The High Court has recently considered the interpretation of Section 6(a) of the 1992 ISDA Master Agreement: Grant & Ors v WDW 3 Investments Ltd & Anor [2017] EWHC 2807 (Ch).

The judgment considered the situation where the innocent party to a bankruptcy event of default under Section 5(a)(vii) of the 1992 ISDA Master Agreement chose not exercise its Section 6(a) right to terminate certain interest rate swaps (and there was no automatic early termination). The court held that, when that original innocent party itself subsequently triggered an event of default under the swaps, it could be served with a Section 6(a) notice to terminate and was liable to pay an early termination payment, notwithstanding the original event of default (to which it was the innocent party and which was continuing).

This decision should serve as a reminder to parties to derivative contracts governed by ISDA, underlining the importance of decisions taken following an event of default. Innocent parties to such events should take account of their options to terminate, and weigh those options against their own willingness and ability to continue to comply with their obligations under the derivative contracts.

It will also be of interest to those drafting derivative contracts, particularly as to whether or not to specify automatic early termination to their ISDA Master Agreement. Early termination will usually require one or both parties to initiate the termination. Automatic early termination is an exception, where the ISDA transactions will terminate automatically if certain insolvency events occur. It is worth noting that there is some debate as to the effectiveness of such provisions in different jurisdictions. Although not expressly stated in the judgment, the court’s decision must be premised on the basis that automatic early termination was not specified in this case.


Olympia Securities Commercial plc (“Olympia”) was part of a group of companies involved in residential property development. It borrowed sums in excess of £50 million from the Irish Bank Resolution Corporation Limited (the “Bank”) under a facility agreement (the “Facility Agreement”). The Facility Agreement provided for a floating rate, which was hedged by three interest rate swap agreements between the parties (the “Swaps”), governed by an International Swap Dealers Association Master Agreement in the form of the 1992 Agreement (the “ISDA MA”).

Three key events took place after the conclusion of the derivative transaction, in chronological order as follows:

  1. First, the Bank went into liquidation. This constituted a bankruptcy event of default (“Event of Default”) under Section 5(a)(vii) of the ISDA MA. Olympia chose not to exercise its right to terminate the Swaps earlier than their scheduled termination date and did not serve notice under Section 6(a) specifying the Event of Default and designating an early termination date.

  2. Secondly, Olympia failed to make repayment of the loans provided under the Facility Agreement when they fell due for repayment. In contrast with the approach of Olympia above, the Bank chose to notify Olympia that an Event of Default had occurred under the Facility Agreement, and that this also constituted an Event of Default under the ISDA MA. Accordingly, the liquidators of the Bank sought to terminate the Swaps and claimed an early termination payment from Olympia in the sum of circa £6 million (the “Early Termination Payment)”.

  3. Thirdly, Olympia itself went into Administration. The Administrators of Olympia repaid the principal sum lent under the Facility Agreement and other sums, but not the Early Termination Payment.

The instant judgment relates to an application for directions made by the Administrators of Olympia to the Insolvency and Companies List. One of the central issues in the application, was whether Olympia’s default under the Facility Agreement entitled the Bank to terminate the Swaps pursuant to the ISDA MA and demand the Early Termination Payment, notwithstanding that prior to that default, the Bank suffered a ‘bankruptcy’ Event of Default within the meaning of Section 5(a)(vii) of the ISDA MA (which was continuing). The court also considered issues relating to the assignment by the Bank of the Facility Agreement and the security offered by a debenture (the “Debenture”), which are mentioned briefly below.

The Administrators of Olympia took a neutral position towards the application, but sought directions in order to make appropriate distributions. The respondents to the application were: (1) WDW 3 Investments Limited (“WDW”); and (2) Arazim (Gibraltar) Limited (“Azarim”). WDW had taken an assignment of the Bank’s rights under the Facility Agreement and Debenture, and was seeking payment of the Early Termination Payment as a purported secured creditor of Olympia. Azarim was the sole shareholder of Olympia’s sole shareholder, and an unsecured creditor of Olympia. Azarim disputed WDW’s alleged debt and security.


