Case No: HC10C02146
Neutral Citation Number: [2011] EWHC 718 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 28/03/2011

Before :

MR JUSTICE BRIGGS
- - - - - - - - - - - - - - - - - - - - -
Between :

	LEHMAN BROTHERS SPECIAL FINANCING INC.
	
Claimant	
	- and -
		
	CARLTON COMMUNICATIONS LIMITED	
Defendant	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Mr Jonathan Nash QC (instructed by Weil, Gotshal & Manges, One South Place, London EC2M 2WG) for the Claimant
Ms Felicity Toube (instructed by Hogan Lovells International LLP, Atlantic House, Holborn Viaduct, London EC1A 2FG) for the Defendant

Hearing dates: 21st March 2011
- - - - - - - - - - - - - - - - - - - - -
Judgment
Mr Justice Briggs:
INTRODUCTION
1.	This judgment follows the trial, on agreed facts, of a claim by Lehman Brothers Special Financing Inc (“LBSF”) for £2,656,649.00 plus interest alleged to have been owing by the defendant Carlton Communications Ltd (“Carlton”) upon the maturity on 2nd March 2009 of two linked interest rate swaps incorporating the terms of the 1992 ISDA Multicurrency Cross Border Master Agreement (“the Master Agreement”).  The claim seeks, in addition, declarations that provisions in the Master Agreement are, at least as between these parties, unenforceable because they offend the anti-deprivation principle or, alternatively, constitute a penalty.
2.	The issues which arise on this claim are substantially the same as those which I determined, in December 2010, in Lomas & ors v. JFB Firth Rixson Inc & ors [2010] EWHC 3372 (Ch).  An application for this claim to be tried together with the Firth Rixson case was made but dismissed by me in October 2010.  This was in part because LBSF wished (unlike the applicants in the Firth Rixson case) to rely upon expert evidence and in part because this claim had, as at that date, some catching up to do in terms of preparation.
3.	In view of the almost complete overlap of issues, counsel for both parties very sensibly took my Firth Rixson judgment as the starting point for their submissions.  That judgment is the subject of a pending appeal, yet to be heard.  In relation to the anti-deprivation principle, the Supreme Court has now heard the appeal in Perpetual Trust Co Ltd v. BNY Corporate Trustee Services Ltd [2009] EWCA Civ 1160, but judgment is awaited.  Counsel’s submissions have therefore concentrated on those aspects of this case in respect of which the facts and/or expert evidence lend themselves to different submissions than those made in the Firth Rixson case.  In addition, the argument that Section 2(a)(iii) of the Master Agreement operates as a penalty has been actively pursued, there being no concession, as there was in the Firth Rixson case, that it is bound to fail at first instance.
4.	I shall in this judgment follow counsel’s sensible lead by treating my judgment in the Firth Rixson case as essential pre-reading.  In this judgment I shall adopt definitions and abbreviations used there, and take the in-depth analysis of the 1992 version of the Master Agreement as read.
THE FACTS
5.	LBSF is a Delaware corporation and was, prior to the Lehman Group’s collapse, the principal group company engaged in fixed income OTC derivatives business including interest rate swaps.  It was an unregulated entity with no capital adequacy requirements.  Its ultimate parent company was Lehman Brothers Holdings Inc. (“LBHI”).
6.	Carlton is and has at all material times been an English company carrying on business in media and broadcasting from headquarters in London.  LBSF is, but Carlton is not, a member of ISDA.
7.	LBSF and Carlton entered into an ISDA Master Agreement (1992 version) dated as of 8th July 2003 for the purpose of regulating derivative transactions between them.  LBHI was LBSF’s Credit Support Provider. The accompanying Schedule elected against Automatic Early Termination and chose the Second Method, Loss version, under Section 6(e), for the purpose of calculating payments on Early Termination. 
8.	On or about 22nd December 2004 LBSF and Carlton signed confirmations in relation to two related interest rate swap transactions, the trade date for each of which was 14th December 2004.  The notional amount for each was £250 million.  Under the first swap LBSF paid a fixed rate of £7,031,250.00 on 2nd March and 2nd September in each year beginning on 2nd March 2005 and ending on 2nd March 2009.  Carlton paid a floating rate based on sterling LIBOR, fixed in arrears, on the same dates.
