The English High Court in Fondazione Enasarco v Lehman Brothers Finance S.A. and Anthracite Rated Investments (Cayman) Limited [2015] EWHC 1307 (Ch) applied a common sense approach in the circumstances to the determination of Loss under the 1992 ISDA Master Agreement. The judgment of the judge (Mr Justice David Richards) is useful reading for those involved in structured products and derivatives.


The case is one of the many that have arisen from the Lehman insolvency.  In this case, Fondazione Enasarco (an Italian pension fund, the “Investor”) indirectly had the benefit of a cash-settled put option granted by Lehman Brothers Finance S.A. (“LBF”) in connection with a structured product. The put option had been documented under the 1992 version of the ISDA Master Agreement and the parties had elected for the Second Method and Loss. The put option terminated in September 2008 due to the automatic early termination which arose from the Lehman insolvency. The Investor was not able to enter into a replacement transaction until May 2009 and even then not all the terms were the same. It was only in September 2009 that LBF received a statement of the Loss calculation.

The 1992 ISDA Master Agreement

“Loss” is defined in Section 14 and together with Section 6(e)(i)(4) requires the Non-defaulting Party to “reasonably determine in good faith” its total losses and costs, and to do so as of the relevant Early Termination Date “or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable”.

Pursuant to Section 6(d)(i), LBF as the Defaulting Party should have received a statement showing the calculation of Loss “on or as soon as reasonably practicable following the occurrence of” the Early Termination Date.

The court's decision

The judge examined the factual background and in particular the general turmoil in the markets at the relevant time:

  • in the circumstances, calculating the Loss as of May 2009 met the requirement in the definition of Loss to do so as soon as reasonably practicable after the Early Termination Date, even  though here it was almost seven months after the Early Termination Date;
  • the judge rejected LBF’s arguments based on differences between the terms of the terminated transaction and the replacement transaction. In particular, the Non-defaulting Party was not required to obtain quotations only from an entity with the same financial standing as the Defaulting Party prior to the Lehman insolvency.

The judge also commented that in his view the definition of Loss did not require the Non-defaulting Party “to comply with some objective standard of care as in a claim for negligence…but must not arrive at a determination which no reasonable non-defaulting party could come to”. In other words, the test is one of rationality, commonly referred to in England as the Wednesbury test.

The judge agreed that the delivery of the calculation statement only in September 2009 was late and was therefore a breach of contract (i.e. of Section 6(d)(i)) but held that this did not affect the binding nature of the Loss calculation.


The approach of the court to the facts in this case shows a reassuring adoption of common sense. The case is also useful guidance on close-out provisions in transactions governed by English law.