England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, QUEEN'S BENCH DIVISION
MR JUSTICE TEARE
2009 FOLIO 497

		Royal Courts of Justice Strand, London, WC2A 2LL
		24/04/2012

Lord Justice Rix :

1. On 15 September 2008 Lehman Brothers in New York went into bankruptcy and world financial markets, which had been in a fragile state for more than a year, went into free fall. In the liquidity crisis which quickly ensued, the so-called "credit crunch", values became entirely distorted. The best of shares, because they could at least be freely traded, suffered egregious mark-downs in price as their holders strived for liquidity. The worst of shares suffered even more horrendously. Banks, whose transactions had become hugely leveraged and which were in the very crucible of the credit crunch, saw their share price cut to ribbons as they struggled for survival.
2. This was the market in which a basket of exotic stocks or shares held by a fund, the Global Opportunities Fund (the "Fund"), fell to be valued as of a date falling 20 business days prior to the maturity date of financial instruments which represented that Fund, ie 20 business days prior to 28 October 2008, or 30 September 2008. The portfolio of stocks and shares was invested in mainly private companies variously domiciled in Indonesia, the Bahamas, British Virgin Islands, Jersey or Singapore and which were not quoted or traded on any established market. Three shares only were those of quoted Indonesian companies, one of which was an Indonesian bank, PT Bank Century, which in November 2008 had to be taken over by the Indonesian authorities. These stocks and shares held by the Fund were themselves represented by share units in the Fund itself (the "Shares"). Thus each Share in the fund (there were 195,000 in all, described as "participating redeemable preference shares" of a nominal value of $1 each) represented an aliquot slice of the portfolio of assets held within the Fund.
3. That was a bad time to have to value the portfolio of assets within the Fund, but the issue in this litigation is nevertheless as to its proper valuation. The judge, Teare J, found that the Fund would have been valued as of 30 September 2008 as worthless, that is to say worth nothing or at any rate less than the sum of US $1,722,135 which was the fee to which the Fund was then subject.
4. This appeal is brought by WestLB AG, a bank which, by reason of its own error, had left itself, in place of the Fund's investors, exposed to the risk represented by the Fund. The respondents are two companies within the Nomura Group. Nomura Bank International Plc ("Nomura Bank") and its affiliate "Nomura International Plc" ("Nomura International"). Nomura Bank was the issuer of financial instruments which represented the Fund, and these instruments were described as Variable Redemption Notes (the "Notes"). As such, Nomura Bank ought also to have been insulated from exposure to the risk constituted by the Fund. Nomura International is a broker-dealer within the Nomura Group, but its role for present purposes was limited to that of "Calculation Agent" for the purposes of the Notes. The judge explained: Nomura Bank had no employees other than its statutory directors, but had an established note issuance programme; Nomura International was calculation agent because of its status as a broker-dealer within the group.
5. If everything had worked as it was supposed to have worked, the parties to this litigation ought to have had no exposure to the risk constituted by the Fund and represented by the Notes. That risk ought to have been borne by the investors in the Fund. It is unnecessary to explain the complex mechanisms and packaging of these financial instruments, for which readers can consult the judgment of Teare J, [2010] EWHC 2683 (Comm). The position was, however, that in error WestLB, instead of delivering the Notes to the end investors, paid their nominal value, $26 million, to those investors and retained the Notes. Thereupon, Nomura Bank, which had been entitled to make physical delivery of the portfolio of shares in the Fund to the holders of the Notes, in error served its notice for such physical delivery too late. It therefore became important to WestLB to recover from Nomura Bank the value of the Fund represented by the Notes, on the Notes' maturity. The question is, what was the value of the Fund?
6. WestLB has at various times in this litigation put forward five valuations. The first (1) is based on a figure which WestLB says that Nomura Bank had actually, albeit implicitly, used in a formal notice to it, to value the Fund. That would produce, it says, a binding valuation of $22,307,715. This is WestLB's "first case". The second, third and fourth valuations represent alternatives at which WestLB submits that Nomura Bank would have valued the Fund if it had carried out a rational valuation as of 30 September 2008. This is what the judge described as WestLB's "second case". Thus the second (2) is a valuation which is premised on a redemption figure of $123.23 per share unit in the Fund, published by MITCO (Mauritius International Trust Company Limited), the Fund's administrator. That figure stated (or purported to state) the share unit's Net Asset Value (or NAV) as at 31 August 2008 and had been published (as amended) by MITCO on 17 October 2008. Such a figure, when allowance was made for the fee due to Nomura Bank of $1,722,135, would again produce a valuation for the Fund of $22,307,715. The third valuation (3) is based on MITCO's published NAV for 30 September 2008, which was certified on 12 November 2008 and amended on 9 December 2008. That figure was $121.84 amended to $112.57. The fourth valuation (4) was a "discounted value" for the Fund, starting from the published NAVs, but purporting to take into account the hypothesis that the supposed redemption figure may not have been available from the Fund and that markets would provide only some realistic portion of the published NAV. That valuation was left at large, but was submitted to be likely to be substantial. It was accepted that allowance would again have to be made for the fee of $1,722,135. The fifth valuation (5) was a residual "hope value" of 5%, but such a valuation would produce less even than the fee, and so the fifth valuation was not pursued at appeal.
7. The respondents submit that the judge was right to reject all these alternatives, on the facts.

