This morning, the Court of Appeal judgment in The Netherlands v Deutsche Bank AG appeared. The Netherlands lost their appeal against Robin Knowles J’s ruling that negative interest should not be implied into an ISDA CSA. This was a 1995 CSA dated 14th March 2001 and so predated the concerns about negative interest rates, and the 2014 ISDA Collateral Agreement Negative Interest Protocol. That protocol does provide for negative interest to be paid. However, this CSA had not been amended. The outcome of the judgment is that The Netherlands, having received cash collateral which it could only redeposit it at less than 0% p.a., found itself sitting on a gradually wasting asset, while Deutsche was being paid to borrow the cash (at less than 0%) and so was making a tidy turn on it. This may not sound fair, but – apart from a brief period when Lord Denning was Master of the Rolls – the English courts have long regard upholding the wording of commercial documents as of paramount importance, and particularly with ISDA documents, which are the basis of trillions of dollars of business. As the excellent Briggs J (now Lord Briggs) said in Lomas v JFB Firth Rixson back in 2010, these are standard agreements used in a multiplicity of transactions in a plethora of circumstances, and it “axiomatic” that they should, “as far as possible be interpreted in a way that achieves the objectives of clarity, certainty and predictability, so that the very large number of parties using it know where they stand”. The judgment is not very long, and not really all that interesting, unless you have an old CSA yourself which is not affected by the 2014 protocol. The court accepted that the arguments of both sides were acceptable, and both pointed out that if the other side’s argument was right, the CSA could – but did not – have said so. It could have gone either way.
The moral for debt lawyers is perhaps to beware derivatives documents: there are tricky, with traps for the unwary.
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