Court provides guidance on rectification of swap agreement

In the recent case of  LSREF III Wight Ltd V Millvalley Ltd, the Commercial Court determined that a restructured swap agreement which erroneously referenced an earlier version of the International Swaps and Derivatives Association master agreement (ISDA) should be rectified to reflect the continuing common intention of the parties and in doing so correct the mistake.

The loan facility in question had been renegotiated and a restructured swap agreedPart of the restructured swap confirmation referred to the 1992 ISDA Master Agreement. However, the agreement that was executed by the parties was in the form of the 2002 ISDA Master Agreement.

Subsequently, the bank sought to rely upon additional termination event provisions which were only contained in the 2002 ISDA Master Agreement and which provided for an early termination amount to be paid. Following an assignment, the claimant argued that the defendant was obliged to pay an early termination amount. The defendant, however, argued that " the 1992 master agreement applied to both swap agreements and therefore no early termination was due."

The Court held "the reference in the restructured swap to the 1992 master agreement had been a mistake, but as a matter of construction it could not be concluded that the parties' objectively expressed intention had been for the restructured swap to be governed by the 2002 master agreement."

The Court highlighted that "it could not be said that something had gone so wrong with the language that there was a clear mistake that required correction." Further commenting that there "was no ambiguity or syntactical difficulty in construing the language used."

The Court further noted that "there had been a continuing common intention when executing the restructured swap confirmation that it should be governed by the 2002 agreement, and not only was there clear outward expression of that accord, but it had also been the defendant's  subjective intention that  that  should be so."  As  such the restructured swap was be rectified to refer to the 2002 Master Agreement and to reflect the parties' common intention.

Payment obligations may not be deferred in cases of alleged LIBOR rigging

In Deutsche Bank AG v Unitech Global Limited, the Court of Appeal (CoA) considered whether a borrower could defer payment of the minimum sum for which it would be liable whilst it pursued its claim for misrepresentation against its lenders.

Unitech Global Limited (UGL) entered into a $150 million facility and an interest rate swap with Deutsche Bank AG (Deutsche Bank) and several other lenders. Under the agreements, interest rates were calculated by reference to LIBOR.

When UGL defaulted on the loan, Deutsche Bank and the other lenders accelerated repayment of the facility. UGL alleged that Deutsche Bank had rigged LIBOR and that it had been induced to enter into the agreements by an implied representation that LIBOR was a genuine and objective market rate and consequently that Deutsche Bank would not manipulate it.

UGL claimed rescission. However, rescission required repayment of the principal sum lent under the loan agreement, less repayments made. Deutsche Bank therefore sought an order at first instance that UGL should make immediate payment into court of £120 million, being the minimum sum it would be obliged to repay even if successful.

The High Court refused to grant the order on the basis that the Civil Procedure Rules did not permit the award of an interim payment or the imposition of a condition upon the right to be able to defend the claim.

On appeal, whilst the CoA allowed UGL's case to continue, it decided that it did have power to order the immediate payment of £120 million into court, demonstrating that allegations of LIBOR rigging will not enable a borrower to defer its payment obligations.

The Goldman Touch

In Videocon Global Ltd & Anor v Goldman Sachs International [2016] EWCA Civ 130 the Court of Appeal (CoA) confirmed a decision at first instance that late service of an early termination notice under section 6(d) of the ISDA Master Agreement did not extinguish a repayment obligation.

In December 2011, following default by Videocon Global Ltd (Videocon), Goldman Sachs International Ltd (Goldman) terminated several currency swaps executed under an ISDA Master Agreement. Goldman served an early termination notice for the amount payable to crystallise the Agreement. Its subsequent application for summary judgment in September 2012 was refused where the calculation of the amount payable under the notice did not contain the "reasonable detail" as required.

As such, when Goldman served a second rectifying early termination notice upon Videocon in March 2014, it was claimed that this later notice was also invalid, not being served upon them under section 6(d) "as soon as [was] reasonably practicable" after the Early Termination Date. Videocon argued that they were not required to pay the amount due to Goldman.

The CoA considered that notice served under section 6 (d) must explain the sum claimed so that it can be understood and verified, and inform the paying party of the account into which the sum must be paid. Once these details were established, the notice was effective.

The CoA noted that where a notice was effective but not served "as soon as is reasonably possible" it did not avoid the obligation to pay the amount due. The clause did not operate as a condition precedent to paying the amount claimed. Rather, the breach would give Videocon a possible contractual claim for damages for any loss caused by late service of the notice.

It was stated that to follow Videocon's argument that late service of the notice would extinguish their obligation to pay  the debt owed to Goldman would be "commercially absurd".

Regulatory Decisions

Former equities trader pleads guilty to insider dealing

Damian Clarke, a former equities trader at Schroders Investment Management Limited, pleaded guilty at Southwark Crown Court to nine counts of insider trading.

Mr Clarke admitted dealing on the basis of inside information he obtained during the course of his employment at Schroders between 2003 and 2012. The total profits Mr Clarke made amount to at least £155,161.98.

A sentencing hearing is scheduled for 13 June 2016.

FCA continues action against Capital Alternatives

The FCA is continuing its action in the High Court against Capital Alternatives and several other firms and individuals over their promotion and operation of collective investment schemes.

The primary focus of the FCA's action is on two investment schemes­ African Land (also known as Agri Capital) and Reforestation Projects (also known as Capital Carbon Credits).

In February 2014, the High Court determined that these schemes were collective investment schemes which could not be lawfully operated by the defendants. The FCA is now continuing to deal with remaining aspects of the case, including the issue of misleading statements, which the FCA alleges were made to investors in relation to these schemes.

Phillip Boakes Sentenced for Failing to Pay Confiscation Order

Phillip Boakes was sentenced to 730 days’ imprisonment for failing to satisfy the full value of a confiscation order made against him.