The decision also provides commentary on key provisions of the ISDA Master Agreement, such as the entire agreement clause, and on the use of non-reliance clauses.
Background to the case
The case concerned the parties’ rights under an interest rate hedging arrangement (the Transaction) agreed in 2010 between BNP Paribas SA (BNPP) and the defendant, Trattamento Rifiuti Metropolitani SPA (TRM). The Transaction terms comprised a 1992 ISDA Master Agreement (the ISDA Master) governed by English law, with a schedule (the Schedule), and a final Confirmation (all together the Transaction Documents).
The Transaction reflected TRM’s interest rate hedging obligations to various banks, including BNPP, under a Financing Agreement (FA) agreed in 2008. The FA, governed by Italian law and containing a jurisdiction clause in favour of the Court of Turin, was created to provide funding for TRM to design, build and operate a waste-to-energy plant in Italy.
A dispute arose when, in July 2016, TRM expressed to BNPP its dissatisfaction that, inter alia, the Transaction had generated a significant negative cashflow for TRM.
Following correspondence, BNPP responded by issuing a claim form in respect of the dispute seeking various declarations of non-liability to TRM. The claim form was served in March 2017, and in April 2017 TRM brought an action in Italy, whereby it alleged that BNPP breached both contractual obligations under the FA and non-contractual obligations owed by BNPP to TRM under Italian law.
The judgment was published on 11 September 2020, and this article seeks to provide an overview of the useful commentary it provides.
Principles for the granting of negative declaratory relief
In the judgment’s discussion of whether to grant negative declaratory relief, it is noted that a court should be cautious when granting such relief as, although negative declarations can form a positive role, they do reverse the roles of the parties and this role reversal may lead to procedural difficulties and possible injustice to the unwilling ‘defendant.’
The judgment indicates that the granting of negative declaratory relief is essentially a discretionary exercise and, reflecting on the authorities, the following overarching issues were drawn:
- The touchstone is utility.
- The Court found that the “deployment of negative declarations should be scrutinised and their use rejected where it would serve no useful purpose”.
- The prime purpose for the use of negative declarations is to do justice in the particular case, this includes justice to the defendant.
- Consideration must be given to whether the granting of declaratory relief is the “most effective way of resolving the issues raised”, the process of which will include considering other options available.
- The emphasis on justice means the following limitations are generally applied.
- The court will not entertain purely hypothetical questions. It will not pronounce upon legal situations which could arise, but generally upon those which have arisen.
- There must, in general, be a real and present dispute between the parties before the court as to the existence or extent of a legal right between them.
- If the issue in dispute is not based on concrete facts the issue can still be treated as hypothetical. This can be characterised as “the missing element which makes a case hypothetical.”
Factors such as absence of positive evidence of utility and absence of concrete facts to ground the declarations may not be determinative. However, where there is such a lack, the court will wish to be particularly alert to the risk of producing something which is not only not useful but may also create confusion.
This commentary provides a helpful summary of the courts’ approach to applications for negative declaratory relief, including the circumstances in which a court would be limited from granting the relief.
Construction of the ISDA Master Agreement entire agreement clause
The declarations sought by BNPP included that the Transaction Documents (including documents entered into pursuant to the Transaction Documents) constituted “the entire agreement and understanding of the parties…”. The result of which would mean the parties’ agreement and understanding was not also contained in the FA (as was TRM’s approach).
BNPP was successful in obtaining this declaration. The Court found first that, the meaning of the entire agreement clause contained in the ISDA Master, was on its face, “clear and unambiguous”. The Court was also not convinced that, what was on a simple reading an “unambiguous” clause, could be seriously challenged by TRM’s argument that the ISDA Master and the FA were not separate documents but overlapped. The Court therefore found that:
- The FA did not override the ISDA Master, as TRM could not identify the provision of the ISDA Master which is offensive and with what part of the FA it is in conflict.
