Neutral Citation Number: [2011] EWHC 692 (Comm)
Case No: 2009 FOLIOS 1087/1331
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 25/03/2011
Before :

THE HON MR JUSTICE FLAUX
- - - - - - - - - - - - - - - - - - - - -
Between :

	BRITANNIA BULK plc
(in liquidation)	Claimant	
	- and -		
	(1)	PIONEER NAVIGATION LIMITED
(2)	ATLAS SHIPPING LIMITED 
-and-
BULK TRADING S.A.
	Defendants in Folio 1087

Defendant in Folio 1331
	
- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Mr Mark Phillips QC and Mr Stephen Robins (instructed by Norton Rose LLP for the Claimants in Folio 1087 and instructed by Watson Farley & Williams LLP for the Claimants in Folio 1331)
Mr Mark Hapgood QC and Mr Andrew Baker QC and Mr James Willan (instructed by Berwin Leighton Paisner LLP for the First Defendants in Folio 1087 and the Defendant in Folio 1331)

Hearing dates: 1st and 2nd March 2011
- - - - - - - - - - - - - - - - - - - - -
Judgment

The Honourable Mr Justice Flaux :
Introduction 

1.	This judgment relates to a dispute as to the correct construction of the 1992 Master Agreement of the International Swap Dealers Association, now the International Swaps and Derivatives Association (“ISDA”) which concerns the financial consequences of Automatic Early Termination of a series of forward freight agreements (“FFAs”) between the parties following the insolvency of the claimant Britannia Bulk. On 11 November 2010 Paul Walker J ordered that the so-called “nil loss” issue raised in the pleadings in 2009 Folio 1331 be tried as a preliminary issue and on 17 December 2010, David Steel J ordered that the same issue raised in 2009 Folio 1087 should be tried at the same time. I heard that trial in both actions on 1 and 2 March 2011.
The terms of the contracts
2.	In order to understand the “nil loss” issue, it is necessary to set out in some detail the relevant contractual provisions. Each of the FFAs in issue incorporated the 2007 Terms of the Forward Freight Agreement Brokers Association (“the FFABA 2007 Terms”). Those Terms incorporated by reference the ISDA 1992 Master Agreement (“the Master Agreement”). An FFA on the FFABA 2007 Terms is a cash-settled contract for differences referenced to the Index rate or rates published by the Baltic Exchange as selected by the parties. A “Settlement Sum” is calculated for each FFA and each Contract Month from the “Contract Rate” agreed between the parties, the “Settlement Rate” for that Contract Month derived from the Baltic Exchange indices, and the number of days in the Month. 
3.	Clauses 7 and 8 of the FFABA 2007 Terms set out the payment terms for each contract month: 
7 Settlement Sum
If the Settlement Rate is higher than the Contract Rate, the Seller shall pay the Buyer the Settlement Sum. If the Settlement Rate is lower than the Contract Rate, the Buyer shall pay the Seller the Settlement Sum.
8	Payment Procedure and Obligations
Payment of the Settlement Sum is due on the later of two (2) London business days after presentation of payee's invoice (with complete payment instructions) or five (5) London business days after the Settlement Date and for this purpose a "London business day" means a day (other than a Saturday or Sunday) on which commercial banks are open for business in London). The Settlement Sum will be deemed "paid" when it has been received into the bank account designated by the payee.
4.	Clause 9 of the FFABA 2007 Terms then incorporates the Master Agreement with specific amendments, as follows:
9.        ISDA Master Agreement:
This clause 9 applies only if either:
(i) 	this Confirmation does not already constitute a Confirmation under an existing master agreement entered into by the parties to this Confirmation; or
(ii) 	the parties agree, either by virtue of clause 20 or otherwise, that the terms of the Master Agreement that is constituted by this clause are to replace any such existing master agreement.
This Confirmation constitutes and incorporates by reference the provisions of the 1992 ISDA® Master Agreement (Multicurrency - Cross Border) (without Schedule) as if they were fully set out in this Confirmation and with only the following specific modifications and elections:
				….
(e)	for the purposes of payments on Early Termination, Loss will apply and the Second Method will apply;
(f)		Automatic Early Termination will apply to both parties…
5.	As will be seen later, the reference to “Second Method” and to “Loss” was to one of two payment methods and to one of two payment measures set out in the Master Agreement. As to the obligation to make payments during the period when a FFA was extant (i.e. before any Automatic Early Termination), Section 2 of the Mater Agreement set out certain General Conditions to which the payment regime in clauses 7 and 8 of the 2007 FFABA Terms was obviously subject:
2. Obligations
(a) General Conditions.
