Business Law Quarterly—First Quarter 2012

Editor’s Column

This issue of Business Law Quarterly includes the second of Janet Stiven’s articles about Cloud Computing, and the third (of four) pieces about ISDA documents. It also includes a selection by Stephen Mahieu, a new contributor, about attorney-client privilege. That’s a topic that seems to come up fairly often, particularly on television shows like The Good Wife, but without much explanation. Many people think that anything they communicate about with their attorney is privileged, but that is not so, as Steve’s article points out. And, even if a communication is privileged, the privilege can be lost through what may seem to some as innocent (or at least harmless) disclosure. So, we thought our readers might like a refresher on the subject.

Michael Kim is another new contributor appearing in this issue. Mike’s article is about negligent misrepresentation claims. Imagine that you needed a trailer which could carry four snowmobiles. By internet, you inquire of several sources and receive back information giving specifications on various choices of trailer. Based on the information you received, you order a particular trailer. But, after acquiring the trailer, when you start using it you find it behaves poorly and sags and clearly cannot handle the load. Upon further inquiry you learn that the trailer isn’t rated for your load. The trailer’s okay, but it doesn’t meet your actual requirements. Can you recover damages from the party that provided the incorrect information? Read Mike’s piece to find out.

An entertaining and informative book I recently read is Bill Bryson’s At Home. Bryson writes about themes relating to the house where he lives in England, which was built in 1851 as a parsonage. Did you ever wonder why the rooms which we refer to as the parlor and the hall have those names? Bryson explains. But he does much more, starting with the story of The Crystal Palace, an enormous (and, for its time, fantastic) cast-iron and plate glass building erected for Britain’s 1851 Great Exhibition, designed not by an architect but by a gardener. Read the book for more.

Andy Connor, Editor

Cloud Computing: Understanding the Business Benefits and Legal Issues (Part II)

In Part I of this article, published in the last issue of Business Law Quarterly, we discussed how cloud services can assist a company in executing its business strategy. Key considerations included potential for enhanced productivity, lower cost, increased scalability and flexibility. Here, we discuss questions a company needs to consider before moving to the cloud or choosing a provider.  

Considerations Before Contracting for Cloud Services

What do companies need to consider when looking at cloud services? Before entering into a cloud service arrangement, it is important for a business to undertake due diligence to ensure that the nature of its business allows for use of cloud services and that the cloud vendor will be able to meet the needs of the business. It is important to ensure that the service provider is reputable and reliable as well as financially stable. Also, prior to signing an agreement with a cloud vendor, a customer should understand its rights to terminate the agreement and should develop a transition plan to move its data quickly and efficiently if the need arises.

Companies also need to address a variety of legal risks associated with cloud computing, including security, privacy and jurisdictional concerns. Security is a primary concern for most cloud computing customers. Once data is transferred to the cloud, customers must rely on the physical and information security of the vendor to protect their valuable information. Companies need to ensure that the cloud vendor’s security procedures are compatible with the needs of the company. A company using a public cloud will not have the same level of control over its data as the company would have if it were using its own network. The third-party service provider generally insists on the right to move data to maximize storage. That makes it difficult for a company to determine the location of its data at any point in time. Additionally, a company typically has to contact the third-party cloud computing service provider to access the company’s data. Companies should understand that, for purposes of litigation, where the data resides may be a key factor in determining what law applies to the dispute or how easy it is to access the information.

Companies should also be aware that it is common for third-party cloud providers to store one company’s data at a location where many companies’ (maybe even a competitor's) data is also stored. Care should be taken to ensure that there are protocols in place to ensure that one company’s data is not commingled with data from another company. Additionally, there must be systems in place to prevent data from being improperly accessed or removed by an unauthorized user. Cloud customers should also be sensitive to the fact that vendors often have access to the data of multiple customers; as such, they may be able to mine the customer’s data to determine business trends or strategies and data usage patterns. Cloud customers should address these issues in their services agreements.

In evaluating whether cloud services are right for your business, it is important to address a number of questions such as those listed below.

