For our call this afternoon.  This is very helpful.  I ta slo sounds complicated, but I think you will se that absent a perfect world, Robert is suggesting only minor changes to the set-off clause previuosly circulated by Mark for EWS trading contracts.  Roberts has also attached more fully developed provisions for both triangular set-off and for square set-off (which would be applicable under the Master Netting and Collateral Contract) which address the issues of mutuality, privity and consideration in greater detail.

 -----Original Message-----
From: 	"ROBERT ANDERSON" <robert.anderson@blakes.com>@ENRON [mailto:IMCEANOTES-+22ROBERT+20ANDERSON+22+20+3Crobert+2Eanderson+40blakes+2Ecom+3E+40ENRON@ENRON.com] 
Sent:	Wednesday, August 15, 2001 9:22 PM
To:	Keohane, Peter
Subject:	Set-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, blacklined 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 request 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-Off and Security Agreement with a view to developing terms of set-off that will be enforceable in Canada.  (For the moment, I have considered the laws applicable in Alberta and have received input from my Ontario partner, Kevin McElcheran).

Unlike certain jurisdictions (including, for example, Great Britain), in Canada  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 as 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.  Contractual set-off provisions are ordinarily enforceable in an insolvency provided the contract of which the set-off provision is part is itself enforceable (i.e. has all of the elements of an enforceable contract including privity 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 would otherwise receive the benefit of the debt owed by the setting-off creditor to the insolvent company.

The essence of set-off is mutuality: the setting-off of a claim and cross-claim between the same parties.  The difficulty with the expansive set-off terms sought by Enron is that they would permit "set-off" as between Enron and its counterparty of debts owed by or to a third party.  My concern is that such purported "set-off" is so different in substance from the common notion of set-off which requires mutuality, as to be set-off in name only.  Without mutuality, I am concerned that a court may not recognize such "set-off" of obligations relating to third parties as "set-off" within the meaning of Canadian insolvency legislation.  The concern is not only that a court may be reticent to allow receivables owed by third parties to the insolvent state to be used to satisfy the insolvent estate's indebtedness to a creditor.  The court may be view any contractual arrangement that baldly purports to do that as something other than set-off known under the laws of Canada.  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 liability clause") to try and ensure that in each instance the claim and cross-claim will be between the same parties.

The first two attachments analyse the various combinations involved in square 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 (attachment 3), I have the following comments:

1.    I have included wording to clarify that the option to set-off is to be exercised jointly by X and its affiliates.  The reason for this is to avoid the uncertainty associated with multiple parties having the ability to exercise inconsistent set-off options.  We must assume that this set-off provision will be included in separate contracts between a counterparty and various Enron affiliates.  If the counterparty defaults on more than one of these contracts, (or if they contain cross-default provisions,) the Enron affiliate that is a party to each separate contract would be "X" under that contract 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 owed to any of its affiliates.  Those affiliates may each in turn be "X" under their respective contracts and similarly entitled to exercise set-off rights.  While it is unlikely that Enron and its affiliates would act inconsistently in exercising set-off rights, making it clear that the option to set-off must be exercised jointly by X and its affiliates, minimizes any attack 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 consideration, I have included an acknowledgement by the parties (including affiliates) that each has received valuable consideration for the covenants involved.  This provision is not a complete answer to the requirement of consideration but is helpful.

3.  Paragraph (B) is included to address the mutuality requirement by including an aggregate liability clause, as discussed above.

4.  In the second paragraph of Mandatory Setoff Language for EWS Trading Contracts, the changes to the sentence including "limitation to" have been made 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 "without prejudice" language in the prior draft, would leave it open to the defaulting party to argue that the set-off provision cannot work to its prejudice.

5.  The balance of the revisions are simply drafting changes made in an attempt to improve the clarity and certainty of the terms involved.  In attachment 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 triangular set-off provision (attachment 5) which is clearer, more certain and about one page longer.

Finally, I have included a square set-off provision (attachment 6) which affords Enron (and any non-defaulting counterparty) even better set-off protection.  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 are not the intended recipient, please notify me at the telephone number shown above or by return e-mail and delete this communication and any copy immediately. Thank you.

 - SquareSe.DOC 
 - Triangul.DOC 
 - Blacklin.DOC 
 - RevisedM.DOC 
 - Triangul.DOC 
 - SquareSe.DOC