Pioneer Freight Futures Company Ltd v Cosco Bulk Carrier Company Ltd

The claimant (to which I will refer as “Pioneer”) is a company incorporated in the British Virgin Islands which has been in liquidation since December 2009. Between January 2007 and August 2008, the claimant entered into a series of eleven forward freight agreements (“FFAs”) with the defendant (to which I will refer as “Cosco”), in seven of which Pioneer was the Seller and in four of which it was the Buyer. All the FFAs are on the standard 2007 Terms of the Forward Freight Agreement Brokers Association (“FFABA”), the FFAs made in 2007 originally on the 2005 FFABA Terms having been effectively amended when the first 2008 FFA was made in June 2008, so as to put them on the 2007 Terms as well. The 2007 Terms incorporated by reference the 1992 Master Agreement of the International Swap Dealers Association (“ISDA”), to which I will refer as “the Master Agreement”.

The effect of the liquidation of Pioneer in December 2009 was to bring about Automatic Early Termination under the Master Agreement. In essence, the dispute between the parties is as to whether the closing out or “wash-out” calculations which Pioneer then undertook pursuant to Section 6 of the Master Agreement should or should not include those FFAs where the last Contract Month under each such FFA had passed prior to December 2009.

An FFA is a cash-settled contract for differences referenced to the Index rate or rates published by the Baltic Exchange, as selected by the parties. A "Settlement Sum" is calculated for each FFA and each Contract Month from the "Contract Rate" agreed between the parties, the "Settlement Rate" for that Contract Month derived from the Baltic Exchange indices, and the number of days in the Month. As Gloster J said in Pioneer Freight Futures Company Limited v TMT Asia Limited [2011] EWHC 778 (Comm) at paragraph 2:

“In essence, an FFA is a "bet" as to the future movements of the freight market. The product can be used as a hedge by parties involved in shipping freight to protect themselves against fluctuation in shipping rates, or as a means of trading in futures.”

Clauses 7 and 8 in the FFABA 2007 Terms set out the payment terms for each Contract Month:

7 Settlement Sum

If the Settlement Rate is higher than the Contract Rate, the Seller shall pay the Buyer the Settlement Sum. If the Settlement Rate is lower than the Contract Rate, the Buyer shall pay the Seller the Settlement Sum.

8 Payment Procedure and Obligations

Payment of the Settlement Sum is due on the later of two (2) London business days after presentation of payee's invoice (with complete payment instructions) or five (5) London business days after the Settlement Date and for this purpose a "London business day" means a day (other than a Saturday or Sunday) on which commercial banks are open for business in London). The Settlement Sum will be deemed "paid" when it has been received into the bank account designated by the payee.

Clause 9 of the FFABA 2007 Terms then incorporates the Master Agreement with specific amendments, as follows:

9 ISDA Master Agreement

This clause 9 applies only if either:

(i)

this Confirmation does not already constitute a Confirmation under an existing master agreement entered into by the parties to this Confirmation; or

(ii)

the parties agree, either by virtue of clause 20 or otherwise, that the terms of the Master Agreement that is constituted by this clause are to replace any such existing master agreement.

This Confirmation constitutes and incorporates by reference the provisions of the 1992 ISDA® Master Agreement (Multicurrency - Cross Border) (without Schedule) as if they were fully set out in this Confirmation and with only the following specific modifications and elections:

….

(a)

Section 2(c)(ii) shall not apply so that a net amount due will be determined in respect of all amounts payable on the same date in the same currency in respect of two or more Transactions;

(e)

for the purposes of payments on Early Termination, Loss will apply and the Second Method will apply;

(f)

Automatic Early Termination will apply to both parties…

Section 2 of the Master Agreement is headed “Obligations” and sub-section (a) then sets out General Conditions to which the payment regime in the FFABA Terms was clearly subject:

(a)

General Conditions.

(i)

Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.

(ii)

Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement.

(iii)

Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement

Other provisions of the Master Agreement which are relevant to the present dispute are as follows:

1.

Interpretation

(c)

Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions.

2

Obligations

(c)

Netting.

If on any date amounts would otherwise be payable:-

(i)

in the same currency; and

(ii)

in respect of the same Transaction,

by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount.

(e)

Default Interest… Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate…

5.

Events of Default and Termination Events

(a)

Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an “Event of Default”) with respect to such party:-

(i)

Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party;

(ii)

Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) …) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party.

(vii)

Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:

(2)

becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; …(5) has a resolution passed for its winding up, official management or liquidation …(6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all of its assets…

6.

Early Termination

(a)

Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).

(c)

Effect of Designation

(ii)

Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e).

(e)

Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off.

(i)

Events of Default. If the Early Termination Date results from an Event of Default:-

….

(3)

Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.

(4)

Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party’s Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.

9.

Miscellaneous

(c)

Survival of obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction.

14.

Definitions

“Loss” means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or re-establishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party’s legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets.

“Market Quotation” means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the 'Replacement Transaction') that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included …

“Potential Event of Default” means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default.

“Set-off” means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer.

“Settlement Amount” means, with respect to a party and any Early Termination Date, the sum of:-

(a)

The Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined;

and

(b)

such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result.

“Terminated Transactions” means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating the Early Termination Date (or, if “Automatic Early Termination” applies, immediately before that Early Termination Date).

“Unpaid Amounts” owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties.

The dispute has been dealt with as a Part 8 Claim and, by cooperation and goodwill between the parties, the facts are essentially agreed.

In the fourth quarter of 2008, there was considerable volatility in markets generally and a dramatic downturn in the freight market, which meant that there was a significant difference between the Contract Rates fixed under the FFAs at a time when the market was more buoyant and the Settlement Rates fixed by reference to Baltic Exchange indices. In consequence, each of the FFAs between these parties was substantially “in the money” for whichever party was “the Seller” under the particular FFA.

Seven of the eleven FFAs had October 2008 as a Contract Month. Under four of those, Cosco was the Seller and payment was due from Pioneer in an amount of US$9,022,995.64. Under the other three, Pioneer was the Seller and payment was due from Cosco of US$2,544,992.42. With netting, this meant that a balance in favour of Cosco of US$6,478,003.22 was due (pursuant to clause 8 of each FFA) on 7 November 2008. Although Pioneer accepts that such sum was due to Cosco, it did not pay it or any part of it.

On 11 November 2008, Cosco wrote to Pioneer giving notice of failure to pay this sum and stating that, if Pioneer failed to pay the sum on or before the third business day after receiving the letter, that failure would constitute an Event of Default under Sections 5(a)(i) and 5(a)(v)(2) of the Master Agreement. The letter also stated that, by virtue of Section 2(a)(iii), Cosco would have no obligation to make any payment in respect of any of the FFAs for so long as such Event of Default was continuing.

Pioneer did not pay the sum due within that time scale or at all and it is common ground that there was an Event of Default or Potential Event of Default, following Pioneer’s failure to make that payment and that, by virtue of Section 2(a)(iii), Cosco was not obliged to make any payments falling due to Pioneer in future Contract Months during the currency of the Master Agreement, while Pioneer’s failure to pay had not been cured.

It follows that, after November 2008, neither party made any payment under any of the FFAs. This remained the position until Pioneer went into liquidation in December 2009. During that period, in the case of eight of the FFAs, the last Contract Month for any payment passed. It is Cosco’s case that each of those FFAs terminated or expired through effluxion of time when the last Contract Month under the particular FFA passed. Thus, by way of example, FFA No. 80825381390 dated 5 August 2008 was an FFA under which Pioneer was Seller and Cosco was Buyer. There were three Contract Months, January, February and March 2009. Because of the persisting Event of Default caused by Pioneer’s failure to pay the net amount due for October 2008 under other FFAs, Cosco was not obliged to make any payments in any of those months by virtue of Section 2(a)(iii). Cosco’s case is that at the end of March 2009 that contract came to an end, there being no obligation on it to make any payment in the future.

However, in the case of four of these eight FFAs (contracts nos. 031863, 072483, 072575 and 80826552500), Cosco was Seller and at the time when the last Contract Month passed under each of those FFAs at the end of December 2008, substantial sums were due from Pioneer for October, November and December 2008, which Pioneer had been liable to pay under clauses 7 and 8 of the 2007 FFABA Terms and Section 2(a)(i) of the Master Agreement, but had not paid. Accordingly, Cosco contends that, although each of those FFAs terminated or expired at the end of December 2008, an accrued debt continued to be due of all unpaid sums, together with default interest under Section 2(e).

On 14 December 2009, Pioneer passed a resolution for its own winding up and Joint Provisional Liquidators were appointed in the British Virgin Islands on 17 December 2009. The winding up resolution was an Event of Default under Section 5(a)(vii)(5) of the Master Agreement and, by virtue of Section 6(a), Automatic Early Termination occurred immediately on 14 December 2009. Thereafter, the Joint Provisional Liquidators calculated the Loss for the purposes of Section 6(e)(i)(4) (i.e. Second Method and Loss) and arrived at a sum of US$16,554,061.69 due from Cosco to Pioneer. That calculation reflected the net position across all eleven FFAs. On 24 December 2009, the Joint Provisional Liquidators wrote to Cosco stating that they had calculated that that sum was due to Pioneer.

