BNP Paribas v Wockhardt EU Operations (Swiss) AG

A contractual close-out mechanism is not penal merely because it determines the amount payable by applying a valuation method rather than a fixed sum, or because the amount varies with market conditions. The question is whether the provision requires payment of an extravagant or unconscionable sum in comparison with the loss resulting from the breach.

Where commercial parties agree that persistent non-payment permits termination of all related transactions and payment representing the value of the unperformed bargain, the payment may properly compensate loss of bargain rather than impose a penalty. A clause may make timely payment a condition by specifying termination and compensatory consequences, even without using the words condition or repudiatory breach. The court should give effect to carefully drafted commercial arrangements, particularly in complex financial transactions.

BNP Paribas claimed an Early Termination Amount under an ISDA Master Agreement after Wockhardt failed to make payments due under several foreign exchange transactions. The sum comprised unpaid amounts already due and a Close-out Amount calculated by reference to the value of the outstanding transactions.

Wockhardt argued that the Close-out provisions were unenforceable penalties because the same termination mechanism applied to defaults of differing seriousness and because the amount payable depended on market movements. BNP applied for summary judgment or strike-out. The central issues were whether the Close-out Amount was commercially reasonable and whether the contractual termination provisions engaged the doctrine of penalties.

1. Commercial reasonableness. The evidence established that BNP had calculated the Close-out Amount using its standard internal pricing model, applied in the ordinary course of its business to similar transactions. In the absence of any substantive challenge, BNP had shown that it had acted by commercially reasonable procedures to produce a commercially reasonable result.
2. Unpaid amounts. Requiring the defaulting party to pay sums which had already fallen due under individual transactions was not penal. Those sums were accrued contractual debts and did not represent a sanction for default.
3. Close-out Amount. The contractual method did not prescribe an extravagant or unconscionable measure. It calculated the cost of replacing the terminated transactions, or their economic equivalent, and therefore sought to place BNP in the position it would have occupied had the uncompleted transactions proceeded.
4. Condition and termination. Although the agreement did not use the expressions “condition” or “repudiatory breach”, it provided that failure to pay continuing after notice entitled BNP to designate an Early Termination Date. It then substituted an obligation to pay the value of the terminated transactions for the parties’ future payment and delivery obligations. The parties had therefore agreed consequences equivalent to those following breach of condition.
5. The fluctuating value of the Close-out Amount was not extraneous to the breach. Market movements were necessarily relevant to valuing the unperformed bargain. The fact that the calculation could produce a payment in either direction, with credit for any net value favouring the defaulting party, also negated any suggestion of a windfall.
6. The provisions were not rendered penal merely because one termination mechanism applied to defaults of differing seriousness, or because the amount was determined by the non-defaulting party, subject to good faith and commercially reasonable procedures. There was no realistic prospect of establishing that the Early Termination provisions were penalties.
7. Paragraphs 19 and 20 of the existing Defence, concerning penalties, were to be struck out. The issue of summary judgment or interim payment was deferred pending determination of Wockhardt’s proposed amendment.

First instance decision. No earlier appellate decision is stated in the judgment.