Matthew Hardwick KC success in ISDA Master Agreement dispute

Matthew Hardwick KC, instructed by Adam Brown of Simmons & Simmons LLP, successfully represented Macquarie Bank Limited (“Macquarie”) in its application for summary judgment against Phelan Energy Group Limited (“Phelan”). The judgment of Foxton J., as handed down on 18 October 2022, provides (1) important clarification of the requirements of a valid notice for the purposes of Section 5(a)(i) of the ISDA 2002 Master Agreement (the key failure to pay “Event of Default”); and (2) a welcome rejection of Phelan’s prescriptive claims that such notice must identify the confirming documents and the precise amount (and currency) of the payment due.

The dispute arises out of a foreign exchange (USD/ZAR) swap on the terms of the ISDA 2002 Master Agreement. Macquarie and Phelan had entered into a transaction on 14 May 2021 with a first settlement date on 28 May 2021. Phelan did not pay. Macquarie issued (1) a notice of default under Section 5(a)(i) (“the Default Notice”); (2) a notice designating an early termination date in respect of all outstanding transactions under Section 6(a) (“the Early Termination Date Notice”); and (3) and a statement of the payments due under Section 6(d)(i).

In Commercial Court proceedings fixed for trial in March 2023 Phelan (1) contends that the 14 May 2021 transaction was concluded by a different exchange of documents at a marginally lower strike price; and (2) denies the validity of the Default Notice (and consequently also the validity of Early Termination Date Notice) on the basis that (on Phelan’s version of the contract) the Default Notice refers to the wrong amount and the wrong transaction.

In this summary judgment application Macquarie (1) proceeded on the basis that Phelan’s version of the contract was correct; but (2) nevertheless maintained that the Default Notice was valid. In particular Macquarie contended: (a) that Section 5(a)(i) did not require Macquarie to state the amount of the payment due; and (b) (applying the approach in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749) that a reasonable recipient, circumstanced as the actual parties were, would have understood the Default Notice, and what the recipient was required to do in order to remedy its failure to pay, without difficulty.

Foxton J. agreed. Whilst accepting that the issue of whether or not an Event of Default has occurred is “…of fundamental importance under the ISDA Master Agreement…”, Foxton J. (1) rejected Phelan’s claims that Section 5(a)(i) requires (a) identification of the “Confirmation” and (b) an accurate statement of the amount or currency of payment; and (2) determined that in order to be valid a Section 5(a)(i) notice must be such as to “…communicate clearly, readily and unambiguously to the reasonable recipient in the context in which it is received the failure to pay…” and “…thereby enable the reasonable recipient to identify what the relevant trade requires it to do in order to cure any failure to pay…within the applicable grace period…”.  Foxton J. concluded that, in the context in which the reasonable recipient would have received and read the Default Notice, its requirements would indeed have been “unambiguously clear”, declared that the Default Notice was valid and granted Macquarie summary judgment accordingly.

The full judgment can be read here.

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