9.	Under the second swap LBSF paid sterling LIBOR based payments fixed in arrears, while Carlton paid a floating rate consisting of the greater of (i) a LIBOR based rate from the end of the relevant period or (ii) a LIBOR based rate from the last day of the preceding period.  Payments were to be made on the same dates as under the first swap.  The net effect of the two swaps, taken together, was that LBSF was the fixed rate payer and Carlton the floating rate payer by reference to a LIBOR based ratchet coupon.
10.	The underlying commercial purpose of the swaps for Carlton was to hedge its fixed interest exposure.  While this may sound a little less easy to understand than a hedge against a floating rate exposure, Carlton’s objective was to match its fixed interest rate liabilities against income which it expected to fluctuate broadly in accordance with floating interest rates.
11.	Carlton’s only use of derivative financial instruments was for the purpose of hedging its exposure to interest rates.  It was not a speculator in derivatives, and had no knowledge of the regulatory capital requirements affecting some financial institutions.
12.	All but the last of the payment dates under the two swaps had come and gone by the time the Lehman Group collapsed in late 2008.  LBHI was placed in Chapter 11 bankruptcy on 15th September, and LBSF followed on 3rd October.  There were therefore two Events of Default continuing by 2nd March 2009, the default constituted by LBHI’s bankruptcy having occurred first.
13.	LBSF was in the money on 2nd March 2009 and, but for those Events of Default, was entitled to be paid £2,656,649.31 by Carlton.  During the period between the two Events of Default and the expiry of the two swaps by effluxion of time on 2nd March 2009 Carlton did not re-hedge.
CONSTRUCTION
Gross Net
14.	In paragraphs 60 to 65 of my Firth Rixson judgment, I described a convention between the parties to that case, to the effect that, notwithstanding Marine Trade SA v. Pioneer Futures Co Ltd BVI [2009] EWHC 2656 (Comm) [2010] 1 Lloyd’s Rep 631, the non-defaulting party did have to give credit on any payment date for an amount which, but for the other party’s default, it would have been obliged to pay, when claiming any amount from the defaulting party.  In the present case, both LBSF and Carlton adopted the same convention, both in relation to payment obligations arising on the same date, and in relation to netting of payment obligations arising on different dates during a period of continuing default.  For LBSF Mr Jonathan Nash QC emphasised that this convention should be understood to be limited strictly to the swaps the subject matter of this litigation, and to have no wider purport or effect.
Once and for All v Suspension
15.	Carlton was broadly content to adopt the construction of the 1992 Master Agreement set out in my Firth Rixson judgment, albeit that Ms Felicity Toube reserved Carlton’s right to argue on any appeal (like ISDA in the Firth Rixson case) that there was an indefinite survival of contingent obligations suspended by Section 2(a)(iii) of the Master Agreement.  It was therefore common ground that the effect of non-satisfaction of the condition precedent in Section 2(a)(iii)(1) was suspensory rather than once and for all.  
The Constructions Alternatively Advanced by LBSF 
16.	For LBSF Mr Jonathan Nash QC advanced two of the three alternative submissions which had been made by the Administrators in the Firth Rixson case.  They are identified under subheadings A and B in paragraph 81 of my Firth Rixson judgment.  In the context of a case in which the Events of Default occurred only before the very last of the payment dates provided for in the two swaps, Mr Nash submitted that Carlton had the necessary reasonable time between the occurrence of the defaults (in September and early October 2008) and the payment date (2nd March 2009) in which to decide whether to elect Early Termination. Carlton was therefore obliged to pay the full aggregate amount of £2.6 million odd, not having elected for Early Termination in the meantime, despite the fact that both Events of Default were, in ordinary language, still continuing at the time of the final payment date.
17.	Mr Nash made a number of additional submissions in support of LBSF’s case on construction, beyond those which I addressed in my Firth Rixson judgment.  The first was that I should approach the interpretation of the Master Agreement upon the basis of a matrix of fact which included an awareness that the capital adequacy requirements of most bank participants in ISDA agreements were such as to prohibit the inclusion of what are known as “walk-away clauses”.  He submitted that any construction of Section 2(a)(iii) which could permanently discharge the non-defaulting party from what would otherwise have been a payment obligation (whether immediately, or upon expiry of the agreement by effluxion of time) meant that Section (2)(a)(iii) would be classified as a walk-away clause, contrary to the parties’ assumed intention.  By contrast, a construction of Section 2(a)(iii) which merely suspended the payment obligation for a reasonable time, or until termination by effluxion of time, pending an election for Early Termination, would not have that effect.
