24 March 2020

Swap terms and giving oral notices – Tips for avoiding disputes

This article was written by Richard Mazzochi, Minny Siu and Jonathan Chapman.

On 26 February 2020, the High Court of England and Wales handed down its judgment in the case of Alfred Street Properties Limited (formerly known as Killultagh Estates Limited) (“APSL”) v National Asset Management Agency (“NAMA”)[1].


APSL and NAMA were parties to 5 extendable interest rate swaps (the “Swaps").  On 2 April 2012, NAMA purported to exercise options (the “Extension Options”) to extend the Swaps for a further three years. Thereafter, until 1 April 2014, ASPL made quarterly payments to NAMA on the assumption that the Swaps had been duly extended.

The case was brought by APSL who disputed, on a number of technical and formal grounds, that NAMA had effectively exercised the Extension Options.  As such, they claimed restitution of the amounts that they paid to NAMA after the purported exercise of the Extension Options.[2] 


This alert examines potential issues in connection with:

  • incorporating provisions contained in another document into a contract; and
  • giving oral notices under a contract,

and provides practical tips to avoid associated disputes. We set these out as a set of “lessons learnt” below.

Key lessons:

1. ...when a contract relies on provisions contained in another document

Issue: the primary issue in the case was whether NAMA could rely on the option exercise mechanics (the “ISDA Option Exercise Mechanics”)[3] set out in the standalone 2000 ISDA Definitions booklet (the “2000 ISDA Definitions”)[4].  This was important because the ISDA Option Exercise Mechanics allow the Extension Options to be exercised orally whereas the ISDA master agreement’s general notice provisions[5] do not permit oral exercise.

This issue arose because the ISDA Option Exercise Mechanics are drafted to apply to derivative transactions identified by the parties as “Option Transactions” (including transactions identified as “Swaptions”).  In this case, the Swaps were not expressed to be “Option Transactions” or “Swaptions”.  As such, APSL argued that the ISDA Option Exercise Mechanics (which permit exercise orally) did not apply and therefore the Extension Options could only be exercised by NAMA giving APSL notice by post or courier as required by the ISDA master agreement (which had not occurred).

Although the court agreed with APSL that the terms of standard market agreements (such as the ISDA master agreement and the 2000 ISDA Definitions) should be interpreted strictly to promote clarity, certainty and predictability in the relevant markets where they are used, those terms are subject to specific provisions agreed between the parties in any Schedule and confirmation (which prevail in the event of any uncertainty).[6] 

This was a case where specific provisions applied.  The court determined that the ISDA Option Exercise Mechanics did apply to the Swaps even though (i) the Swaps were not expressed to be “Option Transactions” or “Swaptions”; and (ii) the Swaps did not fully align with all the terminology used in the ISDA Option Exercise Mechanics.  This was on the basis that the Swaps interpreted as a whole (and the construction most consistent with business common sense) was for the ISDA Option Exercise Mechanics to apply to them.

Legal test: in interpreting a contract, the court will attempt to ascertain the objective meaning of the language used by the parties:

  • considering the contract as a whole; and
  • in the case of rival constructions, by reaching a view as to which construction is more consistent with business common sense.[7]

Lessons learnt: the court in APSL v NAMA gives market participants comfort that it will not take an overly technical or restrictive approach to interpreting contracts (even where based on market standard contracts).  However, when attempting to rely on/incorporate provisions contained in another document (the “Other Document”), parties should make sure that:

  • the agreement between them expressly states that the relevant provisions of the Other Document are intended to apply to that agreement; and
  • the agreement fully aligns with the relevant provisions of the Other Document.[8]

2. ...in agreeing notification methods

Issue: APSL argued that the oral exercise of the Extension Options was impossible as only a postal address for APSL had been given and so that was the only notification method that would be permitted.

The court rejected this analysis on the basis of the drafting of the ISDA Option Exercise Mechanics (which refers to notice being given “…orally, including by telephone, unless the parties specify otherwise…in accordance with the contact details, if any, specified in the related Confirmation.” [emphasis added]).[9]  As such, the court determined that a party may exercise an option pursuant to the ISDA Option Exercise Mechanics orally even if no telephone number has been provided.[10]

Legal test:

  • As a general rule, parties must comply with the general notice provisions in an ISDA master agreement.[11] If no contact details are specified for a method of notification (eg post, fax, electronic messaging service etc) that method cannot be used.[12]
  • However, the ISDA Option Exercise Mechanics are drafted such that oral notice is allowed (unless expressly specified otherwise). A failure to provide a specified telephone number for oral notices does not affect the notice method contemplated in the ISDA Option Exercise Mechanics.

Lessons learnt:

  • If the parties do not intend to allow for oral notices, they should expressly state so in their trade confirmation.
  • If oral notices are permissible, the parties should agree who is entitled to receive the relevant notices on behalf of the grantor of the option (and provide their contact telephone number(s)).