On 15 February 2010, Cosco’s solicitors replied, disputing this calculation. Cosco’s position, as set out in that letter and maintained at trial, is that of the eleven FFAs, only three (nos. 0410701, 037856 and 045828) were “outstanding transactions” within the meaning of Section 6(a) or transactions “in effect” within the definition of “Terminated Transactions” in the Master Agreement. The other eight FFAs, as I have already indicated, had already terminated or expired (because the last Contract Month had passed under each of them) before Automatic Early Termination occurred on 14 December 2009. Accordingly, Cosco contends that the payment on Early Termination calculated under Section 6(e) should be made only by reference to the three transactions which it accepts were outstanding as at 14 December 2009.

Cosco calculates that under those three transactions a sum of US$22,467,112.27 (inclusive of interest) was due to Pioneer. However, Cosco contends that, pursuant to the third sentence of Section 6(e), it is entitled to set off against that sum the accrued debt and default interest due to it under the four expired transactions where it was Seller, which it calculates as US$29,994,737.25. This gives rise to a balance due to Cosco of US$7,527,624.98.

In response, Pioneer maintains that all eleven FFAs are to be brought into account in the Loss calculation under Section 6(e) of the Master Agreement and that the fact that the Contract Months under eight of them had come to an end does not mean that they are not still outstanding transactions or transactions “in effect”.

I propose to set out in broad outline each party’s main submissions in turn before setting out my own analysis and conclusions. To the extent that detailed points made by a particular party are not picked up in the broad outline, I have endeavoured to deal with those points when I come to my own analysis.

The submissions of Mr Thanki QC on behalf of Pioneer take as their starting point the commercial purpose of Section 2(a)(iii) of the Master Agreement as explained by Gloster J at paragraphs 69 to 76 of her judgment in Pioneer Freight Futures Company Limited v TMT Asia Limited [2011] EWHC 778 (Comm) (referred to hereafter as TMT):

“Commercial purpose of Section 2(a)(iii)

69.

Second, in my judgment it is obvious that the commercial function or purpose of the condition precedent to payment as set out in Section 2(a)(iii) is to mitigate counterparty credit risk during the currency of what may be numerous swap transactions under the umbrella of ISDA 92 and while they remain open. It ensures that a Non-defaulting Party does not have to pay a Defaulting Party, who may be of doubtful solvency, in circumstances where, under ongoing open swap transactions, a Defaulting Party may subsequently owe sums to the Non-defaulting Party.

70.

In other words, it prevents any increase in credit risk that might occur if actual payments were made. Its effect is to substitute an accounting procedure whereby debits and credits build up or accrue in an account between the parties, but suspending the obligation of the Non-defaulting Party to pay any amounts which it may for the time being owe.

71.

However, once Automatic Early Termination occurs, the ongoing credit risk disappears. All outstanding transactions are terminated, the account is struck and one net payment is made to the party in the money as part of the wash out process: see Section 6(e). That regime supersedes the regime under Section 2(a) which prevails while the contract is still on foot. There is, going forward, no ongoing credit risk that the Non-defaulting Party might have to pay sums to the Defaulting Party, in circumstances where, subsequently, and ultimately the Defaulting Party might have to pay sums to the Non-defaulting Party.

72.

But, in order to achieve this credit protection purpose of Section 2(a)(iii), as I have described it, it is simply not necessary for the obligations of the Non-defaulting Party in respect of a Contract Month to be effectively extinguished once and for all, or, as Mr. Crow preferred to put it, in his oral reply submissions, never to come into existence. So in my judgment, one would need to find something very clear in the language of Section 2(a)(iii) itself, or in Section 6(e), or in the definition of Loss, to support the conclusion that the commercial intention was that the obligation never arose to be taken into account on the "wash out"/Early Termination calculation under Section 6.

73.

Moreover, the structure and mechanics of ISDA 92 make it clear that an entirely different regime is put into place once Early Termination occurs. The conditions precedent apply to the obligation to make payment under Section 2(a)(i) during the currency of the agreement. But, following Early Termination, a different regime governs the relationship between the parties. Section 6 governs what is to occur on Early Termination. It provides (under Section 6(c)) that:

"(ii)

Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e)."

74.

Thus, upon Early Termination, the obligation to make payment under Section 2(a)(i) is replaced with the obligation to make payment of such sums as may be due under Section 6(e). The new regime does not retain or introduce the concept of conditions precedent.

75.

Commercially, this all makes sense. Prior to Early Termination, whether Automatic Early Termination or at the election of the Non-defaulting Party, both parties need to be protected during the life of the swap transactions against ongoing credit risk. Once all the transactions between the parties are terminated under Section 6, that risk no longer pertains. All gains and losses are crystallised and there is no credit risk or other logical commercial reason why the party who, in a netting off or net basis, is in the money, should not get paid what it is owed.

76.

Otherwise, the gamble of the transaction is a very different one, dependent not simply upon which party is in the money, but whether it has or has not become subject to an Event of Default, triggering Automatic Early Termination.”

In quoting that section of the judgment, I have underlined the passages upon which Mr Thanki placed particular reliance in support of his submission that only Pioneer’s construction was consistent with this commercial purpose. He submits that once Automatic Early Termination occurs and the payment obligations are moved from Section 2 to Section 6 (as I held at paragraph 26 of my judgment in Britannia Bulk Plc v Pioneer Navigation Limited [2011] EWHC 692(Comm)) then, as Gloster J recognised in the passage quoted from paragraph 75 of the judgment in TMT, the credit risk no longer exists. In those circumstances, there is no reason why the sums owing under all the transactions (including those where the last Contract Month had passed) should not be brought into the calculation of Loss under Section 6(e). Mr Thanki submits that, in contrast, Cosco’s argument that, after the last Contract Month of any particular FFA, the default cannot be cured and the Non-defaulting Party’s payment obligations cannot be revived pays no attention to counterparty credit risk and seeks to punish the Defaulting Party by depriving it of its expectation interest.

Mr Thanki emphasised that where Second Method is adopted, the intention is to move away from the common law approach of damages for repudiatory breach of contract which the First Method reflects, to an approach where all the transactions covered by the Agreement are closed out: see Peregrine Fixed Income Ltd v Robinson Department Stores Plc [2000] CLC 1328 at paragraphs 22 to 24 per Moore-Bick J, approved and applied by me in Britannia Bulk at paragraphs 21 and 37-39. The same analysis of Second Method was adopted by Gloster J in TMT at paragraph 67:

“But the whole point of choosing Second Method is to ensure that a party does not lose the benefit of its bargain merely because it is affected by an Event of Default leading to Early Termination. In other words, by choosing Second Method, the parties ensure that both parties, in all events, have their expectation interest protected.”

Mr Thanki relies on the definition of “Loss” and submits that the reference in the first sentence to “one or more Terminated Transactions” is to cover the situation where the parties have adopted the default position of Second Method and Market Quotation but, because it is not possible to determine a Market Quotation or one which produces a commercially reasonable result, the Loss measure is adopted instead. In contrast, he submits that the reference in the first sentence to “this Agreement” is to the position where the parties have adopted Second Method and Loss, as in the present case. That construction would seem to be supported by the wording of Section 6(e)(i)(3) and (4) respectively.

Mr Thanki goes on to submit that, because of the “Single Agreement” provision in Section 1(c), all the FFAs must be included in the Loss calculation (even those where the last Contract Month has passed), as all the FFAs are part of one and the same single Agreement. As he put it in his submissions in reply, the parties take it on the chin that with each separate FFA transaction, they are extending the life of the single agreement. The fact that under individual FFAs the last Contract Month has passed is of no consequence.

Mr Thanki also submits that the words in the second sentence of the Loss definition: “Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made” place no temporal limitation on the transactions which are to be brought into account. If it had been intended that some of the FFAs would fall out of the picture for the purposes of calculating Loss because they had passed their last Contract Month, this would be a radical departure and one would have expected the provision to have expressly so stated. It did not and, accordingly, all eleven FFAs should fall to be considered.

In so far as the distinction between Loss and Market Quotation is concerned, Mr Thanki recognises, as he has to, that the courts have consistently stated that the two measures are intended to lead to broadly the same result, but he submits that exactly the same result may not follow. This submission was essentially advanced to counter Mr Jacobs’ submission that the definition of Market Quotation is clearly contemplating that the transactions in respect of which a quotation is to be sought for a “Replacement Transaction” can only be those where there were payment or delivery obligations which lay in the future and that since the two measures are intended to achieve broadly the same result, the definition of Loss should also be interpreted as only applicable to transactions where there were payment or delivery obligations which lay in the future.

Mr Thanki also realistically accepted that there must be some “broad equivalence” between the concepts of “outstanding transactions”, transactions “in effect” and “Terminated Transactions” as those expressions were used in different parts of the Master Agreement. His primary submission remained that the use of the phrase “outstanding Transactions” in Section 6(a) was to exclude transactions entered into after the Early Termination Date and transactions where all the obligations have been fully performed by both parties by the time of the Early Termination. His argument was that the correct analysis in relation to those transactions where the last Contract Month had passed was that they were not transactions where the obligations had been fully performed. This was because, when Automatic Early Termination occurs, pursuant to the second sentence of the definition of Loss, the conditions precedent under section 2(a)(iii), which had applied to preclude any obligation to pay up to that moment, were now assumed to be satisfied, so that upon Automatic Early Termination, the payment obligation revived. Mr Thanki contended that this analysis held true for all the FFAs, including those where the last Contract Month had passed.

