An export credit agency (ECA) supported facility agreement in a buyer credit will usually contain an "Isabella clause". Detail and drafting varies, but these clauses tend to provide:

• the facility agreement, and any other finance documents, are separate and independent from the export contract;
• the obligors' obligations under the finance documents do not depend on the validity, legality, enforceability or performance of the export contract; and 
• those obligations shall not be affected by any dispute under or in connection with the export contract, or by any insolvency of any party. 

Is this clause addressing a clear and specific legal issue affecting a buyer credit transaction, such as the following? 

• An obligor under the facility agreement being entitled to use a breach by the exporter of the export contract to generate a set-off which the obligor could invoke to withhold payment under the facility agreement; or 
• An English court recharacterising the export contract and the facility agreement as a single contract under which the obligation to repay the loan depended on a perfect supply of goods or services. 

Set-off

The widest and most flexible type of set-off is equitable set-off. An obligor might hope an equitable set-off could arise in its favour under the facility agreement based on an exporter breach of the export contract. This hope might be bolstered by the significant connection between the facility agreement and the export contract. Examples of this connection include: 

• sometimes the export contract will be conditional upon the financing being documented and/or effective; and 
• some ECAs require some form of agreement between the ECA and the exporter relating to the financing. 

However, for an equitable set-off to arise in favour of an obligor, the finance parties' claims for payment under the facility agreement would have to be so closely connected with the obligor's cross-claim for defective performance under the export contract that it would be inequitable to allow the finance parties to obtain judgment on their claims without giving credit for the obligor's cross-claim.

This is unlikely in most cases as, although equitable set-off can arise across separate contracts, the claim the obligor wanted to set off would be against the exporter under the export contract, not against the finance parties under the facility agreement. 

A further point is the standard set-off waiver in, for example, an LMA facility agreement would tend to be more effective in blocking obligor set-offs than many Isabella clauses. 

Recharacterisation

The English courts may recharacterise one type of agreement as another if they:

• consider the agreement a sham, intended to deceive third parties as to its parties' true intentions; or 
• have analysed the agreement to determine the parties' expressed intention and consider the agreement as a whole inconsistent with that intention. 

Neither of these paths to recharacterisation appear likely to enable an obligor under an ECA-supported facility to persuade an English court that the export contract and the facility agreement should be recharacterised as a single, composite agreement, where disputes under the export contract justify non-payment under the facility agreement. 

Pre-empting obligor arguments for non-payment 

Despite the legal analysis above, there are significant practical advantages to including an Isabella clause in an ECA-backed facility agreement. These advantages include that the clause:

• may protect the finance parties in a rare and highly unusual transaction where the above, high-level, analysis would not hold good;  
• may deter an aggrieved obligor from withholding payment in breach of the facility agreement where, in the obligor's mind, the export contract and the facility agreement are a single, overall deal under which the obligor has received defective performance for which it should not have to pay anyone. This perception might arise, for example, given the degree of connection between the facility agreement and the export contract mentioned above, or because the obligor was not required to sign utilisation requests under the facility agreement and disbursements were made direct to the exporter; and 
• would tend, in any dispute between an obligor and the finance parties about non-payment, lead the court to treat the facility agreement (and any other finance documents) as completely legally separate and independent from the export contract.