Macquarie Bank Limited v Phelan Energy Group Limited

This is the hearing of the Claimant’s (Macquarie’s) application for summary judgment and for an interim payment.

The dispute arises out of a foreign exchange swap (USD being swapped for South African Rand or ZAR) on the terms of the ISDA 2002 Master Agreement dated as of 26 September 2019 between Macquarie and the Defendant (Phelan). I shall refer to this document as the Master Agreement and, together with the associated trades which were concluded, the Transaction. There is a dispute between the parties as to whether:

This is Macquarie’s second summary judgment application in these proceedings. The first proceeded on the basis that there was no issue to be tried as to whether or not the Transaction had been terminated, and sought payment of the amount which would have been due even if Phelan was correct in its contention that the trades had proceeded to their maturity date. That application did not proceed to judgment, because Phelan agreed to an order requiring it to pay the amount claimed (US$ 14,719,523.18) within a stipulated time period which has since been extended on an “unless order” basis.

Macquarie brings this further summary judgment application on the basis that, even if it is Phelan and not Macquarie who is right about the strike price for the ZAR payment due on 28 May 2021, there was nonetheless an Event of Default and Macquarie was entitled to and did terminate the Transaction on 4 June 2021. On this occasion, therefore, Macquarie invites the court summarily to determine the termination issue in its favour, while accepting that there remains a triable issue as to what the correct strike price is, and to order an interim payment in its favour in an amount equivalent to the Early Termination Amount as it would have been due had the Transaction been on the terms alleged by Phelan (the Alternative Early Termination Amount).

Macquarie and Phelan entered into the Master Agreement on 26 September 2019.

In June 2020, Phelan entered into four USD/ZAR swaps with Macquarie, which were rolled on a number of occasions, extending the expiration date until 14 May 2021.

Between 13 and 14 May 2021, there were emails and a telephone call between Macquarie and Phelan about the terms of proposed new trades, in which Macquarie initially proposed a ZAR strike price of 22.05 for the trade due to settle on 28 May 2021 (Macquarie’s email of 13.28 on 13 May 2021). There is a dispute between the parties as to whether that trade was concluded by reference to that strike price, or whether the deal was done by reference to a strike price of 22.16. It is the latter figure which appears in the trade recap email sent by Macquarie to Phelan at 12.44 on 14 May 2021, but the status of that document is in dispute. However, there is no dispute that a swap was concluded on 14 May 2021 for settlement on 28 May 2021 (the 28 May 2021 Settlement Trade).

On 28 May 2021 at 07.34, Macquarie emailed Phelan stating, “Macquarie Bank is due to receive ZAR 117,780,488.64” (a figure arrived at using the 22.16 strike price). Phelan responded at 15.49 stating “we hereby dispute the amounts stated in the email as being due and correct as we are unable to reconcile the amounts to the fully executed agreement and/or trade”.

On 31 May 2021, Macquarie sent Phelan a notice entitled “Transaction between [Macquarie] and [Phelan] with trade date 14 May 2021 and Reference TTD933K/23728873 (the ‘Transaction’)”, stating:

“We refer to the Transaction. We hereby notify that you have failed to make a payment to Macquarie in the sum of [ZAR 117,780,488.64] [square brackets in original] which was due on 28 May 2021 in respect of the Transaction …

A failure to make this payment to Macquarie on or before the first Local Business Day after this notice is given to you will constitute an Event of Default under Section 5(a)(i) of the ISDA Agreement”.

(the Disputed Default Notice).

On 31 May 2021, Phelan replied stating it “does not confirm that the amount quoted in the .. email [of 31 May 2021] is correct, and accordingly disputes this matter”.

Macquarie provided a response on 2 June 2022, and stated that it was reserving its right to designate an Early Termination Date under the Master Agreement. The following day, Macquarie sent Phelan a letter entitled “Designation of Early Termination Date” which stated:

“We hereby give you notice, pursuant to Section 6(a) of the ISDA Master Agreement that we designate 4 June 2021 as the Early Termination Date in respect of all outstanding Transactions under the ISDA Agreement as a result of the aforementioned continuing Event of Default”.

