No second bite at the ISDA valuation cherry: Lehman Brothers Special Financing Inc v National Power Corporation

Abstract

... A party closing out a 2002 ISDA Master Agreement must use commercially reasonable procedures to determine the close-out amount that is due in order to produce a commercially reasonable result but what standard of reasonableness applies? Is it enough to show that there was no irrationality or bad faith or does the determination have to be justifiable on objective grounds? And if it turns out that an error was made, can the determining party correct it by providing a revised calculation statement? The occasion for these issues to be considered was the termination, following the collapse of the Lehman Brothers group, of a currency swap between National Power Corporation (NPC) and Lehman Brothers Special Financing Inc (LBSF). NPC was required to determine the close-out amount that was due under the Agreement and so, on the Early Termination Date, it sought (and received) three indicative quotations for a replacement transaction. These were followed up, four days later, by a series of firm quotations from the same dealers and, the following week, NPC entered into a replacement transaction with the dealer that had offered the most favourable terms. NPC’s original calculation statement had demanded a close-out amount based on the cost of the transaction it had entered into. However, it sought to withdraw this and make a revised determination based on the ‘indicative’ quotation originally offered by that dealer. This was less favourable to NPC than the price it eventually accepted and so it sought to increase the amount it claimed from LBSF.