(i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.
					…..
 (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement.
6.	 Section 5 of the Master Agreement sets out various Events of Default and Termination Events. These cases are concerned with so-called “Bankruptcy Events of Default” which trigger Automatic Early Termination:
5.	Events of Default and Termination Events
(a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an “Event of Default”) with respect to such party:-
(vii)	Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:
(6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all of its assets…
7.	Section 6 then deals with early termination in these terms:
6.	Early Termination
(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).
 (e)	Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties’ election in the Schedule of a payment measure, either “Market Quotation” or “Loss”, and a payment method, either the “First Method” or the “Second Method”. If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that “Market Quotation” or the “Second Method”, as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off.
(i) Events of Default. If the Early Termination Date results from an Event of Default:-
(1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party.
(2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party’s Loss in respect of this Agreement.
(3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.
(4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party’s Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.
….
(iv) Pre-estimate	The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses.
8.	First Method and Second Method are not in fact defined in the Mater Agreement, but Loss and Market Quotation together with other relevant expressions are defined in Section 14: 
14.	Definitions
“Loss” means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or re-establishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party’s legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets.
“Market quotation” means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the ‘Replacement Transaction’) that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included …
"Settlement Amount" means, with respect to a party and any Early Termination Date, the sum of:-
(a) The Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined;
and
(b) such party’s Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result.
“Unpaid Amounts” owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties.
Effect of appointment of administrators
9.	Administrators were appointed over Britannia Bulk on 31 October 2008, so that by virtue of Sections 5 and 6 of the Master Agreement Automatic Early Termination then occurred immediately. The payment regime which had been in place under clauses 7 and 8 of the FFABA 2007 Terms and Section 2 of the Master Agreement was thus replaced by the regime for Payments on Early Termination in Section 6(e). Under the Second Method and Loss provision and the definition of Loss, each of the defendants as the Non-defaulting Party was required to reasonably determine in good faith its total loss or gain from the terminated contracts. 
Summary of parties’ cases
10.	The case for Britannia Bulk is that, had the event of default not occurred and each of the FFAs run to expiry, on the basis of the forward rates available at the time of Automatic Early Termination, each of the defendants would have been liable to pay Britannia Bulk considerable sums over the remaining term of the contracts. It is Britannia Bulk’s case that, because early termination has relieved the defendants of those liabilities, the defendants have incurred gains and are required to make payments to Britannia Bulk accordingly.
11.	The defendants’ case is that in fact they have not made any gain at all, the so-called “nil loss” argument. It is an argument which will require careful analysis in the present judgment, but its essence can be shortly stated. The defendants’ case is that, if termination had not occurred, nothing would have been payable to Britannia Bulk under Section 2(a)(i) of the Master Agreement because the condition precedent to payment in Section 2(a)(iii)(1) would not have been fulfilled, since Britannia Bulk would have been affected by bankruptcy throughout the rest of the contractual period. Accordingly, no gain has been made by the defendants from early termination, because nothing would have been payable anyway.
12.	As I have said, the nil loss argument is one which requires a close analysis but I should say at the outset that it seems to me that the argument faces two major difficulties. First, despite the ingenious submissions presented by Mr Hapgood QC on behalf of the defendants, the argument is contrary to what was said, albeit strictly obiter, by Mance LJ in Australia and New Zealand Banking Group Ltd v Societe Generale  [2000] CLC 833 and is also contrary to the judgment of Moore-Bick J as he then was, in the later case of Peregrine Fixed Income Ltd (In Liquidation) v Robinson Department Store Plc [2000] CLC 1328, where the dicta of Mance LJ were approved and applied. 
13.	Second and perhaps more importantly, it seems to me that Mr Phillips QC for Britannia Bulk is right that the fundamental fallacy in the nil loss argument is that it is founded on an impossibility. Under the terms of a Master Agreement in which Automatic Early Termination applies (as was the case here), you cannot have a Bankruptcy Event of Default without there being Automatic Early Termination. In other words, the argument assumes an Event of Default going forward for the remainder of the contract period, but that is simply not possible, because any such Event of Default would itself lead to Automatic Early Termination. As Mr Phillips says, that is why the “Loss” assessment which the Non-defaulting Party is obliged to make upon termination is on the basis that the loss or gain is valued “clean”, which is what Mance LJ considered was the position in the ANZ case.
