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

The claim of the Claimant (Lehman Brothers Finance S.A. (in liquidation)) is for the balance of the sum which it claims was properly due from the Defendant (Sal. Oppenheim jr. & Cie. KGAA) arising out of early termination of four option transactions governed by an English law ISDA Master Agreement (1992 version) (“the Agreement”) dated 6^th September 2001, together with interest. The dispute is one of the continuing consequences of the Lehman Brothers crash. It has been ably and thoroughly argued by Mr Bayfield for the Claimant and Mr Forbes Smith for the Defendant.

The following is common ground:

By letter dated 30^th April 2009, the Defendant informed the Claimant that it had determined that the amount to be paid by it to the Claimant in respect of the transactions arising out of the Early Termination was €1,849,968.99, (although without at that stage providing any calculations in support), and after an email dated 18^th June 2009, by which it submitted calculations which it asserted supported such figure (to which I shall return), the Defendant paid the said sum on 14^th July 2009, together with interest of €27,297.94 said to be due thereon. The Claimant claims that this figure was wrongly calculated and an incorrect and substantial underpayment.

The relevant provisions of the Agreement are as follows:

It is thus not in dispute that Early Termination occurred at 01.44 am New York time on 15^th September 2008, that the Nikkei Index fell after that date, and the effect on the net value of the four options was that their value rose as a result: and that as a result of the election and the definition sections, the Settlement Amount was in the event payable by the Defendant as Non-defaulting Party, and fell to be calculated by reference to the Market Quotation method and not the Loss method unless, by reference to the Settlement Amount provision:

Each party accuses the other of having a motive in taking the position it does. The Claimant submits that the Defendant is seeking to retain, and not pay over pursuant to the terms of the Agreement into which it entered, the profit it has gained by virtue of the increasing market, a suspicion on the Claimant’s behalf exacerbated by the fact that the Defendant did in fact carry out some hedging on September 15^th 2008 while the market was closed, and has not disclosed what occurred, a matter to which I shall return below. The Defendant on the other hand submits that the Claimant wishes to take advantage of a profit derived from the increased value of the options which they would never have obtained had there not been the event of default. Whatever the rival positions and motives, I am satisfied that I can and must simply construe the terms of the Agreement into which they entered, and calculate the consequences.

I have referred above to the Defendant’s calculation and payment of the sum which it alleged was due. This was explained, once the absence of any basis for it was queried by the Claimant, by reference to a schedule or spreadsheet said to contain three quotes, supplied with the Defendant’s email of 18^th June 2009. These purported to emanate from ABN Amro, Credit Suisse and Société Générale (“SocGen”). No other documents were supplied apart from this schedule which recorded in each case a spot rate of 12,214.76. Based upon the three quotes, and taking the median as apparently required by the Agreement, the figure was arrived at based upon which the Defendant made payment, as set out in paragraph 3 above.

As the Claimant’s witness Mr Singh explained, the Claimant company itself went into liquidation in December 2008 and Lehman staff had a very great deal to do (analysing thousands of transactions). It was only by February 2011 that the Claimant had had the opportunity to analyse the position of the Defendant. By an email dated 17^th February 2011 the Claimant wrote to point out that Automatic Early Termination had occurred on 15^th September 2008, and that it seemed that the quotations that the Defendant was representing it had received were dated from 12^th September 2008. It continued:

“If you agree that your market quotations were taken on the 12 ^th September 2008, could you then please send us a renewed calculation statement taking the early termination date as valuation date of the trades: i.e. 15 ^th September 2008. If prices cannot be obtained for the early termination date then you need to roll forward and take prices from the next business day.”

Mr Wilhelms of the Defendant sent a response on 18^th February 2011 which does not help the case which the Defendant was either then or now seeking to put forward:

“On what basis did your team come to the conclusion that we used quotes for Sept. 12 ^th ? In the spreadsheets we sent you, there is no date mentioned. However, in the first spreadsheet, we have stated that the termination date is Sept. 15 ^th . How could we have used quotes from Sept. 12 ^th , when on that date no one knew that LB was insolvent?”

Mr Singh’s response pointed out that the only information supplied in the schedule made it clear that the spot rate used was the closing level of the Nikkei Index on 12^th September 2008:

“Given that the valuation method to be used is ‘market quotation’ you need to calculate your loss as at 16-Sept-2008, given that the Japanese Stock Market was closed on 15-Sept-2008, the ISDA termination date.”

No further information or documentation has been supplied in relation to the figures supplied by ABN or Credit Suisse, nor is there any record of any request to either of them, nor any evidence given by the Defendant as to what they were asked for or who supplied what information and on what basis. So far as SocGen is concerned, there has simply been disclosed by the Defendant a document under the SG logo headed “Products Valuation for SAL Oppenh Crosspricing” with a considerable number of such “products” and in respect of the options in question a “valuation date” of 12^th September 2008 and the following note “The valuations presented in this document result from calculations of Société Générale at a given time, on the basis of market conditions at such time. Therefore, the prices or figures indicated in this document only have an indicative value and do not constitute in any manner a firm price offer from Société Générale”.

