Introduction

For all of the legal difficulties which market participants are facing in light of the insolvency of Lehman Brothers, the insolvency is providing the Courts with the opportunity to pass judgment on many of the tricky provisions of the 1992 and 2002 versions of the ISDA Master Agreement (together the "Agreements").

In our Alert last November , we made reference to the Administrators of Lehman Brothers International (Europe) ("LBIE") making an application to the Courts asking for a declaration as to how the Administrators can treat those OTC counterparties who did not close out their positions as soon as LBIE went into Administration. Section 2(a)(iii) of the ISDA Master Agreement was at the centre of the application. Since LBIE will always be in default, the Administrators were arguing that counterparties should not be allowed to use Section 2(a)(iii) to "ride the market" and choose when to terminate, as to do so has the effect of allowing an exception to English insolvency laws.

The decision has now been published (Lomas v JFB Firth Rixson2). We discuss the decision below and also provide a useful quick-look summary box at the end of this Alert.

Factual Summary

Upon the insolvency of Lehman Brothers International Europe ("LBIE") four of its out-of-the-money counterparties exercised their right under Section 6(a) of the Agreements not to terminate the 1992 ISDA Master Agreement ("1992 Agreement") in place with LBIE. They then relied on Section 2(a)(iii) to not make payments which they would have been required to make but for this provision.

The LBIE Administrators asked the Court to consider the true interpretation of this controversial ISDA provision in addition to assessing its compatibility with certain principles of English insolvency law.

Please see full Alert below for further information.