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BANKING LITIGATION NOTES
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COMMERCIAL COURT DISMISSES CHALLENGE TO EXERCISE OF OPTIONS IN SWAP
CONFIRMATIONS INCORPORATING 2000 ISDA DEFINITIONS
CATEGORIES
This post is part of the following categories:
Contractual Construction, ISDA (and other) Master Agreements
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March 18, 2020
The Commercial Court has dismissed a challenge to the exercise of options
contained in five extendable interest rate swaps which incorporated the 2000
ISDA Definitions: Alfred Street Properties Ltd v National Asset Management
Agency [2020] EWHC 397. The challenge was brought on the basis that notice was
either not given by a contractually prescribed method or at all, despite the
resultant swap transactions having been performed to term without challenge by
either party.
The decision provides some helpful guidance on the approach to contractual
interpretation of the ISDA Master Agreement and the 2000 Definitions. The court
noted that while a strict approach, favouring clarity, certainty and
predictability is required in interpreting the terms of standard market
agreements, any questions as to incorporation and variation of such provisions
should be interpreted according to the recognised principles of general
contractual interpretation as confirmed by the Supreme Court, e.g. in Wood
(Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24 (see
our litigation blog post).
Adopting a “unitary” approach, which involves an iterative process by which
rival interpretations are checked against the provisions of the contract and the
commercial consequences investigated, the court considered (in particular)
Article 10 of the 2000 Definitions (which sets out the definitions of “Option
Transaction” and “Swaption”). The court held that there is no requirement under
Article 10 for parties to use the precise name or label “Option Transaction” or
“Swaption” in the confirmation evidencing the swap transaction. It is sufficient
for a transaction to be identifiable as such, e.g. by defining or describing
either the transaction or its operation, in terms which “make it clear that it
falls within the provisions dealing with those transactions”.
The key parts of the decision are considered below.
Background
Alfred Street Properties Limited (“ASPL”) entered into facilities totalling
£111.5 million with Anglo Irish Banking Corporation, together with five
extendable interest rate swaps to hedge its interest rate exposure under the
facilities (the “Swaps”). The National Asset Management Agency (“NAMA”)
subsequently acquired the bank’s interests in the loans and the Swaps. For
convenience, in this blog post the bank’s rights and obligations under these
documents are referred to as belonging to NAMA.
Each of the confirmations relating to the Swaps (each a “Confirmation”)
incorporated the 2000 ISDA Definitions and was governed by the 1992 ISDA Master
Agreement (Multicurrency-Cross Border) (the “ISDA MA”).
The Confirmations provided, amongst other things, that NAMA had the right, but
not the obligation, to extend the Swaps by 11.00am (London time) on 2 April 2012
(the “Options”). In the event that NAMA exercised that right by the specified
time and date, the Swaps would be extended on the same terms for a further three
years, save that ASPL would pay an increased fixed rate.
NAMA sought to exercise the Options (via its agent) on 2 April 2012 at 9.15am by
telephone (the “Notice Call”). Thereafter, ASPL made quarterly payments to NAMA
on the assumption that the Swaps had been duly extended, totalling £4,778,289.56
(the “Swap Payments”).
The claim
A year after the term of the Swaps expired, ASPL alleged that NAMA’s exercise of
the Options was invalid and sought restitution of the Swap Payments plus
interest. Proceedings were commenced in January 2017 in which ASPL claimed that:
1. NAMA was not entitled under the terms of the Confirmations to notify ASPL of
the exercise of the Options by telephone. Whilst, s.12.2 of the 2000
Definitions allowed for notice of the exercise of Options to be provided
orally, including by telephone, ASPL argued that the s.12.2 procedure was
not engaged because the Confirmations did not expressly identify (using
capitalised terms) that the transactions in question were “Option
Transactions” or “Swaptions”. Instead, ASPL asserted that NAMA should have
given notice in accordance with s.12(a) of the ISDA MA, which did not allow
for notice by telephone. Alternatively, ASPL argued that, even if the s.12.2
procedure in the 2000 Definitions was engaged, exercise of the Options by
telephone was not permissible as the Confirmations did not include a
telephone contact number for ASPL, only a postal address (the “Notice
Issue”); and
2. NAMA’s agent did not actually exercise the Options on the Notice Call but
merely indicated NAMA’s intention to exercise the Options (the “Intention
Issue”).
Decision
The court dismissed the claim in its entirety.