In Marine Trade v Pioneer Freight Futures Co Ltd [2009] EWHC 2656 (Comm); [2010] 1 Lloyd’s Rep 631, I considered, obiter, whether the effect of the conditions precedent in Section 2(a)(iii) was that no payment obligation came into existence. At paragraph 61 of that judgment, I said:

“By parity of reasoning with my conclusions set out above on Issues 2 and 5(iii), it seems to me that Clauses 7 and 8 of the FFABA 2007 Terms and Section 2(a)(i) and (iii) are "one time" provisions for the calculation and assessment at the end of the Contract Month of whether a sum is owed. If the party seeking payment of a Settlement Sum for a Contract Month cannot comply with the conditions precedent, then it is clear from the terms of the contract which I have discussed in relation to Issue 2, that no obligation to pay the Settlement Sum comes into existence. There is nothing in the wording of the provisions of the contract to suggest that if the condition precedent is fulfilled at some later date, some obligation to pay then springs up.”

It was not a necessary step in Mr Thanki’s argument in the present case that my conclusion on this point was wrong, not least because, in that judgment, I had expressly recognised (for example at paragraphs 24 and 25) that the position following Early Termination would be different, since, at that point, the express terms of the Master Agreement in Section 6 would bring in payments previously not due by virtue of non-compliance with the conditions precedent in Section 2(a)(iii). However, I should point out that I was only considering what the position would be with transactions which would have continued in the future but for early termination, as the closing words of paragraph 25 make clear. I was not considering transactions such as those in dispute in the present case, where the last Contract Month had passed before Early Termination.

The “once and for all” analysis in Marine Trade did not find favour with ISDA, which sought to intervene in Pioneer’s appeal from my decision to the Court of Appeal, to put in written submissions as to why my analysis was wrong. Those submissions were not considered by the Court of Appeal because the appeal was subsequently abandoned. Mr Thanki pointed out that the “once for all” analysis has not found favour with other judges. In later cases both Briggs J and Gloster J have preferred the approach of Austin J in the Supreme Court of New South Wales in Enron Australia v TXU Electricity [2003] NSWSC 1169 (which was not cited to me in Marine Trade) that the effect of Section 2(a)(iii) is to suspend the payment obligation while the condition precedent remains unfulfilled.

In Lomas v JFB Firth Rixson [2010] EWHC 3372 (Ch), Briggs J dealt with this issue of “once for all” versus suspension in these terms at paragraphs 66 to 74 of his judgment:

“Once and for All v Suspension

66.

There was a multi-faceted dispute between the respondents about the precise effect of the default condition precedent in Section 2(a)(iii)(1) under the 1992 Master Agreement, and a narrower dispute in relation to the same question under the 2002 Master Agreement. Taking the 1992 version first, Mr Hapgood QC and Mr Fisher (for the Firth Rixson companies and KPGZ respectively) both submitted that if an Event of Default or Potential Event of Default had occurred and was continuing on a particular date for payment by the Non-defaulting Party, then that payment obligation never arose, and would not thereafter arise in the event that the default was cured. Mr Zacaroli QC for ISDA submitted that the effect of a continuing Default (or Potential Default) on a particular payment date was only to suspend the coming into effect of the payment obligation until the default was cured and the condition precedent thereby satisfied. In answer to the obvious question, for how long might that payment obligation remain in suspense, he submitted that it might do so, at least in theory, indefinitely.

67.

In relation to the 2002 Master Agreement, Mr Hapgood was constrained to accept (because of Section 9(h)(i)(3)(A)) that he could not maintain his once and for all submission, since that provision expressly contemplated that an amount might become payable due to the satisfaction of the Section 2(a)(iii) condition precedent after a payment date. Nonetheless, he and Mr Dicker for BEIG both submitted that an amount could not become payable by reason of the satisfaction of a condition precedent after the Swap had run its term: i.e. after the last date for payment specified in the relevant Confirmation. If the relevant Event of Default (actual or potential) was continuing on that date, then the Non-defaulting Party was forever freed from any risk that it might become payable thereafter.

68.

Again, this issue was also raised in Marine Trade (supra), but only in relation to the 1992 Master Agreement. Since by the time of the trial the Defaulting Party (Pioneer) had not remedied its default, Flaux J expressed only an obiter view about it. His conclusion, at paragraph 61 was that:

"There is nothing in the wording of the provisions of the contract to suggest that if the condition precedent is fulfilled at some later date, some obligation to pay then springs up."

69.

Flaux J was not referred to the earlier dictum to the contrary of Austin J in the New South Wales Supreme Court in Enron Australia v. TXU Electricity [2003] NSW SC 1169, at paragraph 12:

"Since these two conditions are conditions precedent to the payment obligations of the counterparties, if either condition has not been met at any given time there is no payment obligation under any of the trades that have been made under the Agreement. However, a payment obligation will spring up under a pre-existing trade once the relevant condition is satisfied, and in that sense it might be said (with only approximate accuracy) that the payment obligation is "suspended" while the condition remains unfulfilled, and that amounts "accrue" notwithstanding that the condition is unfulfilled."

It does not appear that Austin J's conclusion was the result of adversarial argument on the point. Rather, it appears to have been his assumption as to the way in which Section 2(a)(iii) of the 1992 Master Agreement worked.

70.

Flaux J was referred to, but disagreed with, the opinion in Firth on Derivatives: Law and Practice, that the condition precedent in Section 2(a)(iii) was suspensory rather than once and for all in its effect. Mr Firth has nonetheless maintained that opinion in the 2010 edition, on the basis that the once and for all construction produces an extremely uncommercial result, in particular in cases of a short-lived default for which the Defaulting Party bore no responsibility, such as the presentation by a vexatious litigant of a winding up petition.

71.

The question whether Section 2(a)(iii) has a once and for all or suspensory effect is of minimal practical relevance in the present context, since there is no realistic prospect that LBIE will ever cease to be in default. Nonetheless it is squarely raised by the agreed issues, and I consider that a proper understanding of the way in which the condition precedent in Section 2(a)(iii) works is a pre-requisite to a reliable analysis of the Administrators' case, based as it is essentially on implication.

72.

Taking the 1992 Master Agreement first, there are persuasive reasons in favour of the once and for all approach. It is in my view more consistent with the language of Section 2(a), and it has the undoubted merit of simplicity and certainty. If a payment does not fall due on a particular payment date because the condition precedent is not satisfied, then the payer need make no provision against the risk of it falling due in the future. Furthermore, there is real force in Flaux J's conclusion that the absence of any express provision that a payment obligation should arise at a later date if the condition precedent is satisfied points to the absence of any such outcome. Using Lord Hoffmann's analysis in Belize, subsequent satisfaction of the condition is an event for which the contract makes no express provision, so that the starting assumption is that none was intended.

73.

I have however come on a fairly narrow balance to the conclusion that Austin J's suspensory construction is to be preferred. My main reason is the first of those given by Mr Firth, namely that the once and for all construction would produce a pointlessly draconian outcome, in the event of a minor and momentary default. Secondly, the condition precedent is unsatisfied even if there is merely a Potential Event of Default, which never matures into an Event of Default, sufficient to trigger Early Termination at the Non-defaulting Party's election. The permanent destruction of a payment obligation in those circumstances is even more surprising.

74.

Thirdly, there is I consider some force (despite Flaux J's rejection of it) in the point that, even under the 1992 Master Agreement, the election for an Early Termination would trigger a termination payment which included all Unpaid Amounts; i.e. amounts which would have been payable but for an earlier default. The essence of the once and for all approach is that, if a payment obligation on a particular date is nullified by an outstanding condition precedent, it can be forgotten about for all time. It is at least counterintuitive then to find that, quite possibly due to some much later default, an Early Termination brings that payment obligation back to life.”

In TMT, counsel for the defendant (Mr Jonathan Crow QC) contended, on the basis of my conclusion in paragraph 61 of my judgment in Marine Trade, that once Automatic Early Termination occurred, there could be no revival of an obligation on the part of the Non-defaulting Party for the purposes of the Loss calculation under Section 6. Gloster J pointed out at paragraphs 78 and 86 of her judgment that neither Marine Trade nor Lomas were cases where there was a provision for Automatic Early Termination and that I had not been considering in Marine Trade what would happen on wash-out under Section 6. Nonetheless, Mr Crow maintained that the “once and for all” analysis was logically correct and that, if no obligation ever came into existence during the time that the FFAs were open and prior to Automatic Early Termination, there was nothing in the terms of the Master Agreement to suggest that such a payment obligation came into existence at a later date upon Automatic Early Termination.

Gloster J rejected that submission at paragraphs 90 and 91 of her judgment. Although in this passage, she refers to clauses 8 and 9 of the 2007 Terms, she obviously means clauses 8 and 9 of the 2005 Terms, corresponding to clauses 7 and 8 in the 2007 Terms:

“90.

