Although it is customary to use various expressions in modern commercial agreements, very few such agreements have been the subject matter of interpretation before Indian courts. Hence, it is essential to draw inspiration from jurisprudence being developed elsewhere. One such development relates to a decision rendered by the English High Court in December 2014 in Goldman Sachs International v. Videocon Global Limited and another (which came to my attention only recently).
Goldman Sachs (the Claimant) brought an action against two Videocon companies (the Defendants) under a series of ISDA Master Agreement pertaining to currency swaps. The agreement was terminated on 2 December 2011 due to the inability of Videocon to meet margin calls. By way of a notice dated 14 December 2011, Goldman Sachs set out calculations of the sum it claimed from Videocon under the agreement. In the first round of litigation, a judge held that Goldman Sachs had failed to provide sufficient details as to how the claim amount had been calculated. Thereafter, over two years later, on 7 March 2014, Goldman Sachs provided further details regarding the manner in which it arrived at the calculations.
The short question that arose for consideration before the judge was whether the notice (provided in two stages above) was in compliance with the requirements of the relevant clause of the ISDA Master Agreement.
It would be useful to set out the relevant extracts of the clauses from the judgment:
(i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. …
(ii) Payment Date. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective ... Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. ..."
Issues and Ruling
In order to sustain the claim, Goldman Sachs had to establish that the notice as provided was effective, so as to compel Videocon to perform its part of the contract. The judge bifurcated the legal issues into: (i) the timing of the notice, and whether it was delayed; and (ii) the effect of a delayed notice regarding the details of the calculation.
(i) Timing of the notice
The question for consideration was whether the second notice of details was delivered "on or as soon as reasonably practicable" following the Early Termination Date. On this, the judge held to the effect that the notice intended by Clause 6(d) included not just the calculation but the details as well. Moreover, there was a delay in the provision of the details. The judge observed:
8. In my judgment the Defendants plainly have a real prospect of establishing at trial that the second notice was not delivered "on or as soon as reasonably practicable" following the Early Termination Date. It seems to me most improbable that the parties to this currency swap envisaged that the provision of details of the sum claimed some two years or more after the Early Termination Date could ever be within the phrase "on or as soon as reasonably practicable" following the Early Termination Date.
(ii) Effect of Delayed Notice
Given that the judge came to the finding that Goldman Sachs’ notice (with the requisite details) was delayed, the next question was to consider the effect and the consequences of such a delay: more specifically, whether the delay rendered the notice and the claim ineffective. Here, the judge interpreted the terms of Clause 6(d) and made a fine distinction: Goldman Sachs’ notice was not rendered ineffective because it was not served “on or as soon as reasonably practicable” but that it was merely rendered “late”. He noted: “… clause 6(d)(ii) states that the sum is payable when the notice is effective. That requires one to have regard to the purpose of the notice. When one does so the second notice, albeit late, can be seen to be effective”.
In rejecting the argument of Videocon that a delayed notice must necessarily be ineffective resulting in the fatality of a claim, the judge observed:
19. I consider this construction to be so lacking in commercial sense that it cannot have been the meaning which a reasonable person with the background knowledge available to the parties would have understood the clause to bear. Indeed, it is difficult to conceive of a reason why the parties would have intended that a late notice should be an ineffective notice. By contrast there is commercial sense in a construction pursuant to which a notice is effective if it provides the paying party with the information required by clause 6(d). That is not to say that the provision of a late notice, that is, one which is not served "on or as soon as reasonably practicable" following the Early Termination Date is devoid of legal consequence. It is a breach of contract and so it may found an action in damages if the lateness has caused loss. Although [Vidoecon’s counsel] did not suggest that the lateness in this case has caused any loss I do not consider that it can be said that lateness can never cause loss. All will depend upon the circumstances of the case.
20. Finally, my approach to the construction of clause 6(d) is consistent with the policy of the court to give effect to, rather than to invalidate, commercial agreements. …
In sum, although the notice was delayed, the claim was found to be effective. This was the conclusion arrived at in summary judgment by the court, although a couple of incidental points were considered as well.
This decision highlights the difficulties in construing clauses in complex commercial contracts that are not altogether clear (although the particular term in question was the run-of-the-mill notice clause). First, for example, it was not evident from the clause whether the timing requirement of “on or as soon as reasonably practicable” applied to the first notice of the claim with the calculation of the amount payable or if it applied both to the calculation as well as the detailed basis on which it arrived at. The effect of the High Court’s decision effective subsumes both aspects within the timing requirement.
Second, the judge appears to have adopted a purposive or even pragmatic construction of the contract to give effect to the terms. A hyper technical would have rendered Goldman Sachs’ claim ineffective resulting in consequences, which the judge believes may not have been intended.
Third, the judge has struck a fine balance by treating the claim to be effective although it was delayed. But, at the same time, he allowed Videocon to claim a breach of contract for Goldman Sachs’ non-compliance with the notice provisions and to claim any loss that may have occurred to it. Although there was no evidence of such loss caused to Videocon in this case because of the delay, according to the judge such a possibility cannot be ruled out as it all depends on the circumstances of the case. Whether a defendant in such circumstances will be able to claim substantial amount in damages or whether it will enjoy only a pyrrhic victory is another matter. After all, it would be cumbersome and costly for the defendant to bring another action to sustain such a claim in damages.
At a broad level, this decision calls to attention the importance of greater clarity in drafting some of these clauses, which tend to occupy less prominence as they are considered “miscellaneous” or rather procedural in nature, but can become crucial in sustaining or negating a substantive claim.