The terms of the Notes

8. The material terms of the Notes were set out in the Schedule to a "Pricing Supplement", and described as "Special Conditions". These were as follows:

"1. Redemption Amount

Subject to Special Condition 3 (Issuer's Physical Delivery Option), the Noteholder shall receive, on the Maturity Date a pro rata share (determined on the date falling 20 Business Days prior to the Maturity Date by reference to the percentage which the Principal Amount represents of the Aggregate Principal Amount) (the "Pro Rata Share") of the NAV of the Reference Fund minus the Funding (the "Redemption Amount"), as determined by the Calculation Agent in its sole and absolute discretion.

2. Determination in respect of the Reference Fund

The determination of the NAV of the Reference Fund by the Calculation Agent shall (in the absence of manifest error or fraud) be final and binding upon all parties. A certificate of the Calculation Agent as to the NAV of the Reference Fund shall be conclusive and binding as between the Issuer and the bearer hereof.

If the Calculation Agent fails at any time for any reason to establish the NAV of the Reference Fund or to make any other determination or calculation required pursuant to these Conditions, the Issuer shall do so and such determination or calculation shall be deemed to have been made by the Calculation Agent. In doing so, the Issuer shall apply the provisions of these Special Conditions, with any necessary consequential amendments, to the extent that, in its opinion, it can do so, and, in all other respects, it shall do so in such manner as it shall deem fair and reasonable in all the circumstances.

None of the Issuer or the Calculation Agent shall have any liability to the Noteholder, and the Noteholder shall not have any recourse to the Issuer or the Calculation Agent, in respect or on the basis of the performance in respect of the Reference Fund, or any assets or instruments to which the Reference Fund, or any assets or instruments to which the Reference Fund is linked, or any determination of the NAV of the Reference Fund.

3. Issuer's Physical Delivery Option

a) Physical Delivery Option: If at any time a Redemption Amount becomes payable to the Noteholder, the Issuer shall have the option (the "Issuer's Physical Delivery Option"), instead of paying such amount to deliver to the Noteholder on the Maturity Date a Pro Rata Share of either (i) the underlying assets representing the Reference Fund; or such lesser amount of underlying assets representing the Reference Fund as the Issuer shall determine in its sole discretion together with an amount in U.S.$ which in aggregate equals the value of the Redemption Amount to which the Noteholder would otherwise be entitled, or (ii) the shares of the Reference Fund; or such lesser amount of the shares of the Reference Fund as the Issuer shall determine in its sole discretion together with an amount in U.S.$ which in aggregate equals the value of the Redemption Amount to which the Noteholder would otherwise be entitled (the "Deliverable Property").

b) Exercise of Issuer's Physical Delivery Option. In order to exercise Issuer's Physical Delivery Option the Issuer will notify the Noteholder at least [15] Business Days prior to the Maturity Date by delivery of a "Physical Settlement Notice"…

I will refer to these Special Conditions as SC1, SC2 and SC3 respectively.

9. The Schedule also contained definitions, as follows:

""NAV of the Reference Fund" means an amount equal to the value of the assets in the Reference Fund net of all and any expenses, costs, taxes, deductions, imposts and/or duties, including but not limited to the Unwind Amount, in each case, determined by the Calculation Agent, based on such assumptions and information, including but not limited to prices, derived from such sources as the Calculation Agent deems appropriate in its sole and absolute discretion."

""Calculation Agent" means Nomura International plc. The determination by the Calculation Agent of any amount or of any state of affairs, circumstance, event or other matter, or the formation of any opinion or the exercise of any discretion required or permitted to be determined, formed or exercised by the Calculation Agent pursuant to the Notes shall (in the absence of manifest error) be final and binding on the Bank and the Noteholders. In performing its duties pursuant to the Notes, the Calculation Agent shall act in its sole and absolute discretion. Any delay, deferral or forbearance by the Calculation Agent in the performance or exercise of any of its obligations or its discretion pursuant to the Notes including, without limitation, the giving of any notice by it to any person, shall not affect the validity or binding nature of any later performance or exercise of such obligation or discretion, and the Calculation Agent shall bear no liability in respect of, or consequent upon, any such delay, deferral or forbearance."

""Reference Fund" means a portfolio of 195,000 participating redeemable preference shares of a nominal value of US$100 each in the capital of the sub-fund designated the Global Opportunities Fund managed by Chinkara Global Funds Limited PCC."

