Neutral Citation Number: [2011] EWHC 1390 (Comm)
Case No: 2010 Folio 79
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 07/06/2011

Before :

MR JUSTICE FIELD
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Between :

	Lehman Brothers Commodity Services Inc	Claimant	
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	Crédit Agricole Corporate and Investment Bank
(formerly Calyon)	Defendant	

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 Alain Choo-Choy QC (instructed by Weil Gotshal & Manges) for the Claimant
Robin Dicker QC and Jeremy Goldring (instructed by Clifford Chance LLP) for the Defendant

Hearing dates: 1, 2 & 3 March 2011
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Judgment

Mr Justice Field:
Introduction 

1.	This is a trial of a number of Preliminary Issues ordered to be determined by Burton J. 
2.	The issues arise out of proceedings in which the Claimant (“LBCS”) sues on a Letter of Credit issued by the Defendant (“Calyon”) in favour of LBCS. The Letter of Credit was provided in connection with a derivatives trading contract contained in an ISDA Master Agreement and the Schedule thereto, including a Credit Support Annex (“the EDF/LBCS Master Agreement”). The contract was made on 23 May 2006; the parties were LBCS and EDF Trading Ltd (“EDF”).
3.	The Letter of Credit was issued on 25 September 2007 and when drawn upon on 21 November 2008 was in the sum of €50,000,000. It is governed by English law. As at 25 September 2007, LBCS and Calyon were already in a wholly separate contractual relationship governed by a distinct ISDA Master Agreement and Schedule dated 2 October 2006 (“the Calyon Master Agreement”). This agreement is governed by the law of New York. 
4.	Section 6 (f) of the the Calyon Master Agreement provided (in relevant part):
(i) In addition to any rights of set-off a party may have as a matter of law or otherwise, upon the occurrence of an Event of Default, Credit Event Upon Merger, or an Additional Termination Event and the designation of an Early Termination Date pursuant to Section 6 of the Agreement with respect to a party (“X”), the other party (“Y”) will have the right (but not be obliged) without prior notice to X or any other person to set-off or apply any obligation of X owed to Y (whether or not matured or contingent and whether or not arising under this Agreement, and regardless of the currency, place of payment or booking office of the obligation) against any obligation of Y owed to X (whether or not matured or contingent and whether or not arising under this Agreement, and regardless of the currency, place of payment or booking office of the obligation.
(ii) …
(iii) If the amount of an obligation is unascertained, Y may in good faith estimate that amount and set-off in respect of the estimate, subject to the relevant party accounting to the other when the amount of the obligation is ascertained.
(iv) Nothing herein shall be effective to create a charge or other security interest. This provision shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise).
5.	Section 9 (a) and (b) of the Calyon Master Agreement read:
(a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto.
(b) Amendments.  No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system.
6.	Both the Calyon Master Agreement and the EDF/LBCS Master Agreement provided in Section 6 (e) for the calculation of payments due on Early Termination, depending on whether the Early Termination Date results from an Event of Default or a Termination Event and on the chosen method of calculation. The chosen method of calculation under each agreement was Loss and Second Method.  Under this method of calculation, if there is an Early Termination Date and the non-defaulting party is “out of the money”, he can end up paying the defaulting party. 
7.	LBCS’ obligations under the the Calyon Master Agreement are guaranteed by Lehman Brothers Holdings, Inc (“LBHI”) pursuant to a guarantee dated 12 October 2006. LBHI was also the Credit Support Provider under the Calyon Master Agreement On 15 September 2008, LBHI filed under Chapter 11 of the US Bankruptcy Code (“the Code”), an act that constituted an Event of Default in respect of LBCS under the Calyon Master Agreement. On 15 and 16 September 2008, Calyon served notices on LBCS under Section 6 (a) of the Calyon Master Agreement designating those dates Early Termination Dates on which all outstanding transactions under the Calyon Master Agreement would be terminated; and on 30 December 2008, Calyon served a notice on LBCS stating that the sum due under the Calyon Master Agreement was US$15,030,239. 
8.	LBHI’s filing under Chapter 11 also constituted an Event of Default under the Calyon Master Agreement and 16 September 2008 was designated an Early Termination Date under this contract. The sum due and owing to LBCS by EDF is said to be €125,538,461.
9.	On 21 November 2008, LBCS sought to draw down on the Letter of Credit. On 28 November 2008, Calyon paid LBCS €38,377,190.69 and, relying on Section 6 (f), set-off the sum of €11,622,809.31 against the US$15,030,239 due under the Calyon Master Agreement.
10.	LBCS does not accept that Calyon were entitled to set-off the sum due from LBCS against Calyon’s obligation under the Letter of Credit. In its Reply it pleads that: (i) on its true construction Section 6 (f) did not apply to Calyon’s obligation under the Letter of Credit; (ii) there was no legal set-off; and (iii) any entitlement to set-off the Letter of Credit obligation against the debt due from LBCS was automatically stayed pursuant to the provisions of s. 362 (a) of Title 11 of the Code. 
The Preliminary Issues
11.	The preliminary issues ordered to be tried are: 

