LBI EHF (in winding up) v. Raiffeisen Zentralbank Österreich AG and Raiffeisen Bank International AG [2017] EWHC 522 (Comm)

Following the decision in LBIE v. Exxonmobil referred to in our last update, Mr Justice Knowles CBE had to consider whether default notices sent by fax had been properly served, and how securities should be valued under the termination provisions in the Global Master Repurchase Agreement 2000 (GMRA) and Global Master Securities Lending Agreement 2000 (GMSLA), in particular as to the meaning of the words “fair market value”.

The claimant bank, Landsbanki Islands hf (LBI), entered into trades with the defendants (RZB). When LBI failed in October 2008 there were several open positions between LBI and RZB: 11 repo trades on GMRA terms, and three securities lending trades on GMSLA terms. RZB had attempted to serve default notices in relation to these trades by fax on 8 October 2008.

Both the GMRA and GMSLA specified the fax number to be used (a number starting “0044207”) and that service would be effective “at the time when the transmission is received by a responsible employee of the recipient”. RZB’s position was that it sent default notices by fax, and LBI’s was that it could not trace receipt of any such notices.

RZB’s transmission receipts were marked “OK”, but contained the number for LBI starting “0207”. Based on the fact that the number had been dialled previously for trade confirmations, the judge concluded it was more likely than not that the correct number was dialled and the receipt just showed the answerback of the machine reached.

LBI contended that “responsible employee” should be interpreted as meaning someone who would recognise what a default notice was. The judge felt this went too far, and would result in too much uncertainty, to have been the intention behind the contractual service provisions. An employee in the fax room is given responsibility for this task by their employer: accordingly, receipt by such an individual is sufficient. The fact that LBI had searched for the notices and been unable to find them did not mean they had not been delivered. The fact that LBI was not found to have a reliable system of recording or storing faxes evidently had a significant bearing on this conclusion.

In respect of the valuation point, LBI’s position was that RZB’s valuation of the transactions was incorrect. It argued that RZB did not serve a default valuation notice in time. In those circumstances, the GMRA provided for RZB to determine the default market value as an amount representing the “fair market value” of the securities, in the reasonable opinion of RZB.

LBI contended that the approach to fair market value should be informed by other valuation standards. In particular, it should be interpreted as excluding prices achieved in a distressed market. However, the judge considered this was inconsistent with other GMRA provisions.

LBI accepted that the court had to put itself into the shoes of RZB (as decision-maker) and ask what decision it would have reached, acting rationally and not arbitrarily or perversely. The judge found the approach of Blair J in the LBI v. Exxonmobil case helpful and concluded from it that he needed carefully to examine what RZB contended it would have taken as “fair market value” and why.

On dispatch of the default notices, RZB requested bids from 10 institutional counterparties. It also used algorithm-based prices from Bloomberg, but did not consider them commercially realisable in the volatile circumstances following Lehman’s default. RZB used this combination of information, applying haircuts to the Bloomberg figures as it considered appropriate, to set the fair market value. The judge considered RZB’s approach was rational and made in good faith. The availability of other valuation methods, or other information that RZB could have used but did not, did not render RZB’s assessment irrational.

As with the Exxon case, the judgment is another reminder of the importance of following default provisions precisely. It is also a prime example of the difficulties in sending notices by fax. Firms would be well advised to consider whether it remains appropriate to include fax as a means of notification in their agreements and, if so, to review whether they have sufficiently reliable systems and procedures to receive, store and forward on faxes.

As to valuation, on the facts of this case, it appears that, provided non- defaulting parties act in good faith in determining valuations and their approach is not irrational, the court will be reluctant to intervene and impose any particular approach.