I reject this argument. Mr. Crow's analysis fails to differentiate between the two different obligations that arise under a swap transaction concluded on 2007 FFABA terms and subject to ISDA 92. The first is the debt obligation: i.e. is one party indebted in respect of/does one party owe a Settlement Sum to the other party? The second obligation is the payment obligation: is one party obliged to pay the Settlement Sum to the other party at any particular moment in time in the events which have happened? The clear commercial purpose of the swap transaction on FFABA 2007 terms, as recorded in the Confirmation, is that the Seller indeed becomes indebted to the Buyer (i.e. obliged to pay a particular amount) if the Settlement Rate is higher than the Contract Rate. And the Buyer becomes indebted to the Seller if the Settlement Rate is lower than the Contract Rate: see clause 8 of FFABA 2007. If, and when, actual payment of that indebtedness is to be made is governed by clause 9 of FFABA 2007, and Section 2(a) of ISDA 92. In my view, Section 2 is only addressing the payment obligation; it is not addressing the incurring of a debt obligation. That debt obligation is imposed on a party as and when he enters into a swap transaction subject to a Confirmation on FFABA terms; the actual incidence of, the calculation of the quantum of, and the date upon which it becomes payable, depend upon subsequent contingencies. But the debt obligation arises upon entry into the swap transaction subject to a particular Confirmation.

91.

Once one approaches the analysis on the basis that, under Section 2(a)(iii), one is only looking at the payment obligation, rather than the debt obligation, the whole machinery makes sense. Thus, the wording of Section 2(a)(iii) makes it clear that the payment obligation is subject to the condition precedent that no Event of Default or Potential Event of Default has occurred "… and is continuing". The natural reading of those words envisages that once a condition precedent is fulfilled, the obligation to pay revives. There is no need for any further creation of the debt obligation itself, as Mr. Crow seeks to suggest”

As I said above, it is not a necessary part of Mr Thanki’s argument that the “suspension” approach is to be preferred to the “once and for all” approach, although he says that the analysis of Gloster J renders easier his contention that, because only the payment obligation is suspended and the debt obligation subsists throughout, upon Automatic Early Termination, the condition precedent in Section 2(a)(iii) is assumed to have been satisfied and the payment obligation revives under all the FFAs, including those where the last Contract Month has passed. However, he recognises that, as is clear from paragraph 95 of her judgment, Gloster J was not purporting to deal with the situation where the conditions precedent have not been satisfied by the natural termination date of any particular FFA.

Pioneer contends that the sums outstanding and due to Cosco under the four FFAs where Cosco was the Seller, which also came to an end when the last Contract Month under those FFAs passed, are also to be brought into account as part of the close-out calculation of Loss, essentially for two related reasons. First, Mr Thanki submits that once the payment obligations moved from Section 2 to Section 6, as they did upon Automatic Early Termination, the only basis upon which the sums outstanding are recoverable is pursuant to the second sentence of the definition of Loss.

Second, he contends that until Automatic Early Termination, the basis for Cosco’s entitlement to the principal sums outstanding must have been under Section 2(a)(i) and to the default interest under Section 2(e). Not only did any entitlement to payment of both principal and interest cease upon Automatic Early Termination, being replaced by the close-out calculations under Section 6, but the fact that that entitlement persisted until Automatic Early Termination demonstrates that those four FFAs had not terminated or expired upon the last Contract Month passing. On this basis, Pioneer contends that Cosco’s position as regards the other allegedly “expired” FFAs is also flawed.

Mr Jacobs’ starting point is that, as at the natural termination date of each of the four FFAs in dispute under which Pioneer was the Seller, the position was that there were no future obligations to be performed by Cosco, as all the Contract Months had passed and, as at that date, Cosco did not owe any past obligations either, for the simple reason that the condition precedent to any payment obligation under Section 2(a)(iii) had not been fulfilled. He submitted that there is nothing surprising or radical in that conclusion. The normal position under any contract is that, once it has terminated through natural expiry, the obligations under it also come to an end. Far from it being necessary for the Master Agreement to spell that out, as Mr Thanki contended, Mr Jacobs submitted that, if it had been intended that obligations which had previously been suspended, because the condition precedent had not been fulfilled, should survive the termination of the particular FFA when the last Contract Month had passed, one would expect the Master Agreement to spell out this surprising conclusion in terms.

He submitted that this analysis was supported by the judgment of Briggs J in Lomas. In the passage in his judgment immediately after he had concluded that he preferred the suspensive approach to Section 2(a)(iii) to the “once and for all” approach, Briggs J went on to consider how long the suspended obligation remained in suspense. Was it indefinitely, as ISDA was submitting in that case, or was it only until the relevant transaction terminated upon natural expiry? Briggs J concluded in favour of the latter, in these terms, at paragraphs 75 to 79 of his judgment:

“75…… The only candidates [as to how long a suspended payment obligation remains in suspense] raised in argument were:

i)

Until the expiry of the term of the Transaction;

ii)

Indefinitely.

76.

The proponents of the limited period in (i) point to the unlikelihood that commercial persons would contemplate, let alone specifically agree, to leave potentially large contingent obligations hanging over themselves indefinitely. They pointed to Section 9(c) as containing the necessary express provision, within the phrase "Without prejudice to Sections 2(a)(iii) and (6)(c)(ii)". The general effect of clause 9(c) is to provide for the obligations of the parties under the Master Agreement to survive "the termination of any Transaction". By making that general provision subject to Section 2(a)(iii) it is suggested that contingent obligations suspended by Section 2(a)(iii) will not therefore survive the termination of the Agreement by effluxion of time.

77.

Mr Zacaroli for ISDA was the only proponent of the indefinite survival of contingent obligations suspended by Section 2(a)(iii). He sought to meet the objection that not even a limitation period would bring them to an end by suggesting that the Non-defaulting Party, if troubled by the contingent liability, could always elect for Early Termination, even after the termination of the Transaction by effluxion of time. He submitted that Section 9(c) was not concerned with termination by effluxion of time but rather merely with preserving the effect of the Master Agreement in relation to other Transactions from any unintended dissolution as the result of the termination of a particular Transaction.

78.

Faced with those two alternatives, I consider that the first is clearly to be preferred. My main reason is that it seems to me to be wholly inconsistent with any reasonable understanding of the Master Agreement that payment obligations arising under a Transaction could give rise to indefinite contingent liabilities, because of the possibility that an Event of Default may be cured long after the expiry of a Transaction by effluxion of time. Secondly, although Section 9(c) is certainly a roundabout way of making express provision against payment obligations springing to life after the expiry of a Transaction by effluxion of time, it is the only relevant indication one way or another anywhere in the Master Agreement which bears on this issue. Finally, I am not at all persuaded by Mr Zacoroli's submission that the potentially indefinite risk of a contingent payment obligation beyond the natural expiry date of a Transaction could be avoided by a party electing, on or after that date, for Early Termination. It would not be early in any conceivable sense, and it would be difficult, to say the least, to apply the default method for calculating Early Termination payments where, ex hypothesi, there would be no continuing period in relation to which to obtain a Market Quotation for a replacement swap.

79.

Nor am I persuaded that Section 9(c) has only the limited purpose identified by Mr Zacaroli. The deliberate use of "termination" with a small rather than capital "t" suggests that Section 9(c) is all about termination by effluxion of time (i.e. on the last payment date referred to under Section 2(a)(i)). The exclusion of Section 6(c)(ii) follows naturally from the comprehensive provisions about payment obligations triggered by Early Termination. The exclusion of Section 2(a)(iii) must therefore be a reference primarily to condition precedent (1) (i.e. the default condition). Although some provisions in the Master Agreement operate across rather than within transactions, (usually where an election is made that they should), generally the Master Agreement exists to provide the detailed terms of each of the Transactions to which it is applied. While by no means ideally phrased, I consider that Section 9(c) does mean that, where any obligation is suspended by Section 2(a)(iii) because of the non-fulfilment of a condition precedent, then that obligation does not survive the termination of a Transaction at the end of its natural term, if by then the condition precedent is still unsatisfied.”

Mr Jacobs submits that this analysis, which was not obiter but formed part of the learned judge’s reasoning on one of the issues he was asked to decide (Issue 4 set out at paragraph 52 of the judgment), was clearly right and is fatal to Pioneer’s case. To the extent that Pioneer suggested that Briggs J had not dealt with an alternative case, that the suspended obligations under a particular transaction survived until all the other transactions covered by the Master Agreement had expired, Mr Jacobs pointed out that this had been raised by Issue 4(2) in Lomas. He submitted that this point was not pursued by any of the parties because it was hopeless and illogical. If a transaction has terminated upon natural expiry and was fully performed according to its terms (including, because of the continued operation of Section 2(a)(iii), payment obligations which had not arisen or had been suspended), it cannot become unperformed or incomplete simply because the parties had entered into another transaction which has yet to be performed.

Mr Jacobs submitted that, contrary to Pioneer’s submissions, the “Single Agreement” provision in Section 1(c) of the Master Agreement did not have the effect of converting a transaction which had been performed and had come to an end into one which had not been performed. He submitted that the principal purpose of the Single Agreement clause is to facilitate set off of sums which are contractually due from one party to another under a series of transactions.

