Australia and New Zealand Banking Group Ltd v Société Générale

Under the ISDA Loss provisions, losses said to arise from hedging transactions are recoverable only where they result from terminating, liquidating, obtaining or re-establishing the hedge. A loss caused by the counterparty’s inability to pay, or by the intrinsic collapse in value of the hedge, is not attributable to its termination or liquidation.

Early-termination payments must be valued on the basis of the contractual payments, assuming applicable conditions precedent are satisfied. They should not be reduced by speculation about a possible future Trade Event or restricted payment mechanism. An appellate party should ordinarily raise all such construction points at the hearing on the merits.

Australia and New Zealand Banking Group Ltd and Société Générale entered into three non-deliverable forward foreign exchange contracts governed by an ISDA Master Agreement. Société Générale terminated the transactions following a Russian banking moratorium and sought to bring losses on related hedges into the calculation of Loss.

Aikens J gave summary judgment for ANZ, holding that the hedge losses were not incurred as a result of terminating or liquidating the hedges. Société Générale appealed and sought permission to raise two new construction points concerning the valuation of the transactions and an alleged election under the Loss definition. The central issues were the proper construction of the ISDA provisions and whether the new points should be admitted.

1. Appeal dismissed. Lord Justice Mance delivered the judgment, and Lord Justice Kennedy agreed. Société Générale’s applications for permission to rely on the two new points were refused.
2. The specific Russian Market Event provisions in the confirmations could not alter the meaning of the standard ISDA Loss clause. The losses on the Vostok hedges resulted from the banking moratorium and Vostok’s inability to pay, or from the intrinsic loss of value of the contracts. They were not losses incurred as a result of terminating or liquidating the hedges.
3. The phrase referring to losses incurred as a result of terminating, liquidating, obtaining or re-establishing a hedge contemplated losses or gains associated with accelerated termination, liquidation or replacement of a hedge. It did not extend to the simple collapse in value of a hedge. The contractual allocation of that risk was inherently unlikely to include a counterparty’s hedge failure in circumstances unknown to the other party.
4. The Loss and Market Quotation provisions were intended to produce broadly similar results. Accordingly, the transactions had to be valued “clean”, by reference to the nominal value of the contractual payments assuming satisfaction of applicable conditions precedent, without speculative allowance for a possible Trade Event at the settlement date.
5. Both new points could and should have been raised before the judge. A party who has obtained judgment after a hearing on the merits should not be deprived of it without very solid grounds. The case-management duties under CPR 1.1(2)(d), CPR 1.4(2)(b), CPR 1.4(2)(c) and CPR 1.3 reinforced that conclusion.
6. The Court expressed a provisional view that the hedge wording might cover substantive replacement or buy-out costs and corresponding gains, but found it unnecessary to decide whether it created an alternative elective measure.

• Court of Appeal (Civil Division): appeal from the summary judgment of Aikens J dismissed; permission to raise two new points refused.
• High Court of Justice, Queen’s Bench Division: Aikens J gave summary judgment for ANZ for the outstanding balance and interest.