This article has been contributed to the blog by Steven Golick and Patrick Riesterer. Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, and Patrick Riesterer is an associate in the group.

Devonshire Trust (“Devonshire”) and Barclays Bank PLC (“Barclays”) were involved in the Asset Backed Commercial Paper (“ABCP”) market in Canada. The ABCP market consisted of AAA rated short term notes issued by special purpose vehicles (the “conduits”). The conduits invested in longer term assets issued by “asset providers”. The conduits paid coupons on the ABCP notes through their earnings from their long term investments, but depended on new ABCP note purchases to repay the principal.

In August of 2007, the ABCP market seized up. Upon the collapse of the ABCP market, the various participants negotiated certain terms to provide a breathing space within which to come to resolution of the complex issues before them. During the negotiations, the parties issued suspension notices, whereby the conduits and the asset providers agreed not to exercise their rights against one another.

In a unique development, almost all of the conduits in Canada, representing over $32 billion, were ultimately joined into one formal restructuring proceeding under the Companies’ Creditors Arrangement Act which was ultimately successfully concluded and approved by the court.

Devonshire was the only conduit that was not successfully restructured as a result of these negotiations. Barclays was its asset provider. Barclays Bank v. Metcalfe & Mansfield Alternative Investments VII Corp. involved a dispute between Devonshire (through Metcalfe & Mansfield, Devonshire’s Indenture Trustee) and Barclays Bank, over who was entitled to certain collateral held on trust for Barclays to secure Devonshire’s obligations to Barclays as its asset provider.

Devonshire and Barclays had a complex agreement (the “Agreement”) governed by the 1992 ISDA Master Agreement. There were three major parts to the Agreement: First, Devonshire agreed to purchase assets exclusively from Barclays. Second, Barclays agreed to provide Devonshire with liquidity support in the event of a general disruption of the ABCP market. Third, Barclays entered into two credit default swaps (the “Swaps”) with Devonshire, which required Devonshire to compensate Barclays in the event that certain corporate bonds declined in the value. Devonshire posted $600 million of collateral pursuant to the Swaps.

The trial was bifurcated to simplify matters. Mr Justice Newbould of the Ontario Superior Court of Justice [Commercial List], heard this matter over a period of a month in May/June 2011 and delivered extensive reasons in September.

It was agreed, but only for the purposes of the first trial, that, among other things, Barclays was in default under the liquidity support agreement and that Devonshire had delivered valid notices of default to Barclays. A second trial may be held to determine these hotly contested issues.

When the ABCP market froze, Devonshire sent a market disruption notice to Barclays requesting payments under the liquidity facility. Barclays took the position that there was no market disruption. Devonshire therefore delivered a default notice, which in effect gave Barclays 3 days to cure its failure to make the liquidity support payments. The next day, as a result of the negotiations (including amongst all the major market participants), Devonshire delivered a “suspension” notice, under which it suspended the effect of the default notice, without prejudice, until the end of a standstill period that had been negotiated.

Negotiations began in August 2007 and continued until January 2009. During this period, Barclays negotiated with Devonshire’s noteholders, seeking to reach an agreement whereby Barclays and the noteholders would enter into the Swaps directly, with certain modifications. Devonshire was not party to these negotiations. It received daily emails from Barclays stating that the negotiations were ongoing and requesting that the notices of suspension be renewed, which was ultimately done on a daily basis.

In January 2009, negotiations broke down. Devonshire’s noteholders refused to become party to the Swaps without major modifications. Nevertheless, Barclays continued to email Devonshire reports that the negotiations were ongoing. At the same time, Barclays began taking steps to terminate the Agreement.

On January 13, 2009, Barclays and Devonshire both attempted to terminate the Agreement. Barclays attempted to terminate the Agreement on the basis that Devonshire was insolvent, thereby giving Barclays a right of termination pursuant to s. 5(a)(viii) of the 1992 ISDA Master Agreement. Devonshire attempted to terminate the Agreement on the basis that Barclays had failed to make liquidity support payments, thereby giving Devonshire a right of termination pursuant to s. 5(a)(i) of the 1992 ISDA Master Agreement. The litigation ensued as a result of disagreement as to which of the two was entitled to terminate the Agreement.

