Lomas & Ors v JFB Firth Rixson Inc & Ors

Under the 1992 ISDA Master Agreement, an Event of Default leaves the underlying debt intact but suspends the corresponding payment obligation while the default continues. The obligation neither revives nor is extinguished merely because the transaction reaches maturity.

Mandatory payment netting applies to reciprocal amounts contractually payable on the same date. Upon early termination, all transactions within the single agreement enter the close-out calculation, including transactions whose final performance date has passed.

The suspensory condition is commercially justified and does not infringe the anti-deprivation or pari passu rules. A Loss calculation following Automatic Early Termination assumes satisfaction of applicable conditions precedent when valuing the parties’ prospective bargain.

Four conjoined appeals concerned the construction and insolvency effect of the 1992 ISDA Master Agreement as incorporated into interest-rate swaps and forward freight agreements. Two appeals arose from decisions of Briggs J, [2010] EWHC 3372 (Ch) and [2011] EWHC 718 (Ch). Two arose from decisions of Flaux J, [2011] EWHC 1692 (Comm) and [2011] EWHC 692 (Comm).

The issues were whether an Event of Default prevented a debt from arising or merely suspended payment; whether suspension ended at maturity; how payment and close-out netting operated; and whether indefinite suspension offended insolvency law. The fourth appeal separately concerned whether a forward-looking Loss calculation following Automatic Early Termination assumed satisfaction of applicable conditions precedent.

1. Disposition. The first appeal failed in substance, although the lower court’s order required amendment because suspended obligations were not extinguished at maturity. The second and fourth appeals were dismissed. The third appeal was allowed.
2. Section 2(a)(iii) of the Master Agreement qualifies the payment obligation, not the underlying indebtedness. A debt arising under a Confirmation remains intact after an Event of Default. Performance is suspended while the default continues and revives if the default is cured before termination. Suspension is preferable to extinction because the agreement recognises numerous defaults of differing gravity and permits the non-defaulting party to elect early termination.
3. No term could be implied requiring payment to revive after a reasonable period, at the maturity of one transaction, or at the maturity of all transactions. Nor was the non-defaulting party obliged to exercise its termination right reasonably. The express condition continued while the Event of Default continued. Conversely, no term extinguishing the suspended obligation at maturity could be implied. Section 9(c) did not produce that result, and inconvenience arising from indefinite contingent liabilities was insufficient to justify such an implication.
4. Section 2(c) imposed automatic and mandatory netting upon reciprocal amounts which would otherwise be payable in the same currency and under the relevant transactions. It operated notwithstanding the failure of a section 2(a)(iii) condition. It applied only to obligations which the contract made payable on the same date, not to obligations falling due on different dates.
5. The indefinite suspension under section 2(a)(iii) did not engage the anti-deprivation principle. It was a commercially justified protection against the additional credit risk of performing while the counterparty could not perform. It was neither designed to evade insolvency law nor disproportionate. The pari passu rule was also inapplicable because no payment was enforceable when the bankruptcy commenced and therefore no distributable asset existed.
6. The Master Agreement treated all transactions as one agreement. Accordingly, Automatic Early Termination and section 6 close-out netting encompassed transactions whose final contractual performance dates had already passed. Maturity did not amount to expiry by effluxion of time.
7. Under the Second Method and Loss calculation, prospective loss or gain was valued on the assumption that applicable conditions precedent would have been satisfied. Loss and Market Quotation were different formulae directed towards broadly similar close-out results. The calculation was not equivalent to common-law damages.

1. Court of Appeal (Civil Division): In [2012] EWCA Civ 419, the court dismissed the first appeal in substance but required amendment of the order, dismissed the second and fourth appeals, and allowed the third appeal.
2. High Court, Chancery Division: Briggs J decided the construction proceedings concerning the administrators in [2010] EWHC 3372 (Ch) and the Carlton proceedings in [2011] EWHC 718 (Ch).
3. High Court, Commercial Court: Flaux J decided the Pioneer–Cosco proceedings in [2011] EWHC 1692 (Comm) and the Bulk–Britannia proceedings in [2011] EWHC 692 (Comm).