Payment to the wrong entity did not discharge a liability under an ISDA Master Agreement but the intended recipient was estopped from claiming payment itself.

UBS and Kaupthing Singer Friedlander (KSF) entered into a foreign exchange trade under the 1992 ISDA Master Agreement. One of the payments to be made under the trade was US$65 million from UBS to KSF. However, UBS mistakenly paid this sum to JP Morgan Chase (JPMC) with instructions to credit it to the account of Kaupthing Bank (KhF), KSF’s parent entity.

KSF and KhF both became aware of the error on the day of payment, but they did not tell UBS. Instead, they made arrangements to transfer the sum from KhF to KSF. UBS sent corrected instructions several days later, but before the sum was moved from KhF to KSF both banks collapsed into administration.

UBS then terminated the Master Agreement and calculated a close out amount that excluded the US$65 million (under the ‘Second Method and Loss’ option in the ISDA Master Agreement). KSF accepted the close out amount. Eventually, the administrators noticed the discrepancy and started proceedings to recover the US$65 million from UBS.


Andrew Smith J held that KSF as the intended recipient was estopped from denying that the payment had been discharged, although the payment by UBS had not in fact been a good discharge of the debt.

With regard to the original payment, Smith J considered that the essential point was whether, in accordance with the ISDA Master Agreement, the payment had been made ‘in freely transferable funds’. This means that they must be credited to the account specified for receiving payment, so that the payee has control over the money following payment. UBS’s payment to KhF did not satisfy this requirement. Although the ISDA Master Agreement specified KSF’s account at JPMC, this did not constitute JPMC as an agent to receive money on behalf of KSF.

Smith J also rejected alternative arguments that KhF received the money as agent and that this was ratified by KSF. There was no act by KhF which could be ratified: receiving the money was not an act done by it. Nor did KSF elect to abandon a claim against UBS when it asked for the money to be transferred from KhF.

Smith J dealt shortly with the argument that acceptance of the close out amount was in satisfaction of all outstanding claims. In accepting the amount, the administrators stated that they were not thereby abandoning other claims. Smith J expressly refused to give a view as to whether satisfaction of all claims would otherwise be an implied term in the ISDA close out arrangements generally

UBS’s final set of arguments were based on estoppel and these were successful. Smith J held that there was an estoppel by convention and, in addition, an estoppel by acquiescence or even by representation which prevented KSF from claiming that the sum had not been discharged. The test that applied to all forms of estoppel was unconscionability. Essentially, if KSF believed that the debt had not been discharged, it had not behaved honestly or responsibly in failing to contact UBS. UBS had acted to its detriment by not making any effort to recover the money from KfH as the wrong recipient. Accordingly, the test of unconscionability was satisfied.

Smith J also rejected an argument that the estoppel should only extend to the amount of the detriment. Although this limit might be appropriate for a restitutionary claim, it did not apply in the current case.


Although the judgment is of interest in dealing with the increasingly common occurrence of an electronic payment going astray, its relevance to construction of the ISDA Master Agreement is limited. Smith J avoided considering whether there was an implied term that acceptance of a close out amount calculated in respect of an ISDA Master Agreement constituted a discharge of all claims outstanding between the parties in respect of those agreements. He also refused to allow a late change to pleadings that would have raised a further argument: that UBS’s determination of ‘Loss’ was unreasonable, or otherwise contrary to the ISDA Master Agreement, because it left the US$65 million out of account.

The only area where he gave general guidance was in determining what constituted a payment under the ISDA Master Agreement: an amount to be paid ‘in freely transferable funds’ must come under the control of the payee.

Smith J’s principled treatment of estoppel emphasises the concept of unconscionability as a common requirement for every flavour of estoppel. However, the ‘pro tanto’ argument: that the estoppel should only apply to the extent that there has been a detriment, was dealt with only briefly in the judgment and may need to be revisited.

Although estoppel saved UBS in the particular circumstances, it is clear from this case that recovering a payment made to the wrong payee in error can be fraught with difficulty and the legal basis for doing so can be obscure, leading to uncertainty.