Socimer International Bank Ltd v Standard Bank London Ltd

Where a contract gives one party a discretion to value assets following termination, the discretion must be exercised honestly and reasonably. The valuation must properly reflect the assets’ value at the relevant date, although the decision-maker may adopt a conservative approach and account for illiquidity, volatility, transaction costs and other risks. The court assesses what the decision-maker would probably have done had the contract been performed, rather than substituting its own view of a reasonable valuation.

Where the contractual machinery requires assets sufficient to satisfy a debt to be liquidated or retained, surplus assets must be returned. A lack of a purchaser on the valuation date does not necessarily justify a nil valuation. The court may award compensation by reference to the claimant’s actual loss, including the value of assets which should have been returned.

Socimer, a bank in liquidation, claimed an account or damages from Standard under a forward sale agreement concerning emerging-market debt instruments. The agreement terminated on 20 February 1998 following Socimer’s default.

A previous trial had determined that Standard was required to elect promptly whether to liquidate or retain the designated assets, value them as at termination, and bring the values into account. The second trial concerned the proper approach to that valuation, the amount of the unpaid debt after credits and set-offs, and the values of the Socma depositary receipts, Brazilian TDA-Es, a North Korea asset and a Brazil LTN.

1. Valuation method. The court had to determine, on the balance of probabilities, what Standard would have valued the assets at if it had complied with clause 14. The court was not simply to substitute its own view of a reasonable figure, but had to put itself in Standard’s position while assuming contractual performance.
2. Good faith and reasonableness. Standard’s contractual discretion required it to act honestly and reasonably and to arrive at a value properly reflecting the assets’ value at termination. It could take account of its exposure to market risk, illiquidity, volatility, currency and transaction costs, and the need to value promptly. Those considerations justified a conservative valuation, but not an arbitrary or capricious one. The certificate’s conclusive effect in the absence of manifest error did not remove that obligation.
3. Credits and set-offs. The court held that the Unpaid Amount was US$20,382,063.24, after allowing credits for the Spot Trade Balances, the other balances and accrued coupon interest. The court found that Standard would have applied those credits had it understood its contractual obligations.
4. Socma DRs. Standard would probably have valued and retained other, less uncertain assets sufficient to satisfy the debt and returned the Socma DRs. Their value in Socimer’s hands was the amortised face value, US$8,424,966, rather than their depressed market value or the expected insolvency dividend.
5. Other assets. The TDA-Es were valued at US$8.5 million. A forced-sale valuation was inappropriate where there was a reasonably ready market and liquidation could occur over about ten business days. The North Korea asset was valued by reference to its actual sale price, converted into US dollars at the applicable exchange rate. The Brazil LTN was not a designated asset and attracted no allowance.
6. Socimer was entitled to judgment by way of an account or damages, subject to the final order and calculation of interest.