ISDA Master Agreement dispute highlights need for precision in drafting

October 15, 2013

This article originally appeared on Lexis Nexis

Banking & Finance analysis: What is the extent of contractual liability in transactions based on an ISDA Master Agreement? Financial services litigation specialists Tom Custance, partner, and Molly Ahmed, senior associate, at Fox Williams comment on a case involving a derivatives contract made pursuant to an ISDA Master Agreement.

Original news

Goldman Sachs International v Videocon Global Ltd [2013] EWHC 2843 (Comm), [2013] All ER (D) 201 (Sep)

The claimant bank entered into various transactions with the defendants on the basis of the 1992 (Multicurrency—Cross Border) form of ISDA Master Agreement, with the 1995 (Bilateral Form—Transfer, English Law) form of ISDA Credit Support Annex (together, the ISDA Master Agreement). The claimant demanded payment by the first defendant by way of margin call as eligible credit support under the credit support annex. When the first defendant failed to pay, the claimant brought an action for breach of contract and applied for summary judgment. The Commercial Court decided that the claimant was entitled to summary judgment on liability but not on quantum.

What was this case about?

On 9 August and 2 September 2011, Videocon Global Limited (Videocon), an Indian manufacturer of consumer electronics, entered into Indian rupee/US dollar and Brazilian real/US dollar currency option agreements with Goldman Sachs. Videocon’s liabilities under the currency options were guaranteed by the second defendant, Videocon Industries Limited.

The currency option gave Videocon the right to buy or sell money denominated in one currency in another currency at a pre-determined price or exchange rate within a specific time period. The advantage to Videocon of taking out such currency option contracts was that by doing so it could hedge its risk of disadvantageous movements in exchange rates—an important factor for a multinational global conglomerate like Videocon.

The agreements with Goldman Sachs were governed by the terms of the 1992 (multi-currency—cross-border) form of the ISDA Master Agreement, together with the 1995 (bilateral form—transfer, English law) ISDA Credit Support Annex (the ISDA Master Agreement). The ISDA Master Agreement gave Goldman Sachs the ability to make margin calls—simply put, Goldman Sachs had the right to demand that Videocon deposit cash to cover possible losses caused by its trading.

On 23 November, Goldman Sachs made a margin call, obliging Videocon to pay US$840,000 by 28 November. A second margin call requiring payment from Videocon of US$660,000 was made on 24 November; a third on 25 November in the sum of US$380,000 and a final margin call was made on 28 November, requiring payment from Videocon of US$1,470,000. None of those margin payments was made.

On 28 November, Goldman Sachs delivered a notice of potential event of default. On 2 December, Goldman Sachs sent Videocon an early termination notice stating: ‘2 December 2011 or, if this notice is not effective on such date, the next Local Business Day on which the notice is effective under section 12(a) of the ISDA Master Agreement, as the Early Termination Date’.

On 14 December, Goldman Sachs delivered to Videocon a statement setting out the loss that it had incurred as a result of the terminated transactions, totalling US$4,599.271. That sum was not paid by Videocon, as a result of which Goldman Sachs brought proceedings against both the Videocon entities in the Commercial Court in London.

What were the key issues?

The key issues in the case were:

  • whether the first margin call, pursuant to which the notice of potential event of default and early termination notice were delivered, was effective in light of the subsequent margin calls
  • whether the early termination notice designated an early termination date, as required by section 6(a) of the ISDA Master Agreement
  • whether the statement of losses complied with provisions of section 6(e) of the ISDA Master Agreement which contained provisions for the calculation of loss

How is the case helpful in construing the terms of the 1992 (multi-currency—cross-border) form of the ISDA Master Agreement?

Without a valid margin call having been made, the notices would have been ineffective, with the result that Goldman Sachs would not have been entitled to claim any loss. It was Videocon’s case that the first margin call made on 23 November was ineffective because the subsequent margin calls superseded the first one. Videocon argued that as the second margin call required a lesser margin of US$660,000, the obligation to pay a margin of US$840,000 was negated.

The court decided that the ISDA Support Annex should be construed as anticipating and allowing for successive margin calls of amounts which would necessarily differ because they would be calculated on fluctuating valuations. The inference from the judgment is that unless a margin call has been expressly withdrawn, pursuant to the ISDA Support Annex, it remains liable for payment.

Videocon also sought to argue that the early termination notice was invalid because it failed to ‘designate a day’ as required by section 6(a) of the ISDA Master Agreement. Goldman Sachs submitted that the phrase ‘next local business day on which this notice is effective’ was sufficient to comply with the requirement.

The court had no truck with Videocon’s argument, and decided that the notice was designed to designate one day, as opposed to more than one day, but recognised the reality that ‘in certain circumstances section 12(a) may deem a day other than the actual day of delivery as the day on which the notice is deemed effective’.

In addition, section 6(a) of the ISDA Master Agreement requires notice to be given no more than 20 days from the event of default and Goldman Sach’s early termination notice made it clear that the choice had been made not to designate a date that went beyond the stipulated 20 day period.

Section 6(d) of the ISDA Master Agreement essentially provides that each party has to provide to the other party calculations of the loss it has suffered on or as soon as reasonably practicable following the early termination date. The statement has to show those calculations in reasonable detail.

The court decided that the statement delivered by Goldman Sachs on 14 December 2011 failed to comply with section 6(d) because it did not set out in any detail how it had calculated the loss. Goldman Sachs’ schedule simply set out a figure for the first transaction, a figure for the second transaction which it added together and then subtracted from the total of the transaction figures a sum standing to Videocon’s credit support balance. Goldman Sachs should have set out precisely how it arrived at the transaction figures.

In addition, because the statement referred to underlying quotations for spot exchange rates, forward rates and FX volatilities and pricing models, it should have set out precisely what those quotations and pricing models were, along with their sources. The purpose of the requirements in section 6(d) is to enable the parties to determine whether the calculation of loss satisfies the contractual requirements of reasonableness and good faith. The fact that Videocon did not seek to question the statement did not negate any liability on the part of Goldman Sachs to produce a compliant statement. Consequently, while Goldman Sachs was given summary judgment on liability, the court decided that it was not entitled to summary judgment on quantum.

What do finance lawyers and parties to the 1992 ISDA need to watch out for as a result of this case?

In our view, this case does not create any new pitfalls for parties entering into ISDA Master Agreements, but emphasises the existing contractual principles and the need for clarity and precision in drafting any document created pursuant to the ISDA Master Agreement. Key points to note are:

  • if a margin call is made, it must be paid unless that margin call is expressly revoked, irrespective of whether further margin calls are made, which in turn must be paid
  • an early termination notice must designate one date on which the notice is effective
  • the more detailed and comprehensive a statement of loss is, the less likely the opposing party will be able to challenge it


Is this the same in the 2002 ISDA Master Agreement?

As regards the issues arising from the Goldman Sachs International v Videocon Global Ltd case, had the parties contracted under the 2002 ISDA Master Agreement, two main differences arise.

The first is an administrative one. One of the issues in the case was whether the early termination notice was delivered before or after 5.00pm on 2 December 2011, as it was hand delivered by Mr Thakore of Goldman Sachs. Mr Thakore had a contemporaneous note stating that he delivered the notice at 3.55pm whereas witness evidence from Videocon records the notice as having been delivered at 5.15pm.

The notice provisions in section 12 of the 2002 ISDA Master Agreement differ from the 1992 notice provisions in that notice can now be given by e-mail (other than notices pursuant to section 5 ‘events of default’ and ‘termination events’, or section 6—the provisions by which a party may terminate transactions early and the procedure to calculate loss) and a notice made by e-mail will be deemed effective on the day it is delivered.

Additionally, the restrictions in the 1992 ISDA Master Agreement prohibiting section 5 and 6 notices to be delivered by fax have been abolished.

The second main difference as regards Goldman Sachs International v Videocon Global Ltdrelates to the calculation of loss arising from an early termination event. The 1992 ISDA Master Agreement provides that the early termination amount will be calculated in accordance with whichever market quotation or loss measure is chosen by the parties in the ISDA schedule.

In the 2002 ISDA Master Agreement the market quotation and loss measures have been replaced by a single ‘close-out amount’ measure. The definition of ‘close-out’ is set out in section 14 and provides for the procedures to be used in determining the close-out amount and the information (such as third party quotations and third party market data) to be used to assess the close-out amount. The rationale for changing the principles to determine loss was to ensure a more objective approach to valuation.

Will parties still use the 1992 ISDA Master Agreement and 1995 ISDA Credit Support Annex now that the new 2013 ISDA Standard Credit Support Annex has been launched?

In our view, parties are, at present, likely to continue to want to use the 1992 ISDA Master Agreement and 1995 ISDA Credit Support Annex on the grounds that they provide the parties with more flexibility and options for negotiating how their transactions will be governed.


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