Lehman Brothers Special Financing Inc. v (1) National Power Corporation
| Jurisdiction | England & Wales |
| Judge | Mr Justice Robin Knowles |
| Judgment Date | 12 March 2018 |
| Neutral Citation | [2018] EWHC 487 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: FL-2017-000011 |
| Date | 12 March 2018 |
[2018] EWHC 487 (Comm)
Mr Justice Robin Knowles CBE
Case No: FL-2017-000011
IN THE HIGH COURT OF JUSTICE
THE BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
COMMERCIAL COURT (QBD)
FINANCIAL LIST
Royal Courts of Justice
Strand, London, WC2A 2LL
Sa'ad Hossain QC and Joyce Arnold (instructed by Weil, Gotshal & Manges (London) LLP) for the Claimant
Jasbir Dhillon QC and Geoffrey Kuehne (instructed by Pinsent Masons LLP) for the Defendants
Hearing dates: 4–7, 12–13 December 2017
Introduction
This case involves a return to the subject of calculation of Close-out Amount under the 2002 ISDA (International Swaps and Derivatives Association, Inc.) Master Agreement. Is it open to a Determining Party to remake a determination of Close-out Amount? Did the change in wording from “reasonably determines in good faith” in the 1992 ISDA Master Agreement to “act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result” in the 2002 ISDA Master Agreement have the effect of replacing a requirement for a rational decision with a requirement for an objectively reasonable decision?
The particular transaction (“the LBSF Transaction”) was a principal-only US dollar (US$)/Philippine peso (PHP) forward currency swap. It was made on 18 July 2007 under a 2002 ISDA Master Agreement dated as of 21 December 2016 and entered into on 5 April 2007 with accompanying Schedule.
Under the LBSF Transaction the Claimant (“LBSF”) agreed to pay US$100 million to the First Defendant (“NPC”) in 2028, and NPC agreed to pay LBSF the US$ equivalent of PHP 4.4788 billion in 2028 (PHP 4.4788 billion being the PHP equivalent of US$100 million when the LBSF Transaction was entered into). Semi-annual coupons were payable at a fixed rate by NPC to LBSF. An option (“the Option”) was granted by LBSF to NPC under which NPC could choose to pay US$1 million on 15 May 2008 instead of paying the US$ equivalent of PHP 4.4788 billion in 2028.
NPC did not exercise the Option, although in May 2008 NPC had exercised options in two swaps with other counterparties.
Lehman Brothers collapsed in September 2008. LBSF itself filed for bankruptcy relief in the United States under Chapter 11 on 3 October 2008. These developments constituted events of default under the LBSF Transaction. The LBSF Transaction was terminated early in accordance with its terms, NPC serving notice of early termination on 17 October 2008. The designated contractual “Early Termination Date” was 3 November 2008.
It is common ground that it was then for NPC to determine the Close-out Amount payable where there has been early termination, and to do so using “commercially reasonable procedures in order to produce a commercially reasonable result”.
In due course, on 26 January 2009, NPC demanded US$3,461,590.93, enclosing its calculations by way of an annex. LBSF contends that commercially reasonable procedures were not used to arrive at this figure and that it is not a commercially reasonable result. It is a feature of the case that NPC too wishes to ignore the sum demanded on 26 January 2009.
There is a wide disparity between the parties over what is or would be a commercially reasonable result. At one end of a spectrum NPC and its successor, the Second Defendant (“PSALM”), say that LBSF owes US$10,778,943 to NPC/PSALM, before interest. At the other end of the spectrum LBSF says that NPC/PSALM owes US$12,826,887 to LBSF, before interest. There are various other points on the spectrum. Different approaches have been urged, including through experts called by the parties.
The LBSF Transaction
NPC is owned and controlled by the government of the Republic of the Philippines. I was told in evidence of a board of NPC that comprised members of the Republic's Cabinet.
NPC had issued US$300 million of bonds maturing in 2028. The LBSF Transaction was part of a hedging strategy in connection with the bond issue. Its purposes included, broadly, to help provide to NPC, subject to the credit risk represented by LBSF, some protection against the risk of devaluation of the PHP and some clarity over the cost of paying US$ on the maturity of the bonds. It was, according to Mr Exequiel Cempron, manager of the capital markets division at PSALM, the first of its kind for a government corporation like NPC in the Republic.
The elements of the LBSF Transaction are summarised above. As set out in the relevant confirmation they:
a. required LBSF to pay NPC US$100 million 15 Business Days before 15 May 2028 (“the Termination Date”);
b. required NPC to pay LBSF on the Termination Date the amount of US$ that could be purchased for PHP 4.4788 billion two Business Days prior to the Termination Date (“Party A Exchange Amount 2”);
c. by the Option, allowed NPC to remove the obligation to pay Party A Exchange Amount 2 in 2028 by giving notice on 15 May 2008 to exercise the Option and paying US$1 million within two Business Days after that;
d. required NPC to pay LBSF a fixed rate of 2.687% of US$ 100 million per year, in semi-annual coupons from 15 November 2007 to 15 May 2026 inclusive.
NPC had the right to transfer its rights and obligations under the LBSF Transaction to PSALM. PSALM too is owned and controlled by the government of the Republic of the Philippines. The boards of NPC and PSALM have more recently passed resolutions confirming that NPC's rights and liabilities in respect of the LBSF Transaction have been transferred to PSALM. LBSF has accepted that PSALM is the correct defendant to the proceedings. For ease of reference I shall generally continue to use the abbreviation NPC in the remainder of this judgment to apply to NPC, PSALM or both.
The terms of the LBSF Transaction
Section 6 of the 2002 ISDA Master Agreement includes the following provisions:
“(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. …
…
(c) Effect of Designation.
(i) If notice designating an Early Termination Date is given under Section 6(a) …, the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing.
(ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 9(h)(i) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date will be determined pursuant to Sections 6(e) and 9(h)(ii).
(d) Calculations; Payment Date.
(i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations), (2) specifying (except where there are two Affected Parties) any Early Termination Amount [defined below] payable and (3) giving written details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation or market data obtained in determining a Close-out Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of the existence and accuracy of such quotation or market data.
(ii) Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable (1) on the day on which notice of the amount payable is effective in the case of an Early Payment Date which is designated or occurs as a result of an Event of Default …
(e) Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the “Early Termination Amount”) will be determined pursuant to this Section 6(e) and will be subject to Section 6(f).
(i) Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non-defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party.
…
(v) Pre-Estimate. The parties agree that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and, except as otherwise provided in this Agreement, neither party will be entitled to...
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