“2 Obligations (a) General conditions. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the accounts specified in the relevant Confirmation or otherwise pursuant to this Agreement in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement.” (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the accounts specified in the relevant Confirmation or otherwise pursuant to this Agreement in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement.”
“6. Early Termination (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (c) Section 6(b)(iv) provides: “(iv) Right to Terminate If:- (1) a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party, either party in the case of an Illegality, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions.”
“‘Unpaid Amounts’ owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery …”
“ ‘Loss’ means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or re-establishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets.”
“5. Payments on Early Termination The 2002 Agreement has been modified significantly from the 1992 Agreement in terms of calculating payments owed if an Early Termination Date occurs… The addition of Close-out Amount, and the deletion of Market Quotation and Loss as payment measures, was made in response to member comments that a single measure of damages in the 2002 Agreement was desirable as was the single method of payment. The 1992 Agreement included two payment methods, the First Method and the Second Method. The First Method under the 1992 agreement was sometimes referred to as "limited two-way payments" or a "walk away clause". Under the First Method, if a single net amount ran in favour of the Defaulting Party, it would not receive that amount from then Non-defaulting Party. The First Method has been deleted from the 2002 Agreement leaving the second method as the sole payment method, in response to member comments that the First Method was no longer used, most likely due to rules adopted by bank regulators that conditioned the recognition of netting for capital purposes on use of the Second Method. a. Close-out Amount. One of the more significant amendments in the 2002 Agreement is the inclusion of a single measure of damages provision, Close-out Amount, as defined in section 14. This Section will: (i) explain the definition of and illustrate differences between this definition, and the 1992 Agreement’s definitions of "Market Quotation" and "Loss"; (ii) explain the mechanics and results on the application of Close-out Amount if an Event of Default or a Termination Event occurs… Close-out Amount is a payment measure developed to offer greater flexibility to the party making the determination of the amount due upon the designation and occurrence of an early termination date and to address some of the potential weaknesses of Market Quotation that became apparent during periods of market stress in the late 1990s. The need for increased flexibility was highlighted during the market crises in 1998 and 1999 when many determining parties encountered difficulty in trying to obtain quotations from Reference Market-makers as required by the definition of Market Quotation in the 1992 agreement. In addition, even in instances where four quotations could be obtained, in an illiquid market those quotations could be widely divergent. Balanced by the interest of increased flexibility was the need to ensure that the new provision incorporated certain objectivity and transparency requirement, that were felt to be lacking, particularly in the definition of Loss in the 1992 Agreement. The first paragraph of the definition of Close-out Amount provides that the Determining Party will determine the amount of the losses or costs incurred or the gains realised in replacing or providing the economic equivalent of the material terms of the Terminated Transaction …. This calculation includes the payments and deliveries owed under Section 2 (a)(i) in respect of that Terminated Transaction or group of Terminated Transactions that would have, but for the occurrence of the Early Termination Date, been required. The calculation of Close-out Amount also includes option rights in respect of the Terminated Transaction or group of Terminated Transactions that would have existed but for the occurrence of the Early Termination Date. The language related to preserving the economic equivalent of payments and deliveries owed under Section 2(a)(i) is similar to the “Market Quotation" definition in the 1992 Agreement, but the paragraph clarifies that it is the "material terms" of the terminated transaction or terminated transactions that are considered. The addition of the phrase "material terms" was intended to refer to direct payment flows and other items that impact pricing. The reference to option rights is also new in the 2002 Agreement as a matter of clarification. The second paragraph of the Close-out Amount definition instructs the Determining Party to act in good faith and to use commercially reasonable procedures when determining a Close-out Amount in order to produce a commercially reasonable result. This is an overarching principle that applies to all determining party actions in its determination of a Close-out Amount.” a. Close-out Amount. One of the more significant amendments in the 2002 Agreement is the inclusion of a single measure of damages provision, Close-out Amount, as defined in section 14. This Section will: (i) explain the definition of and illustrate differences between this definition, and the 1992 Agreement’s definitions of "Market Quotation" and "Loss"; (ii) explain the mechanics and results on the application of Close-out Amount if an Event of Default or a Termination Event occurs… Close-out Amount is a payment measure developed to offer greater flexibility to the party making the determination of the amount due upon the designation and occurrence of an early termination date and to address some of the potential weaknesses of Market Quotation that became apparent during periods of market stress in the late 1990s. The need for increased flexibility was highlighted during the market crises in 1998 and 1999 when many determining parties encountered difficulty in trying to obtain quotations from Reference Market-makers as required by the definition of Market Quotation in the 1992 agreement. In addition, even in instances where four quotations could be obtained, in an illiquid market those quotations could be widely divergent. Balanced by the interest of increased flexibility was the need to ensure that the new provision incorporated certain objectivity and transparency requirement, that were felt to be lacking, particularly in the definition of Loss in the 1992 Agreement. The first paragraph of the definition of Close-out Amount provides that the Determining Party will determine the amount of the losses