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20 Mar 2017

Commercial Court delivers judgment on close-out valuations


LBI EHF. v Raiffeisen Zentralbank Österreich AG & Raiffeisen Bank International AG [2017] EWHC 522 (Comm)

The English High Court (Knowles J) has today ruled on issues arising out of a close-out under the Global Master Repurchase Agreement (2000 version) ("GMRA") and the Global Master Securities Lending Agreement (2000 version) ("GMSLA"). It addresses, in particular, matters relating to service of default notices by fax and valuation issues.

This claim was brought by LBI ehf (formerly Landsbanki Islands hf) ("LBI") against the Defendants arising out of the close-out in October 2008 of repo and securities lending transactions entered into by Raiffeisen Zentralbank Österreich AG ("RZB") and LBI.

On 7 October 2008, following the collapse of the Icelandic banking system the Financial Supervisory Authority of Iceland appointed a Resolution Committee to manage the affairs of LBI. That was an event which RZB was entitled to declare an Event of Default under both the GMRA and the GMSLA.

Service by fax

On 8 October 2008, RZB sent Default Notices to LBI by fax. LBI denied that either notice was received by a responsible employee of LBI, and hence contended that neither notice was effective.

Paragraph 14(b)(iii) of the GMRA and paragraph 21.1(iii) of the GMSLA both provide that a notice sent by fax will be deemed effective when:

"the transmission is received by a responsible employee of the respondent in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine)."

Knowles J therefore assessed whether, on the balance of probabilities, RZB's faxes were received by a responsible employee of LBI in legible form. On the basis of the factual evidence of the parties, the judge concluded that (a) the faxes were sent by RZB to the relevant fax number; (b) there was a greater likelihood of the faxes being received in legible form rather than in illegible form; and (c) the faxes were collected by an employee with responsibility for collecting them.

LBI contended that "responsible employee" meant "an employee with responsibilities relevant to the default, i.e. someone who will recognise a … notice for what it is, and what steps will be taken as a result". Knowles J concluded that LBI's interpretation of the clause read "far too much into the phrase" as it would allow the quality of the recipient's systems and procedures to affect the position considerably and it was not accepted that the parties would intend such uncertainty.


Since an Event of Default had occurred under the GMRA and the GMSLA on 8 October 2008, the remaining issue was the subsequent close-out valuations in relation to the GMRA trades (there was no valuation issue in relation to the GMSLA trades).

No Default Valuation Notice (as defined by the GMRA) was served by RZB by the Default Valuation Time (of 15 October 2008). In those circumstances the GMRA provided, by paragraph 10(e)(ii) that:

"…the Default Market Value of the relevant Equivalent 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 … in question, it is not possible for the non-Defaulting Party to determine a Net Value of such Equivalent Securities … which is commercially reasonable, the Default Market Value of such Equivalent 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."

Paragraph 10(d)(iv) of the GMRA defines "Net Value" as:

"…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" (emphasis added).

In the event, as soon as the GMRA Default Notice had been dispatched to LBI, RZB asked for bids from 10 institutional counterparties. It also enlisted its own traders and sales people to help sell the positions. The response RZB received supported a decision by RZB to place orders to sell, setting a price or limit. At the time and in the (distressed market) circumstances prevailing, RZB did not consider the prices shown on Bloomberg to represent a practical and commercial realisable value. This view was based on its experience following the Lehman default in September 2008. LBI however argued that RZB should not have carried out a determination of value based on prices obtained/obtainable in a distressed market. Knowles J did not accept this.

Knowles J considered that the task for the court (citing the leading cases of Socimer Bank Ltd v Standard Bank Ltd [2008] EWCA Civ 116 and Lehman Brothers International (Europe) v Exxonmobil Financial Services BV [2016] EWHC 2699 (Comm)) was to put itself into the shoes of the decision maker (i.e. RZB, the non-Defaulting party) and ask what decision RZB would have reached, acting rationally and not arbitrarily or perversely.

Knowles J considered RZB's submissions as to fair market value based on the information actually available to it on 15 October 2008 regarding the valuation of the securities. The judge was prepared to accept that RZB's figures (including the adjustments it applied for the positions closed out after 15 October 2008) met the requirement for a rational, honest determination of fair market value as at 15 October 2008.

It was common ground that on those figures LBI's claim was bound to fail, so the claim was dismissed.


The case reaffirms that the non-defaulting party, particularly in a distressed market, is afforded a wide amount of contractual discretion in reaching a determination on "fair market value" subject to it acting rationally and not arbitrarily or perversely.

Stephenson Harwood LLP (Richard Gwynne, Stephen Davis and Jeremy Livingston) represented RZB in these proceedings.



Richard Gwynne

Richard Gwynne

T:  +44 20 7809 2321 M:  +44 7789 873 908 Email Richard | Vcard Office:  London

Jeremy Livingston

Jeremy Livingston
Senior associate

T:  +44 20 7809 2086 M:  +44 7825 528 217 Email Jeremy | Vcard Office:  London

Stephen Davis

Stephen Davis

T:  +44 20 7809 2309 M:  +44 7785 552 041 Email Stephen | Vcard Office:  London