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Posted: October 25, 2013

Divided First Department Panel Enforces Burdensome “Notwithstanding” Clause

On October 24, 2013, the First Department, in a 3-2 decision, issued a decision in BDC Finance L.L.C. v. Barclays Bank PLC, 2013 NY Slip Op. 06963, enforcing a contract in a way that created a significant burden on one party but not the other. This apparent unfair result was due to a “notwithstanding” clause similar to the clause examined in the First Department decision that was a subject of our October 24, 2013 post: “Notwithstanding” Clause Controls Contract Even When It Reads Other Term Out of the Contract.”

The BDC Finance majority (Saxe, DeGrasse, and Richter, JJ.) held that Barclays breached its contract with the plaintiff hedge fund by not immediately complying with the hedge fund’s demand that Barclays return certain collateral pledged to secure a derivative transaction, even though Barclays disputed the amount of collateral that had to be returned. The majority held:

The plain and unambiguous language of the Delivery of Collateral clause requires Barclays to transfer any Return Amount demanded by BDC no later than the business day following the demand. This obligation is unconditional and absolute and exists “[n]otwithstanding anything in the [CSA] to the contrary.” Thus, the Delivery of Collateral clause expressly supercedes the form language in the CSA which would have otherwise permitted Barclays to dispute before paying.

Because this provision was part of a group of agreements that were “negotiated by two sophisticated commercial entities,” the majority would “not, in the guise of contractual interpretation, alter the plain language of the clause.”

The dissenters (Andrias and Gische, JJ.), however, disagreed, and interpreted the contracts as permitting Barclays to refuse to honor the hedge fund’s capital call while the parties made use of the contractually agreed-upon dispute resolution procedures: “[t]he court will endeavor to give the [contract] [the] construction most equitable to both parties instead of the construction which will give one of them an unfair and unreasonable advantage over the other” because “[i]t is highly unlikely that two sophisticated business entities, each represented by counsel, would have agreed to such a harshly uneven allocation of economic power under the Agreement” (citations omitted).

In conclusion, the First Department, albeit by a bare majority, has held sophisticated parties to the plain language of the “notwithstanding clauses” in their contracts, no matter how onerous the result.  Lawyers should keep this in mind in drafting and performing contracts.  Those who expect a court to ignore contract provisions that are unfair to their clients may be disappointed.

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