COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THE HONOURABLE MRS JUSTICE GLOSTER DBE
2003 Folio 344
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIX
LORD JUSTICE LLOYD
| Socimer International Bank Limited (in liquidation)
|- and -
|Standard Bank London Ltd
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Mr Stephen Auld QC (instructed by Messrs Jones Day) for the Defendant/Appellant
Hearing dates : 11-14 December 2007
Crown Copyright ©
Lord Justice Rix:
"The value of any Designated Assets liquidated or retained and any losses, expenses or costs arising out of the termination or the sale of the Designated Assets shall be determined on the date of termination by Seller."
I shall call that the "valuation sentence".
"I hold therefore that, on the proper construction of the Agreement, Standard was obliged to value the Designated Assets as at the date of termination of the Agreement for the purpose of clause 14(a) of the Agreement and to bring into account the value as assessed as a credit against the amounts payable to Standard under the Agreement and Trade Confirmations and was not entitled to bring into account the actual proceeds of sale of those Designated Assets for the purpose of its continuing obligations to Socimer under that clause."
"32. There is no difficulty in this from Standard's point of view since the valuation exercise lies entirely in its hands as at the date of termination. If the value on the screens, or the information available from other sources, indicates a value which it regards as too high because of the nature of the Designated Assets and the difficulty in liquidation, Standard can take such matters into account, and provided that the assessment is in good faith and is not challengeable on any other basis, it can value the assets at a lower figure. If the assets are truly liquid then although it may be impracticable for Standard to notify or consult Socimer before liquidating, it can sell and the value which it would ordinarily attribute, in good faith, to the Designated Assets would be the value actually realised. If the assets appear completely illiquid, then in theory a zero valuation is possible."
(1) whether Standard's valuation obligation was to carry out a reasonable, objective, valuation (Socimer's "should have" case) or only the honest but otherwise subjective valuation which Standard would have carried out if it had been aware of its contractual obligation to value (Standard's "would have" case); and
(2) whether other credits would, could or should have been set off immediately against the "Unpaid Amounts" so that, even on Standard's valuations, Standard would have had surplus assets.
"Designated Assets" means the assets referred to as such in the Trade Confirmation.
"Forward Settlement Date" means the date on which the Buyer acquires ownership with full title guarantee of the Designated Assets.
"Forward Value" means, with respect to each Transaction, the value in the Payment Currency at which the Transaction is entered into on the Trade Date, inclusive of the Seller's cost of Funds, as specified in the Trade Confirmation.
"Market Value" means, on any day and for each Transaction, the value in the Payment Currency determined by the Seller in its sole and absolute discretion for assets of the same description and type, denominated in the same currency and in the same principal amount as the Designated Assets.
"Transaction" means each agreement between the Seller and Buyer for the sale of assets on a forward basis subject to these Standard Terms.
"Unpaid Amount" means, on any day, and for each Transaction, the total outstanding currency amount payable with respect to the relevant Transaction as determined by the Seller, being the Forward Value less the Downpayment, any Additional Downpayment and any Subsequent Additional Downpayment(s) plus any other moneys owing to the Seller.
(a) A downpayment as determined by the Seller (the "Downpayment") will be required from the Buyer and shall be payable to the Seller with respect to each individual Transaction. The Downpayment…will be treated as a partial payment of the amount due to the Seller. The parties hereby agree that the Downpayment shall be non-returnable once paid.
3. CONSIDERATION FOR SALE AND PURCHASE
(a) On or prior to the Forward Settlement Date for each Transaction, the Buyer shall pay to the Seller the Unpaid Amount with respect to such Transaction in the Payment Currency.
(c) For the avoidance of doubt and subject to receipt of the Unpaid Amount in accordance with Section 3(a), the Buyer shall not acquire any legal or equitable interest in the Designated Assets until the Forward Settlement Date but the Seller shall consult with the Buyer (without any obligation to carry out the Buyer's wishes) in connection with the exercise of any right or discretion or performance of any obligation by the Seller under or pursuant to any of the Designated Assets.
4. FORWARD SALE
(a) On each Forward Settlement Date, subject to the prior receipt by the Seller in full of the consideration referred to in Section 3, the Seller shall sell to the Buyer, without recourse, and the Buyer shall purchase from the Seller, all of the Seller's rights, title and interest in respect of the Designated Assets (which expression shall include all interest and in the case of bonds, coupons, and other amounts due in respect thereof) for the period from (but excluding) the Effective Date to (and including) the Forward Settlement Date)…
6. ADDITIONAL DOWNPAYMENTS, SUBSEQUENT ADDITIONAL DOWNPAYMENTS
If at any time there is [a series of certain defined events involving a mark-to-market loss as itself defined, such that that loss is greater than one half of remaining equity] the Seller may at any time while such circumstance exists request the Buyer, such request to be confirmed in writing, to make such further payment (a "Transaction Additional Downpayment",…) to the Seller…
(f) Any calculation made by the Seller under this Section 6 shall be conclusive and binding on the Buyer, in the absence of any manifest error…
Subject to the due performance by the Buyer of each of its obligations under these Standard Terms and each Trade Confirmation, the Buyer will be entitled to receive on the Forward Settlement Date…amounts equal to any and all amounts received by the Seller (but subject to such withholdings as the Seller is obliged by law to make), in the currency in which those amounts are received, in respect of the Designated Assets (including, without limitation, payments of principal and interest) for the period from the Effective Date to, and including, the Forward Settlement Date…and such amounts shall be paid with interest at LIBID by the Seller to the Buyer from the date of receipt up to (but excluding) the Forward Settlement Date…
The Seller shall be entitled to set off and deduct from any amount payable to the Buyer under this Section 8 any moneys owed and then due and not paid by the Buyer to the Seller with respect to any Transaction whatsoever.