1. Understand the Business Need and Costs

    • What business problem will the cloud service will be solving?
    • Is the cloud service business-critical?
    • When, where and how will the cloud service be accessed?
    • Are the data and application interoperable with the customer’s internal systems and those of the customer’s other service providers?
    • Does the price for cloud services include integration, migration, upgrades, service desk and technical support services?
    • How can the customer ensure the accuracy of metering and billing by the cloud vendor?

2. Data Location and Access

    • Where will the data be stored or processed? Can the number of locations be limited? Does the business have the right to approve in advance any transfer of the data to another state or country? Can the movement of data be controlled?
    • Are there multiple cloud platforms/ parties involved?

3. Data Security

    • What data will be in the cloud? Should/can the data be encrypted?
    • What security measures are in place? Who will have access to the data? Will there be different levels of access? Who will have oversight responsibilities? Who will supervise and will there be monitoring and auditing of the policies and procedures? Who is processing the data? Will subcontractors be used?
    • What are the restrictions on the use of data by the vendor? Does the agreement with the vendor prohibit “data mining” of the customer’s business data?
    • Who is liable for the data or any security breaches?
    • What are the procedures for timely breach notification?

4. Service Levels

    • What type of availability can the company expect from the cloud vendor?
    • How will outages, whether planned or unplanned, be handled?
    • Will service credits be provided if the vendor fails to meet service level standards?

5. Back Up and Disaster Recovery

    • What are the provider’s disaster recovery procedures?
    • What are the redundancy or back-up systems?
    • Does the cloud services agreement include ability for the customer to require back up copies of data to be stored by the customer or another third party site in addition to the back up provided by the cloud vendor?

6. Litigation

    • How will production of the data in litigation be handled?
    • Will the customer be able to manage the review and production/inspection or will the third-party provider need to be involved?
    • Can the customer’s data be extracted from the cloud?
    • Does the cloud service agreement require the cloud provider to notify the customer in the event that the government requests access to customer data?

7. Regulatory; Tracking and Auditing Data in the Cloud

    • What are the cloud provider’s policies and procedures for managing and protecting customer data?
    • Who has responsibility to ensure that data regulations being met? Does the flow of data adequately meet the regulatory requirements of each jurisdiction through which it flows? How does the vendor address issues associated with cross border data flow?
    • How is the data segregated from the data of other companies that are using the same provider?
    • Can all of the data be accessed in the future? For how long will it be retained (and is that long enough for legal and tax purposes)?
    • Are the cloud vendor’s data retention and storage procedures consistent with the company’s record retention policy?
    • How will data integrity be monitored and verified?
    • Does the customer desire the right to require independent security audits of the cloud vendor’s operations?
    • Who will be liable for stolen data? Does the cloud provider limit or disclaim liability for stolen data?

8. Termination; Transition

    • What are the customer’s rights to terminate the contract?
    • How easy is it to move to another cloud vendor? Does the cloud provider use proprietary data formats which might limit ability to easily switch to another cloud vendor?
    • How will a terminated vendor support the transition?
    • What happens to the data if the cloud provider goes bankrupt or there is a change in ownership?
    • When will data be transferred and what form will it take?
    • What are the obligations on each party regarding an exit plan?


While cloud computing has many benefits, cloud service arrangements are complex and require careful planning to ensure that a company’s business objectives are met. Companies considering cloud computing strategies need to understand that standardization and simplification are key drivers of cloud computing and that if a business has the need for a customized computing solution, cloud computing services may not be the answer. Since cloud service risks are still being evaluated and addressed, it is important for a business to take time to understand the scope and limitations of the services it will receive before heading to the cloud.

Janet A. Stiven, 312-627-2153

Understanding the Attorney-Client Privilege

Privilege can be a hot-button issue when a business relationship goes awry, and parties find themselves in court pointing fingers. Many people assume that any communication they have with their attorney is automatically privileged, and not subject to disclosure. This assumption is often incorrect. In fact, communications with attorneys are privileged only if they meet narrowly-defined criteria. Further, a party’s own actions can waive an otherwise legitimate claim of privilege. Having a working knowledge of the parameters of the attorney-client privilege is important for avoiding unintended and potentially harmful missteps. This article provides general information about the attorney-client privilege as it applies in Illinois state courts.