1.	Is the question of whether the Defendant was entitled to set off, against its obligation under the Letter of Credit, the amount of the Early Termination Payment to be determined solely in accordance with English law or are the laws of New York (including in particular the bankruptcy law applicable in New York) relevant to the determination of that question?
2. Is the English court required or entitled to recognise or take account of the provisions of bankruptcy law applicable in New York in these proceedings or do the Cross-Border Insolvency Regulations 2006 and/or English public policy preclude it from doing so on the facts of this case?
3. On the proper construction of (i) the Calyon Master Agreement dated 2 October 2006 and (ii) the Letter of Credit between the Claimant and Defendant, does Section 6 (f) of the Calyon Master Agreement entitle the Claimant to set off any Early Termination Payment calculated by the Defendant pursuant to Section 6 (d) of the Calyon Master Agreement against the amount payable by the Defendant to the Claimant under the Letter of  Credit?
4. If on the proper construction of the relevant agreements the Claimant is entitled to rely on contractual set-off pursuant to Section 6(f) of the Calyon Master Agreement, does the US Bankruptcy Code (insofar as applicable) preclude the Defendant from relying on that provision in any way?
5. Under the laws of the State of New York (insofar as relevant), did any amount properly calculated under Section 6(d) of the Calyon Master Agreement cease to be payable to the Defendant following the Claimant’s Chapter 11 filing on 3 October 2008 as a result of the stay imposed by Section 362(a) of the US Bankruptcy Code?
6. As a matter of English law, is the effect of Section 362(a) of the US Bankruptcy code (insofar as relevant) such as to prevent the Defendant from satisfying the requirements under English law for set-off under the Statutes of Set-Off and Civil Procedure Rule 16.6 with regard to the set-off at law of any Early Termination Payment calculated by the Defendant under Section 6(d) of the Calyon Master Agreement against the amount payable by the Defendant to the Claimant under the Letter of Credit?
7. As a matter of English Law and having regard to the proper construction of the Letter of Credit, even apart from Section 362(a) of the US Bankruptcy code, is the defence of legal set-off available in respect of a claim for payment under the Letter of Credit?
8. Was the Early Termination Payment calculated in accordance with Section 6(d) of the Calyon Master Agreement?

