Kaupthing Singer & Friedlander Ltd v UBS AG

Under an ISDA payment provision requiring funds to be paid to a specified bank, payment will ordinarily require the payee to have control of freely transferable funds. A mistaken payment to another group company does not, without more, discharge the contractual obligation by ratification, election or agreement.

However, a party may be estopped from asserting non-payment where both parties shared an operative assumption that the obligation had been discharged, the assumption crossed the contractual line, and the other party relied on it to substantial detriment. Detriment need not be financially quantified. A late amendment raising a materially different construction of an ISDA close-out provision will generally be refused where the issue was not properly pleaded and cannot fairly be tried.

Kaupthing Singer & Friedlander Limited, acting through its administrators, claimed US$65 million from UBS AG under a foreign exchange transaction governed by a 1992 ISDA Master Agreement. UBS had instructed payment to the claimant’s parent company, Kaupthing Bank hf, rather than to the claimant’s account. The payment was not ultimately credited to the claimant.

UBS relied on discharge, accord and satisfaction, election, waiver and estoppel defences. During the trial, the claimant sought permission to amend its case to allege that UBS’s close-out calculation was invalid or unreasonable because it omitted the US$65 million. The central issues were whether the original payment obligation survived, whether UBS’s mistaken payment had discharged it, whether the claimant was estopped from relying on non-payment, and whether the late amendment should be allowed.

1. The claim was dismissed. The original payment obligation under the FX trade was replaced by the close-out provisions when the Master Agreement was terminated, but the claimant was in any event estopped from asserting that UBS remained liable.

2. The contractual obligation was to pay at the place of the account specified in the confirmation, in freely transferable funds and in the customary manner. Ordinarily, funds would not be freely transferable in the hands of the payee until credited to the specified account. Authorities concerning payment in cash under charterparties, including Tenax SS Co Ltd v The Owners of the Ship “Brimnes” [1974] EWCA Civ 15 and A/S Awilco of Oslo v Fulvia SpA di Navigazione of Cagliari (The “Chikuma”) [1981] AC 314, did not determine the construction of the ISDA provision.

3. The mistaken credit to Khf did not discharge UBS’s obligation through ratification, election or contract. Khf had not acted in the name or on behalf of KSF. KSF’s request that Khf transfer the money was not an unequivocal abandonment of its claim against UBS, and the communications did not establish a contractual agreement releasing UBS.

4. KSF and UBS nevertheless shared the operative assumption that the payment obligation had been discharged. The assumption was reinforced by communications through JPMC and by KSF’s failure to notify UBS that the funds had not reached its account. UBS relied on the assumption by closing out the Master Agreement, settling with Khf and failing to lodge a timely claim in Khf’s winding-up. That reliance caused substantial detriment, and it would be unjust to permit KSF to resile. The detriment did not need to be quantified.

5. Acceptance of the close-out payment did not itself amount to accord and satisfaction because KSF had expressly reserved its rights. Permission to amend was refused. The proposed amendment was very late, insufficiently precise and raised difficult ISDA construction issues that UBS had not been required to meet at trial.