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April 3, 2012 10:06 pm
Companies that bought interest rate swaps from two Lehman Brothers units cannot be forced to make payments on contracts relating to the period after the investment bank collapsed in 2008, the UK’s Court of Appeal has ruled.
However, lawyers say the ruling in effect means that if Lehman were ever to come out of default, the counterparties that have not closed out their swaps would have to make good on their payments.
The complex ruling on four separate cases hinged on the consequences of an event of default under the ISDA master agreement, the contract that governs derivative transactions.
The Court of Appeal ruled that where there was a default with respect to one party, the other party’s obligation to make payments is suspended by part of the ISDA accord until the company is no longer in default.
In this case, the ruling means that Carlton Communications, part of ITV, does not have to pay about £2.7m plus interest to Lehman Brothers Special Financing. The outcome also means the administrators of Lehman Brothers International (Europe) cannot force JFB Firth Rixson and three other companies to resume payments on interest rate swaps sold by Lehman in 2007.
Marc Florent, partner at Allen & Overy, said: “The court’s conclusions and detailed reasoning will be relevant for all derivatives practitioners and represents a welcome confirmation of the orthodox industry understanding of key provisions in the [ISDA] agreement.”
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