9. CALL ACCOUNT AND SET-OFF
(b) The Seller may at any time, and without limiting the foregoing, after the Buyer commits any event of default specified in Section 14 and without notice to the Buyer, apply in or towards satisfaction of any moneys due and owing to the Seller under these Standard terms or any Trade Confirmation (including without limitation any Downpayment, Additional Downpayment, Subsequent Additional Downpayment, Unpaid Amount or interest due under Section 11) any credit balance (whether or not then due and irrespective of the currency of the balance) on the Account(s) or any other account (whether current, deposit, loan, fixed money-market deposit or other) maintained with the Seller in the name of the Buyer…
14. EVENTS OF DEFAULT
[The subparagraphs of sub-clause (a)(bb) below have been numbered by me to enable easier reference to them.]
In the event that:
(i) the Buyer fails to pay when due any amount payable by it under these Standard Terms or any Trade Confirmation; or
(ii) a party becomes insolvent or generally fails or becomes unable to pay its debts as they become due or commences any bankruptcy, insolvency, liquidation, administration, receivership, administrative receivership or similar proceedings or any such proceedings are commenced against it; or…
(iv) a party repudiates or does or causes or permits to be done any act or thing evidencing an intention to repudiate these Standard Terms or any Trade Confirmation; then
(a) where such a party is the Buyer, the Buyer shall promptly inform the Seller of such event and the obligation of the Seller to sell the Designated Assets to the Buyer and all the other obligations of the Seller under these Standard Terms and each Trade Confirmation shall, save as otherwise provided in these Standard Terms, terminate. Upon such termination, neither party shall be required to refund, pay or otherwise account to the other in any way whatsoever for any payments paid hereunder except as follows:
the Seller shall have the right, in its sole discretion, either:
(aa) to refund to the Buyer any Additional Downpayments and any Subsequent Additional Downpayments paid to it with respect to such terminated Transactions, after deducting therefrom any amounts due and owing to it under these Standard Terms and the Trade Confirmations (including without limitation any Downpayments or the amount of any losses, costs or expenses of the Seller, arising as a result of this termination, but not the Unpaid Amounts in respect of each terminated Transactions, the Buyer's obligation to pay the same being terminated in consideration of the termination of the Seller's obligation to deliver the Designated Assets in respect of such terminated Transactions); or
(bb)  to liquidate or retain sufficient Designated Assets and to apply the proceeds of their sale to satisfy to the extent possible any amounts payable to the Seller under these Standard Terms and the Trade Confirmations, particularly, and without limitation, the amount of any Unpaid Amount, Downpayment, Additional Downpayment or Subsequent Additional Downpayment payable by the Buyer and the amount of any losses, costs or expenses of the Seller arising as a result of this termination and the sale of the Designated Assets.
 The Seller may in its sole and absolute discretion sell the Designated Assets at such time, in such manner and at such price as it deems reasonable and appropriate. The value of any Designated Assets liquidated or retained and any losses, expenses or costs arising as a result of the termination or the sale of the Designated Assets shall be determined on the date of termination by the Seller.
 Any Designated Assets remaining following the satisfaction of the Seller's claims, shall be sold to the Buyer, in the same manner as is contemplated by these Standard Terms and the relevant Trade Confirmation, as soon as practicable after the date of termination. Any proceeds from the sale of the Designated Assets remaining following the satisfaction of all amounts payable to the Seller as stated above, shall be paid by the Seller to the Buyer.
In the event that any amounts payable to the Seller cannot be satisfied in full by the application of any Additional Downpayments and Subsequent Additional Downpayments, where (aa) applies, or the Designated Assets in the manner above, where (bb) applies, then the Buyer shall pay to the Seller an amount equivalent to the deficiency. The Seller shall prepare a certificate specifying the amount of the deficiency, and such certificate shall be conclusive and binding on the Buyer, in the absence of any manifest error. The Buyer shall make payment of such deficiency upon delivery of the certificate by the Seller in the currency or currencies specified in such certificate…
16. ACKNOWLEDGMENT BY THE BUYER
The Buyer hereby acknowledges that:-
(ii) the Seller shall not be liable for any loss or liability involving any Designated Assets, or arising from a currency transaction or contract or any other transaction or contract entered into in relation to a Transaction, including without limitation, where such loss or liability results, directly or indirectly, from market or price fluctuations; or nationalisation, expropriation, devaluation, revaluation, confiscation, seizure, cancellation, destruction or similar action by any governmental authority, de facto or de jure; or enactment, promulgation, imposition or enforcement by any such governmental authority or currency restrictions, exchange controls, taxes, levies or other charges affecting the Designated Assets or any Transaction, or acts of war, terrorism, insurrection or revolution, or any act or event beyond the Seller's control; and
(iii) (A) it invests in and is a sophisticated buyer of assets similar to the Designated Assets in the normal course of its business; (B) it is familiar with the type of transactions undertaken pursuant to these Standard Terms and with assets of the type and description of the Designated Assets; (C) it has made its own independent appraisal of, and investigations into, the financial condition, credit-worthiness, affairs, status and nature of all the Obligors and the Designated Assets and the Asset Documents, and has examined such information concerning the Designated Assets as it has deemed appropriate; (D) it understands and is able to assume the risk of loss associated with such Designated Assets and has sufficient knowledge and experience to be able to evaluate the merits and risk of entering into Transactions with the Seller pursuant to these Standard Terms and (E) it recognises the volatile nature of the emerging markets and understands and accepts that circumstances may thereby arise in which it is impracticable for the Seller to notify or consult the Buyer before liquidating a position…."
