In June 2014, the International Swaps and Derivatives Association, Inc. (“ISDA”) published a form of amendment relating to Section 2(a)(iii) of the preprinted form of ISDA Master Agreement. Section 2(a)(iii) generally permits a contracting party to withhold performance indefinitely if an event of default or potential event of default has occurred and is continuing (or an early termination date has been designated) with respect to its counterparty. ISDA initially announced an initiative to evaluate and address issues arising under Section 2(a)(iii) in 2011.
As previously discussed in Derivatives in Review, Section 2(a)(iii) has been treated inconsistently by courts across various jurisdictions in recent years, leading to market uncertainty regarding the ability of a non-defaulting party to indefinitely withhold performance. The form of amendment effectively allows a defaulting party to impose a limit on the non-defaulting party’s right to suspend performance by designating a “condition end date” to that suspension of performance (the form of amendment suggests 90 days after notice by the defaulting party for this period), after which a non-defaulting party either must perform (together with payment of interest[1] on withheld amounts or other compensation in respect of withheld delivery), or terminate.
[1] Such interest would be payable at the “Non-default Rate,” which is defined: (i) under the 1992 ISDA Master Agreement, as a rate equal to the cost (without proof or evidence of any actual cost) to the non-defaulting party if it were to fund the relevant amount, as certified by it; and (ii) under the 2002 ISDA Master Agreement, as a rate offered to the non-defaulting party, as certified by it, by a major bank in a relevant interbank market for overnight deposits in the applicable currency, such banks selected in good faith by the non-defaulting party for the purpose of obtaining a representative rate that will reasonably reflect conditions prevailing at the time in that relevant market.