Goldman Sachs International v. Videocon Global Ltd and another  EWHC 4267 (Comm)
Goldman Sachs International (GSI) has recently succeeded on an application for summary judgment against Videocon Global Ltd (Videocon) on somewhat unusual facts. The short judgment of Mr Justice Teare (the Judge) reflects the continuing ability of the 1992 ISDA Master Agreement to generate previously undecided points of dispute in relation to its construction, notwithstanding more than 20 years' use. It is interesting to note that major market participants continue to use the 1992 form of the ISDA Master Agreement.
Section 6(d) of the ISDA Master Agreement requires that notice of the amount due on early termination (and details of the account to which it should be paid) must be provided on or as soon as reasonably practicable following the occurrence of an early termination date. The Judge was required to decide whether GSI was entitled to summary judgment in circumstances where its notice was not served in compliance with that requirement.
GSI and Videocon entered into a number of currency swaps under the umbrella of an ISDA Master Agreement. The judgment does not specify which, but it appears from the extracts quoted by the Judge that the parties entered into an agreement in the form of the 1992 Master Agreement. GSI terminated that agreement on 2 December 2011 following Videocon's failure to meet various margin calls.
GSI provided a notice setting out the amount it sought (approximately US$4 million) on 14 December 2011, and later applied for summary judgment. At the hearing of such application (in September 2013), Videocon was held to be liable to GSI in principle, but the judge at that hearing also decided that GSI had failed to provide the "reasonable detail" of its calculations which section 6(d) requires. It therefore failed to obtain judgment, and did not serve a revised calculation until March 2014.
Having done so, it made a second application for summary judgment, which the Judge was required to consider.
Section 6(d) of the 1992 ISDA Master Agreement
The relevant parts of section 6(d) are as follows:
(i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations … and (2) giving details of the relevant account to which any amount payable to it is to be paid. …
(ii) Payment Date. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective. … Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate."
The parties' arguments
Videocon alleged that, on its proper construction, section 6(d) meant that service of a notice meeting the requirements of section 6(d) (including as to timing) was a condition precedent to any amount becoming payable on early termination.
GSI argued that Videocon was wrong, for four reasons:
- GSI's notice had indeed been served as soon as reasonably practicable after the early termination date (the Judge held that Videocon "plainly" had a real prospect of establishing at trial that this was not the case);
- even if notice was served late, the amount it specified would still be payable;
- the words "on or as soon as reasonably practicable after" in section 6(d) related only to the making of the necessary calculations of amounts due following termination, not to the requirement to communicate them to the other party; and
- GSI would in any case be entitled to recover the sum it sought from Videocon as damages, if it were unable to recover it as a debt.
The Judge rejected GSI's third argument, holding that the requirements of section 6(d) as to timing applied equally to the service of notices. In relation to GSI's fourth ground, the Judge confined himself to noting that the measure of damages to which GSI would be entitled might not be the same as the sum it sought to recover as a debt. In the event, however, he did not need to base his judgment on either of these matters, but focused instead on GSI's second argument.
Is the amount sought in a notice under section 6(d) still payable if the notice was served late?
The crux of this argument is, essentially, whether a notice which does not comply with the timing requirements of section 6(d) is "effective", for the purposes of sub-section (ii) of that section, such that the amount claimed in the notice is payable. The Judge held in this case that it was.
In order to determine when the notice became "effective", the Judge considered the purpose of the notice, as it could be understood from sub-section (i) of section 6(d). He held that the purpose of the notice was twofold: (a) to provide the paying party with an explanation of the sum claimed such that it could be understood and (if necessary) challenged; and (b) to inform the paying party of the account to which he or she should pay the amount sought.
The Judge's view was that once a notice met these two purposes, it was effective, such that the amount it claimed became payable. If such a notice did not comply with the requirements of section 6(d) as to timing, then it was late, and in breach of contract as a consequence, but it was not ineffective.
The Judge said in his judgment that the alternative approach (advocated on behalf of Videocon) was so lacking in commercial sense that the parties could not have intended it. GSI also made the point in its submissions that Videocon's construction would have the effect that, if notice were to be served so much as a day late, the receiving party would lose its entitlement to be paid.
Notices are often spoken of as being "valid" or "invalid", and it can be tempting to treat those terms as synonymous with "effective" or "ineffective". To be valid, a notice has to comply with any mandatory requirements as to its form or content. This judgment illustrates that a notice can be effective (the term used in section 6(d)), even if it does not comply with contractual requirements.
It is hard to argue with the proposition that some fairly clear wording would be needed in an agreement, were it intended that a party entitled to receive payment would be deprived of that right completely because of late service of a notice. On the other hand, it is also plainly unsatisfactory for there to be no effective sanction for failure to comply with a clear contractual requirement as to the timing of service of notices.
The response of the Judge to the latter point was that there is indeed an effective sanction, which is the right of the paying party to claim damages for breach of contract in respect of any loss suffered as a result of the notice being served late. No argument was advanced by Videocon that it had suffered any such loss, but the Judge said that he did "not consider that it can be said that lateness can never cause loss. All will depend upon the circumstances of the case."
It may be that the provisions of section 6(d) in relation to payment of interest will give rise to claims for damages in similar future cases. Interest is payable from the early termination date until the date of payment, irrespective of when an effective notice is actually served. Where the ISDA Master Agreement is terminated for an event of default, the paying party will need to pay interest at the default rate (the receiving party's cost of funding the sum, plus 1 per cent per annum). If the receiving party delays serving an effective notice, it could receive a windfall in the form of additional interest for which the paying party would not otherwise be liable, and which it cannot avoid.
While it is open to the paying party to claim damages in respect of any such loss, the reality must be that the Judge's conclusions on the meaning of section 6(d) give the receiving party the whip hand. It is doubtful how many payers will consider it worthwhile to go through what will often be a laborious and intricate exercise of proving an entitlement to damages in these circumstances, with the accompanying uncertainty as to outcome and risk as to costs.
The judgment will, however, provide some comfort to those entitled to receive payment following early termination of an ISDA Master Agreement, that their rights will not be extinguished because of a technical failure to serve a timely notice.