The Expert Witnesses
12.	The court has been assisted by three distinguished expert witnesses who were called to give their opinions on questions of New York law and the Code. Professor Jeffrey Bruce Golden gave evidence on behalf of Calyon. He is admitted to practise in the States of New York and New Jersey and before the US Supreme Court. He was in practice for over 30 years in New York and London and is now Visiting Professor in the Law Department at the London School of Economics. He participated in the preparation of ISDA’s standard master agreement forms and other documentation for global derivatives and has written extensively on the law of derivatives. 
13.	Calyon also called Professor Jay Westbrook who is licensed to practise in the State of Texas and before the US Supreme Court. Professor Westbrook practised in Washington DC for a number of years before becoming a member of the University of Texas Law Faculty. He has written extensively on insolvency and bankruptcy subjects. 
14.	The expert called by LCBS was Professor Edward R Morrison, Harvey J Miller Professor of Law and Economics at Columbia Law School. Professor Morrison has published broadly on topics related to bankruptcy law and currently serves as a member of the Bankruptcy Rules Advisory Committee, which advises the US Supreme Court on rules of procedure in bankruptcy courts.
15.	By the time of the hearing, Issues (2), (4), (5), (6) and (7) had fallen away, since Professors Westbrook and Morrison were agreed that: (1) if Calyon had a right of set-off, this right would not be stayed under s. 362 (a) of the US Bankruptcy Code; (2) debts arising between the parties under the Calyon Master Agreement and the Letter of Credit were mutual, as that term is used under the applicable law of New York and the Code; (3) s. 362 (a) of the Code does not render the amount properly calculated under Section 6 (d) of the Calyon Master Agreement non-payable in the sense of “incapable of being paid”; and (4) such an amount may be “payable immediately” to the extent that “safe habour” rules contained in s. 362 (b) (17) and s. 560 of the Code permit Calyon to satisfy its claims by means of a contractual right of set-off.
16.	It was also agreed (and so ordered by Burton J) that the determination of issue (8) should be deferred pending resolution of the question whether Calyon was entitled to the set-off it alleges was available to it under Section 6 (f). In the result, the argument at trial centred on Issue (3).
17.	On the question whether an obligation owed as issuer of a letter of credit was covered by the words “any obligation” in Section 6 (f), Professor Golden testified that the courts of New York adopt a “formalistic, textualist approach” when construing contracts. Entire agreement clauses such as that in Section 9 (a) of the Calyon Master Agreement are given virtually conclusive effect and the parol evidence rule is strictly applied. The aim of Section 6 (f) was “to mitigate the risk, following termination of the ISDA Master Agreement, of a non-defaulting party making a payment to a defaulting party while, at the same time, that non-defaulting party may not have had any realistic expectation of receiving payments owed to it by the defaulting party (and its affiliates) under the ISDA Master Agreement or under other agreements or instruments”. The words “any obligation” were unlikely to be held to be ambiguous. Letters of credit are a familiar form of credit support in the global derivatives market. If an obligation owed by one party to the other under a letter of credit was to be excluded from the reach of Section 6 (f) it would have been easy so to have provided. 
18.	This approach is essentially the same as that adopted by Briggs J in Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch) when construing the ISDA Master Agreement:
It is necessary to begin with some preliminary observations about the correct approach to construction. The ISDA Master Agreement is one of the most widely used forms of agreement in the world. It is probably the most important standard market agreement used in the financial world. English law is one of the two systems of law most commonly chosen for the interpretation of the Master Agreement, the other being New York law. It is axiomatic that it 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: see Scandinavian Trading Tanker Co, v. Flota Petrolera Ecuatoriana [1983] 1 QB 529 ("the Scaptrade") per Robert Goff LJ at 540.
19.	In his first report, Professor Morrison says that a New York court would likely observe that the language of Section 6 (f) is broad, particularly because the term “obligation” is not defined in the Calyon Master Agreement. Viewed in isolation, the term would appear to encompass any payment due from the Claimant to the Defendant, regardless of whether the payment arises from an agreement between the parties or from an undertaking by one party for the benefit of the other. However, the question arises whether the Letter of Credit, coming after the Calyon Master Agreement, expressly or impliedly, curtails the right of set-off conferred by Section 6 (f). In Professor Morrison’s view, a New York court would likely conclude that this was the case if the Letter of Credit were explicit that the Defendant’s obligations under it are not subject to set-off or if the parties’ intent – as construed by English law – showed that they expected the Defendant’s duties under the Letter of Credit to be independent of any rights of set-off. 