The background facts

10. I can take the facts, helpfully set out by the judge, from his judgment essentially as follows.
11. The principal person behind the Fund, its investment manager (First Capital Management Limited, or "First Capital") and MITCO was Mr Rafat Rizvi. The Fund was a sub-fund within what is now known as First Global Funds Limited PCC ("First Global"). First Capital was the parent of First Global and the subsidiary of First Gulf Asia Holdings Ltd ("First Gulf"). Mr Rizvi was a director of First Global, managing director of First Capital, and controlled First Gulf.
12. Each month, MITCO, as fund administrator, issued reports of the NAV per share of the Fund. On the receipt of such reports, Nomura International would send "interpreted values" to the investors in the Fund, subject to a disclaimer that these values were "indicative only", and that they were not represented to be accurate or complete.
13. Thus on 29 September 2008 MITCO reported that the NAV per share was $107.44 as of 31 August 2008. It revised that NAV (as at 31 August) to $123.23, on 17 October 2008.
14. On 30 September 2008, the investors in the Fund (who held their investment via Certificates of Deposit, linked to the Notes, issued by WestLB) were, in error, paid $26 million by WestLB.
15. 30 September 2008 was also the date on or as of which the valuation of the redemption amount per Share would have to be made, pursuant to SC1, which provided for such an amount to be calculated by Nomura International after deducting the fee (or "Funding") due to Nomura.
16. 7 October 2008 was the deadline for Nomura Bank to issue a Physical Settlement Notice under the terms of the Notes, if it wished to avoid paying away the net value of the Fund. Nomura Bank missed this deadline in error.
17. On 28 October 2008 the Notes matured. However, Nomura mistakenly thought they matured on 4 November 2008, and, equally mistakenly, that it had until that day to send its Physical Settlement Notice.
18. On 29 October 2008, Mr McKenzie-Smith, who worked for Nomura International in its Structured Credit Group, e-mailed Mr Rizvi as follows, concerning discussions they were having as to maturity, redemption and Nomura's fee:

"As you know, the USD 26m NBI 08 with ISIN XS0177751541 is due on 4 Nov 08.

The Redemption Amount would equal (i) the NAV of 195,000 shares in Global Opps sub-fund minus (ii) any losses incurred by NBI in selling the shares minus (iii) the funding charge of USD 1,722,135 (note that out of this, NBI would then need to pay 765,393 to First Gulf).

Assuming NBI can sell shares at their current NAV of 123.23, then the Redemption Amount would be USD 22.31m (i.e. 195.000 x 123.23 minus 1,722,135). If NBI cannot sell the shares at their current NAV then the Redemption Amount would be materially lower.

NBI shall have the option to pay the Redemption Amount in one of 3 ways:

1. Payment of USD 22.31m in cash – this assumes that NBI has pre-sold all of the Global Opps shares at their implied NAV of USD 24,029,850.

2. Delivery of 181,025 shares in Global Opps (i.e. shares with a NAV of USD 22.31m) – this assumes that NBI has pre-sold 13,975 shares at their implied NAV of USD 1,722,135. As explained above, if NBI cannot sell at that price then NBI would deliver a much lower amount of shares in order to ensure that NBI retained enough shares to cover the funding charge of USD 1,722,135.

3. Delivery of the correct amount of underlying assets in the Global Opps Fund – which I assume is not an option.

In order to effect any of the share sales and/or deliveries under options 1 or 2, then I understand that various transfer forms, and sign-offs from the Fund directors are required – given that we now have only 3 good business days between today and Nov 4^th (i.e. Thursday, Friday and Monday) then we need to begin this process ASAP. This means we need to agree today who will buy the shares from NBI and at what price.

Please advise."

19. The judge observed that it was apparent from that e-mail that Mr McKenzie-Smith was concerned to ensure that Nomura's fee was paid by the selling of a sufficient number of Shares to do so; and that that was a legitimate concern. I would also observe that the e-mail contemplates that the redemption amount might be "materially lower" if Shares could not be sold at the current NAV.
20. Following that e-mail it was agreed between Mr Rizvi and a colleague of Mr McKenzie-Smith, namely Mr Manners who was co-head of sales within Nomura International's Fixed Income Group and was the point of contact with Mr Rizvi, that 181,025 Shares in the Fund would be delivered, the balance of 13,975 being bought by Mr Rizvi for First Gulf and thus going to provide the means to fund the fee of $1,722,135. This was worked out on the basis of a NAV per share of $123.32 and gave rise to a delivery of 6,962 Shares (equating to $857,989) per $1 million nominal of the Notes. This was confirmed by an internal e-mail within Nomura International dated 4 November 2008 ("The Redemption Amount of the NBI Notes is (i) the NAV of the Reference Fund minus (ii) the Funding = (i) US 123.23 x 195,000 minus (ii) USD 1,722,135 = USD 22,307,715...In accordance with the Issuer's Physical Delivery Option, we will be settling the Redemption Amount via delivery of shares…"). The fact that the financing of the fee was fixed by reference to the latest amended NAV published by MITCO was confirmed by Mr McKenzie-Smith in his evidence at trial. However, as Mr McKenzie-Smith also said, that transaction was not done by reference to market value, since Mr Rizvi had his own broader commercial interests in mind such as trying to secure various fund repackaging transactions at this time. Moreover, 44.4% of the Funding fee was to go back to First Gulf itself. The sale of the 13,975 Shares was evidenced by a trade confirmation. However, in the event, First Gulf never paid for these Shares which it had bought.
21. On 4 November 2008 Nomura Bank issued a notice, albeit out of time, to WestLB purporting to exercise its physical delivery option. The notice, signed for Nomura Bank by a Clare Jarrett, stated:

"NOTICE OF EXERCISE OF PHYSICAL DELIVERY OPTION…The issuer [Nomura Bank] hereby exercises its Physical Delivery Option in accordance with the terms of the Notes…

The Physical Settlement Date for the purposes of the Notes will be Tuesday 11 November 2008, or such later date by which the transfer of the Deliverable Property to the Noteholders has been approved by the fund manager and the fund administrator MITCO of the Reference Fund.