Evidence has been given on behalf of the Defendant, by Mr Wilhelms, then Senior Vice President, by Mr Busch, then Senior Option Trader, and Ms Wirth, then in the risk management department, all of whom attended and were cross-examined, while a Civil Evidence Act Statement was produced from a Mr Klein, who was then a Senior Trader. As I have said, none of them could give any evidence about the circumstances of the obtaining of the valuations from the three banks. It was not suggested that any of them amounted to quotations for a Replacement Transaction, nor were any of them able to say that they were either instructed to request or did request quotations as at any particular date or time. Mr Klein said that he did not personally contact any counterparties and denied any recollection of the spreadsheet, which Ms Wirth ascribed to him. Mr Wilhelms says that he told traders on 15 September to “close out the positions and to try to obtain quotations from reference market-makers”, and accepts that the spreadsheet suggests that the “quotations for the Options (with a valuation date of 12 ^th September 2008) may have been retrospective”.

In the course of cross-examination, Mr Busch sought to expand upon or clarify a statement which he had made in his very recent third witness statement so as to state that he had asked a broker for a quotation on the 16^th September 2008, to which he did not get an answer, but I do not accept this evidence, insofar as it amounted to any kind of positive assertion of an attempt by him to get a quotation and some kind of failure or refusal to give one. That apart, none of the factual witnesses for the Defendant suggested that they were unable to obtain a price quotation for a Replacement Transaction, or indeed that they ever tried to get one. What does seem to be the case, which only became clear in such third witness statement by Mr Busch, is that on 15^th September 2008 he carried out a transaction to hedge the delta risk, and shortly after 15^th September hedged residual risks, but does not recall the details of those trades or when the latter trades were made. Although there is no record of any request in writing for any price quotations (or valuations) on 15 or 16 September, there are some written requests by the Defendant to market-makers in subsequent days for a “valuation”, which were not fruitful because the requests were for backdated valuations and although up to date ‘fair values’ were given, it was said on one occasion that they could not be backdated.

The conclusions from this evidence are really hardly in doubt:

I heard evidence from two experts on behalf of the parties, Mr Mark Ekins for the Claimant, and Professor Uwe Wystup for the Defendant, to whom I shall refer further below. They were in agreement that, although the Nikkei Index was closed on 15 September 2008, such that a price quotation could not have been obtained on that day, it was more likely than not that a price quotation could have been obtained on 16 September 2008, had it been requested from market-makers, and I conclude that four such market-makers could have been asked and (at least) three price quotations could have been obtained on 16 September 2008.

I turn to the question of construction of the Agreement in this regard. It is clear that the chosen method, Market Quotation, imposed upon the Defendant, as Non-defaulting Party, the obligation to follow the course of seeking price quotations from four Reference Market-makers for an amount that would be paid “in consideration of an agreement between (the Non-defaulting Party) and the quoting Reference Market-maker to enter into a transaction (“the Replacement Transaction”) that would have the effect of preserving for such party the economic equivalent of any payment or delivery (. . . assuming the satisfaction of each applicable condition present) by the parties . . . in respect of such Terminated Transaction . . . that would, but for the occurrence of the relevant Early Termination Date, have been required after that date.”

It seems to me entirely plain that this is intended to be what was described in the course of argument as a “live quotation”, i.e. one capable of being taken up there and then. It is not a question of a historic valuation or an enquiry as to what the quotation would have been at an earlier date. If assistance in this regard were needed other than from the terms of the Agreement itself, I would gain it from the User’s Guide to the 1992 ISDA Master Agreements 1993 Edition issued by the Association itself, and (as both sides accepted) a significant part of the factual matrix, which provides as follows:

“Section 6 Early Termination

(4)(a) . . . The Market Quotation provided by the Reference Market-makers will be for the replacement cost of the relevant Terminated Transaction(s) . . .

In a significant change from the 1987 Agreement the definition of “Market Quotation” acknowledges the practical difficulties that may arise in obtaining quotations from Reference Market-makers on the relevant Early Termination Date and, accordingly, provides that a party making the determination of Market Quotation may request quotations “on or as soon as reasonably practicable after the relevant Early Termination Date” ”.

Notwithstanding a doubt raised in Henderson on Derivatives (2 ^nd Edition) at 19.11, (though he clearly (and for obvious reasons) has to accept that the wording of the Agreement “implies a firm quote”), the views expressed in Firth: Derivatives Law and Practice (2013) are in my judgment clear and persuasive:

“11.126

Quotations for replacement transactions

. . .

