The degree to which certain elements of a recovery right under a contract, including a debt instrument, are assignable or transferable to a third party has been questionable under English law for some time. “Litigation rights” are one example. Many English legal practitioners regard litigation rights as personal rights, and personal rights are by their nature not capable of assignment or transfer. However, given the economic importance many assignees attach to “litigation rights” as a recovery right, such rights are commonly assigned or transferred to assignees “to the extent that they are capable of being or permitted to be assigned or transferred.” In this manner, the effectiveness of the assignment of any such any right is reserved. In the latest Waterfall IIC litigation, another element of a recovery right, default interest, may now be added to the list of items the ability of which to assign or transfer is questionable under English law.

On 5 October 2016, Mr Justice Hildyard handed down the judgment in the latest Waterfall IIC litigation. This case considered the entitlement of counterparties to default interest, as described in the 1992 and 2002 ISDA Master Agreement (ISDA), in particular covering the interpretation of the phrase ‘cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount’.

Of particular note is the ruling on the meaning of ‘relevant payee’. It is a common occurrence, and indeed was for numerous claims against LBIE, that counterparties to an ISDA assign their claims to default interest pursuant to the express right set out in clause 7 of the ISDA to third party purchasers. Thus, it would typically be considered to be the third party purchaser that has the interest in the claim against the defaulting party. However, Mr Justice Hildyard ruled that it was the original contractual counterparty, and not the third party purchaser, that was the ‘relevant payee’ for the purpose of assessing the cost of funding the relevant amount. This restriction on the right of transfer is to protect against unknown credit risks and that purpose is undermined if the ‘relevant payee’ is an unknown assignee of the original counterparty. Further, following the principles set down in Snell’s Equity 33rd ed. at 3-027, ‘an assignee cannot recover more from the debtor than the assignor would have. The purpose of the principle is to prevent the assignment from prejudicing the debtor. This would happen if, for example, he had to pay damages to the assignee that he would not have had to pay to the assignor if the assignment had not taken place’. To rule otherwise would pose a foreseeable risk of the third party assignee claiming a greater amount than the original counterparty would have claimed.

In light of this ruling, consideration must now be given by third party purchasers that have purchased, or had assigned to them, default interest claims pursuant to the rights set out in clause 7 of an ISDA. Further, it is unclear how this ruling will affect equivalent rights of assignment that arise under similar agreements – such application will likely only become clear when new cases are brought before the courts.

While this decision should be borne in mind when counterparties are considering the use of clause 7 of an ISDA, it is subject to appeal which may reinforce or overrule the application of all or some of Mr Justice Hildyard’s decision.