Accordingly, on the Physical Settlement Date the Issuer shall cause to be delivered pro-rata to the Noteholders 6,962 shares in the Reference Fund per USD 1,000,000 Specified Denomination of the Notes, which equates to a Redemption Amount for all the Notes of an amount equal to USD 22,307,715 in accordance with the terms of the Notes" (emphasis added).

22. WestLB relies on this notice, given by Nomura Bank as issuer of the Notes pursuant to SC3, and in particular on the words to which I have given emphasis, as amounting to a notice pursuant to SC2 of a determination by Nomura Bank as issuer (deemed to have been made on behalf of Nomura International as calculation agent) of the NAV of the Fund, and thus as being "conclusive and binding" as to the valuation of the Fund. This is the basis of WestLB's first case.
23. In November and December 2008 PT Bank Century was taken over by the Indonesian government and Mr Rizvi was named as a suspect by the Indonesian police in relation to the collapse of that bank. During this period Nomura Bank failed to obtain payment from Mr Rizvi or his affiliates of the sums due in respect of Nomura's fee, so that the shares intended to be sold pursuant to Mr Manners' agreement continue to be held by Nomura Bank.
24. On 9 January 2009 WestLB asked Mr McKenzie-Smith for the calculations which determined the number of shares to be delivered by Nomura Bank to WestLB. On 12 January Mr McKenzie-Smith's reply stated that –

"In accordance with the terms of the Notes, we calculated (i) the Funding as USD 1,722,135 and (ii) the Deliverable Property as 181,025 shares."

He added that no representation was made as to the market or realisable value of the Shares.

25. There followed further correspondence, which was not entirely satisfactory on the part of Nomura, but the judge acquitted it of anything sinister or dishonest and the exchanges are no longer relevant. (Their previous relevance went to the honesty of the valuation exercise conducted by Nomura International in February 2009. However, as will be explained below, that valuation, relied on by Nomura to say that the value of the Fund was nil, was held to be invalid as being irrationally confined to a dealer poll. The judge went on to consider whether the valuation was a dishonest charade, but found that it was not. But it was in any event invalid as a determinative valuation.) Internal traffic within Nomura demonstrated that it was conscious that the share portfolio was illiquid, the published NAV might not be reliable, and any valuation had to be reasonable.
26. On 21 January 2009 Mr McKenzie-Smith and a colleague, Mr Marshall, discussed how a valuation of the portfolio might be conducted, viz that it should focus on the realisable value of the portfolio as demonstrated by a firm bid from a third party, such as might emerge from a dealer poll.
27. On 26 January 2009 WestLB wrote to Nomura Bank pointing out that the physical settlement notice had been served out of time and therefore requesting redemption of the Notes in cash.
28. On 2 February 2009 Mr Ahmed, who worked on Nomura International's equity derivatives desk, confirmed in a telephone call with Mr McKenzie-Smith that a dealer poll would be a standard method to determine the value of an illiquid or distressed portfolio.
29. Between 6 and 10 February 2010 a dealer poll was conducted by Mr Marshall of Nomura International. At that time Nomura did not even know, and thus was unable to tell the dealers it approached, what was in the Fund's portfolio. The invitation to the dealers to make a bid described the portfolio as "long-only…with no leverage and invests in illiquid/distressed assets in South East Asia and Africa". All the dealers approached declined to bid. In consequence Mr Marshall concluded on or about 13 February 2009 that the value of the shares was zero. By letter dated 13 February 2009 Nomura International, as calculation agent, certified to WestLB that the NAV of the Reference Fund was US$0.00.

The judge's findings as to the February 2009 dealer poll valuation

30. WestLB alleged that Nomura International in determining the NAV of the Fund in February 2009 by means of a dealer poll had acted both irrationally and in bad faith. Despite having a discretion as to how to value (see the definition of "Calculation Agent" and SC1), there remains an implicit requirement that any such valuation should be carried out rationally and in good faith: Socimer International Bank Limited v. Standard Bank London Limited [2008] EWCA Civ 116, [2008] 1 Lloyd's Rep 558 at [66].
31. Both parties adduced expert evidence. Mr McGuinness, a partner and managing director of HedgeSupport, gave evidence on behalf of WestLB, and Mr Malik, managing director of Navigant Consulting (Europe) Limited, gave evidence on behalf of Nomura. On this issue, the judge did not find either expert wholly reliable. Mr McGuinness' reliance on MITCO's NAV reports "had an air of unreality", for "He clung to the MITCO declarations without appearing to acknowledge any risk that they might in the dramatic circumstances of that month be unreliable evidence that redemption in cash at the declared NAV was likely" (at [69]). On the other hand, the judge considered that, in circumstances where there was no evidence that Nomura International had even contacted MITCO to enquire as to whether the shares could be redeemed and at what price, it was irrational to value the portfolio purely on the basis of the zero returns from the dealer poll which had been conducted (at [72] – [74]). However, as indicated above, there was no lack of good faith in what Nomura International had done and certified. As the judge concluded (at [81]):

"They irrationally canvassed only the dealers in the market and failed to canvass the other possible buyer, MITCO. This was an irrational mistake but I do not consider that it was made dishonestly."

