Lehman Brothers International (Europe) v Exxonmobil Financial Services BV

Factual and Procedural Background

This case concerns a dispute between Company A, the principal European trading entity in a large financial group until its administration in September 2008, and Company B, a financial services arm of a major oil industry group based in the Netherlands. The dispute arises from a sale and repurchase ("repo") transaction under a standard form Global Master Repurchase Agreement (GMRA) dated January 9, 2008.

When Company A entered administration on 15 September 2008, an outstanding repo transaction existed under which Company B had effectively lent US$250 million to Company A, secured by a diversified portfolio of 181 securities (equities and bonds) from various global markets. Most securities were sold by Company B on 17 and 18 September 2008, with remaining securities valued a few days later.

The dispute centers on the construction and application of the termination provisions of the GMRA 2000 version, specifically the validity and timing of notices served by Company B, and the appropriate valuation of the securities. Company B contends it validly exercised the Default Valuation Notice procedure, valuing sold securities at sale price, bonds with quotations at quoted prices, and ascribing valuations to bonds without sales or quotations. Company A disputes the validity of the Default Valuation Notice based on timing, method of service, and the application of "Appropriate Markets" provisions, arguing that the "fair market value" provisions apply instead.

The proceedings involved limited factual disputes, with evidence from two factual witnesses and three expert valuation witnesses. The trial was relatively short, focusing on complex contractual interpretation and valuation issues. The parties agreed a list of issues for the court's determination, and the court requested a high-level summary of valuation principles rather than security-by-security valuations.

Legal Issues Presented

1. Whether the communication of 15 September 2008 or 16 September 2008 constituted a valid Default Notice under the GMRA.
2. Whether the Default Valuation Notice (DVN) was validly served to the specified fax number.
3. Whether Company A waived any objection to service of the DVN to the alternative fax number.
4. The time of effective receipt of the DVN.
5. Whether the DVN was validly served by email.
6. Whether paragraph 14(b) of the GMRA deems the DVN as received at the opening of business on 23 September 2008.
7. Whether it was open to Company B to determine a single Appropriate Market for all securities.
8. Whether the DVN conveyed a determination of a global Appropriate Market.
9. If the DVN conveyed no determination of Appropriate Market, the consequences of that.
10. What Appropriate Market should be determined for the securities.
11. When close of business in the Appropriate Market occurred.
12. Whether the DVN was served before the Default Valuation Time.
13. If Company B's valuation of certain bonds (A3 bonds) in the DVN was invalid, the consequences.
14. Whether Company B's valuation of the A3 bonds in the DVN was valid.
15. If Company B's valuation of the A3 bonds was invalid, what valuation should have been given under paragraph 10(e)(i)(C) of the GMRA.
16. The correct approach to valuation under paragraph 10(e)(ii) of the GMRA.
17. Whether Company B would validly have relied on the actual sale prices for the equities (A1 equities).
18. If not, how Company B would validly have valued the A1 equities.
19. Whether Company B would validly have relied on the actual sale prices for the bonds (A1 bonds).
20. If not, how Company B would validly have valued the A1 bonds.
21. Whether Company B would validly have adopted the bid quotations obtained for the A2 bonds.
22. If not, how Company B would validly have valued the A2 bonds.
23. If the DVN was invalid, whether Company B would validly have adopted the values for the A3 bonds stated in the DVN.
24. If not, how Company B would validly have valued the A3 bonds.
25. What net sum is payable and to whom (for consideration post-judgment).
26. Interest on any net sum payable (for consideration post-judgment).
27. Whether Company B is entitled to legal expenses and compensation for wasted management time (for consideration post-judgment).

Arguments of the Parties

Company B's Arguments

• The Default Notice of 15 September 2008 was invalid because it did not expressly identify the event to be treated as an Event of Default; a second communication on 16 September 2008 was the valid Default Notice.
• The Default Valuation Notice was validly served before the close of business at 7 pm on 22 September 2008, and the service to the alternative fax machine was effective due to actual receipt.
• It was open to Company B to determine a single Appropriate Market (global or US market) for the portfolio, rationally simplifying the valuation process.
• Valuation should be based on the reasonable opinion of Company B acting rationally, considering liquidity, market impact, and opportunity cost, as reflected in expert evidence supporting a conservative valuation methodology.
• It would have been rational to adopt the prices at which securities had been sold or quoted, or otherwise apply reasonable discounts to value illiquid securities.
• Email was a valid method of service under the GMRA's "electronic messaging system" provision.

