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ISDA Anatomy™
In a Nutshell™ Section 5(c):
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).
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2002 ISDA 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.
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Click here for the text of Section 5(c) in the 1992 ISDA
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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