14.	It is an essential aspect of the nil loss argument that, whereas adopting Second Method and Market Quotation is intended to create what Mr Hapgood described as a “fictional world” with a notional replacement transaction, adopting Second Method and Loss is rooted in the real world of what actually happened prior to Automatic Early Termination and what would have happened absent Automatic Early Termination. Mr Phillips on the other hand contends that the two payment measures are intended to achieve a broadly similar result, a contention which recommended itself to both Mance LJ and Moore-Bick J.  In order to test these rival contentions, it is necessary to look more closely at the four regimes for Payment on Early Termination set out in Section 6 (e) of the Master Agreement and at the effect of Automatic Early Termination.
First Method and Second Method
15.	As I have said, the Master Agreement, somewhat curiously, does not define First Method and Second Method or even explain the difference between them. However, one contrast between them is apparent from the wording of the provisions. First Method only ever involves payments by the Defaulting Party to the Non-defaulting Party where on Early Termination the calculation (whether the payment measure adopted is Market Quotation or Loss) arrives at a positive number, i.e. a loss for the Non-defaulting Party. The Non-defaulting Party never has to make a payment to the Defaulting Party when it has made a gain. This option is explained in Firth: Derivatives Law and Practice (2010) at para 11.157 as follows:
“First Method reflects the position that applies at common law, where damages are never payable to the party in breach. In other words, if First Method has been chosen and the calculation has a negative value, no payment is due to either party. Such a provision is often referred to as a walkaway clause because it means that the Defaulting Party forfeits the embedded value of the transactions that have been closed out”. 
16.	On the other hand under Second Method the wording of Section 6(e) expressly contemplates (for both the Market Quotation and the Loss payment measures) that the Non-defaulting Party not only has to make a payment if the calculation produces a positive number, but also if the calculation produces a negative number i.e. a gain for the Non-defaulting Party. Firth at para 11.157 explains this option as follows: 
“On the other hand, where Second Method has been selected and the calculation results in a negative value, the Non-defaulting Party must make an equivalent payment to the Defaulting Party”. 
17.	Mr Phillips set out in his written submissions the history of the two methods in the derivatives markets. In the early days of derivatives, most market participants preferred the First Method which applied automatically under the 1987 version of the Master Agreement. This approach was the subject of some criticism and, in the 1992 Master Agreement which I have to consider, the Second Method applies automatically as the default position, unless First Method is expressly chosen.
18.	Mr Phillips explained that one of the main factors which had led the market to prefer the Second Method was the change in capital adequacy rules for financial institutions in July 1994, when the Basel Committee on Banking Supervision “adopted the view that netting arrangements with ‘walk-away’ clauses introduce[d] an undesirable element of instability and uncertainty into netting arrangements” (Gooch & Klein, Documentation for Derivatives (4th ed., 2002), vol.1, p.232) and therefore amended the Basel Accord to provide expressly that “contracts containing walkaway clauses will not be eligible for netting for the purpose of calculating capital requirements pursuant to this Accord”.
19.	Mr Hapgood objected to reference to the Basel Accord as any sort of aid to the construction of the Master Agreement in the present case, on the basis that his clients were not members of the ISDA and knew nothing about the Basel Accord. The position of banks whose regulators consider that the Second Method reduces their capital requirements was of no concern to companies such as these defendants (or for that matter Britannia Bulk itself), trading FFAs on FFABA Terms. The Master Agreement was just a convenient umbrella agreement adopted in the FFA trade. In one sense, this objection is rather surprising as Mr Hapgood himself, in his Skeleton Argument, asserted that “Market Quotation” was “made available under the Master Agreement simply to facilitate the capital adequacy requirements of the financial institutions which dominate ISDA’s membership” and then referred, in a lengthy footnote, to the amendment to the Basel Accord.
20.	Be that as it may, I have to construe the Master Agreement as incorporated in these FFAs and, in doing so, I derive little assistance from the history of why there are two payment methods. In any event, the difference between the two methods is apparent from an analysis of the wording of Section 6(e), as I have indicated.