If Barclays was entitled to terminate the Agreement, it had first priority over the $600 million in collateral. If Devonshire was entitled to terminate the Agreement, then Devonshire’s investors had first priority over the collateral pursuant to a flip clause in the waterfall portion of the Agreement.

The case required the court to interpret various provisions of the 1992 ISDA Master Agreement. In particular, the court was asked to examine the default provisions in s. 5, examine the early termination for default provisions in s. 6(a) and interpret the payments on early termination provisions in s. 6(e).

Barclays’ Notice of Early Termination Date

The court rejected Barclays early termination of the Agreement due to Devonshire’s insolvency.

The court found that Barclays had waived its right to terminate the Agreement on the basis of Devonshire’s insolvency, because it had continued to make and accept payments due under the Agreement after it learned that Devonshire was insolvent.

Moreover, the court found that Barclays’ failure to make liquidity support payments was the cause of Devonshire’s insolvency and Barclay’s should not be entitled to take advantage of its own breach.

Finally, the court found that Barclays had made fraudulent misrepresentations in the process of terminating the Agreement. The misrepresentations were part of Barclays’ litigation strategy. This strategy consisted of sending intentionally misleading emails to Devonshire concerning the negotiations between Barclays and another market participant to induce Devonshire to extend the suspension notices, allowing Barclays time to take steps to remedy its default under the liquidity support agreement, and terminate the Agreement immediately after. Barclays ensured that Devonshire was not notified of the liquidity support payments until Barclays had delivered notice of early termination to Devonshire. Statements of claim were issued simultaneously with the notices of early termination, and these statements of claim demanded return of the liquidity support payment.

Devonshire’s Notice of Early Termination Date

The court held that Devonshire’s termination of the Agreement was valid. Devonshire had delivered notices of early termination to Barclays after receiving Barclays’ notices of early termination. The notices specified that Barclays had failed to make the required liquidity support payments and had failed to remedy this default on or before the third day after the delivery of the notices of default.

In finding that Barclays had failed to remedy its default within three days of the delivery of notices of default, the court held that notices of suspension extending the suspension period issued by Devonshire after negotiations had broken down were not binding on Devonshire. Devonshire had issued the notices in reliance on misleading emails sent by Barclays, emails that were found to be fraudulent misrepresentations in the circumstances.

Rights to the collateral

The court held that Devonshire was entitled to the return of its $600 million in collateral minus a portion of the liquidity support payment it received from Barclays, as well as certain other costs and damages, plus interest. The court rejected Barclays claim that Devonshire was obligated to post $1.2 million of collateral, which Barclays could claim on the termination of the Agreement.

In reaching this conclusion, the court held that the loss method of calculating payments on early termination in s. 6(e) of the 1992 ISDA Master Agreement is the common law measure of loss – what the parties would have received had the contract had been performed. The loss measure includes a duty to mitigate. While the parties had selected the market quotation method, there was no market for the Swaps. Thus, the loss method applied to determining the value of the Swaps. The court rejected Barclays’ contention that the loss method was intended to reach the same result as the market quotation method. The court found that where there is no market to canvas, there is no need to construct a theoretical market.

Barclays loss under the loss method was zero. The bonds referenced in the Swaps had not depreciated in value and were not expected to during the term of the Swaps, so Devonshire was not required to compensate Barclays. Devonshire may have been required to post further collateral, but the netting provisions of the 1992 ISDA Master Agreement ensured that Devonshire was entitled to that collateral on early termination of the Swaps. In calculating Barclays’ loss, the court chose a cash flow analysis over a mark to market analysis. The court found that market conditions at the time were too volatile and that the model Barclays used for the mark to market calculation was unsatisfactory.

Due to the nature of the situation, the parties asked the court not to make any order directing payment, and so none was made. The court noted that there remains the question of whether the issues that were bifurcated need to be dealt with or not.


While the facts of this case are extremely complex and perhaps unique, the extensive reasons of the court provides important guidance on numerous issues including fraudulent misrepresentation, duty of good faith, the meaning of insolvency, and damages. These are applicable to commercial, as well as insolvency situations. In addition, in its reasons, the court provided detailed analysis and comment on various provisions of the 1992 ISDA Master Agreement. This will provide good guidance to market participants.

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