Construction - Contractual term

Pioneer Freight Futures Company Ltd v TMT Asia Ltd: Queen's Bench Division, Commercial Court: 21 July 2011

On 1 April 2011, the claimant company was successful on its application for summary judgment against the defendant company in the sum of $26m (see [2011] All ER (D) 23 (Apr)). Following the handing down of the judgment, the defendant was given permission to amend its defence so that it could argue a new point, the effect of which, the defendant claimed, was to reduce the claimant's claim by $10m. In the event the parties settled the issue, nevertheless the court gave an advisory opinion on the issues raised.

The principal issue raised by the defendant's re-quantification of its liability was whether payment obligations which were suspended by virtue of s 2(a)(iii) of the 1992 Master Agreement of the International Swaps and Derivatives Association (ISDA 92) were nonetheless taken into account for netting purposes under s 2(c) of ISDA 92 (the netting issue). That issue raised the correctness of the decision in Marine Trade SA v Pioneer Freight Futures Co Ltd BVI [2009] All ER (D) 30 (Nov) in which it was held that the settlement sums owed to the defaulting party could not be taken into account under s 2(c). Consideration was given to Lomas v JFB Firth Rixson Inc [2010] All ER (D) 248 (Dec) in which it was held that s 2(a)(iii) of ISDA 92 could not be construed as preventing netting under s 2(c) despite the fact that one party was in default.

The court ruled: In interpreting commercial contracts such as ISDA 92, the words had to be set in the landscape of the instrument as a whole. Once that had been done the shape of the policy and the purpose of the terms became clear (see [27] of the judgment).

In the instant case, the 'landscape' of ISDA 92 and the relevant FFA's was that it strongly demonstrated an intention to provide for an equitable netting or set off of payments and obligations, both throughout the relevant contract period of the transactions and on early termination, or AET.

Against such a landscape, there was no commercial justification or linguistic requirement or a construction of s 2 of ISDA 92 which enabled a non-defaulting party to claim against a defaulting party on a gross basis. For the purposes of determining what was due and payable on any particular settlement date, cl 2(c) imposed an automatic netting process which set off the aggregate or gross amounts that were due from each party to the other in respect of settlement sums payable in the same currency on the same date in respect of all transactions across the board, without regard to whether one or other party had complied with the conditions precedent specified in s 2(a)(iii) of ISDA 92 (see [36], [51] of the judgment)

Accordingly, the netting issue would be decided in favour of the claimant with the conclusion that for the purposes of determining what was due and payable on any particular settlement date, cl 2(c) imposed an automatic netting process which set off the aggregate or gross amounts that were due from each party to the other in respect of settlement sums payable in the same currency on the same date in respect of all transactions across the board, without regard to whether one or other party had complied with the conditions precedent specified in s 2(a)(iii) of ISDA 92 (see [51] of the judgment).

Marine Trade SA v Pioneer Freight Futures Co Ltd BVI [2009] All ER (D) 30 (Nov) criticised; Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352 applied; Sigma Finance Corpn, Re [2009] All ER (D) 297 (Oct) applied; Lomas v JFB Firth Rixson Inc [2010] All ER (D) 248 (Dec) considered.

Charles Kimmins QC and Luke Pearce (instructed by Holman Fenwick & Willan LLP) for the claimant. Jonathan Crow QC and James Leabeater (instructed by Ince & Co) for the defendant.