or costs incurred or the gains realised in replacing or providing the economic equivalent of the material terms of the Terminated Transaction …. This calculation includes the payments and deliveries owed under Section 2 (a)(i) in respect of that Terminated Transaction or group of Terminated Transactions that would have, but for the occurrence of the Early Termination Date, been required. The calculation of Close-out Amount also includes option rights in respect of the Terminated Transaction or group of Terminated Transactions that would have existed but for the occurrence of the Early Termination Date. The language related to preserving the economic equivalent of payments and deliveries owed under Section 2(a)(i) is similar to the “Market Quotation" definition in the 1992 Agreement, but the paragraph clarifies that it is the "material terms" of the terminated transaction or terminated transactions that are considered. The addition of the phrase "material terms" was intended to refer to direct payment flows and other items that impact pricing. The reference to option rights is also new in the 2002 Agreement as a matter of clarification. The second paragraph of the Close-out Amount definition instructs the Determining Party to act in good faith and to use commercially reasonable procedures when determining a Close-out Amount in order to produce a commercially reasonable result. This is an overarching principle that applies to all determining party actions in its determination of a Close-out Amount.”
“(e) Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the “Early Termination Amount”) will be determined pursuant to this Section 6(e) and will be subject to any Set-off. (i) Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non-defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party….” (i) Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non-defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party….”
“(v) Pre-Estimate. The parties agree that an amount recoverable under this Section 6 (e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and, except as otherwise provided in this Agreement, neither party will be entitled to recover any additional damages as a consequence of the termination of this Agreement or any Transaction or for any claim arising out of or in connection with this Agreement or any Termination (This clause is set out as amended from the standard form by Part 5 (e) of the Schedule.).”
“Close-out Amount' means, with respect to each Terminated Transaction or each group of Terminated Transactions and a Determining Party, the amount of the losses or costs of the Determining Party that are or would be incurred under then prevailing circumstances (expressed as a positive number) or gains of the Determining Party that are or would be realised under then prevailing circumstances (expressed as a negative number) in replacing, or in providing for the Determining Party the economic equivalent of, (a) the material terms of that Terminated Transaction or group of Terminated Transactions, including the payments and deliveries by the parties under section 2(a)(i) in respect of that Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in section 2(a)(iii)) and (b) the option rights of the parties in respect of that Terminated Transaction or group of Terminated Transactions. Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result. The Determining Party may determine a Close-out Amount for any group of Terminated Transactions or any individual Terminated Transaction but, in the aggregate, for not less than all Terminated Transactions. Each Close-out Amount will be determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates following the Early Termination Date as would be commercially reasonable. Unpaid Amounts in respect of a Terminated Transaction or group of Terminated Transactions and legal fees and out-of-pocket expenses referred to in section 11 are to be excluded in all determinations of Close-out Amounts. In determining a Close-out Amount, the Determining Party may consider any relevant information, including, without limitation, one or more of the following types of information: i) quotations (either firm or indicative) for replacement transactions supplied by one or more third parties that may take into account the creditworthiness of the Determining Party at the time the quotation is provided and the terms of any relevant documentation, including credit support documentation, between the Determining Party and the third party providing the quotation; ii) information consisting of relevant market data in the relevant market supplied by one or more third parties including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other relevant market data in the relevant market; or iii) information of the types described in clause (i) or (ii) above from internal sources (including any of the Determining Party's Affiliates) if that information is of the same type used by the Determining Party in the regular course of its business for the valuation of similar transactions. The Determining Party will consider, taking into account the standards and procedures described in this definition, quotations pursuant to clause (i) above or relevant market data pursuant to clause (ii) above unless the Determining Party reasonably believes in good faith that such quotations or relevant market data are not readily available or would produce a result that would not satisfy those standards. When considering information described in clause (i), (ii) or (iii) above, the Determining Party may include costs of funding, to the extent costs of funding are not and would not be a component of the other information being utilised. Third parties supplying quotations pursuant to clause (i) above or market data pursuant to clause (ii) above may include, without limitation, dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of market information.” (Bold type and italics added) i) quotations (either firm or indicative) for replacement transactions supplied by one or more third parties that may take into account the creditworthiness of the Determining Party at the time the quotation is provided and the terms of any relevant documentation, including credit support documentation, between the Determining Party and the third party providing the quotation; ii) information consisting of relevant market data in the relevant market supplied by one or more third parties including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other relevant market data in the relevant market; or iii) information of the types described in clause (i) or (ii) above from internal sources (including any of the Determining Party's Affiliates) if that information is of the same type used by the Determining Party in the regular course of its business for the valuation of similar transactions.