18.	The legal basis for this submission consisted of a citation from a passage in Lord Bingham’s speech in Dairy Containers Ltd v. Tasman Orient CV [2005] 1 WLR 215, at paragraph 12:
“There may reasonably be attributed to the parties to a contract such as this such general commercial knowledge as a party to such a transaction would ordinarily be expected to have .…  The contract should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed….”
The “document” in that case was a bill of lading which incorporated, with significant amendments, the Hague Rules.  Mr Nash submitted that, because in the vast majority of contracts incorporating the ISDA Master Agreement, one or both parties will be banks, with regulatory requirements as to capital adequacy, an understanding that such requirements precluded walk-away clauses would be part of the background knowledge “reasonably available to the person or class of persons to whom the document is addressed”.  
19.	The factual basis for Mr Nash’s submission consisted of the unchallenged expert evidence of Professor Alan Morrison, Professor of Finance at the University of Oxford’s Saïd Business School, an undoubted expert in bank regulation in general, and capital regulation in particular.  His report was prepared under the following very general instruction:
“In your report, we should be grateful if you would consider, as a general point rather than on the facts of this case, whether “walkaway” clauses in an ISDA Master Agreement have an effect on regulatory capital requirements for financial institutions under the Basel II framework applicable in the United Kingdom and what such an effect would be.”
Those instructions did not require Professor Morrison to provide a precise definition of a walk-away clause, still less to opine on the question whether any particular construction of Section 2(a)(iii) of the Master Agreement made it a walk-away clause within the general meaning attributed to that phrase in his opinion.
20.	The gist of Professor Morrison’s opinion may be summarised as follows:
i)	Banks commonly enter into a multitude of derivative contracts with particular counterparties to whose credit risk they are exposed.  At any moment in time the bank will have unrealised profits on one group of transactions within that multitude and unrealised losses on the other, where each group of derivatives has opposite market exposures.
ii)	In the absence of any netting agreement, the insolvency of the counterparty will expose the bank to full liability for its unrealised losses, but (depending upon the extent of the insolvency) reduce or extinguish its unrealised profits.  
iii)	Banks therefore commonly make netting agreements with their counterparties providing for the aggregation of their mutual transactions in the event of a default, so that the bank’s exposure to its counterparty’s credit risk is limited to the net unrealised profit (if any) on the aggregate of those transactions.
iv)	Bank regulators assess the bank’s credit risk exposures in accordance with rules laid down by the Basel Committee which recognise such netting arrangements as reducing that risk, and apply regulatory capital adequacy requirements accordingly.
v)	The ISDA Master Agreement is currently recognised as providing effective netting of all mutual transactions, including swaps, between parties to a Master Agreement, provided that it does not include the “First Method” for the calculation of Payments on Early Termination provided in clause 6(e) of the 1992 Master Agreement, since the First Method constitutes a walk-away clause, generally regarded as destructive of an effective netting arrangement between the parties.
vi)	The First Method is a walk-away clause because it enables the non-defaulting party to avoid making any payment to the defaulting party on Early Termination in relation to transactions under which the defaulting party is in the money, or where the defaulting party is in the money on the net aggregate of terminated transactions.
vii)	For that reason banks tended to avoid using the First Method under the 1992 Master Agreement, and it was removed altogether from the 2002 reissue.  
viii)	The basis upon which regulated bank users of the ISDA Master Agreement report their credit risk exposures to their regulators means that both the banks and their regulators must be taken as assuming that, save for the First Method under the 1992 Master Agreement, those Agreements do not include a walk-away clause.
