The defendants entered into a number of single stock derivative transactions with the claimant, governed by ISDA 1992 Master Agreement (Multicurrency—Cross Border). The claimant’s parent company filed for bankruptcy protection in the United States of America, which gave rise to the automatic early termination of the transactions under the ISDA master agreements. The defendants served a determination of their loss upon the claimant. The claimant brought a claim challenging the calculation of loss and claiming that it was not binding on the basis that the defendants had not determined their loss in accordance with the requirements of the ISDA master agreements. The defendants relied upon what they contended was the deliberate choice of wording in section 14 of the 1992 ISDA master agreements not to provide an exhaustive definition or to prescribe a specific methodology for determining loss under the agreement, but instead simply to provide that loss was what the non-defaulting party “reasonably determines in good faith to be its total losses and costs … in connection with the terminated transactions”.
On the claim—
Held, claim allowed. While the ISDA master agreement was designed to give the non-defaulting party discretion and flexibility in selecting the method for calculating its loss, subject to such methodology being reasonable and in good faith, the non-defaulting party did not have a similar freedom to decide what matters could be included within the meaning of loss, or to decide what that expression actually meant. Therefore, whilst the defendants had latitude and flexibility in choosing the method by which they should determine their loss, provided that they did so in good faith and reasonably, it was not up to them to decide for themselves what loss meant under the ISDA master agreements. The defendants’ loss calculation was not in accordance with the close-out provisions of the master agreements, as incorporated into the transactions, and that, accordingly it was not binding upon the claimant (paras 175, 179, 274).
Lehman Brothers International (Europe) v Exxonmobil Financial Services BV [2016] EWHC 2699 (Comm) applied.
David Wolfson QC and Edmund King (instructed by Watson Farley & Williams llp) for the claimant.
Robin Dicker QC and Henry Phillips (instructed by Clifford Chance llp) for the defendants.