Each quotation is for the amount that would be paid to, or would have to be paid by, the determining party in consideration for a [replacement] transaction . . . This reflects the fact that, in a liquid market, the loss or gain accruing to the determining party as a result of the termination of the parties’ future rights and obligations will generally be the same as the replacement cost, since the determining party can replicate what has been lost by entering into a new transaction for the remaining term.

. . .

11.132

Historic Prices

Where quotations are not obtained on the Early Termination Date, the Reference Market-makers must provide quotations for the entry into of replacement transactions at the time the quotations are submitted. They are not required to backdate their quotations to the Early Termination Date so that they represent market prices that were prevailing on that date. This follows from the fact that firm quotations must be provided. If the Reference Market-maker is stating the price at which it is prepared to deal, this will necessarily reflect market rates prevailing at the time the quotation is provided. A statement of the price that would have been available on the Early Termination Date is not sufficient, as this is not a quotation but a hypothetical assessment of the price at which the Reference Market-maker (or a third party) would have been prepared to deal.

. . . The transactions quoted for must, in any event, be for a term commencing on the Early Termination Date and so the words “as of” are not intended to address this issue. Indeed, the requirement for the determining party to select “the day and time as of which those quotations are to be obtained” would be otiose if it always had to select the Early Termination Date. Instead, the fact that the quotations must be provided “as of” the Early Termination Date, or as soon as reasonably practicable thereafter, reflects the fact that the purpose of the Market Quotation provisions is to ascertain the replacement cost of the transactions at that time. It is the time at which the quotations have to be provided, therefore, that is critical”.

Professor Wystup accepted in cross-examination that market quotations for a replacement trade obtained on or as soon as reasonably practicable after the Early Termination Date would be “a perfect proxy for their value at the time”.

Such quotations are required to be obtained for a Replacement Transaction on or as soon as reasonably practicable after the Automatic Early Termination, which in this case was 01.44 am New York time (14.44 pm Tokyo time). According to the sentence which I have marked B in the Market Quotation provision, the quotation was to be sought from all four Reference Market-makers (to the extent reasonably practicable) as of the same day and time (without regard to different time zones), so that they would all be more or less contemporaneous, but on or as soon as reasonably practicable after the relevant Early Termination Date. It is clear from the passage in the User’s Guide quoted in paragraph 16 above that this was intended to resolve the previous difficulty of a Non-defaulting Party having to ask for such a quotation on the date of Automatic Early Termination (of which he may not have notice), and hence the addition of the provision “or as soon as reasonably practicable” after that date. The User’s Guide adds the words “Parties should be care in utilising this additional flexibility in Market Quotations, however, because any abuse of this flexibility could undermine its enforceability”. What is quite clear is that the price quotation, the live quotation for a Replacement Transaction so as to make the Non-defaulting Party ‘whole’, as Mr Ekins put it, is not one that is backdated to a time prior to the Early Termination Date. He persuasively explains that: “Since the Settlement Amount represents the option premium that [the non-defaulting party] did or could have received (or paid) by executing replacement trades as soon as reasonably practicable, the Non-defaulting Party will be ‘made whole’ regardless of the change in option price after the time of termination. Thus it will be put back into a position as if the early terminations had never occurred.” It is not a satisfaction of the Defendant’s obligation that the Defendant has, as Mr Forbes Smith put it in paragraph 5 of his closing submissions, “paid to LBF the most recent price that LBF could have received for the options prior to their termination”.

The sentence I have marked C in the Market Quotation provision provides that “the day and time as of which those quotations are to be obtained will be selected in good faith” by the Non-defaulting Party. But in my judgment this clearly does not permit the Defendant to choose a day or time, in good faith or otherwise, prior to the Early Termination Date, since what is required is an un-backdated quotation for a Replacement Transaction as of there and then. This is further made clear in the User’s Guide at Section G paragraph (1)(a), which states:-

“The primary disadvantage of Automatic Early Termination is that an Early Termination Date could occur without the knowledge of the Non-defaulting Party and, prior to the discovery by the Non-defaulting Party of the occurrence of such a termination, the relevant market could have moved significantly from its position on the Early Termination Date. To mitigate the consequences for a Non-defaulting Party, the 1992 Agreements determine payments on early termination as of the Early Termination Date or as soon thereafter as is reasonably practicable”.

Mr Forbes Smith in my judgment misreads this passage when he submits (paragraph 39(4) of his closing submissions) that this means that “it was always intended that the Non-defaulting Party would have the discretion in at least some cases to calculate the Settlement Amount as of the date and time of Automatic Early Termination, even although (ex hypothesi) this calculation would only in fact be made at a later time and therefore retrospectively.” In my judgment it clearly means that the quotation must be a ‘live’ quotation, and if such cannot be obtained at the time of the Early Termination then it can and should be obtained (live) as soon thereafter as is reasonably practicable.