The judgment of Cooke J
"1. The issues as to the true construction of the… Agreement…including (to the extent necessary and admissible) the matrix of fact surrounding the conclusion of the Agreement, as contained in paragraph 11 of the Particulars of Claim, paragraphs 2 to 7 of the Defence and paragraphs 4 to 48 of the Reply (the "Issue") be tried as a preliminary issue and before all other matters…"
Langley J's order included directions for disclosure, witness statements and expert reports. Thus although the preliminary issue argued before Cooke J was essentially to clear away problems of construction which divided the parties, evidence of fact and of expert opinion as to the matrix of the agreement was deployed, and Cooke J made various findings (see below).
"Cooke J: On this clause you recognise that it is the seller's determination which counts.
RM: Yes. So we could be stuck with a rotten valuation on the termination date.
Cooke J: Unless it was a bad faith determination, you would be stuck with it basically. Subject to that, you are basically stuck with it.
RM: That is right. It cuts both ways. So it is wrong to say that that valuation exercise shifts the risk to the seller. It does not at all. It cuts both ways but actually, because we are at the mercy of the seller, they have the whip hand always. That is what we say about that."
"What Mr [Beckman] is saying is absolutely right but it is also undoubtedly consistent with our construction of clause 14, which is that on or as at the termination date, the seller has to assess the value of the asset…If he cannot because there is no real buyer prepared to pay good money at that moment – and one can read into this, "there is no other way of getting a hard price" – and you have to make a valuation, then you put zero. The result of that is that the poor buyer gets no credit at all for the value of the asset…
We can live with that perfectly well. We say that is entirely right, it entirely protects the seller and it is a risk that the buyer takes. In other words, when he enters into a forward deal contemplated by standard terms, he takes the risk that on termination, the seller will not be able to get any prices and is forced to value them at nil, and therefore he gets no credit. Given the nature of the assets, he knows that is what he is in for. He has to trust the seller to do his best to find a price if he can. But if he cannot, that is life: tough. Tough on the buyer. That is how it works and that is what Mr [Beckman] is saying."
"Socimer contended that there was no difficulty in treating this clause as a valuation clause because Standard was given a wide discretion in relation to valuation whilst "termination" in the clause meant the same wherever it appeared.
Socimer also contended that there was no problem here about liquid or illiquid assets since the Agreement drew no distinction between one or the other and treated all as capable of having a value to be determined by Standard. With such discretion in valuation, even if Standard was to be treated as a "lender", it had adequate protection on Socimer's construction of clause 14 in the event of default by Socimer."
"19. Whilst the Agreement sets out Socimer's acknowledgment of the volatile nature of the emerging markets in which the Transactions involving Designated Assets are taking place and the impracticality for Standard to notify or consult it before liquidating a position [clause 16(a)(iii)] and the considerable risks involved in the Designated Assets themselves [clause 16(a)(ii)], the whole of the Agreement proceeds on the basis that it is possible to value the Designated Assets on any day. If the Designated Assets are the subject of forward sale, then the Agreement assumes that there is a market for such assets or at least that a "Market Value" can be determined for them by Standard, although the method by which it makes that assessment is left entirely to Standard's own discretion. This, in my judgment is a crucial factor when approaching the question of construction of clause 14…"
"26. Clause 14(a)(bb) has then to be construed in this context. It is clear that clause 14(a)(bb) provides in the first paragraph for Standard either to liquidate or retain sufficient Designated Assets and to apply the proceeds of their sale to satisfy amounts payable to it. Where the reference is to "proceeds of their sale" this must be taken to include the notional proceeds where the Designated Assets are retained and valued, as Standard accepted in argument. Of course, under the terms of the Agreement, the Designated Assets belong to Standard at all times until payment of the Unpaid Amount and transfer to Socimer, so that sub-clause (bb) gives Standard the right either to liquidate or retain sufficient Designated Assets to satisfy the amounts outstanding under the Agreement. There is no question of Standard selling Designated Assets to itself since it already owns them but the object of sub-clause (bb) is plainly to make Standard "whole", as Counsel for Standard put it in argument. Standard had expected to transfer the Designated Assets to Socimer on payment of the Unpaid Amount at the Forward Settlement Date, thus receiving the full agreed Forward Value which included its costs of funds without taking any risk on the value of the Designated Assets. The intention of the sub-clause is that Standard should recoup the amounts which it would otherwise have received and not be out of pocket in respect of any losses, costs or expenses which arise as a result of the termination and the sale of the Designated Assets to a third party or retain them itself in order to recoup these amounts, following which the third paragraph of sub-clause (bb) comes into play.
27. The third paragraph of sub-clause (bb) sets out what is to occur following "the satisfaction of the Seller's claims", namely the recoupment by Standard of the sums to which reference is made in the sub-clause. Once that has been done, the remaining Designated Assets which have not been liquidated or retained are to be sold to the buyer as contemplated by the Agreement and the Trade Confirmations, "but as soon as practicable after the date of termination". Moreover, if there is any balance from the sale of the Designated Assets following satisfaction of all amounts payable to Standard, Standard is also to pay this to Socimer. This provision makes it plain that the whole process of liquidation or retention is to take place "as soon as practicable after the date of termination", which, as I have already held, can only mean the date of the event of default or notice thereof.
