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English Court of Appeal Upholds Merrill Lynch's Reliance on ISDA Standard Terms

August 18, 2020, Covington Alert

On Friday 14 August, the Court of Appeal handed down judgment in the FX dispute CFH Clearing Limited v Merrill Lynch International [2020] EWCA Civ 1064. This appellate success, coming one year after Merrill Lynch obtained summary judgment at first instance against all CFH Clearing’s claims, was a comprehensive victory for the clear wording of standard ISDA documentation over creative legal arguments. 

Despite, or even because of, the one-sided result, the judgment contains important lessons for market participants on the approach the English Courts will take to future interpretation issues in ISDA disputes.   

The Background

The facts of the case can be briefly stated. CFH Clearing suffered serious losses in a large number of automated FX trades entered into during the ‘Swiss flash crash’ of 2015, in which the relevant EUR/CHF exchange rate fluctuated wildly for a short period of time. After the event, a number of its banking counterparties agreed to limit CFH Clearing’s losses to a market-recognised ‘official low’, which was set at a level higher than the rate at which some of CFH Clearing’s trades had been executed.  Merrill Lynch did not agree to limit CFH Clearing’s losses to this ‘official low’. In these proceedings, CFH Clearing therefore sought to recover from Merrill Lynch the losses it suffered over and above this market cap. 

The swaps entered into by CFH Clearing with Merrill Lynch were governed by a 2002 ISDA Master Agreement, and by an FX Confirmation Agreement. Importantly, the swaps were also governed by the Merrill Lynch terms of business (the “MLI Terms”). Abandoning various other arguments that had been unsuccessful at first instance, on appeal CFH Clearing advanced breach of contract claims against Merrill Lynch based solely on Clause 7 of the MLI Terms, which stated in relevant part that:

“… All transactions are subject to all applicable laws, rules, regulations howeverso applying and, where relevant, the market practice of any exchange, market, trading venue and/or any clearing house and including the FSA Rules…”

CFH Clearing argued that Clause 7 of the MLI Terms incorporated foreign exchange market practice into the terms of its agreement with Merrill Lynch. Specifically, CFH Clearing claimed that Merrill Lynch was in breach of the foreign exchange market practice to adjust or cancel deals, when extreme events occurred (such as the Swiss flash crash) which caused those deals to occur at prices outside the normal market range. CFH Clearing relied upon the provisions of the Model Code published by ACI - The Financial Markets Association (the International Code of Conduct and Practice for the Financial Markets) as evidence that this market practice did in fact exist.  

This contention was denied by Merrill Lynch, whose position was that market practice was too vague and uncertain to be incorporated as a contractual term, and that the purpose of Clause 7 of the MLI Terms was simply to ensure neither party was obliged to act in a way which breached any laws, rules or regulations. 

The Court’s Decision

The Court of Appeal came down strongly on the side of Merrill Lynch, for three main reasons:

  • First, it was expressly stated in the MLI Terms that the terms of specific transactions would take precedence over the general provisions of the MLI Terms themselves. In the opinion of the Court, “it could not be clearer” that the terms of the ISDA Master Agreement would therefore prevail over any contrary provisions introduced by the MLITerms, such as (on CFH Clearing’s case) any cap on losses arising from market practice.
  • Second, even if it were possible to override the provisions of the ISDA Master Agreement to account for market practice (which it was not), Clause 7 could not in the opinion of the Court properly be interpreted as referencing foreign exchange market practices, as opposed to specific markets such as the platform used for CHF/EUR exchanges (in this case, the EBS platform). CFH Clearing had not shown that any loss-limiting market practice could be said to arise from those platforms.
  • Third, even if Clause 7 had referred to foreign exchange market practice (which it had not), the alleged market practice was far too vague and uncertain to be incorporated as a contract term. Tellingly, the Court noted that the Model Code itself recognised that the requirements of legal certainty, including as to market practice, should be addressed by formalising the parties’ relations through an ISDA Master Agreement, the very document CFH Clearing was seeking to override.


The Court of Appeal’s judgment represents a welcome endorsement of an important fact - that parties that contract using ISDA Master documentation do so precisely because they want their deals to be governed by ISDA Master terms.  In the last twenty or so years, there have been a number of creative challenges by claimants who have sought to vary those terms by reference to market regulations or practices, on the basis of clauses similar to Clause 7 of the MLI Terms.  While each case will turn on its own facts, the Court of Appeal’s decision recognises that parties are unlikely to have intended to agree unspecified terms which contradict the terms of ISDA documentation. The door opened by Brandeis (Brokers) Ltd v Black [2001] 2 All E.R. (Comm) 980 is closing, and sensible provision by parties for legal or regulatory obstacles, in the manner of Clause 7 of the MLI Terms, should lead to fewer challenges in future. 

The judgment is also noteworthy as the latest in a series of decisions by the English Courts to emphasise the importance of certainty and predictability in the interpretation of ISDA Master agreements more generally. Indeed, it is fast becoming a commonplace for English Courts, including the Court of Appeal both here and previously, to preface their discussions on this topic with a reference to the comments of Briggs J in Lomas & Ors v JFB Firth Rixson Inc & Ors [2010] EWHC 3372 (Ch) that:

 “The ISDA Master Agreement is one of the most widely used forms of agreement in the world. It is probably the most important standard market agreement used in the financial world … It is axiomatic that it should as far as possible, be interpreted in a way that serves the objectives of clarity, certainty and predictability, so that the very large number of parties using it should know where they stand”.[1]

In this case, the Court of Appeal went further still, noting that CFH Clearing “was bound by the terms of those transactions according to the ISDA Master Agreement it had negotiated and agreed with MLI, an agreement which could have made, but did not make, provision for market disruption. I see no reason why CFH should not be held to its bargain.” The message to parties is simple: if you want to vary the terms of ISDA Master Agreements, make sure you do so explicitly.

If you have any questions concerning the material discussed in this client alert, please contact the below members of our Litigation and Investigations practice.

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[1] See e.g. The State of the Netherlands v Deutsche Bank AG [2019] EWCA Civ 771; Re Lehman Brothers (No 8) [2016] EWHC 2417 (Ch).


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