(the Disputed ETDN).

Phelan replied the following day, contending that in the light of its notice of dispute of 31 May 2021, it was not open to Macquarie to designate an Early Termination Date (a contention no longer pursued).

On 9 June 2021, Macquarie sent Phelan a document entitled “Notice of Early Termination Amount|” which stated:

“Please find attached in the schedule (‘Schedule’) a statement specifying the payments due in respect of the Early Termination Date. This notice constitutes the statement required by Section 6(d)(i) of the Agreement … Please make payment of USD 22,643,860.22 (the ‘Termination Payment Amount’).”

Phelan contends that:

Phelan does not dispute that, on its case as to the terms of the 28 May 2021 Settlement Trade, the sum of ZAR 117.2m was payable on 28 May 2021 and was not paid. The difference between the amount which Macquarie says was due, and the amount which Phelan accepts was due, is some US$42,000.

For purposes of the determining the first part of this application, the following provisions of the ISDA Master Agreement are material:

I was referred by the parties to various authorities commenting on the interpretation of the ISDA Master Agreement which emphasise the considerations which need to be kept in mind when interpreting that agreement. I have had particular regard to the following considerations:

For an Event of Default of the kind specified within Section 5(a)(i) to occur:

The issue of whether the notice required by Section 5(a)(i) needed to specify the outstanding amount of the payment at all, and what the consequence of including an incorrect figure would be, is ultimately a matter of construction of two documents:

I accept that the issue of whether or not an Event of Default has occurred is of fundamental importance under the ISDA Master Agreement. As Mr Dhillon KC pointed out, the effect of an Event of Default will be:

Further, the “period of grace” for curing any Potential Event of Default within section 5(a)(i) is very short, an Event of Default occurring if the payment or delivery is not made on the next local business or delivery day after a valid notice (section 5(a)(ii), in comparison, providing a 30 day grace period).

Notwithstanding the significance of Events of Default and of the requirement of a notice before a Potential Event of Default will crystallise into an actual Event of Default, the terms of sections 5(a)(i) and (ii) offer limited express guidance as to the contents of such a notice before it will be effective. This is to be contrasted with:

I accept that the grace period which service of a valid notice triggers is a relevant consideration when determining what is necessary for a notice to be effective. In Deutsche Bank AG v Sebastian Holdings Inc [2013] EWHC 3463 (Comm), [1225]), Cooke J observed that “the whole point of section 5(a)(ii) and section 2(a)(iii) is to provide an opportunity to remedy the failure which gives rise to the Event of Default or Potential Event of Default”. A statement to similar effect was made by Andrews J, in a judgment principally concerned with the form of the notice required by section 5(a)(ii), in Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch), [97]. I accept Mr Dhillon KC’s submission that the fact that the notice is intended to give a window for remedying the receiving party’s failure is relevant when considering what a valid notice requires, as is the length of the grace period.

In my view, a valid notice under section 5(a)(i) must be such as to:

This follows from:

I do not accept, however, Mr Dhillon KC’s argument that Section 5(a)(i) requires the notice itself to contain express and wholly accurate statements of the following matters in order to be effective:

If accepted, that argument would involve a number of highly improbable consequences:

There is no language which requires such a construction, nor does the nature of the ISDA Master Agreement compel it. At points in his submissions, Mr Dhillon KC appeared to accept that minor errors in identifying the trade or stating the outstanding amount would not be fatal to a Default Notice, but no clear test for distinguishing between fatal and non-fatal errors was given. The requirements of certainty which I accept should influence the construction of the ISDA Master Agreement, and in particular the Event of Default provisions, are satisfied by the requirement that the notice be such as to clearly, readily and unambiguously to the reasonable recipient in the context in which it is received communicate the matters in [24] above. As Lord Hoffmann observed in Mannai, 774, the issue of whether the required information has been communicated unambiguously does not solely depend on the language used alone, and there can be an unambiguous communication of information even when the communication in question involves a mistake.