28. This means that Standard must elect whether to liquidate by sale to third parties or keep Designated Assets at the date of termination or at least as soon thereafter as is practicable, since the remittance to Socimer of any balance, after satisfaction of Standard's claims, ahs to take place by this point.
29. It follows therefore that the second sentence of the second sub-paragraph of (bb) [the valuation sentence]…is entirely consistent with the procedure envisaged. If Standard elects to liquidate or retain particular Designated Assets, their value is to be determined on the date of termination by Standard itself. Self-evidently, the words "on the date of termination" must allow some latitude to Standard, particularly if the event occurs or the notice of the event is given at 23.59 hours on the date in question. In practice it requires a determination "as at" the date of termination, but the principle is clear in requiring the election and the liquidation or the retention to be effected at that point or so soon thereafter as is practicable. The value of those Designated Assets, as determined by Standard, then has to be taken into account to satisfy amounts payable to Standard under the Agreement and the Trade Confirmation (which have also to be ascertained at that point), as provided by the sub-clause, including any losses, expenses or costs arising as a result of the termination of the sale of Designated Assets.
30. The sub-clause does not envisage such lack of liquidity as would render this impossible to achieve. The words "the proceeds of their sale" in the first line of sub-clause (bb), which refer to the Designated Assets, are not therefore to be seen as inconsistent with the valuation "on the date of termination" in the second paragraph of that sub-clause. Standard itself can assess the value of the Designated Assets liquidated or retained in the same way as it can assess the Market Value as set out in the definitions clause in the Agreement. The whole point of the exercise is to crystallise the position as at the date of termination by reference to value as at that date.
31. Standard relied heavily on the first sentence of the second paragraph of sub-clause (bb) which stated that:-
"The Seller may in its sole and absolute discretion sell the Designated Assets at such time, in such manner and at such price as it deems reasonable and appropriate."
Standard maintained that this sentence operated to give it discretion to sell the Designated Assets and apply the proceeds of the sale which they achieved, however long after the date of termination, in satisfaction of the sums owing to it under the Agreement, regardless of the second sentence of the second paragraph [the valuation sentence] requiring the value of any Designated Assets liquidated or retained to be determined on the date of termination. The central difficulty with Standard's construction of the clause is the absence of any meaning which it can properly give to the second sentence. The same problem does not exist with Socimer's construction, since the purpose of the first sentence of the second paragraph of sub-clause (bb) is to make it clear that Standard does have, as it must have as owner of the Designated Assets in any event, a complete discretion about sale, whilst the clause as a whole is designed to ensure that the calculation of the net position between Standard and Socimer takes place at or immediately following the termination of the parties' obligations, with immediate sale to third parties or retention by Standard, so that the existence of a surplus or deficiency is immediately obvious on the basis of the value of the assets as at the termination date. If there is a surplus the third paragraph of sub-clause (bb) comes into operation whereas if there is a deficiency, the last paragraph of sub-clause (a) as a whole comes into play with the preparation by the Seller of a certificate specifying the amount of the deficiency, which is again to be conclusive and binding on Socimer in the absence of any manifest error and which gives rise to the obligation on Socimer to make good that deficiency.
32. There is no difficulty in this from Standard's point of view since the valuation exercise lies entirely in its hands at the date of termination. If the value on the screens, or the information from other sources, indicates a value which it regards as too high because of the nature of the Designated Assets and the difficulty in liquidation, Standard can take such matters into account, and provided that the assessment is in good faith and is not challengeable on any other basis, it can value the assets at a lower figure. If the assets are truly liquid then although it may be impracticable for Standard to notify or consult Socimer before liquidating, it can sell and the value which it would ordinarily attribute, in good faith, to the Designated Assets would be the value actually realised. If the assets appear completely illiquid, then in theory a zero valuation is possible. That is the essential assumption on which sub-clause [(bb)] works so that there is no conflict between "the proceeds of their sale" and the "value of any Designated Assets liquidated" as "determined on the date of termination by the Seller".
33. Whilst clause 14(a)(bb) is not a model of drafting, the overall intention is, in my judgment, clear. Whereas sub-clause (aa) provides for Standard to opt to retain the Downpayment and the Designated Assets and only to refund the Additional Downpayments and Subsequent Additional Downpayments (after deducting other amounts due and owing and losses arising as a result of termination), which Standard would presumably wish to operate if the Market Value of the Designated Assets exceeded the Forward Value or in a rising market, sub-clause (bb) provides for it to liquidate, whether by sale to third parties or retention at a value for its own account, sufficient Designated Assets to meet the outstanding amounts owing to it under the Agreement, which it would presumably wish to operate if the Market Value was lower than the Forward Value or in the event of a falling market. In the latter situation it would take on the market risk of particular assets which it chose to retain. Whilst it remained free in its sole discretion to sell the Designated Assets which it owned at any time and in any place and at any price, it was the value of those assets at the point of election to liquidate or retain which fell to be taken into account as a credit against the sums owing to it under the Agreement, before assessing the surplus or deficiency which would give rise to the remaining obligations in clause 14(a), under the last paragraph of sub-clause (bb) and the final paragraph of sub-clause (a)."
