On 8 March 2016, the High Court rendered judgment on a claim by LSREF III Wight Limited (“Wight”) against Millvalley Limited (“Millvalley”) resulting from the early termination of a swap.
The entitlement to an Early Termination Amount stood or fell on Additional Termination Events included in the 2002 ISDA Master Agreement executed by the parties, but subsequently missed from a long-form confirmation (“LFC”) incorporating by mistake a blank form of the 1992 ISDA Master Agreement.
Wight sought a declaration from the Court that the Confirmation, whether by way of construction or rectification, incorporated the executed 2002 ISDA Master Agreement.
The original swap was dated 2 January 2007, as an interest hedging arrangement required under facility agreements. The LFC incorporated a blank 1992 Master Agreement, without a Schedule. The parties were under the obligation to use all reasonable efforts to negotiate a 1992 Master Agreement, but it was never executed.
In 2010, the existing facilities were extended and it was agreed to document the existing hedging arrangements by entering into an ISDA Master Agreement. This time, a 2002 Master Agreement was executed, along with Additional Termination Events triggered on the repayment, prepayment or cancellation of outstanding facilities.
In December 2012, the parties entered into a restructured swap reflecting the reduced amount of the facilities made available to Millvalley. The LFC incorporated a blank 1992 Master Agreement, ignoring the 2002 Master Agreement executed previously.
On 2 July 2014, the swap was terminated on the basis of the Additional Termination Events from the 2002 Master Agreement and the Early Termination Amount was calculated at £4,282,518.90.
No Additional Termination Events, no Early Termination Amount
Wight was assigned the rights in the Early Termination Amount from Irish Bank Resolution Corporation Ltd (“IBRC”), itself the successor corporation of Anglo Irish Bank Corporation plc (“AIB”) after it underwent a state-initiated restructuring and liquidation.
Due to the occurrence of the liquidation – a standard Event of Default under an ISDA Master Agreement – Millvalley was entitled in principle to either:
- Rely on Section 2(a)(iii) condition precedent to suspend any payment indefinitely; or
- Exercise the right to terminate the Transaction.
In that context, under the LFC, Millvalley was the sole party entitled to determine an Early Termination Amount. As the swap was out-of-the-money, its intention was to suspend all payments instead.
In contrast, under the 2002 Master Agreement, AIB/IBRC could be entitled to terminate the Transaction based on the Additional Termination Events as a repayment of the facilities occurred on 27 June 2014.
Bringing the swap under the 2002 ISDA Master Agreement
Wight contended that on its proper construction or by way of rectification the swap was governed by the 2002 ISDA Master Agreement.
In simple terms, the Court stated that “[t]he major difference between construction on the one hand and rectification on the other is that the former is concerned with the meaning of the instrument or instruments which the parties had executed whilst in the case of rectification, the question is whether, objectively, there was a common continuing intention to which the instrument failed to give effect.”
More precisely, a party seeking rectification must show that:
“ i) The parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified.
ii) There was an outward expression of accord.
iii) The intention continued at the time of the execution of the instrument sought to be rectified.
iv) By mistake, the instrument did not reflect that common intention.”
As a matter of construction, the express language in the LFC did not allow for the conclusion that it was governed by the 2002 Master Agreement.
As a matter of rectification, further to a thorough analysis of dealings between the parties, the Court was entirely satisfied that there was a continuing common intention to execute the swap on the basis of the 2002 Master Agreement. Not only was there clear outward expression of that accord, but there was also a subjective intention by Millvalley to do so.
The strength of the evidence supporting the intention of the parties to submit the swap to the 2002 Master Agreement cannot be overstated. It was also relatively straightforward to reflect the clear intention of the parties on a very narrow question.
The remedy of rectification can prove effective for simple situations, but it should not be mistaken for a reliable safety net for faulty Confirmations.
 See Lomas and others v JFB Firth Rixson Inc and others  EWCA Civ 419. The Court of Appeal confirmed the right, in certain circumstances, to suspend payment and delivery obligations indefinitely. Discussed hereContact Us