Mandatory disclosure of all relevant information is the default rule in civil litigation. Indeed, the Illinois Supreme Court Rules provide that, absent an applicable privilege, “a party may obtain by discovery full disclosure regarding any matter relevant to the subject matter involved in the pending action.” Litigants pursue this information through written interrogatories, requests to admit facts, requests to produce documents, requests for inspection, depositions, and other fact-finding methods.

The Illinois Supreme Court Rules protect from disclosure “privileged communications between a party or his agent and the attorney for the party,” but do not define what qualifies as an attorney-client privileged communication.1 Illinois courts hold that “where legal advice of any kind is sought from a professional legal advisor in his capacity as such, the communications relating to that purpose, made in confidence by the client, are protected from disclosure by himself or the legal adviser, except the protection be waived.” The purpose of the attorney-client privilege is “to encourage and promote full and frank consultation between a client and legal advisor by removing the fear of compelled disclosure of information.2 Because a claim of privilege is an exception to the general duty to disclose relevant information, the party asserting the privilege bears the burden of establishing its applicability.

Courts interpret the attorney-client privilege as narrowly as possible, and apply it only to “those communications which the claimant either expressly made confidential or which he could reasonably believe under the circumstances would be understood by the attorney as such. . . . [I]n Illinois, we adhere to a strong policy of encouraging disclosure, with an eye toward ascertaining that truth which is essential to the proper disposition of a lawsuit.”3 Some Illinois courts have held that the attorney-client privilege is a one-way street; that is, it applies only to certain types of communications from the client to his or her attorney. Other Illinois courts have rejected this interpretation and held that the attorney-client privilege applies to certain types of communications between the client and his or her attorney, regardless of who initiates the discussion. But even those appellate districts that consider the attorney-client privilege to apply only to communications from the client apply the work-product privilege to communications from the attorney.

Communications with in-house counsel may fall within the privilege in the same way as communications with outside counsel. In-house counsel may wear multiple hats, however, such that communications regarding business advice, as opposed to legal advice, fall outside the attorney-client privilege, and courts often carefully scrutinize claims of privilege involving communications between employees and in-house counsel. Further, simply because a company is the client instead of an individual does not mean that every communication between in-house counsel or outside counsel and an employee of a company is privileged. Illinois courts apply a “control group” test to determine whether such communications are privileged. This test shields from disclosure the communications between the company’s attorney and two tiers of employees. The first tier includes “the decision-makers, or top management.” The second tier includes any employee whose “advisory role to top management in a particular area is such that a decision would not normally be made without his advice or opinion, and whose opinion in fact forms the basis of any final decision by those with actual authority.”4  When an employee of the status described is consulted for the purpose of determining what legal action the company will pursue, his communication is protected from disclosure.

Even when the attorney-client privilege exists, however, parties can waive the privilege. For instance, a party who voluntarily discloses the content of a confidential attorney communication to a third party may be deemed to have waived the attorney-client privilege as to that communication and as to all other communications regarding the same subject. Such a subject-matter waiver can severely undermine the prosecution or defense of a lawsuit. A client also risks waiving privilege as to documents used to refresh his or her recollection prior to testifying at a deposition or trial. A better practice when preparing to testify is for the attorney to review the subject matter of a privileged document with the client without showing the client a copy of the document. Finally, waiver may also apply when a client or attorney puts the privilege “at issue,” such as in a fee dispute between the attorney and the client, or in an insurance declaratory judgment action involving underlying litigation.

One additional concern is inadvertent disclosure of privileged communications or other protected documents, the risk of which is significantly heightened when the parties engage in extensive electronic discovery. Illinois law, unlike federal law, currently does not provide a claw-back rule that addresses inadvertent disclosure, although the parties may ask the court to enter a protective order with a claw-back provision. Illinois Rule of Professional Conduct 4.4(b) requires a lawyer who receives any document inadvertently produced to “promptly notify the sender,” but leaves it to the courts to address the ramifications of an inadvertent disclosure. Various Illinois courts have applied three different rules in determining whether the inadvertent disclosure of a privileged document waives that privilege. Under the subjective rule, “inadvertent disclosure can never result in a true waiver because there was no intention to waive the privilege, and one cannot waive the privilege without intending to do so.”5 In other words, because waiver requires the voluntarily relinquishment of a known right, the subjective rule provides that one can never inadvertently waive a privilege. But, under the objective rule, the production of a privileged document destroys any privilege.6 Under this rule, inadvertent production always waives the privilege. Because of the unfairness of both absolute positions, some Illinois courts have followed the federal rule and adopted a balancing test. Courts applying the balancing test consider five factors: “(1) the reasonableness of the precautions taken to prevent the disclosure; (2) the time taken to rectify the error; (3) the scope of the discovery; (4) the extent of the disclosure; and (5) the overriding issue of fairness.”7 The Illinois Supreme Court is currently holding hearings regarding a proposed Illinois Rule of Evidence 502 that would more specifically and concisely address inadvertent disclosure.