21.	Professor Morrison stopped short of a conclusion that the interpretation of Section 2(a)(iii) of the Master Agreement contended for by Carlton in its pleading (which he had read) made it a walk-away clause.  His instructions did not require him to address that question.  Nonetheless Mr Nash submitted that an interpretation of Section 2(a)(iii) which, upon the expiry of a relevant transaction by effluxion of time, enabled the out of the money non-defaulting party permanently to avoid payment to the party in continuing default made it into a walk-away clause.  His reasoning was that it would in those circumstances have broadly the same effect as the First Method under Section 6(e), in the event of Early Termination.  The First Method calls for a close-out calculation under which nothing is ever payable to the defaulting party: see paragraph 17 of my Firth Rixson judgment.
22.	In the Firth Rixson case, Mr Zacaroli QC for ISDA (which appeared as intervenor) cautioned me against any simplistic conclusion that any particular interpretation of Section 2(a)(iii) of the Master Agreement could make it a walk-away clause, but the evidence in that case did not address the issue.  As will appear, it is unnecessary for me to decide that question in the present case.  On Professor Morrison’s analysis the question does not turn on the effect of Section 2(a)(iii) on an insolvent regulated bank, but rather upon the effect of the clause on a non-defaulting bank’s ability to net its unrealised profits and losses in the aggregate of its ISDA transactions with a potentially insolvent counterparty to whose credit risk the bank is exposed.  While I recognise the force of Mr Nash’s analogy with the First Method under section 6(e), it is only an analogy, and by contrast the effect of Section 2(a)(iii) on Carlton’s construction is suspensory rather than immediate, at least until the termination of a transaction by effluxion of time. 
23.	For present purposes I am prepared to assume, but without deciding, that the interpretation of Section 2(a)(iii) for which Carlton contends (and which I concluded was correct in the Firth Rixson case) would make it a walk-away clause, and that those responsible for its appraisal in a regulated bank may generally be assumed to have thought otherwise, to the extent that they gave the matter any conscious consideration.
24.	But that assumption comes nowhere near justifying the inclusion, as part of the relevant matrix of fact, of the regulatory and capital adequacy underlay for the proposition that a regulated bank would be unlikely to intend to contract under the Master Agreement on the basis that Section 2(a)(iii) was a walk-away clause.  My reasons follow.  
25.	First, it is by no means typical that both parties to a Master Agreement will be banks, let alone regulated banks.  More typically, banks will sell swaps and other financial derivatives on ISDA terms to non-bank customers which, like Carlton and all the respondents in the Firth Rixson case, will as consumers of those derivatives, leave the regulatory capital implications of their sale by regulated banks to be dealt with by the banks, rather than investigated as a matter of mutual interest or concern.  
26.	Using Lord Bingham’s language in the Dairy Containers case, the “person to whom the document is addressed” in a typical bank/customer swap transaction is not the bank but the customer.  The bank will typically be a member of ISDA and the proponent of the Master Agreement as containing the terms governing the swap.  Of course, the customer may well be a sophisticated commercial enterprise, but I consider it unrealistic to suggest that non-bank customers as a class should be regarded as having the banks’ regulatory capital concerns as part of the “background knowledge which is reasonably available” for the purposes of construction.  Thus while I accept Mr Nash’s submission that it may be insufficient for a particular member of the class of person to whom a document like the Master Agreement is addressed to plead ignorance of some reasonably available background facts, the application of the objective approach of the Privy Council in Dairy Containers takes his case no further.
27.	I do not of course have access to statistical evidence which would enable me to conclude whether there are more banker/banker than banker/customer derivative transactions on ISDA terms.  It is sufficient for present purposes to conclude, as I do, that the banker/customer class of such transactions is sufficiently large for it to be treated as the relevant class for the purpose of the application of Lord Bingham’s analysis.
28.	Secondly, Mr Nash’s submission comes unacceptably close to an attempt to treat as part of the matrix of fact the subjective intentions and expectations as to the meaning of the contract likely to be entertained by one class of typical party, i.e. regulated banks.  It is no part of the function of the admissibility of the matrix of fact to be used in that way.
29.	Thirdly, to the extent that parties to a swap on ISDA terms are at all likely to consider its implications in the event of insolvency, it is the insolvency of the non-bank counterparty rather than of the bank which they may be supposed to have had primarily in mind.  It is by no means obvious, even after having the benefit of the analysis from as distinguished an expert as Professor Morrison, that to treat Section 2(a)(iii) as enabling the bank to avoid paying an insolvent non-bank counterparty when out of the money would be a consequence adverse to the analysis of its counterparty credit exposures when addressing regulatory capital adequacy.  It is in that context noteworthy that Professor Morrison’s analysis of the effect of off-setting derivative positions between a bank and its customer upon the bank’s capital adequacy is based upon a review of the effect of the non-bank counterparty’s risk of insolvency, rather than of the effect of the insolvency of the bank.