The judge's findings as to what Nomura International would have valued the shares at, if it had performed an adequate valuation

32. With the failure of Nomura International's actual valuation, the judge then had to find what value it would have put on the shares had it acted rationally and made enquiries of MITCO as to redemption, in addition to conducting a dealer poll: see Socimer at [65], citing Cantor Fitzgerald v. Horkulak [2004] EWCA Civ 1287 (14 October 2004). The court has to put itself in the position of the decision maker and find what the decision maker would have done, if it had carried out a contractual valuation. However, the decision remains that of the contractual valuer with its contractual discretion, and not that of the court. The question is what Nomura International as calculation agent would have done, if within its broad discretion it had carried out an honest and rational valuation. The question is not what the court, as an objective finder of value, would do or would have done (see Socimer at [66]).
33. On that question, the judge found in favour of Nomura. The valuation had to be carried out "on the date falling 20 Business Days prior to the Maturity Date" (SC1), ie on 30 September 2008 (at para [59]), or at any rate, now that the process had to be evaluated retrospectively, as at that date. Given that the market itself had failed to respond to an offer to sell the portfolio of assets, the remaining enquiry concentrated on the only other possible buyer, namely the Fund itself, through its administrator, MITCO, under the terms of the information memorandum relating to redemption by the Fund. That allowed for redemption at NAV, but also allowed for the suspension of redemption and/or for the postponement of payment for redeemed shares.
34. There was no evidence as to whether, as in the case of many other funds at that time, the Fund had suspended redemptions. Nor was there any evidence of cash redemptions (see at [85]). However, market conditions were such that Nomura International could not have expected MITCO to respond positively to the idea of cash redemptions (at [88]). Mr McGuiness agreed that it was unlikely that MITCO could have honestly responded positively to an enquiry to redeem 185,000 Shares for cash (at [89]). Even so, WestLB's case was based on MITCO's published NAV figures, whether as at 31 August 2008 (although that was a month too early for the valuation date, and before the Lehman failure had triggered a market collapse) or, on the basis that pressure on MITCO could have derived a NAV figure as at 30 September itself earlier than its actual publication of 12 November 2008 in respect of that end September date.
35. However, the judge rejected WestLB's submissions. He found that WestLB had failed to prove that Nomura International would have placed any reliance on any ability to redeem the Shares for cash. In this respect, the judge thought that Nomura International would be entitled to take into account what it had learned after 30 September 2008 (concerning Mr Rizvi and his failure to pay for the Shares he had agreed to buy to fund Nomura's fee) to the extent that such information shed light on value as at 30 September 2008: even though both counsel at trial had argued the case on the basis that whatever happened after the maturity date of 28 October 2008 was irrelevant (at [95]). (In my judgment anything that happened after 30 September 2008 was irrelevant save to the extent that it evidenced a contemporary view of value as of that date, without an element of hindsight.)
36. The judge concluded: "the Claimant has not persuaded me on the balance of probabilities that the Second Defendant, had it sought to value the Shares rationally in September 2008, or in February 2009 as at 30 September 2008, would have valued them at the NAV per share declared by MITCO for 30 September 2008" (at [100]). (Thus the difference between the judge's first exercise (reviewing Nomura International's actual valuation of February 2009) and his second exercise (finding what Nomura International would have done if it had carried out a contractual valuation on or as at 30 September 2008) was a fine one. He appears to have decided that Nomura International was not justified in ignoring the possibility of redemptions by the Fund itself (the first exercise) but would have been justified in setting on one side as unlikely the possibility of redemptions if it had actively considered that possibility. That is not far from justifying the first exercise, but that is by the way.)
37. As stated above, WestLB's case on valuation had been pinned to MITCO's published NAV figures. That was the case which its expert, Mr McGuinness, had spoken to: see para 11.1 of his first witness statement:

"It is my opinion that market practice would be, in the absence of contrary factors which I explain below, to value the NAV of the Reference Fund [sc on the basis of the] most recently published Mitco NAV prior to the calculation date."

Or as Mr Jonathan Nash QC, on behalf of WestLB at this appeal put it: WestLB's and Mr McGuinness's case was that the MITCO NAV prior to 30 September 2008 was the best evidence of value as of that date. The only alternative case put forward by Mr McGuinness in his report was at para 11.3 of his witness statement, viz:

"In the event that NAV was not appropriate then, in my opinion, the most reliable source of prices for the Reference Fund would be recent transactions in the shares of the fund on the secondary market."

However, no reliable evidence was found of that.

38. Nevertheless, one plank in WestLB's case in favour of reliance on MITCO's NAV was that Nomura Bank had itself used that NAV for the purpose of the sale of the 13,975 Shares in the Fund to First Gulf, agreed with Mr Rizvi, in order to fund the fee of $1,722,135. As to that, however, the judge found (at [99]) as follows:

"To conclude from Mr Rizvi's purchase of 6% of the shares at the declared NAV for the purpose of paying [Nomura Bank's] fee, that all the Shares were worth the declared NAV per share would be unsafe. Mr McGuinness accepted this in cross-examination. I was not persuaded that Mr McKenzie-Smith valued the shares in that way in serving the [physical delivery] notice. He simply calculated the number of shares to be delivered to the Claimant having deducted the number of shares sold to cover the Defendants' fees. He then applied the MITCO price which Mr Rizvi had agreed to pay for that number of shares without considering whether that price was a realistic price for that number of shares having regard to the prevailing market conditions. It seems to me most unlikely that [Nomura International], valuing the shares in February 2009, would have regarded the physical delivery notice as reliable evidence of value."

