Socimer International Bank Ltd ((in Liquidation)) v Standard Bank London Ltd

Hearing dates: 11–14 December 2007

Introduction

This is large-scale litigation between two banks which, before the failure of one of them, had been trading together in the securities of emerging markets. When, shortly before the failing bank entered into liquidation, it was put into default, it owed its counter-party bank some US $24.5 million in so-called “Unpaid Amounts” in respect of a portfolio of forward sales of securities which it had bought. That was on 20 February 1998, the so-called termination date. Under the operative agreement between the banks, the “Standard Terms for Forward Sale Transactions” dated 8 November 1996 (the “agreement”), the creditor bank, the seller, had to “liquidate or retain” that portfolio (the “Designated Assets”) to satisfy the amount due to it. For these purposes it had to value the portfolio on the termination date. The critical sentence of the agreement, of which much more will have to be set out below, found in its clause 14(a)(bb), is this:

“The value of any Designated Assets liquidated or retained and any losses, expenses or costs arising out of the termination or the sale of the Designated Assets shall be determined on the date of termination by Seller.”

I shall call that the “valuation sentence”.

The seller bank, Standard Bank London Limited (“Standard”), did not in fact carry out a clause 14(a)(bb) valuation. Instead, it sold what it could over the ensuing months and (and in the case of one security) almost years, and credited the proceeds to the buyer bank, Socimer International Bank Limited (“Socimer”), in dribs and drabs. Until sale of any security, Socimer received no credit for it. In the meantime, Socimer had entered into liquidation on 3 March 1998, about two weeks after the contractual termination date. It was not until November 2002 that the liquidator's London solicitors, Messes Allen & Overy, wrote to Standard to complain that no clause 14(a)(bb) valuation had been carried out. That complaint led to the issue of these proceedings by Socimer's liquidator on 9 April 2003, in which, ignoring the amounts for which Standard had actually sold the portfolio and asserting other valuations as at the termination date, then alleged to be 3 March 1998, Socimer claimed a surplus of some $13.8 million as due to it. Standard, however, defended these proceedings on the basis that it had done what it ought to have done and was itself still owed money in the liquidation.

The issue of construction thrown up by this claim and defence, namely whether Standard should have carried out an immediate valuation and credited the resultant amount to Socimer, as Socimer maintained, or was obliged to credit Socimer only with what it had obtained from sales in its discretion, as Standard maintained, was decided as a preliminary issue in the litigation, by the judgment of Mr Justice Cooke dated 11 May 2005. He held in favour of Socimer's submissions on the construction of clause 14(a)(bb). He concluded [2004] EWHC 1041 (Comm) at para 34 that –

“I hold therefore that, on the proper construction of the Agreement, Standard was obliged to value the Designated Assets as at the date of termination of the Agreement for the purpose of clause 14(a) of the Agreement and to bring into account the value as assessed as a credit against the amounts payable to Standard under the Agreement and Trade Confirmations and was not entitled to bring into account the actual proceeds of sale of those Designated Assets for the purpose of its continuing obligations to Socimer under that clause.”

For the purpose of that decision, Cooke J had accepted the submissions of Mr Richard Millett QC on behalf of Socimer that “Standard was given a wide discretion in relation to valuation” at para 16. Thus the judge expressed that discretion as follows:

“32. There is no difficulty in this from Standard's point of view since the valuation exercise lies entirely in its hands as at the date of termination. If the value on the screens, or the information available from other sources, indicates a value which it regards as too high because of the nature of the Designated Assets and the difficulty in liquidation, Standard can take such matters into account, and provided that the assessment is in good faith and is not challengeable on any other basis, it can value the assets at a lower figure. If the assets are truly liquid then although it may be impracticable for Standard to notify or consult Socimer before liquidating, it can sell and the value which it would ordinarily attribute, in good faith, to the Designated Assets would be the value actually realised. If the assets appear completely illiquid, then in theory a zero valuation is possible.”

Assisted as they were in this way by Cooke J, and despite a mediation, the parties were nevertheless unable to settle for themselves the resultant question of valuation of the portfolio. Indeed, they remained over $14 million apart when default interest was taken into account. Accordingly, the valuation issues were addressed at a witness trial in June and July 2005 before Mrs Justice Gloster. Before her, Socimer now submitted that Standard no longer had a “wide discretion” in valuing, but was bound (to take reasonable care) to find the true market value. That was put as a matter of contractual implication, or alternatively as a matter of equity by analogy with the duties of a mortgagee with a power of sale. It was submitted on behalf of Standard, on the other hand, that the answer depended not on what a reasonable, objective, valuation should have produced, but on the valuation which Standard itself would have performed, if it had been alive at the time to the true meaning of its contract. Indeed, it was also said that Socimer's “should have” case (as contrasted with Standard's “would have” case) was not open to it. Gloster J, however, agreed with Socimer's submissions. For good measure she rejected the evidence of Standard's factual witnesses on valuation, and, founding herself in the main on Socimer's expert witnesses, produced a valuation greatly in excess of Standard's case. Most of that difference, however, was made up on two particular securities, a corporate bond known as Socma DRs, where the judge's valuation was $3,000,000 as against Standard's valuation of $500,000; and a species of Brazilian sovereign debt known as Brazilian TDA-Es, where the valuation was $8,500,000, as against Standard's valuation of $3,500,000. That created a difference of $7,500,000 (plus consequential interest) on those two assets alone.

Gloster J also found in favour of another, major, aspect of Socimer's case, which was premised on the assertion that even if Standard's valuations had been otherwise accepted, but Standard had also credited to the “Unpaid Amounts” various cross-credits owed to Socimer deriving from other transactions between the parties, amounting to some $4,000,000, then Standard would have found itself with surplus assets in its hands and would have returned to Socimer the Socma DRs as having been fully paid for. On that basis, referred to at trial as Socimer's Socma Primary Case, the judge agreed with Socimer that the value of the Socma DRs in Socimer's hands was not merely $3,000,000, but their amortised face value namely $8,424,96Accordingly, the judge ended up giving judgment for Socimer in the sum of $11,686,295.43, plus interest (at US Prime) in the sum of $3,528,936.59, in the total sum of $15,215,232.02.

Standard now appeals, with the leave of Thomas LJ. Of a number of issues on appeal, as to which there has even been some dispute as to whether or not permission to appeal has been granted, we have heard only two, or perhaps three, as we shall explain. The two issues which we have heard debated in full, for which it is common ground permission to appeal has been granted, relate to the two main matters of decision referred to above, namely:

(1) whether Standard's valuation obligation was to carry out a reasonable, objective, valuation (Socimer's “should have” case) or only the honest but otherwise subjective valuation which Standard would have carried out if it had been aware of its contractual obligation to value (Standard's “would have” case); and

(2) whether other credits would, could or should have been set off immediately against the “Unpaid Amounts” so that, even on Standard's valuations, Standard would have had surplus assets.

The importance of issue 1 is that the judge only made findings of valuation on the basis of an objective valuation. The importance of issue 2 is that it is common ground that it is only if it is answered as the judge answered it that Socimer is able to advance its Socma Primary Case. Issue 1 may be described, loosely, as the “implied term” issue, since Socimer accepts that the objective valuation for which it contends, so far successfully, needs to be introduced by implication. Issue 2 may be described as the “Unpaid Amounts” issue, since its purpose is to define the total of the Unpaid Amounts to which Standard's valuation needs to be...