Breach of Agreement - ISDA Provision
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2002 ISDA Master Agreement
Section 5(a)(ii) in a Nutshell™ Use at your own risk, campers!
Full text of Section 5(a)(ii)
Related agreements and comparisons
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Content and comparisons
Redlines
- 1987 ⇒ 1992: Redline of the ’92 vs. the ’87: comparison (and in reverse)
- 1992 ⇒ 2002: Redline of the ’02 vs. the ’92: comparison (and in reverse)
- 1987 ⇒ 2002: Redline of the ’92 vs. the ’87: comparison (and in reverse)
Discussion
Note the addition of Repudiation of Agreement to the 2002 ISDA. Common law purists like the JC will grumble that you don’t really need to set out repudiation as a breach justifying termination of a contract, because that’s what it is by definition but stating the bleeding obvious has never stopped ISDA’s crack drafting squad™ before. Also, an interesting question: if you do feel the need to provide for what is in essence an evolving common law remedy, then, to the extent your draw that remedy inside the cope of the common law remedy — or the common law evolves some new different and remedy that no-one had thought of before — then what? Section 9(d) has you covered. Woo-hoo.
Summary
A failure to perform any agreement, if not cured within 30 days, is an Event of Default, except for those failures which already have their own special Event of Default (i.e., Failure to Pay or Deliver, under Section 5(a)(i)), those that relate to a pre-existing default (for example, default interest on unpaid amounts) and those that only bear on the “defaulting” party’s tax position, meaning that non-performance is punishment enough in itself (and does not affect the “non-defaulting” party) — that is, the non-compliant party will just get clipped for tax it could have avoided had it performed.
These are the boring breaches of agreement: those of a not immediately existential consequence to a derivative relationship (like Failure to Pay or Deliver, or a party’s outright Bankruptcy), which are not therefore hugely time critical, but which, if not promptly sorted out, justify shutting things down with extreme prejudice. Note that, while the 2002 truncates a bunch of other grace periods in the agreement (notably for a Failure to Pay or Deliver, and for discharging a Bankruptcy petition) it does not truncate the grace period for “boring” defaults, which stays at the glacially long 30 days.
All rendered in ISDA’s crack drafting squad™’s lovingly tortured prose, of course: note a double negative extragvaganza in 5(a)(ii)(1): not complying with an obligation that is not (inter alia) a payment obligation if not remedied within a month. High five, team ISDA.
Repudiation
New in the 2002 ISDA: repudiation of contract. Not actually breaching it, per se, but high-handedly saying that you are going to. In writing. Could you argue that by codifying that a repudiation must be in writing to count, in a counter-intuitive way this new clause dilutes the common law rules, rather than reinforcing them? A common law repudiation can, if clear enough, be oral, by conduct, body language, morse code, semaphore and so on,
So rather than empowering a Non-defaulting Party, the addition of a narrow definition of what counts as repudiation makes their avenue of redress that teeny bit narrower. Doubtful it has ever made a difference, but — well, they said that about LIBOR didn’t they?
Note that unlike Breach of Agreement, there is no grace period to cure a Repudiation of Agreement: If you say the magic words in writing and cast the spell[1] The death eaters will come and take your ISDA away at once, as surely as if you had failed to pay — sooner indeed: even there there is a short grace period.
Hierarchy of Events
Note that a normal Section 5(a)(ii)(1) Breach of Agreement that also amounts to a Section 5(b)(i) Illegality or a Section 5(b)(ii) Force Majeure Termination Event will, thanks to section 5(c), be treated as the latter, but a repudiatory Breach of Agreement under section 5(a)(ii)(2) willl not enjoy the same leniency. If you have repudiated your contract, the fact that there happens to be a concurrent Illegality — it is hard to see how a repudiatory breach could be an Illegality in itself — will not save you from the full enormity of section 5(a)(ii) Event of Default style close out.
General discussion
Failure to Pay or Deliver carve-out
Why is Section 5(a)(i) specifically carved out? No good reason, other than ISDA’s crack drafting squad™’s general neurosis/delight in over-communicating. Yes, it has its own separate Event of Default, with a much tighter timeline, so in practice one would never realistically trigger a failure to pay as a 5(a)(ii) event, but it is still a bit fussy carving it out.
ISDA’s crack drafting squad™. Never knowingly outfussed.™
It is an Event of Default not to supply documents for delivery
A failure to Furnish Specified Information — ie those documents for delivery specified in Part 3 of the ISDA Master Agreement, adverted to in Section 4(a)(ii) will therefore be an Event of Default, although you have to navigate a needlessly tortured string of clause cross references and double negatives to settle upon this conclusion.
See also
- Furnish Specified Information and sub-limb 4(a)(ii) (documents for delivery) but not 4(a)(i) or 4(a)(iii) (which relate to tax documents).
- Section 3(d) representations.
References
- ↑ NiGEL butted in at this point to suggest “Confoundo pactotum!” “It fits with J.K. Rowling’s style of combining Latin words with a whimsical but scholarly vibe: “pactum” is Latin for “pact” or agreement. The echo of “factotum” (a person who does all kinds of work) gives it an almost comical suggestion of confounding an agreement-of-all-things or a do-everything-pact. You could imagine it being used to magically muddle or interfere with magical contracts or agreements.” Thanks for that, NiGEL.