21.	Furthermore, I am assisted in that analysis by what was said about the two payment methods in Section 6(e) of the Master Agreement by Moore-Bick J in Peregrine Fixed Income Ltd (In Liquidation) v Robinson Department Store Plc [2000] CLC 1328 at 1335, paragraphs 23 and 24:
23 In s. 6(e) the Agreement provides for two fundamentally different methods of handling payments on Early Termination. Under what is termed the ‘First Method’ the Defaulting Party pays the Non-defaulting Party an amount equal to the value of the outstanding obligations under the transactions which have been terminated less any unpaid amounts owed to him by the Non-defaulting Party. The Defaulting Party recovers nothing in respect of the loss of his bargain, notwithstanding that he may have been ‘in the money’ at the time of default. This reflects the position under English law following the repudiation of a contract: accrued liabilities are unaffected and the defaulter must compensate the non-defaulter for the loss of any unperformed obligations but he is not entitled to receive anything himself in respect of the lost bargain. Under the ‘Second Method’ a payment may be made either way depending on whether the net balance of gain and loss favours the Defaulting or Non-defaulting Party. That appears most clearly from s. 6(e)(i)(4) and the definition of Loss from which it is clear that the Non-defaulting Party's ‘Loss’ in respect of the Terminated Transactions may be a negative amount (i.e. a gain), in which case a payment of that amount must be made to the Defaulting Party.
24 These provisions seem to me to support Mr Hapgood's submission that the object of the Second Method of payment (whether combined with Market Quotation or Loss as the basis of measurement) is to move away from a simple breach-based approach towards one under which all the transactions covered by the Agreement are effectively closed out. I think that it would be going too far to say that they are intended in all cases to operate neutrally as between the parties, but the fact that the Non-defaulting Party must account to the Defaulting Party for any gain clearly deprives the Event of Default of most of its characteristics as a breach of contract. However, the parties are free to agree to that and there are no doubt good commercial reasons for doing so. It is interesting to note that in the absence of any other choice s. 6(e) provides that the Second Method is to apply. 
Automatic Early Termination
22.	The default position under the Master Agreement is that when an Event of Default occurs, the Non-defaulting Party will have the option of serving a notice under the first sentence of Section 6(a), so as to give rise to an Early Termination Date. As Mr Phillips points out, where the Non-defaulting Party is in the money, it has a financial incentive to serve such a notice. An Early Termination Date crystallises the Non-defaulting Party’s entitlement to compensation for its loss. In contrast, if the Non-defaulting Party is out of the money, it has a financial incentive not to serve such a notice, but to “sit on its hands” and keep the contract on foot, relying on the Defaulting Party’s inability to comply with the condition precedent in Section 2(a)(iii)(1) as relieving it from the obligation to make any payments under Section 2(a)(i), also thereby avoiding having to make any payment to the Defaulting Party on Early Termination.
23.	Mr Phillips submits that if, as in the present case, the parties have selected Automatic Early Termination in their contract, then once one of the specified “Bankruptcy Events of Default” occurs, there will be Automatic Early Termination, in which case an out of the money Non-defaulting Party will be required to calculate and pay an appropriate amount to the liquidator, trustee or administrator of the in the money Defaulting Party. In other words, Mr Phillips submits, selection of Automatic Early Termination prevents the Non-defaulting Party from sitting on its hands and relying on non-compliance with the condition precedent in Section 2(a)(iii).
24.	Mr Hapgood denies that, at least where the Loss payment measure has been selected, Automatic Early Termination has such a radically different effect from the position under the first sentence of Section 6(a). He submits that the real reason for having Automatic Early Termination is to avoid the netting problem i.e. that once a Bankruptcy Event of Default has occurred, the bankruptcy laws of most counties would not permit any set off between different transactions such as Section 2(c) contemplates. Automatic Early Termination seeks to do this by providing that the termination takes effect immediately prior to the presentation of a bankruptcy petition. Whether the provision is effective to circumvent bankruptcy laws is another matter. 
25.	Mr Hapgood submits that Automatic Early Termination has two effects. First it eliminates the possibility of an Event of Default being cured. Whether, whilst the contract is still on foot, an Event of Default can be cured and an obligation to pay under Section 2(a) can revive, is the subject of differing judicial views. In Marine Trade v Pioneer Freight Futures [2009] EWHC 2656 (Comm); [2010] 1 Lloyd’s Rep 631 I expressed the view, obiter, at paragraphs 60 and 61 of my judgment, that the provisions of Section 2(a) are “one time” provisions so that, if the settlement date passes with nothing being payable because of an Event of Default, that obligation to pay does not revive at some later date if the condition precedent is then fulfilled. In contrast, in the Lehman Brothers litigation, Lomas v JFB Firth Rixson [2010] EWHC 3372 (Ch), at paragraphs 72 to 79, Briggs J preferred on balance the view that a payment obligation under Section 2(a)(i) would be suspended whilst the condition precedent was not complied with, but could revive if at any time before the swap agreement came to its natural end, the condition precedent was then complied with. Whichever view is correct, Automatic Early Termination undoubtedly has the effect that an Event of Default can no longer be cured, even if it could be cured when the contract was on foot.
