The High Court of England and Wales (Commercial Court) recently decided in favor of Lehman Brothers Finance S.A. (in liquidation) (LBF) against Sal. Oppenheim Jr. & Cie. KGAA (Oppenheim). The matter involved a dispute over the Market Quotation calculations made by Oppenheim following the Automatic Early Termination of the 1992 ISDA Master Agreement (1992 ISDA) between the two parties, arising from LBF’s credit support provider, Lehman Brothers Holdings Inc., entry into Chapter 11 proceedings on September 15, 2008. The parties had entered into four option agreements referencing the Nikkei 225 Stock Average Index (Nikkei). The Nikkei fell substantially between September 12, 2008 and September 16, 2008, the day on which Japanese exchanges re-opened following a public holiday on September 15, significantly benefiting LBF’s position in the options. 

Oppenheim requested three reference market makers, rather than the four required under the 1992 ISDA, to make its market quotation calculations as of September 12, 2008, three days prior to the actual occurrence of the Automatic Early Termination Date. Oppenheim had not put in writing any explanation as to why it maintained that obtaining the market quotations with a value date after September 12 would lead to a commercially unreasonable result, which may have entitled it to use an earlier valuation date. 

The court awarded LBF’s claim for the balance of the sum with interest of what it contended it was due under the Market Quotation provisions of the 1992 ISDA. Oppenheim had originally paid the claimant €1,849,968.99. The court ordered Oppenheim to pay €2,963,091.18, which included interest on the unpaid amount. The court held that the Market Quotation provisions required the non-defaulting party to seek quotations as soon as reasonably practicable after Automatic Early Termination occurs. Additionally, the court held that market quotations should be sought from four reference market makers as of the same time and day, so that they are contemporaneous; the quotations must not be back-dated before the Early Termination Date, even if the relevant markets have moved significantly from their positions on the Early Termination Date.  

This case demonstrates the importance for market participants to expressly follow the termination provisions of the ISDA Master Agreement and to keep precise records of all calculations as well as written justification for any aspects of the calculations that do not follow the procedures to the letter.