Indeed, Mr McGuinness, in cross-examination, had agreed that "the fee transaction may be somewhat artificial" (Day 2.101).

39. The only other case put forward in evidence by Mr McGuinness as to value was of a "hope value" of 5% of declared NAV. That, however, amounted to less than the fee of $1,722,135, and so has not been pursued by WestLB on this appeal. What Mr McGuinness did not suggest as a further alternative was that, even if MITCO's NAV was not best evidence of value, nevertheless it was a starting-point from which value could be derived by making an appropriate allowance for then current market conditions. That was nevertheless a new alternative case first advanced by Mr Nash in closing oral submissions (but not even in the preceding closing written submissions).
40. The closing written submissions had relied for the first time on the later figure published by MITCO on 12 November 2008 for NAV as at 30 September: prior to that, WestLB's case, based on Mr McGuinness's expert evidence, had relied only on MITCO's NAV for 31 August 2008 published on 29 September 2008. Mr Nash submitted that the end September NAV could have been obtained earlier than it was, at any rate earlier than the maturity date of 28 October 2008, had it been pressed for. However the judge rejected that possibility as unlikely (at [96]).
41. As for Mr Nash's final oral submission, the judge said this:

"101. Mr Nash submitted that in those circumstances [the failure of WestLB's primary case] the court should not conclude that [Nomura International] would have determined that the Shares had no value but that [Nomura International] would have determined that the shares had a value. He submitted that such value would have been closer to the declared NAV per share than to 50% of that figure. The method of valuing the shares would have been, as it was put in additional written submissions served after the hearing, using the MITCO valuations "as a starting point and then applying a discount to reflect the uncertainties debated during the trial." The difficulty with this submission is that the expert evidence did not seek to quantify the effect of the turbulent market conditions in September 2008 on the value of the Shares as declared by MITCO. That is not itself a bar to the court embarking on the suggested exercise if other evidence enables the court to reach a view on the percentage discount likely to have been applied by [Nomura International] as Calculation Agent. However so turbulent were those conditions that the likely discount could have been anywhere from very substantial to substantial. The court is in truth being invited to speculate. Mr McGuinness suggested that the Shares would have a "hope value" of, say, 5% of the declared NAV which would be about US$1m. I agree that they might have had a "hope value" assessed by reference to a very substantial discount on the declared NAV but the result of the dealer poll coupled with the extreme market conditions suggests that even this may be optimistic. But even if a "hope value" were realistic the Claimant adduced no evidence to enable the court to find that it was more likely than not that the Calculation Agent, acting rationally, would have concluded that such value would have been in excess of the Defendant's fee of about USD1.7m., so as to give rise to a damages claim against the Defendants."

42. In the result, the judge concluded that WestLB had "failed to prove on the balance of probabilities that the Shares had a value in excess of the Defendants' fee and so has failed to prove that it has suffered any damage" (at [102]).

WestLB's first case: Nomura Bank had determined the NAV in its physical delivery notice.

43. On this appeal WestLB's first case has been raised again (ground 1 of its grounds of appeal). It is that by stating in its physical delivery notice "a Redemption Amount for all the Notes of an amount equal to USD 22,307,715 in accordance with the terms of the Notes", Nomura Bank had made a determination within SC1 of the "NAV of the Reference Fund minus the Funding (the "Redemption Amount")". It is submitted that Nomura Bank was entitled, and indeed obliged, to take the place of Nomura International for the purpose of this determination, because Nomura International, the calculation agent, had failed to do its job of establishing the NAV of the Fund (see the definition of the "Calculation Agent" and SC2), either on 30 September 2008 or even by the Maturity Date of 28 October 2008, and therefore that duty had fallen on Nomura Bank pursuant to the second paragraph of SC2.
44. As to this case, which he also rejected, the judge said this:

"61. I am not persuaded that this is an accurate or realistic analysis of what in fact happened. It is correct that [Nomura International] failed to determine, in the sense that it had not determined, the NAV of the Reference Fund or the redemption amount either on 30 September 2008 or by the maturity date of 28 October 2008. However, it had not refused to do so. It had not been asked to do so. In early November 2008, believing that the maturity date was 4 November 2008, [Nomura Bank] wished to make a physical delivery pursuant to Special Condition 3 and to ensure that its fee (the "funding") was paid. The mechanism for ensuring payment of its fee was to sell an appropriate number of shares to Mr Rizvi at the NAV which had been declared by MITCO. The remaining shares were to be delivered to the Claimant. [Nomura International], as Calculation Agent, was not asked to determine the NAV of the Reference Fund or the redemption amount. Nor did [Nomura Bank] purport to value the Shares in circumstances where [Nomura International] had failed to do so. This is not surprising given that [Nomura Bank] had not appreciated that the determination of the NAV had to be made before 4 November 2008.