26.	Mr Hapgood accepts that the second effect that Automatic Early Termination has, is that the payment obligations of the parties are moved from Section 2 to Section 6. That is of course the effect of any Early Termination even after election through giving notice but, as Mr Hapgood recognised, the critical difference is that where there is Automatic Early Termination, the Loss calculation occurs automatically, rather than by the election of the Non-defaulting Party.
Market Quotation and Loss
27.	As Mr Phillips submits, the Market Quotation payment measure “provides a rigid and mechanistic approach which produces an objectively verifiable result” whereas the Loss measure is more flexible. As he points out, in a case where a Market Quotation cannot be obtained or would not produce a commercially reasonable result, the Loss measure is the fallback. Peregrine was such a case.
28.	In order to determine the “Market Quotation” amount in respect of each Terminated Transaction, the Non-defaulting Party is required to obtain quotations from “Reference Market-makers” for a “Replacement Transaction” which is “a transaction … that would have the effect of preserving … the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction ... that would, but for the occurrence of the relevant Early Termination Date, have been required after that date”. 
29.	Accordingly, the task of the Reference Market-makers is to provide estimates of the market value of each Terminated Transaction from the perspective of the Non-defaulting Party and those estimates must assume the satisfaction of each applicable condition precedent, in other words assume that the Event of Default has not occurred. Once the Settlement Amount (i.e. the Market Quotation or in a fallback situation, the Loss) has been calculated, the Non-defaulting Party then has to add the “Unpaid Amounts” owing to it and deduct any Unpaid Amounts owing to the Defaulting Party. The definition of Unpaid Amounts covers both amounts that became payable prior to the Early Termination Date, but were not paid and amounts that would have become payable, but for Section 2(a)(iii). 
30.	That calculation then produces a positive or a negative amount. What consequences flow depends obviously upon whether the parties have chosen First Method or Second Method. If it is a positive amount then under both Methods, the Defaulting Party will be liable to pay the Non-defaulting Party. However, if it is a negative amount, equivalent to an overall gain for the Non-defaulting Party, then only if Second Method applies will the Non-defaulting Party have to pay the Defaulting Party. If First Method applies, then a negative amount is irrelevant.
31.	 It is in relation to the definition of “Loss” that the biggest divergence in the approach of the parties arises. Mr Phillips submits that Loss is less mechanistic and more flexible than Market Quotation, but that there is an overlap between the two, in the sense that even if the Market Quotation measure has been chosen, the Loss measure is the fallback position. That is recognised within the Loss definition by the words: “except, so as to avoid duplication, if Section 6(e)(i)(1) or (3)…applies”, which are the two Market Quotation regimes. Mr Phillips submits that, quite apart from any authority bearing on the point, one would expect the two measures to lead to broadly the same result.
32.	Mr Hapgood takes fundamental exception to that proposition. He submits that the words in the first sentence of the Loss definition: “its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain”, do not require the defendants to assess matters on the artificial basis that Britannia Bulk was not affected by an Event of Default and would not have been affected by an Event of Default, had there been no Early Termination. 
33.	He submits that the assessment under the Loss measure is one made in the real world, in contrast to the position under the Market Quotation measure where an artificial replacement transaction is created. He submits that, critically, the “assuming satisfaction of each condition precedent” used twice in the Market Quotation definition is absent in the first sentence of the Loss definition, an indication that the Non-defaulting party does not, in making its calculation under this provision, have to make false artificial assumptions, that the conditions precedent in Section 2(a)(iii) would have been satisfied if termination had not occurred, which they clearly would not. The Loss provision with its mention of “loss of bargain” had, so Mr Hapgood submitted, a “distinctly common law/damages feel”. In assessing loss of bargain, one looks at what hypothetically would have happened had the contract not come to an end. Since the defendants would never have been liable to pay anything by virtue of Section 2(a)(iii), accordingly they made no “gain” from Automatic Early Termination.
