French law ISDA - An update

Among the many legal consequences of the United Kingdom leaving the European Union (the Brexit), whose date has been postponed to 31 January 2020, one of them is that, in the absence of any agreement in this respect, the United Kingdom will become a third-country to the European Union and thus, will no longer be part of the European system of judicial cooperation, set up by the Regulation (EU) no 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I Regulation). As a consequence, judgments rendered by English courts will not be automatically recognised and enforceable anymore across the European Union and European Economic Area (EEA) members’ jurisdictions, and will have to be subject, in order to be recognized in the European Union territory, to the lengthy and costly exequatur procedure.

In order to avoid these consequences in respect of derivatives, the International Swaps and Derivatives Association (ISDA) published on 3 July 2018 a new French (and Irish) version of its master agreement, intended to provide the entities who wish to keep trading under a European Union (France or Ireland) member-state law, once the UK leaves the EU, to do so. In order to complete this master agreement, the ISDA published a complete set of documentation, including the French law Credit Support Annex, the 2016 French law Credit Support Annex for Variation Margin, the French law Initial Margin Collateral Documents and the supporting French law legal opinion.

With the aim of easing the use of this French law ISDA master agreement, the French government issued an ordinance No. 2019-75 6 February 2019 (the Order), which ensures the enforceability of the provisions of the master agreement under French law (capitalisation of interests due for less than one year authorized in the context of an ISDA master agreement, inclusion of precious metals or CO2 allowances in the scope of derivatives transactions eligible for the close-out netting, etc.). Such Order provides that, during the 12 months following its entry into force (i.e. following the date of a no-deal Brexit), if a bank or an investment firm authorised in the United Kingdom offers, in writing, to its French counterparty to conclude a new master agreement which is similar to an one and designates French law and the jurisdiction of French courts, such offer will be deemed to be accepted by the French counterparty, under certain conditions (the clauses of the new master agreement are identical to those of the already entered into master agreement, the offeror belongs to the same group of companies as the credit institution or investment firm incorporated under British law, etc.).

The main changes introduced in the French law ISDA master agreement compared to the British ISDA master agreement are the following:

• changes have been introduced to the British flawed asset theory, as per which a party’s payment and delivery obligations are subject to a number of conditions precedent, including the condition precedent that no “Event of Default” has occurred and is continuing in relation to the other party.  In order to comply with French law, this amendment limits the suspension of performance until the occurrence of the Early Termination Date;
• an amendment relating to the netting of payments, specifying that payment netting under French law, unlike British law, does not qualify as novation;
• the reference to equity as a source of law has been replaced with a reference to equity (équité)  and good faith (bonne foi), as equity is not a source of law under civil law;
• an amendment related to the “no waiver of rights” clause includes the legal time limit applicable to contractual obligations under French law; and
• the law of France is designed as the governing law of the master agreement, and any dispute relating to it should be submitted to the jurisdiction of the Paris Commercial Court and the Paris Court of Appeal. Whereas the Paris Commercial Court has had one since 1993, the Paris Court of Appeal created on February 2018 a new chamber specialised in disputes relating to international commercial contracts, whether they are governed by French law or by the law of another country. This chamber, composed of ten specialised English speaking judges, has especially jurisdiction on disputes related to operations on financial instruments, standard master agreement, and financial contracts, instruments, and products, and allows the use of English language in the debates in court and proceedings.

On January 2019, the French Association of Financial Management (AFG) announced that it supported the ISDA’s initiative regarding the use of French law for derivatives transactions, and recommended to its members to use the new ISDA master agreement; such approval, combined with the French Association of Corporate Treasurers (AFTE)’s one, should help to develop the adoption of the French law ISDA master agreement by the market participants.