No need for perfection: ISDA Master Agreement default notice still valid where some errors made

10 January 2023. Published by Daniel Hemming, Partner and Olivia Dhein, Knowledge Lawyer

The High Court has decided that a default notice under an ISDA Master Agreement is still valid even if it does not contain wholly accurate statements of the amount of the payment not made, the confirmation of the trade, or the currency of the payment.

However, the notice needs to communicate clearly, readily and unambiguously to the reasonable recipient in the context in which it is received the failure to pay or deliver in question. It also needs to enable the reasonable recipient to identify what the relevant trade requires it to do in order to cure any failure to pay or deliver within the grace period (Macquarie Bank Ltd v Phelan Energy Group Limited1).

The court completed a careful analysis at an interim stage of exactly how inaccurate a default notice can be while remaining valid. In doing so, it preferred an approach of substance over form, emphasising that the question is whether clear enough communication has been effected by the notice or not. While the decision arose in the context of an FX swap, the decision is of interest more generally for trades governed by the ISDA Master Agreement, especially in times of general market volatility where calculations may need to be carried out at speed. 


Macquarie Bank Limited (Macquarie) and Phelan Energy Group Limited (Phelan) entered into a USD / South African Rand (ZAR) FX swap, governed by an ISDA 2002 Master Agreement. The parties concluded a trade for settlement in May 2021. However, the parties were at odds as to whether a strike price of 22.16 or 22.05 should apply, and Macquarie emailed Phelan on 29 May stating that it was due to receive a figure arrived at using the 22.16 strike price. Phelan disputed this, argued that a strike price of 22.05 should apply and did not pay Macquarie. Macquarie's use of the 22.16 spot rate for the calculation resulted in additional amount of USD 42,000 or approx. an additional 0.5% allegedly payable by Phelan.

Shortly after, Macquarie sent Phelan a notice informing it that failure to make payment by the first local business day after the notice would constitute an Event of Default under s. 5(a)(i) of the ISDA Agreement (the Disputed Default Notice). Phelan replied disputing that the amount quoted by Macquarie, based on the 22.16 strike price, was correct. Macquarie responded that it was reserving its right to designate an Early Termination Date under the ISDA Master Agreement. The following day it sent a letter titled "Designation of Early Termination Date", giving notice pursuant to s. 6(a) of the ISDA Master Agreement that it designated a June 2021 date as the Early Termination Date for the outstanding transactions, as a result of a continuing Event of Default (the Disputed ETDN). A few days later, Macquarie sent Phelan a "Notice of Early Termination Amount" which requested payment of approximately USD 22.6m.

Macquarie applied for summary judgment and an interim payment. The application was brought on the basis that, even if Phelan was right about the strike price, there was nonetheless an Event of Default and Macquarie was entitled to terminate the transaction on 4 June 2021. Macquarie therefore invited the court to summarily determine the termination issue in its favour, but accepted that there remained a triable issue as to what the correct strike price was. The interim payment that Macquarie applied for should be in an amount equivalent to the Early Termination Amount as if the transaction had happened on the terms alleged by Phelan. 

Was there an event of default under the Master Agreement?

The court found that there had been a failure to make payment which had not been remedied, as required for an Event of Default under s. 5(a)(i).  The court noted that Phelan nevertheless argued that there was no failure to remedy after notice of the failure was given, because the Disputed Default Notice was not valid.

The court then considered what the consequence of an incorrect figure in the Disputed Default Notice would be, and whether it needed to specify an amount at all. This was a matter of construing the contractual provision providing for the notice to be served and the notice.

The contractual provision needed to be construed to identify "the specification in the clause" (Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd2). This required a process of construction on conventional principles, but also with regard to the particular considerations relating to the ISDA Master Agreement set out in two authorities. 

  • Lomas v JFB Firth Rixson Inc3 where it was held that the agreement should be interpreted in a way that serves "the objectives of clarity, certainty and predictability"; and

  • Lomas & Ors (Joint Administrators of Lehman Brothers International (Europe)) v Burlington Loan Management Ltd & Ors4 where it was held that the focus is "ultimately on the words used, which should be taken to have been selected after considerable thought and with the benefit of the input and continuing review of users of the standard forms and of knowledge of the market". 

As for the notice, this should be construed properly in context to ascertain whether it meets the requirement of that specification and whether "they key represented by the notice fits the lock constituted by the contractual provision requiring the service of a notice to achieve a particular legal effect". 

