LBI EHF v Raiffeisen Bank International AG

Under the GMRA, “fair market value” is assessed within the broad contractual discretion conferred on the non-Defaulting Party. It may consider such pricing sources and methods as it considers appropriate, including evidence from the particular market at the relevant time. The general constraint, absent an express or implied contractual limitation, is rationality: the assessment must not be arbitrary or perverse. The contract does not require a notional willing buyer and seller, or require illiquidity or market distress to be disregarded. The same meaning applies where Net Value is used under the alternative default-valuation provisions. A fixed definition is inappropriate because the GMRA applies across varied financial instruments and factual settings. The appeal was dismissed.

The appeal concerned eleven open repo positions under the Global Master Repurchase Agreement 2000 edition. Following the appellant’s insolvency, the respondent served Default Notices but did not serve a Default Valuation Notice within the contractual period. Valuation therefore depended on Net Value and required a counterfactual assessment of the value the respondent would have determined under the GMRA.

Robin Knowles J held that the respondent’s figures represented a rational and honest determination of fair market value: [2017] EWHC 522 (Comm). The central issue on appeal was whether fair market value had to exclude prices or quotations from an illiquid or distressed market, and whether the GMRA Guidance supported that construction.

The appeal was dismissed. Lord Justice Flaux gave the judgment, with Lord Justice Henderson and Lord Justice Longmore agreeing.

Construction of the GMRA

1. The definition of Net Value gave the non-Defaulting Party a broad discretion to assess fair market value by reference to such pricing sources and methods as it considered appropriate. This could include available prices for securities with similar maturities, terms and credit characteristics.
2. Absent an express or implied contractual limitation, the relevant constraint was rationality. The decision-maker had to act rationally and not arbitrarily or perversely. That approach was consistent with Socimer Bank Ltd v Standard Bank Ltd [2008] EWCA Civ 116 and Lehman Brothers International (Europe) v Exxonmobil Financial Services BV [2016] EWHC 2699 (Comm).
3. The GMRA contained no requirement that fair market value be assessed by reference to an unimpaired or willing buyer and seller, with market illiquidity or distress excluded. Evidence of actual prices or other information from the particular market at the relevant time could be used. The appellant’s proposed restriction was inconsistent with the contractual language and would make the proviso in paragraph 10(e)(ii) effectively otiose.
4. The expression had the same meaning under paragraphs 10(e)(ii) and 10(e)(i)(C). Its meaning had to be determined from the particular contract and its context. Definitions developed in other legal, financial or tax contexts could not be imported without regard to the GMRA’s wording. The Commonwealth authorities were therefore of limited assistance, while Barclays Bank plc v Unicredit Bank AG [2014] EWCA Civ 302 supported a contextual approach.
5. The Guidance merely explained the contractual valuation provisions, and the FAQs were for information only and did not alter the construction. The judge was entitled to find that the respondent’s assessment, based on imperfect information during exceptional market conditions, fell within the range of rational assessments.

The appeal was accordingly dismissed.

1. Court of Appeal (Civil Division) dismissed the appeal from the order of Knowles J.
2. High Court of Justice, Queen’s Bench Division, Commercial Court dismissed the appellant’s challenge and held that the respondent’s figures represented a rational and honest assessment of fair market value: [2017] EWHC 522 (Comm).