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Enron Mail |
Elizabeth Sager 713-853-6349 -----Original Message----- From: =09Keohane, Peter =20 Sent:=09Thursday, August 16, 2001 9:42 AM To:=09Sager, Elizabeth; St. Clair, Carol Cc:=09Crawford, Sharon Subject:=09FW: Set-Off Language For our call this afternoon. This is very helpful. I ta slo sounds compli= cated, but I think you will se that absent a perfect world, Robert is sugge= sting only minor changes to the set-off clause previuosly circulated by Mar= k for EWS trading contracts. Roberts has also attached more fully develope= d provisions for both triangular set-off and for square set-off (which woul= d be applicable under the Master Netting and Collateral Contract) which add= ress the issues of mutuality, privity and consideration in greater detail. -----Original Message----- From: =09"ROBERT ANDERSON" <robert.anderson@blakes.com<@ENRON [mailto:IMCEA= NOTES-+22ROBERT+20ANDERSON+22+20+3Crobert+2Eanderson+40blakes+2Ecom+3E+40EN= RON@ENRON.com]=20 Sent:=09Wednesday, August 15, 2001 9:22 PM To:=09Keohane, Peter Subject:=09Set-Off Language Further to our conversations yesterday and today, I attach the following: 1. Memorandum of Square Set-Off Combinations; 2. Memorandum of Triangular Set-Off Combinations; 3. Mandatory Set-Off Language for EWS Trading Contracts - Revision #1, bl= acklined to the version forwarded by Mark Haedicke; 4. Clean copy of attachment 3; 5. Revised Triangular Set Off Provisions; and 6. Square Set-Off Provision This is a very interesting although somewhat complex assignment. At your r= equest I have reviewed the draft Mandatory Setoff Language for EWS Trading = Contracts as well as the set-off language in the draft Master Netting Set-O= ff and Security Agreement with a view to developing terms of set-off that w= ill be enforceable in Canada. (For the moment, I have considered the laws = applicable in Alberta and have received input from my Ontario partner, Kevi= n McElcheran). Unlike certain jurisdictions (including, for example, Great Britain), in Ca= nada a creditor's set-off rights are generally preserved in an insolvency.= Section 97(3) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 a= s amended and section 18.1 of the Companies' Creditors Arrangement Act, S.C= . 1985 c. C-36 as amended, both expressly reserve application of the law of= set-off in the context of an insolvency to which those acts apply. Contra= ctual set-off provisions are ordinarily enforceable in an insolvency provid= ed the contract of which the set-off provision is part is itself enforceabl= e (i.e. has all of the elements of an enforceable contract including privit= y and consideration). Set-off is a powerful tool in insolvency because it permits a creditor with= an otherwise unsecured claim to effectively satisfy that claim on a dollar= -for-dollar basis out of amounts the creditor in turn owes to the insolvent= company. This is done at the expense of other unsecured creditors who wou= ld otherwise receive the benefit of the debt owed by the setting-off credit= or to the insolvent company. The essence of set-off is mutuality: the setting-off of a claim and cross-c= laim between the same parties. The difficulty with the expansive set-off t= erms sought by Enron is that they would permit "set-off" as between Enron a= nd its counterparty of debts owed by or to a third party. My concern is th= at such purported "set-off" is so different in substance from the common no= tion of set-off which requires mutuality, as to be set-off in name only. W= ithout mutuality, I am concerned that a court may not recognize such "set-o= ff" of obligations relating to third parties as "set-off" within the meanin= g of Canadian insolvency legislation. The concern is not only that a court= may be reticent to allow receivables owed by third parties to the insolven= t state to be used to satisfy the insolvent estate's indebtedness to a cred= itor. The court may be view any contractual arrangement that baldly purpor= ts to do that as something other than set-off known under the laws of Canad= a. I am not, however, aware of any case law on point. With a view to solving the perceived problem with lack of mutuality, I have= incorporated language (referred to in the materials as an "aggregate liabi= lity clause") to try and ensure that in each instance the claim and cross-c= laim will be between the same parties. The first two attachments analyse the various combinations involved in squa= re and triangular set-off. These memoranda serve as a check list to ensure= that the proposed language will cover every possible combination of claim = and cross-claim. Turning now to the Mandatory Setoff Language for EWS Trading Contracts (att= achment 3), I have the following comments: 1. I have included wording to clarify that the option to set-off is to b= e exercised jointly by X and its affiliates. The reason for this is to avo= id the uncertainty associated with multiple parties having the ability to e= xercise inconsistent set-off options. We must assume that this set-off pro= vision will be included in separate contracts between a counterparty and va= rious Enron affiliates. If the counterparty defaults on more than one of t= hese contracts, (or if they contain cross-default provisions,) the Enron af= filiate that is a party to each separate contract would be "X" under that c= ontract and would have the option to exercise the set-off rights thereunder= including the right to set-off against amounts it owes, amounts that are o= wed to any of its affiliates. Those affiliates may each in turn be "X" und= er their respective contracts and similarly entitled to exercise set-off ri= ghts. While it is unlikely that Enron and its affiliates would act inconsi= stently in exercising set-off rights, making it clear that the option to se= t-off must be exercised jointly by X and its affiliates, minimizes any atta= ck of the set-off provision on the basis of uncertainty associated with the= potential for inconsistent exercise of the option to set-off. 2. With respect to the requirement that the set-off contract must have con= sideration, I have included an acknowledgement by the parties (including af= filiates) that each has received valuable consideration for the covenants i= nvolved. This provision is not a complete answer to the requirement of con= sideration but is helpful. 3. Paragraph (B) is included to address the mutuality requirement by inclu= ding an aggregate liability clause, as discussed above. 4. In the second paragraph of Mandatory Setoff Language for EWS Trading Co= ntracts, the changes to the sentence including "limitation to" have been ma= de to clarify that the set-off provision is without limitation to any other= rights which X or its affiliates may have. I was concerned that the "with= out prejudice" language in the prior draft, would leave it open to the defa= ulting party to argue that the set-off provision cannot work to its prejudi= ce. 5. The balance of the revisions are simply drafting changes made in an att= empt to improve the clarity and certainty of the terms involved. In attach= ment 3 I have attempted to minimize the changes with the result that it is = not as clear and certain as it might be. I have also attached a revised tr= iangular set-off provision (attachment 5) which is clearer, more certain an= d about one page longer. Finally, I have included a square set-off provision (attachment 6) which af= fords Enron (and any non-defaulting counterparty) even better set-off prote= ction. As discussed, I will include this provision in the Master, Netting = Setoff and Security Agreement form. I would be pleased to discuss the attachments with you at your convenience. Best Regards A. Robert Anderson Blake, Cassels & Graydon LLP 3500, 855 Second Street SW Calgary, AB T2P 4J8 Tel: 403.260-9624 Fax: 403.260.9700 E-mail: raa@blakes.com This e-mail communication is confidential and legally privileged. If you ar= e not the intended recipient, please notify me at the telephone number show= n above or by return e-mail and delete this communication and any copy imme= diately. Thank you. - SquareSe.DOC=20 - Triangul.DOC=20 - Blacklin.DOC=20 - RevisedM.DOC=20 - Triangul.DOC=20 - SquareSe.DOC
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