Lehman Brothers Finance SA v Sal. Oppenheim Jr. & CIE. KGAA

Under the 1992 ISDA Master Agreement, a Market Quotation requires live quotations for a Replacement Transaction, obtained on or as soon as reasonably practicable after the Early Termination Date. Historic or backdated valuations do not satisfy that obligation. The determining party cannot select a pre-termination valuation date.

Market Quotation may be displaced by Loss only where quotations cannot be determined or the determining party reasonably believes that Market Quotation would not produce a commercially reasonable result. The availability of an alternative hedging strategy does not establish that gateway. The value clean principle assumes satisfaction of applicable conditions precedent, but does not require market effects of the default to be ignored.

The claimant sought the balance allegedly due following the automatic early termination of four Nikkei 225 option transactions governed by a 1992 ISDA Master Agreement. The parties had elected Market Quotation and Second Method.

The defendant calculated the Settlement Amount using valuations dated before the Early Termination Date, when the relevant Japanese markets were closed. The claimant challenged that calculation and sought additional principal and interest. The central issues were whether the defendant had complied with the Market Quotation provisions, whether either gateway to the Loss measure was available, how the Settlement Amount should be reconstructed, and what contractual default rate was payable.

1. Market Quotation. The Agreement required the defendant, as Non-defaulting Party, to seek quotations from the Reference Market-makers for a live Replacement Transaction. The quotations had to be obtained on or as soon as reasonably practicable after the automatic Early Termination Date. Backdated valuations as at 12 September 2008 were not quotations and did not comply with the Agreement.
2. The power to select the day and time of quotation in good faith did not permit selection of a time before the Early Termination Date. The value clean principle required applicable conditions precedent and the event giving rise to termination to be assumed away for the replacement transaction. It did not require the market impact of the default to be disregarded.
3. Gateways to Loss. The First Gateway was unavailable because at least three live quotations could probably have been obtained on 16 September 2008. The Second Gateway was also unavailable. The defendant had not shown a reasonable belief that Market Quotation would not produce a commercially reasonable result. It was required to show that compliance with the agreed route was unreasonable; it was insufficient that alternative hedging steps might themselves have been commercially reasonable.
4. The defendant had breached the Agreement by failing to obtain the required quotations. The court therefore reconstructed the Market Quotation amount using the agreed and reliable data, adopting a gross figure of €6,549,000 and a resulting payment of €2,963,081.18.
5. The Loss measure, if applicable, would likewise have required valuation on the Early Termination Date or the earliest reasonably practicable date thereafter, not before termination. The available evidence would have produced a broadly similar replacement-cost calculation.
6. The defendant was also liable for contractual interest. The claimant had not established the certified funding rate relied upon as at 15 December 2008, but an 11 per cent funding rate was available. Under Section 6(d)(ii), the recoverable default rate was therefore 12 per cent per annum, compounded. Judgment was given for the claimant, with the sums to be calculated in accordance with the findings.

First-instance decision. No prior or appellate decision is stated in the judgment.