High Court Finds No Continuing Event Of Default Under ISDA Master Agreements Once Administration Of Counterparty Terminates

• Published date: 10 November 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Corporate and Company Law, Directors and Officers, Contracts and Commercial Law
• Law Firm: Herbert Smith Freehills
• Author: Mr Andrew Cooke, John Mathew and Nihar Lovell

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...