Court of Appeal rules on section 2(a)(iii) of the ISDA Master Agreement
The Court of Appeal has today handed down a consolidated judgment in four related appeals concerning the proper construction of certain key provisions of the 1992 ISDA Master Agreement (sub nom Lomas v Firth Rixson and others  EWCA Civ 419).
One of the cases considered by the Court of Appeal was an appeal from a decision of Flaux J in Pioneer v Cosco  EWHC 1692 (Comm). That case arose out of a series of 11 forward freight agreements (FFAs) entered into between the parties, each of which was on the 2007 terms of the Forward Freight Agreement Brokers Association and incorporated the terms of the 1992 ISDA Master Agreement. In November 2008 Pioneer failed to make a payment which was due to Cosco under the FFAs. That was an Event of Default under the ISDA Master Agreement, the effect of which was to entitle Cosco to withhold any payments which would otherwise have been due under the FFAs for so long as the Event of Default was continuing, by virtue of section 2(a)(iii) of the Master Agreement. After that date, neither party made any payment to each other until, in December 2009, Pioneer went into liquidation. That was also an Event of Default, but significantly, one which brought about the Automatic Early Termination (AET) of all “outstanding transactions” between the parties, pursuant to section 6(a) of the Master Agreement.
The principal question in the case was how many of the FFAs between the parties could be regarded as “outstanding transactions” as at December 2009. Pioneer contended that all of the FFAs between the parties were “outstanding transactions” at that date, and that all of the FFAs were therefore subject to AET. If that was right, it would follow that approximately $16 million would be due from Cosco to Pioneer under the close out provisions of section 6(e) of the Master Agreement. However, Cosco contended that in fact, not all of the FFAs were subject to AET. In particular, as at December 2009 some of the FFAs had reached the end of their natural term. Cosco contended that those FFAs could not be regarded as “outstanding transactions”, and were therefore not the subject of AET. If that was right, Cosco contended that it would follow that a payment of about US$7 million would be due from Pioneer to Cosco.
The Court of Appeal held that all of the FFAs were “outstanding transactions” as at December 2009, and were therefore subject to AET. In reaching that conclusion the Court of Appeal overturned the decision of Flaux J at first instance, as well as that of Briggs J in the case of Lomas v Firth Rixson  EWHC 3372 (Ch), to the effect that payment obligations which were suspended by virtue of section 2(a)(iii) of the Master Agreement were extinguished once and for all at the end of the term of the transaction. It was held that there was no language in the Master Agreement to support that conclusion, and that on a proper analysis payment obligations which were suspended under section 2(a)(iii) remained suspended for so long as the relevant Event of Default was continuing, whether or not the term of the transaction had passed. It followed that, as at December 2009, even those FFAs whose natural term had passed were “outstanding transactions”, as they were transactions under which there remained obligations which were capable in the future of arising for performance. The result was that Pioneer’s claim succeeded in full.