34.	Attractively though these submissions were presented, I cannot accept them, as they seem to me to contain a fundamental flaw. Taking Mr Hapgood’s reference to the real world and asking what would have happened if Automatic Early Termination had not occurred, one rapidly realises that his argument has to assume a contract which is fundamentally different from this one. The argument depends upon the Bankruptcy Event of Default continuing if Automatic Early Termination had not occurred, relieving the defendants of their payment obligation, because the condition precedent in Section 2(a)(iii)(1) could not be satisfied. However, what that overlooks is that, under these contracts, that could never occur, because once there was a Bankruptcy Event of Default, the contracts terminated automatically. It was impossible for there to be a continuing Bankruptcy Event of Default. That is the whole point of Automatic Early Termination. It is an inevitable consequence of a Bankruptcy Event of Default. 
35.	As Mr Phillips pointed out, once there has been such a Bankruptcy Event of Default, which is a status changing insolvency event, the contract comes to an end. It is simply impossible to have a contract going forward where Britannia Bulk is in administration. Accordingly, although it is right that the first sentence of the Loss definition does not say in terms “assuming satisfaction of all conditions precedent”, it does not need to, because that is the only basis upon which the assessment of the “gain” can proceed, namely on the basis that there was no Bankruptcy Event of Default and thus no Automatic Early Termination. The gain in connection with the contract being terminated on that basis is indeed the amount of the payments which the defendants would have been required to make over the remaining term of the contracts.
36.	Since the Second Method contemplates, whichever payment measure is selected, that if the calculation produces a negative number (i.e. the equivalent of a gain to the Non-defaulting Party) the Non-defaulting Party will make payment to the Defaulting Party, Mr Hapgood’s construction of the Loss definition produces the very odd result that, on his analysis, the only circumstances in which the Non-defaulting Party would have to give credit for a “gain” within the first sentence would be if, under the second sentence of the definition (to which I return below), the Non-defaulting Party was liable to pay the Defaulting Party in respect of payments required to be made before the Early Termination Date, but not made. 
37.	If the nil loss argument were right, nothing would ever be payable in respect of what might be described as the “gain of bargain” the Non-defaulting Party achieves through Automatic Early Termination, namely the fact that, but for the Bankruptcy Event of Default and consequent Automatic Early Termination, the Non-defaulting Party would have had to make substantial payments to the Defaulting Party. In that context, I agree with Mr Phillips that Mr Hapgood’s attempt to equate the definition of Loss with the common law measure of damages is misconceived. The Second Method is one which, unlike the First Method, is not to be equated with the position at common law. Rather it is a method of calculating close out positions on the termination of a transaction or series of transactions. 
38.	That analysis of the Second Method, whether the payment measure is Market Quotation or Loss, was one which Mr Hapgood himself advanced before Moore-Bick J in Peregrine where at paragraph 22 of the judgment the learned judge said:
It was fundamental to Mr. Hapgood’s argument that the Market Quotation and Loss measures should lead to a broadly similar result, and indeed he relied in part on the difference in the results he said they produced in this case as evidence of the fact that the result produced by the Market Quotation measure is commercially unreasonable. Whether any given result is in fact commercially unreasonable must very largely depend on the extent to which it departs from the result which the parties must be taken to have had in mind, and that, of course, is a matter which has to be determined by reference to the terms of the Agreement. One of the interesting characteristics of the Agreement is that on Early Termination as a result of an Event of Default the Non-defaulting Party may be required to make a payment to the Defaulting Party. Mr. Hapgood submitted that where the parties have specified Automatic Early Termination the occurrence of an Event of Default effectively closes out all their open transactions at once and a payment will then become due from the Non-defaulter to the Defaulter if, taken overall, the Defaulter is "in the money", as was the case here.
39.	That argument found favour with the learned judge as is apparent from the passages in paragraphs 23 and 24 of his judgment which I have already quoted.  I agree with Moore-Bick J’s analysis of the Second Method (whether the Market Quotation or Loss payment measure is adopted) that: “the fact that the Non-defaulting Party must account to the Defaulting Party for any gain clearly deprives the Event of Default of most of its characteristics as a breach of contract” (paragraph 24). It is a misconception to seek to equate the Loss provision with what the position would be if the Non-defaulting Party had a claim for damages at common law, which is the effect of Mr Hapgood’s argument before me.
40.	Given the clear conclusion I have reached about the meaning of the first sentence of the Loss definition, it is not strictly necessary to consider the parties’ rival submissions about the second sentence, not least because ultimately it seems to me that whatever it means has no real impact on the fundamental point I have addressed above. Nonetheless since the point was argued, I will deal with it.