He also drew attention to another point highlighted by Simon James in The Law of Derivatives paragraph 7.3.5 (1999) that: “in essence it means that a default under one transaction is a default under all transactions. This facilitates netting between transactions.” A similar point is made by Simon Firth in Derivatives Law and Practice (2010) at paragraph 11-004: “the objective [of the Single Agreement provision] being to try to ensure that each party has a net exposure to the other.”

In relation to closing out under Section 6 of the Master Agreement, Mr Jacobs emphasised that, as has been held consistently by the courts, the two payment measures within Second Method, Loss and Market Quotation, are intended to lead to broadly the same result, as Mr Thanki accepted. It is not necessary to set out in detail the submissions Mr Jacobs made about the comparison between the two measures, which essentially followed my analysis in Britannia Bulk. For present purposes, the critical point he made was that, in relation to that element of the computation concerned with past losses, I held in that case, albeit obiter, that the second sentence of the definition of Loss was dealing with past losses and was a reference to what, in the context of Market Quotation, would be Unpaid Amounts. The definition of “Unpaid Amounts” makes it clear that transfer of the payment obligations from the past from Section 2 to Section 6 applies only to Terminated Transactions which are defined as those “in effect” immediately before the Early Termination Date. Mr Jacobs submitted that transactions which had terminated, because the last Contract Month had passed, as in the case of the four FFAs in dispute, cannot be described as still “in effect”.

He then submitted that, given that the second sentence of the Loss definition was intended, as I held in Britannia Bulk, to reflect Unpaid Amounts and given that one of the circumstances in which the Loss measure will apply is where the Market Quotation measure is impractical or produces an unreasonable result, it would be surprising if, sub silentio, the second sentence of the Loss definition entitled Pioneer to bring into the computation not only the open transactions which are closed out by the early termination, but other transactions which had already expired through effluxion of time.

Mr Jacobs contends that, on the true construction of Section 6(a) and (e) and the definition of Loss, the second sentence of that definition does not have that surprising consequence. Section 6(a), in particular, makes it clear that the Early Termination Date only “occurs” in respect of “outstanding transactions” (which do not include transactions which have already terminated), so that the computation of Loss is only in respect of those outstanding transactions.

In response to Mr Thanki’s submissions that the sums outstanding (including default interest) under the four FFAs where Cosco was the Seller are only recoverable as part of the close-out calculation and that it follows that all eight of the “expired” transactions have to be brought into account as part of that close-out calculation, Mr Jacobs submits as follows. The monies which were payable by Pioneer under the four expired transactions where Cosco was Seller, for the months of October, November and December 2008 (the last Contract Month under each of those Transactions being December 2008), amounted to an outstanding contractual debt as at termination of those transactions at the end of December 2008. Cosco had a straightforward claim in debt for recovery of what was owed, a right provided by law expressly preserved by Section 9(d) of the Master Agreement.

Mr Jacobs submits that, contrary to Mr Thanki’s submissions, when Automatic Early Termination of the open transactions occurred, that claim in debt was not extinguished in respect of the expired transactions, nor was it brought within the close-out calculation under Section 6. In particular, he contends that both the third sentence of Section 6(e) and the definition of Set-off make it clear that there may well be sums due under the Master Agreement under transactions which do not form part of the close-out calculation, but which may be set off against whatever amount is arrived at in the close-out calculation in respect of the Terminated Transactions.

Although Mr Thanki had accepted that it was not a necessary part of his argument that my “once and for all” approach in Marine Trade was wrong and the “suspension” approach preferred by Briggs J and Gloster J was right, Mr Jacobs did, nonetheless, seek to persuade me that my approach had been right all along. He did so primarily by reference to the delivery obligations contained within the ISDA Master Agreement, although those are of no specific relevance in the present case, which concerns only payment obligations. He made the perfectly valid point that, if it were the case that the delivery obligation was suspended because of the non-fulfilment of a condition precedent and could be revived if the condition were subsequently fulfilled, the Non-defaulting party could find itself obliged to deliver an asset which had increased in value since the original date for delivery, making the contract a different and more disadvantageous bargain than it would have been if Section 2(a)(iii) had never applied at all.

Mr Jacobs also submitted that the distinction which Gloster J drew in TMT between the debt obligation and the payment obligation was an artificial one. He pointed out that, contrary to what Gloster J held at paragraph 90 of her judgment, the debt obligation cannot have been created when the FFA was entered, since at that stage there is no “Settlement Sum”, nor is it known which party will be “in the money” on a particular Settlement Date. He submitted that the correct analysis is that there is only one obligation, which is to make payment and that if, at the time that obligation arises, there is a condition precedent which has not been fulfilled, there is no debt and so no obligation to make payment arises.

He did also contend that one further problem with Gloster J’s analysis is that, if there was an accrued debt which was subsequently rendered unpayable pursuant to Section 2(a)(iii) as a result of the breach of another contract, that exposed Section 2(a)(iii) to being held to be an unenforceable penalty: see Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 723 per Lord Salmon. This was a false point and the answer to it is that given by Briggs J in Lehman Brothers Special Financing Inc v Carlton Communications Limited [2011] EWHC 718 (Ch) at paragraph 47:

“I acknowledge that, in an appropriate case, a contractual provision for the withholding of monies otherwise due may be analysed as a penalty: see Gilbert-Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd [1974] AC 689, at 723. In the present case however, not only is the withholding of payment triggered by an event not constituting a breach of contract, it is also a provision operating even-handedly as between the parties, so that either may rely upon it when there is a continuing Event of Default affecting the other party. The circumstances are as far removed from oppression as could be imagined. ”

Effect of termination through natural expiry

I agree with Mr Jacobs that, as a matter of normal contractual analysis, if, at the time that a contract terminates at its natural expiry date (for example when the last date for performance passes), a condition precedent to one party’s obligation remains unfulfilled by the other party, then, even if, immediately prior to termination, the other party could have fulfilled the condition precedent and brought the contingent obligation into existence, once the contract has come to an end, any such contingent obligation ceases to exist.

That this is the correct analysis in the context of these transactions and this Master Agreement is supported strongly by the judgment of Briggs J in Lomas. It seems to me that, if his analysis is right, that is fatal to Pioneer’s case. Mr Thanki urged me to conclude that Briggs J’s analysis in paragraphs 75 to 79 of his judgment was wrong for a number of reasons.

First, he submitted that Briggs J had misunderstood Section 9(c). Undoubtedly, this is a difficult and obscure provision and Mr Thanki himself had difficulty in formulating a coherent case in relation to it. In his submissions in reply, he submitted that the reason why the survival of obligations upon termination of any particular Transaction was made without prejudice to Section 2(a)(iii) was that it was confirming that the suspension under Section 2(a)(iii) continued in effect until it is lifted, as would occur on Early Termination. However, as I see it, if that were the intention, there would be no need to say “without prejudice to Section 2(a)(iii)”, because the other words of Section 9(c) make it clear that the obligations under the Agreement survive the termination of any Transaction.

Since, on Pioneer’s case, the effect of Early Termination is to lift the suspension under Section 2(a)(iii) and bring the suspended payments into the close-out calculation and that is one of the obligations of Cosco which survives termination, the reference to survival of those obligations being “without prejudice to Section 2(a)(iii)” makes no sense. It is much more likely that the reason why the survival of Cosco’s obligations post termination of a particular transaction is made “without prejudice to Section 2(a)(iii)”, is because the effect of Section 2(a)(iii) is that, where the condition precedent is not satisfied, once termination occurs, any contingent obligation which was suspended by virtue of Section 2(a)(iii) ceases to exist. In other words, those words are included to confirm that any such contingent obligation is not one of the obligations which survives the termination of the particular transaction.

As for the survival of obligations being without prejudice to Section 6(c)(ii), Mr Thanki recognised that it was difficult to make much sense of that reference and submitted that it was merely confirmatory of what the position would be on Early Termination, namely that the payment obligation has shifted from Section 2 to Section 6. However, as I pointed out in the course of argument, if that is the correct construction, the provision is pointless, because Section 6(c)(ii) itself and Section 6(e) make it clear that the payment obligation shifts.

Mr Jacobs submitted that the reference to Section 6(c)(ii) in Section 9(c) is there because, whilst Section 9(c), as Briggs J held, is dealing with cases where the particular transaction terminates though effluxion of time, there may be other transactions between the parties which are continuing (because there are obligations under them to be performed in the future). The reference is there simply to make it clear that those continuing transactions may at some point come up against the barrier of early termination. Mr Jacobs submits that this is what Briggs J had in mind when he said at paragraph 79:

“The exclusion of Section 6(c)(ii) follows naturally from the comprehensive provisions about payment obligations triggered by Early Termination.”

I can see some force in this point, although it is difficult to see why the draftsman would find it necessary to refer to what may happen with continuing transactions, in a provision which is dealing with termination of particular transactions through effluxion of time. Mr Jacobs only put forward the point tentatively and it may be that the reference to Section 6(c)(ii) in Section 9(c) cannot really be explained. However, whatever the precise purpose of the reference, it seems to me incapable of supporting a construction of Section 9(c) contrary to that reached by Briggs J.

Accordingly, I do not accept Mr Thanki’s submissions and prefer the analysis of Briggs J, that Section 9(c) is a roundabout way of making it clear that where the transaction terminates by natural expiry, as in the case of the FFAs in dispute here, if the Section 2(a)(iii) condition precedent has suspended or (if my analysis in Marine Trade were right) extinguished any payment obligation, that obligation does not somehow survive or spring up after such termination.

The second reason why Mr Thanki submitted that the analysis of Briggs J was wrong is that it is open to the same objection that the learned judge made to my “once and for all” approach in Marine Trade, that it produces a potentially draconian outcome and that the permanent destruction of a payment obligation is surprising. However, as I have already said, in terms of normal contractual analysis, there is nothing in the slightest bit surprising about a conclusion that, if a contractual obligation is subject to a condition precedent and that condition precedent remains unfulfilled when the contract comes to an end, then the obligation does not revive after termination. I agree with Mr Jacobs that if that somewhat heterodox effect were intended, one would expect the Master Agreement to say so in terms. Whatever else Section 9(c) means, it does not say that in terms.

In a sense that is also the answer to Mr Thanki’s third submission, that Briggs J was wrong in paragraph 78 to conclude that it was not a reasonable construction of the Master Agreement that there should be contingent survival of payment obligations, after the natural expiry of a particular Transaction, either indefinitely or until the Non-defaulting Party chose to elect for Automatic Early Termination of the Master Agreement. In my judgment, Briggs J’s conclusion, which is in accordance with normal contractual principles as to what happens when a contract comes to an end, is clearly correct.

I agree with Mr Jacobs that the matter can be tested by looking at what the position would be in relation to a transaction subject to the ISDA Master Agreement which had delivery obligations rather than payment obligations. On Mr Thanki’s case, the Seller’s obligation to make delivery, for example of a particular financial instrument, which obligation was suspended by virtue of Section 2(a)(iii), would remain a contingent obligation after termination of the transaction through effluxion of time for an indefinite period in the future until the default was cured or until there was Automatic Early Termination.

As Mr Jacobs said, it is very difficult to see how, if that were right, the Seller could hedge against a risk that, at some indeterminate point of time in the future, it might be required to deliver the financial instrument after all, the value and thus cost of which may have increased considerably in the intervening time. The position with delivery obligations is a further indication, as I see it, that the correct analysis is that, where the transaction terminates through effluxion of time, any contingent delivery obligation ceases to exist.

The fourth reason why Mr Thanki submitted that Briggs J was wrong is that the suggestion that Early Termination cannot apply to a transaction which has expired is misconceived, because, where the executory obligations remain in existence, albeit suspended, although the period of the FFA has expired when the last Contract Month has passed, the FFA has not terminated. This point does not seem to me to add much to his other points. I agree with Briggs J that where (as is the case with the four FFAs in dispute) the last Contract Month has passed nine or twelve months before the Early Termination Date, termination on that date in respect of those transactions would not be early in any conceivable sense.

Indeed, if Pioneer were right that, notwithstanding that the period of the FFA had expired when the last Contract Month has passed, the contingent payment obligations, albeit suspended, continue, in some form of contractual “limbo”, until termination occurs at some date in the future, when there is an Automatic Early Termination in respect of transactions which still had Contract Months to run, it would be more accurate to describe termination for those transactions where the period of the FFA had expired months previously, as “late termination”.

The final reason why Pioneer submitted that the analysis that the suspended obligation ceased when the particular transaction terminated through effluxion is wrong is that it is inconsistent with Section 5(a)(ii). That provides that there will be an Event of Default if there is a breach of contract by the Defaulting Party which has not been cured within 30 days of notice from the Non-defaulting Party of a failure to perform. Once that notice is given, there is a Potential Event of Default as defined and Section 2(a)(iii) bites to suspend the payment obligation. Mr Thanki made the point that if, during the 30 day period, the contract terminated through effluxion of time and the effect of that was that the suspended payment obligation ceased, the Defaulting Party would be deprived of the opportunity, which Section 5(a)(ii) contemplates it will be given, of remedying the breach and would thus be deprived of the value of the contract.

I can certainly see that this point about remedying any breach within 30 days may be one of the reasons why the “suspensive” approach to Section 2(a)(iii) is to be preferred to my “once and for all” approach in Marine Trade. However, this point seems to me to have nothing to do with whether or not a transaction has expired through natural effluxion of time and the consequences of such expiry. I agree with Mr Jacobs that what Section 5(a) is doing is defining what will be an Event of Default which (save in cases of Bankruptcy Events of Default to which Automatic Early Termination will apply) will then entitle the Non-defaulting Party, if it chooses to do so, to serve a notice under Section 6(a), designating an Early Termination Date. As Mr Jacobs says that is not something the Non-defaulting Party is going to want to do in respect of a transaction which is about to expire through the effluxion of time.

In any event, even if Mr Thanki were right that the Lomas analysis might lead to a curious result which would prejudice the Defaulting Party, in what might be regarded as an unlikely factual scenario of a breach committed less than 30 days before the transaction is going to terminate naturally anyway, this point does not seem to me to cast serious doubt on Briggs J’s analysis being the correct one, for all the reasons I have given.

Accordingly, I consider that Briggs J was right in his analysis in Lomas at paragraphs 78 and 79 that, where the particular transaction has terminated at the end of its natural term, any contingent obligation which might have revived or sprung up, if the condition precedent in Section 2(a)(iii) had been fulfilled before the transaction terminated, does not survive the termination of the transaction at the end of its natural term. It also seems to me that it is a logical consequence of Briggs J’s analysis that none of those transactions which terminated at the end of its natural term is a Terminated Transaction within the meaning of the Master Agreement. At all events, as I see it, Briggs J’s analysis is, in a very real sense, fatal to Pioneer’s case.

Single Agreement

Mr Thanki seeks to avoid the logic of that conclusion by relying upon the Single Agreement provision in Section 1(c) of the Master Agreement to contend in this context that, so long as there are Contract Months outstanding under any FFA, there will be “Early Termination” of the Master Agreement. However, I agree with Mr Jacobs that this provision in the Master Agreement is essentially to facilitate set off between different transactions subject to the same Master Agreement and to ensure that default under one outstanding transaction is default under all the others. I agree that the Single Agreement provision is saying nothing about which transactions form part of that single agreement.

Equally, the provision does not suggest that, in relation to transactions which have otherwise come to an end, obligations which had been suspended or which did not come into existence by virtue of Section 2(a)(iii) somehow survive the relevant transaction coming to an end, in some form of contractual limbo, until Automatic Early Termination occurs in relation to other transactions which remain in effect at the time of such Automatic Early Termination.

It is important to bear in mind that, whilst the FFAs may form a single agreement, it is the FFAs which constitute the contractual transactions between the parties. The ISDA Master Agreement is, in effect, an umbrella contract form incorporated in each of the FFAs. In my judgment, the conclusion that the transactions which form part of the single agreement are those which are “outstanding” or “in effect” (i.e. which have Contract Months left to run) at any given time and, in particular, at the time of any Automatic Early Termination, gives full effect to the Single Agreement provision and is the most natural and obvious meaning of that provision.

Furthermore, that construction does not distort the concept of Early Termination. In contrast, to describe what happened on 14 December 2009 as Early Termination in relation to transactions which had come to an end through effluxion of time months earlier, when the last Contract Month passed, is a distortion of language. In my judgment, Pioneer’s construction of the Single Agreement provision gives it an excessively wide and strained meaning and effect.

The meaning of “Terminated Transactions” and transactions “outstanding” or “in effect”

I consider that it is also something of a distortion of language to include within “Terminated Transactions” (as Pioneer’s case necessarily does) transactions which had already come to an end. The definition of “Terminated Transactions” only encompasses transactions “in effect” at the time of Early Termination. It seems to me difficult to describe “in limbo” transactions, where the Contract Months had all passed, but somehow the suspended obligation had survived, as “in effect”. Furthermore, the very fact that it is necessary to have such a definition of “Terminated Transactions” in the Master Agreement suggests that there are other transactions which fall outside the definition and, thus, outside the calculation of the payment measure, namely transactions which are not or are no longer “in effect”.

On Pioneer’s construction, the only transactions not in effect are presumably those which have reached their natural expiry date with no obligations suspended as a consequence of Section 2(a)(iii). Thus, this construction draws a distinction between two categories of transactions which have come to an end through natural expiry, one where Section 2(a)(iii) has operated at some stage in the lifetime of the transaction and one where it has not. If the intention were to draw that rather surprising distinction, one would expect it to be spelt out in clear terms.

Pioneer also contends that the four FFAs where Cosco was the Seller and there was an accrued debt due to Cosco (through non-payment of Settlement Sums for October, November and December 2008) when they came to an end in December 2008, were still “in effect” at the date of Automatic Early Termination. In my judgment it is not apt to describe those FFAs as still “in effect”. The words “in effect”, used as they are in the context of the definition of “Terminated Transactions”, seem to me to connote transactions which are capable of being terminated by the occurrence of Automatic Early Termination, in other words transactions where there are still future obligations to be performed, as opposed to transactions which have already terminated twelve months previously.