20.	In a joint memorandum signed on 4 February 2011, Professors Morrison and Golden agreed that: (1) A New York court, reading Section 6 (f) in isolation would (in Professor Golden’s view) or would likely (in Professor Morrison’s view) permit set-off of obligations arising from the Calyon Master Agreement against obligations arising either from separate agreements between the parties or from separate undertakings by one party for the benefit of another; (2) a New York court would enforce a purported amendment of the Calyon Master Agreement only if the amendment modifies or conflicts with the Calyon Master Agreement and satisfies the procedural rules established by Section 9 (b)  of the Calyon Master Agreement; Professor Morrison believed that a New York court would interpret these procedural rules in light of New York’s General Obligations Law and related case law; and (3) a New York court would apply New York law to determine: (i) the scope of the set-off rights created by Section 6 (f); (ii) the formalities required by Section 9 (b) with respect to amendments, modifications, or waivers of the Calyon Master Agreement and whether the Letter of Credit satisfies these requirements; and (iii) whether the terms of the Letter of Credit conflict with, and therefore modify, the rights created by Section 6 (f). 
21.	A few days before the hearing LBCS raised a new point. It was alleged that there was a market practice which rendered the word “obligation” in Section 6 (f) ambiguous with the result that the word would be narrowly construed so as to exclude obligations arising under the Letter of Credit and thereby avoid an unreasonable and/or absurd result. The alleged market practice was the inclusion in Credit Support Annexes, where a letter of credit is “Eligible Credit Support” under an ISDA Master Agreement, of provisions allowing the counter-party beneficiary to draw on the letter of credit after an Event of Default and apply the “proceeds” (in the sense of a cash receipt) from such drawing against amounts payable to the counterparty-beneficiary under the master agreement. 
22.	In support of this new point, LBCS relied on a second supplemental report by Professor Morrison dated 21 February 2011. In this report, Professor Morrison assumed that the effect of allowing a set-off under Section 6 (f) would lead to an “absurd” situation in which EDF would be liable to indemnify Calyon for the whole value of the Letter of Credit (€50,000,000) and yet remain liable to LBCS for the difference between €125,538,461 and €38,377,190.69 -- €87,161,270.40 -- and at the same time LBCS would have the benefit of a windfall of €11,622,809.31, by reason of being discharged of its indebtedness to Calyon. 
23.	At the hearing, Mr Choo-Choy QC for LBCS accepted that Calyon had been given insufficient notice of the alleged market practice for that part of the new case to be proceeded with. What he sought leave to do was to be allowed to run a construction argument under New York law that was founded on the assumed unreasonable/absurd outcome in this particular transaction without placing any reliance on a market practice. And this is what he was permitted to do, with the grudging acceptance of Mr Dicker QC for Calyon. 
24.	Mr Choo-Choy’s submission that a right to set-off Calyon’s obligations under the Letter of Credit against debts due under the Calyon Master Agreement would give rise to absurd/unreasonable results depends on the meaning and effect of the terms of the EDF/LBCS Master Agreement, including in particular the Credit Support Annex (“the EDF CSA”). 
25.	The basic scheme of the EDF CSA is to ensure that any exposure that the parties have in relation to their transactions is credit supported by a transfer of title in cash or certificated securities by delivery in the manner specified. If there is a default, the value of cash and/or securities is set-off against the exposure. In respect of Eligible Credit Support comprised of a letter of credit, however, the value thereof is excluded from the calculation of the Value of the Credit Support Balance for the purposes of fixing Payments on Early Termination under clause 6 (e) (see paragraph 6. Default set out below), but if there is an Event of Default or Termination Event with respect to a Transferor of a Letter of Credit, or an Early Termination Date is designated or deemed to occur with respect to a Transferor of a Letter of Credit, then “[T]he Transferee may draw on the entire or part of the undrawn portion of any outstanding Letter of Credit upon submission to the issuer thereof of one or more documents specifying the amounts due and payable to the Transferee in accordance with the specific requirements of the Letter of Credit.  The Transferor shall remain liable for any amount due and payable to the Transferee and remaining unpaid after the application of the amounts so drawn by the Transferee”. [See below, para 11 (h) (iv) (v) (3)]. 
26.	The particular relevant provisions of the EDF CSA are:

[The opening paragraph]
This annex supplements, forms part of, and is subject to the ISDA Master Agreement referred to above and is part of its Schedule.  For the purposes of this Agreement, including, without limitations, Sections 1(c), 2(a), 5 and 6, the credit support arrangements set out in this Annex constitute a Transaction (for which this Annex constitutes the Confirmation).

Paragraph 6. Default
If an Early Termination Date is designated or deemed to occur as a result of an Event of Default in relation to a party, an amount equal to the Value of the Credit Support Balance, determined as though the Early Termination Date were a Valuation Date, will be deemed to be an Unpaid Amount due to the Transferor (which may or may not be the Defaulting Party) for purposes of Section 6 (e).  For the avoidance of doubt if Market Quotation is the applicable payment measure for purposes of Section 6 (e), then the Market Quotation determined under Section 6 (e) in relation to the Transaction constituted by this Annex will be deemed to be zero, and, if Loss is the applicable payment measure for purpose of Section 6 (e), then the Loss determined under Section 6 (e) in relation to the Transaction will be limited to the Unpaid Amount representing the Value of the Credit Support Balance.

Paragraph 10. Definitions
“Credit Support Balance”  means, with respect to a Transferor on a Valuation Date, the aggregate of all Eligible Credit Support that has been transferred to or received by the Transferor under this Annex, together with any Distributions and all proceeds of any such Eligible Credit Support or Distribution, as reduced pursuant to Paragraph 2 (b), 3 (c)(ii) or 6;  Any Equivalent Distributions or Interest Amount (or portion  of either) not transferred pursuant to Paragraph 5(c)(i) or (ii) will form part of the Credit Support Balance.   
PARAGRAPH 11. ELECTIONS AND VARIABLES
(b)  Credit Support Obligations.
(ii)	Eligible Credit Support. The following items will qualify as “Eligible Credit Support” for the party specified.
(2) Letter of Credit (as defined in Paragraph 11(h)(iv)(i) but only to the extent that the undrawn portion of the Value of the Letters of Credit comprised in a party’s Credit Support Balance does not (or would not if as of the Valuation Date one or more Letters of Credit were comprised in Eligible Credit Support Transferred pursuant to Paragraph (2) (a), 3(c) or 4 (a) exceed $100,000,000 (USD one hundred million) or its equivalent in Euros. 
[The party specified is B (i.e. EDF) and the Valuation Percentage is: “100% of the Value of the undrawn portion of any Letter of Credit unless a Letter of Credit Default shall occur and be continuing with respect to such Letter of Credit, in which case the Valuation Percentage shall be zero”. Party A is LBCS].
                          (h)  Other Provisions.
                      (iv) Letters of Credit – Definitions
(i) Letter of Credit means an irrevocable, transferable standby letter of credit denominated in the Base Currency or an Eligible Currency issued by a financial institution acceptable to the other Party with a Credit Rating at the time of issue of at least A by S&P or A2 by Moody’s, in a form acceptable to the Transferee.
(v)           Letters of Credit  - Other Provisions
(1) 	  Default.  For the purposes of Paragraph 6:

(aa) 	the Value of Eligible Credit Support comprised of a Letter of Credit shall be excluded from the calculation of the Value of the Credit Support Balance; and
(bb)	in respect of any Letter of Credit, to the extent that the Transferee draws under such Letter of Credit, the Transferee may apply any proceeds of such drawing against any amount payable to it as a result of a Termination Event, an Event of Default or an Early Termination Date and exercise any other applicable rights it may have in respect of such proceeds. [Italics supplied]

(3)	Drawing. If:
(aa) 	an Event of Default or Termination Event has occurred and is continuing with respect to a Transferor of an outstanding Letter of Credit; or
(bb) an Early Determination Date is designated or deemed to occur as a result of an Event of Default or Termination Event with respect to a Transferor of an outstanding Letter of Credit; or	
(cc) The Transferor of an outstanding Letter of Credit shall fail to pay or deliver, when due, any amount payable by it under the Agreement and such failure is continuing ; or
(dd) a Letter of Credit Default has occurred and is continuing with respect to a Letter of Credit comprised in a party’s Credit Support Balance,		
then the Transferee may draw on the entire or part of the undrawn portion of any outstanding Letter of Credit upon submission to the issuer thereof of one or more documents specifying the amounts due and payable to the Transferee in accordance with the specific requirements of the Letter of Credit.  The Transferor shall remain liable for any amounts due and payable to the Transferee and remaining unpaid after the application of the amounts so drawn by the Transferee.	[Italics supplied]			    
               (4)   Other	
(c)   For the avoidance of doubt and notwithstanding that the Value of Eligible Credit Support comprised of a Letter of Credit shall be excluded from the calculation of the Value of the Credit Support Balance for the purpose of Paragraph 6, the amount of any drawing of a Letter of Credit shall constitute Eligible Credit Support and shall be comprised in the Credit Support Balance of the Letter of Credit’s Transferor.

27.	Mr Choo-Choy submitted that the net effect of above provisions, particularly the  italicised paragraphs (paras 11 (h)(iv)(v)(1)(bb) and 11 (h)(iv)(v)(1)(3)), is that: (1) the amount payable by the Transferor to the Transferee of a Letter of Credit which has been provided as Eligible Credit Support is only reduced “to the extent that the Transferee draws under such Letter of Credit [and] appl[ies] any proceeds of such drawing against any amount payable to it as a result of ... an Event of Default or an Early Termination Date”; and (2) the Transferor remains liable to the Transferee for the amount which remains unpaid after the application of the proceeds of the drawing by the Transferee.
28.	Mr Choo-Choy emphasised that under these provisions the application of the proceeds of any drawing is expressed to be by the Transferee (i.e. the beneficiary of the Letter of Credit) and the Transferor continues to be liable for what remains unpaid after the Transferee has applied the proceeds of the drawing to the Transferee’s debt. This is inconsistent, he submitted, with the issuer of the Letter of Credit having a right to determine how to apply the proceeds of a demand for payment under the Letter of Credit (such as by set-off against a separate debt owed or alleged to be owed by the Transferee to the issuing bank). It followed that, since the proceeds of LBCS’s drawing under the Letter of Credit amounted to €38,377,190.69 only, the debt owed by EDF to LBCS as a result of the relevant Event of Default (i.e. the Lehman bankruptcy) and consequent Early Termination Date was only reduced by that amount, leaving EDF liable to LBCS for  €125,538,461, less €38,377,190.69 i.e. €87,161,270.40. And if, by reason of its purported set-off, Calyon were entitled to claim credit for the full Letter of Credit amount of €50,000,000 as against EDF, the absurd result would be a windfall of €11,622,809.31 for LBCS with EDF being liable for that amount twice over.
29.	I do not accept these submissions. In the absence of an express agreement to the contrary, where an obligee is owed money by A and can look to B in respect of the same debt, a set-off by B reduces pro tanto the debt owed by A; see M.S. Fashions Ltd v BCCI [1993] Ch 425. It follows that, in the absence of a contrary provision in the EDF/ISDA Master Agreement, Calyon’s set-off in respect of the sum owed by LBCS reduced the sum owed to LBCS by EDF;  and this reduction would feature in the taking of the account between EDF and LBCS that is implied by the law, see Cargill International SA v Bangladesh Sugar and Food Industries Corporation [1998] 1 WLR 461. Furthermore, there is nothing in the EDF CSA, including the above italicised provisions, that excludes this outcome. Instead, the words, “the Transferor shall remain liable for any amount due and payable to the Transferee and remaining unpaid after the application of the amounts so drawn by the Transferee” mean that if there is anything that is still due after the full value of the Letter of Credit has been received, EDF has to pay the balance in any event. The words do not contemplate that merely because the issuer of the Letter of Credit pays and the Transferee receives value under the Letter of Credit partly by way of set-off, that receipt of value is something of which the Transferor cannot take the benefit.
30.	EDF has not been made a party to the proceedings and the agreement governing Calyon’s right to be reimbursed or indemnified in respect of the Letter of Credit has not been disclosed on grounds of French banking secrecy. However, approaching the matter in terms of general principle, I am of the opinion that, LBCS having had the full value of the Letter of Credit, EDF would be obliged to reimburse or indemnify Calyon in respect of that full value. 
31.	Professors Golden and Morrison are agreed that in New York proceedings the meaning and effect of the EDF/LBCS Master Agreement would be determined by English law. It follows that LBCS’s “absurdity” argument would be bound to fail at the first hurdle in a New York court, for on its true construction the EDF CSA does not have the “absurd”  or “unreasonable” consequences on which the argument is premised. 
32.	But even if the EDF CSA does give rise to the consequences contended for by LBCS, I am not persuaded that a New York court would read down what would otherwise be the plain meaning of Section 6 (f) so as to hold that “any obligation” did not include obligations arising under the Letter of Credit.
33.	Whilst recognising that there are no cases directly on point, Professor Morrison expressed the view that a New York court could construe Section 6 (f) so as to avoid the “unreasonable” result of EDF being liable both to indemnify Calyon for the full value of the Letter of Credit and to pay LBCS the difference between €125,538,461 and €38,377,190.69 -- €87,161,270.40, whilst LBCS would have the windfall of being released from its debt due to Calyon.  Professor Morrison instanced cases where a New York court had adopted a particular construction of a contract so as to avoid an unreasonable result as between the parties to the contract. He agreed that in these cases the approach of the court was to construe the intention of both parties and if on the basis of matters known to both a particular construction would produce an absurd result, it could be concluded that the parties were unlikely to have intended that result. He also referred to In re Bond & Mortgage Gurarantee Co 196 N.E. 313 where an insured was held to be free to terminate the appointment of an insurance company under a contract of mortgage insurance to collect the interest and principal due from a mortgagor in circumstances where, subsequent to the execution of the contract, the mortgagor was made independent of both the mortgagee and the insurer by a change in the law and the insurer was in the hands of a rehabilitator having become insolvent. In the opinion of the Court of Appeals of New York, the basis on which the policy had been entered having been removed and the value of the guarantee impaired, the question was what would a reasonable and fair-minded business man in the place of the insurer be entitled to expect. To which the answer was that the insured should be entitled to end the contract upon giving a release to the insurer. 
34.	Professor Morrison said that at first he had thought that this case was a frustration case but his researches revealed that it had only been cited as an interpretation case and not a frustration case by the courts of New York. Nonetheless, he accepted that “arguably it does seem to fall into a frustration kind of paradigm.”
35.	Professor Golden was firmly of the view that a New York court would not read down Section 6 (f) in light of the absurdity alleged by LBCS. Section 6 (f) conferred a most important right of set-off and its language was plain and unambiguous. The set-off right is particularly important given that under the Second Method of calculation of sums due on Early Termination the non-defaulting party may have to pay a defaulting party which has become insolvent. Certainty in commercial transactions such as the ISDA Master Agreement was of the greatest importance. A New York court would not undermine the clear right of set-off conferred by Section 6 (f) where the alleged absurdity arises from a subsequent contract to which Calyon is not a party and which contained a peculiarly English CSA which involved risks in that it treated a letter of credit as Eligible Credit Support. These risks arose because English CSAs (like the EDF CSA) rely on a transfer of title theory and might for that reason be characterised by US courts as creating a security interest and then be struck down for failure to comply with the formalities necessary to perfect that interest. 
36.	 I found Professor Golden’s evidence to be persuasive. In my judgment, a New York court would not read down Section 6 (f) to avoid the postulated absurdity because: (i) Calyon entered into the Calyon Master Agreement and issued the Letter of Credit unaware of the EDF/LBCS Master Agreement; (ii) the right of set-off conferred by Section 6 (f) is an important right and Calyon were entitled to assume that Section 6 (f) meant what it said; (iii) the absurdity cases cited by Professor Morrison did not involve third party absurdity but were concerned with consequences for the parties to the contract under consideration and, save for In re Bond & Mortgage Guarantee Co, were cases where the intention of the parties was being construed by reference to the wording they used and the surrounding circumstances known to each when they entered into the contract; (iv) In re Bond & Mortgage Guarantee Co is in the nature of a frustration case and in any event is one which is readily distinguishable on the facts; and (v) such “absurdity” as results from the EDF CSA if Section 6 (f) applies to the Letter of Credit should be borne by EDF and LBCS rather than being finessed by a reading down of Section 6 (f). 
