In a judgment handed down in the Commercial Court on 25 March 2011, Flaux J ruled on the proper construction of “Loss” in the 1992 ISDA Master Agreement.
The cases concerned forward freight agreements (“FFAs”) on the market-standard Forward Freight Agreement Brokers Association 2007 Terms (“the FFABA 2007 Terms”). Such FFAs are cash-settled contracts for differences indexed to Baltic Exchange rates. The “Seller” sells a Contract Route forward to the “Buyer” at a fixed “Contract Rate” and so the trade is notionally “in the money” for the Seller if the Settlement Rate is lower than the Contract Rate and for the Buyer if the Settlement Rate is higher. In these cases, Brit Bulk was the Seller, Pioneer and Bulk Trading were Buyers and all Settlement Rates would have been below the Contract Rate. During the life of the trade, the party notionally “in the money” is not entitled to be paid if it is affected by an Event of Default (see Section 2(a)(iii) of the Master Agreement).
The FFABA 2007 Terms stipulate that Automatic Early Termination applies under the Master Agreement and that upon (any) Early Termination, “Second Method” and “Loss” apply. Therefore, when Administrators were appointed over Brit Bulk on 31 October 2008, Early Termination occurred, Brit Bulk was the “Defaulting Party”, Pioneer and Bulk Trading were “Non-defaulting Parties”, and in each case a termination amount would be payable “equal to the Non-defaulting Party’s Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.” By the Loss definition, the Non-defaulting Party’s Loss is “an amount [the Non-defaulting Party] determines in good faith to be its total loss and costs (or gain, in which case expressed as a negative number) in connection with this Agreement …“.
Pioneer and Bulk Trading argued that Loss was nil (the “nil Loss” argument), because (they said) the Loss definition asked what would have happened if there had been no Early Termination; they could reasonably conclude, in good faith, that if there had been no Early Termination nothing would have had to be paid to Brit Bulk because it would have been affected by Bankruptcy Events of Default; so the Early Termination did not relieve Pioneer and Bulk Trading of any payment obligation and there was no gain (“negative” loss).
Flaux J. rejected the nil Loss argument, and accepted Brit Bulk’s contrary argument that Pioneer and Bulk Trading were obliged to assume, when asking what would have happened in the absence of Early Termination, that Brit Bulk would never have been affected by an Event of Default. The judge considered that to be the correct construction of the Loss definition, and a conclusion supported by the analysis, obiter, of Mance LJ (as he then was) in Australia and New Zealand Banking Group Ltd v. Societe Generale  CLC 833 and the decision of Moore-Bick J. (as he then was) in Peregrine Fixed Income Ltd (in liquidation) v. Robinson Department Store plc  CLC 1328.
Pioneer and Bulk Trading was represented by Andrew W Baker QC, a Member of 20 Essex Street, who appeared with Mark Hapgood QC and James Willan, instructed by Berwin Leighton Paisner LLP.