Lehman Brothers Commodity Services Inc v Credit Agricole Corporate and Investment Bank

A contractual right of set-off expressed to cover any obligation may extend to obligations arising under a separate letter of credit, unless the relevant agreements clearly provide otherwise. A subsequent agreement to which the issuer is not party does not alter the issuer’s pre-existing rights or form part of the factual background for construing the letter of credit. A purportedly unreasonable result will not justify reading down clear commercial language where the alleged consequences arise from a separate transaction and the parties to the set-off agreement were unaware of it.

The claimant drew €50 million under a standby letter of credit issued by the defendant in connection with a derivatives transaction between the claimant and EDF Trading Ltd. The defendant paid part of the drawing and set off the balance against the claimant’s debt under a separate ISDA Master Agreement.

The trial concerned preliminary issues about the proper law, construction and effect of the contractual set-off clause. The parties agreed that the US bankruptcy stay did not prevent contractual set-off. The central issue was whether the phrase any obligation covered the defendant’s obligation under the letter of credit and whether the letter of credit or the related EDF arrangements displaced that right.

1. Construction and applicable law. The scope of the set-off clause was to be determined under New York law, while the meaning and effect of the EDF/LBCS agreements would be determined under English law. The court adopted the commercial approach to ISDA agreements described in Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch), emphasising clarity, certainty and predictability.
2. Effect of the EDF arrangements. Where an obligee can look to another party in respect of the same debt, a payment or set-off by that other party reduces the debt pro tanto: M.S. Fashions Ltd v BCCI [1993] Ch 425. The EDF Credit Support Annex did not provide otherwise. EDF therefore benefited from value received through Calyon’s set-off, while remaining liable for any amount still unpaid after the full value of the letter of credit had been received.
3. No absurdity requiring a narrower construction. The alleged windfall resulted from arrangements between LBCS and EDF to which Calyon was not party and of which it was unaware. The authorities relied on concerning unreasonable contractual consequences did not justify reading down the important and unambiguous set-off right. The court distinguished In re Bond & Mortgage Guarantee Co 196 N.E. 313 and regarded the other authorities as concerned with consequences between the parties to the relevant contract.
4. Letter of credit. The letter of credit contained no express exclusion of set-off. The undertaking to cover LBCS according to its instructions concerned matters such as multiple or partial drawings and payment accounts. It did not waive Calyon’s pre-existing set-off right. The EDF/LBCS agreement could not affect that right or form part of the admissible factual matrix, applying BCCI v Ali [2001] 1 AC 251.
5. Issue 3 was answered Yes. Issues 4 and 5 were answered No. It was unnecessary to decide whether Calyon also had a right of legal set-off under the general law.