Pioneer Freight Futures Co Ltd v Cosco Bulk Carrier Co Ltd
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The Jolly Contrarian Law Reports
Our own, snippy, in-house court reporting service.
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Pioneer Freight Futures Co Ltd v Cosco Bulk Carrier Co Ltd [2011] 2 All ER (Comm) 1079
In the JC’s view, the first instance judgment was the sort of case that undermines the received notion that English Courts, and English law, are the best, most sensible and most certain venues for resolving international commercial disputes. Because — seriously?
In any case this transparently potty decision was overturned by the Court of Appeal
Facts
Pioneer and Cosco entered into freight forward contracts under terms incorporating the 1992 ISDA. In October 2008, Pioneer failed to pay. Under section 2(a)(iii) Cosco suspended its payment obligations.
In December 2009, Pioneer went into liquidation, triggering automatic early termination of all outstanding Transactions. Cosco went to determine its Early Termination Amount (for which “Loss” applied). Between the Event of Default and the termination, eight of the eleven forwards had expired. Pioneer argued that the sums that would have been due to it on those eight transactions but for section 2(a)(iii) should still be taken into account in calculating the Loss. Cosco argued, citing Briggs J in Lomas v Firth Rixson that once a transaction expired, payments suspended by section 2(a)(iii) vanished for ever so there was therefore nothing to bring into the calculation.
First instance
That sounds a pretty preposterous route to take, doesn’t it, but it is the one Flaux J decided to take, seemingly concerned about the infinite, indeterminate liability a party would have to the other party to account for a derivative payment that could, subsequently, go to the moon and back. The court seemed unmoved — or possibly inadvertent — to the idea that a party suspending under 2(a)(iii) can crystallise its risk at any moment by, you know, actually calling a close-out and terminating all the transactions, thereby swapping such a terrifying indeterminate liability for the basic credit risk it already assumed against its counterparty, and that if it didn't like that, it could — you know — hedge its liabilities under the contract to the derivative: something you would like to think it would be doing in any case.
Appeal
Happily, the court of appeal rejected pretty much all of Flaux J’s conjectures.
- 2(q)(iii) suspends, and does not extinguish payment obligations. You have to make them if the conditions are satisfied prior to termination.
- Maturity of the trades doesn’t affect the obligation
- They still count towards close out netting.
Section 2(a)(iii) litigation
There is a (generous) handful of important authorities on the effect under English law or New York law of the suspension of obligations under the most litigationey clause in the ISDA Master Agreement, Section 2(a)(iii). They consider whether flawed asset provision amounts to an “ipso facto clause” under the US Bankruptcy Code or violates the “anti-deprivation” principle under English law. Those cases are: