The Court of Appeals’ decision in BDC Financial v. Barclays Bank1 illustrates that when an agreement allows either party to demand a payment from the counter-party to address market changes during the life of a contract, years of litigation can result from the failure to clearly set forth what will happen when a demanded payment is disputed.
Background
In May 2005, BDC and Barclays entered into a total return swap whereby BDC would obtain the benefits and assume the risks of an investment in a portfolio of corporate debt instruments owned by Barclays (the reference assets) in exchange for BDC paying financing fees to Barclays. The transaction documents included standard form documents of the International Swap and Derivative Association (a master agreement and customer support annex (CSA)) and a negotiated master confirmation that modified certain provisions of the standard forms.
