Neutral Citation Number: [2009] EWHC 3116 (Comm)
Case No: 2009 Folio 717
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 03/12/2009

Before :

MR JUSTICE CHRISTOPHER CLARKE
- - - - - - - - - - - - - - - - - - - - -
Between :

	                           BNP PARIBAS	Claimant	
 	                                  - and -		
	WOCKHARDT EU OPERATIONS (SWISS) AG	Defendant	

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

Ewan McQuater, QC and Christopher Harris (instructed by Clifford Chance) for the Claimant
Antony White, QC (instructed by Reed Smith) for the Defendant
Hearing date: 18th November 2009 
- - - - - - - - - - - - - - - - - - - - -
Judgment
Mr Justice Christopher Clarke : 
1.	BNP Paribas, the claimant (“BNP”), has a branch in Mumbai. The defendant – Wockhardt EU Operations (Swiss) AG (“Wockhardt”) – is a Swiss company and a wholly owned subsidiary of Wockhardt Ltd, an Indian company, based in Mumbai. Wockhardt Ltd is a leading pharmaceutical and biotechnology company – the largest Indian pharmaceutical group in Europe.  BNP has an established banking relationship with Wockhardt Ltd.
2.	In April 2008 BNP and Wockhardt entered into a Master Agreement in the standard form of the International Swap Dealers Association (ISDA) with accompanying Schedule dated as of 20 July 2007. A number of transactions were entered into pursuant thereto. Those transactions fall, so far as presently relevant, into two categories. 
3.	In the first category were foreign exchange target redemption forward transactions. By these transactions, so far as presently relevant, BNP sold euros to Wockhardt for dollars. In the second category were a number of foreign exchange forward transactions. These were transactions under which Wockhardt agreed to buy from BNP on a series of settlement dates an amount of either Euros or dollars (the amount being established by reference to a notional amount in Euros) for dollars or euros as the case might be at a defined rate of exchange. The transactions are set out in Schedule 2 to the Particulars of Claim. 
4.	The ISDA Master Agreement contains the following provisions 
“BNP Paribas and Wockhardt EU Operations (Swiss) AG have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be governed by this 2002 Master Agreement, which includes the schedule (the “Schedule”), and the documents and other confirming evidence (each a “Confirmation”) exchanged between the parties or otherwise effective for the purpose of confirming or evidencing those Transactions. This 2002 Master Agreement and the Schedule are together referred to as this “Master Agreement”,

Accordingly, the parties agree as follows:-

1.	Interpretation

…...

(c)	Single Agreement. All transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions.

2	Obligations

(a)	General Conditions

(i)	Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.
………

5	Events of Default and Termination Events

(a)	Events of Default. The occurrence at any time with respect to a party …… of any of the following events constitutes (subject to Sections 5(c) and 6(e)(iv)) an event of default (an “Event of Default”) with respect to such party:- 

(i)	Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a) (i) or 9(h) (i) (2) or (4) required to be made by it if such failure is not remedied on or before the first Local Business Day in the case of any such payment or the first Local Delivery Day in the case of any such delivery after, in each case, notice of such failure is given to the party;
	
				………

6	Early Termination; Close-Out Netting

(a)	Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions.

		………

		(c)		Effect of Designation 

(i)	If notice designating an Early Termination Date is given under Section 6(a) or 6(b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing.

(ii)	Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2 (a)(i) or 9(h)(i) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date will be determined pursuant to Sections 6(e) and 9(h) (ii). 

(d)	Calculations; Payment Date.

(i)	Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations), (2) specifying ……… any Early Termination Amount payable and (3) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation or market data obtained in determining a Close-out Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of the existence and accuracy of such quotation or market data.

(ii)	Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h) (ii) (2), be payable (1) on the day on which notice of the amount payable is effective in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default ……

(e)	Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the “Early Termination Amount”) will be determined pursuant to this Section 6(e) and will be subject to Section 6(f).

(i)	Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-Out Amounts (whether positive or negative) determined by the Non-defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party.

……

(v)	Pre-Estimate.	The parties agree that an amount recoverable under this Section 6 (e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and, except as otherwise provided in this Agreement, neither party will be entitled to recover any additional damages as a consequence of the termination of this Agreement or any Transaction or for any claim arising out of or in connection with this Agreement or any Termination.

14	Definitions

“Close-out Amount” means, with respect to each Terminated Transaction or each group of Terminated Transactions and a Determining Party, the amount of the losses or costs of the Determining Party that are or would be incurred under then prevailing circumstances (expressed as a positive number) or gains of the Determining Party that are or would be realised under then prevailing circumstances (expressed as a negative number) in replacing, or in providing for the Determining Party the economic equivalent of, (a) the material terms of that Terminated Transaction or group of Terminated Transactions, including the payments and deliveries by the parties under Section 2(a)(i) in respect of the Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in Section 2(a)(iii)) and (b) the option rights of the parties in respect of that Terminated Transaction or group of Terminated Transactions.

Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result. The Determining Party may determine a Close-out Amount for any group of Terminated Transactions or any individual Terminated Transactions but, in the aggregate, for not less than all Terminated Transactions. Each Close-out Amount will be determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates following the Early Termination Date as would be commercially reasonable.

Unpaid Amounts in respect of a Terminated Transaction or group of Terminated Transactions and legal fees and out-of-pocket expenses referred to in Section 11 are to be excluded in all determinations of Close-out Amounts.

In determining a Close-out Amount, the Determining Party may consider any relevant information, including, without limitation, one or more of the following types of information:-

(i)	quotations (either firm or indicative) for replacement transactions supplied by one or more third parties that may take into account the creditworthiness of the Determining Party at the time the quotation is provided and the terms of any relevant documentation, including credit support documentation, between the Determining Party and the third party providing the quotation;

(ii)	information consisting of relevant market data in the relevant market supplied by one or more third parties including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other relevant market data in the relevant market; or

(iii)	information of the types described in clause (i) or (ii) above from internal sources (including any of the Determining Party’s Affiliates) if that information is of the same type used by the Determining Party in the regular course of its business for the valuation of similar transactions.

The Determining Party will consider, taking into account the standards and procedures described in this definition, quotations pursuant to clause (i) above or relevant market data pursuant to clause (ii) above unless the Determining Party reasonably believes in good faith that such quotations or relevant market data are not readily available or would produce a result that would not satisfy those standards. When considering information described in clause (i), (ii) or (iii) above, the Determining Party may include costs of funding, to the extent costs of funding are not and would not be a component of the other information being utilised. Third parties supplying quotations pursuant to clause (i) above or market data pursuant to clause (ii) above may include, without limitation, dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of market information.

Without duplication of amounts calculated based on information described in clause (i), (ii) or (iii) above, or other relevant information, and when it is commercially reasonable to do so, the Determining Party may in addition consider in calculating a Close-out Amount any loss or cost incurred in connection with its terminating, liquidating or re-establishing any hedge related to a Terminated Transaction or group of Terminated Transactions (or any gain resulting from any of them).

Commercially reasonable procedures used in determining a Close-out Amount may include the following:-

(1)	application to relevant market data from third parties pursuant to clause (ii) above or information from internal sources pursuant to clause (iii) above of pricing or other valuation models that are, at the time of the determination of the Close-out Amount, used by the Determining Party in the regular course of its business in pricing or valuing transactions between the Determining Party and unrelated third parties that are similar to the Terminated Transaction or group of Terminated Transactions; and 

(2)	application of different valuation methods to Terminated Transactions or group of Terminated Transactions depending on the type, complexity, size or number of Terminated Transaction or group of Terminated Transactions.

“Terminated Transactions”  means with respect to any Early Termination Date …….(c ) if resulting from an Event of Default, all Transactions in effect …immediately before the effectiveness of the notice designating the Early Termination Date ….”

“Transaction” has the meaning specified in the preamble

“Unpaid Amounts” owing to any party means, with respect to an Early Termination date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii) or due but for Section 5(d)) to such party under Section 2(a)(i) or 2(d)(i)(4) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date”.

5.	The foreign exchange target redemption forward transactions were confirmed by a series of Confirmations. This case is concerned with three of them dated 13 June, 2 July and 6 August 2008. Each Transaction involved the sale by BNP to Wockhardt of at least €400,000 per month on specified Valuation Dates in each month over a period of several months in exchange for US dollars at a fixed rate (which was not the same for all months although it was for some). Each of the confirmations specified a Trade Date which was earlier than the date of the confirmation. The terms of the Confirmations provided in effect that if on a Valuation Date the Fixing Price, being the $/€ exchange rate appearing on a Reuters screen page at or around 2.15 p.m Frankfurt time, was below or equal to the rate specified in the confirmation Wockhardt would buy twice the €400,000 specified; if the Fixing Price was above that rate, Wockhardt would buy €400,000. 
6.	There were thus a series of payments in dollars which fell to be made by Wockhardt against delivery of euros. On 30 December 2008 Wockhardt failed to make payment of the net amount owing in respect of the transactions due on that date in the sum of US$327,155.28. It also failed to make payment of a net amount due on 28th January 2009 in the sum of US$356,566.63. 
7.	On 17 February 2009 notice was given to remedy these non-payments by 18 February (or, if later, the first Local Business Day after the date of valid service of the notice) under clause 5 (a) (i) of the ISDA Master Agreement. No payment was forthcoming and there was in consequence an Event of Default under the Master Agreement.
8.	Two further amounts of US$317,523.60 and US$256,565.20 fell due on 2 and 30 March 2009 and were not paid.  
9.	On 2 April 2009, as it was entitled to do under clause 6 (a) of the Master Agreement, BNP designated 2 April 2009 as the Early Termination Date in respect of all outstanding Transactions under the Agreement. 
10.	By a demand in writing dated 22 April 2009, BNP provided to Wockhardt a Statement of Calculations pursuant to clause 6(d)(i) of the Master Agreement, showing the Early Termination Amount payable by Wockhardt (“the Early Termination Amount”), which then stood at US$2,150,570.10. To that sum was added default interest which had accrued from 2 April to 22 April 2009 in the sum of US$1,503.06. The total sum of US$2,152,073.16 was due and payable immediately.
11.	The Early Termination Amount claimed by BNP was, apart from interest,  made up of two elements: 
(a) unpaid amounts already due under specific forward deals amounting (as at 22 April 2009) to US$1,260,090 (“the Unpaid Amounts”) and 
(b) a Close-out Amount of US$890,480 (“the Close-out Amount”).
12.	By a letter of 7 May 2009 BNP made a final demand for payment of the amounts outstanding.
13.	At no time prior to the filing of its Defence on 28 July 2009 did Wockhardt dispute its liability to pay any of these amounts.
	The original defence
14.	In the original defence two substantive points were taken. The first was that Wockhardt put BNP to proof that the Close-out Amount included in the Early Termination Amount was commercially reasonable as required by the definition in clause 14 of the Master Agreement. Secondly Wockhardt contended that the Early Termination and Close-out provisions relied on by BNP to claim the Early Termination Amount were unenforceable by reason of the doctrine relating to penalties. 
15.	On 30 September BNP applied for summary judgment or for the Defence to be struck out in respect of the whole claim or, alternatively for summary judgment in respect of the Unpaid Amounts on the basis that Wockhardt had no real prospect of successfully defending the claim or at least part of it. It is those applications that are presently before me. 
The amendment
16.	On 12 November Wockhardt issued an application to amend the Defence and Counterclaim. According to the proposed Amended Defence in about mid 2007 two representatives of BNP, Ms Peacho Dhaul and Mr Ashwani Sindhwani, approached Mr Kumar Ajwani of Wockhardt Ltd and recommended that Wockhardt  enter into derivatives transactions by acquiring derivative products marketed by BNP to hedge the interest rate risks associated with its dollar borrowings. These two are said to have represented (i) that the products were suitable for the purpose of hedging the interest rate risks associated with the dollar borrowing; (ii) that the Transactions would be an “indirect hedge” which would generate income for Wockhardt in order to offset the loan interest, and (iii) that the Transactions were very low risk.  Those  representations are said to have been false and made negligently in that the Transactions (a) were not suitable for the purpose of hedging the interest rate risks associated with the dollar borrowing, (b) were not a hedge, and (c) were extremely high risk. BNP is said to be guilty of misrepresentation and in breach of a duty of care and Wockhardt seeks by the pleading to rescind the Transactions and/or the Master Agreement; or to claim damages equivalent to anything due to BNP under the claim.
17.	The hearing before me was not fixed with a view to dealing with any proposed amendment. BNP wished to have the opportunity to consider whether to oppose the giving of permission and, if necessary for that purpose, to file evidence. In those circumstances I ruled that the question of any amendment would fall to be considered at a subsequent hearing and I say no more about it.
Commercially reasonable
18.	In response to the first point BNP has put in a witness statement of 30 September 2009 from Sean Goh, who is the assistant trader in BNP’s Singapore branch who was responsible for calculating the Close-out Amount on 2 April 2009.  In it he explains that the Close-out Amount comprises a negative value of $35,700 in relation to the FX forward transactions,  representing an amount due from BNP to Wockhardt; and a positive value of $926,180 in aggregate in relation to the three Target Redemption Forward Transactions, representing an amount due to BNP from Wockhardt, as follows:

Confirmation No	Date 			Present Value
8047786 		10.6.08 		$  168,590
8049387		 1.7.08		$  322,790
8051599		29.7.08		$  434,800 
				            		$  926,180
19.	The Present Value, as he explains, represents the current value of the future cash flows both incoming and outgoing in relation to each of the transactions outstanding under the several Confirmations discounted to take account of earlier receipt. In essence the calculations estimate through the use of a model what is the likely upshot of the transactions. This involves inputting the amount of the currency (euros) to be purchased, the maturity date of the transactions (i.e. when the purchase is to take place), the agreed forward rate, the actual spot rate at 2 April 2009 and a measure of the volatility of the price of the underlying currency (in order to determine the likely strike rate at the respective maturity dates). 
20.	The model used was BNP’s own standard internal pricing model used by it in the regular course of its business in pricing and valuing similar transactions with third parties and for the purpose of calculating exposures under Credit Support Annexes relating to the ISDA Master Agreements. Mr Goh describes the model as “reliable and trusted by the Claimant”.  The currency’s volatility is supplied by the model and calculated from the prices at which options to purchase and sell the currency are trading in the market.  The calculation of the Close-out Amount in relation to the FX forward transactions used the same method as for the target redemption forward transactions. 
21.	No evidence has been filed in response to Mr Goh’s witness statement nor has any submission been made that I should treat is as unreliable or as failing to demonstrate that BNP had taken a commercially reasonable approach. If, therefore, there was no question of the law of penalties being applicable, and no question of an amendment I would be prepared to grant summary judgment. 
Penalty 
22.	 Mr Antony White QC on behalf of Wockhardt submits that it has an arguable case that the provisions relating to an Early Termination Amount are unenforceable by reason of the doctrine relating to penalties. The Early Termination Amount is a sum payable upon breach following the giving of a Notice of Default and a failure to pay within a very short period after notice of an earlier failure. The full Early Termination Amount is payable (i) whether the defaulting party has one open transaction or many open transactions; (ii) whether the default occurs early in the life of a Transaction or towards the end of its life; (iii) whether the default is a small default on one Transaction, a large default on one Transaction or a large default on many or all Transactions; and (iv) the amount of the Early Termination Amount cannot be predicted at the time of entering into the Transactions as it depends on upon market fluctuations. For all these reasons the provisions providing for an Early Termination Amount, at any rate in relation to the Close-out Amount are penal. They do not provide for a genuine pre-estimate of the loss but for payment of the same amount on the occurrence of any one of a number of possible breaches which may give rise to widely different consequences. At any rate there is a realistic argument that that is so. 
Approach
23.	In considering the potential application of the doctrine of penalties the authorities provide a number of guidelines. The ISDA Master Agreement is very widely used in international financial markets in all types of derivative transactions. That does not mean that its standard provisions may not be penal but the consequences of that being so means that the sooner the issue of its validity is determined the better: AWB (Geneva) SA & Anor v North America Steamships Ltd & Anor [2007] EWCA Civ 739. 
24.	The desirability of a prompt determination cannot alter the test as to whether some form of summary judgment should be given, but:
“…… on general principles the court should not be astute to interpret commercial transactions so as to invalidate them, particularly when … consequential doubt might be cast on other long-standing commercial  arrangements”:  Perpetual Trustee Co Ltd v BNY Corporate Trustees Services and another; Belmont Park Investments Pty Ltd v Corporate Trustee Services Ltd and another [2009] EWHC 1912 (Ch) per Sir Andrew Morritt, QC. 
 “It is also desirable that, if possible, the courts give effect to contractual terms which the parties have agreed. Indeed there is a particularly strong case for party autonomy in cases of complex financial instruments …” per the Master of the Rolls at para 58 of the Butters appeal [2009] EWCA Civ 1160.
“…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”; per Dickson J in the Supreme Court of Canada in Elsey v J.G. Collins Insurance Agencies Ltd [1978] 83 DLR 1, p 15. , approved by the Privy Council in Phillips Hong Kong Ltd v AG of Hong Kong [1993] 61 BLR 49, p 58.
25.	The policy of the law is to encourage the use of liquidated damages clauses especially in commercial contracts: Murray v Leisureplay plc [2005] EWCA Civ 963, para 114 citing Diplock, LJ in Robophone v Blank [1966] 1 WLR 1428, 1447.
26.	 Lord Dunedin classically described a penalty clause as one which stipulates a pre-defined sum payable on one or more breaches of contract “if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach”: Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 87.  In the same case he said that there was a presumption (but no more) that a clause is a penalty when ‘a single lump sum is made payable by way of compensation on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage”. In such a case the court may look to see whether or not the sum is disproportionate to the least important of the contractual undertakings to which it applies and thus whether it represents an extravagant or unconscionable  sum in  relation to such a breach. 
27.	In the present case the clause pre-defines not the sum, but the method by which a sum – the Early Termination Amount, is to be determined and by whom. The fact that it prescribes a method would not save it from being a penalty if the result of the application of the method was to produce an amount which was extravagant and unconscionable in the respects described by Lord Dunedin. The fact that it does not contain a pre-estimate in the sense of a fixed figure or one easily determinable by a specified formula (as opposed to a criterion) does not mean that it must, on that account, be penal. 
28.	In order to determine whether the clause is penal in consequence it is necessary to consider what is due to BNP following termination in consequence of the breach. 
29.	So far as the Unpaid Amounts are concerned, they had already fallen due before termination under individual forward transactions. There is nothing penal in requiring Wockhardt, the defaulting party, upon a termination following an Event of Default, to pay amounts that were already due but unpaid prior to the termination. 
30.	So far as the Close-out Amount is concerned the critical question, to my mind, is whether or not non-payment of any amount due on delivery amounts to a breach of condition by virtue of which BNP is entitled to treat itself as discharged from its obligations under the contract and entitled to damages for the loss of its bargain upon the footing that the contract has come to an end by virtue of Wockhardt’s default. 
31.	Mr White submits that that is not, or at least arguably is not, the position here since the parties have not specified that punctual payment of each amount due was a condition, or non-payment a repudiatory breach, and there is no need for that to be implied.
32.	 I disagree. Whilst the parties have not used the expression “condition” or “repudiatory breach” they have specified that any failure to pay which continues after the first Local Business Day after notice of failure will entitle BNP to designate an Early Termination Date; and have gone on to provide that upon an effective designation no further payments or deliveries (the primary obligations under the contract) will be due.  Wockhardt’s obligation to make future payments against deliveries will, therefore, cease as will BNP’s obligations to make deliveries against payment. In the place of those obligations there is to be substituted an obligation on the part of Wockhardt, the defaulting party, to make a payment which represents the cost of replacing the Terminated Transactions or in providing the economic  equivalent of those Transactions. The former would, no doubt, need to take into account any price to be paid for replacing the terminated transactions as at the Early Termination Date. The latter would involve a determination of the value as at the Early Termination Date of the remainder of the contract i.e. the present value, allowing for the time value of money, of putting BNP into the same position as it would have been in if the uncompleted sales of euros had gone ahead according to their terms.  These are two methods of putting BNP into the same position it would have been if the contract had not been validly terminated on account of Wockhardt’s breach. Neither of them provides for an extravagant or unconscionable measure if what is being measured is BNP’s loss of bargain.
33.	 In providing for BNP’s entitlement to terminate the ongoing primary obligations of the parties and the method of calculation of the sum to be paid in that event, the parties have, subject to one qualification, spelt out the consequences which result from a breach of condition. It is unrealistic to suppose that, having done so, they are to be taken to have intended that a failure to pay should be regarded as a warranty or an innominate term, particularly in the light of the Pre – Estimate clause which (see above) provides that the amount recoverable under clause 6 (e) is payable for the non Defaulting Party’s loss of bargain and the loss of protection against future risks. Commercial parties to a contract for the sale and delivery of currency who specify that non-payment or non-delivery shall have the consequences which would follow from a breach of condition, both as to entitlement to terminate and measure of recovery, must be taken to have agreed that the term in question shall have that status. The expressions “condition” and “repudiatory breach” are legal shorthand for a term breach of which entitles the innocent party to terminate the contract and to claim damages for loss of bargain or a breach which has those consequences. When the parties have expressed those consequences for themselves they have no need of the shorthand. 
34.	 Whilst by section 41 of the Law of Property Act 1925 stipulations as to time which “according to rules of equity are not deemed to be or to have become of the essence of the contract are also construed and have effect at law in accordance with the same rules” time is held in equity to be of the essence of the contract “in cases of direct stipulation or of necessary implication”: per Sir John Romilly M.R in Parkin v Thorold [1852] 16 Beav 59, 65; and that implication can arise from the nature and content of the contract. 
35.	Mr White submitted that to hold that the doctrine of penalties was not applicable because the contract specified the consequences of breach was to misunderstand the rule. Where the doctrine is applicable it takes effect notwithstanding that the contract provides for the payment in question. That does not, however, mean that the court is disabled from construing the nature of the obligation which the parties have agreed on from an examination of (i) the obligation in question (here payment against delivery) and (ii) the consequences which the parties have agreed shall follow on fulfilment (termination at the option of BNP and compensation for loss of bargain). 
36.	 A clause prescribing the damages payable upon breach could still be a penalty if it prescribed an extravagant payment even for a breach of condition: see Lombard PLC v Butterworth [1987] QB 527, 535, proposition 7. The present clause does not, however, do so. 
37.	The qualification is that the Early Termination Sum is a calculation of the net position between the parties as at the date of termination in relation to Terminated Transactions. The defaulting party will thus, in any event, be entitled to credit for any positive present value in its favour in respect of those transactions. The valuation does not necessarily result in sums becoming payable from the defaulter to non-defaulter; they can be payable in either direction. No doubt BNP will not be inclined to terminate the agreement if, upon its so doing, it would not receive any sum, unless, perhaps, it thought that a later termination might put it in a position where it would have to pay out even more. What it cannot, however, do is to refuse to credit Wockhardt with any overall net balance in its favour upon the ground that it was discharged from all future performance. Since that is something which redounds to Wockhardt’s advantage it cannot be relied on as making the provisions penal. 
38.	The effect of the provisions is not that either party receives a windfall but that both receive the benefit (or disbenefit) of the unperformed transactions comprising their agreement crystallized at an earlier point in time (of the Non Defaulting party’s choosing). Whilst the analogy is not exact, since the amount, if any, payable as an Early Termination Amount (and thus the total value of the performance remaining) will change throughout the life of the agreement in line with market fluctuations, there is nothing penal in a provision which requires the acceleration in the event of breach of an amount which, without breach, would become due later: Protector Endowment Loan Co v Grice (1880) 5 QBD 592; The Angelic Star [1988] I Lloyd’s Rep 122, 125-7. 
39.	The clause does not become unconscionable or extravagant simply because it provides for a determination of what is to be due to be made by the Non Defaulting party, particularly when it requires BNP to “act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result.”
   Time of the essence
40.	Both parties have made reference to the fact that, in cases where the term in question does not have, expressly or impliedly, the status of a condition, the other party can by a notice make time of the essence. In Dalkia Utilities Services PLC v Celltech International Limited [2006] EWHC 63 (Comm) I summarised the position in this way:
“In Re Olympia & York Canary Wharf Ltd (No 2) [1993] BCC 159 Morritt J, as he then was, considered the authorities relating to the making of time of the essence. From that analysis and other authority I derive the following propositions: 
(a) Equity, before the Judicature Acts, insisted that prima facie time for payment was not essential. But Equity's patience was exhaustible. It would allow the contract to be treated as repudiated if the party in default had been given the opportunity to mend his ways by the giving of a notice to comply within a reasonable time. Whilst this is described as making time of the essence in reality the notice is the means of bringing to an end equity's interference with the contract. Behzadi v Shaftesbury Hotels [1992] Ch 1;
(b) Such a notice, which may be given in respect of any species of term, may not be served until the time for performance has expired; but it may be served as soon as that time arrives;
(c) Such a notice must state clearly what the other party is required to do and the consequence if he fails i.e. that the contract may be terminated; Afovos Shipping v Pagnan [1982] 1 WLR 848,854C;
(d) If the defaulting party fails to perform after service of such a notice, the failure is not automatically a repudiation of the contract, giving rise to a right to terminate. The breach must go to the root of the contract;
(e) The notice operates as evidence of the date by which the promisee considers it reasonable to require the contract to be performed, failure to perform by which is evidence of an intention not to perform: see Lord Simon of Glaisdale in United Scientific Holdings Ltd v Burnley Borough Council [1978] A.C. 904, 946E – 947A; Astea (UK) Ltd v Time Group Ltd [2003] EWHC 725, TCC, para 147 - 
41.	Mr Ewan McQuater, QC, for BNP submits that there can be no complaint about the reasonableness of the time limit imposed by BNP in this case since the length of the notice period is specified in clause 5 (a) (i) of the Master Agreement. However, as is apparent from paragraph (d) of the summary in the previous paragraph a notice making time of the essence does not automatically turn the breach into one repudiatory of the contract entitling the innocent party to treat himself as discharged. But in the present case, as it seems to me, the parties have, by their agreement, made performance of the obligation to pay within no more than one Local Business Day of a failure notice essential. If BNP gives notice of failure and designates an Early Termination Date it has no further need to make time of the essence
42.	I do not ignore the fact that there are cases in which the Court has declined to accept that a provision that “any” breach of contract shall give rise to a right to terminate extends to any breach whatever; and have restricted it to such breaches as are repudiatory: The “Antaios” [1985] AC 191; Rice v Great Yarmouth BC [2001] 3 LGLR 4. But it is open to the parties to agree that any non-payment or non-delivery shall have that consequence and that, as it seems to me, is exactly what the draftsman of the ISDA has done, in a carefully drawn standard form intended for widespread commercial use. 
43.	As Lord Wilberforce observed in Hong Kong Fir Shipping v Kawasaki Kisen Kaisha  Ltd [1962] 2 QB 26:
“It remains true, as Lord Roskill has pointed out in Cehave NV v Bremer Handelsgesellshaft m b H (The Hansa Nord) [1976] QB 44, that courts should not be too ready to interpret contractual clauses as conditions … But I do not doubt that, in suitable cases, the courts should not be reluctant, if the intentions of the parties as shown by the contract so indicate, to hold that an obligation has the force of a condition. ”
	   Indicators
44.	Mr White submitted that in the present case there were two indicators of the penal nature of the provisions which required the Court to consider their commercial justification e.g., by considering their genesis, the nature of the negotiations or considerations that had led to them, and the problems, if any, which they were designed to address.  Such a consideration was inappropriate for a summary process; and, indeed, there was very little evidence of the reasonableness of the provision. The first indicator was that the same sanction – the close out of the Transactions – was exigible for breaches of very different seriousness. The second was that the clause provided for the payment of a fluctuating amount since the sum to be paid would alter according to market rates or volatility, matters which were extraneous to the breach. 
45.	I do not accept this submission. The fact that the clause is capable of application to several breaches of different seriousness might well be an indicator that it was penal in character but for the fact that, in my judgment, the provision of timely payment is a condition of the agreement. The fact that the amount to be paid will fluctuate according to the movements of the market is not something extraneous to the breach. It is a circumstance that must necessarily be taken into account in determining the present value of the contract at any given time.  
46.	Reliance was placed on the decision in Public Works Commissioner v Hills [1906] 1 AC 368 where a railway construction contract provided that in the event of a breach by the contractor he should forfeit “as and for liquidated damages” certain percentages retained by the Government of the Cape of Good Hope of money payable for work done as a guarantee fund to answer for defective work and also certain security money deposited with the Government. The amount of that retained money depended on the progress of contracts other than the one in suit. That was an example of a liquidated damages clause whose operation was dependent on facts which had nothing to do with the relevant breaches. But that is a circumstance far removed from this case.
47.	I was also referred to the observations of Thomas, LJ at paragraph 49 in Cine Bes Filmcilik Ve Yapimcilik & Anr v United International Pictures & Ors [2003] EWCA Civ 1669 that “a decision on whether [a clause] is penal involves a careful examination of the circumstances which is not possible on a Part 24 application”. I do not, however, understand him to have laid down that a summary decision in relation to whether a clause is penal is always inappropriate. In that particular case the clause failed to give credit for rights to films for which payment would have been made against sums payable on termination; and that was regarded as a circumstance which required justification or, at least an examination as to whether or not its effect was penal. That feature does not arise here. 
48.	Mr White directed my attention to a passage in The Law on Financial Derivatives, 4th edition para 3.11 where Professor Hudson refers to the “artificial link” between the transactions constituted by the provision in the Master Agreement that all of the Confirmations entered into between two parties together with their Master Agreement, Schedule and Credit Support documentation are construed as constituting one single contract. The reason, as he points out, for introducing this artificial link is so as to secure that on the termination of the relationship between the parties it is possible to set off all of the amounts owed between the parties and to come to one final, net sum which will settle all of the exposures of the parties one to another, a provision which may assume very great importance upon insolvency. The link is  designed to avert the risk that the solvent party may be required to make payment of all amounts which it owes but not be entitled to recover, save through the relevant insolvency process and to the extent that there is a sufficiency of assets, the amounts due to it. 
49.	The fact is, however, that the parties have created that link by their agreement, as they were entitled to do. Their intention, as manifested in the language which they have used, is that the Master Agreement and all Confirmations shall form a single agreement between the parties, and that prompt payment in respect of each individual transaction shall be an essential term of that agreement. There is, in my judgment, no reason why a commercial contract such as this should not take effect in accordance with its terms; nor anything particularly surprising in a provision which makes payment of the debt within a day of notice of failure a condition. Mr White submitted that, if the link between transactions was artificial, the doctrine of penalties was engaged because that doctrine was concerned with substance. But, in truth, there is nothing artificial about the agreement of the parties. They have by agreement produced a situation which, in the absence of their agreement, would not have arisen; but their agreement prescribes the substance of the legal relations into which they have freely chosen to enter. 
50.	In short there is, in my judgment, no realistic prospect of Wockhardt establishing that the Early Termination provisions are penal in character. I note that in the New York case of Drexel Burnham Lambert Products Corporation v Midland Bank PLC 92 Civ 3098 (MP) the US District Court for the Southern District of New York held, on a motion for summary judgement, that a “Limited Two-Way Payments Clause” contained in a Swap Agreement constituted a valid liquidated damages clause and was enforceable in accordance with its terms since it bore a reasonable relationship to the probable loss. I do not, however, base my decision on that case in any way since both the terms of the clause and the applicable law are unclear. 
Conclusion
51.	Accordingly, subject to any further submissions as to the precise form of the order, I propose to strike out paragraphs 19 and 20 (which relate to penalties) of the defence as it currently stands. So far as paragraph 13 is concerned it does not seem to me appropriate to strike out a non-admission of whether the Close-out amount was commercially reasonable. But, as I have indicated, it appears to me, in the light of the evidence that has been tendered since the defence was filed, and the absence of any substantive challenge, that the claimants have established that it was. 
52.	Whether or not the court should give any summary judgment or order an interim payment must, however, await the upshot of the application to amend.