On Friday 14 August, the Court of Appeal handed down judgment in the FX dispute CFH Clearing Limited v Merrill Lynch International [2020] EWCA Civ 1064.  This appellate success was a comprehensive victory for the clear wording of standard ISDA documentation over creative legal arguments.

Despite, or even because of, the one-sided result, the judgment contains important lessons for market participants on the approach the English Courts will take to future interpretation issues in ISDA disputes.  

The Background

CFH Clearing suffered serious losses in a large number of automated FX trades entered into during the ‘Swiss flash crash’ of 2015.  After the event, a number of its banking counterparties, but not Merrill Lynch, agreed to limit CFH Clearing’s losses to a market-recognised ‘official low’.   CFH Clearing then sued Merrill Lynch to recover the losses it suffered over and above this market cap.

The swaps entered into by CFH Clearing with Merrill Lynch were governed by a 2002 ISDA Master Agreement, an FX Confirmation Agreement, and also by Merrill Lynch’s terms of business (the “MLI Terms”).  On appeal, CFH Clearing advanced breach of contract claims based solely on Clause 7 of the MLI Terms, which stated in relevant part that:

“… All transactions are subject to all applicable laws, rules, regulations howeverso applying and, where relevant, the market practice of any exchange, market, trading venue and/or any clearing house and including the FSA Rules…”

CFH Clearing argued that Clause 7 of the MLI Terms incorporated FX market practice into the terms of its agreement with Merrill Lynch.  Specifically, CFH Clearing claimed that Merrill Lynch was in breach of the FX market practice to adjust or cancel deals, when extreme events occurred (such as the Swiss flash crash) which caused those deals to occur at prices outside the normal market range.

This contention was denied by Merrill Lynch, whose position was that market practice was too vague and uncertain to be incorporated as a contractual term, and that the purpose of Clause 7 of the MLI Terms was simply to ensure neither party was obliged to act in a way which breached any laws, rules or regulations.

The Court’s Decision

The Court of Appeal came down strongly on the side of Merrill Lynch, for three main reasons:

  • First, it was expressly stated in the MLI Terms that the terms of specific transactions would take precedence over the general provisions of the MLI Terms themselves. In the opinion of the Court, “it could not be clearer” that the terms of the ISDA Master Agreement would therefore prevail over any contrary provisions introduced by the MLI
  • Second, even if it were possible to override the provisions of the ISDA Master Agreement to account for market practice (which it was not), Clause 7 could not properly be interpreted as referencing FX market practices in general, as opposed to the practice of specific markets such as the EBS platform in fact used in for these trades.
  • Third, even if Clause 7 had referred to FX market practice (which it had not), the alleged market practice was far too vague and uncertain to be incorporated as a contract term.


The Court of Appeal’s judgment represents a welcome endorsement of an important fact – that parties contract using ISDA Master documentation because they want their deals to be governed by ISDA Master terms.  The Court of Appeal’s decision recognises that parties are unlikely to have intended to agree unspecified terms which contradict the terms of ISDA documentation.  Sensible provision by parties for legal or regulatory obstacles, in the manner of Clause 7 of the MLI Terms, should lead to fewer challenges before the English Courts in future.

The judgment is also noteworthy as the latest in a series of decisions by the English Courts to emphasise the importance of certainty and predictability in the interpretation of ISDA Master agreements more generally.  Indeed, it is fast becoming a commonplace for English Courts to preface their analysis (as the Court of Appeal did here) with a reference to the comments of the Court in Lomas & Ors v JFB Firth Rixson Inc & Ors [2010] EWHC 3372 (Ch) that the ISDA Market Agreement “should as far as possible, be interpreted in a way that serves the objectives of clarity, certainty and predictability, so that the very large number of parties using it should know where they stand”.

In this case, the Court of Appeal went further still, noting that CFH Clearing “was bound by the terms of those transactions according to the ISDA Master Agreement it had negotiated and agreed with MLI, an agreement which could have made, but did not make, provision for market disruption. I see no reason why CFH should not be held to its bargain.”  The message to parties is simple: if you want to vary the terms of ISDA Master Agreements, make sure you do so explicitly.