The same point is made in a Statement by ISDA as of 16^th September 2008, and in Firth at 11.131. Mr Forbes Smith points to the words of Henderson at paragraph 19.6, in which he points out that “there is a significant advantage to being the determining party . . . you really do want to be the determining party”. But Henderson makes it quite clear that this is because it enables the party obtaining the quotation from the dealer to obtain one by reference to a bid/offer spread which may advantage him. This does not in any way support a suggestion that the Non-defaulting Party is able, contrary to the clear terms of the Agreement, to justify obtaining a valuation at a date prior to the Early Termination Date.

Mr Forbes Smith seeks to justify such a position by reference to a ‘principle’ which seems to originate from words in the judgment of Mance LJ in ANZ Banking v SocGen [2001] AER (Comm) 682 at paragraph 30 (“ANZ’s loss and SG’s gain fell to be valued ‘clean’”), and became referred to as the “value clean principle” by Arden LJ in Re: Lehman Brothers International (Europe) [2013] EWCA Civ 188.

This arose by way of a late amendment of the Defence. There is no doubt that, as was explained by Briggs J in Anthracite Rated Investments (Jersey) Ltd v Lehman Brothers Finance SA and Others [2011] 2 Lloyds Law Rep 538 at 116(2), as approved by Longmore LJ in Lomas v JFB Firth Rixson [2012] 2 AER (Comm) 1076 at 129 (dealing with Loss): “The identification of the Non-defaulting Party’s loss of bargain arising from the termination of the Derivative Transaction requires a “clean” rather than a “dirty” market valuation of the lost transaction. This means that the loss of bargain must be valued on an assumption that, but for termination, the transaction would have proceeded to a conclusion, and that all conditions to its full performance by both sides would have been satisfied, however improbable that assumption may be in the real world.”

Thus for the “value clean principle” the conditions precedent as to payment etc must be deemed to have been satisfied. Otherwise no Replacement Transaction can be entered into, as there would be nothing to transfer to the new party, or only a transaction capable of being immediately terminated. The quotation is to be given for the Replacement Transaction on that basis. But, as Firth in my judgment rightly explains, that is the limit of the value clean principle, such as it is:

“11.133

. . . The purpose of the valuation provisions is, so far as possible, to put the parties into the same position that they would be in if the relevant Termination Event had not occurred. To make commercial sense of the provision, therefore, the phrase “assuming the satisfaction of each applicable condition precedent” should be construed as meaning “assuming the satisfaction of each applicable condition precedent and the event(s) giving rise to it”. The existence of the Termination Event as well as the Early Termination Date must, therefore, be disregarded.”

Firth considered that what was being referred to by Briggs J and by Longmore LJ is not every single contractual obligation but (11.134) “merely anything that is specified as a condition precedent for the purposes of Section 2(a)(iii), together with the events giving rise to them.” However what is not the subject of any suggestion, whether in academic writing or in any decision of the courts, is what Mr Forbes Smith here contends for, namely that the “value clean principle” should be extended so that the option should be valued not only on the basis that the Event of Default and Termination have not occurred but on the basis that any effect on the market, if there has been any, should be disregarded or ruled out. He submits that the value that should be placed upon the option is that immediately antedating the Early Termination Date, when not only the Event of Default had not occurred but there had been no effect (if there was to be any) on the market. Hence he submits (in paragraph 38(3) of his closing submissions) that the value clean principle “directs the enquiry towards the price or value of the options as of the most recent practicable date before Early Termination. There is no reason why an assessment of the bid prices or values that would then have been applied cannot be made whether under Market Quotation or as necessary Loss. It is a fallacy that Market Quotation can only ever be firm and live, but even if that is correct the retrospective assessment of the loss of bargain as of Early Termination would occur in a quite straightforward manner under Loss”. Thus Mr Forbes Smith supports the payment made in this case by the Defendant (as set out above) as having been a “fair and reasonable assessment of the bid price that LBF would have received had LBF gone to the market to close the options out at the close of Friday 12 ^th September 2008” (paragraph 3 of his closing submissions) and “the most recent price that LBF could have received for the options prior to their termination” (paragraph 5 of those submissions).

I agree with Mr Bayfield that this proposition is unarguable:

This “perfect proxy” is plainly intended

The consequence is that I am satisfied that the Market Quotation formula required the Defendant to follow the course of seeking price quotations, and that there is no evidence that the Defendant did so, or could not have obtained three had it done so. Indeed both experts agree that, while it is more likely than not that no such price quotation could have been obtained on the 15^th September 2008, while the Tokyo market remained closed, such price quotations could have been obtained on the 16^th September 2008. Firth makes it clear, rightly in my judgment, at 11.131, that:

“If it is clear that quotations will not be available but it is reasonable to expect that the position will change in the near future, it would be impractical to expect the determining party to seek the quotations immediately. On the other hand, if there is no reasonable prospect of the market disruption being resolved in the near term, the correct conclusion should probably be that a Market Quotation cannot be determined (so that Loss should apply instead).”

