CAP Reform - yet again!

When I qualified as a solicitor in 2005 I well remember the complexity bought about by the introduction of the Single Farm Payment that cruelly coincided with the start of my new job.  There was much debate as to the new drafting required for sale contracts and tenancy agreements to take into account the entitlements to the Single Farm Payment and the requirement that these were transferred correctly or that provision be made for their future transfer. We went on courses, adopted procedures and formalised our drafting. By now, everybody who deals with agricultural land has a good feel for the Single Farm Payment and it is a standard feature rural transactional work.

 

Fate has dealt me a bitter blow.  Whilst on the move from my last firm to Gibson and Co. and whilst my back was turned doing exams things have started to change all over again.  No doubt, another suite of drafting will have to be created, argued over and negotiated.  Another set of rules will have to be understood and incorporated.  We can only hope that the new scheme will have a similar scent to the current scheme so that payments continue to be made to farmers who farm and who have entitlements allocated to them.

 

The worst thing of all is that we are to be subjected to a slow burn explosion. The proposals (set out in just shy of 1000 pages of draft regulations) were announced by Dacian Ciolos, Commissioner for Agriculture and Rural Development, on 12th October 2011.  However there is no guarantee that what is on the table now will ever become reality.  By their implementation post 2013 the current proposals will have probably morphed into something entirely different.

 

To this end, where rural transactional work is undertaken the parties must be quite clear with one another what the mutual intentions are with respect to the entitlements and unambiguous provision must be made for this in the paperwork so that when things do change there is good evidence for what the parties intended.  Contracts and leases should certainly contain suitable and robust provision for dispute resolution.

 

I have identified five aspects of the reforms which are of interest to me as both a solicitor and as a farmer and these are set out briefly below. I think that these will be what have the greatest practical impact.

 

1.       “Golden Ticket”

  

We can thank Roald Dahl for this soubriquet which seems to have been widely adopted for the eligibility criteria for a farmer to apply for the new entitlements.  A farmer will have to have “activated” at least one payment entitlement in 2011 thereby claiming on that entitlement in the current 2011/2012 scheme year.  This application is the “Golden Ticket” which secures continued payments post 2013 much as claims during the reference years did for the current scheme.

 

The clear concern on this is whether a buyer of land or a tenant who does not have entitlements and who has not activated his “Golden Ticket” can ever then obtain claimable entitlements.  There certainly won’t be an entitlements shop that he can go to (although there is a provision for young farmers to receive a top up).  Under current proposals, the right to apply may be transferred but only on the occasion of the sale or grant of a new lease and only to one farmer.  There is no provision allowing it to be split between multiple farmers or tenants so as things stand the “Golden Ticket” can only be transferred by one to one transfers or tenancies.

 

2.       “Active Farmer”

 

This is another phrase that is going to become normal parlance in the agricultural world.  An “Active farmer” is the opposite of a “Sofa Farmer”.  “Sofa Farmers” are a cunning and devious breed who can receive the proceeds of a claim whilst doing little or no real farming.  To prevent this, only someone who can be defined as an “Active Farmer” will be able to claim post 2013.

 

The current proposal is that to qualify as an “Active Farmer” the claimant’s claim must be worth at least 5% of that claimant’s total receipts form non agricultural activity in the last fiscal year.  This will be difficult for a farmer with, for example, a successful diversification, non – farming job or profitable wind farm.  Even a decent lottery win might jeopardise the claim of a previously Active Farmer.

  

3.       Greening 

 

Whilst most farmers are doing a great deal already for the long term benefit of the environment it is now proposed that 30% of the direct payments should be subject to conditions “beneficial for the climate and the environment”.  The three conditions are:-

  •  An arable farmer of more than 3 ha will have to grow at least 3 crops with no single crop to be grown on more than 70% or less than 5% of the arable land.
  • Anybody with permanent pasture in 2014 will have to retain 95% of it.
  • 7% of a farmers land will have to be maintained as an “ecological focus area”.  This phrase is my least favourite of all the Dacian Ciolos speak.  With luck this 7% will include what is there already such as woods, hedges, ponds and margins.  It is unclear how these focus areas are to interact with land already in stewardship schemes or whether they will be in addition to or within such schemes.  I suspect that “ecological focus area” is a fancy way of saying “set aside”. 

 

4.       Capping 

 

The UK political will to cap payments is strong and there has been much discussion and commentary on this over the past few years.  Much effort has been expended trying to second guess what is going to happen so that farm business structures can be designed to avoid any limiting of payment as a result of capping.  Dire warnings have been issued about the risks of creating a sham in order to these maximise payments.

