A New Case Involving “Notwithstanding”

MSCD explains as follows how using the word notwithstanding in a contract can create problems:

For one thing, notwithstanding operates remotely on the provisions it trumps; readers could accept at face value a given contract provision, unaware that it is undercut by a notwithstanding contained in a different provision.

Furthermore, although a notwithstanding clause that refers to a particular section at least warns readers what is being undercut, one that encompasses the entire agreement leaves to the reader the often awkward task of determining which provisions are affected.

Now, via cousin Joshua Stein, comes a case, BDC Finance L.L.C. v Barclays Bank PLC (N.Y. App. Div. Oct. 24, 2013) (PDF copy here), that shows that notwithstanding can be more than awkward—it can create confusion regarding what exactly it trumps.

The dispute in question relates to the alleged failure by defendant Barclays to meet a $40 million collateral call (referred to as a “Return Amount”) made by plaintiff BDC in connection with a derivative transaction the two of them had entered into in 2005. I’ll spare you the details: what matters for our purposes is that Barclays argued that complying with the contract required only that it pay the undisputed amount, whereas BDC argued that Barclays had had to pay the entire amount. The court sided with BDC.

The transaction was expressed in a series of documents, including a standard-form master agreement, a standard-form credit support annex (the “CSA”), and a negotiated master confirmation that modified certain provisions of the standard forms.

Paragraph 3(b) of the CSA provided that “[s]ubject to Paragraphs 4 and 5, upon a demand made by [BDC] . . . [Barclays] will Transfer to [BDC] [the amount of collateral] specified by [BDC] in that demand.” And paragraph 5 of the CSA provided that the disputing party had to both notify the other party of the dispute and transfer the undisputed amount by the end of the business day following the date of the demand. The parties were then to consult with each other in an attempt to resolve the dispute, and if that failed, they had to follow the CSA’s formal dispute-resolution process.

But the master confirmation contained a “Delivery of Collateral” provision that stated that “[n]otwithstanding anything in the [CSA] to the contrary . . . [Barclays] shall Transfer any Return Amounts . . . not later than the Business Day following the Business Day on which [BDC] requests the Transfer of such Return Amount.”

BDC argued that the “Delivery of Collateral” provision in the master confirmation trumped paragraph 5 of the CSA, so that to be in compliance Barclays would have had to have paid the entire amount of the collateral, not just the undisputed amount. The court agreed with BDC.

I concur with cousin Joshua: it’s not clear that the reference in the master confirmation to transfer of “any Return Amounts” precluded applying the CSA mechanism allowing for transfer initially of only the undisputed portion. That’s why the dissent disagreed with the majority:

[T]he delivery of collateral provision in the parties’ Master Confirmation Agreement should be read as modifying only the Transfer Timing provision of the CSA. Under this interpretation, the Master Confirmation Agreement does not modify any portion of CSA’s dispute resolution or conditions precedent provisions, which remain in full force and effect.

So this case demonstrates that when notwithstanding refers to an entire contract, it can be not only awkward but also confusing.

What’s the cure for notwithstanding? Using subject to. Again, a snippet from MSCD:

Using subject to allows you to signal to the reader, in the context of a given provision, that the provision is undercut by another provision, and the reader doesn’t have the burden of spotting a notwithstanding elsewhere in the contract. And if you use subject to, nothing would be gained by also using notwithstanding.