High Court Finds That Bank's Notice Of Event Of Default Under Section 5(a)(i) Of The 2002 ISDA Master Agreement Is Valid

• Published date: 21 November 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Financial Services, Corporate and Company Law, Trials & Appeals & Compensation
• Law Firm: Herbert Smith Freehills
• Author: Mr Simon Clarke, Nihar Lovell and Mannat Sabhikhi

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 [2002] 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...