Fondazione Enasarco v Lehman Brothers Finance SA & Anor

Under the 1992 ISDA Master Agreement, a non-defaulting party determining Loss must act rationally and in good faith. It need not satisfy an objective negligence standard. The question is whether its determination was one which no reasonable non-defaulting party could have made.

Where the agreement permits reliance on dealer quotations, a quotation ordinarily means a firm offer at which the dealer was willing to contract. The first reasonably practicable date for obtaining a replacement transaction is fact-sensitive and may require consideration of the circumstances particular to the person required to act. A breach of the obligation to provide the calculation statement promptly does not necessarily invalidate an otherwise valid Loss calculation.

Fondazione Enasarco claimed payment from Lehman Brothers Finance SA in respect of Loss arising from the automatic termination of a put option following the Lehman Brothers collapse. Anthracite Rated Investments (Cayman) Ltd, the original non-defaulting party, had assigned its claims to Enasarco and brought a related Part 20 claim.

Enasarco relied on the cost of a replacement put option obtained from Credit Suisse on 6 May 2009. Lehman contended that a replacement quotation could have been obtained earlier, that the Credit Suisse option was materially different, and that the calculation statement was served too late. An earlier judgment in the same proceedings had rejected Lehman’s separate contention concerning an early termination cash settlement amount.

1. Outcome. Enasarco was entitled to US$61,507,902 plus interest. No sum was payable by Enasarco or ARIC to LBF.
2. Standard for determining Loss. The obligation to determine Loss reasonably and in good faith imposed a rationality standard, not an objective duty of care equivalent to negligence. The determination would fail only if no reasonable non-defaulting party could have reached it. This approach was supported by Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, Australian & New Zealand Banking Group Ltd v Societe Generale [2000] 1 All ER (Comm) 682 and Peregrine Fixed Income Ltd v Robinson Department Store Public Co Ltd [2000] CLC 1328.
3. Replacement transaction. “Reasonably practicable” meant more than merely possible. It required assessment of all the circumstances, including those particular to the person required to act. The collapse of Lehman Brothers, the complexity of the structure, the illiquidity of the hedge-fund portfolio, the insolvency of several essential Lehman entities and the absence of a ready market made an earlier firm quotation impracticable. The evidence did not establish that a firm quotation could have been obtained by the end of 2008.
4. Dealer quotations. The permitted quotation was a real offer at which a dealer was willing to contract. The court applied the reasoning in Lehman Brothers Finance SA v Sal Oppenheim JR & Cie KGAA [2014] EWHC 2627 (Comm). The Credit Suisse option remained a proper basis for calculating Loss despite its longer maturity, premium-adjustment provisions and stronger counterparty credit.
5. Calculation statement. ARIC had breached its obligation to provide the statement as soon as reasonably practicable after the Early Termination Date. That breach did not affect the binding validity of the Loss calculation, which was otherwise valid under the Master Agreement.

The judgment describes an earlier decision in the same proceedings in which LBF’s separate early-termination cash-settlement argument was rejected and a declaration was made that ARIC could calculate Loss by reference to the cost of a replacement transaction.