“13A. Alternatively, the amount of the claim is in any event overstated. The contracts numbered 5, 6, 7, 8, 11, 12, 13, 15 and 16 in Schedule 1 to the Amended Particulars of Claim (‘the 2008 Contracts’) all terminated according to their terms at the end of December 2008. In the premises set out in paragraphs 6.6 and 6.7 above, and on the true construction of the ISDA Master Agreement – 13A.1 no Settlement Sums fell due for payment from the Defendant to the Claimant under any of the 2008 Contracts in respect of the Contract Months of November or December 2008, and 13A.2 on the termination of the 2008 Contracts, any liability on the Defendant to pay any Settlement Sums to the Claimant in respect of the 2008 Contracts was extinguished once and for all. 13B. In the premises pleaded in paragraph 13A above, the amount that should be credited to the Defendant is understated by a sum of US$4,568,754.39 in respect of November 2008 and by US$4,962,517.47 in respect of December 2008. Even if the Claimant is otherwise entitled to judgment against the Defendant, the correct sum would accordingly be US$16,557,594.10 , not US$26,088,856.94 .”
“5. Contract Period Average of all BPI Index days of the contract month(s) up to and including the settlement date(s).” “Contract Months” are defined in a FFA as the relevant months in respect of which a party has to pay a “Settlement Sum” (as also defined in a FFA).
“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 account 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, 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. ... (c) Netting. If on any date amounts would otherwise be payable (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries.”
“… a net amount due will be determined in respect of all amounts payable on the same date in the same currency in respect of two or more Transactions.”
“22. I have no doubt that Mr Baker’s construction of the provision in section 2(c) is the correct one. As a matter of ordinary language, ‘payable’ clearly means now due and owing, for immediate payment and not only payable if and when some suspensive condition for which Mr Tselentis contends is satisfied. Quite apart from the ordinary meaning of language, when the agreement is considered as a whole, the word ‘payable’ in section 2(c) clearly means that there is a current enforceable obligation to pay. This is clear from the fact that, having talked about ‘amounts which would otherwise be payable’, the provision goes on to talk about ‘each party’s obligation to make payment’ being ‘automatically satisfied and discharged’ by payment of the balance after netting. However, where Pioneer is affected by an Event of Default, as a consequence of section 2(a)(iii), Marine Trade has no obligation to make payment to Pioneer at all. 23 That ‘payable’ connotes an immediately enforceable obligation to pay is also clear from the definition of ‘Unpaid Amounts’ for the purposes of the calculation of the payment due on Early Termination. This refers to such unpaid amounts being ‘the amounts that became payable (or that would have become payable but for section 2(a)(iii))’ which demonstrates that the effect of non-compliance with the conditions precedent in section 2(a)(iii) is that the amounts have not become payable. That is only consistent with ‘payable’ meaning immediately due for payment and wholly inconsistent with Mr Tselentis’ construction of ‘payable’ as somehow covering a situation where the payment obligation has been suspended. Mr Tselentis accepted that if his construction of ‘payable’ was wrong (which I do consider it to be), his argument on Issue 2 could not run. 24 Given what I consider to be the clear construction of section 2(c), it is not necessary to consider in any great detail the various arguments about the commercial purpose of the provision with which Pioneer sought to bolster its construction. The main thrust of those arguments was the alleged absurdity of a situation such as would obtain if Marine Trade were right, where a Non-Defaulting Party could insist that the Defaulting Party paid sums gross to it without netting off, even if, were the Non-Defaulting Party to designate an Early Termination Date under section 6 (which ex hypothesi it would not do) the calculation of the payment on such Early Termination would result in a substantial balance in favour of the Defaulting Party, because the Settlement Sums which would have become payable to the Defaulting Party but for section 2(a)(iii) fall to be considered in arriving at the eventual figure. 