 

Current proposals set the thresholds as follows:-

  • E150k – E200k reduced by 20%
  •  E200k – E250k reduced by 40%
  •  E250k – E300k reduced by 70%

 

There will be no payment over E300k.

 

There will be no capping on the 30% of direct payment paid for the benefit of the climate and the environment.  Another bonus is that the cost of employing staff may be deducted before the application of the cap although this deduction cannot be applied to the services of contractors.  The correlation between a large claim and high staff number will in many cases considerably mitigate the effect of capping.

 

5.       Cross Compliance

 

This will continue to apply but it is likely that the number of requirements will reduce.  Good Agricultural and Environmental Condition will be limited in scope and the number of SMRs will be reduced.

 

I have to admit that none of this, as it stands, will sound too alarming to the majority of farmers.  The trick, however, will be to monitor progress and to keep a weather eye on changes to these proposals. By 2013 it could all look very different.

 

AHR Chrisp

Senior Associate

Gibson and Co. Solicitors Ltd

 

 
 
Test Case on National Insolvency Law & Economic Successor Liability

Test Case on National Insolvency Law & Economic Successor Liability

 

Gibson & Co recently acted for the European Commission in High Court litigation in London.  The matter was an important test case brought against the Commission by Conex Banninger Limited concerning the inter-relation of English insolvency law and the Commission's right to impose fines in relation to cartel membership upon economic successor entities. 

 

An English and a French company (IBP Limited and IBP France SA) were fined a total of €35 million by the European Commission in 2006 for their involvement in a copper-fittings cartel.   The fines were never paid.  Both companies went into administration in 2007, leaving the fines owing to the Commission as an unsecured debt.  Conex acquired the relevant shareholdings.  The Commission began investigating Conex and issued an Information Request as part of its inquiry into whether Conex was liable, as an economic successor to the IBP companies, to pay the unpaid fines.  

 

In December 2009 Conex started proceedings in the High Court against the Commission, asking for a declaration that it was not liable, by succession or otherwise, for the IBP infringements.  This was on the basis that any attempt by the Commission to enforce the fine on Conex as IBP's economic successor would be to "subvert the national insolvency regime" and to elevate the Commission above its unsecured creditor status. 

 

The Commission claimed that if the Court were to grant the declarations, this could "give the appearance of supporting, faciliating, encouraging and endorsing breaches of competition law" on the basis that the purchase by Conex of the IBP assets were not, as Conex claimed, "carried out in good faith".

 

Prior to the trial of the action, Conex applied for leave to refer these questions to the European Court of Justice.  The Commission contended that the English Court had no jurisdiction to grant the substantive declaratory relief sought where it would interfere with a pending competition inquiry.  Any reference to the ECJ was similarly premature. 

 

In July 2010 the English High Court ruled in favour of the Commission and declined to grant Conex's application that the questions be referred to the European Court of Justice on the basis that "the references have no realistic prospect of obtaining for Conex the protection they seek". 

 

Conex's application for leave to appeal to the Court of Appeal was granted by the first instance Judge (Mr Justice Floyd).  The Commission cross appealed that the first instance finding be upheld on further and alternative grounds to those found by Floyd J.  Regrettably however in 2011, shortly before the appeal was due to be heard, Conex itself went into administration and so the appeal did not proceed. 
 
"The most important standard market agreement used in the financial world" - what does it mean?

 

“The most important standard market agreement used

in the financial world”[1] - what does it mean?

 

 

One theme running through the mis-selling litigation in the English Commercial Court in the last 10 years is the primacy of the contract.  Time and again, the investor has failed to pierce the protection afforded to the financial institution by its standard form contract.  It is interesting therefore to see a case in which ISDA[2] (an entity which counts most of the major financial institutions as its members) has been on the wrong end of a debate about the proper construction of the contract, particularly when the contract in question is its own Master Agreement, so often the rock on which investor claims have foundered.  The case is Lomas v JFB Firth Rixson [2010] EWHC 3372.  To understand the issues in the case, some background is necessary.

 

Background

 

The case arises from the Lehman insolvency.  The Joint Administrators of Lehman Brothers International Europe (LBIE) asked the Court to construe five interest swap agreements, all governed by the 1992 ISDA Master Agreement.  When LBIE became insolvent, the respondent counterparties all had positions that were, or would shortly become, out the money.  In other words, the respondents would be net payers and LBIE would be the net receiver of money under the swaps.  Unsurprisingly, LBIE wanted the money (roughly £60m) that it would have received if it had not gone bust. 

