Hierarchy of Events - ISDA Provision

2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Resources and navigation [[{{{1}}} - 1992 ISDA Provision|This provision in the 1992]] Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project Navigation Preamble | 1 • (a) (b) (c) | 2 • (a) (b) (c) (d) | 3 • (a) (b) (c) (d) (e) (f) (g) | 4 • (a) (b) (c) (d) (e) | 5 • 5(a) Events of Default: 5(a)(i) Failure to Pay or Deliver 5(a)(ii) Breach of Agreement 5(a)(iii) Credit Support Default 5(a)(iv) Misrepresentation 5(a)(v) Default Under Specified Transaction 5(a)(vi) Cross Default 5(a)(vii) Bankruptcy 5(a)(viii) Merger Without Assumption 5(b) Termination Events: 5(b)(i) Illegality 5(b)(ii) Force Majeure Event 5(b)(iii) Tax Event 5(b)(iv) Tax Event Upon Merger 5(b)(v) Credit Event Upon Merger 5(b)(vi) Additional Termination Event (c) (d) (e) | 6 • (a) (b) (c) (d) (e) (f) | 7 | 8 • (a) (b) (c) (d) | 9 • (a) (b) (c) (d) (e) (f) (g) (h) | 10 | 11 | 12 • (a) (b) | 13 • (a) (b) (c) (d) | 14 | Index: Click ᐅ to expand: 2002 ISDA 1992 ISDA Section 5(c) in a Nutshell™ Use at your own risk, campers! 5(c) Hierarchy of Events 5(c)(i) As long as an event counts as an Illegality or a Force Majeure Event, it will not count as an Failure to Pay or Deliver, a non-repudiatory Breach of Agreement or the first limb of Credit Support Default. 5(c)(ii) In any other circumstances, an Illegality or a Force Majeure Event which also counts as an Event of Default or a Termination Event, will count as the relevant Event of Default or Termination Event, and not the Illegality or Force Majeure Event. 5(c)(iii) If a Force Majeure Event also counts as an Illegality, it will be treated as an Illegality and not a Force Majeure Event (unless covered by clause 5(c)(ii) above). view template Full text of Section 5(c) 5(c) Hierarchy of Events. 5(c)(i) An event or circumstance that constitutes or gives rise to an Illegality or a Force Majeure Event will not, for so long as that is the case, also constitute or give rise to an Event of Default under Section 5(a)(i), 5(a)(ii)(1) or 5(a)(iii)(1) insofar as such event or circumstance relates to the failure to make any payment or delivery or a failure to comply with any other material provision of this Agreement or a Credit Support Document, as the case may be. 5(c)(ii) Except in circumstances contemplated by clause 5(c)(i) above, if an event or circumstance which would otherwise constitute or give rise to an Illegality or a Force Majeure Event also constitutes an Event of Default or any other Termination Event, it will be treated as an Event of Default or such other Termination Event, as the case may be, and will not constitute or give rise to an Illegality or a Force Majeure Event. 5(c)(iii) If an event or circumstance which would otherwise constitute or give rise to a Force Majeure Event also constitutes an Illegality, it will be treated as an Illegality, except as described in clause 5(c)(ii) above, and not a Force Majeure Event. view template Related agreements and comparisons Click here for the text of Section 5(c) in the 1992 ISDA Click to compare this section in the 1992 ISDA and 2002 ISDA. Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Content and comparisons

A simple piddling match between Events of Default and Illegality in the 1992 ISDA makes way for a full-blown hierarchy of competing circumstances justifying closeout of the ISDA Master Agreement in the 2002 ISDA.

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Summary

Compared with its Byzantine equivalent in the 2002 ISDA the 1992 ISDA is a Spartan cause indeed: it is as if ISDA’s crack drafting squad™ assumed all ISDA users would be cold, rational economists who instinctively appreciate the difference between causation and correlation — or hadn’t considered the virtual certainty that they would not be — and therefore did not spell out that where your Event of Default is itself, and of itself, the Illegality, this hierarchy clause will intervene but it will not where your it simply is coincidental with one. I.e., if you were merrily defaulting under the ISDA Master Agreement anyway, and along came an Illegality impacting your ability to perform some other aspect of the Agreement, you can’t dodge the bullet.

In the 2002 ISDA the JC thinks he might have found a bona fide use for the awful legalism “and/or”. What to do if the same thing counts as an Illegality and/or a Force Majeure Event and an Event of Default and/or a Termination Event.

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General discussion

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See also

• Force majeure (including the JC’s ultimate force majeure clause)
• Event of default
• Termination event

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References

In which the JC thinks he might have found a bona fide use for the awful legalism “and/or”. Crikey.

What to do if the same thing counts as an Illegality and/or a Force Majeure Event and an Event of Default and/or a Termination Event.

Why do we need this? Remember an Event of Default is an apocalyptic disaster scenario which blows your whole agreement up with extreme prejudice; a Termination Event is just “one of those things” which justifies termination, but may relate only to a single transaction: it isn’t something one needs necessarily to hang one’s head about.

A Force Majeure Event is something that is so beyong one’s control or expectation that it shouldn't count as an Event of Default or even a Termination Event at all.

An Event of Default has more severe consequences for the counterparty. Well, the whole point about force majeure is that it is meant to give you an excuse not to perform your agreement. and an Illegality is only a Termination Event (one can’t be criticised if they go and change the law on you, can one?), so

See also

• Force majeure (wherein for a giggle you will find a sample ultimate force majeure clause)
• Event of default
• Termination event