasonable recipient to identify what the relevant trade requires it to do in order to cure any failure to pay within the applicable grace period.

Foxton J also emphasised that the presence of minor errors in the default notice would not invalidate that notice; this would, in his view, be a commercially unreasonable outcome.

Before turning to the default notice in the instant case, Foxton J examined the context in which the notice was received:

  • The parties had entered the Trade on 14 May 2021 for settlement on 28 May 2021 in a US$ amount which was not in dispute;
  • This was the only trade between the parties involving payment on 28 May 2021 or indeed during the whole of May 2021;
  • On 14 May 2021, Macquarie had sent the recap email;
  • On 14 and 26 May 2021, Macquarie had sent trade confirmations for signature, setting out all details of the Trade;
  • On 28 May 2021, Macquarie had sent an email to Phelan asking it to confirm that it had agreed that on 28 May 2021, Macquarie would receive a ZAR amount and Macquarie was due to pay the undisputed USD amount; and
  • Phelan had at that point made no payment in respect of the Trade.

Foxton J also determined that a reasonable recipient would have understood that:

  • Macquarie was complaining that Phelan had failed to make payment on 28 May 2021 under the Trade which was due to be settled that day;
  • Phelan had made no payment in respect of that Trade at all; and
  • There was only 1 trade between the parties due for settlement on 28 May 2021.

Consequently, Foxton J held that the Default Notice had met the requirements of a valid notice and, accordingly, that Macquarie was entitled to call an Event of Default as a result of Phelan's subsequent inaction. In arriving at that conclusion, he rejected Phelan's arguments that s5(a)(i) of the ISDA Master Agreement required a default notice to contain express and wholly accurate statements of the following to be effective:

  • The identification of documents and other confirming evidence for the relevant trade;
  • A precise and entirely accurate statement of the amount for payment; and
  • The currency in which the payment was due.

Whilst, on the facts, Macquarie was successful in arguing that there had been an Event of Default, it is clear that had there been any ambiguity regarding the specific trade which was the subject of the Default Notice, the Default Notice would have been invalid. This is likely to be of greater significance where, unlike in the instant case, there are a large number of trades between contractual counterparties which become due for settlement on the same day.

In summary, Foxton J's judgment makes clear that:

  • Where a party is preparing to serve a default notice under s5(a)(i) of the ISDA Master Agreement, that party must ensure that the default notice is as unambiguous and precise as possible and that it includes, at the least, sufficient information such that the reasonable recipient will clearly understand the trade to which it relates, the particular obligation which has not been performed, and the necessary steps to cure any failure within the applicable grace period;
  • Insignificant errors in a default notice under s5(a)(i) of the ISDA Master Agreement will not necessarily invalidate that notice; and
  • Where a recipient of a default notice under s5(a)(i) of the ISDA Master Agreement fails to make payment of amounts that are said to be outstanding thereunder, with which they disagree in amount only, they place themselves at serious risk if they refuse to perform their obligation at all, rather than paying the amounts which they consider are, in fact, due and payable.

Whilst in this case Foxton J was willing to tolerate, at least in principle, a degree of imprecision in the form of the default notice, it should be emphasised that this decision, made in the context of the ISDA Master Agreement, is fact specific and should not be assumed to have a more general application. The prudent course remains for parties to ensure that notices of default or termination are properly prepared and sent in strict accordance with relevant contractual provisions. Where there is any ambiguity as to the meaning of those provisions, caution should be exercised when deciding the extent of the information to provide a recipient.



Adam Polonsky

Adam Polonsky
Managing associate

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