62. [Nomura Bank] issued a physical delivery notice on 4 November 2008. That was too late because such a notice had to be issued by 7 October 2008. [Nomura Bank's] notice was therefore ineffective. However, [Nomura Bank] stated in the invalid notice dated 4 November 2008 that the shares to be delivered "equate[d] to a Redemption Amount for all of the Notes of an amount equal to USD 22,307,715 calculated in accordance with the terms of the Notes." The notice did not identify a determination of the NAV of the Reference Fund, although an internal e-mail of the same date showed that the MITCO declaration of the NAV had been used tio determine the NAV. In circumstances where the terms of the (invalid) notice of 4 November 2008 did not purport to be a determination pursuant to special Condition 2 I am unable to accept the Claimant's submission that, objectively assessed, the (invalid) notice of 4 November 2008 is to be regarded as a determination by [Nomura Bank] pursuant to Special Condition 2. I do not consider that reference either to later e-mails to the Claimant or to internal e-mails on the Defendants' side improves the Claimant's argument.

63. When it was appreciated by Nomura Bank on 3 February 2009 that the notice of 4 November 2008 had been issued too late [Nomura International] was instructed to determine the NAV of the Reference Fund. That determination was made over 4 months after the date when it ought to have been made but pursuant to the express terms of the Notes such delay did not affect the validity of the determination…"

45. On this appeal Mr Nash, in an attractive argument, submits that the judge erred. He submits that (i) although the physical delivery notice itself was invalid, as being given out of time, nevertheless Nomura Bank's determination of the NAV of the Fund was valid and remained so despite the failure of the notice; (ii) that although the determination of the NAV was not expressly mentioned in the notice, it was implicit in the finding of the redemption amount, as the internal email traffic within Nomura makes clear; (iii) that although the implicit determination of the NAV was made for the purposes of SC3, it counted towards the fulfilment of Nomura Bank's obligation under SC2 to make good the failure of Nomura International to determine the NAV; (iv) that the judge was wrong to say that there had not been a failure by Nomura International which brought into play Nomura Bank's obligation to determine the NAV in place of, but also as the deemed exercise of, Nomura International's obligation to determine the NAV (see the second paragraph of SC2); (v) that for these purposes all that mattered was a failure of Nomura International to make its determination by (at latest) the maturity date of 28 October 2008, even if there had been no request to it to make the determination and no refusal by it to do so; (vi) although it was accepted that the findings of the judge in both paras 62/63 and in para 99 (cited above at my para 38) meant that there was in fact no determination of the NAV by reference to market value, nevertheless what mattered was objective appearances: and on a true construction of the notice there was a representation, albeit implicit, of the determination of the NAV.
46. In my judgment, however, attractive as that submission is, it fails. Perhaps that is not altogether surprising seeing that it was never pleaded prior to trial: it was floated on the first day of trial, and pleaded on the second day. It is, in the highest category of an honourable tradition, a lawyer's point. WestLB's pleading up to the second day of trial had simply been that the notice was a "nullity" and that there had been a breach of SC1 in that there had been failure to make a payment to WestLB on the maturity date of a properly calculated redemption amount (which still remained to be determined). That pleading (paras 11.1 and 11.2 of the reamended particulars of claim) survived all amendments. The plea of nullity succeeded. However, inserted into that pleading on the second day of trial was the new plea (para 11.1A) that the notice "constituted or evidenced a determination" by Nomura Bank on behalf of Nomura International of the NAV.
47. In his reply, which was devoted exclusively to this first case, Mr Nash sought to grapple with the judge's findings on the evidence that there had been no determination of value by Mr McKenzie-Smith (at [99]). Mr Nash veered between saying, first, that he did not rely on a close construction of the physical delivery notice (seeing that NAV is not expressly mentioned there), but that nevertheless there had in fact been a determination of NAV; and secondly, that whatever might have happened in fact, what mattered was what appeared to be the position from the notice on an objective understanding of it, especially seeing that the finding of a Redemption Amount was itself built inherently into the physical delivery option under SC3 (see its opening words, "If at any time a Redemption Amount becomes payable to the Noteholder…"). It did not therefore matter what Nomura Bank or Mr McKenzie-Smith consciously thought they were doing, if the objective effect of the notice was to inform WestLB of an implicit NAV determination. It was sufficient, he submitted, that for the purposes of SC3, if not SC1 or SC2, Nomura Bank made use of MITCO's NAV, even though in doing so there was no actual valuation of the assets so as to derive a NAV.
48. In my judgment, however, the judge was right in his conclusion on this ground, and I would seek to put it in the following way. First, there was in fact no SC1 determination of NAV in the exercise of Nomura International's "sole and absolute discretion" (other than the failed determination, accompanied by a certificate, in February 2009). That is not in dispute. It is not in dispute even though, as it seems to me, if there was any determination of NAV which lay behind Nomura Bank's physical delivery notice, it would have been Nomura International's valuation, for Mr McKenzie-Smith was an employee of Nomura International. Secondly, there was in fact no SC1/SC2 determination of NAV in the exercise of Nomura Bank's sole and absolute discretion. There was no attempt to undertake a valuation exercise at all. On the contrary the decision was to tender physical delivery of all the assets of the Fund (less the Funding fee), in part no doubt on the very basis that the assets could not be properly valued. Nomura did not even know what was in the Fund. No one was concerned to value the assets "on [30 September 2008]". Even Mr McGuinness recognised that "the fee transaction was somewhat artificial". That is a recognition that it was not an exercise in valuation, but a mathematical exercise itself based on an artificial sale of Shares to First Gulf, in order to raise the Funding nearly half of which was to go to First Gulf in any event. For these purposes it did not matter in the slightest that First Gulf and Nomura Bank were prepared to treat on the basis of MITCO's out of date NAV for 31 August 2008 (all the more out of date because of the catastrophe which had hit the world's financial markets since the end of August). Mr McKenzie-Smith was not cross-examined on the relevant part of his evidence. I do not see how there can be an unconscious exercise of a discretion. If there was in fact no exercise of any valuation discretion by Nomura Bank, then that is the end of this ground of appeal.
49. Thirdly, Nomura Bank had no contractual discretion to exercise unless the obligation to value under SC1 had passed to Nomura Bank from Nomura International under the second paragraph of SC2. One only has to read that paragraph in full to appreciate that it would be impossible for Nomura Bank to be undertaking that exercise without being conscious of doing so. Thus Nomura Bank "shall apply the provisions of these Special Conditions", "with any consequential amendments", "to the extent that, in its opinion, it can do so," and in all other respects it shall do so "in such manner as it shall deem fair and reasonable in all the circumstances". This also goes in support of my previous point. But it goes further, for it underlines the consideration, which carried weight with the judge, that the obligation to value should not be considered as passing from Nomura International to Nomura Bank automatically by a certain date, but on Nomura International's positive failure (albeit "at any time for any reason") to carry out its responsibilities. After all, Nomura Bank was not well equipped, in the way Nomura International as a broker-dealer was, to carry out the obligations of the calculation agent. Suppose, therefore, a failure by the calculation agent to carry out a valuation on the valuation date (30 September 2008). It is difficult to suppose, if the calculation agent was able and willing to do it the next day, that the obligation to do it would have passed irrevocably to Nomura Bank. Otherwise the definition of "Calculation Agent", which provided that "Any delay…in the performance or exercise of any of its obligations or its discretion…shall not affect the validity or binding nature of any later performance…", could make no sense, for there could never be a later performance. In my judgment, there had been no such irrevocable passing of the obligation to value to Nomura Bank as would support a contention that its physical delivery notice necessarily constitutes or evidences its valuation determination of NAV.
50. Fourthly, it is common ground that the notice was invalid. It was pleaded by WestLB to be a nullity, but now it suits it to say that it survives for some important purpose, because it constitutes or evidences a determination of value. In my judgment, it does not. It seems difficult to me to say of an invalid notice that it is "final and binding" on all parties, especially when the contract contemplates that there would be a certificate issued as to the NAV which "shall be conclusive and binding".
51. I should add, although I do not rely on this matter as it appears not to have been observed at trial or in any of the submissions of counsel, that it is only Nomura Bank's physical delivery notice itself that is Nomura Bank's act. What lay behind it was centred on Mr McKenzie-Smith and Nomura International. However, it suited WestLB to place its reliance on the notice, but in my judgment unsuccessfully.

