Lehman Brothers Special Financing Inc. v National Power Corporation and another [2018] EWHC 487 (Comm)(12 March 2018)

/ / English Contract Law, 2019, News


The claimant in this matter was Lehman Brothers Special Financing Inc. (the “Claimant”) and the defendant was National Power Corporation (the “First Defendant”). The First Defendant’s claim was subsequently transferred to the First Defendant’s successor, Power Sector Assets And Liabilities Management Corp (the “Second Defendant”). The First and Second Defendant were wholly owned and controlled by the government of the Republic of the Philippines.

The First Defendant entered into a United States Dollar (“USD”)/Philippine Peso (“PHP”) forward currency swap with the Claimant, as part of a currency hedging protection in respect of bonds which has been issued by the First Defendant in the value of USD300 million, and which would mature in 2028 (the “LBSF Transaction”). The LBSF Transaction was concluded under a standard form 2002 ISDA Master Agreement (the “2002 ISDA Agreement”).

In terms of the LBSF Transaction:

1. the Claimant agreed to pay USD100 million to the First Defendant in 2028 and the First Defendant agreed to pay the Claimant the USD equivalent of approximately PHP 4.4 billion in 2028 (PHP 4.4 billion being the PHP equivalent of USD100 million when the LBSF Transaction was entered into);

2. a fixed rate premium was payable semi-annually by the First Defendant to the Claimant; and

3. an option was granted by the Claimant to the First Defendant in terms of which the First Defendant could elect to pay USD1 million on 15 May 2008 instead of paying the US Dollar equivalent of PHP 4.5 billion in 2028 (the “Option”). The First Defendant did not however exercise the Option, and the Option subsequently lapsed.

In 2008, the Claimant filed for bankruptcy relief in the United States, which constituted various events of default under the LBSF Transaction. As a result of the Claimant’s default, on 17 October 2008, the First Respondent served notice of early termination in respect of the LBSF Transaction, designating 3 November 2008 as the “early termination date” (the “Early Termination Date”).

In terms of the 2002 ISDA Agreement, the First Defendant’s obligation as the non-defaulting party, was to provide the “Close out Amount” which was a calculation statement setting out the amount which was due by or owed to each of the parties. For the First Defendant to do so, it had to use “commercially reasonable procedures in order to produce a commercially reasonable result”.

The First Defendant, wishing to reinstate the currency hedge it had lost as a result of terminating the LBSF Transaction, solicited indicative quotes for replacement transactions from various international investment banks. On 14 November 2008, the First Defendant entered into a replacement transaction with UBS Group AG (the “UBS Replacement Transaction”), based on a firm quotation which it received from UBS Group AG, one week prior.

On 26 January 2009, the First Defendant demanded approximately USD3,400,00.00 from the Claimant, based on the cost of the UBS Replacement Transaction. The Claimant contended that “commercially reasonable procedures” were not used to arrive at this figure and that it was not a commercially reasonable result. Instead, the Claimant contended that the First Defendant owed it approximately USD12,800,00.00.

On 27 October 2016, nearly eight years after the First Defendant had filed its initial determination of the Close out Amount, the First Defendant served what it labelled as a “revised calculation statement” on the Claimant. The First Defendant demanded an increased figure of approximately USD10,700,00.00, based on the three indicative quotations it had received on the Early Termination Date from the same international investment banks.

The First Defendant argued that its initial determination based on the UBS Replacement Transaction was invalid based on, inter alia, the fact that it had failed to account for a portion of the semi-annual premium payments that had accrued under the LBSF Transaction (the “Accrued Amount”). According to the First Defendant, this meant that there had not yet been a valid determination of the Close out Amount, and accordingly, in terms of the LBSF Transaction, the First Defendant was entitled to provide the Claimant with a new and revised determination.

Due to the fact that this case raised issues relating to the interpretation of the 2002 ISDA Agreement, which was of general market importance, the case was listed on the Financial List of the United Kingdom.


The two main issues of principle which the High Court of Justice Court, Business and Property Courts of England and Wales (Commercial Court) (the “Court”) needed to determine were as follows:

1. whether a party was entitled to recalculate the determination of the Close out Amount if the initial determination was claimed by that party to have been invalid? and

2. how the court should construe the requirement of using a “commercially reasonable procedures” to produce a “commercially reasonable result” in the determination of the Close out Amount, and what the consequences of a non-compliant determination would be?

In terms of the first issue, the First Defendant argued that the determination of the initial Close out Amount was invalid and that the Court needed to rely on its revised and more favorable determination, served nearly eight years after the Early Termination Date. The Court rejected this argument and stated that on a true interpretation of the 2002 ISDA Agreement, the early termination and the determination of the Close out Amount were significant contractual events which affected the relationship between the parties and which were not reversible (save by agreement or by way of an order of court).

Accordingly, if there had been an error in the First Defendant’s determination, and in the absence of an agreement between the parties, it would have been for the Court (rather than the determining party) to declare what the Close out Amount would be.

In terms of the second issue, in instances where “reasonableness” is required by a contract when exercising a power and/or discretion, authorities consider two different standards which could potentially apply:

a) “Rationality”: under this standard, the only requirement is the absence of arbitrariness, capriciousness, perversity or irrationality on the part of the decision maker. In other words, a decision will fall short of this standard only if it was a decision which no reasonable decision-maker would have reached; and

b) “Objective reasonableness”: this standard is analogous to that which is applied where a party is subject to a duty to take reasonable care and where the concept of reasonableness is assessed with reference to a purely objective criterion. Objective reasonableness is a higher standard than mere rationality.

The First Defendant argued that the references in the definition of Close out Amount to “commercially reasonable procedures” and a “commercially reasonable result” required only that the determining party use rational procedures to produce a rational result. However, in this regard, a higher objective standard of reasonableness, which is analogous to the duty to take reasonable care, should be applied to the First Defendant’s decision making.

The Court held that the First Defendant’s original determination, based on the UBS Replacement Transaction, did, in fact, comply with the requirements under the definition of Close out Amount in the 2002 ISDA Agreement, save for two errors in the original determination. The Court held that the aforementioned errors in the original determination were the fact that the First Defendant did not account for the Accrued Amount and included the value of the Option, despite the Option having lapsed prior to the Claimant’s default, under the LBSF Transaction.

In the circumstances, the Close out Amount would have been the First Defendant’s original determination, which was based on the cost of the UBS Replacement Transaction, with the appropriate corrections in respect of the abovementioned two errors.


This case confirms that a non-defaulting party, when calculating a Close out Amount following an event of default under the 2002 ISDA Agreement, is required to act objectively reasonably and to produce an objectively commercially reasonable result, rather than just being required to act “rationally”.

Practically, although there might be a range of possible valuations, it is not for the non-defaulting party to elect which valuation of the Close out Amount best suits them. It is an obligation of the non-defaulting party to determine the Close out Amount.

Written by Michal Asoulin and  Simone Jansen van Rensburg

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