The fast-paced nature of business today makes it tempting to proceed under the assumption that any communication with an attorney is privileged. This assumption may result in unexpected and harmful consequences, but such mistakes are avoidable. When in doubt, the best practice is to consult with an attorney by phone before initiating, forwarding, or otherwise disclosing any potentially privileged document or information.

Stephen M. Mahieu, 312-627-2170

Are You an Information Seller? How Being in the Business of Selling Information Opens the Door to Negligent Misrepresentation Claims 

When business relationships sour, plaintiffs often resort to tort claims in addition to standard breach of contract claims to try to remedy their losses. A claim based on negligent misrepresentation is one such strategy that attacks the underlying premise of business transactions—that one party induced the other to enter into a business agreement under false pretenses. This article will explore the legal arguments that form the basis of negligent misrepresentation claims and discuss real-world applications and outcomes of such claims.

In Illinois, a plaintiff’s claim for negligent misrepresentation must allege multiple elements:

  1. A false statement of material fact from the defendant;
  2. Defendant’s carelessness or negligence in asserting such a statement as truthful;
  3. Defendant’s intention to induce the plaintiff to act upon such statement;
  4. Action by the plaintiff in reliance on the purported truth of the statement; and
  5.  Damage to the plaintiff resulting from such reliance.

In a business or contractual breach context, the damages incurred by a plaintiff are normally purely economic damages (i.e. loss of the bargain, not property damage or personal injury). So, where the plaintiff is claiming negligent representation in a business context, a sixth element is added:

  1. A duty on defendant making the statement to communicate accurate information.

To prevail, plaintiff must prove each of these six elements by a preponderance of the evidence (not “beyond a reasonable doubt”, which is the standard for criminal cases). Elements 1 through 5 above can readily be determined by examining the facts of each case. However, the question of whether defendant has a duty to a plaintiff is somewhat more nuanced.

In determining a defendant’s duty to a plaintiff in negligent representation claims when purely economic damages are sought, Illinois courts apply a concept known as the economic loss doctrine, also know as the Moorman doctrine, named after the case first establishing the rule: Moorman Mfg. Co. v. National Tank Co., 435 N.E.2d 443 (Ill. 1982). The Moorman doctrine is a court-developed set of guidelines that prohibit a tort recovery when only economic losses are incurred. It represents a boundary between contract law (which governs the expectations of the parties to a contract) and tort law (which defines duties owed to injured parties), and serves to maintain separation between these two areas of law while protecting commercial parties’ freedom to allocate economic risk. The Moorman court reasoned that tort law is not intended to compensate parties for losses suffered as a result of duties that are owed only because of a contract. It also noted that additional applications of tort law into negotiations and commercial agreements would likely result in the price increases to customers as the costs associated with potential tort liability would be passed-through to some degree to the customer.

When applying Moorman principles to negligent misrepresentation claims, Illinois courts only impose a duty upon a defendant to avoid negligently conveying false information if the defendant is in the business of supplying information for the guidance of others in their business transactions. In other words, if your business is selling information to businesses which they will use for guidance, you have a duty not to be negligent about the information you provide.

The Illinois Supreme Court’s test for determining whether a defendant is in the business of supplying information for business guidance hinges on whether the end product of the commercial relationship is or is not a tangible object (i.e. a product) which can be readily described in a contract.

