MHB- Bank Ag v Shanpark Ltd [2015] EWHC 408 (Comm)

[2015] EWHC 408 (Comm)

Case No 2014 Folio 762 and 763

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 25/02/2015

Before

MR JUSTICE COOKE

Between

Shanpark LtdDefendant

(1) Vendart LimitedDefendants

(2) Structadene LimitedDefendant

Mr Sa’ad Hossain QC (instructed by Sidley & Austin) for claimants

Mr Stephen Auld QC and Mr Matthew Cook (instructed by Cooke, Young & Keidan) for defendants

Hearing Hearing dates: 17th and 18th February 2015

Judgment

Introduction

[1]The claimant (MHB) applies for summary judgment against defendants in two actions which raise identical issues of contractual construction relating to MHB’s claims for “Early Termination Amounts”, which is a shorthand expression used in this judgment for the sums payable following the termination of ISDA Master Agreements together with their relevant Schedules and Confirmations. Each of the defendants entered into arrangements on materially identical terms with the Irish Bank Resolution Corporation (previously Anglo-Irish Bank Plc) (the Bank).

[2]On 16th May 2014 the right to payment of the Early Termination Amounts was assigned to MHB pursuant to Part 5(p) of the ISDA Master Agreement (the IMA). The total of the early termination amounts sought is some £30.5 million. The exact amount is not in dispute but each of the defendants have alleged that the Bank mis-sold the interest rate swaps governed by the IMA’s terms and that the mis-selling claims found a defence of set-off under the terms of ss. 2(c) and 6(f) of the IMAs.

[3]Additionally, the defendants contend that in parallel proceedings, the Bank exercised its contractual right to set-off under clause 31 of the loan agreement which the Bank had with each of the defendants – the Sterling Term Facilities Agreement (the STFA) and/or under s. 6(f) of the IMA, so that, as MHB can be in no better position than its assignor, the Bank, it is bound by the set-off which has already been effected.

[4]The issues raise points of construction in relation to ss. 2(c) and 6(f) of the IMA and their interrelationship with the STFA, as well as arguments relating to the effect of the Bank’s statement of case in the parallel proceedings.

The history

[5]Whilst the dates differ as between the various defendants, the essential history follows the same sequence so that it is not necessary to do anything more than set out the facts in relation to the claim against the defendants in Folio 762 (Shanpark).

[6]Shanpark was involved in the purchase and development of commercial and residential property and as part of that business, over a number of years, concluded substantial facility agreements with the Bank, which required the defendants to enter into interest rate hedging (swaps). The swaps which are the subject of the claim against all three defendants in the two Folios were concluded between June 2006 and October 2008. In the case of Shanpark, its swaps were concluded pursuant to an IMA executed on 10 October 2007.

[7]In December 2012 Shanpark entered into the STFA, which replaced all previous loan agreements. Under clause 9, it was a condition of the lending that Shanpark enter into interest hedging arrangements with the Bank, which were governed by the IMA which had been concluded earlier. According to Shanpark, as at 21st December 2012 it was already well known that the Bank was in financial difficulty. Some six weeks later, on 7th February 2013, a Special Liquidation Order was made in respect of the Bank in Ireland. This amounted to an Event of Default under the IMA. Shanpark was entitled to terminate the Agreement in consequence but did not do so. It chose to suspend making payments under the IMA, as it was entitled to do under its terms.

[8]On 26th November 2013 Shanpark issued a Claim Form against the Bank claiming that the interest rate swaps purchased were unsuitable and that they were concluded as a result of the Bank’s breaches of contract and/or breaches of statutory duty and/or breaches of a common law duty of care. It seems that the Claim Form was amended and served on 19th/20th December 2013.

[9]Two other events occurred on 20th December 2013. First, Shanpark repaid its loans in full. It is common ground that this constituted an Additional Termination Event within the meaning of the IMA under s. 5(b)(v). Second, and consequent on the repayment, the Bank sent to Shanpark a Notice of Early Termination under s. 6(b)(i).

[10]This gave rise to the obligation on the part of Shanpark to pay the Early Termination Amount which is a figure derived in the manner set out in s. 6(d), s. 6(e), and Part 1(f) of the Schedule to the IMA (Second Method and Market Quotation).

[11]On 6th January 2014 the Bank notified Shanpark of the Early Termination Amount and that amount became payable two business days later on 8th January 2014 under s. 6(d)(ii). There is no issue as to the quantum of that figure.

[12]On 5th February 2014 Shanpark served its Particulars of Claim in the mis-selling action, alleging breaches of contract, namely breaches of the STFA or alternatively a Retail Customer Services Agreement, as well as breaches of statutory duty and a common law duty of care. On 14th May 2014 the Bank served its Defence and Counterclaim. It denied any liability for mis-selling and, in paragraph 68 of the Defence, set out its position in the following words:

“If, which is denied, the claimants have any claims against the Bank, the Bank will by way of defence set off against those claims the amounts claimed by way of Counterclaim herein.”

[13]The Counterclaim then set out the Bank’s entitlement to the Early Termination Amount, together with a claim for interest thereon.

[14]It has always been Shanpark’s case that no sum was due to the Bank because the damages for mis-selling exceeded, and were to be set off against, sums due to the Bank in respect of the early termination. As quantified in the mis-selling action, the claims against the Bank amounted to some £52.1 million.

[15]On 16th May 2014, as part of the winding up of the Bank’s business, its claims for the Early Termination Amounts were assigned to MHB, a bank incorporated in Germany. On 30 July 2014, the Bank amended its defence to withdraw the claim to any set-off.

[16]On 24th June 2014 MHB had commenced the present proceedings and then served Particulars of Claim on 1st August. Shanpark served its Defence in August which led to the current application for summary judgment on 22nd September, following which, in December, Shanpark served an Amended Defence, to which I shall refer subsequently.

The issues

[17]It is now accepted by Shanpark that the assignment to MHB is valid. It is also accepted that there is no room for equitable set-off or liquidation set-off. Having originally pleaded both such forms of set-off, Shanpark has abandoned any such arguments. It is common ground therefore that any permissible set-off could only arise from the terms of the IMA and the Schedule as properly construed alongside the STFA.

[18]Shanpark’s major concern can be expressed shortly. Its case is that it has good mis-selling claims against the Bank which is insolvent and where the degree of recovery on a successful claim is unknown. It is accepted that, for present purposes, the mis-selling claims are arguable. It is also accepted that MHB has, in the shape of Shanpark’s charged property, security which is sufficient to satisfy the claim for the early termination amounts. An undertaking has been given by MHB not to enforce those security rights without giving notice to Shanpark to enable it to apply to the court, so as to hold the position pending the determination of the parties’ respective entitlements.

