Express or implied? High Court rejects "market practice" term

In 2015, CFH Clearing entered into FX spot trades with Merrill Lynch under which CFH Clearing bought Swiss francs and sold Euros. These trades were documented by an ISDA master agreement and electronic confirmations. They took place shortly after the Swiss National Bank removed the currency floor relating to the Swiss franc, so at a time of severe fluctuations in the FX market. Later that day, other banks adjusted the pricing of similar trades that they had executed with CFH Clearing to reflect the official interbank low of EUR/CHF 0.85.

CFH Clearing argued that Merrill Lynch had an express or implied obligation to follow suit.

In this summary judgment application by the bank, the High Court held that CFH Clearing had no real prospect of succeeding.

1. Express term argument

CFH Clearing relied on the following clause: "All transactions are subject to all applicable laws, rules, regulations…, where relevant, the market practice of any exchange… FSA rules…".

However, the court held that the words "subject to" did not, in this context, incorporate all applicable laws, rules and regulations (or market practice) into the contract. That interpretation would cause uncertainty and make the contract unworkable, particularly since "market practice" is itself a nebulous term.

Furthermore, that interpretation contradicted another clause which stated that FSA rules were not incorporated into the contract.

Lastly, CFH Clearing's proposed interpretation was commercially difficult, as it required the court to impose an obligation on Merrill Lynch to effect either of two conflicting alternatives – to keep but vary the transactions or to cancel them – without apparent regard to the parties’ wishes.

The court said the clause did not impose contractual obligations on any party. It had a negative effect: it was intended to relieve a party of its contractual obligations if that party was unable to perform those obligations due to relevant market practice.

For instance, if an order could not be fulfilled because its particular size was not being traded on the chosen market, the clause would have relieved the relevant party of its obligations relating to that order.

2. Implied term argument

The court also held that there was no implied term that Merrill Lynch had to follow market practice and reprice the transactions. It noted that an ISDA agreement contains comprehensive provisions widely used in the market. In these circumstances implying a general "market practice" term was neither necessary for business efficacy nor so obvious that it went without saying. The contract still worked without the implied term. It did not lack commercial or practical coherence without it (Marks and Spencer v BNP Paribas).

Update August 2020

This case was upheld on appeal. Only the express term argument was put to the Court of Appeal. It noted that the transaction were "were governed by a detailed contract which was on industry standard terms, reflected market practice (as further recognised by [a model code produced by the ACI Financial Markets Association which acknowledged that "legal aspects" were to be dealt with by a Master Agreement]) and was tailored by the parties for their specific business relationship." So, while it was certainly open for the parties to agree to vary, amend or supplement the ISDA Master Agreement, any alleged agreement to such effect must be considered in that context. Here there was no arguable basis to say the parties had so agreed.