The State of the Netherlands v Deutsche Bank AG

An English-law ISDA Credit Support Annex must be construed objectively and as a whole through a unitary and iterative exercise. The language, drafting quality, commercial consequences and admissible context must be considered together.

A definition of an Interest Amount capable, mathematically, of producing a negative figure does not itself create an obligation to account for negative interest. Under the standard-form annex considered, the express machinery for transferring interest, the treatment of minimum amounts and rounding, the provision governing payments to another account, and the contemporary market materials showed that only positive interest was contemplated.

The State held cash collateral transferred by Deutsche Bank under an English-law ISDA Master Agreement and Credit Support Annex. The agreed rate was EONIA minus four basis points. After that rate became negative, the State sought declarations that negative interest accrued and reduced the Credit Support Balance used to calculate Delivery and Return Amounts.

Robin Knowles J dismissed the claim, holding that the annex contained no obligation to account for negative interest. The State appealed. The central issue was whether, on the true construction of the annex, a negative Interest Amount formed part of and reduced the Credit Support Balance, notwithstanding that paragraph 5(c)(ii) expressly provided only for transfers from the collateral holder to the collateral provider.

1. Appeal dismissed. The Credit Support Annex did not provide for the payment or accounting of negative interest. Although the definition of Interest Amount was linguistically capable of producing a negative figure, the objective meaning of the annex had to be ascertained from the instrument as a whole.

2. The judge had taken too simple an approach by concentrating on the absence of an express obligation to pay negative interest. The final sentence of the definition of Credit Support Balance could, in isolation, bear the State's proposed meaning. It provided that an Interest Amount not transferred under paragraph 5(c)(ii) formed part of that balance. The machinery applied to untransferred positive interest as well as the State's asserted negative interest.

3. Nevertheless, the competing constructions had to be checked iteratively against the entire agreement and their commercial consequences, consistently with Wood v Capita Insurance Services Ltd [2017] 2 WLR 1095. The most natural place to provide for negative interest was paragraph 5(c)(ii), yet that paragraph provided only for positive interest to be transferred by the collateral holder.

4. The contractual asymmetries supported the Bank's construction. Positive Interest Amounts were excluded from the minimum-transfer and rounding provisions, whereas negative interest under the State's construction would be affected by those mechanisms. Paragraph 11(f)(iv) also set a zero rate for collateral paid into another account. If negative interest had been contemplated, the provision would have been expected to address whether the lower of zero and the negative rate applied.

5. The contemporary User's Guide did not alert users that negative interest would be accounted for. Later ISDA materials were not conclusive and could not ordinarily constitute the contractual factual matrix. They nevertheless indicated that negative rates had not been contemplated when the standard documentation was drafted and that subsequent amendment or bilateral agreement was regarded as necessary.

6. The case could therefore fall within the principle discussed in Arnold v Britton [2015] UKSC 36: an event may occur which the contractual language shows was not intended or contemplated. The agreement's collateral-maintenance structure and default provisions did not overcome the absence of any indication that negative interest was intended to accrue, potentially for years.

1. Court of Appeal (Civil Division): The State's appeal was dismissed. The court affirmed the conclusion that the Credit Support Annex did not provide for negative interest.

2. High Court, Financial List (Commercial Court): Robin Knowles J dismissed the State's claim on 26 July 2018 after holding that the annex did not contemplate a legal obligation to account for negative interest. No neutral citation is stated in this judgment.