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Lomas v Firth Rixson: Difference between revisions
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'''Section 2(a)(iii)''': Suspension or one time only? | '''Section 2(a)(iii)''': Suspension or one time only? | ||
*The Court of Appeal held that the operation of Section 2(a)(iii) has the effect of suspending (potentially indefinitely) the non-defaulting party's payment obligations. These obligations remain suspended for as long as the Event of Default is continuing, or until the non-defaulting party elects to terminate. | *The Court of Appeal held that the operation of Section {{isdaprov|2(a)(iii)}} has the effect of suspending (potentially indefinitely) the non-defaulting party's payment obligations. These obligations remain suspended for as long as the Event of Default is continuing, or until the non-defaulting party elects to terminate. | ||
*This decision ends a judicial debate that commenced with Flaux J’s decision in {{casenote|Pioneer|Cosco}}. Flaux J held that even if the Event of Default or Potential Event of Default ceases to exist, performance does not become due. The obligation is effectively extinguished. Contrastingly, in Pioneer | *This decision ends a judicial debate that commenced with Flaux J’s decision in {{casenote|Pioneer|Cosco}}. Flaux J held that even if the {{isdaprov|Event of Default}} or {{isdaprov|Potential Event of Default}} ceases to exist, performance does not become due. The obligation is effectively extinguished. Contrastingly, in {{casenote|Pioneer|TMT}}, Gloster J argued that the payment obligation arises as soon as there ceases to be an Event of Default or Potential Event of Default. Although Section 2(a)(iii) makes payment conditional on the absence of an Event of Default, the underlying debt remains in existence. The Court of Appeal upheld Gloster J’s approach, concluding that payment netting must be applied to any sums that would otherwise be payable, without regard to Section 2(a)(iii). Moreover, the Court of Appeal rejected an appeal advanced by the administrators of Lehman Brothers International that Section 2(a)(iii) implicitly operates only for a reasonable length of time, or until the scheduled maturity date, with payment from the Non-defaulting party then becoming due if an Early Termination date has not been designated. | ||
Payment Netting | Payment Netting | ||
The Court of Appeal resolved the question of whether, if a non-defaulting party’s obligations are suspended under Section 2(a)(iii), it can nevertheless enforce the defaulting party’s obligations under Section 2(c) without giving credit for the suspended obligations. In Cosco Bulk Carrier, Flaux J had argued that payment netting is not available in these circumstances. Conversely, in Pioneer Freight Futures, Gloster J, held that the payment netting provisions apply to any sums that would be payable in the ordinary course of events. The Court upheld the approach of Gloster J, holding that it is the payment obligation alone which is suspended. The underlying debt obligation under Section 2(a)(i) remains irrespective of Section 2(a)(iii). Section 2(c), however, will only apply to payments falling due on the same date. | The Court of Appeal resolved the question of whether, if a non-defaulting party’s obligations are suspended under Section 2(a)(iii), it can nevertheless enforce the defaulting party’s obligations under Section 2(c) without giving credit for the suspended obligations. In Cosco Bulk Carrier, Flaux J had argued that payment netting is not available in these circumstances. Conversely, in Pioneer Freight Futures, Gloster J, held that the payment netting provisions apply to any sums that would be payable in the ordinary course of events. The Court upheld the approach of Gloster J, holding that it is the payment obligation alone which is suspended. The underlying debt obligation under Section 2(a)(i) remains irrespective of Section 2(a)(iii). Section 2(c), however, will only apply to payments falling due on the same date. | ||