Mr Forbes Smith accepted (paragraph 23 of his closing submissions) that whether or not Mr Busch’s evidence (to which I have referred in paragraph 12 above) is accepted, “it is common ground that [the Defendant] probably would not have obtained a quotation on or as of the 15 ^th if it had asked”. But I am entirely satisfied that they would have obtained at least three quotations, had they asked, on the 16^th September 2008. This First Gateway out of Market Quotation into Loss is not available to the Defendant.

As for the Second Gateway (referred to in paragraph 5 above), I am not satisfied that there was evidence from the Defendant that Mr Wilhelms, or whoever it was who made or would have made the determination, had a belief, reasonable or otherwise, that the Market Quotation course would not produce a commercially reasonable result. So far as documentary evidence is concerned, what we have are (pursuant to requests made, the nature of which, as I have said above, are not clear) valuations received, which were subsequently relied upon to support the calculation, and which Mr Wilhelms subsequently denied were based, which they plainly were, on the 12 September date: other requests for (backdated) valuations: and the evidence from Mr Busch that at the same time as he was giving instructions for quotations/valuations to be sought, he was taking steps to hedge the transactions in other ways. He does not even say that he was doing the latter because he formed the conclusion that to have followed the contractual route would not have produced commercially reasonable results.

Even in the absence of evidence as to the existence of such a reasonable belief, but if and insofar as it were possible to infer such a belief, it is worth repeating what that belief requires, namely a belief that the Market Quotation route would “not produce a commercially reasonable result”. In his closing submissions, Mr Forbes Smith seems to me to turn this on its head. In paragraphs 12 and 13 of his closing submissions he relates that “having entered into alternative trades on the 15 ^th , which to some extent offset the loss of the options from his books, Mr Busch had no need to enter into replacement options on the 16 ^th . . . It is submitted this was plainly a commercially reasonable trading response to the termination of the options.”

It is of course not a question as to whether an alternative route was reasonable, but that the Defendant had agreed to a contractual obligation, and has to show that complying with it would be unreasonable. Similarly, in paragraph 16 of his closing submissions, Mr Forbes Smith suggests that “it is submitted that it cannot possibly be maintained that [finding replacement options in due course which would retrospectively hedge his positions from the 15^th] was the only commercially reasonable trading decision open to him in the difficult situation in which he found himself . . . having become un-hedged on a day when the market for replacement options was closed. It was plainly reasonable for Mr Busch to make a trading decision to take immediate steps on the 15 ^th to put alternative hedging arrangements to some extent in place.” Again this wholly misapplies the terms of the Agreement, which require not that the parties do not need to follow the Market Quotation route if some other route would be reasonable, but to follow it unless that route is unreasonable.

An alternative way in which it seems to be put by the Defendant is that it was a reasonable judgment for it to make to value the transactions by reference to a date prior to the Event of Default - paragraph 25(1)(b) of the closing submissions and paragraph 38(3), quoted in paragraph 24 above (“the price or value of the options as of the most recent practicable date before Early Termination”). Insofar as (despite the evidence referred to in paragraphs 9 to 11 above) that is what the Defendant was doing, it seems to me clear that a choice by the Defendant to follow that route does not mean that the Market Quotation route produces a commercially unreasonable result.

In paragraph 44(2) of his closing submissions Mr Forbes Smith submits that the Defendant’s “decision to select the Early Termination Date as the Valuation date and time was made in good faith and was not irrational (and was objectively commercially reasonable, insofar as that is the test)”. Of course that is not the test, as I have said. The way that he puts it in paragraph 40(4) of his closing submissions appears to me to be intended as an ‘open sesame’ to the gateway to Loss, without having to fulfil either of the necessary requirements: “Where the Non-defaulting Party has reason to select Automatic Early Termination as the valuation time notwithstanding the closure of the markets on that time, such that it can make that selection in good faith and not irrationally, the effect is that . . . Market Quotation cannot be determined and Loss applies.”

The fact that Mr Busch chose to look into the possibility of alternative hedges and indeed to enter into some of them (wholly un-particularised), while also purporting to follow the Market Quotation route, cannot in my judgment begin to formulate a case that (irrespective of the absence of the necessary evidence of reasonable belief) it was thereby rendered unreasonable for the Defendant on the following day to comply with the contractual formula. If the Defendant decided not to enter into such Replacement Transactions, that would be their own choice, but the quantum would still be settled in such a way, so as to indemnify them against their loss of bargain. The previous day’s hedging activity may have made them better off or worse off (we shall never know, because of the lack of disclosure) but the taking of that course does not exclude the contractual operation of the Market Quotation formula.