The applicable principles of law

[19]There is no dispute between the parties as to the relevant principles. In essence, if MHB is to succeed on its application for summary judgment, it must show that Shanpark has no realistic prospects of success in its defence of set-off and that there is no other compelling reason why this matter should go to trial.

[20]So far as the approach to construction is concerned, I was referred to ICS v West Bromwich

[1998] 1 WLR 896

, Chartbook v Persimmon

[2009] AC 1101

, The Rainy Sky [2012] 1 AER 1137 and Napier Park v Harbourmaster

[2014] EWCA Civ 984

, particularly at paragraphs 31-37. Both parties prayed in aid “commercial common sense” and the dicta that, where the term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense. Rival interpretations should be placed within their commercial setting and investigated or evaluated for their commercial consequences. Although the wording of an instrument is paramount, the instrument must be interpreted as a whole in the light of the commercial intention which may be inferred from the face of the instrument, with the result that detailed semantic analysis may give way to business common sense.

[21]In the context of ISDA, my attention was drawn to paragraph 53 of the decision of Briggs J (as he then was) in Lomas v JFB Firth Rixson

[2011] 2 BCLC 120

, where he said this:

“The ISDA Master Agreement is one of the most widely used forms of agreement in the world. It is probably the most important standard market agreement used in the financial world. English law is one of the two systems of law most commonly chosen for the interpretation of the Master Agreement, the other being New York law. It is axiomatic that it 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: see Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana, The Scraptrade [1983] All ER at 308-309, [1983] QB 529 at 540 per Robert Goff LJ.”

[22]Counsel for Shanpark, Mr Stephen Auld QC, submitted that the whole structure of the IMA, as referred to in the authorities, when combined with commercial considerations, required there to be room for the set-off of Shanpark’s claim for unliquidated damages for mis-selling against the Early Termination Amount. He submitted that Mr Hossain QC’s approach, which he characterised as one of black letter construction of the IMA amounted to “demolition” of it.

The STFA

[23]In Section 10 of the STFA there are various clauses relating to payment. Clause 30.3 and 31 are relevant for current purposes and read as follows: “30.3 No set-off by Obligors(a) All payments to be made by an Obligor under the Finance Documents shall be calculated and made without (and free and clear of any deduction for) set-off or counterclaim.

(b) Paragraph (a) above shall not affect the operation of any payment or close out netting in respect of any amounts owing under any Hedging Agreement. … 31. SET-OFF The Lender may set off any matured obligation due from an Obligor under the Finance Documents (to the extent beneficially owned by the Lender) against any matured obligation owed by the Lender to the Obligor, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Lender may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.” (a) All payments to be made by an Obligor under the Finance Documents shall be calculated and made without (and free and clear of any deduction for) set-off or counterclaim. (b) Paragraph (a) above shall not affect the operation of any payment or close out netting in respect of any amounts owing under any Hedging Agreement.

[24]Thus the rights of set off are asymmetric. Clause 30.3(a) prevents Shanpark from exercising any rights of set off, save as specifically stated, whilst Clause 31 permits the Bank, to set off “matured obligations”, without limit.

[25]For the purposes of clause 30.3(a), the Finance Documents are defined in the STFA as including “the Hedging Agreement” and the “Hedging Agreement” is defined as meaning “each ISDA Master Agreement, confirmation, schedule or other agreement in the agreed form entered into by any obligor and the lender for the purpose of hedging the liabilities and/or risks in relation to the Loan”. Thus, by sub-paragraph (a) all payments due under the IMA must be made in full, without any deduction in respect of a set-off or counterclaim whilst sub-paragraph (b) allows for “the operation of any payment or close out netting in respect of any amounts owing” under the IMA. “Payment netting” and “close-out netting” are therefore specifically permitted under the IMA, in contrast to any other set-off against sums due under the IMA. It is common ground that “payment netting” is apt to describe the process set out in s. 2(c) and that “close-out netting” is apt to describe the process set out in s. 6(e). The latter is referred to in that context by the Court of Appeal in Lomas v JFB Firth Rixson

[2013] 1 BCLC 27

, at paragraph 12 (xiii).

[26]Whereas clause 30.3 referred to the absence of set off available to Shanpark, clause 31 permitted set off by the Bank in the circumstances there referred to. The focus was on “matured” obligations due in each direction, regardless of the place of payment, booking branch or currency of either obligation, with liberty to the Bank to carry out an appropriate currency exchange where those obligations were expressed in different currencies. The words “matured obligation” in the context of that clause, can, in my judgment only refer to obligations which are ascertained and immediately due and payable. No meaning is otherwise given to the word “ matured”. The words would apply to any debt but not to a claim for unliquidated damages unless and until it resulted in a debt, either by virtue of a judgment or an agreement between the parties.

The IMA

[27]The structure or “architecture” of the IMA has been conveniently summarised in the judgment of Longmore LJ in Lomas (ibid) at paragraph 12, to which reference should be made. The critical provisions for present purposes are however as follows:

“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. … (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 respect of 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 be 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 would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that the 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. … 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) or (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). (b) Right to Terminate Following Termination Event (i) Notice. If a Termination Event occurs, an Affected party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) Transfer to Avoid Termination Event. If either an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist. If the Affected party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i). Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party’s policies in effect at such time would permit it to enter into transactions with the transferee o the terms proposed. (iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (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. (c) Effect of Designation … (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). … (e) Payments on Early Termination. (e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties’ election in the Schedule of a payment measure, either “Market Quotation” or “Loss”, and a payment method, either the “First Method” or the “Second Method”

. If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that “Market Quotation” or the “Second Method”, as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) Events of Default. If the Early Termination Date results from an Event of Default: (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party’s Loss in respect of this Agreement. (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and of the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that 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 that amount to the Defaulting Party. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party’s Loss in respect of this Agreement. If that 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 that amount to the Defaulting Party. (iii) Termination Events. If the Early Termination Date results from a Termination Event: (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and if Loss applies and fewer than all the Transactions being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected parties: (A) if Market quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (1) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount (“X”) and the Settlement Amount of the party with the lower Settlement Amount (“Y”) and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (II) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between he Loss of the party with the higher Loss (“X”) and the Loss of the party with the lower Loss (“Y”). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because “Automatic Early Termination” applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) Pre-Estimate. The parties agree that if Market Quotation applies 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 such losses. (f) Set-off Any amount (the “Early Termination Amount”) payable to one party (the Payee) by the other party (the Payer) under Section 6(e), in circumstances where there is a Defaulting Party or one Affected Party in the case where a Termination Event under Section 5(b)(iv) has occurred, will, at the option of the party (“X”) other than the Defaulting Party or the Affected Party(and without prior notice to the Defaulting Party or the Affected Party), be reduced by its set-off against any amount(s) (the “Other Agreement Amount”) payable (whether at such a time or in the future or upon the occurrence of a contingency by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement(s) between the Payee and the Payer or instrument(s) or undertaking(s) issued or executed by one party to, or in favour of, the other party (and the Other Agreement Amount will be discharged promptly and in all respects to the extent it is so set-off). X will give notice to the other party of any set-off effected under this Section 6(f). For this purpose, either the Early Termination Amount or the Other Agreement Amount (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, acting in a reasonable manner and in good faith, to purchase the relevant amount of such currency. If an obligation is unascertained, X may in good faith estimate that obligation and set-off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. Nothing in this Section 6(f) shall be effective to create a charge or other security interest. This Section 6(f) shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise).” (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. … (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) in respect of the same currency; and (ii) in respect of the same Transaction, (i) Notice. If a Termination Event occurs, an Affected party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) Transfer to Avoid Termination Event. If either an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist. If the Affected party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i). Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party’s policies in effect at such time would permit it to enter into transactions with the transferee o the terms proposed. (iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (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, … (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). … (e) Payments on Early Termination. (e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties’ election in the Schedule of a payment measure, either “Market Quotation” or “Loss”, and a payment method, either the “First Method” or the “Second Method”. If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that “Market Quotation” or the “Second Method”, as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) Events of Default. If the Early Termination Date results from an Event of Default: (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party’s Loss in respect of this Agreement. (3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and of the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that 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 that amount to the Defaulting Party. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party’s Loss in respect of this Agreement. If that 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 that amount to the Defaulting Party. (iii) Termination Events. If the Early Termination Date results from a Termination Event: (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and if Loss applies and fewer than all the Transactions being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected parties: (A) if Market quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (1) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount (“X”) and the Settlement Amount of the party with the lower Settlement Amount (“Y”) and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (II) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between he Loss of the party with the higher Loss (“X”) and the Loss of the party with the lower Loss (“Y”). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because “Automatic Early Termination” applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) Pre-Estimate. The parties agree that if Market Quotation applies 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 such losses. (A) if Market quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (1) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount (“X”) and the Settlement Amount of the party with the lower Settlement Amount (“Y”) and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (II) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between he Loss of the party with the higher Loss (“X”) and the Loss of the party with the lower Loss (“Y”). (f) Set-off Any amount (the “Early Termination Amount”) payable to one party (the Payee) by the other party (the Payer) under Section 6(e), in circumstances where there is a Defaulting Party or one Affected Party in the case where a Termination Event under Section 5(b)(iv) has occurred, will, at the option of the party (“X”) other than the Defaulting Party or the Affected Party(and without prior notice to the Defaulting Party or the Affected Party), be reduced by its set-off against any amount(s) (the “Other Agreement Amount”) payable (whether at such a time or in the future or upon the occurrence of a contingency by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement(s) between the Payee and the Payer or instrument(s) or undertaking(s) issued or executed by one party to, or in favour of, the other party (and the Other Agreement Amount will be discharged promptly and in all respects to the extent it is so set-off). X will give notice to the other party of any set-off effected under this Section 6(f). For this purpose, either the Early Termination Amount or the Other Agreement Amount (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, acting in a reasonable manner and in good faith, to purchase the relevant amount of such currency. If an obligation is unascertained, X may in good faith estimate that obligation and set-off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. Nothing in this Section 6(f) shall be effective to create a charge or other security interest. This Section 6(f) shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise).”

Two distinct regimes

[28]It is clear, as Mr Hossain QC submits, that the IMA provides for two distinct regimes, during which a form of netting operates as between the parties. The first regime applies during the life of the “Agreement” which, by s. 1(c) means the IMA itself (plus Schedule) and all transactions entered into in reliance on it, as set out in Confirmations. It ceases to apply at termination. The second regime covers the position where the Agreement has been terminated, which can happen, under ss. 5 and 6, either following an Event of Default or following a Termination Event. In either case, termination takes place by the giving of a notice by one party to the other of not more than 20 days. In this IMA, there are no automatic termination events. There is however an Additional Termination Event, namely that set out in the Schedule at Part 5 paragraph (g), namely the repayment or pre-payment of part of or the entire amount of a Loan (as defined in the STFA). Part 5 paragraph (g) provided that upon such repayment, Party A (the Bank) could designate the repayment date as the relevant Early Termination Date. Under paragraph (g), Party B (Shanpark) was designated as the Affected Party. As previously noted, the Agreement was terminated on this basis. Although it is accepted that the Special Liquidation Order made in respect of the Bank constituted an Event of Default, no notice was ever served by Shanpark to terminate the Agreement on this ground. Instead, as appears below, it relied upon the terms of s. 2 as exempting it from making further payments.

[29]Under s. 2(a)(i), each party was obliged to pay the other according to the terms of each Confirmation, “subject to the other provisions of this Agreement”. Under s. 2(a)(iii), that obligation to pay was subject to the conditions precedent set out in the Agreement including in particular the absence of any Event of Default or designation of an Early Termination Date. It was this position which permitted Shanpark, up to the Early Termination, to refrain from making payments to the Bank, because the Special Liquidation Order constituted an Event of Default on the part of the Bank. This is clear from the decision of the Court of Appeal in Lomas (ibid), where it was held that, where the conditions precedent were not satisfied, the other party’s obligations were suspended.

[30]S. 6 not only sets out the right to terminate following an Event of Default or a Termination Event but also the effect of serving a notice in either circumstance. In each case a day is to be specified as the Early Termination Date. S. 6(c)(ii) then provides that upon the effective designation of an Early Termination Date, “no further payments … under s. 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement”. The paragraph goes on to provide expressly that the amount, if any, payable in respect of the Early Termination Date is to be determined pursuant to s. 6(e), which represents “ the other provisions of this Agreement”, to which reference is made. S. 6(e) then sets out a scheme for calculating what payments are due under the heading “Payments on Early Termination”. It is therefore clear, as MHB submits, that the provisions for payment which operate under s. 2(a) are only effective during the life of the Agreement and that it is the provisions of s. 6 which come into play once Early Termination occurs.

[31]S. 6(e)(i) (and derivatively s. 6(e)(ii) in the case of the one Affected Party situation) require a calculation to be made, if the Market Quotation measure is chosen which involves the assessment of Unpaid Amounts owing by each party to the other. Unpaid Amounts are defined as meaning the aggregate of figures which include, in respect of all Terminated Transactions, the amount that became payable (or that would have become payable but for s. 2(a)(iii) [the condition precedent provision]) to such party under s. 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date. Thus s. 6(e) specifically takes into account the outstanding s. 2(a)(i) sums due in the context of Early Termination, in its particular calculations applicable on early termination. There is no room for the operation of s. 2(a)(iii) in this situation, since s. 6(e) makes full provision for the way in which outstanding sums on the Transactions are to be taken into account.

[32]I am reinforced in my conclusions as to the general structure of the IMA and the existence of the two regimes, by references in the judgment of Gloster J in Pioneer Freight Futures v TMT Asia Ltd [2011] 2 CLC 226 at paragraphs 28-36 and that of the Court of Appeal in Lomas at paragraphs 71 onwards, as well as the comments in the 1992 ISDA User Guide on s. 6 at page 23.

[33]Both s. 2(c) and s. 6(e) provide for some “netting” of payments due in either direction under the Agreement, whilst s. 6(f), provides for a “set-off”. It is clear, from reading the terms of s. 2(c) and s. 6(e), as compared with s. 6(f), that netting and “set-off” are different concepts for the purposes of the IMA. Netting relates to sums due under the IMA, whether during the life of the Agreement or after termination. Set-off, as used in s. 6(f) allows amounts payable under any other agreement to reduce the Early Termination Amount, which is in itself the result of close-out netting. There is therefore a significant difference between the way in which the expressions are used.

Section 2(c)

[34]I have already held that s. 2(c) cannot apply once the Agreement is terminated. At that point s. 6 takes over. There is no outstanding s. 2(a) payment against which any netting or set-off could occur. There are however a number of further reasons why Shanpark’s mis-selling claim cannot be “netted-off” under this sub-paragraph.

[35]Shanpark submits that the wording of s. 2(c) is very wide and could encompass a claim for mis-selling which arises “in respect of the same Transaction”.

[36]It is however clear that s. 2(c) is aimed at payments arising under s. 2(a)(i) because the former refers to amounts payable “on any date”, “in the same currency”,“and in respect of the same Transaction”. In Part 4, paragraph (i) under the heading “Netting of Payments”, the parties agreed that sub-paragraph (ii) of s. 2(c) of the Agreement would apply to all transactions under the Agreement. In other words, contrary to the submission made that sub-paragraph (ii) of s. 2(c) was disapplied by the parties’ election, the parties confirmed that netting was only possible in respect of the same transaction and not in respect of different transactions.

[37]S. 2(a)(i) refers expressly to “each payment …specified in each Confirmation”. It is the Confirmation which sets out the terms of the transaction or transactions and specifies the date upon which payments are to be made by either party - here the payments due in each direction on the fixed and floating interest rates.

[38]The wording of s. 2(c) is not apt to provide for netting between the Early Termination Amount which is calculated on a global basis in respect of all transactions under the Agreement on the one hand and a claim for unliquidated damages relating to all those transactions on the other. They are not payable in respect of the same transaction, but arise in relation to the combination of the transactions, as appears from the terms of s. 6(e) and the claim made by Shanpark. They do not represent amounts payable under the Confirmations at all, which set out the Transactions and the amounts to be paid.

[39]Nor could it properly be said that those amounts were payable on the same date as s. 2(c) requires. It is clear, to my mind, that s. 2(c) does so require, the object being to replace each of the party’s individual obligations to pay each other a gross amount on a given date in a particular nominated currency in respect of the same transaction by a substitute obligation imposed on the party owing the larger amount to pay the net difference. The paragraph is not apt to apply to or cover anything other than debts which are payable on the same date.

[40]In Lomas (ibid), the question arose as to whether the effect of s. 2(a)(iii) was that the payment obligation of the non-defaulting parties was suspended or extinguished while the Event of Default continued and what happened to those obligations on expiry of, or maturity of, the transaction. In the judgment of the Court, at paragraphs 77, 79 and 113, Longmore LJ, in discussing the operation of s. 2, put the matter thus:

“The concluding words are unqualified and subject that primary obligation to pay to the remaining provisions of S. 2 including both S. 2(a)(iii) and S. 2(c). Although there has been some argument as to the order in which these sub-S.s should be applied, the netting provisions in S. 2(c) (which are both automatic and mandatory) state in terms that they are to operate in relation to amounts which "would otherwise be payable" in the same currency and in respect of the same Transaction. The use of the words "would otherwise be payable" take account in our view of the payment requirements specified in each Confirmation regardless of whether the conditions precedent have been satisfied as at the relevant date for payment. They are general words which qualify the terms of payment in the Confirmation ("would otherwise be payable") so as to convert each party's contractual obligations into ones to pay a net sum. The words "would otherwise" can and, in our view, should be read as the draftsman's indication that S. 2(c) operates irrespective of the terms of each payment obligation and the particular circumstances then prevailing. They are not therefore concerned with whether the amounts specified in the Confirmation have actually become payable ("are payable") on the date in question. Their purpose is to re-formulate the content of the obligations which arise as at each payment date. This can be contrasted with the definition of Unpaid Amounts in S. 14 which is concerned to capture amounts "that become payable" under the Terminated Transactions or "would have become payable but for S. 2(a)(iii)". In this context the emphasis is on what actually fell due or would have become due and payable but for the non-satisfaction of the conditions precedent. It is not concerned to re-formulate the obligations but to enforce payment under the wash-out provisions of the net payment obligations which would otherwise have operated. … 79. Mr Kimmins QC submitted that a debt which falls due on a particular date but is not then paid remains payable at all times until it is paid. This is undoubtedly true but it is not what s.2(c) contemplates by its reference to amounts being payable "on any date" or "on the same date". It seems to us that s.2(c) applies its netting provisions only to the amounts which, under the original terms of the contract, were expressed to be payable on the same date in respect of the same (or at the parties' election) two or more of the relevant Transactions. We shall deal later in this judgment with how (if at all) this affects the outcome of the Cosco appeal. … 113. … S. 2(c) applies its netting provisions only in relation to contemporaneous payment obligations, that is to say only to amounts which, under the original terms of the contract, were expressed to be payable on the same date in respect of the same (or at the parties' election) two or more of the relevant transactions.”

Here, in this passage, the Court of Appeal distinguished between the two regimes to which I have already drawn attention and specifically related s. 2(c) to s. 2(a), although it is true to say that that was the framework of the debate before it. The critical point, nonetheless, is that obligations to pay which arise in the same currency in respect of the same transaction on a specific date are replaced by an obligation on the greater debtor to pay the net difference.

[41]It cannot be said that the Early Termination Amount became payable on the same date as the mis-selling claim for unliquidated damages. It is common ground that the cause of action in respect of the latter claim arose at the point of reliance upon any advice given in breach of contract or duty, which occurred long before the Early Termination Amount became payable. A claim for damages could have been made from that point onwards, with damages to be assessed by reference to the future, however difficult that might be. Shanpark submitted that the loss on the mis-selling claim only “crystallised” at the point where the Early Termination Amount was ascertained because it was only then that proper quantification could be made of the difference between amounts payable in respect of the swap transactions which were concluded and the amounts payable on the swap transactions which, on their mis-selling case, should have been concluded. That does not assist Shanpark because ex post facto quantification of the loss by a defendant cannot, as a matter of law, be the point at which anything becomes “payable”.

[42]A debt in respect of a claim for unliquidated damages can only become payable at the point at which it is ascertained by a court or agreed by the parties (see e.g. Standard Life v Greycoat Devonshire Square [2001] L&TR 290 at p. 295). That has not occurred. Furthermore, on 6th January 2014 MHB notified Shanpark of the Early Termination Amount but that figure did not become payable until two days later, on 8th January 2014. In the meantime, on 7th January 2014 Shanpark’s lawyers wrote a letter to MHB’s lawyer in which they claimed to be entitled to set-off the claim for unliquidated damages which was then quantified (and as subsequently set out in Shanpark’s Particulars of Claim on 5th February 2014). The damages claim was not payable, nor was quantification nor “crystallisation” of the claim contemporaneous with the date when the Early Termination Amount became payable under the terms of the IMA.

[43]There is therefore, in my judgment, no room for the operation of the claimed set-off by reason of the terms of s. 2(c). S. 2(c) is concerned with the “netting” of sums due under the Confirmations – namely those which are payable on the same date, in the same currency and in respect of the same transaction. It has nothing whatever to do with the Early Termination Amount payable under s. 6(e) or any set-off against it in respect of any amount payable under another agreement under s. 6(f).

S. 6(f)

[44]S. 6(f) is by Part 5 of the Schedule, added to s. 6 and is headed “Set-off”. It is the basic set-off provision in the model recommended by ISDA where the parties wish to include a right to set-off for which the IMA does not provide. S. 6(f) expressly provides for a set-off against the Early Termination Amount payable to one party (the payee) under s. 6(e) in the circumstances to which s. 6(f) specifically refers.

[45]It is important to understand the structure of s. 6 as whole and, in this respect, I once again draw attention to paragraph 12 of the judgment of Longmore LJ in Lomas. The section is headed “Early Termination” and sets out the circumstances in which a right to terminate will arise. i) It arises following an Event of Default where the party which is not in default, “the Non-defaulting Party”, may give notice to the Defaulting Party, specifying the Default and designating the day of the notice or a day not more than 20 days ahead as the Early Termination Date in respect of all outstanding Transactions. Although an Event of Default occurred with respect to the Bank, and continued from 7th February 2013 onwards, Shanpark never gave notice designating an Early Termination Date. ii) The right to terminate also arises following a Termination Event, in this case the repayment of the Loan which, under Part 5(g), defined the Affected Party as Shanpark. Under s. 6(b)(iv), where an Additional Termination Event occurs, “the party which is not the Affected Party” (the Non-affected Party) is entitled to give notice to the other party and designate a day as an Early Termination Date. This, the Bank did on 20th December 2013.

[46]Under s. 6(c), as already set out earlier in this judgment, the effect of the designation of an Early Termination Date is that no further payments are required to be made under s. 2(a)(i) or s. 2(e) (Default Interest) in respect of the Terminated Transactions. This is said to be “without prejudice to the other provisions of this Agreement”, with the amount, if any, payable in respect of the Early Termination Date to be determined under s. 6(e).

[47]It is clear, in my judgment, that clause 30.3 of the STFA, when referring to the operation of payment and close-out netting was referring to s. 2(c) and s. 6(e). There is no room for setting off the unliquidated damages claim under s. 2(c) at all and none under s. 6(e), unless it is permitted under s. 6(f).

[48]Under s. 6(e) provision is made for the payments to be made on Early Termination, both in relation to termination as a result of an Event of Default and termination resulting from a Termination Event. It is the latter which is relevant in the present case. S. 6(e) however provides in the last sentence before sub-paragraph (i), which deals with Events of Default, and sub-paragraph (ii), which deals with Termination Events, that “the amount, if any, payable in respect of an Early Termination Date and determined pursuant to this section will be subject to any set-off”. Thus both s. 6(e) and s. 6(f) cross-refer to each other and the two are clearly inter-linked.

[49]Under s. 6(e)(i) four different ways of determining the amount to be paid are set out, if the Early Termination Date results from an Event of Default. The parties are free to choose between the Market Quotation measure or the Loss Measure and between the First and Second Methods of payment. By Part 1(f) of the Schedule, the parties chose the Market Quotation measure and the Second Method but it is instructive to consider both the First and Second Method in the context of the current dispute. i) Where the First Method is applied, the Defaulting Party must pay the Non-defaulting Party, if the calculation gives rise to a sum in favour of the Non-defaulting Party but not vice versa if the calculation gives rise to a sum in favour of the Defaulting party. ii) This is to be contrasted with the Second Method where, the Defaulting Party and the Non-defaulting Party are bound to pay the sum obtained by the relevant calculation, whether it results in favour of one party or the other. iii) In other words, under the First Method (whether Market Quotation or Loss) it is only the Defaulting Party which can be liable to pay the sums which results from the calculation, whereas by the Second Method (whether Market Quotation or Loss) each party is liable to pay the other whatever figure results from the calculation. iv) Further, in relation to both the First and Second Methods, when combined with the Market Quotation measure, it is the Non-defaulting Party which determines the Settlement Amount which is part of the calculation of the payment to be made.

[50]It is therefore important in the case of Early Termination by reason of an Event of Default, to know which is the Defaulting Party and which is the Non-defaulting Party, in order for these provisions to operate. The question is concluded by the terms of s. 6(a). The Non-defaulting Party is the one who sends the notice specifying the relevant Event of Default and designating the Early Termination Date, whether or not that party itself is in default in any material respect and whether or not the other party could have served a notice under s. 6(a) (but did not do so).

[51]If however the Early Termination Date results from a Termination Event, and there is only one Affected Party, as is expressly the position here under Part 5(g) of the Schedule (that the Affected Party being Shanpark) the amount payable is to be determined in accordance with the Second Method and (because the parties had so elected) the Market Quotation measure. In these circumstances, s. 6(e)(i)(3) is to apply to ascertain the Early Termination Amount, save that “references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively”.

[52]Here therefore, for the purpose of ascertaining the Early Termination Amount, it was for the Bank, as the party which was not the Affected Party, to determine the Settlement Amount, which is what happened.

[53]With this in mind, s. 6(f) falls to be examined. I set it out once again but sub-divided into eight segments, omitting immaterial provisions, in the form put forward by MHB in the course of argument. “(1) Set-off Any amount (the “Early Termination Amount”) payable to one party (the Payee) by the other party (the Payer) under Section 6(e) (2) … in circumstances where there is a Defaulting Party or one Affected Party in the case where a Termination Event under Section 5(b)(iv) has occurred, … (3) … will, at the option of the party (“X”) other than the Defaulting Party or the Affected Party (and without prior notice to the Defaulting Party or the Affected Party), (4) … be reduced by its set-off against any amount(s) (the “Other Agreement Amount”) payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency place of payment or booking office of the obligation) (5) … under any other agreement(s) between the Payee and the Payer or instrument(s) or undertaking(s) issued or executed by one party to, or in favour of, the other party (and the Other Agreement Amount will be discharged promptly and in all respects to the extent it is so set-off). (6) X will give notice to the other party of any set-off affected under this Section 6(f). … (7) If an obligation is unascertained, X may in good faith estimate that obligation and set-off in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained. … (8) This Section 6(f) shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise).” 52. S. 6(f) provides for a set-off against any Early Termination Amount calculated to be payable by one party to the other under s. 6(e) but only, so far as is material for present purposes, in circumstances where there is a “Defaulting Party”. (The other circumstance referred to in the second segment arises under s. 5(b)(iv) – a Credit Event Upon Merger which is not relevant here). In such circumstances, the other party (X) – the Non-defaulting Party – is given an option in the third segment. That option consists, as set out in the fourth segment, of setting off against its liability to pay the Early Termination Amount sums payable under other agreements (the “Other Agreement Amount”). Segments four and five also amplify what is meant by the “Other Agreement Amount” by stating that it is any amount or amounts payable immediately, or in the future or upon the occurrence of a contingency, irrespective of the currency, place of payment or booking office of the obligation. It must however be payable “under any other agreement between the same parties or instrument or undertaking between them.” Although prior notice is not required before exercising the set-off (segment three) notice must be given once it has been effected (segment six). Under segment seven, the Non-defaulting Party is entitled, in good faith, to estimate the extent of an obligation which is unascertained and set off that amount, subject to final accounting when the obligation is quantified. Finally, in segment 8, it is provided that s. 6(f) is without prejudice and in addition to any right of set off to which either party is entitled.

[54]As I have already said, s. 6(e) specifically provides that an Early Termination Amount is to be subject to any set-off, but clause 30.3 negates any right of set-off by Shanpark in respect of any payments to be made under the IMA with the exception of “the operation of any payment or close out netting in respect of any amounts owing under [the IMA]”.

[55]It is accepted that s. 2(c) provides for “payment netting” and s. 6(e) is often referred to as “close out netting”. Netting of sums due under the IMA under those provisions is different from setting off amounts payable under an Other Agreement (for which s. 6(f) provides) against a sum which has already been the subject of the close-out netting under s. 6(e) of the IMA. It is clear, in my judgment, that the intention of clause 30.3 of the STFA was to exclude any rights of set-off for Shanpark other than the netting specifically provided for in ss. 2(c) and 6(e), which are the netting provisions, but which could be seen as a form of set-off. S. 6(e) in the IMA specifically allowed for “any Set-off” against the Early Termination Amount, in circumstances where the STFA, by clause 30.3 negated the right of set-off for Shanpark in relation to (inter alia) the STFA and the IMA, whilst clause 31 of the STFA allowed it for the Bank in relation to “matured obligations”. The issue is how such provisions are to be reconciled.

[56]The STFA post-dates the IMA and I consider that clause 30.3 must be given its full effect in relation to the position of Shanpark, regardless of the terms of s. 6(f) of the IMA. Shanpark was not entitled to exercise the s. 6(f) set-off at all. Clause 31 meant that the Bank could, under its terms, set-off “matured obligations”, but nothing in the STFA restricted the Bank’s right to rely on s. 6(f) of the IMA, where applicable. Although s. 6(e) can be taken to refer to s. 6(f), as it appears in the next paragraph (by the parties’ specific agreement in the Schedule), the STFA negates the right of Shanpark to rely upon it. S. 6(e) and (f) and clauses 30.3 and 31 of the STFA must be read together, with the STFA recording the later agreement between them, with the result that I have just set out.

[57]I turn, nonetheless to s. 6(f) and the construction issues which arise in relation to it.

[58]It is Shanpark’s submission that, regardless of the basis of the Early Termination (namely by the Bank’s notice on the happening of an Additional Termination Event), the Bank was a defaulting party because of the Special Liquidation Order made on 7th February 2013 and continued to be such. The fact that Shanpark did not give notice of termination on the ground of the Bank’s default in becoming insolvent is, it is submitted, neither here nor there. The provision applies in any circumstances where there is “a Defaulting Party” which, by s. 6(a) is said to be a party with respect to whom an Event of Default has occurred and is then continuing.

[59]Per contra, MHB contends that the only purpose of labelling a party as a Defaulting Party is for the operation of the Early Termination provisions which set out the rights and obligations of the Defaulting Party and the Non-defaulting Party following an Event of Default and termination consequent upon it. The concept of “Defaulting Party” is an irrelevance where the Agreement is terminated following a Termination Event, as opposed to termination following an Event of Default. In the case of termination following a Termination Event, the relevant concepts are those of the Affected Party and the “party other than the Affected Party” (to whom I have sometimes referred as the Non-Affected Party).

[60]In my judgment, MHB’s submission is correct. S. 6(f) draws the distinction between a Defaulting Party and an Affected Party, where, in the latter case, it is only a Credit Event upon Merger which gives rise to set-off rights. S. 6(f) applies therefore only to the situation where termination has taken place as the result of an Event of Default, allowing the Non-Defaulting Party to exercise an option of set-off on the one hand, and, on the other hand, to circumstances of termination where a specific class of Termination Event has taken place, where the Non-Affected Party can exercise the option. It makes no sense for the party defined as “the party other than the Affected Party” in a situation where termination has occurred as a result of an Additional Termination Event, to be labelled as a Defaulting Party, within the framework of the IMA.

[61]If a party becomes a Defaulting Party when an Event of Default occurs, it may continue to be a Defaulting Party as long as that Event of Default continues but cannot be such once the Agreement comes to an end because of a Termination Event. Shanpark’s submission leads to a confusion of categories for the purposes of the s. 6(e) calculations and renders parts of s. 6 effectively inoperable.

[62]The relevant wording of s. 6(f) can therefore only apply where there is a Defaulting Party and there has also been early termination following an Event of Default and notice given under s. 6(a). The Defaulting Party in question, for the purposes of s. 6(f) is the party whose Event of Default has resulted in termination, in exactly the same way as the “Affected Party” means the party in respect of whom there has been a Credit Event upon Merger leading to termination. The concept of Defaulting Party arises only in the context of setting out the rights and mechanics of termination. The concept is only relevant in that situation and appears nowhere in s. 5 which delineates Events of Default or s. 2(c) which makes their absence a condition precedent to payment by the other parties.

[63]It is clear that there can only ever be one Defaulting Party once termination for an Event of Default has occurred and has been the subject of a terminating notice. Whilst it is possible for there to be separate Events of Default with respect to both parties – e.g. a breach by each, or insolvency or Credit Support Default, so that each has a right to give a notice of termination under s. 6(a), only one of them can be the Defaulting Party and one the Non-Defaulting Party for the purposes of the operation of s. 6(e). The identification of one or other of them as the Non-defaulting Party and the Defaulting Party depends upon which of them gives notice to the other specifying the relevant Event of Default and designating an Early Termination Date. A party cannot be a Defaulting Party and a Non-defaulting party at the same time.

[64]Whilst it is possible to conceive of issues arising where both parties give notice of default at the same time, designating the same Early Termination Date, the position, as here, will normally be clear. In my judgment, whether or not there has been an Event of Default with respect to a particular party, if it gives a valid notice under s. 6(a), while the other party does not, once the Early Termination Date arrives, (which will frequently be the same day as the notice, as it was in the present case), the characterisation of the parties is complete, with the party giving notice becoming the Non-defaulting Party for the purpose of s. 6(e) whilst the other becomes the Defaulting Party.

[65]I have already drawn attention to the way in which s. 6(e) works. i) In the case of the First Method, there can only ever be a payment from the Defaulting Party to the Non-defaulting Party, whether the measure used is Market Quotation or Loss. Furthermore, the Settlement Amount for the First Method/Market Quotation measure is determined by the Non-defaulting Party. ii) Where the Second Method is used, although the calculation can produce a positive or negative number and an obligation on either party to pay the balance, the Settlement Amount, for the Market Quotation measure is again to be determined by the Non-Defaulting Party. It is therefore clear that there can only be one Defaulting Party and one Non-defaulting Party in the event of termination following an Event of Default.

[66]There is a clear contrast between termination following an Event of Default and termination following a Termination Event where s. 5 (which does not refer to a Defaulting Party) does explain who is to be considered an Affected Party and allows for more than one Affected Party. Moreover s. 6(e)(ii)(2) provides for a wholly different way in which the Settlement Amount is to be determined on a Market Quotation measure, where there are two Affected Parties, as opposed to the one Affected Party situation, where s. 6(e)(i)(3) or (4) applies. Under that provision, the Affected Party and the Non-Affected Party are to be treated as the Defaulting Party and the Non-defaulting Party respectively for the purpose of the Market Quotation measure, if chosen by the parties. It is impossible to see how the notion of Defaulting Party can apply in the situation where termination has occurred following a Termination Event, as opposed to an Event of Default.

[67]In my judgment therefore, s. 6(f) was not engaged because Termination occurred by reason of the Bank’s notice of an Additional Termination Event and questions of earlier default, or continuing default by the Bank, at the time of the notice, do not play any part in relation to s. 6(e) with the result that there is no Defaulting Party for the purpose of s. 6(f).

[68]S. 6(f) is primarily aimed at the position where a party gives a notice of termination on the basis of an Event of Default with respect to the other party. The Non-defaulting Party thereby terminates the Agreement under s. 6(a) but if the Second Method of calculation is used under s. 6(e), it could produce a negative number which would oblige the Non-defaulting Party to pay the Defaulting Party. In those circumstances the Non-defaulting Party is given the option of setting off against the Early Termination Amount payable to the Defaulting Party, amounts payable under other agreements between them. The same point can arise in the context of a Credit Event upon Merger, where it is the party other than the Affected Party which has the option of set-off. (Clauses 30 and 31 of the STFA did not restrict the Bank from utilising this provision, but did, as I have already held, prevent Shanpark from doing so.)

[69]MHB also submitted that a claim for unliquidated damages could not in any event fall within s. 6(f) because it would not constitute “an Amount Payable under an agreement within the meaning of s. 6(f) and the fourth segment thereof”. A number of points were made in support of this submission.

[70]It was accepted that the amount in question need not be immediately payable but could be prospective, contingent and unascertained, as s. 6(f) expressly provides. The seventh segment allows the Non-defaulting Party or Non-affected Party to make a good faith estimate of the extent of the obligation in order to set it off, with a final accounting to take place when the extent of the obligation is ascertained. What is said, however, is that a claim for unliquidated damages is not “payable” under another agreement, instrument or undertaking. The contrast is made between a present, future, contingent or unascertained debt on the one hand, which can be described as “payable” and a damages claim which requires duty and breach to be established, quite apart from quantum. It is said that what s. 6(f) envisages is a contractual obligation because of the reference in the fourth segment which allows for set-off “irrespective of the currency, place of payment or booking office of the obligation”. In the context of a common situation where ISDA arrangements are in place to hedge risks arising from primary obligations such as loans, s. 6(f) was intended to allow a Non-defaulting Party or Non-affected Party to set-off amounts due to it under loan facility arrangements against sums payable under the IMA.

[71]It is said that if the ISDA draughtsman had intended to allow damages to be set off, much clearer language would be required, which would inevitably have referred to “claims made”, “losses resulting” or “liabilities arising” and that he would not have restricted the set-off to an amount payable under an agreement or instrument. The words are said not to be apt to cover secondary obligations in damages as opposed to primary obligations under a contract and cannot, on the face of them apply to damages payable for breaches of common law or statutory duty, which would be expected if the intention was to cover damages for breach of contract.

[72]Since Shanpark’s claim for breach of contract covers the same ground as its claim for breach of common law duty or statutory duty, the reference to the words “under any other agreement” only takes MHB a limited distance. The question is whether or not the wording, on its proper construction, covers only contract debts as opposed to claims in damages for breach of contract.

[73]I do not need to decide this point because I have already held that s. 6(f) is inapplicable to the present case but it appears to me that it is a provision designed to protect the Non-defaulting Party or the Non-affected Party, by giving it a wide power of set-off. It allows for any amount which will become payable in the future or contingently “under any other agreement” to be set off. Whilst the draughtsman primarily had in mind contractual debts, I am inclined to think that, when segment four and segment seven are read together, the Non-defaulting Party or the Non-affected Party can in good faith estimate the unascertained obligation which arises under a contract, in respect of any breach of it and set off its good faith estimate against an Early Termination Amount payable by it. The terms of s. 6(f) are different from the terms of clause 2(c) which required amounts to be payable on a specific date and from clause 31 which referred to “matured obligations”. S. 6(f) specifically allows for the set-off of amounts which are not yet due and which are only contingently due. Claims for unliquidated damages will only become a debt upon judgment being given by a court or upon agreement between the parties but s. 6(f) allows for a good faith estimate to be made, which in itself involves a good faith assessment of the existence of a duty and breach, as well as damages. The exercise of the s.

The exercise of the s. 6(f) option

(f) option

[74]This point has taken a number of different forms prior to and during the course of the proceedings.

[75]I have already drawn attention to the Bank’s plea at paragraph 68 of its defence dated 14th May 2014 in the mis-selling action.

[76]In Shanpark’s original Defence in August 2014 to the current Claim, at paragraph 50, it referred to the Bank’s claim of entitlement to set off in its Defence and Counterclaim in the mis-selling action. At paragraph 51 the following appeared:

“In the premises, if the Early Termination Amount which would otherwise have been due to IBRC had not already been netted off but alternatively set off against the sums due to Shanpark from IBRC for the mis-selling of the Extendable Swaps, then with effect from 14th May 2014 they were discharged to the extent of the overlap pursuant to the terms of section 6(f) of the ISDA Master Agreement, IBRC having been entitled to assert its right as the Non-defaulting Party and having asserted the right of set off in its Defence and Counterclaim.”

At paragraph 52 Shanpark went on to say that, if clause 30.3 of the STFA had any impact upon netting off and/or set off rights, by expressing a right of set off in its pleading, the Bank had waived that provision and exercised its rights of set off under clause 31 of the STFA. In consequence, no sum or alternatively no net sum, was due to the Bank at all.

[77]It can thus be seen that, in this action, Shanpark initially relied on s. 6(f) on the basis that the Bank was a Non-defaulting Party and that it had exercised its right of set off in paragraph 68 of its defence in the mis-selling action.

[78]In its Amended Defence served in December 2014, Shanpark relied on the Special Liquidation Order and pleaded that the Bank thus became a Defaulting Party which exempted Shanpark from making payment as long as the Event of Default continued. The Event of Default was said to be continuing as at the date of the pleading. In consequence, it was alleged that Shanpark had asserted its right of set off pursuant to s. 6(f) when responding on 7th January 2014 to the Bank’s letter setting out the Early Termination Amount the day before.

[79]In Shanpark’s letter of 7th January, reference was made to the proceedings which had already been commenced by it against the Bank claiming damages for mis-selling. In the second paragraph, reliance was placed on s. 2(c) of the IMA, which was said to have been expanded by Part 4 paragraph (i) in the Schedule so that automatic netting off applied across all transactions under the IMA. Alternatively it was said that Shanpark was entitled to exercise rights of equitable set off. In the third paragraph, it was said that Shanpark had already paid well in excess of the sums for which it would have been liable to the Bank if suitable swaps had been sold to it, with the result that it was entitled to recover damages in respect of the excess sums paid.

[80]A further point was made in the pleading, that if, contrary to that case, Shanpark did not have any right of set off or netting off, it became a Defaulting Party by failing to pay the Early Termination Amount, and the Bank had exercised its right of set-off.

[81]I have already held that, in circumstances where the Bank terminated the Agreement following an Additional Termination Event, s. 6(f) was not available to either party and could not, in any event, have been available to Shanpark because of the terms of the STFA, so this point does not arise. Clause 31 of the STFA covered only matured obligations, so that the Bank could not set off against a claim for unliquidated damages.

[82]There is no need for any prior notice to be given in respect of a set-off under s. 6(f), whilst notice must be given when it is effected. The question then arises as to how any such set-off is “effected”. What s. 6(f) appears to envisage is the Non-defaulting Party or Non-affected Party actually making a deduction from sums payable as the Early Termination Amount on the day it is due. Hence the need for notice of effecting the set-off but the absence of any requirement for prior notice.

[83]Shanpark’s solicitor’s letter of 7th January 2014 did not purport to exercise a s. 6(f) set off at all. Each of the three grounds put forward in the second paragraph of the letter was misconceived. It did not rely on rights arising under another agreement or instrument. Nonetheless it did claim an entitlement to set off and contended that an automatic netting off had taken place under s. 2(c). If Shanpark had a right of set off under s. 6(f), it would not appear to matter that it purported to exercise a right of set off under provisions of the IMA or provisions of law which did not justify it, as it did purport to set off its damages claims against the Early Termination Amount, payable by it on the next day. Had it been entitled to do so, I consider that would have been good enough. I have however found that it had no such entitlement.

[84]Paragraph 68 of the Bank’s Defence expressed an intention to set off the Early Termination Amount against Shanpark if Shanpark’s claims against it were made good. It was a standard plea of entitlement to make a set off in a pleading which could be amended and the claim of entitlement to set off withdrawn, as it duly was. That was not a set- off for the purposes of s. 6(f). It did not purport to set off against a sum due from it as an Early Termination Amount any sum due to it under another Agreement. Further the Bank merely set out an intention to make a set off which was contingent on Shanpark establishing liability against it, which it denied. All the Bank ever did was claim to be entitled to put forward the Termination Amount as a set-off should Shanpark succeed in establishing its mis-selling claims. The obligations would then be matured obligations for the purpose of clause 31 of the STFA. That has not taken place and the Bank was entitled to withdraw the plea, not having effected a set-off in its books or served a notice to say that such a set-off had been effected.

[85]No argument of waiver of rights under the IMA or STFA can get off the ground. The Bank was never saying that Shanpark had no obligation to pay the Early Termination Amount until its mis-selling claims had been determined.

[86]The final argument on this point, as now pleaded by Shanpark, is that it became a Defaulting Party on 9th January 2014, if it was not entitled to exercise a set-off, by failing to pay the Early Termination Amount. Again reliance is placed upon the Bank’s plea of entitlement, contingently to set off the Early Termination Amount in its Defence against the mis-selling claims if established and this argument can fare no better than the previous submission.

Conclusion

[87]I have determined the points of construction which arise on this application for summary judgment because, although not short, they are clear and determinative of the actions. There are, to my mind no other compelling reasons why this matter should proceed to trial. It is accepted that there is no room for equitable set off or insolvency set off so that Shanpark’s cri de coeur in relation to being left with an irrecoverable mis-selling claim against an insolvent bank cannot affect the question. To require MHB to proceed to a trial in circumstances where Shanpark would seek a joint trial of its claims against the Bank, would make no sense at all.

[88]MHB is therefore entitled to summary judgment against Shanpark and, because the issues are identical, also against Vendart and Structadene in Folios 762 and 763.

Cited in 1 later judgment

Grant & Ors v WDW 3 Investments Ltd & Anor 2017