The ISDA master agreement forms the backbone of a significant amount of over-the-counter derivative transactions. In this article, we identify three key legal issues arising under Mauritian law which are addressed by the master agreement.

1. Disclaimer of onerous contracts. The insolvency regime across many jurisdictions (including Mauritius) generally allows a liquidator to disclaim onerous contracts which require an insolvent company to pay or perform obligations. In an insolvent liquidation of a Mauritian company, a liquidator could exercise the power to disclaim a contract if that contract gives rise to liabilities on the part of the insolvent company. The effect of such disclaimer would be to limit the rights of the non-defaulting party to a claim for damages.

In addition, where contracts are beneficial to the insolvent company, a liquidator can recognise such contracts and require that the counterparty pays or performs its obligations towards the insolvent company.

If the powers of the liquidator to disclaim are applied to the transactions governed by the master agreement, the non-defaulting party could find itself being under the obligation to make payments to the insolvent company under transactions where it owes money. The non-defaulting party would then need to prove the amounts owed to it. It would do so by claiming, against the insolvent company for the loss it has suffered as a result of the disclaimer.

Section 1(c) of the master agreement sets out that the master agreement, schedule and each confirmation form a single agreement. This section aims to protect the transactions under the master agreement from being disclaimed by a liquidator. Section 1(c) of the master agreement aims to contractually protect the non-defaulting party such that a liquidator may only disclaim the entire master agreement rather than having the ability to disclaim each transaction under the master agreement.

2. Payment netting. Cash-settled OTC derivatives involves netting from the outset. This is known as payment netting.

Section 2(c) of the master agreement provides that payments due in the same currency on the same date can be netted during the term of the master agreement. Once a single amount is payable by each party, the obligation by each party to pay the other is satisfied and discharged if the party who owes the larger aggregate amount pays to the other party the excess of the larger aggregate amount over the smaller aggregate amount.

The section seeks to remove delivery risk and also has the potential to reduce the amount of withholding tax if such tax is imposed.

Outside of insolvency, the set-off contemplated by section 2(c) of the master agreement requires the set-off of mutual debts which are liquid and demandable. While payment netting set out in the  master agreement would generally operate under a governing law other than Mauritian law, the provisions of the Mauritian Civil Code would recognise such mechanism.

3. Close out netting. The master agreement provides that a single net sum will be payable by one party to the other in respect of all terminated transactions. The 1992 and 2002 versions of the master agreement apply a different methodology to calculate the early termination amount.

Close-out netting under both 1992 and 2002 versions of the master agreement involves the early termination of the transactions, valuation of the terminated transactions and calculation of a single net sum payable by one party to the other.

Under the methodology adopted by the 2002 master agreement, the early termination amount is made up of the total cost or loss or gain that would be incurred by the parties in replacing each terminated transaction. The party making the determination has a duty to act in good faith and to use commercially reasonable procedures in order to produce a commercially reasonable result. The non-defaulting party may also set-off other amounts due to it by the defaulting party which arise under other agreements.

It is therefore paramount that the close-out netting provision under the master agreement be enforceable under the insolvency laws of the counterparty. To the extent that a counterparty is incorporated in Mauritius, the key issue that must be considered is whether close-out netting would be recognised and enforced by the insolvency regime in Mauritius.  If the counterparty is subject to administration or insolvent liquidation, the mandatory rules set out in Part V of the Insolvency Act 2009 would apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.