41.	Mr Phillips submits that the words in the second sentence of the Loss definition: “Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made”, are a reference to Unpaid Amounts. The assumption that the conditions precedent are satisfied is spelt out because (unlike the first sentence) this is looking at past and not future loss of bargain. The assumption avoids any dispute about whether the Defaulting Party was insolvent before Automatic Early Termination (the sort of dispute with which the court was concerned in the Marine Trade case).
42.	Mr Hapgood challenged this submission, making the obvious point that if it had been intended to refer to Unpaid Amounts, it would have been easy enough to say so. He submits that the words: “Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made” cover only those payments wrongfully unpaid prior to termination, which should have been paid. In other words, Mr Hapgood submits that the words in brackets mean “assuming, that is to say, that each applicable condition precedent was satisfied at the time”. 
43.	Although I agree that the wording is somewhat awkward and that it could simply have referred to Unpaid Amounts, I prefer Mr Phillips’ construction of the sentence. I agree with him that Mr Hapgood’s argument that “required to be made” means only those payments which ought to have been made, but were wrongfully not made, does not deal at all with payments withheld under Section 2(a)(iii)(1). By using the same formula: “assuming satisfaction of each applicable condition precedent” as elsewhere in the contract, it seems to me clear that the sentence is saying that the Non-defaulting Party is not entitled to rely upon any condition precedent, in which case payments withheld under Section 2(a)(iii)(1) have to be brought into account under the second sentence of the Loss provision.
44.	Furthermore, in my judgment the overlap point is a further indication that the two payment Measures were intended to achieve a broadly similar result. Given that the definition of Settlement Amount  expressly contemplates that, if a Market Quotation cannot be determined or would not produce a commercially reasonable result, the fallback position will be a calculation of Loss, it would be very odd if the two payment measures were not intended to achieve broadly the same result, in terms of the payments that have to be made either way by way of close out, on the termination of a transaction or series of transactions.  
45.	This was a point which Moore-Bick J in Peregrine also considered was an indication that the two payment measures were broadly intended to achieve the same result: see paragraph 30 of his judgment where he said: 
I think Mr. Hapgood was right in saying that when one is seeking to determine what outcome is broadly contemplated by the Agreement when Market Quotation is used in the calculation of the Settlement Amount and hence the amount payable under Section 6(e)(i)(3) some assistance can be derived from Section 6(e)(i)(4) which is concerned with the alternative calculation based on the Loss payment measure. I say that because Loss is defined in terms which make it clear that loss of bargain is one of the principal heads of damage intended to be covered and both Section 6(e)(i)(3) and Section 6(e)(iv) indicate that the Market Quotation measure and the Loss measure are intended to lead to broadly the same result.
46.	The Pre-Estimate provision in Section 6(e)(iv) with its reference to the amount recoverable where Market Quotation applies being a reasonable pre-estimate of loss and being payable for loss of bargain (to which of course the Loss definition expressly refers) is a further indication that the two payment measures were intended to have broadly the same result, as Moore-Bick J also accepted at paragraph 28 of his judgment in Peregrine. 
The earlier authorities
47.	Given my firm conclusion that Mr Hapgood’s nil loss argument simply fails on the true construction of the Master Agreement, it is not strictly necessary to consider in any detail his submissions as to why, to the extent Mance LJ in the ANZ case and Moore-Bick J in Peregrine reached the same conclusion, they were wrong to do so, since, by definition, if I have rejected his argument on the construction of the Master Agreement, it must follow (i) that the common ground in ANZ was correctly agreed; (ii) that Mr Hapgood’s own submissions before Moore-Bick J in Peregrine were correct and (iii) that both judges’ analysis was also correct. Nonetheless, given that Mr Hapgood devoted a fair amount of time in his submissions before me to an elegant exposition as to why all three of those points are wrong, and given that this case may go further, I propose to deal briefly with the submissions he made.
48.	Australia and New Zealand Banking Group Ltd v Societe Generale [2000] CLC 833 was a case where, as Mance LJ records at the outset of his judgment: “it was common ground that the Loss and Market Quotation clauses aim at broadly the same result and may to that extent assist [to] construe each other” and as Mr Hapgood points out, Mance LJ referred to that common ground several times in his judgment. The case was somewhat unusual in that it involved Societe Generale (“SG”) seeking to raise a number of new points on appeal, the detail of which do not matter, save to note that the Court of Appeal (Kennedy and Mance LJJ) decided that those new points were not open to SG on appeal. Notwithstanding that conclusion, Mance LJ, with whom Kennedy LJ agreed, went on to consider the merits of those new points as they had been extensively argued. 