Company A's Arguments

• The Default Notice of 15 September 2008 was valid as it clearly conveyed the intention to treat an event as an Event of Default, and did not require explicit identification of the event.
• The Default Valuation Notice was invalid because it was served to the wrong fax number, was received after close of business (5 pm), or was received only the next day by a responsible employee, thus falling outside the contractual window.
• It was not open to Company B to determine a single Appropriate Market; the GMRA requires a security-by-security determination based on the specific "description" of each security.
• The valuation must be objectively reasonable fair market value ascertained at the Default Valuation Time, not based on earlier sale prices or liquidation strategies.
• The 40% discount applied to illiquid bonds (A3 bonds) was irrational and excessive, unsupported by market evidence or internal valuations.
• Company B's expert valuation methodologies, especially those relying on liquidation over multiple days with opportunity costs, were unrealistic and irrational.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Førsta AP-Fonden v Bank of New York Mellon [2013] EWHC 3127 (Comm)	Definition and commercial nature of repo transactions.	Confirmed the economic nature of repos as secured loans despite legal form.
Lomas v JFB Firth Rixson [2010] EWHC 3372 (Ch)	Importance of contractual certainty and predictability in standard form financial contracts.	Supported the court’s approach to interpreting the GMRA with commercial common sense.
Lehman Brothers Finance SA v SAL Oppenheim [2014] EWHC 2627 (Comm)	Contractual certainty and interpretation in financial contracts.	Reinforced the need for clarity and commercial purpose in interpreting GMRA clauses.
Rainy Sky SA v Kookmin Bank [2011] UKSC 50	Principles of contractual interpretation favoring commercially sensible constructions.	Guided the court to interpret the GMRA provisions sensibly.
Arnold v Britton [2015] AC 1619	Emphasis on the natural and commercial meaning of contract terms.	Supported the court’s interpretation of the Default Notice definition.
Laminates Acquisition Co v BTR Australia Ltd [2004] 1 All ER (Comm) 737	Requirement for notices to state specific information when prescribed.	Referenced by Company B but distinguished by the court in context of GMRA Default Notice.
Mannai Investment Co Ltd v Eagle Star Life Assurance Ltd [1997] AC 749	Strict compliance required for contractual notices where conditions are clear.	Considered but court found no such strictness required for Default Notice under GMRA.
Burman v Mount Cook Land [2002] Ch 256	Importance of literal compliance with specified notice requirements.	Distinguished by the court as not applicable to GMRA Default Notice.
Yates Building Co v RJ Pulleyn & Sons [1976] 1 EGLR 157	Practical effect of notice sent to specified address or number.	Supported the requirement that notices be sent to specified fax number but allowed waiver.
The Brimnes [1975] QB 939	Effective receipt of faxed notices and responsibility of recipient.	Applied to determine when notice was effectively received by Company A.
Greenclose Ltd v National Westminster Bank PLC [2014] EWHC 1156 (Ch)	Validity of email as a method of serving contractual notices.	Distinguished on facts; court accepted email as valid under GMRA 2000.
Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116	Limits and legal consequences of contractual discretion, including rationality test.	Applied as leading authority on valuation discretion under GMRA.
Fondazione Enasarco v Lehman Brothers Finance SA [2015] EWHC 1307 (Ch)	Application of rationality test to valuation discretion under ISDA Master Agreement.	Supported court’s approach to valuation discretion and rationality in this case.
Hayes v Willoughby [2013] 1 WLR 935	Distinction between rationality and reasonableness in judicial review context.	Clarified the standard of rationality applicable to contractual discretion.
Braganza v BP Shipping Ltd [2015] 1 WLR 1661	Limits on contractual discretion including good faith and rationality.	Discussed but court found limited procedural judicial review in commercial contracts.
Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223	Wednesbury unreasonableness standard applied analogously to contractual discretion.	Referenced to explain rationality test.

Court's Reasoning and Analysis

The court began by establishing the factual background and contractual framework under the GMRA 2000. It emphasized the importance of contractual certainty and commercial common sense in interpreting standard form financial contracts.

On the Default Notice issue, the court held that the 15 September 2008 communication was a valid Default Notice. The GMRA requires a written notice stating that an event shall be treated as an Event of Default, but does not require explicit identification of the event. The court rejected Company B's argument that the notice was invalid for lack of specificity and held that the notice clearly conveyed the intention to treat the appointment of administrators as an Event of Default.