What happened in this case does not begin to approximate to a case in which the Non-defaulting Party had a reasonable belief that Market Quotation would not produce a commercially reasonable result. Moore-Bick J described such as scenario in Peregrine Fixed Income Ltd (in liquidation) v Robinson Department Store Public Co Ltd [2000] Lloyd’s Rep (Bank) 304 at 38:

“The Non-defaulting Party is responsible for determining the Settlement Amount and the Agreement provides for the use of the Loss measure only if Market Quotation would not, in the reasonable belief of that party, produce a commercially reasonable result. The court cannot, therefore, simply substitute its own judgment of what is commercially reasonable for that of the Non-defaulting Party. However, I do think that the Agreement by necessary implication requires the Non-defaulting Party to consider whether the Market Quotation measure would produce a commercially reasonable result and to adopt the Loss measure instead if it does not believe that it would. Moreover, there is some protection for the Defaulting Party in the fact that the view taken by the Non-defaulting Party must be “reasonable”, that is, it must be based on reasonable grounds. That in turn requires that it must be one which can reasonably be held taking into account all the factors which ought properly be taken into account. In many cases there may well be room for different opinions, but in others it may be possible to say that a view one way or the other cannot reasonably be justified. If in such a case the Non-defaulting Party acted on the basis of a view of the matter which could not reasonably be justified, the Defaulting Party would in my view be entitled to relief on the basis that the adoption of the wrong measure in determining the Settlement Amount would amount to a breach of the Agreement.”

Mr Forbes Smith suggests that such reasonable belief should be tested by reference to Wednesbury reasonableness or rationality. I am satisfied that neither by reference to the unavailability of quotations on the 15 September nor by reference to the steps taken to hedge on the 15^th September nor by reference to a choice to value the options retrospectively as at close on the 12^th September can it be said that the Defendant had a belief, let alone a reasonable one, that the Market Quotation route could not produce a commercially reasonable result.

No gateway to Loss being available, therefore the Market Quotation formula applied, and the Defendant did not follow it. The Defendant still asserts that “Market Quotation can only practicably and properly be determined by reference to the prices as at the close of the 12 ^th ” (paragraph 44(1)(a) of the closing submissions) but I am satisfied that this does not accord with the Defendant’s contractual obligations. In the absence of the Defendant having performed those obligations, the court must plainly do its best to reconstruct what the Market Quotation route would have arrived at. It is clearly not open to the Defendant to assert that that cannot now be performed, when as the experts now agree so far as concerns the 16^th September, (being the following day after the transaction, the first day the Nikkei Index reopened) the quotations could have been obtained at the time. Mr Bayfield relies if necessary on the principle that a party cannot take advantage of his own wrong (e.g. Rede v Farr [1817] 6 M&S 121 at 125) but that does not seem to me to be necessary. The Defendant was in breach of contract (see Moore-Bick J in paragraph 34 above) and the Claimant must be put into the position he would have been in had the Defendant performed that contract. I must decide what sum would have been arrived at by way of net premium payable to the Defendant (and hence payable by the Defendant to the Claimant) had it performed its obligation and obtained at least three quotations for a replacement transaction on 16 September, as I am satisfied, not least from the agreement of the experts, would have been the case. It is in this regard that I turn to the assistance of the two experts.

Of the two experts I found Mr Ekins more reliable, persuasive and consistent. Professor Wystup appeared to me only with reluctance to move away from his initial support for the proposition that the best way of arriving at the Market Quotation formula was to base it on the spot rate at the close of Friday 12 September, before the Event of Default: and he had to correct his statement at paragraph 4.4 of his first report that “the spot rate from the close of 12 ^th September 2008 was still current at 1.44 am EDT on 15 ^th September 2008 . . . Indeed Bloomberg and Reuters give the same spot rate for the close of 12 ^th September 2008 and 15 ^th September 2008” by stating in a list of amendments produced at the hearing that he “meant that Bloomberg and Reuters record the same spot for 12 September [but] both [have] a missing [i.e. blank] entry for 15 ^th September 2008”. He also only with reluctance accepted that the three valuations referred to in paragraphs 7 and 10 above were not price quotations.

In the event however the persuasive force of Mr Ekins’ arguments led to a position in which the two experts ended in large part in agreement. There remained only two issues between them, the first being a dispute between two sets of data provided by a well established entity upon which both parties relied, namely Superderivatives. Professor Wystup relied on their Standard on-line data, Mr Ekins on their 2010 Premium data. I have no doubt at all that I should prefer Mr Ekins’ support of the latter. Mr Singh produced emails, which were not disputed, from Mr Ben-Zvi of Superderivatives, in which he explained that the Premium data constituted an upgrade on the on-line data since, though “based on the standard historical data, it is the most accurate available data because it has been subject to analysis by the SD Team” and that the standard data could be “changed with the aim of ensuring that the data properly reflects the fair market and includes additional premium data contributions”. Using, as I am satisfied I should, the Premium data, it is in the event agreed that the gross figure at the close of the market on 16 September would have been €6,549K.

