WestLB Ag v Nomura Bank International Plc & Anor

A contractual calculation agent exercising a valuation discretion must act in good faith and rationally. A valuation is vulnerable where the agent adopts a method which ignores a materially relevant source of value. For illiquid redeemable fund interests, a dealer poll may be appropriate, but it cannot necessarily be treated as conclusive where nil bids are likely to reflect lack of information rather than absence of value. The agent should investigate other possible buyers, including the fund administrator where redemption is available. The court may consider a delayed valuation if the contract permits delay, and may use later events insofar as they illuminate the value at the contractual valuation date. A defective valuation does not itself establish damages; the claimant must prove the value which a rational valuation would have produced and the loss suffered.

The claimant held variable redemption notes issued by the first defendant and calculated by the second defendant. The notes were linked to redeemable preference shares in an illiquid investment fund. Following the collapse of Lehman Brothers, the second defendant valued the shares at nil after conducting a dealer poll which produced no bids.

The claimant sought payment exceeding $20 million. It argued that the first defendant had made a valid earlier valuation, alternatively that the second defendant’s valuation was invalid because it was late, irrational or made in bad faith. The defendants contended that the valuation was binding under the contractual terms.

The central issues were the construction of the valuation provisions, the validity of the delayed valuation, and whether the claimant had proved recoverable loss.

1. Construction and timing. The contractual provisions were to be read together. The provision dealing with failure to establish the net asset value applied where no valuation had been made, while the provision addressing delay permitted a later valuation where the calculation agent had eventually assessed the value. The February 2009 valuation was therefore not invalid merely because it was made after the maturity date.
2. The redemption amount, including its component parts, had to be determined 20 business days before maturity, namely on 30 September 2008. The physical delivery notice issued on 4 November 2008 was too late and ineffective. Its contents did not objectively amount to a valuation by the issuer under the contractual fallback provision.
3. Rationality. The calculation agent had to act in good faith and avoid an irrational exercise of discretion. A dealer poll was a recognised method of valuing illiquid securities, but the absence of bids was not necessarily evidence of nil value where dealers lacked information about the underlying assets. The agent should also have investigated whether the fund administrator would redeem the shares and at what price. Limiting the valuation to the dealer poll was irrational.
4. The requirement to value the shares was distinct from the first defendant’s payment obligation. Using the need for an immediate cash settlement to favour a method producing an immediately available cash sum was an irrelevant consideration. That conclusion formed part of the finding that the valuation method was irrational.
5. The claimant failed to prove bad faith. The evidence showed an irrational mistake rather than a dishonest abuse of the calculation agent’s position.
6. The court could consider later events insofar as they shed light on the value at 30 September 2008. However, the claimant failed to prove that a rational valuation would have exceeded the defendants’ fee, or that it had suffered damage. The claim was dismissed.