Hierarchy of Events - ISDA Provision

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2002 ISDA Master Agreement

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ISDA Text: 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.

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.

Resources and Navigation

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) | 55(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 to expand:

Overview

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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.

Summary

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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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  • The JC’s famous Nutshell summary of this clause
  • On why we need a hierarchy clause between Events of Default and Termination Events in the first place
  • The Force Majeure Upgrade (for 1992 fans)
  • The Repudiation exception: what is that all about?

See also

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References