Last week, the High Court ruled on the meaning of “Default Rate” in the 1992 and 2002 ISDA Master Agreements (together, the “ISDA Master Agreements”). Whilst the decision addresses a multitude of issues, perhaps the most important take-away is the court’s determination that the Default Rate is intended only to compensate a non-defaulting counter party for the cost of raising funds by borrowing the unpaid amount and only for the period for which the amount was unpaid, and not to cover any other costs or losses that the counter party may have suffered (as further explained below).

This issue is of significance to any party to the ISDA Master Agreements with a counter party that enters insolvency proceeding or otherwise defaults in paying the close-out sum on time. Surprisingly, given the size of the ISDA market, no decision had previously been made on this issue. The decision is one of a series of judgments in the Lehman Brothers International (Europe) (LBIE) administration.