“(i) Loss and Market Quotation are, although different formulae, aimed at achieving broadly the same result, so that outcomes derived from one may be usefully tested by way of cross-check by reference to the other: see per Mance LJ in the Australia case at paras 2, 15 and 22. This derived from a concession in that case, but has subsequently been reaffirmed after adversarial argument in the Peregrine case at para 30, in the Britannia Bulk case at paras 44 to 46 and 51, and in the Pioneer case at paras 98 and 105. It is one of those sensible concessions which has hardened into hornbook law. (ii) The identification of the non-defaulting party's loss of bargain arising from the termination of the Derivative Transaction requires a “clean” rather than “dirty” market valuation of the lost transaction. This means that the loss of bargain must be valued on an assumption that, but for termination, the transaction would have proceeded to a conclusion, and that all conditions to its full performance by both sides would have been satisfied, however improbable that assumption may be in the real world: see in the Australia case at paras 5, 22 to 27 and 30-31, the Britannia Bulk case at paras 11 to 14 and 34-35, and in the Pioneer case at paras 112 to 117. (iii) The termination payment formulae under s 6(e) are not to be equated with, or interpreted rigidly in accordance with, the quantification of damages at common law for breach of contract. They are methods of calculating close-out positions on the termination of a derivative transaction or series of transactions: see the Britannia Bulk case per Flaux J at para 37. This is, in particular, because the Second Method works both ways, and may lead to a close-out payment due to the defaulting party.”
“…the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date.”
“…the economic equivalent of, (a) the material terms of that Terminated Transaction or group of Terminated Transactions, including the payments and deliveries by the parties under section 2(a)(i) in respect of that Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in section 2(a)(iii)) and (b) the option rights of the parties in respect of that Terminated Transaction or group of Terminated Transactions.”
“the material terms”, “including”, “condition precedent”, “that would, but for the occurrence of the Early Termination Date, have been required after that date” and “the option rights”
“[21] The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the Appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”
“He provided me with two colourful examples of early termination provisions which no valuer in the real commercial world could possibly ignore. The first was a ten year interest rate swap with early termination if rates exceeded a stated cap or fell below a stated floor. The second was an oil-based derivative with provision for termination if war broke out between the USA and Iran. To ignore such provisions would make a travesty of the notion that the purpose of the provisions for Close-out Amount determination was to leave the parties no better and no worse off than if the early termination of the transaction had not occurred.”
“27. It is true that the contract does not expressly make the absence of a determination of a Trade Event at the settlement date a condition precedent to payment as agreed in clauses 5 and 6 of the confirmations. But it is also true that it is difficult to tie the reference in ISDA s.2(a)(iii) to “each other applicable condition precedent specified in this Agreement” into other particular terms. One place where additional conditions precedent may be found is among the specially agreed provisions of the confirmations. The concepts of Trade Event, Cost Event, Russian Market Event, Event of Change and Occurrence of an Event of Change are none of them ISDA concepts, they are tailor-made for these transactions and it is accordingly understandable if their language does not in all respects echo or tie exactly into that of the standard ISDA terms. The effect of occurrence of an Event of Change is, in specified circumstances, to transmute SG's primary obligation under clauses 5 and 6 to make payment on the settlement date in dollars in London into an obligation to make payment by one of the four specified methods. It is not difficult, therefore, to treat the non-occurrence of an Event of Change as a condition precedent to SG's obligation to make any payment on settlement under s.2(a)(i). On that basis the language of the Market Quotation clause is precisely satisfied.”