Court of Appeal dismisses Lehmans’ appeals on the effect of the ISDA Master Agreement

24/04/12

The Court of Appeal has now ruled on several aspects of the ISDA Master Agreement in its important judgment on four conjoined appeals, of which two arose out of the insolvency of Lehmans, and two arose out of the insolvency of various participants in the forward freight market. In the two Lehman appeals, the main issue related to the impact of Lehmans' insolvency (which constituted a Bankruptcy Event of Default under Section 5(a)(vii)) on the payment obligations of solvent counterparties, both during the life of the transactions and upon their natural termination.

Lehmans argued that, as a matter of construction of the Master Agreement and/or by virtue of one or more implied terms, the solvent counterparties became obliged to pay Lehmans no later than when their counterparty credit risk came to an end at the natural termination of the contracts. The other possibilities were that the payment obligations of the solvent counterparties came to an end upon the natural termination of the transactions (as Briggs J had held) or that the obligations remain in existence indefinitely, but are not performable unless and until Lehmans cures the Bankruptcy Event of Default.

The Court of Appeal dismissed Lehmans' appeals ([2012] EWCA Civ 419), holding that the payment obligations remain in existence indefinitely, but are not performable unless and until the Bankruptcy Event of Default is cured (which appears to be a most unlikely eventuality).

The judgment is here.