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WFW wins ISDA Master Agreement pricing case

29 July 2014

Watson, Farley & Williams (“WFW”), a leading international law firm, is pleased to announce that it has achieved success in the English High Court on behalf of Lehman Brothers Finance SA (in liquidation) (“LBF”) against German private bank Sal Oppenheim jr. & Cie. KGAA. The case required the court to consider key issues relating to the interpretation of payment mechanisms under the ISDA Master Agreement (1992 version).

LBF’s claim concerned the operation of the agreement’s pricing mechanisms in relation to a series of derivatives transactions it had entered into with Sal Oppenheim. The transactions, put and call options by reference to the Nikkei 225 Stock Average Index, were automatically terminated early in 2008 as a result of LBF’s parent company, Lehman Brothers Holdings Inc., filing for Chapter 11 bankruptcy protection in the United States. The parties had elected to use the market quotation measure to determine what would be payable in such circumstances and the case concerned how that measure should operate where it was not possible to obtain quotations on the early termination date, in this case because the Tokyo Stock Exchange and Osaka Securities Exchange were closed due to a Japanese holiday.

Mr Justice Burton held that in such circumstances the market quotation should be determined by obtaining quotations on the next available date, rather than looking to valuations of the options prior to the early termination date. In reaching this decision the judge confirmed that such market quotations must be “live” and firm, rather than historic or retrospective. Notably, he rejected attempts to extend the “value clean” principle by disregarding the effect on the market of the event of default and termination in valuing the options. Mr Justice Burton also dismissed the defendant’s attempts to argue that the loss measure should operate instead of the market quotation measure, holding that the evidence indicated a market quotation could be determined and there was no evidence it would not produce a commercially reasonable result.

The WFW team comprised London International Litigation and Arbitration partner Andrew Savage and associate Katherine Harper. Daniel Bayfield of South Square appeared as Counsel on behalf of LBF.

WFW London partner Andrew Savage said: “This is an interesting case which analyses some significant aspects of the close out mechanism in the ISDA Master Agreement. We believe that it reflects what the market would expect and gives further commentary on the value clean principle.”