 

The key provision in issue was section 2(a)(iii) of the ISDA Master Agreement:

 

“Each obligation of each party under Section 2(a)(i) [to pay on the relevant settlement date] is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing…”

 

Section 2(a)(iii) therefore provides that a party’s payment obligations are subject to the condition precedent that there is no continuing Event of Default with respect to the other party.  The ISDA Master has a long list of Events of Default, but it was common ground that LBIE’s insolvency on 15 September 2008 was an Event of Default.

 

Issues in the case

 

The respondents simply relied on the plain words of section 2(a)(iii): the condition precedent was not satisfied because LBIE was in default, therefore their payment obligations were not triggered.  However, that begs at least one question: if the condition precedent is not satisfied, does that suspend or extinguish altogether the payment obligation?

 

Mr Justice Briggs plainly found this a difficult question (and the appeal of his decision will be heard in December).  He came to the conclusion “on a fairly narrow balance” that the payment obligation was only suspended.  His main reason was that the alternative construction (permanent destruction of the payment obligation) was pointlessly draconian if there was minor and momentary default or potential default. 

 

That conclusion produced a further question – for how long is the payment obligation suspended?  There were only two options raised in argument: the obligation was suspended until the expiry of the term of the Transaction or (as ISDA contended) indefinitely.  The Judge found this a much easier question and did not hesitate to find that the suspension lasted only until the end of the term of the Transaction (at which point the obligation ceased).  He said that it was wholly inconsistent with any reasonable understanding of the ISDA Master Agreement that payment obligations arising under a Transaction could give rise to indefinite contingent liabilities.  Such liabilities would be indefinite because an Event of Default could be cured long after the expiry of the term of the Transaction and the obligations would then be resurrected.

 

Conclusion

 

The philosophy that underpins much of the ISDA Master Agreement and related documents is that the parties should ultimately net off the sums due under whatever transactions they have undertaken.  It offends that philosophy if, as the Court found in Firth Rixson, the Non-Defaulting Party’s payment obligations are extinguished at the end of the term of the Transaction and there is no netting at all.  However, it might be said that the thrust of ISDA’s argument is simply contrary to the plain words used in its Master Agreement.  The parties can elect “Automatic Early Termination” such that if either party is in default, then the Transactions terminate and the calculation of the Settlement Amount is triggered.  However, if no such election is made, then the default position is that the Non-Defaulting Party is not obliged to terminate.  If ISDA wanted Automatic Termination to be mandatory at some point, then the Master Agreement should say so and make clear at what point this should occur.

 

As ever, it is important to consider whether the decision produced a fair result.  Did it produce a windfall for the respondents and a corresponding shortfall for the LBIE creditors?  The Master Agreement has a formula for calculating payment following an Event of Default that is designed to enable the Non-Defaulting Party to re-enter the market at the expense of the Defaulting Party.  In other words, if the Non-Defaulting Party will receive money from the Defaulting Party on settlement, then that sum should be roughly equivalent to the cost of replicating the Non-Defaulting Party’s position in the market.  Similarly, if the Non-Defaulting Party must pay the Defaulting Party on settlement, then the market should pay the Non-Defaulting Party a roughly equivalent sum to replicate its market position.  However, that assumes that the Defaulting Party is good for the money.  If the Defaulting Party cannot pay (and the Non-Defaulting Party has to prove in the insolvency of the Defaulting Party for its Termination Payment), then the Non-Defaulting Party cannot replicate its existing market position at no cost.  Therefore, the Judge concluded, it is not surprising to find that the Master Agreement contains provision (section 2(a)(iii)) whereby the Non-Defaulting Party may say that, for as long as the continuing default means that he is unhedged, no further payment will be made under the swap.

 

This analysis seems to work satisfactorily for swap counterparties entering into genuine interest rate hedging arrangements.  However, the ISDA Master Agreement now governs a whole myriad of instruments, not just swaps, some of which are used for hedging and some of which are not.  It will be interesting to see the outcome of the appeal, and whether any amendment to the ISDA Master results.

 

 

14 October 2011


[1] Briggs J in Firth Rixson at paragraph 53.

[2] ISDA is the International Swaps and Derivatives Association Inc.  Formed in 1985 it has over 820 member institutions, including most of the world’s major institutions that deal in OTC derivatives, as well as businesses, governments and other end-users.

 
 
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