The only remaining issue is as to whether it is appropriate to take that figure. What here has to be attempted to be reconstructed is what would have happened on the 16^th September. Mr Ekins takes 9 am and Professor Wystup 8.45 am as the opening of the Nikkei Index; but it is clear that neither party can sensibly suggest the opening as the appropriate time to take the price. Particularly in the confused period which would have been an inevitable result of the re-opening of such market, after a long weekend, including the Japanese holiday on the Monday during which LBHI’s Chapter 11 filing had occurred, it would plainly have taken time to obtain three or four price quotations from Market-makers, during the course of the day. For obvious reasons neither Mr Ekins nor Professor Wystup is able to give any other figure than that for the opening on the 16^th September, for which Mr Ekins gives the figure of €6,629K (but at 9 am) and Professor Wystup gives €6,208K (at 8.45 am): it is common ground that some €100K of the difference can be explained by the 15 minute interval, and the rest by way of disputed assessment of the volatilities.

Mr Ekins supports not that figure of €6,629K but the lower figure at close of 16^th September of €6,549K. He takes the view that the figure of €6,549K is the only safe figure to adopt, based upon verifiable and agreed data, and that any other attempted assessment, by way of trying to arrive at an estimated time at some stage between 9 am and close at 3 pm as being the time when the Market Quotation formula could have been settled, is too speculative. In that Professor Wystup agrees the close of the day figure of €6,549K, as set out above, and accepts that by 9 am his figure of €6,208K would have increased to some €6,308K, I am encouraged to try to estimate a figure of somewhere between that and €6,549K to attempt to arrive at a figure half way through the market day. I am satisfied however that such calculation is far too speculative and I should take the agreed close of market figure. I also reject the Defendant’s suggestion of arriving at some calculation, as Mr Forbes Smith invites me to do, by reference to the increase in the bid price between the close of the 12 September and the close of 16 September.

Accordingly I am satisfied that the Market Quotation formula would have led to a gross figure of €6,549K. It is common ground that this would lead, after accounting for credit for collateral etc, to a payment which should have been made of €2,963,081.18.

Notwithstanding my clear conclusions above that neither of the two gateways to Loss referred to in paragraph 5 above lay open, as I have found in paragraph 35, I turn to address Loss.

So far as Loss is concerned, by virtue of the definition set out in paragraph 4(v) above this is to be:

As to authorities:

Firth at 11.140 opines that “the objective is to ascertain what amount is necessary to put [the Non-defaulting] Party in the position it would have been in if the terminated transactions had been fully performed (i.e. on the assumption that no Event of Default would have occurred.)” At 11.141 Firth relies upon the passage in Anthracite which I have cited above to conclude that “where replacement transactions are readily available, it is considered that the cost of entering into such transactions on or about the Early Termination Date will generally provide the most reliable yardstick for measuring the Non-defaulting Party’s loss of bargain under the ISDA Master Agreement.”

There is little doubt that if the evidence had been adduced by the Defendant which was only for the first time hinted at in the very recent witness statement of Mr Busch (referred to in paragraph 12 above) and never supported by disclosure or particulars, as to the steps apparently taken by Mr Busch on 15 and or 16 September and/or later to hedge the transactions, that measure of damage might have been available as a quantification of the Defendant’s loss or profit. However, it was never put forward or evidenced, and the only calculation relied upon as to what would have been the claim had the Defendant been entitled to rely upon the Loss provision is by reference to the original June 2009 calculation (paragraphs 3, 7 and 9 above), Professor Wystup’s originally preferred valuation, based upon the close of the market at 12 September, 2½ days before Automatic Early Termination. Thus the only contractually available calculation of Loss (absent those hedging figures) is the Replacement Cost of the options (assuming compliance with the conditions precedent) at the earliest practicable date after Termination, being the next open day of the Nikkei Index: and so, just as Briggs J and the Court of Appeal above anticipated, the calculation of Loss in this case would have been “broadly similar” to Market Quotation.

The next issue that arises is the calculation of interest on the sum underpaid by the Defendant. Although Mr Forbes Smith referred to paragraph 19 of the judgment of Aikens J in ANZ Banking v Société Générale [1992] 2 AER (Comm) 625 to support a suggestion that interest should not be claimed as damages for breach of contract because the obligation of the parties was to prepare a calculation in good faith, I am entirely satisfied in this case, as I have set out in paragraph 35 above, that the failure to pay the correct sum, and to carry through the correct formula in order to arrive at the correct termination, was a breach of contract by the Defendant.

