Defaulting Party and Affected Party - ISDA Provision
Overview
Defaulting Party and Non-defaulting Party
A “Defaulting Party” is one who has committed or suffered, and a “Non-defaulting Party” is one who is not implicated in the commission or sufferance of, an Event of Default. There is something judgmental and contemptuous about a defaulter, that there isn’t about one who is merely affected.
Affected Party and Non-Affected Party
Not even ISDA’s crack drafting squad™ could confect something worthwhile to say which might improve this Spartan piece of text. But note the concept of Affected Party is sprayed liberally throughout Section 5(b), and it means something different in almost every context so you’re guaranteed to have fun there.
Elsewhere there is much monkeying around as regards the concept of Illegality, particularly insofar as it relates to Credit Support Documents, and the newly introduced Force Majeure.
Summary
Defaulting Party
The key thing to notice here is that — in an uncharacteristically rather neat, understated bit of drafting — Defaulting Party encapsulates a party who has itself defaulted, or whose Credit Support Provider or Specified Entity has committed an act which amounts to an Event of Default for that counterparty to this ISDA Master Agreement. I know, I know, this doesn’t seem that big of a deal: this sort of thing that should be plain, obvious and go without saying — but it saves you a job when, in your peregrinations round the party’s Confirmation, you come to talk of pending Events of Default and Termination Events against that party.
Instead of saying, laboriously, “if there is an Event of Default or Termination Event with respect to a party or its Credit Support Providers or Specified Entities, as the case may be” you can speak of a Defaulting Party or an Affected Party.
Of course, it would be nice if there was a catch-all for a party who has committed an Event of Default or suffered a Termination Event, so you didn’t need to go “Defaulting Party or Affected Party, as the case may be” — cheekily we suggest “Innocent Party” and “Implicated Party” (“Guilty Party”, though fun, isn’t quite right, seeing as Termination Events aren’t meant to impute any kind of culpability).
Non-defaulting Party
To be compared with - well, Defaulting Party. Of all things. And Non-affected Party, as well. The difference between a Non-defaulting Party and a Non-affected Party, and the linguistic torture that distinction as inflicted on the race of ISDA lawyers ever since, says everything you need to know about the absurdity of modern commercial law.
- Do say: “the Non-defaulting Party or the non-Affected Party, as the case may be” over and over again.
- Don’t say: “Is there really no other way you could get across this concept, for crying out loud?”
Affected Party and Non-Affected Party
The Affected Party is the one who is subject to a Section 5(b) Termination Event, as opposed to the perpetrator of a Section 5(a) Event of Default — thus one of a marginally less opprobrious character, seeing as Termination Events are generally not considered to be one’s fault as such, but just regrettable things that happen that no-one expected, or wanted, but bring what was once a beautiful relationship to an end.
It’s not you, it’s — well, it’s not me either — it’s just that confounded tax event that occurred upon your recent merger.
Note that, in its wisdom, ISDA’s crack drafting squad™ chose not to have a generic term for the sort of person who is subject to either a Termination Event or an Event of Default, so there is much “Defaulting Party and/or Affected Party, as the case may be” sort of malarkey. This depresses we prose stylists, but ISDA’s crack drafting squad™ has never cared about us, so we should hardly be surprised.
The practical difference between an “Affected Party” and a “Defaulting Party”
What is the practical, economic difference between being closed out on the same Transaction for an Event of Default and a Termination Event?
This is something that all ISDA ninjas know, or sort of intuit, in a sort of semi-conscious, buried-somewhere-deep-in-the-brain-stem kind of way, but they may mutter darkly and try to change the subject if you ask them to articulate it in simple English.
To be fair the topic might be chiefly of academic interest were it not for the unfortunate habit of the same “real world” event potentially comprising more than one variety of termination right. This leads to some laboured prioritisation in the ISDA, and sometimes some in the Schedule too. What if my Tax Event upon Merger is also a Credit Event Upon Merger and, for that matter, also a Force Majeure Event? That kind of question.
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- The JC’s famous Nutshell™ summary of this clause
- The many different ways in which a Termination Event (starring one or more Affected Parties) and a Event of Default (starring a single Defaulting Party) differ, and how you should think about them.