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ISDA Derivatives and Communicating Notice

In the current environment, various types of derivatives—swaps, options, forwards, among others—are coming under intense pressure. Values of reference assets and rates fluctuate wildly, often on an intra-day basis. At the same time, market values have declined for all types of collateral and assets, resulting in margin and collateral calls being made. As parties grapple with operational challenges and liquidity squeezes in the face of the COVID-19 pandemic, defaults are inevitable. It is critical in these circumstances for non-defaulting parties to ensure they do not inadvertently waive or otherwise prejudice their rights.

One of the ways parties can get tripped up is in delivery of notice. This may seem like a trivial issue in the days of ubiquitous e-mail and other electronic communications, but it is not—ISDA contracts have specific provisions governing the methods of providing notice. The need to focus on these notice provisions is of particular importance now with the myriad of workplace disruptions being experienced. Occurrences like office closures (including offices designated for receipt of notice), slower response times, and employees working remotely are now commonplace and present additional complications. Below is a brief discussion of the law on notice provisions and some suggestions for best practices in the current pandemic environment.

Default and Termination Notice Provisions in the ISDA Master Agreement

In a default situation, the effectiveness of notices delivered by the non-defaulting party is key in determining if and when a default has occurred and when an early termination of a derivative transaction has been declared. Defaults such as failure to make a payment or delivery, or failure to post additional margin, occur only upon expiry of the relevant cure period following effective notice by the non-defaulting party. Similarly, declaration of termination of a transaction under an ISDA contract is effective only when notice of the early termination date is effectively delivered in accordance with the terms of the agreement.

Section 12(a) in the ISDA Master Agreement sets forth the methods for notice. Under the original 1987 version of the agreement, notice can be provided in one of the following manners: (i) in writing and delivered in person, (ii) sent by certified or registered mail (airmail, if overseas) or the equivalent (with return receipt requested), (iii) by overnight courtier, or (iv) by telex (with answerback received).

Subsequent iterations of the ISDA Master Agreement expanded upon these permitted methods. For example, the 1992 ISDA Master Agreement also allows parties to provide notice—other than notice of Events of Default and Termination Events under Section 5 or Early Termination under Section 6—by facsimile or “electronic messaging system.” The 2002 ISDA Master Agreement includes, for the first time, e-mail as a permitted method of providing notice.1 But the 2002 version preserves an exception for Events of Default, Termination Events, or Early Termination—those still cannot be made by electronic messaging system or e-mail.

The standard provisions may be modified, supplemented, and/or overridden by the Schedule to the Master Agreement or by the confirmation for a particular transaction. In some instances, parties have included provisions in the ISDA Schedule or confirmation to permit notice of defaults and/or terminations via e-mail. In the majority of derivatives contracts, however, Section 12(a) of the ISDA Master Agreement remains unchanged.

New York Law Governing Contractual Notice Provisions

New York law is chosen by the parties to govern many ISDA agreements. The general rule in New York, articulated in Rockland Exposition Inc. v. Alliance of Automotive Service Providers of New Jersey, is that strict compliance with contractual notice provisions is not necessary if the recipient received actual notice and was not otherwise prejudiced by the deviation.2 There are very few cases that address the issue of form of notice in the ISDA context, but since Rockland, it has been suggested that what is dispositive is not the method of transmission but whether actual notice was received.3

But the rule expressed in Rockland is not absolute, and New York courts have sometimes held, outside the ISDA context, that strict compliance with the form of notice provided for in the contract is required.4 For instance, strict compliance is required if the notice provision is considered a “condition precedent” that explicitly sets forth the consequences of failing to comply.5 We have not found any cases since Rockland applying the strict “condition precedent” standard to notice in the ISDA context, but there is a notable lack of consistency under New York law on this issue.6 It is worth noting that contractual notice provisions in ISDA agreements governed by English law, another common choice, are more likely to be strictly construed.7

What Happens If Notice Does Not Strictly Comply with the ISDA Provisions?

In circumstances where notice cannot be provided in strict compliance with the governing ISDA Agreement—if a counterparty’s office is closed and not accepting mail, a counterparty is unresponsive, etc.—there are several arguments that notice, if actually received by the non-defaulting party, is nonetheless effective.

The first argument is that under Rockland, strict compliance is not required as long as notice is actually received and the recipient was not otherwise prejudiced. But even if notice in strict accordance with the contractual provision were to be considered a condition precedent, the doctrine of “prevention” may excuse a party’s failure to perform when the failure was caused by another party’s conduct that frustrated or prevented the occurrence of the condition.8 This doctrine has been applied to contract cases generally, and we have located one New York case discussing the doctrine in connection with an ISDA agreement.