30.	Mr Nash’s second submission was more of an after the event comment (but none the worse for that) upon part of my reasoning in the Firth Rixson judgment, at paragraphs 84 to 87.  In paragraph 87 I concluded that, in the context of a bankruptcy Event of Default, there was every reason to think that Section 2(a)(iii) was designed to provide a potentially better option to the non-defaulting party than an election for Early Termination, since the latter would provide only the form rather than the substance of a remedy against the insolvent counterparty.  Mr Nash submitted that if the supposed benefit of the alternative option was a protection for the non-defaulting party from exposure to the cost of having to re-hedge, then Section 2(a)(iii) was a curious way of conferring it, if it was only (at least initially) suspensory in its effect.
31.	I am not persuaded by that submission.  The suspension of the payment obligations of the non-defaulting party comes to an end only if and when the defaulting party remedies its default, in the sense of being able again to provide the hedge for which the non-defaulting party contracted in the first place.
32.	Mr Nash had no persuasive submissions in relation to the conclusions (at paragraphs 88 and 89 of my Firth Rixson judgment), that both the implied terms for which he contends are contrary to the express terms of the Master Agreement.  More generally, and leaving aside the expert evidence to which I have referred, the facts of the present case differ in no discernible respect from those in the Firth Rixson case, so far as affects the issues of construction. I therefore conclude that there are not to be implied into the Master Agreement made between these parties either of the terms for which LBSF contend.
ANTI-DEPRIVATION
33.	Mr Nash made three interrelated points under this heading.  They may be summarised as follows:
i)	This case is indistinguishable from ex parte Mackay (1873) 8 Ch App 643.
ii)	The “continuing obligation” basis of distinction which I identified in my Firth Rixson judgment, at paragraphs 108 to 110, was unsupported by any earlier authority, and unrelated to the public policy justification for the anti-deprivation principle.
iii)	In any case, that basis of distinction broke down on the facts of the present case, in which the supposed deprivation occurred only at the moment of the expiry of the transaction by effluxion of time, when no obligations on either side remained to be performed thereafter.
34.	I am not persuaded that those points, singly or in the aggregate, afford a basis for departing from the conclusions which I have reached, on indistinguishable facts, in the Firth Rixson case.  As to the first, ex parte Mackay is undoubtedly an example of a case in which the anti-deprivation principle was not avoided by the creation, ab initio, of a flaw in the relevant asset.  Nonetheless it was a case in which the relevant asset was the quid pro quo for an earlier out and out sale of a patent by the eventual bankrupt, in relation to which he had no outstanding obligations to perform, as at the date of his bankruptcy, in return for the receipt of the promised payments.  More generally, ex parte Mackay was not a simple case of a condition precedent to an otherwise promised series of payments, but rather of an attempt to constitute the asset represented by the right to payment as a security for a debt owed by the bankrupt, triggered by the onset of bankruptcy.  
35.	As to Mr Nash’s second point, I acknowledge that the basis upon which in my Firth Rixson judgment I sought to distinguish between the circumstances in which an ab initio flaw in an asset will and will not contravene the anti-deprivation principle is not to be found in terms in earlier authority, nor is it a simple application of the underlying rationale for the principle itself.  It is however not uncommon for the retrospective review of decided cases to yield a working guide for the identification of circumstances which fall on one or the other side of a difficult and elusive dividing line.  Furthermore the basis of the distinction is that the anti-deprivation principle should yield in appropriate circumstances to party autonomy: see Perpetual at paragraphs 57 to 58.  It is the underlying interest in permitting and preserving party autonomy that I consider justifies the ‘continuing obligation’ test identified in paragraph 108 of my Firth Rixson judgment.  In short, commercial parties should in principle be free to terminate or adjust what would otherwise be an ongoing relationship where their counterparties go into an insolvency process.