Regarding service of the Default Valuation Notice (DVN), the court found that although the DVN was sent to a different fax number than specified, actual receipt by a responsible employee at Company A's offices rendered service effective. Company A had waived the right to object to the incorrect fax number by inaction and by pleading on the basis of valid service.

The court determined that the DVN was received before close of business on 22 September 2008. It rejected Company A's contention that close of business was 5 pm and accepted expert evidence that close of business for financial institutions in London was closer to 7 pm. The court also found that the DVN was received by a responsible employee on the day of transmission, not the next day.

On the determination of the "Appropriate Market," the court analyzed whether Company B could rationally determine a single global or US market for all securities or whether the GMRA requires a security-by-security analysis. The court accepted the existence of a general "global market" in securities but held that the GMRA’s definition of Appropriate Market contemplates a determination on a security-by-security basis given the contractual emphasis on fungibility and precise security descriptions.

The court found that Company B did not convey a determination of a global Appropriate Market in the DVN and that the securities should be valued according to their individual Appropriate Markets. It accepted Company A's security-by-security approach as consistent with the contract and the practical handling of the portfolio.

Regarding valuation principles under paragraph 10(e)(ii) of the GMRA, the court applied the leading authority from Socimer, requiring that any valuation discretion be exercised honestly, in good faith, and rationally. The court rejected the objective reasonableness standard urged by Company A and held that the valuation should reflect the reasonable opinion that Company B would have formed had it conducted the valuation exercise properly at the Default Valuation Time.

On the equities (Appendix 1), the court held that Company B would not have rationally adopted the actual sale prices from earlier days for valuation at the Default Valuation Time, as market conditions might have changed. It rejected Company B's liquidation strategy valuation methods as irrational in some respects but accepted that a conservative valuation method incorporating market impact and opportunity cost adjustments was rational.

The court found that Company B’s expert’s (Dr Ellis) approach, involving a hedging period and conservative discounting, was within the scope of rational valuation, especially since Company A had previously advanced similar methodology. The court rejected Company A’s argument that the valuation must be based solely on closing prices adjusted by a fixed market impact.

For the A3 bonds (illiquid bonds without bids), the court held that the 40% discount applied by Company B was irrational and excessive. It relied on contemporaneous internal valuations showing a 20% discount and on the quality and liquidity evidence of the bonds. The court found Company B’s failure to test the market at the 40% discount level significant and concluded that the 40% discount could not be justified rationally.

The court accepted that if the DVN was valid but the valuation of the A3 bonds invalid, the bonds should be valued at the Default Valuation Time under paragraph 10(e)(ii), applying a rational valuation consistent with the internal 20% discount rather than the 40% discount.

For the A2 bonds (with quotations), the court accepted Company B’s case that it would rationally have adopted the bid quotations obtained, despite only one quotation being available due to exceptional market conditions.

For the A1 bonds (sold bonds), Company A accepted Company B’s valuation based on sale prices as lower than its own valuations, so no dispute arose on this point.

The court emphasized that the net sum payable and issues of interest and costs would be dealt with post-judgment, as the parties agreed to focus on high-level valuation principles in this trial.

Holding and Implications

The court’s final decision was as follows:

• The Default Notice of 15 September 2008 was validly served and effective.
• The Default Valuation Notice was validly served, except that Company B was not entitled to determine a single global or US Appropriate Market for all securities.
• The DVN was served in time for North American securities and certain UK/Ireland securities but late for the majority of non-North American securities.
• Valuation discretion under the GMRA is governed by a rationality test, not an objective reasonableness standard.
• For equities, Company B would have rationally adopted a conservative valuation methodology akin to its expert’s lower bound valuation rather than actual sale prices or a fixed market impact adjustment.
• For A2 bonds, bid quotations obtained would have been rationally adopted.
• The 40% discount applied to A3 bonds was irrational; a lower discount consistent with contemporaneous internal valuations should apply.

The implications are that the contractual mechanisms for valuation under the GMRA must be strictly observed, with particular attention to timing and method of notice service, and that valuation discretion is broad but bounded by rationality and good faith. The decision clarifies the interpretation of the GMRA’s provisions on Default Notices, Appropriate Markets, and valuation methodology in the context of a complex multi-jurisdictional securities portfolio during a market crisis.

No new precedent beyond the application of established principles was set. The ruling directly affects the calculation of amounts owed between the parties and the determination of claims in the administration of Company A.