Equally, it seems to me that none of the transactions which had come to an end (i.e. both those where Pioneer was the Seller and those where Cosco was the Seller) can naturally be described as “outstanding”, a word which assumes that some obligation remains to be performed in the future. If the relevant FFA has come to an end through natural expiry, it is difficult to see on what basis it can be said that there is an “outstanding Transaction” consisting of that FFA, within the meaning of Section 6(a) of the Master Agreement.

I agree with Mr Jacobs that Pioneer’s contention that the four FFAs where the condition precedent in Section 2(a)(iii) had never been fulfilled before the last Contract Month passed in either December 2008 or March 2009, remained “outstanding” can be tested by looking at the position on 13 December 2009, the day before the resolution to wind up Pioneer had been passed. On that day, in no sense could these four transactions be said to be “incomplete and unperformed” as Pioneer contends. Cosco had performed all its obligations in the past and neither party had any obligation to do anything in the future under those concluded transactions.

Similarly, in relation to the four FFAs where Cosco was the Seller and Pioneer had failed to pay the Settlement Sums due for October, November and December 2008, it seems to me that, whilst it can be said that there was an accrued debt outstanding at the time those FFAs came to an end in December 2008, which remained outstanding as at 14 December 2009, it would be a misnomer to describe those as “outstanding transactions”, a phrase which, as I have indicated connotes transactions under which there remain obligations to be performed in the future.

Another way to test the point is to consider what the position would have been if all the transactions covered by the Master Agreement had reached their natural expiry date months before 14 December 2009, when the winding up resolution was passed. On Pioneer’s construction, all the transactions would remain Terminated Transactions and Automatic Early Termination would still occur on 14 December 2009, notwithstanding that all the transactions had in fact terminated through effluxion of time months previously. As Briggs J said in Lomas at paragraph 78, such Automatic Early Termination on 14 December 2009 would not be early in any conceivable sense.

The definition of “Loss”

Turning to the definition of “Loss”, I have already indicated that I consider Pioneer is right in its submission that, where Loss is the primary measure (as opposed to being indirectly applicable because the Market Quotation measure is not available or is not appropriate) the opening words of the first sentence: “with respect to this Agreement” apply. However, that submission does not assist Pioneer, once it is recognised, as I have held, that the transactions which are within “this Agreement” at the time of Automatic Early Termination are only those in effect on 14 December 2009, in the sense that they still had Contract Months outstanding and not those which had come to an end because the last Contract Month had passed.

So far as the second sentence of the definition of Loss is concerned, in Britannia Bulk (at paragraphs 41 to 46) I held, as part of the overall conclusion that the two payment measures were intended to achieve a broadly similar result, that the words in that sentence: “Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made” were intended to be a reference to what, in the context of the Market Quotation measure, would be Unpaid Amounts.

“Unpaid Amounts” are defined as including: “in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date.” Quite apart from the fact that, for reasons I have held, “Terminated Transactions” do not include transactions which have already reached their natural expiry date before Early Termination, the words: “which remain unpaid at such Early Termination Date” seem to me to import some contingent payment obligation under a transaction which has not already terminated. Where the relevant transaction has come to an end through the natural effluxion of time months before the Early Termination Date, this would hardly be “early termination”, if anything it would be “late termination” (see per Briggs J in Lomas at paragraph 78).

It seems to me that the words of the second sentence of the definition of “Loss”, intended as they are to reflect “Unpaid Amounts”, should be construed in the same way. The words in brackets “(assuming satisfaction of each applicable condition precedent)” are a “deeming” provision which applies as at Automatic Early Termination, when the Section 6 regime replaces the Section 2 regime. The provision makes it clear that once Automatic Early Termination occurs, the Non-defaulting party is not entitled to rely upon any applicable condition precedent (see Britannia Bulk at paragraph 43), so that in respect of “outstanding transactions” (which by virtue of Section 6(a) are the only ones in respect of which an Early Termination Date “will occur”) payments withheld under Section 2(a)(iii) are now “required to have been made...and not made”.

However, those transactions which have come to an end through natural expiry, such as the four FFAs where Pioneer was Seller, are not outstanding transactions in respect of which an Early Termination Date “will occur”, since they had already terminated long before 14 December 2009. I do not see how the deeming provision in brackets can assist Pioneer here. The short answer is that, absent express words in the provision that make it clear that payment obligations under transactions which have already terminated in the past somehow revive, payments under those transactions cannot be said to be “required to have been made...and not made”, because the transactions came to an end without the condition precedent having been fulfilled and, upon such termination, any contingent payment obligation upon Cosco ceased: see per Briggs J in Lomas at paragraphs 78-9, with whose reasoning, as I have said, I agree.

Contrary to Mr Thanki’s submissions, there is nothing in this analysis and conclusion which is inconsistent with Gloster J’s conclusions in TMT as to the commercial purpose of Section 2(a)(iii). However, it is no part of that commercial purpose, which is to eliminate counterparty credit risk: “while the [FFA] transactions remain open” (paragraph 69) or “during the life of the [FFA] transactions” (paragraph 75), that obligations which have been suspended because of non-compliance with a condition precedent somehow survive in limbo after the life of the relevant FFA transaction and spring back into life, upon a subsequent Automatic Early Termination in respect of transactions still in effect at that later date. Nothing in Gloster J’s judgment suggests that she had this consequence in mind. Indeed, on the contrary, as I have already observed, she considered (at paragraph 95 of her judgment) that it was not necessary for her to reach a concluded view as to whether Briggs J’s analysis in Lomas, that suspended obligations would not revive after the natural termination date, was correct.

Once and for all versus Suspension

On the basis of the above analysis, my conclusion is that the four FFAs in dispute do not fall within the transactions to be brought into account in calculating Loss after Automatic Early Termination in respect of outstanding transactions on 14 December 2009. It will be apparent from the analysis I have set out that this is not dependent either (i) on the effect of non-compliance with the condition precedent in Section 2(a)(iii)(1) in November 2008 and subsequent months, until the natural expiry date of the four disputed transactions, being to extinguish the payment obligations rather than suspend them or (ii) on rejection of the preferred analysis of Gloster J that there are two separate obligations, a debt obligation, which remains in effect throughout the continuing life of the transaction, and a payment obligation, which is suspended until the condition precedent is fulfilled or Automatic Early Termination occurs.

So far as the first point is concerned, I see the force of Mr Jacobs’ submission that, in the context of those transactions covered by the ISDA Master Agreement which involve delivery (for example of a valuable financial instrument) as opposed to payment, the effect of non-compliance with the conditions precedent in Section 2(a)(iii) at the time when delivery should otherwise have taken place, should be to extinguish any obligation to make delivery. This is because otherwise the Non-defaulting Party could find itself, when any default was cured at a later date, having to make delivery of an asset which had increased in value since the original due date for delivery, meaning that the Non-defaulting Party was forced into a disadvantageous bargain by virtue of the very condition precedent which was inserted for its protection.

Furthermore, I agree with Mr Jacobs that there is nothing surprising in that analysis in the context of delivery obligations generally, for example in contracts for the sale of goods where, if the date for delivery passes and a condition precedent has not been complied with, the obligation to make delivery does not revive at a later date, merely because the defaulting party can say the condition precedent has now been complied with. In most such contracts, it is usually a complete answer that it is now too late.

Given the inherent unlikelihood of the conditions precedent having a different impact, depending upon whether they affect delivery obligations as opposed to payment obligations, that would suggest further support for the obiter view I expressed in Marine Trade that the payment obligation never came into existence or was extinguished because of non-compliance with the conditions precedent at the time when payment was otherwise due. However, since that point is, as I have said, not a necessary part of my reasoning and since the issue of once and for all versus suspension is likely to be considered by the Court of Appeal either in Lomas (in which I understand there will be a hearing later this year) or in TMT or Britannia Bulk (in both of which cases Gloster J and I gave permission to appeal), it seems to me it is not desirable for me to express any concluded view on this question.

In relation to the second point, it is difficult to see how, as Gloster J held at paragraph 90 of TMT, the debt obligation arises as and when a party enters into an FFA, given that the Contract Months are all in the future and, when the FFA is entered into, it is unknown which party will be “in the money” at the end of any particular Contract Month. Rather it seems to me that, if there are two distinct obligations, the debt obligation for any given Contract Month arose on the Settlement Date, which is the last Baltic Exchange Index publication day of each Contract Month. It is only on that date that, pursuant to clause 7 of the FFABA 2007 Terms, a determination is made as to which Party has to pay the other. The obligation to pay then arose five London business days later in respect of these transactions pursuant to clause 8 of the 2007 Terms.

I have some sympathy with Mr Jacobs’ submission that, once one recognises that there is only that five day gap between when the Settlement Sum is calculated and when the Settlement Sum has to be paid, the idea of two separate obligations is somewhat artificial. However, since it is not a necessary part of my reasoning that there is only one obligation and since this issue is another one which is likely to be considered by the Court of Appeal in one or other of the forthcoming appeals, I do not consider it appropriate to express any further view on the issue.