36.	There is at first sight rather more force in Mr Nash’s third point, on the particular facts of the present case, where the condition precedent only intervened before the occurrence of what would otherwise have been a payment obligation falling due on the very day of the termination of the transaction by effluxion of time.  There were, on those particular facts (not replicated in the Firth Rixson case) no continuing obligations on either side of these two swaps after 2nd March 2009.
37.	Ms Toube’s response was that the payment obligations were suspended not merely on 2nd March 2009, but with immediate effect from the happening of the two Events of Default, in September and October 2008, and for as long as they continued.  Viewed from those earlier dates the transaction had nearly another six months to run, and it could not be predicted with certainty whether Carlton would be in or out of the money when the final payment date arrived.  Thus Carlton was not merely (as it turned out) relieved from an obligation on the final payment date, but deprived of its promised hedge for the whole of the five months or so from the date of default until the termination of the two transactions by effluxion of time.
38.	There is much to be said for that analysis, but in my judgment the more substantial answer to Mr Nash’s third point is that it fails to see the wood for the trees.  The question for the court is not simply whether Section 2(a)(iii) of the Master Agreement offends the anti-deprivation principle on a particular payment date, but whether its propensity to be triggered by LBSF’s bankruptcy makes it offensive to that principle generally.  The fact that one occasion for the operative effect of the bankruptcy condition precedent is the very last payment date under the relevant transaction is, in my view, neither here nor there.  Viewed generally, the condition precedent may operate at any time during the life of the transaction when, and then for as long as, the counterparty is in a state of bankruptcy or insolvency.  In substance the effect of the bankruptcy condition precedent is to relieve the non-defaulting party from payment obligations for as long as the defaulting party is, by reason of bankruptcy, incapacitated from providing the promised hedge.  It makes no difference that the incapacity lasts until the very last day of the transaction, or that it only occurs some five months before termination, with one payment date still to occur.
39.	There is an additional reason why the anti-deprivation principle is in my judgment of no effect in the present case.  It is because, in advance of LBSF’s insolvency, an Event of Default had already occurred by reason of LBHI’s insolvency, as Credit Support Provider.  For the reasons set out in paragraph 118 of my Firth Rixson judgment, and in Perpetual at paragraphs 69 to 73, there was on 2nd March 2009 a continuing Event of Default to which the anti-deprivation principle cannot apply.
PENALTY
40.	In the Firth Rixson case, I described the Administrators as having “very sensibly” conceded that I would be bound to conclude that the assertion that Section 2(a)(iii) operated as a penalty when triggered by a bankruptcy Event of Default was prohibited by the decision of the Court of Appeal in Associated Distributors Ltd v. Hall [1938] 2 KB 83, approved (obiter) in Campbell Discount Co Ltd v. Bridge [1962] AC 600.  Mr Nash robustly challenged that assumption.  His submission was that Associated Distributors v. Hall decided only that a payment contracted to be made as the result of the voluntary exercise of an option by the payer could not be categorised as a penalty, and that the House of Lords went no further in Campbell Discount v. Bridge.  He submitted that neither decision said anything about a penal provision which was triggered neither by a breach of contract (as in Campbell Discount v. Bridge) or by the voluntary exercise of an option (as in Associated Distributors v. Hall) but rather by the happening of an event which, although not a breach of contract, was not in any sense voluntary.  He readily acknowledged that there appeared to be no authority at all on the question whether the penalty doctrine could be applied to that intermediate type of event.  His submission was that if the same apparently penal consequence was applied in a contract to a range of events, some but not all of which amounted to breaches of the contract then, if it was properly categorised as a penalty when triggered by breach, it would also be a penalty when triggered by those other (non-breach) events.
41.	The contract under review in Associated Distributors v. Hall was a hire purchase agreement relating to a tandem bicycle.  It provided by clause 7 an apparently penal consequence for the hirer in the event of early determination “for any cause whatsoever” which might be triggered either by breach under clause 6, or by the exercise of what the Court of Appeal described as an early termination option under clause 5.  The Court of Appeal concluded, reversing the trial judge, that because the termination had occurred by reason of the hirer’s exercise of the early termination option, rather than because of his breach, the penal terms of that option were fully enforceable, even though they required him to pay, in effect, half the full purchase price of the bicycle, even after only a short period of use.