This is not, as Mr Dhillon KC submitted, to confuse the two different stages of the analysis identified in [19] above. Rather it reflects the fact that, in contracting for the provision of “notice of such failure” but without specifying any express requirements for the contents of the notice, the parties are to be taken to have been concerned with what the notice would communicate to the reasonable recipient in the context in which it is received.

Before turning to the Default Notice, it is helpful to consider the context in which the reasonable recipient would have received and read it, assuming for this purpose the correctness of Phelan’s case as to the spot rate to be used:

Against that background, what would the reasonable recipient of the Disputed Notice have understood the position to be? I am satisfied that the following matters would have been unambiguously clear:

Reverting back to the requirements referred to at [24] above, it would, therefore, have been immediately and unambiguously clear to Phelan that:

As a further means of developing his argument, Mr Dhillon KC submitted that, through its use of the internal Macquarie reference which appeared on the unsigned Confirmation using the wrong strike price, and by claiming an amount that was payable which was not in fact payable under the 28 May 2021 Settlement Trade, Macquarie had specified the “wrong trade”, and that the Disputed Default Notice was defective for this reason. However:

Phelan contends that the Disputed ETDN was invalid because there had been no Event of Default. That argument fails for the reasons set out above.

The result is that the Transaction was terminated, and the Early Termination Date was 4 June 2021.

Macquarie’s Particulars of Claim pleads:

Faced with these statements of case, Phelan contends as follows:

I will consider the last – substantive – objection first. Where a party makes an error in its Early Termination Amount calculation, is the effect that it has no right to recover any such amount as a debt at all? To answer that question, it is necessary to look more closely at what is sometimes referred to as the architecture of the ISDA Master Agreement:

In circumstances in which the relevant debt arises as from the Early Termination Date and prior to any calculation under the ISDA Master Agreement, it would be surprising if the effect of an error in one party’s calculation was sufficient to prevent the debt becoming due. As Gloster LJ noted in Videocon Global at [57]:

“The point to make in the present context is that the accrual of the debt obligation in respect of the amount due in respect of an Early Termination Date necessarily arises prior to the service of the statement referred to in section 6(d) (i) . Therefore, it cannot possibly be subject to the type of condition precedent for which Mr Wheeler contended, namely service of a statement compliant with all the requirements of section 6(d)(i) , including the ‘as soon as reasonably practicable’ requirement. The debt obligation in respect of the amount due in respect of an Early Termination Date cannot be discharged simply by reason of a failure to serve a statement that is compliant with all the requirements of section 6(d)(i)” (emphasis added).

An important feature of the ISDA Master Agreement is that a party entitled to an Early Termination Amount is, within certain limits, entitled to quantify the amount of the payment after the debt has arisen. Those limits include the requirement to act “in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result” (which appear in the definition of “close-out amount” in section 14). If no such calculation is performed, it is clear that this does not render the debt which has accrued forever unquantified or unpayable. As Rix LJ noted of the valuation procedures in Socimer International Bank Ltd v Standard Bank London Ltd (No 2) [2008] EWCA Civ 116 (a case not concerned with either form of ISDA Master Agreement) at [65]:

“The second issue referred to above is what is to happen if the contractual discretion ought to have been exercised but has not. That is answered in this court by Cantor Fitzgerald International v. Horkulak [2004] EWCA Civ 1287. There an employee who had been wrongly dismissed sought compensation to include a discretionary bonus which he might otherwise have been awarded. This court held that the court's task in such a case is to put itself in the shoes of the decision-maker”.