In that case—MBIA v. Coöperatieve Centrale Raiffeisen–Boerenleenbank B.A. (“Rabobank”), et. al.—one of the parties, Rabobank, argued there was no breach because its New York branch failed to provide Rabobank’s London branch (which served as counterparty on the ISDA swap agreement and was the entity required to provide notice to plaintiff) with notice that certain reference obligations were being sold. The Court denied the parties’ cross motions for summary judgment, finding in relevant part that Rabobank’s liability under the swap agreement was “not automatically precluded by the New York branch’s failure to send notice to the London branch.”9 Specifically, the court found if the record indicated that Rabobank London frustrated or prevented receipt of notice—either by “actively waiv[ing] notice or abdicat[ing] certain functions to the New York branch in a way that vitiated the notice requirement”—plaintiff could prevail on its claim.10

Finally, the implied covenant of good faith and fair dealing requires a party to “refrain[] from conduct which would prevent or hinder the occurrence of [a] condition.”11 This doctrine is implied in every contract governed by New York law12 and may provide another means to excuse a party’s failure to comply strictly with a notice provision in circumstances when that failure was caused by the counterparty.

Best Practices For Providing Notice

Disruptions in traditional modes of communication can wreak havoc on attempts to provide notice to a counterparty. In order to avoid inadvertent waiver or otherwise prejudicing their rights, parties to ISDA Agreements should take the following steps when preparing and delivering notices of default or termination: 

  • Read the master agreement notice provisions closely along with any modifications in the ISDA Schedule, any Credit Support Annex, and transaction confirmations;
  • Determine what kind of notice needs to be provided;
  • If the contract does not allow it, do not rely on e-mail or other methods used in the past, even with the same counterparty, just because they have not been challenged before;
  • If you can, comply strictly with the contract and use more than one permissible means of providing notice;
  • Keep careful records of the facts relating to all the notices—or attempts to provide notice—you send out; and
  • If your counterparty makes it impossible to provide notice in strict compliance with the contract, do your best to use other methods and preserve any evidence that actual notice was received.

Finally, with respect to new ISDA contracts, new transactions under existing agreements, or amendments to existing contracts, parties should consider adding e-mail as a permissible notice delivery method for all purposes, including in connection with defaults and terminations.



1   The 2002 ISDA Master Agreement also clarifies that the term “electronic messages” does not include e-mail, and that “electronic messaging system” will be construed accordingly.

2   706 F. Supp. 2d 350, 360 (S.D.N.Y. 2009) (citing Yarmy v. Conte, 128 A.D.2d 611, 513 N.Y.S.2d 21, 21 (2d Dept. 1987) and Ives v. Mars Metal Corp., 23 Misc.2d 1015, 196 N.Y.S.2d 247, 249 (N.Y. Sup. Ct. 1960)).

3  See, e.g., Good Samaritan Home, Inc. v. Lancaster Pollard & Co., 3:11-cv-00075-RLY-WGH, 2012 U.S. Dist. LEXIS 37386, *9-10 (S.D. Ind. Mar. 20, 2012) (applying New York law). At least one case interpreting the 1987 ISDA forms suggested strict compliance with contractual notice provisions may be required, but this case predated Rockland and the court concluded that actual notice had not been received in that matter. See First Nat’l Bank v. Ackerley Communs., Inc., 94 CIVIL 7539(KTD), 2001 U.S. Dist. LEXIS 20895, *8‑17 (S.D.N.Y. Jan. 8, 2001), aff’d, 28 F. App’x 61 (2d Cir. 2002).

4  See Dale v. Indus. Ceramics, Inc., 571 N.Y.S.2d 185, 186 (Sup. Ct. N.Y. Cty 1991).

5  Compare Misty Cleaning Serv. Inc. v. Independent Grp. Home Living Program, Inc., No. 616237‑16, 2020 N.Y. Misc. LEXIS 122, *10 (Sup. Ct. Suffolk Cty Jan. 13, 2020) (notice was a condition precedent), with RKI Constr., LLC v. WDF Inc., 14-cv-1803 (KAM) (VMS), 2017 U.S. Dist. LEXIS 50397, *19-20 (E.D.N.Y. April 3, 2017) (notice not a condition precedent).

6  See Scheurer Hosp. v. Lancaster Pollard & Co., Case No. 12-11536, 2012 U.S. Dist. LEXIS 104987, *31 (E.D. Mich. July 27, 2012) (actual notice may be sufficient under New York law “although the law on this issue is not altogether uniform.”).

7 See Greenclose Ltd. v. Nat’l Westminster Bank plc (2014) EWHC 1156.

8 See, e.g., Ferguson v. Lion Holding, Inc., 478 F. Supp. 2d 455, 470 (S.D.N.Y. 2007).

9  MBIA Ins. Corp. v. Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., No. 09 Civ. 10093 RJS, 2011 U.S. Dist. LEXIS 31307, *42 (S.D.N.Y. Mar. 25, 2011).

10  Id.

11  Cauff, Lippman & Co. v. Apogee Fin. Grp., Inc., 807 F. Supp. 1007, 1022 (S.D.N.Y. 1992).

12 Id. (“The prevention doctrine is substantially related to the implied covenant of good faith and fair dealing implicit in every contract.”).


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