42.	In Campbell Discount v. Bridge the House of Lords reviewed a hire purchase agreement in similar form, relating to a car.  The majority (Lords Morton, Radcliffe and Devlin) concluded that the agreement had been terminated by breach rather than by the exercise of an option, so that the stipulated payment could be, and in fact was, a penalty.  Had it been triggered by the exercise of an option then, in the words of Lord Morton, at pages 614-5:
“In that event the present appellant would have been bound to pay the stipulated sum of £206 3s.4d., not by way of penalty or liquidated damages but simply because payment of that sum was one of the terms upon which the option could be exercised.”
43.	It is to be noted that both Lords Denning and Devlin concluded (but for different reasons) that relief would have been available even if the hirer had exercised an early termination option, but this was plainly a minority opinion.
44.	Common to both cases was the structure of the hire purchase agreements which provided for a single, penal, consequence to be triggered by the happening of different events, some but not all of which constituted a breach of contract.  To that extent the structure of the Agreements under review was similar to the Master Agreement, since the condition precedent in Section 2(a)(iii) is triggered by a whole range of Events of Default, only some of which constitute breaches of contract.  There is however force in the submission that it is harder to treat as a penalty the contractual consequence of the voluntary exercise of an option than the consequence of the happening of an involuntary event, such as bankruptcy or insolvency, even though (as is common ground) that does not constitute a breach of contract.
45.	In my judgment the concession that the doctrine of penalty has no application to Section 2(a)(iii) of the Master Agreement, where it is triggered by a bankruptcy Event of Default, was rightly made in the Firth Rixson case.  My reason for that conclusion is not so much that the contrary argument is precluded by Associated Distributors v. Hall, but rather because the doctrine of penalty is a derogation from party autonomy which has only ever been applied (so far as counsel were aware) to cases of breach of contract, and which ought not now to be extended, a fortiori in a sophisticated standard form of agreement governing derivative transactions in wide international use.
46.	In Cine Bes Filmcilik VE Yapincilik & anr v. United International Pictures & ors [2003] EWCA Civ 1669, at paragraph 14, Mance LJ cited with approval the dicta of Lord Woolf in Phillips Hong Kong Ltd v. AG of Hong Kong (1993) 61 BLR 49 to the effect that:
“The court should not be astute to descry a penalty clause”
and that:
“… the court has to be careful not to set too stringent a standard and bear in mind what the parties have agreed should normally be upheld.  Any other approach will lead to undesirable uncertainty especially in commercial contracts.”
In the Phillips Hong Kong  case itself, the Privy Council cited with approval the following dictum of Dickson J in the Supreme Court of Canada, in Elsey v. JG Collins Insurance Agencies Ltd (1978) 83 DLR (3D) 1 at 15:
“… the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum.  It has no place where there is no oppression.”
47.	I acknowledge that, in an appropriate case, a contractual provision for the withholding of monies otherwise due may be analysed as a penalty: see Gilbert-Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd [1974] AC 689, at 723.  In the present case however, not only is the withholding of payment triggered by an event not constituting a breach of contract, it is also a provision operating even-handedly as between the parties, so that either may rely upon it when there is a continuing Event of Default affecting the other party.  The circumstances are as far removed from oppression as could be imagined.
48.	In Firth on Derivatives, Law and Practice, at paragraph 11.045, the rationale for the Event of Default regime in the Master Agreement is described as follows:
“Despite the terminology used, most of the Events of Default do not constitute a breach of contract (unless the relevant Event is in existence at the time that the Agreement or any transaction under it is entered into, when there will be a breach of representation).  Their purpose is not in fact to provide a remedy for breach of contract but to try to identify the circumstances in which the risk of non-performance is so great that the basis on which the parties entered into the Agreement has broken down.”
For the reasons given in paragraph 87 of my Firth Rixson judgment, I regard the provision for suspension of the non-defaulting party’s payment obligations upon the happening of a bankruptcy Event of Default as a reasonable rather than oppressive provision.  In my judgment the doctrine of penalty is entirely inapplicable to it.
CONCLUSION
49.	Mr Nash did not pursue any claim that Section 2(a)(iii) worked a forfeiture.  It follows therefore that LBSF’s claim for payment of that which, but for the condition precedent in Section 2(a)(iii) of the Master Agreement would have been payable on 2nd March 2009 by Carlton, fails and must be dismissed.