Pioneer Freight Futures Company Ltd v TMT Asia Ltd

Under ISDA 92, payment netting is determined by construing the agreement as a whole and in its commercial context. Where the parties have elected aggregate netting, section 2(c) requires gross amounts payable in the same currency on the same date to be netted across the relevant transactions. That process applies without regard to whether a party has satisfied the section 2(a)(iii) conditions precedent. A construction allowing the non-defaulting party to demand gross payment would undermine the commercial purpose of counterparty-risk mitigation and confer an unjustified benefit. The court declined to determine separate issues concerning Automatic Early Termination and the alleged extinguishment of suspended debts at contractual expiry.

The claimant had obtained summary judgment in [2011] EWHC 778 (Comm). Following permission to amend its defence, the defendant argued that the claim should be reduced because payment obligations under certain freight forward agreements had been suspended under section 2(a)(iii) of ISDA 92 and could not be included in later calculations.

The parties subsequently settled but agreed that the proceedings would be withdrawn after judgment. The court therefore considered whether to give an advisory judgment on issues of wider market importance. It decided the netting issue, which was independently sufficient to determine the outstanding quantification question, but declined to determine the Automatic Early Termination and expiry issues.

1. Netting under ISDA 92. The relevant FFAs and ISDA 92 had to be read as a coherent commercial scheme. Clause 10(a) of the FFAs and section 2(c) provided for aggregate netting of amounts payable in the same currency on the same date across the relevant transactions.
2. The court rejected an interpretation under which section 2(a)(iii) had to be applied before section 2(c), so that sums otherwise payable to a defaulting party were excluded from netting. Section 2(a)(i) made the payment obligation subject to the other provisions of the agreement, including section 2(c). The netting process therefore helped define the payment obligation before the section 2(a)(iii) suspension was applied.
3. The commercial purpose of section 2(a)(iii) was to mitigate counterparty credit risk while transactions remained open. Allowing a non-defaulting party to claim gross amounts would undermine that purpose and confer an unjustified benefit. The word “payable” could not be given the narrow meaning of an immediately enforceable obligation merely by relying on the definition of “Unpaid Amounts”.
4. The Netting Issue was decided in favour of Pioneer. For determining amounts due on a Settlement Date, section 2(c) required automatic netting without regard to compliance with the section 2(a)(iii) conditions precedent.
5. The court declined to express a view on whether Automatic Early Termination could apply after the last Contract Month, or whether suspended debts were extinguished at natural expiry. No inference should be drawn from that non-determination.
6. Had the action not settled, Pioneer would have been entitled to a further $9,531,271.84, making a total judgment sum of $26,088,865.94.

The judgment itself records an earlier summary judgment in [2011] EWHC 778 (Comm). The present proceedings were settled before hand-down, and the parties agreed to withdraw them after judgment.