Template:M summ 2002 ISDA 5(b)(i): Difference between revisions

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==={{isdaprov|Illegality}} vs. {{isdaprov|Force Majeure}} smackdown===
Under the {{2002ma}}, {{isdaprov|Illegality}} trumps {{isdaprov|Force Majeure}}. Given that {{isdaprov|Illegality}} is no longer subject to the "two {{isdaprov|Affected Parties}}" delay on termination (as it was in the {{1992ma}}), this is significant.
===2002 User Guide===
{{isdaprov|Illegality}}. Section {{isdaprov|5(b)(i)}} provides that a {{isdaprov|Termination Event}} will occur if (after a {{isdaprov|Transaction}} is entered into and other than due to any action taken by a party or, if applicable, its {{isdaprov|Credit Support Provider}} or a breach by the party of its obligations under Section 4(b)) it becomes unlawful under any applicable law (i) for the {{isdaprov|Office}} through which a party makes and receives payments or deliveries with respect to such {{isdaprov|Transaction}} to make or receive a payment or 4 The two Tax-related {{isdaprov|Termination Event}}s are addressed in Section IV below.
 
16 delivery under such {{isdaprov|Transaction}} or to comply with any material provision of the {{2002ma}} with respect to such {{isdaprov|Transaction}}; or (ii) for a party or its {{isdaprov|Credit Support Provider}} to perform under a {{isdaprov|Credit Support Document}} (whether to make or receive a payment or delivery or to comply with any other material provision of such {{isdaprov|Credit Support Document}}). {{isdaprov|Illegality}}, like {{isdaprov|Force Majeure Event}} (see Section II.F.3.b.below) but unlike other {{isdaprov|Termination Event}}s, is anticipatory in that it may be triggered if it would be unlawful to make a payment or delivery or to comply on a day if the relevant payment, delivery or compliance were required on that day, even if no such payment, delivery or compliance is in fact required on that day. The party in respect of which the {{isdaprov|Illegality}} has occurred will be the {{isdaprov|Affected Party}} (although both parties could be Affected Parties depending on the circumstances).
 
Where performance under a {{isdaprov|Transaction}} is concerned, note that, by focusing on the ability of a party’s {{isdaprov|Office}} through which it makes and receives payments or deliveries with respect to such {{isdaprov|Transaction}} to perform, an {{isdaprov|Illegality}} could still occur despite the fact that the party may be able to satisfy its obligations by making or receiving a payment or delivery through another of its {{isdaprov|Office}}s. In the {{1992ma}}, {{isdaprov|Illegality}} focused simply on the ability of “a party” to perform.
 
Like a {{isdaprov|Force Majeure Event}}, an {{isdaprov|Illegality}} may only be triggered after exhausting the fallbacks and remedies specified in the {{2002ma}}.
 
The obligation of the {{isdaprov|Affected Party}} under the {{1992ma}} to use all reasonable efforts to transfer Affected {{isdaprov|Transaction}}s in order to avoid the occurrence of the {{isdaprov|Termination Event}} is not included in the {{2002ma}}. Deferral of payments and deliveries after an {{isdaprov|Illegality}} occurs is discussed in Section II.F.3.b.1. below.

Latest revision as of 13:30, 12 April 2020

An Illegality is a Section 5(b) Termination Event — being one of those irritating vicissitudes of life that are no-one’s fault but which mean things cannot go on, and not a Section 5(a) Event of Default, being those perfidious actions of one or other Party which bring matters to an end which, but for that behaviour, ought really to have been avoided.

Note also the impact of Illegality and Force Majeure on a party’s obligations to perform through another branch under Section 5(e), which in turn folds into the spectacular optional representation a party may make under 10(a) to state the blindingly obvious, namely that the law as to corporate legal personality is as is commonly understood by first-year law students. Who knows — maybe it is different in emerging markets and former Communist states?

For the silent great majority of swap entities for whom it is not, the curious proposition arises: what is the legal, and contractual, consequence of electing not to state the blindingly obvious? Does that mean it is deemed not to be true?

If the rules change, that is beyond your control, so it can’t be helped and hence Illegality is a Termination Event not an Event of Default. The 2002 ISDA develops the language of the 1992 ISDA to cater to insomniacs and paranoiacs but does not really add a great deal of substance.

An Illegality may only be triggered after exhausting the fallbacks and remedies specified in the ISDA Master Agreement.

Note the effect of section 6(b)(iv)(2) in the 2002 ISDA is to impose a Waiting Period of three Local Business Days before one can terminate for Illegality. There is no such waiting period in the 1992 ISDA.

The 2002 ISDA adds a Force Majeure termination event — Illegality is, of course, a sub-species of force majeure, so it is then obliged to artfully explain what happens when you have a Force Majeure that is also an Illegality. Section 5(c) (Hierarchy of Events) deals with this, providing that (i) Illegality trumps Force Majeure and (ii) Illegality and Force Majeure both trump the Failure to Pay and Breach of Agreement Events of Default. Given that Illegality is no longer subject to the “two Affected Parties” delay on termination (as it was in the 1992 ISDA), this is significant.

Since the 1992 ISDA is still in widespread use, especially in the New World, and Americans are not entirely blind to what goes on beyond their shores, they have seen the sense of the Force Majeure concept and often reverse engineer an equivalent Force Majeure provision into their 1992s via the Schedule (I know, I know: why not just use the 2002 ISDA?) If yours is like that, then all this hierarchy chat may be useful to you.

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