Although a seller of tangible goods and a provider of pure research clearly fall on opposite ends of the spectrum, many scenarios fall in the area between such extremes. In one example, the Illinois Appellate Court explained its standard of review in a negligent misrepresentation matter—Tolan & Son v. KLLM Architects, Inc., et al., 719 N.E.2d 288 (1st Dist. 1999). In Tolan, the plaintiff was a residential contractor that developed and constructed a 13-building townhome complex. Defendant KLLM Architects, Inc. was retained to provide plans and specifications for the development. Louis Walter, another defendant, was geotechnical engineer. Lawrence Reiss, a structural engineer, was the final defendant. After the project was underway, Tolan had KLLM redesign the site plans to relocate buildings 10, 11 and 12 farther south. KLLM apparently knew that this would site those buildings over peat, an unsuitable soil condition. Walter examined the soil and made certain recommendations to KLLM, including adding caissons to deal with the unstable underlying peat. KLLM did redo the plans but did not adopt Walter’s changes adding caissons.

During construction, Tolan found cracks in some of the foundations and contacted KLLM. Reiss got involved (apparently at the request of KLLM) and he and Walter inspected building 11’s foundation cracks. Subsequently, cracks occurred in building 12’s foundation as well. Ultimately, Tolan corrected the problems at a cost over $725,000. It also sued KLLM, Walter and Reiss on various theories, including breach of contract and negligent misrepresentation. According to Tolan, at no time did KLLM, Walter or Reiss advise Tolan that any of the cracks were the result of instability in the soil, although each of them knew of the peat problem.

The trial court granted defendants’ motions to dismiss the negligent misrepresentation claims, and Tolan appealed. The court summarized the Moorman rule by quoting from another decision subsequent to Moorman, where the Illinois Supreme Court said:

“The rule acts as a shorthand means of determining whether a plaintiff is suing for injuries arising from the breach of a contractual duty...or whether the plaintiff seeks to recover for injuries resulting from the breach of the duty arising independently of the contract to produce a nonhazardous product that does not pose an unreasonable risk of injury to person or property."8

Thus, if information supplied is merely ancillary to the sale of merchandise or other tangible object, a defendant is not deemed to be in the business of supplying information. The court then held that KLLM and Walter “were not retained to provide a purely analytical end product. They were retained to design and construct the townhomes. The information supplied by them during the course of construction was incidental to the tangible object—the townhomes.” Therefore, the negligent misrepresentation claims against KLLM and Walter were properly dismissed. (Tolan was, however, permitted to proceed against KLLM and Walter on breach of contract claims.) With regard to Reiss, the facts were less clear as to what he was hired to provide and the court remanded to the trial court to receive additional evidence on Reiss’ role.

In addition to architects, additional examples of defendants providing information deemed to be incidental to the end product cited by Illinois courts include other design professionals such as engineers retained to draft plans and specifications, temporary employment agencies, and manufacturers and sales professionals of tangible goods. Conversely, using analyses analogous to the Tolan holding, Illinois courts have determined that the information provider exception (and potential tort liability for negligent misrepresentation) may be applied to accountants, banks providing credit information to potential lenders, inspectors of aircraft, inventory and termites, environmental consultants, title insurers, real estate brokers, and stockbrokers. In each of these instances, the “product” in question was held to be purely information. The customer received analytical work rather than a tangible product—the end product was the ideas, not the documents or other objects into which the ideas were incorporated. As summarized in Tolan, “supplying information need not encompass the enterprise’s entire undertaking [for the defendant to fall within the information provider exception,] but [information] must be central to the business transaction between the parties.”

It must be emphasized that courts approach the question of whether a defendant is in the business of supplying information for business guidance on a strict case-by-case factual basis. Therefore, one cannot safely assume that any of the industries mentioned above do or do not qualify for the exception to Moorman. But, in today’s information age where data, research and insight can be as valuable as gold or petroleum, businesses should remain cognizant that their role as purveyors of information may leave open the possibility of facing tort claims based on negligent misrepresentation, in addition to contract-related claims, if the end product they are selling is ideas.

Michael D. Kim, 312-627-4622

ISDA and All That–Part III

In the last two issues of Business Law Quarterly, we have had articles on the ISDA Master Agreement, Schedule and Credit Support Annex. This third article about ISDA documents addresses termination events under the Master Agreement.