"34. I hold therefore that, on a proper construction of the Agreement, Standard was obliged to value the Designated Assets as at the date of termination of the Agreement for the purpose of clause 14(a) of the Agreement and to bring into account the value so assessed as a credit against the amounts payable to Standard under the Agreement and Trade Confirmations and was not entitled to bring into account the actual proceeds of sale of those Designated Assets for the purpose of its continuing obligations to Socimer under that clause."
The procedural aspects of the litigation up to the trial before Gloster J
"Similarly, I disagree with the reasoning adopted by Mr Feld…and Mr Clifford…who estimate the value of the portfolio by asking the following question: how much would I be willing to pay to keep the portfolio. In my opinion, this would be a deeply biased method of appraisal: a conservative investor would get to a very low price while a risk-lover would surpass my reasoned estimates by a large extent…In fact, in my opinion, a good appraisal method can never be based on the individual perception for the value of the asset but, rather, on the market assigned value to that good…"
This, in retrospect, highlights what became an issue at trial: whether the approach to valuation should be subjective or entirely objective.
"(1) to comment upon the nature of the TDA-Es;
(2) to provide an opinion as to the value of the TDA-Es as at the alternative event of default dates…on a "local" basis (i.e. from my position in Brazil and not in the position of [Standard] at the relevant time;
(3) to comment on the methodology of and approach taken by [Standard]…
(4) to comment upon the report of Socimer's expert witness, Professor…Rosenberg PhD."
Mr Quintero annexed his letter of instruction. That contained a passage on the "Nature of expertise required" as follows:
"It will be for the parties themselves, namely [Standard] and Socimer, to submit to the Court what valuation methodology would have been used and the values which would have been arrived at. Your expertise will be required to comment upon the nature of a specific emerging market asset as well as the approach taken by [Standard] and Socimer to its valuation and to provide a valuation for that asset as at two specific dates in early 1998."
"5. Having commented upon the approach taken by [Standard] and having placed yourself in [Standard's] shoes in the hypothetical scenario necessitated by the Judgment of Mr Justice Cooke, provide an opinion, insofar as you feel able, as to the value of the relevant assets."
I would make the same comments about Mr Beckman's instructions as I have done about Mr Quintero's. Indeed, since Mr Beckman's expertise was being relied on by Standard on a broader basis – Mr Quintero was essentially relied on as a "local" man in Brazil and thus the kind of person whom Standard might well have contacted for advice about the Brazilian TDA-Es – he was specifically asked to place himself in Standard's shoes, which echoes Cooke J's comment that the valuation exercise "lies entirely in [Standard's] hands".
The procedural aspects of the trial before Gloster J
"…Cooke J decided…the valuation exercise lies entirely in Standard's hands; it can apply its subjective views about liquidity or nature of a particular Designated Asset when reaching its valuation, provided it does so in good faith and cannot be challenged on any other basis. This therefore imports an objective requirement of reasonableness into the valuation process. Socimer contends that a good faith valuation, in the context of clause 14 of the Agreement and the Judgment, is one done in an honest attempt at a valuation which most fairly and reasonably reflects the value of the Designated Asset in question at the termination date…
…However Standard now assert that the Court's function is not to decide value, but to undertake a rather different exercise, namely to decide what Standard would itself have done on 20 February 1998…Standard's reconstructed personal approach was never pleaded until the Re-Amended Defence…The Court must decide, therefore, whether what Standard's witnesses now say, seven and a half years on, they would have done had they properly understood, and not breached, the Agreement is at all relevant, and, if so, how much weight to place on their opinions.
The short answer is that it is not relevant, or else devoid of weight…The Court's task is to decide objectively, on objective criteria, what is the value, within the parameters of the valuation methodology described in the Judgment, that Standard should objectively have applied to those Designated Assets at the time. The Court's task is not to reconstruct Standard's dealing room and apply the subjective approach of its inhabitants on that February morning eight and a half years ago. To do so would introduce uncertainty, hindsight and one-sidedness. It also makes the Court's task difficult because the opinions of both Mr Clifford and Mr Feld, who remain employees of Standard to this day, are necessarily partisan and not independent. Their views are also to be seen darkly through the glass of hostile litigation in which they have both been active participants. The fact that the Agreement, as analysed in the Judgment, gave Standard a broad discretion as to valuation (within the proper parameters) does not mean that the Court may receive evidence from those individuals at the time charged with exercising that discretion."
"SA: …It certainly is not open to Socimer to now attack what the bank says it would have done in terms of saying that it is capricious or dishonest or anything of that sort.
Gloster J: I do not understand that, Mr Auld. Let us assume that I find as a fact that the bank's witnesses are right that they would have valued something at nil or they would have given a low valuation. I do not see why the fact that he has not challenged their statement that they would have valued it at X or at nil means that I am not entitled to determine whether or not that was capricious. They are two separate things are they not?
SA: It is a broad point of fairness, in my submission, and nothing more than that. It cannot be right that highly experienced city people, who are saying in good faith on oath in evidence what they would have done, can then have their opponents saying in litigation, 'No, you would not have done it,' or 'It was dishonest or capricious'."
Gloster J: If I am against you on the would-have, I have to come up with what they would have done and should have done had they been complying with their contractual obligations…What do you say about the point that you did not cross-examine Mr Feld or Mr Clifford about it?
RM: Yes, I did not, and I did not do so deliberately; it was not because I ran out of time or because I was frightened about what they were going to say; I knew what they were going to say…One can take it that he would have disagreed. But where does that take your Ladyship? The question is, what does it add to the court's task, which is to discover the value that Standard…acting reasonably should have come up with…
Gloster J: You cannot dispute that is what they would have done –
RM: I cannot dispute, subject to one thing –
Gloster J: – because you did not cross-examine them.
RM: No, but I can make two submissions. First of all, I say to your ladyship that your ladyship should not accept blindly, without scepticism, what they say they would have done…because it was self-serving…Secondly, we have set out at length in part C the reasons why we say Mr Clifford's evidence is not credible…" [Part C was a reference to Mr Millett's closing written submissions whose Part C was headed "Standard's credibility".]
Authority concerning a contractual power to make decisions
"For purposes of judicial review the Court is concerned to judge whether a decision-making body has exceeded its powers, and in this context whether a particular decision is so perverse that no reasonable body, properly directing itself to the applicable law, could have reached such a decision. But the exercise of judicial control of administrative action is an analogy which must be applied with caution to the assessment of whether a contractual discretion has been properly exercised. The essential question always is whether the relevant power has been abused. Where A and B contract with one another to confer a discretion on A, that does not render B subject to A's uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it must be conferred, it must not be exercised arbitrarily, capriciously, or unreasonably. That entails a proper consideration of the matter after making any necessary enquiries. To these principles, little is added by the concept of fairness: it does no more than describe the result achieved by their application."
"35. It is very well established that the circumstances in which a court will interfere with the exercise by a party to a contract of a contractual discretion given to it by another party are extremely limited. We were referred to Weinberger v Inglis  AC 606; Dundee General Hospitals Board of Management v Walker  1 All ER 896, Docker v. Hyams  1 Lloyd's Rep 487, and Abu Dhabi National Tanker Company v Product Star Shipping Company Limited  1 Lloyd's Rep 397 ("The Product Star"). These cases show that provided that the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene.
36. Mr Rowland sought to derive comfort from some of the language used by Leggatt LJ, with whom the other members of this court agreed, in The Product Star at p 404 in support of a contention that the courts are more ready to apply a standard of objective reasonableness when assessing whether a discretionary decision can stand. That Leggatt LJ had not the slightest intention of watering down the well-established test is manifest from the passages in his judgment (at pp 405 RHC; 406 RHC, and 407 RHC) in which he applied the law to the facts, where it is clear that he is using the epithet "unreasonable" to characterise a view which no reasonable decision-maker could reasonably have formed on the material before him."
"64. I gain some assistance by analogy from these cases. In all of them, it seems to me that what was proscribed was unreasonableness in the sense of conduct or a decision to which no reasonable person having the relevant discretion could have subscribed…
67…I would therefore accept as a general qualification, that any withholding of approval by reinsurers should take place in good faith after consideration of and on the basis of the facts giving rise to the particular claim and not with reference to considerations wholly extraneous to the subject-matter of the particular reinsurance…
73. If there is any further implication, it is along the lines that the reinsurer will not withhold approval arbitrarily, or (to use what I see as no more than expanded expression of the same concept) will not do so in circumstances so extreme that no reasonable company in its position could possibly withhold approval. This will not ordinarily add materially to the requirement that the reinsurer should form a genuine view as to the appropriateness of settlement without taking into account considerations extraneous to the subject matter of the reinsurance…"
"41. So here too, [referring to Gan Insurance v. Tai Ping Insurance] we find a somewhat reluctant extension of the implied term to include unreasonableness that is analogous to Wednesbury unreasonableness. I entirely accept that the scope of an implied term will depend on the circumstances of the particular contract. But I find the analogy of the Gan Insurance case and the cases considered in the judgment of Mance LJ helpful. It is one thing to imply a term that a lender will not exercise his discretion in a way that no reasonable lender, acting reasonably, would do. It is unlikely that a lender who was acting in that way would not also be acting either dishonestly, for an improper purpose, capriciously or arbitrarily. It is quite another matter to imply a term that the lender would not impose unreasonable rates…"
"51. The judge having found in favour of the claimant in this respect, his second task was to assess the amount of the bonus likely to have been paid, bearing in mind the flexibility afforded by the contractual language. Thus the exercise would not permit the judge simply to substitute his own view of what would have been a reasonable payment for the employer to make, but required him to put himself in the shoes of those making the decision, and consider what decision, acting rationally, and not arbitrarily or perversely, they would have reached as to the amount to be paid."
See also para 30, where Potter LJ put in his own words the conclusion to be derived as to the content of the decision-maker's duty, and in particular his comment there that –
"While, in any such situation, the parties are likely to have conflicting interests and the provisions of the contract effectively place the resolution of that conflict in the hands of the party exercising the discretion, it is presumed to be the reasonable expectation and therefore the common intention of the parties that there should be a genuine and rational, as opposes to an empty or irrational, exercise of discretion."
The judgment of Gloster J
"In fact I do not view the obligation to act reasonably as anything in essence different from the obligation to use good faith; it is part of the good faith obligation that Standard should conduct the valuation process in a reasonable manner, to arrive at what objectively can be said to [be] a proper value of the Designated Assets at the termination date…"
"45. I agree with Mr Millett that paragraph 19 of [Silven Properties] supports Socimer's argument that, if a term is to be implied, it should be one that imposes on Standard a duty, in doing its valuation, to take reasonable precautions to value the Designated Assets at "the fair" or "the true market" or "proper" value of such Assets as at the termination date and cannot simply value at nil, simply because there does not happen to be a purchaser or a quoted bid price on that date."
"However, it seems to me that Mr Auld's approach is to be preferred, at least to some extent. In reality, there is not much difference between the two approaches and it is a mistake to become too bogged down with semantic difference between a so-called "subjective" and a so-called "objective" approach. As a matter of principle, and based on the construction of the Agreement as found by Cooke J, in my judgment, what I have to decide is what, on the balance of probabilities, is the value as at the termination date that Standard would have attributed to the Designated Assets, if it had carried out that valuation on or shortly after the termination date (20 February 1998) on the assumption that, although, as Cooke J said, the valuation exercise lay entirely in Standard's hands as at the date of termination, nonetheless Standard was complying with its contractual obligations under clause 14(a)(bb) of the Agreement…In other words, the correct question in calculating Socimer's compensation is what valuation Standard would have reached on that date if the contract had been performed."
"Mr Millett submitted that the evidence of the Standard witnesses as to the valuations that they would have put on the TDA-Es, had they come to value them, was irrelevant and inadmissible. That was because, he said, in circumstances where Standard had not in fact carried out a valuation exercise, the Court should pay no regard to the opinions of the Standard witnesses. I have earlier in this judgment [ie at paras 22/28] ruled against this submission. I have concluded that, where a contract gives one party a discretion and for some reason it does not exercise that discretion, the other party's damages are to be calculated according to the court's assessment of the evidence as to how the party would have exercised that discretion, not as a matter of law according to the court's view of what is reasonable. In other words, the Court's task is to put itself in the shoes of Standard, and decide what figure it would have arrived at, had it appreciated the need to conduct a valuation. Accordingly, in conducting this exercise I have had regard to, and taken into account, the evidence given by the Standard witnesses as to the approach and criteria they would have adopted and the figures at which they would have arrived. However, at the end of the day it is for the Court itself to decide at what figure Standard would have valued the TDA-Es, if it had been acting in good faith and not in an arbitrary fashion."
"This is less than I find to be the actual value of the instruments as at the termination date, but nonetheless I consider it would have been a figure that Standard could legitimately have put forward in compliance with its obligations of good faith and reasonableness under the Agreement."
This valuation, therefore, would seem to demonstrate something of an hybrid approach on the part of the judge. Expressly, she purported to be finding what Standard would have done (see para 94, cited above, as well as para 102: "In my approach to ascertaining what figures Standard would have arrived at for the TDA-Es…I take into account the fact that Standard would have wanted to, and would have been entitled to, have adopted an extremely conservative approach"). She applied her conservative and cautious discount on that basis. She also expressly referred in this context of the TDA-Es to Standard's "wide discretion as to value" (at para 102(iii)). However, she rejected all Standard's factual evidence, and its expert evidence in support of that factual evidence, and essentially adopted the objective market value of Professor Rosenberg.
"In cross-examination, Mr Quintero distanced himself from what Mr Clifford and Mr Feld had done. He was at pains to stress that he did not try to justify the highest discount possible. He said "I was just straight", which carried with it the clear implication that he did not regard Mr Clifford's and Mr Feld's valuations as falling within that description as representing an appropriate approach to the valuation process."
It seems to me that at this point the judge is expressly in the course of saying that those valuations were not in good faith and/or that the evidence that such valuations would have been adopted was not honest evidence. (3) In the next paragraph (at para 110) the judge said:
"At the end of the day I conclude that I cannot accept the Standard witnesses' evidence as to the valuation at which they say they would have arrived had they appreciated Standard's obligations under the Agreement."
That is the judge rejecting unchallenged evidence of what those witnesses say they would have done. That is understandable if the judge thought that Messrs Clifford and Feld were not being "straight". It is also understandable if the reference to "Standard's obligations under the Agreement" begs the question as to whether those obligations were to arrive at an objective true market value. Otherwise, it is not easy to understand.
"The issue is one essentially of law, and is not precluded by anything said or done earlier in this litigation by Socimer, nor by the terms of the Judgment [of Cooke J] which expressly recognised that the valuation might be challenged on the grounds that it was not conducted in good faith or for other reasons."
Issue (1) ("implied term"): Discussion and decision
"In those circumstances, the only rational course open to a court is to choose the figure which it considers that a forecast made with reasonable care was most likely to have produced…"
"It is true that the vendor did not warrant the actual figure in the PRS. He warranted only that reasonable care was taken in its preparation. If therefore it appeared from the evidence that even if reasonable care had been taken, the estimate would still have been to a greater or lesser extent higher than the actual outcome, it follows that to that extent the purchaser's loss has not been caused by the breach of warranty. So far as the price was referable to that part of the overestimate, the vendor is not liable. It should not however be sufficient for the vendor to say that merely because of the uncertainties of forecasting, the estimate could have been higher than the actual outcome, which in the absence of contrary evidence, is that if the vendor had taken proper care, he would have got it right."
"Both parties accepted as an accurate and comprehensive statement of the law on the implication of terms into commercial contracts the formulation of Lord Simon of Glaisdale on behalf of a majority of the Judicial Committee of the Privy Council in BP Refinery (Westernport) Pty Ltd v The President, Councillors and Ratepayers of Shire of Hastings (1978) 52 ALJR 20 at 26:
Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) It must be reasonable and equitable; (2) It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
This passage, to which the judge paid close attention in reaching his decision, distils the essence of much learning on implied terms. But its simplicity could be almost misleading.
The courts' usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is potentially so intrusive that the law imposes strict constraints on the exercise of this extraordinary power.
There are of course contracts into which terms are routinely and unquestionably implied. If a surgeon undertakes to operate on a patient a term will be implied into the contract that he exercise reasonable care and skill in doing so…Again, quite apart from statute, the courts would not ordinarily hesitate to imply into a contract for the sale of unseen goods that they should be of merchantable quality and answer to their description and conform with sample…
But the difficulties increase the further one moves away from these paradigm examples. In the first case [that of the surgeon], it is probably unlikely that any terms will have been expressly agreed, except perhaps the nature of the operation, and the time and place of operation. In the second case [that of sale of goods], the need for implication usually arises where the contract terms have not been spelled out in detail or by reference to written conditions. It is much more difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully-drafted contract but have omitted to make provision for the matter in issue. Given the rules which restrict evidence of the parties' intention when negotiating a contract, it may well be doubtful whether the omission was the result of the parties' oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur.
The question of whether a term is to be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong. For, as Scrutton LJ said in Reigate v Union Manufacturing Co (Ramsbottom) Limited  1 KB 592 at 605,
"A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, 'What will happen in such a case', they would both have replied, 'Of course, so and so will happen; we did not trouble to say that; it is too clear'. Unless the court comes to some such conclusion as that, it ought not to imply a term which the parties have not themselves expressed…"
In the familiar cases already mentioned there could be little room for doubt what the parties' joint answer would have been had the question been raised at the outset. There would, almost literally, have been only one possible answer. But this may not be so where a contract is novel, known to involve more than ordinary risk and known to be more than ordinarily uncertain in its outcome. And it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown that one of several possible solutions would without doubt have been preferred: Trollope & Colls Limited v North West Metropolitan Regional Hospital Board  2 All ER 260,  1 WLR 601 at 609-10, 613-14."
Issue (2) ("Unpaid Amounts"): discussion and decision
"I find as a fact, based to a certain extent upon the evidence given by Mr David Feld, a director of Standard, in cross-examination, as well as the documentary evidence that Standard would have applied the Spot Trade Balances against the Unpaid Amounts as at the termination date, had Standard appreciated its obligation to value or sell as at that date, notwithstanding that the settlement date was a few days later."
"57. Accordingly it follows that I accept Mr Millett's submission that the Unpaid Amount was, or would have been, US $20,382,063.24 as at 20 February 1998, and not US $24.5 million as Standard contends. That is because, as set out above, I have found that either Standard should have deducted, or that, had it appreciated its obligations, it would have deducted:
(i) US $3,120, 480.93 in respect of the cash balances on the six Spot Trades;
(ii) $700,422.37 in respect of the Other Balances; and
(iii) US $302,914.63 in respect of the Accrued Coupon Interest on Designated Assets."
"Mr Millett: On a would-have basis, if you had understood and operated the agreement in accordance with Mr Justice Cooke's interpretation, I assume you would have been similarly content to have applied the Spot Trade Balances to any Unpaid Amounts that were left after your valuations, if done on or shortly after 20th February?
A: Yes, after our valuations, that is correct.
RM. I want to turn to a different subject.
Mrs Justice Gloster: I am not sure, if you are leaving that, that I quite understand what you are saying. Mr Feld, on 20th February, you do the trades. If you had known about the way in which you should have been working the agreement, implementing the agreement, and on the assumption, as we know, that the settlement dates were 25th February in the case of the Russian security or 24th February in respect of the others, on what date would you have credited the amounts?
A: We first would have performed any valuations that we needed to and/or sales that were required of assets to determine whether we had a deficiency or a surplus. Once that exercise was completed, we would have made the accounting of the proceeds of these trades.
Mrs Justice Gloster: Is that as of the 20th or as at the settlement date.
A: We would argue as at the settlement date.
Mrs Justice Gloster: You say you would have argued. If you had been implementing the agreement in accordance with how Mr Justice Cooke has interpreted it, what would you have done?
A: I repeat what I said: we would have had to carry out that series of sales and/or valuations…
Mrs Justice Gloster: As of the 20th?
A: As of the 20th. Then whatever the accounting was, if there was a surplus, we would add the value of the assets to it and send it back to the counterparty; if there was a deficit, we would offset, then see what the acting [accounting?] was.
Mrs Justice Gloster: If you had been doing it as of the 20th February, when you know you had done these sales of the assets, although obviously such sales were subject to settlement, do you simply do your valuation as of 20th February, discounting back for the three days you are out of the money, or how do you do it?...
A: We would not have discounted for the time value money, I do not think.
Mrs Justice Gloster: Not over the three-day period?
A: No, it is not worth it.
Mrs Justice Gloster: You would have done it all as of 20th February?
A: Yes." (emphasis added)
Issue 3(1): the "open to Socimer" issue
Issue 3(2): the "unchallenged evidence" issue
Conclusion and consequences
Lord Justice Lloyd:
"similar principles must apply, with the necessary adjustments, to the valuation powers of a mortgagee, or a person in an analogous position to a mortgagee, such as Standard, in circumstances such as the present, where the valuation is conducted by the seller in order to fix the amount of the buyer's indebtedness to the seller and the quantum of the buyer's deficiency, if any."
"if a term is to be implied, it should be one that imposes on Standard a duty, in doing its valuation, to take reasonable precautions to value the Designated Assets at "the fair" or "the true market" or "proper" value of such Assets as at the termination date and cannot simply value at nil, simply because there does not happen to be a purchaser, or a quoted bid price on that date."
Lord Justice Laws: