In Macquarie Bank Limited v Phelan Energy Group Limited [2022] EWHC 2616 (Comm) the High Court considered what must be contained in a notice of failure to pay or notice of an early termination date under the 2002 ISDA Master Agreement for it to be effective. The findings will be of interest to parties considering closing out derivative transactions.

Macquarie Bank (Macquarie) and Phelan Energy Group (Phelan) entered into a 2002 ISDA Master Agreement on 26 September 2019. In June 2020, Phelan entered into four USD/ZAR swaps with Macquarie, which were  rolled on a number of occasions, extending the expiration date until 14 May 2021. There was a dispute over the settlement price (the ZAR strike price agreed by telephone was different to the price in the trade confirmation – overstating the ZAR amount payable by Phelan to Macquarie).[1] Phelan argued that as the settlement amount was disputed, Macquarie was not entitled to deliver a failure to pay notice under Section 5(a)(i) or an early termination date notice under Section 6(b)(i).

The court helpfully summarised some of the considerations which should be kept in mind when interpreting the ISDA Master Agreement.

  • Lomas v JFB Firth Rixson Inc [2010] EWHC 3372: the ISDA Master Agreement “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.”
  • Lehman Brothers International (Europe) [2016] EWHC 2417: the focus is “ultimately on the words used, which should be taken to have been selected after considerable thought and with the benefit of the input and continuing review of users of the standard forms and of knowledge of the market.”

In light of the fact that the purpose of a failure to pay notice is to give the receiving party the opportunity to remedy a potential event of default, and that period is short (1 day), the court held that the notice should:

  • communicate clearly, readily and unambiguously to the reasonable recipient in the context in which it is received the failure to pay or deliver in question;
  • such that the reasonable recipient can understand what it needs to do in order to cure any failure to pay or deliver.

The notice does not necessarily need to specify the related confirmation or the currency or exact amount of payment or delivery not made. Requiring such detailed specification would create opportunities for unfairness (i.e. a typo would invalidate a notice). And neither the language or nature of the ISDA Master Agreement demands such a requirement.

Even though there were errors in the failure to pay notice (use of an incorrect trade reference and the wrong strike price), there was only one trade between the parties settling on the relevant date and it was clear the notice related to that trade. As the failure to pay notice was valid, it followed that the early termination date notice was also valid. As a result the relevant transaction was terminated, and the Early Termination Date occurred on 4 June 2021.

The court considered whether, if a party makes an error in its Early Termination Amount calculation, it has a right to recover that amount as a debt (or instead prove a claim in damages). The court noted that pursuant to section 6(c)(i) and (ii) the Early Termination Amount is due from the Early Termination Date, so it would be surprising if a mistake in the calculation (which may be after the Early Termination Date) would prevent the debt becoming due. If an incorrect calculation has been made, or none made at all, the last resort is that the court will determine the amount due itself. And of course the parties agree to correct any error that has been made.

The decision will give comfort to parties who are attempting to close out defaulted transactions where there is dispute over the transaction details (a not uncommon occurrence). A failure to pay notice must clearly set out the relevant failure so the recipient can attempt to remedy it, but technical errors relating to amounts or figures should not invalidate the close out.

[1]      The amount in dispute (the difference between the two strike prices) was USD42,000.