The court found in favour of the Bank/its assignee on all issues, which are discussed in further detail below, with emphasis on the termination of the Swaps.

(1) Termination of the Swaps

The court began its analysis by stating that this issue depended ultimately on the true meaning and effect of Section 6(a) of the ISDA MA. Before considering the wording of Section 6(a), the court made three principal statements of mixed fact and law:

i. Olympia had the opportunity to terminate the Swaps on the occurrence of the Bank’s bankruptcy Event of Default, but it did not do so. Olympia was therefore forced to accept all the consequences of the contractual obligations imposed by the ISDA MA continuing to exist.

ii. Following the Bank’s bankruptcy Event of Default, the effect of Section 2(a)(iii) of the ISDA MA was to suspend any payment obligations by Olympia to the Bank in respect of the Swaps. This suspension would continue for so long as the relevant Event of Default was continuing (Lomas v JFB Firth Rixson Inc [2013] 1 BCLC 27, read our e-bulletin). However, this suspension related to payment obligations under the Swaps, not the Facility Agreement.

iii. Olympia’s failure to make a repayment that fell due under the Facility Agreement was not in dispute. This was an Event of Default under the Facility Agreement which did not require any notice. This event was also an Event of Default under the cross-default provision in Section 5(a)(vi) of the ISDA MA and by virtue of part 5(f) of the Schedule to the ISDA MA which provided that an Event of Default under the Facility Agreement would amount to an Event of Default with respect to Olympia under the ISDA MA. This event provided the foundation of the Bank’s notice to terminate under Section 6(a) of the ISDA MA.

Turning to the wording of Section 6(a) of the ISDA MA, the court identified the key part as follows: “[i]f at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may ….” serve an early termination notice. The court noted that the use of the word “may” indicated that Section 6(a) was permissive. It commented that this was also apparent from previous analysis of the section at paragraph 25 of the Court of Appeal’s judgment in Lomas v JFB Firth Rixson.

Taking all of the above into account, the court concluded that if the innocent party in relation to a particular Event of Default (“ED1”) under the ISDA MA chose not to exercise the right to serve a Section 6(a) notice following that event, the relevant ISDA agreement would continue in full force and effect, subject to the Section 2(a)(iii) which operated to suspend Olympia’s payments obligations to the Bank under the ISDA MA (but, importantly, not other rights and obligations under the ISDA MA). However, if the innocent party in relation to ED1 subsequently itself committed an Event of Default (“ED2”), the defaulting party in relation to ED1 would be fully entitled to serve an early termination notice under Section 6(a) in respect of ED2. The court considered that the phrases “Defaulting Party” and “Non-defaulting Party” in Section 6(a) referred to the status of the party concerned in relation to the particular “Event of Default” in respect of which a party served an early termination notice.

In the instant case, the court therefore held that the Bank was fully entitled to serve an early termination notice under Section 6(a) of the ISDA MA and Olympia was liable to pay the Early Termination Payment, notwithstanding that IBRC had committed a bankruptcy Event of Default prior to the service of that notice.

(2) Assignment of the Facility Agreement

The court determined that the assignment of the Facility Agreement from the Bank to WDW was valid, as a matter of construction, on the basis that WDW was a “financial institution” for the purposes of the Facility Agreement.

(3) The Debenture

The loan which was the subject of the Facility Agreement (and any sum due to the Bank under the Swaps) was secured by a Debenture granted to the Bank by Olympia. The court concluded that payment by Olympia of the Early Termination Payment was secured by the Debenture notwithstanding the assignment of the Debenture by the Bank to WDW.


While the outcome is not an unexpected one, this case offers a helpful analysis of the right to terminate under Section 6(a) of the ISDA Master Agreement where the fact pattern is such that different Events of Default have occurred, triggered by different parties. On the occurrence of an Event of Default (where automatic early termination is not specified by the parties as applicable), parties will be well advised to consider their options and decide whether they wish to terminate or continue their transactions, as well as to take care not to affirm the ISDA Master Agreement before they have made their decision.

This case was decided under the 1992 ISDA Master Agreement, but we cannot see any reason in principle as to why the result would not have been the same under the 2002 form of Agreement.