Macquarie Bank Limited v Phelan Energy Group Limited

A notice under sections 5(a)(i) and (ii) of the ISDA Master Agreement is valid if, read in context, it communicates clearly and unambiguously the failure to pay or deliver and enables the recipient to identify what must be done to cure the failure. The notice need not state every identifying detail, or an entirely accurate amount, where the reasonable recipient can identify the relevant transaction and obligation.

An Early Termination Amount accrues as a debt on the Early Termination Date. An error in the determining party’s calculation does not extinguish the debt; the court may determine the correct amount. The judgment left open the precise circumstances in which an incorrectly calculated amount becomes payable under section 6(d)(ii).

Macquarie sought summary judgment and an interim payment arising from USD/ZAR swaps governed by an ISDA 2002 Master Agreement. Phelan disputed the strike price for a trade settling on 28 May 2021 and argued that Macquarie’s default notice, which stated an overstated ZAR amount, was invalid.

The principal issues were whether the notice identified a failure to pay for the purposes of sections 5(a)(i) and (ii), whether Macquarie validly designated an Early Termination Date, and whether an Early Termination Amount calculated on Phelan’s version of the trade terms accrued as a debt and was payable. The court also considered the pleading and interim-payment consequences.

1. Validity of default notice. A notice under sections 5(a)(i) and (ii) must communicate clearly, readily and unambiguously, in its context, the failure to pay or deliver. It must enable the reasonable recipient to identify the relevant trade and obligation and what must be done within the grace period to cure the failure. The ISDA Master Agreement did not require the notice to identify the confirmation, state the precise amount, or state the currency in every case.
2. The notice was valid even though it used a strike price of 22.16 rather than the 22.05 rate which Phelan alleged was contractual. The surrounding correspondence, settlement date, reference number, notional amount and the absence of any payment made clear that the notice concerned the only relevant trade. Phelan could identify the amount required to cure the failure.
3. Termination. There was therefore an Event of Default under section 5(a)(i), and Macquarie validly designated 4 June 2021 as the Early Termination Date under section 6(a).
4. Accrual of debt. Under sections 6(c) and 6(d), the individual payment obligations were replaced by a single Early Termination Amount which accrued as a debt on the Early Termination Date. An error in the calculation did not prevent the debt from arising. The court could determine the correct amount, applying the contractual requirement of good faith and commercially reasonable procedures.
5. The court did not finally decide the legal effect of an incorrectly calculated notice under section 6(d)(ii), particularly given the ISDA interest regime. For the interim-payment application, Macquarie was required to serve a precautionary notice making clear the Alternative Early Termination Amount claimed to be payable. The interim-payment application was adjourned with liberty to restore, including on the notice and hedging-gain issues.
6. The declarations were to record that, if the strike price was 22.05, an Event of Default occurred, the Early Termination Date was validly designated, and the Alternative Early Termination Amount accrued as a debt on 4 June 2021.