In the ISDA lexicon, each particular transaction entered into by the parties pursuant to a Master Agreement and Schedule is called a “Transaction” and the document confirming the specifics of that Transaction (the notional amount, term, who pays fixed rate and who pays floating rate, etc.) is called the “Confirmation”. So long as a Transaction continues, as specified in the applicable Confirmation, the party which is “in-the-money” gets a net payment from the other on each payment date, until the Transaction ends. If, however, a Transaction is terminated early, then usually a valuation is made of the value of the in-the-money side of the Transaction and the other side (the out-of-the-money party) pays that amount as a lump sum. Early termination of a Transaction may result in one party’s paying a substantial sum to the other.

In a “heads I win, tails you lose” world, each party would like to be able to terminate early if its side is in-the-money, but not let the other side terminate early when the other side is in-the-money. In practice, each party recognizes that it is better to have certain early termination rights even if the other side gets similar rights.

Early termination events fall into two broad categories: defaults and other developments affecting one or both parties in some way which impacts their Transactions. Defaults can be further divided into those where a party (or its Credit Support Provider or Specified Entity) did something and those where it failed to do something. These types of events are called “Events of Default” in the Master Agreement.

The second category of early termination events are those which involve other developments such as illegality, force majeure, certain changes in tax laws and something called “Credit Event Upon Merger”. These are events which, if a party is affected, may have a significant impact on the party’s ability to perform under its Transactions or which impair the benefits it would otherwise receive from the Transactions or change the risk profile of remaining a party to the Transactions. Thus, if it should become illegal for a counterparty to perform its obligations due to a change in law in the jurisdiction of the counterparty, the other party to a Transaction may want to terminate.

Section 6(a) of the Master Agreement says that if an “Event of Default” occurs with respect to a party (the “Defaulting Party”), then the other party may terminate all outstanding Transactions. In effect, the “Non-Defaulting Party” has the right to end the relationship. But termination isn’t mandatory and a Non-Defaulting Party may prefer not to terminate, either because it is willing to accept the Event of Default, or because its side is out-of-the-money (in ISDA-speak, it has “Exposure”) and termination would require it to make payment to the Defaulting Party. Moreover, early termination for an Event of Default is all or nothing—the Non-Defaulting Party cannot “cherry pick” which Transactions to terminate, keeping the losers going and terminating only the winners.

Section 6(a) also provides that if “Automatic Early Termination “ is specified in the Schedule as applying to a party, then early termination will occur in respect of all outstanding Transactions upon occurrence of certain specific “Events of Default” identified in Sections 5(a)(vii)(1), (3), (4), (5), (6) or (8). These include events of dissolution, assignment for the benefit of creditors, bankruptcy, corporate action to approve winding up or liquidation, seeking or being subjected to appointment of a receiver, and similar occurrences. If Automatic Early Termination applies, then if any of such events occur, all Transactions will automatically terminate. Given that early termination can be expensive, often the parties prefer that Automatic Early Termination will not apply and specify that in the Schedule, thereby reserving the right of the Non-Defaulting Party to decide about termination in such circumstances.

Events of Default are defined in Section 5(a), which must be reviewed carefully. Subsection 5(a)(v) deals with defaults in respect of “Specified Transactions”. That term is defined in Section 14 of the Master Agreement, and generally encompasses derivatives transactions arising between the parties outside of the Master Agreement. It can also mean other transactions if the parties so choose and specify the details in the Schedule. The parties may also agree in the Schedule to eliminate some or all of the listed Specified Transactions. As an example, it is common when one of the parties is a lender to the other that the lending relationship and the loan documents will be referenced as a Specified Transaction, so that a default by the borrower-party under the loan documentation would also be a default of a Specified Transaction and consequently an Event of Default under the ISDA, thereby giving the lender, as Non-Defaulting Party, the right to early termination. A thoughtful borrower, however, may want to insist that the lender can only exercise its early termination right if it is also terminating the credit facilities and accelerating the debt thereunder, effectively terminating the lender-borrower relationship.