- While TRM is a party to both the ISDA Master and to the FA, BNPP is not a party to the FA in its capacity as the hedging bank. The Court commented that it would be odd if “the terms of a separate agreement in which BNPP participated only in an entirely distinct role, could qualify the agreement.”
- The Schedule notes that the Transaction was entered into “in connection with” the FA which is consistent with the ISDA Master and the FA being distinct, rather than overlapping, agreements.
- Finally, TRM’s approach would sit uneasily with various dicta in the authorities as to the importance of certainty and clarity in interpreting the ISDA Master Agreement.
Court’s findings on entitlement to the declarations sought
Having established that the Transaction Documents constituted the entire agreement and understanding of the parties, the judgment discusses whether BNPP is entitled to the declarations sought in respect of the Transaction.
Of particular importance for financial services contracts were the Court’s findings regarding the Transaction Documents’ ‘non-reliance’ clauses.
BNPP sought declarations, which tracked provisions of the Transaction Documents, including that TRM in entering the Transaction:
- Was acting for its own account and had made its own “independent decision” to enter into the Transaction and as to whether the Transaction was appropriate or proper for it based upon its own judgement (and advice from any advisers).
- Was not relying on any communication of BNPP as investment advice or as a recommendation to enter into the Transaction; it being understood that information and explanations related to the terms and conditions of the Transaction should not be considered investment advice or a recommendation to enter into the Transaction.
- Was capable of evaluating and understanding, and did understand and accept, the terms, conditions and risk of the Transaction.
BNPP’s overall argument was that it was clear that TRM agreed that BNPP did not make any actionable representations to TRM, and that TRM did not rely on any representations. BNPP also sought a further declaration that TRM was estopped by contract from contending otherwise.
Of particular interest is the judgment’s extensive discussion regarding the question of contractual estoppel. In its comments, the judgment referred first to Springwell Navigation Corpn v JP Morgan Chase Bank  EWCA Civ 1221 which broadly supports the finding of contractual estoppels arising from such reliance clauses. In doing so, the judgment cites the following comments from Aikens LJ in Springwell:
“there is no legal principle that states that parties cannot agree to assume that a certain state of affairs is the case at the time the contract is concluded or has been so in the past, even if that is not the case, so that the contract is made upon the basis that the present or past facts are as stated and agreed by the parties.”
After noting that the Court was bound by Springwell to find contractual estoppels arising from such ‘non-reliance’ clauses, the judgment goes on to describe what it would consider if it were not so bound by Springwell. It concluded that the relevant question would be “whether the court can objectively conclude that by the relevant contractual materials the parties did intend to agree in such a way” i.e. the parties did intend to agree to the contractual estoppel. This question itself was found to be a question of substance, looking at the relevant background, including the nature and status of the clauses, rather than attempting to discern a dividing line on the precise wording. The court decided that on this hypothetical basis too it would have reached the conclusion that a contractual estoppel existed.
Misrepresentation Act 1967
TRM further argued that the non-reliance clauses are either not capable of giving rise to contractual estoppel or should not be held to create one because they would be subject to the requirement of proving reasonableness under section 3 of the Misrepresentation Act 1967 (the Act).
As a reminder, section 3 of the Act provides that a term which would exclude or restrict liability, or the remedies available, for misrepresentations made prior to contract shall be of no effect except in so far as it satisfies the reasonableness test set out in Section 11(1) of UCTA 1977.
The Court’s starting point was that TRM’s argument appeared to be only generally directed towards contractual estoppels “without any meaningful attempt to identify which should be said to be exclusion clauses for the purposes of this argument. An exclusion clause must of course clearly be identified”.
The Court also criticised TRM for staying quiet on the subject “until the door of the court” before playing its ‘joker’ by claiming that the burden of reasonableness had not been discharged.
Further, the judgment stated that such evidence as there was, pointed in the other direction in that this particular case did not concern a consumer transaction or a case of inequality of bargaining power. The terms were contained within the standard ISDA Master and the Schedule was negotiated between two commercial parties. The Court consequently granted the declarations sought.