Savings Bank of the Russian Federation v Refco Securities Llc

Under a securities lending agreement, a notice need not use the word “terminate” if, viewed objectively by a reasonable recipient with knowledge of the agreement, it clearly exercises the contractual termination right and invokes the applicable valuation mechanism.

Where a borrower terminates a loan under paragraph 9.2(i), the relevant valuation date is ordinarily the date on which the notice is served, because the set-off obligations under paragraph 9.2(ii) arise upon service. An event of default under paragraph 14.1 occurs only when both the specified event and the required written notice have occurred. The notice does not retrospectively accelerate obligations to the date of the underlying event.

Sberbank and Refco Securities LLC entered into a Global Master Securities Lending Agreement. Sberbank terminated the agreement and required settlement of outstanding securities loans. Refco could not redeliver the collateral.

Sberbank later calculated the amount due by reference to the bid value of the collateral and sought payment. The parties disputed whether that communication was a valid notice under paragraph 9.2(i), and, if so, the date on which the collateral should be valued. In the alternative, they disputed the valuation date following a notice of default under paragraph 14.

The court determined the construction of those provisions on Sberbank’s application for summary judgment.

The court granted Sberbank judgment for US$120,114,706.03 in principal and US$1,565,465.65 in interest.

1. The letter of 2 December 2005 was a valid notice under paragraph 9.2(i). The GMSLA used “terminate” in different contexts. The notice under paragraph 9.2(i) did more than bring a loan to an end: it triggered a set-off of the market value of the undelivered collateral against the market value of the loaned securities, with any shortfall payable by the lender.

2. The notice did not need to use the words “terminate” or “termination”. The question was how a reasonable recipient in Refco’s position, knowing the terms of the GMSLA, would have understood the communication. The court applied the approach in Mannai Investment Co. Ltd. v. Eagle Star Life Insurance Co. Ltd. [1997] A.C. 749, at p. 768. The letter stated the amount calculated by reference to a bid price and requested prompt payment. It therefore objectively invoked paragraph 9.2(i), although Refco could challenge the choice of pricing service.

3. The valuation date under paragraph 9.2(ii) was the date of service of the notice. The obligations to set off the market values and account for any shortfall arose upon service. The valuation date was not necessarily the same as that applicable under the event-of-default procedure.

4. Alternatively, if the paragraph 9.2(i) notice had been invalid, an Event of Default under paragraph 14.1 would have required both the occurrence of an enumerated event and service of written notice. The event did not retrospectively become an Event of Default on the date it first occurred. On that alternative basis, the valuation date would have been 19 December 2005, the date following service of the notice of default, although the court did not determine the precise resulting figure.

5. The claimant was awarded the costs of the action, to be definitively assessed, with an interim payment of £75,000.