Netting

In his original written Skeleton Argument, Mr Thanki contended that the analysis that there are two obligations, the debt obligation and the payment obligation (and that only the latter is suspended by reason of non-fulfilment of the condition precedent in Section 2(a)(iii)) was also consistent with the approach to netting under Section 2(c) in Lomas, where it was common ground between all the parties that netting should still occur even though Section 2(a)(iii) applied (see paragraphs 60 to 65 of the judgment of Briggs J). Thus, the parties in that case agreed that, in relation to the complex swaps transactions there under consideration (where there would always be payment obligations both ways), the conclusion I had reached in Marine Trade at paragraphs 19 to 27, in relation to FFA transactions such as under consideration in the present case, should not apply.

Briggs J in Lomas accurately summarised my conclusion as: “His view was that the clear language, in particular of Section 2(c), meant that credit only had to be given, by way of netting, for an amount that was payable, and not for an amount that, because of an unfulfilled condition precedent under Section 2(a)(iii), was not payable.” This issue was one of the issues raised by the appeal of Pioneer in Marine Trade, which was not pursued.

In the present case, the issue does not arise directly, since, after November 2008, neither party made any payment, Pioneer because it did not have the financial means to do so and Cosco because it was under no obligation to do so because of Section 2(a)(iii). It follows that the question of netting did not arise after Section 2(a)(iii) took effect in November 2008. Whether netting would have been possible in other circumstances where Section 2(a)(iii) had taken effect is thus an academic question. It is of no more than marginal relevance to the issue of whether contingent payment obligations survive in the case of transactions which have reached their natural expiry.

In his Skeleton Argument, Mr Thanki recognised this and said that this point was not essential to his argument, but that the view of all the parties in Lomas was to be preferred. By the time of the hearing, perhaps goaded by Mr Jacobs’ submissions in his Skeleton Argument as to why my decision on the point in Marine Trade was correct, Mr Thanki had put in a detailed written Supplementary Note as to why my decision was wrong. He pointed out that my analysis, that netting was only available if there was a current, enforceable obligation to pay and not if the particular Settlement Sum was not payable because of non-fulfilment of the conditions precedent in Section 2(a)(iii), had been disapproved by textbook writers.

He drew particular attention to the intense criticism my decision had received in Henderson on Derivatives, a textbook by Schuyler K Henderson, an eminent American academic and consultant on derivatives law. Mr Henderson describes my decision variously as “remarkable”, “astonishing” and “bizarre”. He suggests that the flaw in my reasoning is a failure to recognise that, because Section 2(a)(i) says that it is “subject to the other provisions of this Agreement”, one of which other provisions is Section 2(c), both Section 2(a)(iii) and Section 2(c) should be read as referring back to Section 2(a)(i) independently and there is no reason to give primacy to Section 2(a)(iii) (see para. 20.18 of the second edition at p 1074).

However, with respect to Mr Henderson and Mr Thanki, who adopted his reasoning, my analysis in Marine Trade did not depend upon giving Section 2(a)(iii) primacy over Section 2(c). Assuming for present purposes that Mr Thanki is right in his submission that Section 2(a)(iii) is subject to, and logically anterior to, Section 2(c), Section 2(c) still only applies where, before netting occurs, there is an amount which “would otherwise be payable” and “an obligation to make payment of any such amount”, but for the netting process. In the light of Mr Henderson’s criticisms and Mr Thanki’s submissions, I have reconsidered the issue of what those phrases connote in Section 2(c).

Mr Thanki relied upon the definition of “payable” in Black’s Law Dictionary (9^th edition 2009): “(Of a sum of money or a negotiable instrument) that is to be paid. An amount may be payable without being due. Debts are commonly payable long before they fall due.” He also submitted that “payable” meant different things in different contexts in the ISDA Master Agreement, pointing to various references to payment being “due” or “due and payable” but it seems to me that he could not point to anything, at least in the 1992 Master Agreement with which the Court is concerned, which suggested that “payable” is being used anywhere in the Master Agreement in a contingent sense of “payable, although the payment obligation is suspended” or in the sense to which Black is referring.

As I said in Marine Trade, it seems to me from the internal references within Section 2(c) to “each party’s obligation to make payment” being “automatically satisfied and discharged” by payment of the balance after netting, that “payable” in Section 2(c) connotes an immediately enforceable obligation to pay. Furthermore, the “Unpaid Amounts” definition, which refers to “the amounts that became payable (or that would have become payable but for Section 2(a)(iii))”, makes it clear that the effect of non-compliance with the conditions precedent in Section 2(a)(iii) is that amounts did not become “payable” for the purposes of netting under Section 2(c). Thus, in so far as it is necessary to decide this point in the present case, I consider that, where the conditions precedent in Section 2(a)(iii) have not been satisfied, netting is not available to the Defaulting Party, for the same reasons as I gave in Marine Trade.

Accrued debts

The issue as to the status of the sums outstanding under the four FFAs where Cosco was the Seller, which terminated in December 2008, is related to the issue about netting. The starting point, as I see it, is that the Settlement Sums which Pioneer owed Cosco under those four transactions (together with default interest on them) were payable on a gross basis without the benefit of any netting, since the non-fulfilment of the condition precedent in Section 2(a)(iii) meant that no sums were payable by Cosco to Pioneer under the FFAs where Pioneer was the Seller.

Accordingly, since Pioneer had failed to pay any of the Settlement Sums due for October, November or December 2008 under those four FFAs, when they terminated at the end of December 2008 there was an accrued debt due to Cosco which, on ordinary contractual principles, was not extinguished by the termination of the contract. Furthermore, default interest continued to be payable on that outstanding debt, since Section 2(e) makes it clear that default interest will continue to be payable until the date of actual payment.

However, as I have already found above, merely because that accrued debt remained outstanding as at 14 December 2009, when there was Automatic Early Termination of Terminated Transactions, it does not follow that the four FFAs which terminated in December 2008 remained “outstanding” or “in effect”. Those words connote transactions where there are still obligations to be performed in the future. Equally, if all the transactions covered by the Master Agreement had reached their natural expiry date without Automatic Early Termination having occurred at all, the accrued debt would be outstanding but it would be a complete misnomer to describe any of the transactions as “outstanding” or “in effect”.

I agree with Mr Jacobs that the wording of the Master Agreement expressly recognises that there may be sums owing under the Master Agreement, without their being the subject of the close-out calculation. Thus the last sentence of Section 6(e) provides: “The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off.”

The definition of Set-off in Section 14 is expressly directed to the rights of set-off to which the payer under Section 6, in other words the party who pays pursuant to the close-out calculation upon Early Termination, is entitled. Since that definition also expressly provides that the right of set-off which the payer under Section 6 is entitled to exercise may arise under the Master Agreement itself, that is a clear recognition that there may be sums due under the Master Agreement which can be set-off but which fall outside the close-out calculation. It seems to me that sums which have accrued due and remain outstanding under transactions which have already terminated are an obvious example of sums which can be set-off pursuant to the Set-off provision, a further indication that the transactions which have already terminated at their natural expiry date are not, therefore, within the close-out calculation under Section 6.

I also agree with Mr Jacobs that there is nothing in the Default Interest provision in Section 2(e) which should lead to a contrary conclusion. The opening words of that provision: “Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction” are an indication that it is only where a particular Transaction is one which is subject to Early Termination, that the running of default interest under Section 2(e) will cease, and that there may well be other transactions which are not “relevant Transactions”, in respect of which Early Termination does not apply, where the obligation to pay default interest will continue to run.

That construction is supported by the wording of Section 6(c)(ii): “Upon the occurrence or effective designation of an Early Termination Date, no further payments under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement.” In my judgment, this is making it clear that it is only in respect of Terminated Transactions, that is those which are outstanding or in effect at the time of Early Termination, that the obligation to pay default interest comes to an end.

Pioneer contends that the use of the disjunctive “or” in Section 6(c) is an indication that Section 6 is contemplating that a transaction may be affected by Automatic Early Termination even if the only payments outstanding are ones under Section 2(e) for default of a past payment obligation and that that supports the overall contention that all the FFAs in the present case were subject to Automatic Early Termination and that all sums have to be brought into the wash-out calculation. This seems to me to place undue emphasis on the use of “or” in the light of what I have held is the meaning of “outstanding” and “in effect”. It seems to me that Section 2(e) has simply been included in this provision because the draftsman recognises that, in relation to any given Terminated Transaction, there may not only be outstanding future payment obligations (hence the reference to Section 2(a)(i)) but also default interest on past payments which should have been made. Neither the reference to Section 2(e) nor the use of the word “or” is intended to or does have any impact on which transactions fall within the definition of Terminated Transactions, to which alone this provision relates.

It follows that for all the reasons I have given, it is only the three FFAs (nos. 0410701, 037856 and 045828) which still had Contract Months to run as at Automatic Early Termination and thus outstanding obligations to be performed in the future which are to be taken into account in calculating the payment due upon Early Termination under Section 6(e) of the Master Agreement. The other eight FFAs fall outside that calculation, although Cosco is entitled to set off against the sum calculated under Section 6(e) the accrued debt of principal and default interest under the four FFAs where Cosco was the Seller.