A valid s.5 notice - communicating clearly, readily and unambiguously

The court observed that notwithstanding the significance of a notice before a Potential Event of Default and actual Event of Default, s. 5(a)(i) and (ii) of the Master Agreement offered limited guidance as to the contents of such a notice before it will be effective.

The court concluded that a valid notice under section 5(a)(i) must:

  • communicate clearly, readily and unambiguously to the reasonable recipient in the context in which it is received the failure to pay or deliver in question (such that the reasonable recipient will clearly understand the trade under which the obligation to pay or deliver has arisen, and the particular obligation which it is said has not been performed); and

  • thereby enable the reasonable recipient to identify what the relevant trade requires it to do in order to cure any failure to pay or deliver (if it accepts that there has been such a failure) within the applicable grace period.

However, the notice does not need to contain express and wholly accurate statements of:

  • the identification of the confirmation for the relevant trade; 
  • a precise and entirely accurate statement of the amount of the payment or delivery not made; or
  • the currency of the payment.

The court held that were the position otherwise it would lead to highly improbable consequences; for example failure to include the currency or a typing error could invalidate the notice. There was no language requiring such a construction, and the nature of the ISDA Master Agreement did not compel it. Whether the required information has been communicated unambiguously does not solely depend on the language used, and there could be unambiguous communication even when the communication involves a mistake. 

Was the Disputed Default Notice a valid s.5 notice?

The court considered the context in which the reasonable recipient would have read the Disputed Default Notice. It held that it would have been immediately and unambiguously clear to Phelan that Macquarie was complaining that Phelan had failed to make the payment under the trade, that Phelan had made no payment and even on Phelan's case as to the correct strike price, it was obliged to pay ca. ZAR 117 m to cure the default and remedy that failure. 

Phelan had argued that through the use of the internal Macquarie reference on the unsigned confirmation using the wrong strike price, and by claiming an amount that was payable which was not in fact payable, Macquarie had specified the wrong trade, and the Disputed Default Notice was therefore defective.

However, the court disagreed. There was only one trade between the parties with this settlement date, and only one trade by reference to a ca. USD 5.3m notional and it was absolutely clear that this was the trade which Macquarie was saying that Phelan had not paid, even if Macquarie had overstated the amount payable by 0.5%. The Disputed Default Notice was therefore valid and an Event of Default occurred when payment was not made the following day.   

Was the Disputed ETDN valid?

Phelan also contended that the Disputed ETDN was invalid because there had been no Event of Default.  This argument failed for the reasons above, so that in fact the transaction was terminated with an Early Termination Date of 4 June 2021. 

The architecture of the ISDA Agreement 

The court also considered the question whether an error in the Early Termination Amount calculation meant that the party making the error had no right to recover any such amount.  Looking at the "architecture" of the ISDA Agreement5, the court noted that the effect of s 6(c)(i) and (ii) was that on the Early Termination Date all payment obligations owed under individual trades were replaced by the single amount payable. The calculation of the amount due may not occur until after the Early Termination Date (s 6(d)(i)), and interest runs from the Early Termination Date and not the date of any calculation (s 9(h)(ii)(2).

The court noted that where the relevant debt arises as of the Early Termination Date and prior to any calculation under the ISDA Master Agreement, it would be surprising if an error in one party's calculation was sufficient to prevent the debt becoming due. An important feature of the ISDA Master Agreement was that (within some limits) a party entitled to an Early Termination Amount was entitled to quantify the amount after the debt had arisen. The court will frequently determine the amount due itself where there is an invalid calculation of the Early Termination Amount. 

The court found that Macquarie had sufficiently pleaded their cause of action as a debt claim and that even if Phelan succeeded as to the correct strike price, the Alternative Early Termination amount was due from Phelan to Macquarie.

Final conclusions of the court on the summary judgment application

The court asked the parties to agree declarations in an order reflecting its determinations that, if the strike price had been 22.05, then nevertheless:

  • there was an Event of Default within s. 5(a)(i) of the ISDA Master Agreement;
  • Macquarie validly designated 4 June 2021 as the Early Termination Date; and 
  • on 4 June 2021, the Alternative Early Termination Amount accrued as a debt from Phelan to Macquarie. 

1[2022] EWHC 2616
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 755
3Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch) at para 53
4Lomas & Ors (Joint Administrators of Lehman Brothers International (Europe)) v Burlington Loan Management Ltd & Ors [2016] EWHC 2417 (Ch), at para 48(3)
5The court here also referred to the interpretation of the 1992 Master Agreement in Videocon Global v Goldman Sachs International [2016] EWCA Civ 528 at para 56.

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