The effect of the invalid calculation of the Early Termination Amount, therefore, will frequently be that the court will determine the amount due itself. This was the course followed by Burton J in Lehman Brothers Finance SA (in liquidation) v Sal Oppenheim Jr & Cie [2014] EWHC 2627 (Comm), [36] and by Robin Knowles J in Lehman Brothers Special Financing Inc v National Power Corp [2018] EWHC 487 (Comm). At [51], Robin Knowles J summarised the position as follows:

“In my judgment on the true interpretation of the 2002 ISDA Master Agreement the position is as follows:

(a)

With its letter dated 17 October 2008 NPC caused a debt obligation to arise and with delivery of NPC's letter dated 26 January 2009 an obligation to pay arose.

(b)

These are significant contractual events and once they have arisen the relationship between the parties is thereafter affected, and not reversible (save by agreement, or in some cases an order of a court or tribunal).

(c)

NPC was required and permitted to make a determination.

(d)

NPC made a determination that US$3,461,590.93 (plus interest and aside from Expenses) was payable. The Annex showed how that determination had been calculated. This completed its obligation and right to make a determination.

(e)

If there is an error in the determination then (absent agreement) the court or tribunal chosen by the parties will be left to declare that and to state what the Close-out Amount would have been on a determination that was without error.

(f)

However, the Determining Party is also a party to the contract. It can make and accept proposals in its capacity as a party to the contract, including to correct an error in the determination.

(g)

The revised calculation statement may still serve as evidence to inform the question of whether there was an error, and the question what the Close-out Amount would have been on a determination that was without error …”

In my view, therefore, if Phelan’s case as to the 14 May 2021 Trade is accepted, then the Alternative Early Termination Amount is due from Phelan to Macquarie as a debt, and due from 4 June 2021 as the validly designated Early Termination Date.

Is such a claim open to Macquarie’s case on its statement of case? While the Particulars of Claim do not reflect the distinction between debt and damages as faithfully as they might, I am satisfied that the cause of action is pleaded and that there is no prejudice to Phelan in allowing Macquarie to advance such a claim at this hearing:

However, once it is recognised that the same cause of action is in play on both Macquarie’s and Phelan’s cases, it would not be appropriate to grant summary judgment in the amount due on Phelan’s case (which would have the effect that the relevant cause of action would merge in the judgment). That would not present an obstacle to ordering an interim payment in any amount which, on my findings, would be indisputably due at trial even if Macquarie’s case as to the strike price is rejected.

It follows that I am satisfied, on the findings I have made, that, even if Phelan succeeds in its case as to the terms of the 28 May 2021 Settlement Trade, the Alternative Early Termination Amount is due from Phelan to Macquarie.

Mr Hobson argued that even though a debt may have arisen from Phelan to Macquarie on this hypothesis, the debt was not payable. He submitted as follows:

Mr Hobson supported his argument by reference to the following statement in Gloster LJ’s judgment in Videocon Global:

“[59] Before the judge Mr Yeo, appearing on behalf of Goldman, accepted in the light of the decision of Mr Knowles QC that pursuant to section 6(d) the sum claimed only became ‘payable’ once adequate details of the sum claimed had been provided … In my judgment that concession was not correct. Likewise I do not agree with the judge's conclusion as set out in paragraph 16, that once ‘sufficient details’ of both the calculation of the sum claimed and of the bank account into which the sum was to be paid ‘the notice is … effective’. The use by the draftsman of the word ‘notice’, in conjunction with the word ‘effective’, in section 6(d)(ii) in order to ascertain the Payment Date must, in my judgment, be a reference to the language of section 12 , which expressly addresses the question of the precise day upon which a notice is deemed to be ‘effective’. The words used in section 6(d) (ii) (i.e. ‘on the day that notice of the amount payable is effective’) are not, in my view, addressing a wholly different concept of ‘effectiveness’ – namely the concept that a section 6(d)(i) statement (or notice) can only be ‘effective’ once all the details required to be contained in such a statement are supplied, a date which may be unclear and open to argument. On the contrary, section 6(d)(ii) is referring to when, in accordance with the provisions of section 12 , the notice is ‘effective’, viz. a specific delivery date, identified by the provisions of section 12.

