Force Majeure Event - ISDA Provision

Numbering Discrepancy: Note the numbering discrepancy in Section 5(b) between the 1992 ISDA and 2002 ISDA. This is caused by a new 5(b)(ii) (Force Majeure Event) in the 2002 ISDA before Tax Event, which is thus shunted from Section 5(b)(ii) (in the 1992 ISDA) to Section 5(b)(iii) (in the 2002 ISDA).

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Note that, while the 1992 ISDA does not contain the concept of Force Majeure, there is an ISDA Illegality/Force Majeure Protocol (see here) which can be signed to adopt/incorporate the relevant parts:

Section 5(b)(ii) in the 1992 ISDA

There is no equivalent to the Force Majeure Event in the 1992 ISDA. An Impossibility clause was frequently written into the schedule, which endeavoured to do the same thing. Note a few caveats with regard to Force Majeure Events:

• Hierarchy of Events: Under Section 5(c) an Illegality or a Force Majeure Event "trumps" a Failure to Pay or Deliver, Breach of Agreement or Credit Support Default Event of Default occasioned by the same circumstances (e.g. a Failure to Pay or Deliver occasioned by an act of God is a Force Majeure Event and not an Event of Default). this doesn't apply with respect to other Events of Default though (such as Bankruptcy or Cross Default).
  
• Deferral of Payments and Deliveries During Waiting Period: Upon an Illegality or Force Majeure Event, payments and deliveries are deferred until the earlier of (a) the expiry of any Waiting Period; and (b) the date on which the Illegality or Force Majeure Event is cured.

Waiting Period

The Waiting Period for Illegality (Section 5(b)(i)) is three Local Business Days; for a Force Majeure Event (5(b)(ii)) it is 8 Local Business Days.

Incorporating Force Majeure into the 1992 ISDA

One can incorporate Force Majeure into the 1992 ISDA as long as you carry the concept through to its logical conclusion i.e.:

• Include a Hierachy of Events;
• Consider the impact re a deferral of Early Termination Amount etc.

The concept also impacts the basis of Close Out because the 2002 ISDA requires use of true mids for valuation i.e, not the mean of each party's view of the bid/offer where a Force Majeure Event (or Illegality) occurs, which is effectively what you get under the 1992 ISDA with a "Two Affected Parties" option.