Peregrine Fixed Income Ltd v. Robinson Department Store Public Co. Ltd

Factual and Procedural Background

Peregrine is a company incorporated in Hong Kong which, until 12th January 1998, conducted business as a provider of finance and financial products including swaps and derivatives. On 12th January 1998, the board of directors of its parent company resolved to seek the appointment of a provisional liquidator for Peregrine. Provisional liquidators were appointed on 16th January 1998 following a winding-up petition presented to the High Court of the Hong Kong SAR on 15th January 1998.

Robinson is a company incorporated in Thailand operating department stores and was in the process of restructuring its debts under court supervision, with creditors agreeing to convert claims into equity. The value of these claims depends on Robinson's share performance.

Prior to December 1997, Peregrine and Robinson entered into derivatives transactions, including a swap transaction confirmed by a letter dated 20th November 1997, under which Robinson agreed to pay Peregrine 25 annual instalments of US$6.85 million from November 1998 to November 2022. The parties incorporated the 1991 ISDA Definitions and agreed to govern their contract by English law via an Agreement and Schedule dated 17th February 1997.

The Agreement and Schedule are complex documents allowing the parties to choose how the contract operates under certain circumstances, particularly concerning obligations, events of default, termination events, and early termination provisions.

Legal Issues Presented

1. Is Peregrine entitled to challenge Robinson's belief that the Market Quotation payment measure has produced a commercially reasonable result?
2. If so, does the Market Quotation payment measure produce a commercially reasonable result?
3. If the Market Quotation measure is not commercially reasonable, is Peregrine entitled to require Robinson, and/or is Robinson bound, to use the Loss payment measure in determining the Settlement Amount?
4. If the Loss measure is to be used, should Loss be determined as Peregrine contends or as Robinson contends?
5. Is the creditworthiness of Robinson relevant to the assessment of Loss, and if so, are there any conditions or limitations on how such creditworthiness should be considered?

Arguments of the Parties

Appellant's Arguments (Peregrine)

• The Market Quotation measure grossly undervalues Robinson's obligation and thus does not produce a commercially reasonable result.
• The definition of Settlement Amount contemplates the use of the Loss measure if Market Quotation would not produce a commercially reasonable result, which applies here.
• The present discounted value of Robinson's obligation (US$87.3 million) better reflects the gain Robinson received upon termination than the Market Quotation figure (approximately US$9.7 million).
• The Market Quotation and Loss measures should lead to broadly similar results; the large discrepancy indicates unreasonableness.
• The creditworthiness of Robinson should not reduce the Loss amount, as Loss is intended to reflect the total gain or loss without factoring in funding costs or credit risk.

Appellee's Arguments (Robinson)

• The Market Quotation measure produces a commercially reasonable result, reflecting market realities including Robinson's poor financial condition.
• Reference Market-makers are expected to consider the Non-defaulting Party's financial standing when quoting replacement transaction prices.
• The Loss measure should be adjusted for the cost of funding an immediate payment, which is substantial due to Robinson's credit rating, reducing the net gain significantly.
• Once a Market Quotation has been obtained, the option to use the Loss measure does not arise.
• An Event of Default is a breach of contract and the Agreement's provisions prevent the Defaulting Party from obtaining a windfall benefit.

Table of Precedents Cited

Court's Reasoning and Analysis

The court examined the contractual provisions governing the calculation of amounts payable upon Early Termination of the swap transaction between Peregrine and Robinson. It focused on the distinction between the Market Quotation and Loss measures for calculating the Settlement Amount under Section 6(e)(i)(3) and (4) of the Agreement.

The court acknowledged that the Market Quotation reflects the price at which Reference Market-makers would enter into replacement transactions with the Non-defaulting Party, considering factors such as creditworthiness and the risk of default. Because Robinson was financially weak and unsecured, the Market Quotation was significantly discounted compared to the nominal value of the obligation.

However, the court found that the Agreement contemplates situations where Market Quotation would not produce a commercially reasonable result and allows the use of the Loss measure in such cases. The court rejected the argument that once a Market Quotation is obtained, the Loss measure cannot be used, interpreting the phrase "would not produce a commercially reasonable result" as allowing the Loss measure to be applied if the Market Quotation result is unreasonable.

Applying the Wednesbury standard, the court held that Robinson's belief that the Market Quotation produced a commercially reasonable result was not reasonable given the substantial discrepancy between the Market Quotation figure and the Loss figure, the gain Robinson obtained from termination, and the purpose of the Settlement Amount calculation.

The court rejected Robinson's submission that creditworthiness should reduce the Loss amount, holding that Loss is intended to reflect total losses or gains without deduction for funding costs or credit risk.

Accordingly, the court concluded that Robinson acted in breach of the Agreement by using the Market Quotation measure instead of the Loss measure to calculate the Settlement Amount.

Holding and Implications

Holding:

• Peregrine is entitled to challenge Robinson's belief regarding the commercial reasonableness of the Market Quotation measure.
• The Market Quotation payment measure does not produce a commercially reasonable result in this case.
• Peregrine is entitled to require Robinson to use the Loss payment measure in determining the Settlement Amount.
• Loss must be determined as Peregrine contends and in accordance with the principles set out by the court.
• The creditworthiness of Robinson is not relevant to the assessment of Loss for these purposes.

Implications: The decision requires Robinson to recalculate the Settlement Amount using the Loss measure rather than the Market Quotation measure, resulting in a significantly higher payment to Peregrine. No new precedent was established beyond the interpretation of the specific contractual provisions and application of established principles concerning reasonableness and contract interpretation.