Lehman Brothers Special Financing Inc v National Power Corporation & Anor

Under the 2002 ISDA Master Agreement, the Determining Party must use objectively commercially reasonable procedures to produce an objectively commercially reasonable Close-out Amount. The requirement is more demanding than a rationality or Wednesbury standard. Giving the decision to a contracting party does not make the outcome subjective.

After the Early Termination Date and effective payment notice, the contractual position cannot be unilaterally reopened. A Determining Party has one determination. An error may be corrected by agreement or by the court or tribunal, and a later calculation may be evidence of the correct amount. A firm replacement transaction may be preferred to an earlier indicative quotation, but the determination must preserve the economic equivalent of the terminated transaction and cannot pass on an additional option cost.

The claimant entered into a principal-only US dollar/Philippine peso forward currency swap with National Power Corporation under the 2002 ISDA Master Agreement. Following the Lehman collapse, National Power Corporation designated an Early Termination Date of 3 November 2008 and later notified a Close-out Amount based on a UBS replacement transaction.

The claimant challenged that determination and the defendants’ later revised calculations. The court had to decide whether the Determining Party could remake its determination, whether the 2002 ISDA wording required rationality or objective commercial reasonableness, and how the replacement transaction, option and accrued payments should be treated.

The court determined the contractual and valuation issues at first instance.

1. Contractual sequence. The debt obligation arose on the Early Termination Date. The obligation to pay arose when notice of the amount became effective under Section 12. A notice remained effective as a notice despite a dispute about calculation, lateness or missing account details. The court applied Videocon Global Ltd v Goldman Sachs International [2016] EWCA Civ 130.
2. No unilateral remaking. Once the relevant contractual events had occurred, the parties’ position was not reversible without agreement or judicial intervention. National Power Corporation had made one determination by its January 2009 notice. It could not replace that determination unilaterally eight years later. An error, including omission of the Accrued Amount, could be corrected only in the erroneous respect by agreement or by the court or tribunal. The later calculation statement could be evidence of the correct amount.
3. Applicable standard. The 2002 ISDA wording imposed two objective standards: commercially reasonable procedures and a commercially reasonable result. The words concerning the result were substantive and were not merely descriptive of the procedures. The standard was one of objective reasonableness, rather than rationality or Wednesbury unreasonableness. The fact that a contracting party was the decision maker did not alter that conclusion. The court applied the distinction discussed in Socimer International bank Ltd v Standard Bank London Ltd (No 2) [2008] EWCA Civ 116 and approved the approach in Lehman Brothers International (In Administration) v Lehman Brothers Finance SA [2012] EWHC 1072 (Ch).
4. Application. A commercially reasonable result could fall within a range, but the Determining Party could not simply select the result most favourable to itself. On the facts, the firm UBS quotation and resulting replacement transaction were appropriate evidence of replacement cost. The earlier indicative quotation did not justify the Primary Determination. The UBS Transaction included an option which was not part of the terminated transaction, so its US$1 million exercise price or prepayment premium could not be passed to the claimant. The omitted Accrued Amount required correction.
5. Result. The Primary Determination did not use commercially reasonable procedures to produce a commercially reasonable result. Even if the matter were left to the court for determination, the UBS Transaction should be used, subject to the stated corrections and consequential calculations.