Marine Trade v Pioneer

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Marine Trade SA v Pioneer Freight Futures Co Ltd. is a recent case on the ambit of the General Conditions section of the ISDA master, and in particular Section 2(a)(iii).

It follows hard on the heels of the Metavante v Lehman and should also be considered in the light of Enron v TXU.

Settlement netting under Section 2(c)

Marine Trade and Pioneer were parties to 14 standard cash-settled contracts for difference called freight forwarding agreements (FFAs) under an ISDA Master Agreement. Each month the parties exchanged a net “settlement sum” under each transaction FFA.

In January 2009 USD7m was due to Marine Trade and USD12m was due to Pioneer.

but — eheu — Pioneer was in default under the ISDA. Citing section 2(a)(iii) Marine Trade invoiced Pioneer for USD7m, on the pretext its USD12m to Pioneer was suspended.

Pioneer invoiced Marine Trade for the net sum of USD 5 million. Neither party paid.

Pioneer served a notice of Failure to Pay. Fearing close out (Marine Trade was massively out-of-the-money) Marine Trade paid under protest and sought a restitution of the USD5m payment, and payment of the USD7m, from the High Court. It came before Flaux J, who held that Marine Trade could not recover the USD5m by way of restitution: there had been no mistake on the facts and therefore no ground for unjust enrichment.

Marine Trade made the payment thinking it was probably not due. This is no mistake. While some level of doubt might be compatible with mistake, if a party makes a payment thinking that they were not liable (or, more likely than not, that they were not liable), there is no operative mistake.

Permanence of Section 2(a)(iii)

But would a payment, which was meant to have been due but was not because the Section 2(a)(iii) conditions precedent were not satisfied, come back to life and be required if the defaulting party subsequently satisfied its Section 2(a)(iii) conditions? Flaux J thought no: the conditions were assessed for once and for all on the due date. If not satisfied on the then, then the party would never have to make that payment. It was cancelled.

This is mad. After all, if an Early Termination Date is subsequently designated, any payments suspended under Section 2(a)(iii) are considered when determining the Section 6(e) Early Termination Amount.

This nonsense was finally corrected in Lomas v Firth Rixson

See also

Section 2(a)(iii) litigation

There is a (generous) handful of important authorities on the effect under English law or New York law of the suspension of obligations under the most litigationey clause in the ISDA Master Agreement, Section 2(a)(iii). They consider whether flawed asset provision amounts to an “ipso facto clause” under the US Bankruptcy Code or violates the “anti-deprivation” principle under English law. Those cases are:

• Lomas v Firth Rixson
• Marine Trade v Pioneer
• Pioneer v Cosco
• Pioneer v TMT
• Enron v TXU
• Metavante v Lehman