Socimer International Bank Ltd v Standard Bank London Ltd

A contractual default mechanism requiring a seller to value assets on termination must be construed so that the parties’ financial position is crystallised at, or as soon as practicable after, the termination date. A discretion to sell assets at a time and price considered reasonable does not permit the seller to delay valuation and speculate on subsequent market movements. The court must construe the agreement as a whole, against its commercial background, giving effect to the meaning that a reasonable commercial person would understand the words to convey. Where the contract gives the seller responsibility for valuation, that valuation remains subject to the contractual standard, including good faith and the absence of manifest error.

Socimer and Standard entered into an umbrella agreement governing forward sales of emerging-market debt instruments. Socimer paid downpayments and additional margin, while Standard retained ownership of the designated assets until the forward settlement date.

After Socimer defaulted and entered liquidation, the parties disputed the operation of clause 14(a). Standard argued that it could retain the assets and sell them over an extended period, crediting the eventual proceeds against Socimer’s liabilities. Socimer argued that the assets had to be valued as at the termination date. The court was asked to determine the true construction of the default provisions as a preliminary issue.

1. The court applied the ordinary principles of commercial contractual construction. The agreement was to be interpreted in its factual and commercial context, by asking what meaning it would convey to a reasonable person with the relevant background knowledge. Commercial common sense was relevant, but could not justify rewriting clear language.

2. The agreement repeatedly contemplated valuation of the designated assets on any day. Market value and related calculations were placed within Standard’s discretion, subject to the contractual protection against manifest error. Clause 14(a)(bb) therefore had to be read consistently with that valuation structure.

3. On the proper construction of clause 14(a)(bb), Standard could elect either to liquidate or retain sufficient designated assets to satisfy its claims. If assets were retained, their notional value had to be brought into account. The crucial reference to value being determined on the date of termination required valuation as at that date, allowing only such practical latitude as was necessary to carry out the process.

4. The discretion to sell the assets at such time, in such manner and at such price as Standard considered reasonable and appropriate concerned the manner of realisation. It did not authorise Standard to postpone the accounting indefinitely or to use actual sale proceeds obtained after the termination date as the basis of the clause 14 calculation.

5. The contractual mechanism required the position to be crystallised at, or as soon as practicable after, the date of default or notice of default. Standard had to credit the value it assessed at that date against the sums payable under the agreement and trade confirmations. Any resulting surplus or deficiency was then to be dealt with under clause 14.

6. The preliminary issue was determined in Socimer’s favour. Standard was obliged to value the designated assets as at the termination date and was not entitled to rely on later actual sale proceeds for the relevant accounting. The parties were to address the form of declaration and costs.

First-instance determination of a preliminary issue. The judgment records no earlier decision in the same proceedings.