If you were waiting to hear what the English Court of Appeal had to say about the lower court decision in Marine Trade S.A. v. Pioneer Freight Futures Co. Ltd. you’ll be disappointed, as the appeal was dismissed by consent of the parties on October 22, 2010. Given the reasonableness of the lower court decision, however, that’s just fine by me. If you missed it when it was decided in October 2009 (or maybe you can’t remember if you read it), here’s a short description of the decision.

Marine Trade and Pioneer were parties to a Forward Freight Agreement master agreement (under which they entered into numerous cash settled CFDs based on a published freight rate index). The parties were both buyer and seller under the various CFDs. The FAA agreements incorporate terms from the ISDA Master and the case is in large part about the rights to suspend and net payments under section 2 of the ISDA Master.

The monthly settlement amounts due in January 2009 were about US$7m owing by Pioneer to Marine Trade and US $12m owing by Marine Trade to Pioneer.

Was there a Bankruptcy Event of Default? The first issue was whether Pioneer was subject to a bankruptcy Event of Default at the time the payments were due in the beginning of February. Marine Trade argued that it was and, therefore, it did not have an obligation to pay the US$12m by virtue of section 2(a)(iii). The particular default relied on was (1) inability to pay debts as they become due and (2) failure generally to pay debts as they become due. The court received guidance as to the meaning of (1) from the UK Insolvency Act 1986 and the case law on relevant provisions in that Act. I think this is somewhat interesting because it highlights some of the relevance of changing the governing law in an ISDA from the governing law it was drafted with reference to (NY or English law, for example) to a local law. You may be incorporating more than just the local general contract law in making such a change and it’s fairly difficult to predict in advance all the implications of doing so. As to the finding in the case, Pioneer admitted on the last day of trial that it had been subject to such an event at the relevant time.

Was Pioneer Allowed to Net? The court disagreed with Pioneer’s position that it could still net under section 2(c) even though it was subject to an Event of Default. As argued by Marine Trade, because Marine Trade’s payment was not due by virtue of the suspension of its obligation under section 2(a)(iii), the settlement sum was not “payable” within the meaning of section 2(c), and therefore was not available for set-off by Pioneer. Marine Trade was “perfectly entitled” not to elect for early termination and the judge saw the commercial sense of being able to insist on gross payment by a Defaulting Party.

Effect of Marine Trade’s later Event of Default. Later on in the year Marine Trade itself became subject to a Bankruptcy Event of Default. Pioneer had not yet paid the amount owing in February and argued that its obligation to pay was now suspended. Not surprisingly the court did not buy that argument. The argument confused the requirement to satisfy the conditions precedent in 2(a)(iii) before the obligation to pay the settlement sum accrues, with what happens afterwards. The requirement to satisfy the conditions precedent arises only once, at the time that the settlement amount falls due. Where a contractual obligation (and corresponding right in favour of the other party) has accrued, it would require clear words in the contract to remove that obligation and right at some later date. The words “has occurred and is continuing” relate to whether there is an Event of Default at the time the obligation to pay accrued (in February). Also noteworthy is the judge’s comment (obiter dicta for you legal types) that a subsequent curing of its default by Pioneer would also not change the result.

Claim to Get it’s Protest Payment Back. Now back in February 2009 when the settlement sums were due, Pioneer was taking the position with Marine Trade, that it was not subject to a Bankruptcy Event of Default and it threatened to call Marine Trade in default for failing to make the net payment owing to Pioneer. Marine Trade was concerned about that and, while it thought Pioneer probably was in default, it nevertheless paid the net amount “under protest” to Pioneer. Marine Trade sought return of that payment based on principles of unjust enrichment, namely that the payment was made under mistake as to its obligation to pay. The court noted that there may be room to argue for restitutionary relief based on unjust enrichment when you make a payment in cases where you probably are obligated to make it but you have some doubt. However, in this case Marine Trade thought it probably did not have to make the payment. This is not a mistake and Marine Trade could not get the payment back. (Whether the restitution issue would have been decided the same way under Canadian common law, which has a less categorical approach to unjust enrichment, is an interesting question.)