…

[62] In the present case the letter dated 14 December 2011, and delivered on that date clearly set out not only the amount payable, but also Goldman's calculations of the amount payable. The fact that, according to Mr Knowles QC, such calculations were not sufficiently detailed to satisfy the contractual requirements of section 6(d) (i) , did not, in my judgment, prevent the letter constituting an adequate ‘notice of the amount payable’ for the purposes of identifying a Payment Date under section 6(d)(ii) ….

It is to be noted that Gloster LJ expressly rejected the suggestion that the word “effective” in section 6(d)(ii) was addressing the quality of information provided as to the calculation of the Early Termination Amount, saying it was aimed at “a wholly different concept of effectiveness”, namely that dealt with in section 12(a) of the ISDA Master Agreement, which identifies the point in time at which particular forms of notice will be treated as having been received, and effective in that sense. I accept that the passages in bold lend some support to the argument that notice of the amount payable is necessary for the debt to become payable. However, Gloster LJ did not need to consider the legal consequence of a notice which was not properly calculated but which was effectively received. Further, she emphasised the commercial unlikelihood of a scenario in which a debt which became due never became payable.

Gloster LJ referred with approval to the decision of Aikens J in ANZ Banking Group Ltd v Société Générale [2000] CLC 161, another case concerned with the 1992 ISDA Master Agreement. Section 5(b)(v) had been supplemented in that case by an additional termination event for “Russian market events”, with both parties being treated as affected parties and with the “loss” measure to be used in calculating the amounts payable on termination. One party (SG) served a notice of a “Russian market event”, contending that both parties were required to serve their calculation of loss or gain. The parties agreed an early termination date of 24 September 1998, and provided their respective calculations on 1 October 1998. A significant feature of the case was that the net amount payable was dependent on the combined effect of the calculations of both parties. ANZ disputed SG’s calculation, and the court upheld that challenge. A dispute arose as to which interest rate was payable to ANZ, the contractual termination rate or the default rate. SG submitted ([13]):

“[A] party does not have the right to be paid on the ‘payment date’ in accordance with s. 6(d)(ii) until a notice of the amount payable is effective. But in the present case neither side produced a notice of the amount payable because of the dispute as to how the losses of SG should be calculated. The calculation of SG, even if it is ultimately found to be wrong, was, in the words of the ‘loss’ clause, ‘reasonably determined [by SG] to be its total losses and costs’. Therefore if the parties, in good faith, fail to agree on the amount payable in accordance with s. 6(e), and so no effective notice was produced, then no ‘payment date’ can be determined. Therefore the ‘payment date’ will only arrive upon the court's determination of the proper basis for calculating SG's losses. Until that time SG is not in default and so does not have to pay the ‘default rate’.”

Aikens J rejected that argument. He noted at [15]:

“There is nothing in s. 6(d)(i) or (ii) or s. 12 (which defines how a notice may be given under the contract: e.g. in writing or by telex or e-mail, and the point at which it is effective) to indicate that the two parties' statements must agree before there can be a notice of the amount payable to one party or the other. This is not surprising, as in some cases there will only be one ‘affected party’ (see s. 6(e)(ii)(1)) and so only that party will have to make a calculation and serve a statement.”

At [16], he rejected the argument that the amount only became payable when both parties had served their statements, such that the net amount payable was known, concluding:

“I think that time runs once a calculation has been served stipulating the amount payable to one party as set out in s. 6(d)(i) and (ii), provided that the calculation is either agreed or (retrospectively) once the court ultimately finds that the calculation served is correct. If it were otherwise one party could always claim that the ‘payment date’ could never arrive if the calculation of the amounts due were disputed, provided that party's calculation was made in good faith.”

(emphasis added).

In this passage, Aikens J does suggest that time will only run from the service of a notice which contains a correct or undisputed amount. I do not understand Aikens J to have determined in the scenario before him that in the absence of agreement, there would be no cause of action unless and until the court determined that the amount claimed was correct, which would then retrospectively spring into existence from an earlier point in time. That would raise obvious issues as to precisely what claim the litigating party had in the period prior to judgment in its favour. Rather, Aikens J was making the point that the court’s determination would retrospectively confirm the correctness of the notice.

