Westlb AG v Nomura Bank International Plc & Anor

Where a contract entrusts valuation to a party in its sole discretion, the valuation must be made honestly and rationally, but the court must not substitute its own assessment. If the contractual valuer’s determination fails, the court asks what that valuer would have decided had it acted validly, honestly and rationally. A fallback obligation on another party does not arise automatically merely because the primary valuer has not yet acted. Difficulty in quantifying loss does not prevent damages where loss is established, but the court cannot speculate that assets had value or invent an unsupported discount. An invalid notice does not become a conclusive valuation merely because it states a redemption amount.

WestLB paid investors the nominal value of notes linked to an investment fund and retained the notes. Nomura Bank, the issuer, later missed the contractual deadline for exercising a physical delivery option. Nomura International, the calculation agent, subsequently valued the fund at zero following a dealer poll.

Teare J held that the dealer-poll valuation was irrational because the fund administrator had not been contacted, but found that WestLB had not proved that a rational valuation would exceed Nomura’s fee or that WestLB had suffered loss: [2010] EWHC 2683 (Comm). The appeal concerned whether the physical delivery notice itself constituted a binding valuation and whether the court should have assessed a discounted value for the fund.

Appeal dismissed. Rix LJ gave the leading judgment, with Etherton and Patten LJJ agreeing.

1. Contractual valuation. A valuation discretion expressed in broad terms, including a sole and absolute discretion, must be exercised honestly and rationally. The court’s task is to determine what the contractual valuer would have done on or as at the contractual valuation date, not to substitute its own objective valuation. This followed the approach in Socimer International Bank Limited v Standard Bank London Limited [2008] EWCA Civ 116, with reference also to Cantor Fitzgerald v Horkulak [2004] EWCA Civ 1287.
2. Physical delivery notice. Nomura Bank had not exercised a valuation discretion. The calculation of the number of shares to be delivered, based on an artificial transaction and an outdated published NAV, was not a contractual determination of NAV. The issuer’s obligation under SC2 did not arise irrevocably merely because the calculation agent had not yet acted; the contract contemplated later performance by the calculation agent. The notice was invalid for lateness and could not be treated as final and binding as a valuation.
3. Loss and damages. A court may do the best it can where loss is established but precise assessment is difficult. That principle does not permit the court to assume that illiquid assets have value or to speculate about the discount a contractual valuer would have applied. The valuation discretion could properly protect the issuer against an optimistic valuation, provided it was exercised honestly and rationally.
4. Application. WestLB’s discounted-value case was raised late and lacked supporting expert or other evidence of what Nomura would have done. WestLB therefore failed to prove that the shares were worth more than Nomura’s fee and failed to establish recoverable damage. The subsidiary grounds did not arise.

• Court of Appeal (Civil Division): Rix, Etherton and Patten LJJ dismissed WestLB’s appeal under [2012] EWCA Civ 495.
• High Court of Justice, Queen’s Bench Division: Teare J rejected WestLB’s valuation cases and found that it had failed to prove recoverable loss, in [2010] EWHC 2683 (Comm).