37.	Mr Choo-Choy further submitted that under English law, Calyon’s agreement to issue the Letter of Credit amounted to an implied exclusion of whatever rights of set-off Calyon might otherwise have had. I am not sure if it was Mr Choo-Choy’s intention to separate out a prior agreement to open the Letter of Credit from the Letter of Credit itself. I suspect that it was not. If it was, I think that such an approach is impermissible on the facts before the court. Rather, what has to be considered is the scope of Calyon’s rights and obligations as the issuing bank by reference to the Letter of Credit’s terms construed against the admissible background i.e. “all the relevant facts surrounding the transaction so far as known to the parties” per Lord Bingham in  BCCI v Ali [2001] 1 AC 251 at 259 [italics supplied].
38.	It is important to note at the outset that the Letter of Credit contains no express provision excluding any right of set-off. It is expressed to be available for payment at sight on presentation of a written statement signed by an authorized representative of LBCS certifying that EDF has not performed in accordance with the terms of an agreement between LBCS and EDF and the amount being drawn. It also provides: 
WE (CALYON) HEREBY IRREVOCABLY UNDERTAKE TO COVER YOU (I.E. LBCS) AS PER YOUR INSTRUCTIONS WITH VALUE TWO BANK WORKING DAYS.
THIS IRREVOCABLE STAND-BY LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (2007 REVISION), ICC PUBLICATION 600 AND, TO THE EXTENT INCONSISTENT THEREWITH, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH ENGLISH LAW. 
39.	Mr Choo-Choy argued that LBCS’s instruction to Calyon in its letter of 12 November 2008 “to transfer the amount of EUR 50,000,000 without deduction” prohibited Calyon from making the set-off they purported to make by reason of the words, “We hereby irrevocably undertake to cover you (i.e. LBCS) as per your instructions” in the Letter of Credit.  
40.	I decline to accept this submission. In my opinion, the words “We hereby irrevocably undertake to cover you (i.e. LBCS) as per your instructions …” have nothing to do with set-off but are intended to cover situations such as where drawings are multiple or partial or where particular bank accounts are identified to which payment is to be made. They do not mean that Calyon was agreeing to give up a pre-existing right of set-off depending on the wording of LBCS’s subsequent instructions. 
41.	Further and in the alternative, Mr Choo-Choy argued that it was clear from the context that it must have been intended by Calyon and LBCS that the Letter of Credit was to be paid without deduction. In support of this submission, he relied on the provisions in the EDF CSA set out above and on the proposition that the letter of credit arrangement agreed by LBCS and EDF was a form of Eligible Credit Support which was not at risk of the exercise of set-off by EDF itself, a state of affairs that was inconsistent with LBCS becoming subject to a set-off by Calyon under the Letter of Credit.
42.	The short answer to this submission is that Calyon was not a party to the EDF/LBCS Master Agreement and was unaware of the EDF CSA when it entered into the Calyon Master Agreement and when it issued the Letter of Credit. It follows that the EDF/LBCS Master Agreement cannot of itself affect Calyon’s pre-existing rights of set-off and nor can the EDF CSA be part of the factual matrix against which the Letter of Credit stands to be construed. Moreover, for the reasons I have already given, properly construed, the EDF/LBCS Master Agreement does not produce the absurdity postulated by Mr Choo-Choy. 
43.	I accordingly have no hesitation in concluding that the Letter of Credit is not to be construed as being payable without any right of set-off. 
44.	In the face of this conclusion it is plain that a New York court would not hold that the Letter of Credit modifies, waives or conflicts with the rights conferred on Calyon by Section 6 (f). A New York court would therefore not go on to consider whether the Letter of Credit complies with Section 9 (b) of the Calyon Master Agreement or whether the Letter of Credit is an enforceable amendment of Section 6 (f) under the New York General Obligations Law. Instead, a New York court would hold that Calyon has the right under Section 6 (f) to set-off LBCS’s debt to it of US$15,030,239 against its obligation to LBCS under the Letter of Credit to pay €50,000,000.
45.	In the light of the foregoing conclusion, it is unnecessary to consider whether Calyon had a right of legal set-off under the general law and I decline to do so. 
46.	Given the conclusions expressed above and the agreement reached by the experts on various of the Issues, I think it is only necessary and appropriate to answer the questions posed in Issues 3, 4 and 5, which I answer as follows:
Issue 3.Yes.
Issue 4. No. 
Issue 5. No.