In one of the first cases involving the repudiation of a derivatives contract, the U.S. District Court in Chicago has awarded more than $3 million in damages to a French bank spurned in a "swaption" deal.

The decision in the case of Caisse Nationale de Credit Agricole against CBI Industries Inc. is seen by some derivatives lawyers as having a calming effect on a market racked by turmoil in the past year.

"It adds certainty to the market," said Thomas Doyle, a partner in the Chicago office of Baker & McKenzie, the law firm representing Credit Agricole. "When a counterparty claims they did not enter into a transaction, participants now know that at least in the Northern District of Illinois, they can sue to recover damages in accordance with the industry standard formula."

The case involves a swaption transaction between the French bank and CBI's Netherlands-based subsidiary, Chameleon Finance Co. The deal covered a Canadian dollar interest rate swap with notional value of $35 million Canadian which ran between Feb. 18, 1991, and Jan. 16, 1994.

At the same time, CBI sold Credit Agricole an option to extend the contract another two years in exchange for a 26-basis point adjustment to the interest rates involved in the swap.

According to court documents filed by CBI's attorneys, Bell, Boyd & Lloyd of Chicago, confirmation given for the option contract specified Canadian business days would govern the swap, but was silent as to what governed the option.

Because the option expired on a Sunday, and because the next day, Jan. 17, was the Martin Luther King holiday in the United States, Credit Agricole waited until Tuesday, Jan. 18, to notify CBI it was exercising the option to extend the original swap.

CBI's filing contends that the agreement, which used the industry standard contract offered by the International Swaps and Derivatives Association, presumed Canadian business days would govern the transactions. In that case, the first business day following the stated expiration would have been Monday, Jan. 17, meaning Credit Agricole's notification of exercise came too late.

"Our view is that the court did not apply the business definitions of the contract documents," said Robert Shannon, who handled the case for Bell Boyd.

He added that many of these questions would have been settled had Credit Agricole used a supplement to the agreement that deals specifically with options.

"It is our position that Credit Agricole mistakenly failed to use ISDA's option addendum to document the transaction," Mr. Shannon said. "The use of the ISDA agreement without the option addendum is what is responsible for the issues and dispute that has arisen."

If the decision stands - CBI intends to appeal this week - Mr. Doyle said it will have an impact on dealers in this market who often attempt to hedge the position created by derivatives contract.

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