The Notice Issue
The court noted that while a strict approach, favouring clarity, certainty and
predictability is required in interpreting the terms of standard market
agreements such as the ISDA MA or 2000 Definitions, any question as to
incorporation and variation of such provisions should be interpreted according
to the recognised principles of general contractual interpretation. It cited the
Supreme Court’s decisions in Rainy Sky SA v Kookmin Bank [2011] 1 UKSC 50,
Arnold v Britton [2015] UKSC 36 and Wood v Capita. The court emphasised the
“unitary” approach to contractual interpretation in Rainy Sky and Arnold, which
involves an iterative process by which rival interpretations are checked against
the provisions of the contract and the commercial consequences investigated.
Applying this approach, the court rejected ASPL’s arguments, finding that NAMA
was entitled to give notice to ASPL by telephone under s.12.2 of the 2000
Definitions. The key reasons given by the court were as follows:
1. The court held that Article 10 of the 2000 Definitions, which sets out the
definitions of “Option Transaction” and “Swaption”, simply requires that a
transaction be identifiable as such in the confirmation evidencing the swap
transaction (e.g. by defining or describing either the transaction or its
operation, in terms which “make it clear that it falls within the provisions
dealing with those transactions”). It said there was no requirement to use
the precise name or label “Option Transaction” or “Swaption”. The court
found that the terms of the Swaps set out in the Confirmations “clearly and
obviously” showed the transactions were “Option Transactions” because of how
they were described – even though the defined (capitalised) terms were not
used. Accordingly, s.12.2 of the 2000 Definitions was the correct procedure
for NAMA’s exercise of the Options.
2. The court considered, obiter, the alternative scenario if its conclusion at
point (1) above was wrong, namely whether the s.12.2 procedure could still
apply, or whether notice had to be given in accordance with s.12(a) of the
ISDA MA which did not allow for notice to be given orally. The court
commented that a textual analysis of the Confirmations suggested the s.12.2
procedure could still apply because:
12. Even if the Options were not identified as “Option Transactions”, the
s.12.2 procedure had been incorporated into the Confirmations – in
particular because the Options and their terms were structured solely by
reference to terms defined in Articles 11 and 12 of the 2000
Definitions.
13. For the s.12(a) ISDA MA method to apply, the parties would need to have
set out contact details in a Schedule to the Confirmations which they
had not done. In the absence of contact details, only the s.12.2
procedure was workable.
14. The broader business context of the Confirmations also supported the
conclusion that the parties had chosen to adopt the s.12.2 procedure.
The decision to exercise an option by 11am on a particular day, would be
highly sensitive to market movements and may be made at the last minute;
that meant NAMA’s ability to exercise the Options orally made far more
business sense than the alternative which would have required notice by
post.
3. The court also rejected ASPL’s argument that, as the Confirmations only
specified a postal address and not a telephone number, notice by post was
the only method permitted under the s.12.2 procedure. The parties could use
the s.12.2 procedure irrespective of whether telephone contact details had
been provided. S.12.2 expressly permitted oral notification, so the
inclusion of a postal address did not implicitly exclude the other notice
methods to which s.12.2 referred. In any event, the court found that the
postal address had been included as an address for the Confirmation to be
sent, rather than as an address for notice under s.12.2.
The Intention Issue
The court considered that, to decide whether the Options had actually been
exercised on the Notice Call, the test was whether a reasonable person in the
position of ASPL’s Head of Finance (ASPL’s representative on the Notice Call),
with knowledge of the relevant circumstances, would have understood during the
Notice Call, that NAMA was exercising the Options.
As the transcript of the Notice Call showed, NAMA’s agent stated that NAMA would
be exercising the Options; identified the Swaps in question (but not discussed
the terms relevant to the extension); and stated that he would follow up with a
formal confirmation.
The court found that NAMA’s agent’s words were “exactly what would be expected
of a party…exercising an option in a trade…”. The context, including the fact
that the call took place during the limited window when the Options could be
exercised, and the wording of a confirmation email sent by NAMA’s agent to
ASPL’s Head of Finance after the Notice Call, also supported the argument that a
reasonable person in the position of ASPL’s Head of Finance would have
understood that the Options were being exercised.
Conclusion
Accordingly, the court found that the Options had been validly exercised and the
Swaps extended. The court further found on an obiter basis that – in the absence
of the Options having been validly exercised – NAMA would have had defences of
estoppel by convention or by conduct, or change of position, given the parties’
performance of the Swaps to term.
Rupert Lewis
Partner
+44 20 7466 2517
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Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948
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Nic Patmore
Associate
+44 20 7466 2298
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