Event of Default and Illegality - ISDA Provision

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2002 ISDA Master Agreement
A Jolly Contrarian owner’s manual™

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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).

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.

Related agreements and comparisons

Related Agreements
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.

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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.



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, and even if it affects the whole portfolio, it isn’t something one needs necessarily to hang one’s head about. (It’s hardly your fault if they go and change the law on you, is it?)

A Force Majeure Event is something that is so beyond one’s control or expectation that it shouldn’t count as an Event of Default or even a Termination Event at all — at least until you’ve had a chance to sort yourself out, fashion a canoe paddle with a Swiss Army knife, jury-rig an aerial and get reconnected to the world wide web.

Non-repudiatory Breach of Agreement

Note that the subordination of Events of Default to Illegality and Force Majeure in section 5(c)(i) specifically excludes a repudiatory Breach of Agreement as contemplated under the newly introduced section 5(a)(ii)(2), and any Credit Support Default other than a direct, non-repudiatory, default by the Credit Support Provider.

Why? Well, firstly, this is about Events of Default that are directly caused by an Illegality or Force Majeure, not simply ones which are coincidental with them. That being said, disciples of David Hume will appreciate that causal relations are not always perfectly clear, a spurious correlation can resemble causation, so there is inevitably scope for a mischievous defaulter to create confusion and angst here. Recognising this, ISDA’s crack drafting squad™ inserted some language which, in a world governed unstintingly by cold economic logic, would be redundant, but may help to put easily riled minds at rest here.

Secondly, if you have actually repudiated your contract — that is to say, point-blank refused to perform its clear terms — and, by lucky hap, your repudiation coincides with an Illegality or a Force Majeure by which you couldn’t perform it even if you wanted to, then your counterparty should not be obliged to give you the benefit of the doubt and have to close you out via the more genteel route of an Illegality Termination Event.

If you’ve thrown your toys out of the pram, expected to be spanked, that is to say.[1]


General discussion

Template:M gen 2002 ISDA 5(c)


See also



  1. It ought to go without saying that the Jolly Contrarian does not condone corporal punishment to wanton boys, although it never did him any harm.