The degree to which certain elements of a recovery right under a
contract, including a debt instrument, are assignable or
transferable to a third party has been questionable under English
law for some time. "Litigation rights" are one example.
Many English legal practitioners regard litigation rights as
personal rights, and personal rights are by their nature not
capable of assignment or transfer. However, given the economic
importance many assignees attach to "litigation rights"
as a recovery right, such rights are commonly assigned or
transferred to assignees "to the extent that they are capable
of being or permitted to be assigned or transferred." In this
manner, the effectiveness of the assignment of any such any right
is reserved. In the latest Waterfall IIC litigation, another
element of a recovery right, default interest, may now be added to
the list of items the ability of which to assign or transfer is
questionable under English law.
On 5 October 2016, Mr Justice Hildyard handed down the judgment
in the latest Waterfall IIC litigation. This case considered the
entitlement of counterparties to default interest, as described in
the 1992 and 2002 ISDA Master Agreement (ISDA), in particular
covering the interpretation of the phrase 'cost (without proof
or evidence of any actual cost) to the relevant payee (as certified
by it) if it were to fund or of funding the relevant
Of particular note is the ruling on the meaning of 'relevant
payee'. It is a common occurrence, and indeed was for numerous
claims against LBIE, that counterparties to an ISDA assign their
claims to default interest pursuant to the express right set out in
clause 7 of the ISDA to third party purchasers. Thus, it would
typically be considered to be the third party purchaser that has
the interest in the claim against the defaulting party. However, Mr
Justice Hildyard ruled that it was the original contractual
counterparty, and not the third party purchaser, that was the
'relevant payee' for the purpose of assessing the cost of
funding the relevant amount. This restriction on the right of
transfer is to protect against unknown credit risks and that
purpose is undermined if the 'relevant payee' is an unknown
assignee of the original counterparty. Further, following the
principles set down in Snell's Equity 33rd ed. at 3-027,
'an assignee cannot recover more from the debtor than the
assignor would have. The purpose of the principle is to prevent the
assignment from prejudicing the debtor. This would happen if, for
example, he had to pay damages to the assignee that he would not
have had to pay to the assignor if the assignment had not taken
place'. To rule otherwise would pose a foreseeable risk of the
third party assignee claiming a greater amount than the original
counterparty would have claimed.
In light of this ruling, consideration must now be given by
third party purchasers that have purchased, or had assigned to
them, default interest claims pursuant to the rights set out in
clause 7 of an ISDA. Further, it is unclear how this ruling will
affect equivalent rights of assignment that arise under similar
agreements – such application will likely only become clear
when new cases are brought before the courts.
While this decision should be borne in mind when counterparties
are considering the use of clause 7 of an ISDA, it is subject to
appeal which may reinforce or overrule the application of all or
some of Mr Justice Hildyard's decision.
This article is presented for informational purposes only
and is not intended to constitute legal advice.
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