Forward Freight Agreements which still had contract months to run at the time of Automatic Early Termination under an ISDA Master Agreement were to be included in calculating the Early Termination Payment.

Pioneer1 brought a claim against Cosco for payment following an alleged early termination of 11 freight derivative contracts known as Forward Freight Agreements (FFAs).

FFAs are a means of hedging commercial risks arising from the volatility of freight rates. The FFAs in this case incorporated the provisions of the Forward Freight Agreement Brokers Association 2007 Terms (FFABA 2007 Terms) which in turn incorporated by reference the provisions of the ISDA 1992 Master Agreement (ISDA MA), which has been described as "probably the most important standard market agreement used in the financial world"2.

Pioneer went into liquidation in December 2009 which brought about Automatic Early Termination (AET) under the ISDA MA. The dispute concerned whether the closing out or "wash out" calculations which had to be performed (ie, section 6 – Early Termination Payment) following AET should or should not include those FFAs where the last contract month under each such FFA had passed prior to AET event in December 2009.

Mr Justice Flaux held that only the three FFAs which still had Contract Months to run as at AET in December 2009 were to be included in calculating the Early Termination Payment. The remaining eight FFAs were not to be taken into account.

In reaching this conclusion, Mr Justice Flaux followed the analysis of Briggs J in Lomas3 who held that where a particular transaction (ie, FFA) had terminated at the end of its natural term, any contingent obligation which might have revived, if the condition precedent in section 2(a)(iii) had been fulfilled before the transaction terminated, did not survive the termination of the transaction at the end of its natural term. It was a logical consequence of that analysis that none of those transactions that terminated at the end of their natural term was a "terminated transaction" within the meaning of the ISDA MA.

The freight futures market has been greatly affected by the recent financial crisis and as a result there have been a significant number of cases4 before the English courts recently concerning a variety of issues arising out of the incorporation of the ISDA MA in those freight derivative contracts. However, these decisions have a much wider implication for those involved in hedging of financial risks and financial markets generally. This space should continue to be watched.


1 Pioneer Freight Futures Company Limited (in liquidation) v Cosco Bulk Carrier Company Limited (2011)
2 Lomas & Ors v JFB Firth Rixon Inc & Ors (2010), Briggs J
3 ibid
4 Britannia Bulk (In Liquidation) v Pioneer Navigation Ltd and Another Britannia Bulk Plc (In Liquidation) v Bulk Trading SA (2011); Pioneer Freight Futures Co Ltd (In Liquidation v TMT Asia Ltd (2011); TMT Asia Ltd v Marine Trade SA (2011); Lehman Brothers Special Financing Inc v Carlton Communications Ltd (2011) EWHC 718 (Ch); Lomas v JFB Firth Rixson Inc (2010); Marine Trade SA v Pioneer Freight Futures Co Ltd BVI and Another (2009); AS Klaveness Chartering v (1) Pioneer Freight Futures Co Ltd (2) Pioneer Metals Co Ltd (2009.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.