25 However, it seems to me that there is an obvious difference between what is to happen whilst the contract is subsisting and how the parties resolve their differences on early termination by way of ‘wash-out’. As Mr Baker pointed out, in what might be described as orthodox contractual analysis, if one party is in default and that amounts to a repudiatory breach of contract, the other party can accept that repudiation as bringing the contract to an end and thereby terminate any of its own obligations for the future. To that extent, some of the Early Termination provisions of the Master Agreement might be said to be unorthodox, in the sense that they seek to balance the current and future obligations of the Non-Defaulting Party under the relevant futures transactions against those of the Defaulting Party. They are no doubt designed at least in part to ensure a ‘wash-out’ between the parties on termination which strikes a fair balance to reflect that transactions which by definition were going to continue for some time into the future have been terminated early. 26 However, it does not seem to me that what will happen on early termination necessarily has any connection with what happens when the relevant transactions are subsisting. Where the Non-Defaulting Party has chosen (as it is perfectly entitled to do) not to elect for early termination under section 6, I can quite see the commercial sense of being able to insist on ‘gross’ payment by a Defaulting Party. 27 In any event, even if it could be said that the commercial balance of the argument lay in favour of Pioneer, that is not enough to gainsay the clear meaning of section 2(c) as I have held it to be. This is not a case in which Pioneer has suggested that the construction for which Marine Trade contends is so unreasonable commercially that the court should endeavour not to construe the agreements in that way, applying Lord Reid’s famous dictum in Schuler v Wickman Machine Tools[1974] AC 235 at 251.”
“92. Briggs J in Lomas accurately summarised my conclusion as: ‘His view was that the clear language, in particular of Section 2(c), meant that credit only had to be given, by way of netting, for an amount that was payable, and not for an amount that, because of an unfulfilled condition precedent under Section 2(a)(iii), was not payable.’ This issue was one of the issues raised by the appeal of Pioneer in Marine Trade, which was not pursued. 93. In the present case, the issue does not arise directly, since, after November 2008, neither party made any payment, Pioneer because it did not have the financial means to do so and Cosco because it was under no obligation to do so because of Section 2(a)(iii). It follows that the question of netting did not arise after Section 2(a)(iii) took effect in November 2008. Whether netting would have been possible in other circumstances where Section 2(a)(iii) had taken effect is thus an academic question. It is of no more than marginal relevance to the issue of whether contingent payment obligations survive in the case of transactions which have reached their natural expiry. 94. In his Skeleton Argument, Mr Thanki recognised this and said that this point was not essential to his argument, but that the view of all the parties in Lomas was to be preferred. By the time of the hearing, perhaps goaded by Mr Jacobs’ submissions in his Skeleton Argument as to why my decision on the point in Marine Trade was correct, Mr Thanki had put in a detailed written Supplementary Note as to why my decision was wrong. He pointed out that my analysis, that netting was only available if there was a current, enforceable obligation to pay and not if the particular Settlement Sum was not payable because of non-fulfilment of the conditions precedent in Section 2(a)(iii), had been disapproved by textbook writers. 95. He drew particular attention to the intense criticism my decision had received in Henderson on Derivatives, a textbook by Schuyler K Henderson, an eminent American academic and consultant on derivatives law. Mr Henderson describes my decision variously as ‘remarkable’, ‘astonishing’ and ‘bizarre’. He suggests that the flaw in my reasoning is a failure to recognise that, because Section 2(a)(i) says that it is ‘subject to the other provisions of this Agreement’, one of which other provisions is Section 2(c), both Section 2(a)(iii) and Section 2(c) should be read as referring back to Section 2(a)(i) independently and there is no reason to give primacy to Section 2(a)(iii) (see para. 20.18 of the second edition at p 1074). 96. However, with respect to Mr Henderson and Mr Thanki, who adopted his reasoning, my analysis in Marine Trade did not depend upon giving Section 2(a)(iii) primacy over Section 2(c). Assuming for present purposes that Mr Thanki is right in his submission that Section 2(a)(iii) is subject to, and logically anterior to, Section 2(c), Section 2(c) still only applies where, before netting occurs, there is an amount which ‘would otherwise be payable’ and ‘an obligation to make payment of any such amount’, but for the netting process. In the light of Mr Henderson’s criticisms and Mr Thanki’s submissions, I have reconsidered the issue of what those phrases connote in Section 2(c). 