49.	It seems to me that, for present purposes, despite the fact that it was common ground in that case that the Market Quotation and Loss measures were intended to achieve essentially similar results, two sections of the judgment of Mance LJ are of particular relevance. First is the passage in paragraph 24 of his judgment where he deals with what the position would have been, if the Market Quotation basis of calculation had been adopted: 
24 If the market quotation basis of calculation had been adopted between ANZ and SG, it is clear that it would have been necessary to assume the satisfaction of all conditions precedent both in respect of any amounts unpaid on early settlement and in respect of any future payments on settlement. The task of the reference market makers would not have been to put themselves in the shoes of either of the actual parties under the actual transaction, but to assess the consideration required to enter into a replacement transaction to preserve the economic equivalent of any payment provided by such transaction on a hypothetical basis. One hypothesis is that no early termination event has occurred or been effectively designated, another that ‘each other applicable condition precedent specified in this agreement’ has been and will be satisfied.
50.	Second is the passage towards the end of his judgment at paragraphs 29 and 30, where Mance LJ concludes that, whichever payment measure is used, on the basis that a broadly similar result was intended, the calculation of loss of bargain should proceed on the same basis of assuming that all conditions precedent had been satisfied. He expresses his conclusion in these terms at paragraphs 29 and 30 of his judgment: 
29	 Bearing in mind the intention of the loss and market quotation clauses to arrive at broadly the same results, the calculation of loss, or loss of bargain, must proceed on the same basis, that is valuing the transaction according to the nominal value of the payments which would have been required under it, assuming satisfaction of all conditions precedent.
30 I would therefore have held that ANZ's loss and SG's gain on early termination of the ANZ-SG transactions fell to be valued ‘clean’.
51.	Mr Hapgood submitted that this analysis all proceeded on the basis that it was common ground that the Market Quotation and Loss measures were intended to achieve the same results, and no contrary submissions along the lines of the submissions Mr Hapgood now makes were addressed to the Court of Appeal. This is undoubtedly correct, but Mance LJ engaged nonetheless in a detailed analysis of the provisions and would surely have queried the supposed common ground, if he had thought that there was any basis for doing so. 
52.	Peregrine Fixed Income Ltd (In Liquidation) v Robinson Department Store Plc   [2000] CLC 1328 is, as Mr Hapgood points out, not a case concerned with derivatives at all, but apparently a case of a long term unsecured loan wrapped up within the terms of the ISDA Master Agreement, as Moore-Bick J recognised at paragraph 20 of his judgment. Nonetheless, given the incorporation of the Master Agreement, the case is still obviously relevant to the issues of construction I have to decide.  
53.	Mr Hapgood submitted before me that in that case he had advanced three arguments: (i) that the Loss and Market Quotation measures should produce broadly the same outcome; (ii) that the Loss measure produced a valuation of some US$87 million and (iii) that therefore, the Loss measure trumped the Market Quotation measure, as Moore-Bick J accepted at paragraph 37 of his judgment. Mr Hapgood sought to make much before me of the extent to which he would still accept the submissions he advanced in that case, in relation to the Market Quotation measure, but that only served to emphasise the extent to which he was resiling now from what he had argued then in relation to the Loss measure. 
54.	Ultimately, whatever forensic challenges Mr Hapgood may have faced about the fact that what he was arguing before me was flatly contrary to what he had argued before Moore-Bick J ten years ago, what matters is whether his current argument is right or not. As will be apparent from my previous conclusion about the correct construction of the Master Agreement, I have reached the firm view that Mr Hapgood’s current argument is wrong and it necessarily follows that his argument before Moore-Bick J was correct. 
55.	Although the decision of Moore-Bick J was influenced by Mr Hapgood’s then submissions, his conclusions at paragraphs 22 to 24 and 30 of his judgment to which I have previously referred were in my view, clearly correct. Even if I had not independently reached the same conclusion as a matter of construction of the provisions with which I am concerned, I would still have followed the decision of Moore-Bick J, both because it is clearly right and because of the desirability of consistency and certainty in decisions of the Commercial Court. 
Conclusion
56.	It follows that the nil loss argument must fail and the preliminary issue in both actions is resolved in favour of Britannia Bulk.