ISDA clause not a penalty


The early termination provisions in an International Swap Dealers Association (ISDA) master agreement were held not to be a penalty, which would have made them unenforceable.

In BNP Paribas v Wockhardt [2009] EWHC 3116 (Comm) the defendants had defaulted under the terms of the master agreement. That allowed the bank to designate an early termination date to determine an amount due under forward transactions. The defendant argued that the early termination and close-out provisions were unenforceable for being a penalty, because they did not provide for a genuine pre-estimate of the loss but for the payment of the same amount on the occurrence of any one of a number of possible breaches which might give rise to different consequences.

The court held that the close-out amount had been calculated using the bank’s own standard internal pricing model, which it used in the regular course of its business in pricing and valuing similar transactions. The clause in question did not define a sum, but the method by which the sum was to be determined. In order to decide whether or not the clause constituted a penalty, it was necessary to consider what would have been due to the bank following termination in consequence of the breach. In effect that was the same amount.

The fact that the clause was capable of application to several breaches of different seriousness might, in some cases, indicate that it was a penalty, but that was only one factor.

Paul Howcroft, Partner, Fladgate LLP (

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