There is no issue about the running of interest at a Non-default Rate pursuant to contract from 16^th September 2008 to 15^th December 2008, when the correct sum should have been paid. In Schedule 1 to his closing submissions, Mr Bayfield calculates the underpayment on 14^th July 2009 as €1,420,847.14, namely €3,298,114.07 less what was paid, being €1,877,266.93: I do not understand there to be any material dispute as to these figures.

The issue relates to the Default Rate payable thereafter by the Defendant, being in respect of its obligation to pay the amounts properly due under Section 6(e). The provision as to the Default Rate, upon which the Claimant relies in respect of the period after 15^th December 2008 is that it “means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum”. The relevant evidence of Mr Singh was as follows:

“51.

As stated above, the Claimant is a subsidiary of LBHI.

52.

Since its inception, the Claimant sourced all of its funds from LBHI and has never sought to borrow externally. The Claimant’s cost of funding was therefore derived from LBHI’s cost of funding.

53.

LBHI’s cost of funding was calculated on the basis of its senior credit default swaps which, as at 12 ^th September 2008, were priced such that the one year rate was 14.427%. In turn, the Claimant’s cost of funding was also 14.427% above the relevant overnight or money market rate, e.g. EONIA (European Overnight Index Average) in the case of EUR denominated receivables.

54.

The Default Rate under the Master Agreement was the “rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum”. The Default Rate on EUR denominated receivables was therefore 15.427% per annum plus EONIA.”

No particular form of certificate is required, and the Claimant relies, (as indeed does the Defendant in relation to its certification of the Non-default Rate) upon various letters (and if necessary the pleadings). Mr Bayfield relies upon a decision of the United States District Court in Finance One Public Company Limited v Lehman Brothers Special Financing Inc [2003] WL 216 38214 of July 11^th 2003 in which Judge Motley said, in relation to a challenge that the rates certified were exaggerated, that “this argument, however, ignores the fact that the ISDA explicitly precludes an issue of fact contest with regard to the proper default rate with the phrases “without proof or evidence of any actual cost” and “as certified by it””.

Exactly in accordance with that provision, Mr Singh has not sought to evidence the actual borrowing of monies: indeed the Claimant company was in a temporary bankruptcy arrangement on 15^th December 2008, whereafter it has subsequently gone into liquidation. The Claimant’s case is simply that its parent was its only source of finance.

Mr Forbes Smith has taken two points. The first is that on the face of Mr Singh’s evidence he has said nothing about the position on 15^th December 2008, by when, as is common ground, the payment date arose and, as I have found, the Defendants were and continued thereafter to be in breach of contract. The cost of funding relied upon is that of the parent LBHI, as calculated at 12^th September 2008. By 16^th December 2008 neither the parent nor the Claimant were in a position to access that cost of funding. The second point he raises is by reference to a DIP (“Debtor in Possession”) Credit Agreement made available to the parent LBHI as of 17^th September 2008 by Barclays Bank Plc and Barclays Capital. Although there was no obligation on the lenders to lend to the former subsidiaries of the Debtor in Possession, and certainly no obligation on the Debtor in Possession to fund its former subsidiaries, it is not in dispute between the parties that the minimum lending rate of 11% per annum (compounded) would have been available to LBHI and might have been available to the Claimant.

Mr Bayfield submits that the Defendant can only go behind a certificate in the event of bad faith (which is plainly absent in this case): but in my judgment also if there is no evidence to support the certificate. Mr Forbes Smith submits that insofar as there has been a certificate (and there is no particular such document) it must be taken as a certificate as of 12^th September 2008, because of the basis which Mr Singh puts forward to explain it. He submits that if such certificate cannot be relied upon, then there is no route to any alternative recovery of a contractual Default Rate, and the Claimant would have to fall back, assuming that I find, as I have, a breach of contract in respect of Section 6(d)(ii), and thus Section 6(d), on statutory interest.

I am persuaded by Mr Forbes Smith that I cannot be satisfied that there has been a certificate of the default rate as at 15^th December 2008, given that the evidence, given very frankly by Mr Singh for the Claimant, is that the basis for any certificate is twofold, first that the rate is by reference to that available to LBHI, and secondly that that rate (as of 12 September) was 14.427%. However, I accept the evidence that on 15 December and thereafter there was an available source of funding to a company which was by then itself in liquidation. I am satisfied that the 11% rate is a “rate per annum equal to the cost to [the Claimant] if it were to fund . . . the relevant amount”. That leads to a rate of 12% per annum. That is recoverable at compound interest pursuant to the terms of Section 6(d)(ii) of the Agreement. If necessary I would in the alternative have awarded a similar rate by reference to the Court’s discretion in respect of statutory interest, as it seems to me that the Claimant would have been fortunate to have obtained funding at such a rate.

I shall ask counsel to calculate the sums due for which I shall give judgment for the Claimant in the light of these findings as to principal due under the Agreement and interest.