Cross-Default types of Events of Default are addressed in Subsection 5(a)(vi), which requires that a cross-default must be to one or more other agreements relating to “Specified Indebtedness” of a certain agreed upon minimum amount (called the “Threshold Amount”). “Specified Indebtedness” is defined in Section 14 as any obligation in respect of borrowed money, subject (as usual) to the parties’ right to agree to something else in the Schedule. The Schedule is also where the parties establish the Threshold Amount for each party. If there is a lender-borrower relationship, the Threshold Amount for that is usually zero. But the Threshold Amount for obligations to third parties is often open to negotiation.

Section 5(b) of the Master Agreement, titled “Termination Events”, deals with certain other occurrences which may affect Transactions in place. They are named “Illegality,” “Force Majeure Event,” “Tax Event,” “Tax Event Upon Merger,” “Credit Event Upon Merger” and “Additional Termination Event.” These also should be reviewed and understood.

Roughly speaking, an “Illegality” occurs when it becomes unlawful for a party to make or receive a payment or to comply with any other material provision of the Master Agreement relating to a Transaction, or for a party or its Credit Support Provider to make or receive a payment or to comply with any other material provision of a Credit Support Document (such as a guaranty). Similarly, “Force Majeure Event” is when, by reason of force majeure or act of state, a party is prevented from making or receiving a payment or complying with any other material provision of the Master Agreement relating to a Transaction, or it becomes impossible or impractical for a party or its Credit Support Provider to make or receive a payment or to comply with any other material provision of a Credit Support Document.

Under Section 5(c), an Illegality or a Force Majeure Event will not constitute an Event of Default insofar as it relates to the failure to make or receive a payment or to comply with a material provision of the Master Agreement or a Credit Support Document. 

A “Tax Event” occurs when, due to either action of a taxing authority or brought in court or a change in tax law, a party will (or there is a substantial likelihood that it will) be required to start paying an additional amount in respect of a tax, or will receive a payment from which an amount is required to be deducted or withheld for or on account of a tax but no additional amount will be required to be paid by the other party with respect to such tax.

A “Credit Event Upon Merger” arises if there is a merger, consolidation, sale of assets or similar transaction which results in a material weakening of the creditworthiness of a party or a Credit Support Provider of a party.

Other “Additional Termination Events” are sometimes included in the Schedule, such as decline in net asset value of a party or a loss of key personnel. Where there is a lender-borrower relationship, such additional events are usually handled in the loan documentation and are Events of Default under the ISDA documents through cross default to the loan documents, rather than specified as Additional Termination Events in the Schedule.

Certain additional considerations, which are not discussed here, apply with respect to Termination Events when one or both parties is a multibranch entity, effectively calling for efforts to avert a Termination Event if possible through changing the applicable office of a party, particularly with respect to Tax Events.

Under Section 6(a), if an Event of Default occurs as to a party, then the other party has the option to terminate all outstanding Transactions between the parties, but it must terminate all, or else none can be terminated. Under Section 6(b), if a Termination Event, other than an Event of Default, occurs affecting a party as to one or more Transactions, the “Affected” party has the option to terminate any or all of the affected Transactions. If a Transaction is terminated early, the “Early Termination Amount” is determined by the party which exercised the right to terminate, in accordance with Section 6(e), and the in-the-money side is paid by the out-of-money side.

In the next issue of Business Law Quarterly, we’ll end this series of articles about ISDA documents with a discussion of the Credit Support Annex.

Andrew H. Connor, 312-627-2264

1 Although not the subject of this article, the work-product privilege is an equally important privilege and applies to materials prepared in preparation for litigation, and that “contain or disclose the theories, mental impressions, or litigation plans of the party's attorney.” Ill. Sup. Ct. R. 201(b)(2).
2 Consolidation Coal v. Bucyrus-Erie Co., 89 Ill. 2d 103, 117, 432 N.E.2d 250 (1982)
3 Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co., 144 Ill. 2d 178, 190, 579 N.E.2d 322 (1991).
4 Consolidation Coal, 89 Ill. 2d at 120.
5 Id. (internal quotation marks omitted).
6 Id.
7 Id.
8 2314 Lincold Park West Condominium Ass’n v. Mann, Gin, Ebel & Frazier, Ltd. 136 Ill. 2d 302 (1990).

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2012 Dykema Gossett PLLC. 

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2021 Dykema Gossett PLLC.