Aikens J did not have to consider the position where a notice is served which the court subsequently determines was wrongly calculated, and the court arrives at its own calculation of the amount payable on the basis set out at [40] above. While it cannot be the case that in such a scenario the debt which had accrued due never becomes payable (cf. Gloster LJ’s concern at [64(iii)] of Videocon), the date when the amount became payable is capable of being of economic importance because of the interest rate provisions of the ISDA Master Agreement. Section 9(h)(ii)(2) provides that interest on the Early Termination Amount runs at the “Applicable Close Out Rate”. Under the Section 14 definitions:

There are a number of ways of addressing the consequences of an error in the calculation of the Early Termination Amount:

The late stage at which the correct legal classification of Macquarie’s claim came into focus meant that there was no sufficient opportunity at the hearing to explore the first two alternatives, and it would not be appropriate to resolve those issues without the benefit of full argument, given their potential impact on such a widely used form. In these circumstances, I have decided to proceed for the purposes of the interim payment application on the basis that Macquarie would only be entitled to obtain a judgment at trial for the Alternative Early Termination Amount if notice of that amount had been served so as to make it clear beyond scope for argument that such an amount was payable (there being no suggestion that this has already been done), albeit without prejudice to its case as to the validity of the notice of the Early Termination Amount it has already given.

Subject to the quantum issues which I address below, I am willing to adjourn the interim payment application to allow Macquarie to serve such a precautionary notice in respect of its claim to the Alternative Early Termination Amount.

Finally, Phelan raises two quantum issues.

The first is to suggest that the court cannot be confident that the figure for the Alternative Early Termination Amount as calculated by Macquarie will be recoverable at trial, pointing to the fact that the parties had agreed, and on 4 May 2022, Mr Justice Andrew Baker had ordered the parties, to exchange expert evidence as to the appropriate spot rate which is due to be exchanged on 28 October 2022.

However, in its application of 14 April 2022, Macquarie made clear the basis on which it contended that it had used the spot rate most favourable to Phelan, and exhibited the relevant documents. Phelan served no evidence in response. Having failed to answer this aspect of Macquarie’s claim, it cannot now resist an interim payment on the basis that something may come out of the woodwork in the expert evidence. This does not render the order for expert evidence unnecessary because it will still be necessary at trial to determine whether Macquarie is entitled to more than the amount for which it seeks an interim payment.

Second, by way of a late developing point, it was said that there was reason to believe Macquarie had made a “highly material” (but unquantified) gain on a hedging contract it had taken out in relation to its exposure to Phelan, and that it is arguable that such a profit needs to be brought into account when calculating the Alternative Early Payment Amount. In this context, Mr Hobson relied upon the definition of “Close-out Amount”, and in particular the words:

“Without duplication of amounts calculated based on information described in clause (i), (ii) or (iii) above, or other relevant information, and when it is commercially reasonable to do so, the Determining Party may in addition consider in calculating a Close-out Amount any loss or costs incurred in connection with its terminating, liquidating or re-establishing any hedge related to a Terminated Transaction or group of Terminated Transactions (or any gain resulting from any of them”.

Mr Hardwick KC objected that if there had been such a gain, and if it had to be brought into account in the calculation of the Early Termination or Alternative Early Termination Amount (neither of which were admitted), the maximum amount was of the order of US$165,000. However, there was no evidence supporting this figure. In the absence of such evidence, but having regard to the circumstances in which the point arose and the fact that experts’ reports will be exchanged on 28 October 2022, I decided to adjourn this aspect of the interim payment application, with liberty to restore once the expert reports have been exchanged.

In these circumstances, the parties are asked to agree declarations to be recorded in an order now reflecting my determinations that, if the strike price for the 28 May 2021 Settlement Trade was 22.05, then:

Macquarie’s application for an interim payment is otherwise adjourned with liberty to restore in relation to the following issues: