Westlb AG (Appellant/Claimant) v Nomura Bank International Plc and Another (Respondents/Defendants)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix,Lord Justice Etherton,Lord Justice Patten |
| Judgment Date | 24 April 2012 |
| Neutral Citation | [2012] EWCA Civ 495 |
| Date | 24 April 2012 |
| Docket Number | Case No: A3/2010/2801 |
| Court | Court of Appeal (Civil Division) |
[2012] EWCA Civ 495
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, QUEEN'S BENCH DIVISION
MR JUSTICE TEARE
2009 FOLIO 497
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Rix
Lord Justice Etherton
and
Lord Justice Patten
Case No: A3/2010/2801
Mr Jonathan Nash QC and Mr Ian Wilson (instructed by Macfarlanes LLP) for the Appellant/Claimant
Mr Richard Handyside QC and Mr Edward Levey (instructed by Ashurst LLP) for the Respondents/Defendants
Hearing dates : Wednesday 30 th November 2011
On 15 September 2008 Lehman Brothers in New York went into bankruptcy and world financial markets, which had been in a fragile state for more than a year, went into free fall. In the liquidity crisis which quickly ensued, the so-called "credit crunch", values became entirely distorted. The best of shares, because they could at least be freely traded, suffered egregious mark-downs in price as their holders strived for liquidity. The worst of shares suffered even more horrendously. Banks, whose transactions had become hugely leveraged and which were in the very crucible of the credit crunch, saw their share price cut to ribbons as they struggled for survival.
This was the market in which a basket of exotic stocks or shares held by a fund, the Global Opportunities Fund (the "Fund"), fell to be valued as of a date falling 20 business days prior to the maturity date of financial instruments which represented that Fund, ie 20 business days prior to 28 October 2008, or 30 September 2008. The portfolio of stocks and shares was invested in mainly private companies variously domiciled in Indonesia, the Bahamas, British Virgin Islands, Jersey or Singapore and which were not quoted or traded on any established market. Three shares only were those of quoted Indonesian companies, one of which was an Indonesian bank, PT Bank Century, which in November 2008 had to be taken over by the Indonesian authorities. These stocks and shares held by the Fund were themselves represented by share units in the Fund itself (the "Shares"). Thus each Share in the fund (there were 195,000 in all, described as "participating redeemable preference shares" of a nominal value of $1 each) represented an aliquot slice of the portfolio of assets held within the Fund.
That was a bad time to have to value the portfolio of assets within the Fund, but the issue in this litigation is nevertheless as to its proper valuation. The judge, Teare J, found that the Fund would have been valued as of 30 September 2008 as worthless, that is to say worth nothing or at any rate less than the sum of US $1,722,135 which was the fee to which the Fund was then subject.
This appeal is brought by WestLB AG, a bank which, by reason of its own error, had left itself, in place of the Fund's investors, exposed to the risk represented by the Fund. The respondents are two companies within the Nomura Group. Nomura Bank International Plc ("Nomura Bank") and its affiliate "Nomura International Plc" ("Nomura International"). Nomura Bank was the issuer of financial instruments which represented the Fund, and these instruments were described as Variable Redemption Notes (the "Notes"). As such, Nomura Bank ought also to have been insulated from exposure to the risk constituted by the Fund. Nomura International is a broker-dealer within the Nomura Group, but its role for present purposes was limited to that of "Calculation Agent" for the purposes of the Notes. The judge explained: Nomura Bank had no employees other than its statutory directors, but had an established note issuance programme; Nomura International was calculation agent because of its status as a broker-dealer within the group.
If everything had worked as it was supposed to have worked, the parties to this litigation ought to have had no exposure to the risk constituted by the Fund and represented by the Notes. That risk ought to have been borne by the investors in the Fund. It is unnecessary to explain the complex mechanisms and packaging of these financial instruments, for which readers can consult the judgment of Teare J, [2010] EWHC 2683 (Comm). The position was, however, that in error WestLB, instead of delivering the Notes to the end investors, paid their nominal value, $26 million, to those investors and retained the Notes. Thereupon, Nomura Bank, which had been entitled to make physical delivery of the portfolio of shares in the Fund to the holders of the Notes, in error served its notice for such physical delivery too late. It therefore became important to WestLB to recover from Nomura Bank the value of the Fund represented by the Notes, on the Notes' maturity. The question is, what was the value of the Fund?
WestLB has at various times in this litigation put forward five valuations. The first (1) is based on a figure which WestLB says that Nomura Bank had actually, albeit implicitly, used in a formal notice to it, to value the Fund. That would produce, it says, a binding valuation of $22,307,715. This is WestLB's "first case". The second, third and fourth valuations represent alternatives at which WestLB submits that Nomura Bank would have valued the Fund if it had carried out a rational valuation as of 30 September 2008. This is what the judge described as WestLB's "second case". Thus the second (2) is a valuation which is premised on a redemption figure of $123.23 per share unit in the Fund, published by MITCO (Mauritius International Trust Company Limited), the Fund's administrator. That figure stated (or purported to state) the share unit's Net Asset Value (or NAV) as at 31 August 2008 and had been published (as amended) by MITCO on 17 October 2008. Such a figure, when allowance was made for the fee due to Nomura Bank of $1,722,135, would again produce a valuation for the Fund of $22,307,715. The third valuation (3) is based on MITCO's published NAV for 30 September 2008, which was certified on 12 November 2008 and amended on 9 December 2008. That figure was $121.84 amended to $112.57. The fourth valuation (4) was a "discounted value" for the Fund, starting from the published NAVs, but purporting to take into account the hypothesis that the supposed redemption figure may not have been available from the Fund and that markets would provide only some realistic portion of the published NAV. That valuation was left at large, but was submitted to be likely to be substantial. It was accepted that allowance would again have to be made for the fee of $1,722,135. The fifth valuation (5) was a residual "hope value" of 5%, but such a valuation would produce less even than the fee, and so the fifth valuation was not pursued at appeal.
The respondents submit that the judge was right to reject all these alternatives, on the facts.
The terms of the Notes
The material terms of the Notes were set out in the Schedule to a "Pricing Supplement", and described as "Special Conditions". These were as follows:
"1. Redemption Amount
Subject to Special Condition 3 (Issuer's Physical Delivery Option), the Noteholder shall receive, on the Maturity Date a pro rata share (determined on the date falling 20 Business Days prior to the Maturity Date by reference to the percentage which the Principal Amount represents of the Aggregate Principal Amount) (the "Pro Rata Share") of the NAV of the Reference Fund minus the Funding (the "Redemption Amount"), as determined by the Calculation Agent in its sole and absolute discretion.
2. Determination in respect of the Reference Fund
The determination of the NAV of the Reference Fund by the Calculation Agent shall (in the absence of manifest error or fraud) be final and binding upon all parties. A certificate of the Calculation Agent as to the NAV of the Reference Fund shall be conclusive and binding as between the Issuer and the bearer hereof.
If the Calculation Agent fails at any time for any reason to establish the NAV of the Reference Fund or to make any other determination or calculation required pursuant to these Conditions, the Issuer shall do so and such determination or calculation shall be deemed to have been made by the Calculation Agent. In doing so, the Issuer shall apply the provisions of these Special Conditions, with any necessary consequential amendments, to the extent that, in its opinion, it can do so, and, in all other respects, it shall do so in such manner as it shall deem fair and reasonable in all the circumstances.
None of the Issuer or the Calculation Agent shall have any liability to the Noteholder, and the Noteholder shall not have any recourse to the Issuer or the Calculation Agent, in respect or on the basis of the performance in respect of the Reference Fund, or any assets or instruments to which the Reference Fund, or any assets or instruments to which the Reference Fund is linked, or any determination of the NAV of the Reference Fund.
3. Issuer's Physical Delivery Option
a) Physical Delivery Option: If at any time a Redemption Amount becomes payable to the Noteholder, the Issuer shall have the option (the " Issuer's Physical Delivery Option"), instead of paying such amount to deliver to the Noteholder on the Maturity Date a Pro Rata Share of either (i) the underlying assets representing the Reference Fund; or such lesser amount of underlying assets representing the Reference Fund as the Issuer shall determine in its sole discretion together with an amount in U.S.$ which in aggregate equals the value of the Redemption Amount to which the Noteholder would otherwise be...
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