97. Mr Thanki relied upon the definition of ‘payable’ in Black’s Law Dictionary (9th edition 2009): ‘(Of a sum of money or a negotiable instrument) that is to be paid. An amount may be payable without being due. Debts are commonly payable long before they fall due.’ He also submitted that ‘payable’ meant different things in different contexts in the ISDA Master Agreement, pointing to various references to payment being ‘due’ or ‘due and payable’ but it seems to me that he could not point to anything, at least in the 1992 Master Agreement with which the Court is concerned, which suggested that ‘payable’ is being used anywhere in the Master Agreement in a contingent sense of ‘payable, although the payment obligation is suspended’ or in the sense to which Black is referring. 98. As I said in Marine Trade, it seems to me from the internal references within Section 2(c) to ‘each party’s obligation to make payment’ being ‘automatically satisfied and discharged’ by payment of the balance after netting, that ‘payable’ in Section 2(c) connotes an immediately enforceable obligation to pay. Furthermore, the ‘Unpaid Amounts’ definition, which refers to ‘the amounts that became payable (or that would have become payable but for Section 2(a)(iii))’, makes it clear that the effect of non-compliance with the conditions precedent in Section 2(a)(iii) is that amounts did not become ‘payable’ for the purposes of netting under Section 2(c). Thus, in so far as it is necessary to decide this point in the present case, I consider that, where the conditions precedent in Section 2(a)(iii) have not been satisfied, netting is not available to the Defaulting Party, for the same reasons as I gave in Marine Trade.”
“(Of a sum of money or a negotiable instrument) that is to be paid. An amount may be payable without being due. Debts are commonly payable long before they fall due.”
“Where the effect of a contract is that an asset which is actually owned by a company at the commencement of its liquidation would be dealt with in the way other than in accordance with [the statutory provisions for rateable distribution to creditors] then to that extent the contract as a matter of public policy is avoided.”
“… the parties are unlikely to have intended to agree to something ... legally ineffective”
“Where two constructions of an instrument are equally plausible, upon one of which the instrument is valid, and upon the other of which it is invalid, the court should lean towards that construction which validates the instrument.”
“In Charter Reinsurance Lord Mustill underlined the danger of focusing too narrowly on a critical phrase (in that case, a phrase defining the term ‘net loss’ as meaning ‘the sum actually paid by the Reinsured in settlement of claims’), saying, at p.384G-H that: ‘This is … an occasion when a first impression and simple answer no longer seem the best, for I recognise that the focus of the argument is too narrow. The words must be set in the landscape of the instrument as a whole. Once this is done the shape of the policy and the purpose of the terms … become quite clear’ Adopting that approach, the House concluded that the words “actually paid” were in context not intended to introduce a pre-condition of pre-payment by the insurer to the original insured, but to ensure that the reinsurers’ liability was measured precisely by reference to any settlement of liability as between the insurer and insured. Later (at p.387D) Lord Mustill said that the principle that the liability of a reinsurer is wholly unaffected by whether the insurer has in fact satisfied the claim under the inward insurance is one which ‘can undoubtedly be changed by express provision, but clear words would be required; and it would to my mind be strange if a term changing so fundamentally the financial relationship were to be buried in a provision such as clause 2, concerned essentially with the measure of indemnity, rather than being given a prominent position on its own.’” ‘This is … an occasion when a first impression and simple answer no longer seem the best, for I recognise that the focus of the argument is too narrow. The words must be set in the landscape of the instrument as a whole. Once this is done the shape of the policy and the purpose of the terms … become quite clear’ ‘can undoubtedly be changed by express provision, but clear words would be required; and it would to my mind be strange if a term changing so fundamentally the financial relationship were to be buried in a provision such as clause 2, concerned essentially with the measure of indemnity, rather than being given a prominent position on its own.’”
“… what will happen on early termination necessarily has any connection with what happens when the relevant transactions are subsisting …”
“… the commercial function or purpose of the condition precedent to payment as set out in Section 2(a)(iii) is to mitigate counterparty credit risk during the currency of what may be numerous swap transactions under the umbrella of ISDA 92 and while they remain open.”