3. ...when giving oral notices/instructions

Issue: APSL argued that the oral exercise of the Extension Options was invalid because the language used by NAMA during the relevant telephone call was insufficiently clear to ensure that the APSL contact understood that NAMA was exercising the Extension Options on that call.

The court rejected this argument on the basis that the test is an objective “reasonable person” test and as such, the actual understanding of the APSL contact was irrelevant.  On the evidence provided, a reasonable person would have understood that NAMA was exercising the Extension Options.

Legal test: in interpreting the effect of a notice, the court confirmed that the test is whether:

  • a reasonable person in the position of the recipient; and
  • with knowledge of the relevant circumstances,

would have understood that, pursuant to the relevant conversation, the other party was exercising the option.  This should be determined by looking at both the actual words used and the factual context of the case.

Lessons learnt: when giving oral notices as permitted by the underlying agreements should ensure:

  • that their counterparty knew the precise subject matter of the conversation and understood the precise terms of what was being undertaken;[13]
  • that the wording used on the call was unequivocal (for example, when exercising an option, the exercising party should refer to the exercise in the present tense);
  • any mention on the call relating to written follow-up communications should be clear any such communications are merely intended to be by way of confirmation of the notice provided by the call; and
  • that any oral notice is conducted on a recorded line and the recording, or an official transcript of the recording, is retained.

4. ...retain evidence of any communications

Issue: APSL argued (more than 5 years after the date of the relevant call purporting to exercise the Extension Options) that the oral exercise of the Extension Options was invalid because it occurred after the contractual cut-off time (which was 11 am Belfast time) on the date of exercise.

Legal test: this was a purely evidential matter.  As part of disclosure, NAMA was able to produce a transcript (with a relevant time stamp) of the call and an internal timestamped email confirming that NAMA had spoken to APSL and exercised the Extension Options before the contractual cut-off time.

Lessons learnt: to preserve evidence of any oral communications, parties should ensure that:[14]

  • such communication is conducted on a recorded line and the recording (or an official transcript of the recording) is retained with a time stamp and/or meta-data proving the time of the call;
  • a contemporaneous file note is produced (including a time stamp or meta-data to prove the contemporaneous nature of the file note). In the NAMA case, its approach of recording the oral notice by an internal email was accepted as an effective method for doing this; and
  • the records are retained for an appropriate period (which may extend beyond the termination of the relevant transactions).


It is clear that the judge (Lord Justice Phillips) had little sympathy for the arguments of APSL (describing them as “highly opportunistic and meritless”).  However, the case does highlight a number of straightforward steps that parties can take when negotiating and performing agreements to reduce the chance of disputes (opportunistic or not) being raised in connection with:

  • incorporating provisions contained in another document into a contract; and
  • giving oral notices under a contract.

[1] [2020] EWHC 397 (Comm), available here: http://www.bailii.org/ew/cases/EWHC/Comm/2020/397.html.

[2] For the purposes of this article we do not focus on the portion of the judgment (paras 86 to 122) where, amongst other things, the judge considered whether APSL would be estopped from making its claim on the basis of the parties’ common assumption and/or ASPL’s representation that the Extension Options had been validly exercised.

[3] Articles 11 and 12 of the 2000 ISDA Definitions.

[4] The 2000 ISDA Definitions booklet is one of a number of standalone booklets published by the International Swaps and Derivatives Association, Inc. (“ISDA”) containing market standard terms for certain types of derivative transactions.  These booklets are made available by ISDA to be incorporated into transactions by parties with the aim of promoting standardisation and reducing cost and uncertainty in the relevant markets.

[5] Section 12(a) of the 1992 ISDA master agreement (Multicurrency – Cross Border)

[6] At para 46.

[7] See para 48 and statements of Lord Hodge in Wood v Capita Insurance Services Limited [2017] UKSC 24, [2017] AC 1173.

[8] For example, if a defined term is used in the relevant provisions of the Other Document, the parties should attempt to tie their agreement into those defined terms.

[9] In the absence of any contact details, the party exercising the option rights must still notify an authorised representative of their counterparty.  It will be for the exercising party to ensure (and if necessary prove) that they actually notified such an authorised representative.

[10] Note that similar provisions to the ISDA Option Exercise Mechanics are included by ISDA in other definition booklets (for example, the 2006 ISDA Definitions).

[11] Note that, in certain circumstances (specifically, giving notices in connection with events of default, termination events and close-outs), the manner in which notices can be given under an ISDA master agreement are commonly further restricted.

[12] Greenclose v National Westminster Bank plc [2014] 2 Lloyds Rep 169

[13] As a practical matter, depending on the sophistication of the parties, it may be sensible for the exercising party to prepare a script before making the call.

[14] Many licensed and/or regulated entities in various jurisdictions are now subject to mandatory derivative record keeping, portfolio reconciliation and daily valuation requirements which are likely to reduce these types of disputes arising in the future.

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