LBI EHF v Raiffeisen Bank International AG, Court of Appeal - Civil Division, April 11, 2018, [2018] EWCA Civ 719

Resolution Date:April 11, 2018
Issuing Organization:Civil Division
Actores:LBI EHF v Raiffeisen Bank International AG

Case No: A3/2017/1023

Neutral Citation Number: [2018] EWCA Civ 719






[2017] EWHC 522 (Comm)

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 11/04/2018






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Benjamin Pilling QC and Edward Jones (instructed by Stewarts Law LLP) for the Appellant

Guy Philipps QC and Richard Power (instructed by Stephenson Harwood LLP) for the Respondent

Hearing date: 27 March 2018

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JudgmentLord Justice Flaux:


  1. This appeal against the Order dated 20 March 2017 of Robin Knowles J sitting in the Commercial Court concerns the meaning of ``fair market value'' in the Global Master Repurchase Agreement dated 30 August 2007 between the parties.

    Factual background

  2. The appellant, the bank formerly known as Landsbanki Islands hf., failed and went into receivership on 7 October 2008. At that time it had open positions on a number of trades with the respondent bank. The present appeal is concerned only with eleven open positions on so-called ``repo'' trades made on the terms of the Global Master Repurchase Agreement 2000 edition (``GMRA''). ``Repo'' transactions are regarded as in substance a form of secured lending under which securities are provided as collateral for a loan. In effect, the appellant borrower sold a portfolio of bonds to the respondent purchaser and agreed to repurchase them at a later date at a pre-determined price which represented repayment of the principal plus interest.

  3. The failure and insolvency of the appellant constituted an Event of Default under paragraph 10 of the GMRA. The respondent served Default Notices on the appellant the following day, 8 October 2008. In simple terms the GMRA then provided that the Defaulting Party, here the appellant, was to pay the non-Defaulting Party, the respondent, the agreed Repurchase Price for the securities minus the Default Market Value of Equivalent Securities. Sub-paragraph 10(e) provides for a number of methods of ascertainment of the Default Market Value, depending upon whether the non-Defaulting Party has served a Default Valuation Notice by the Default Valuation Time, defined as the close of business on the fifth dealing day after the day on which the Event of Default occurred. The Default Valuation Time in this case was 15 October 2008.

  4. Where a Default Valuation Notice has been served by the Default Valuation Time, sub-paragraph (e)(i) provided for three methods of valuation:

    (1) The bonds can be sold in good faith and the sale price used to determine the Default Market Value (paragraph 10(e)(i)(A)).

    (2) The Default Market Value can be determined from the mean average of commercially reasonable quotations obtained from market makers for the bonds (paragraph 10(e)(i)(B)).

    (3) Where the non-Defaulting Party has endeavoured but been unable to sell the bonds or cannot obtain commercially reasonable quotations, the non-Defaulting Party can determine the Net Value of Equivalent Securities and elect to treat that Net Value as the Default Market Value (paragraph 10(e)(i)(C)).

  5. Where a Default Valuation Notice has not been served on time, sub-paragraph (e)(ii) provides in effect that a method which is largely the same as method 3 (save that it assesses Net Value as at the Default Valuation Time) has to be used, subject to a proviso which was inapplicable in the present case:

    ``(ii) If by the Default Valuation Time the non-Defaulting Party has not given a Default Valuation Notice, the Default Market Value of the relevant Equivalent Securities or Equivalent Margin Securities shall be an amount equal to their Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the non-Defaulting Party reasonably determines that, owing to circumstances affecting the market in the Equivalent Securities or Equivalent Margin Securities in question, it is not possible for the non-Defaulting Party to determine a Net Value of such Equivalent Securities or Equivalent Margin Securities which is commercially reasonable, the Default Market Value of such Equivalent Securities or Equivalent Margin Securities shall be an amount equal to their Net Value as determined by the non-Defaulting Party as soon as reasonably practicable after the Default Valuation Time.''

  6. ``Net Value'' is defined in sub-paragraph (d)(iv):

    ````Net Value'' means at any time, in relation to any Deliverable Securities or Receivable Securities, the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources and methods (which may include, without limitation, available prices for Securities with similar maturities, terms and credit characteristics as the relevant Equivalent Securities or Equivalent Margin Securities) as the non-Defaulting Party considers appropriate, less, in the case of Receivable Securities, or plus, in the case of Deliverable Securities, all Transaction Costs which would be incurred in connection with the purchase or sale of such Securities;''

  7. In the present case, the respondent did not serve a Default Valuation Notice on time, so that only the method of valuation by reference to Net Value was open to it. In fact, by the end of the trial, it was common ground that the respondent had not carried out the correct valuation process, so that the judge had to consider a counter-factual question as to what Default Market Value the respondent would have arrived at if it had acted in accordance with the requirements of the GMRA. Accordingly the principal issue the judge had to decide was the meaning of ``fair market value'' as that phrase was used in the GMRA.

    The judgment of Knowles J

  8. At [17], the judge noted that the parties had not agreed a ``generally recognised pricing source'', as the definition of ``Net Value'' contemplated. At [18] the judge then rejected the appellant's argument that ``fair market value'' should be informed by the way that those words have been used in other legal and financial contexts, such as in the International Valuation Standards (published by the International Valuation Standards Council), the International Financial Reporting Standards (published by the International Accounting Standards Board), the American Society of Appraisers' Business Valuation Standards, and in the United States Treasury Regulations. The judge said:

    ``I do not consider it is a reliable approach to take definitions offered by those sources when the words appear without those definitions in the GMRA.''

  9. The appellant contended before the judge (as it does before this Court) that on the basis of other definitions of ``fair market value'', that phrase should be limited to ``a consistently recognised concept associated with fair market value involving a willing buyer, willing seller, knowledge of the asset in question and a lack of compulsion''. At [20] the judge rejected this submission:

    ``I do not consider the words are to be limited in this way. In the context of the GMRA, when called into action the words are words that will have to work in a whole range of factual scenarios. LBI submitted, drawing on definitions found elsewhere, that a critical point in the meaning for which it contended was the lack of compulsion. This, it was submitted, excluded from the "fair market value" prices achieved in a distressed market. I find the submission that lack of compulsion is within the meaning of the words difficult to reconcile with the fact that under paragraph 10(e)(i) of GMRA the non-Defaulting Party may actually sell the securities, in what may be a distressed market, and determine the Default Market Value on the basis of the prices obtained, provided always that it acts in good faith.''

  10. The judge considered that the issue was more usefully approached by considering first the words in the definition of ``Net Value'' ``reasonable opinion of the non-Defaulting Party''. Both parties had relied upon the judgments of Rix LJ in Socimer Bank Ltd v Standard Bank Ltd [2008] EWCA Civ 116 and of Blair J in Lehman Brothers International (Europe) v Exxonmobil Financial Services BV [2016] EWHC 2699 (Comm). The judge noted that, on the basis of the judgment of Rix LJ, the appellant accepted that the task for the Court was to put itself in the shoes of the decision maker (here the respondent) and ask what decision...

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