WestLB's second case: the judge should have found that the Fund assets had some material value, even if a substantial discount upon MITCO's NAV had to be applied

52. WestLB's second case effectively concentrated on the fourth of the valuations listed in para 6 above. It was recognised that the judge's findings had made it impossible to argue in favour of valuations (2) and (3), and valuation (5) was abandoned as being lower than the Funding. Therefore Mr Nash concentrated on valuation (4), a "discounted value", which started with MITCO's NAVs and then applied a discount to take account of the turbulent market conditions. In this respect Mr Nash submitted that the judge had been wrong to jettison the MITCO NAVs completely. They may not have been conclusive or best evidence of value, but they were nevertheless highly relevant evidence of value, particularly in circumstances where there was no evidence that redemptions had been suspended. Moreover, the judge had been unfair to Mr McGuinness in rejecting his evidence on the basis that he had "clung to the MITCO declarations without appearing to acknowledge any risk that they might in the dramatic circumstances of that month be unreliable evidence that redemption in cash at the declared NAV was likely" (at [69]). However, this was to mischaracterise his evidence, which was rather that there had to be some rational basis to depart from the declared NAVs, especially in the absence of evidence of suspension of the right to redeem.
53. That said, the essence of the appeal was that the judge had erred in law, rather than in fact, in refusing to find some discounted figure (short of the hope value of 5%) for the value of the Fund assets as at 30 September 2008. His error was to fail to address separately (i) the existence of loss, and (ii) its assessment. Jurisprudence demonstrated that difficulties of mere assessment would not prevent a court from doing the best it could. Otherwise, a breach of contract or the commission of a tort, causing loss, would go wholly unvindicated because of mere difficulties of finding a particular measure of loss to be the applicable one.
54. To support this submission Mr Nash cited the following authorities: Chaplin v. Hicks [1911] 2 KB 786 at 792, 795 (CA); Biggin & Co Ltd v. Permanite, Ld [1951] 1 KB 422 at 438/9 (Devlin J); Ashcroft v. Curtin [1971] 1 WLR 1731 at 1737/9 (CA); Penvidic c. International Nickel [1976] 1 SCR 267 at 279/280; Thompson v. Smiths Shiprepairers (North Shields) Ltd [1984] 1 QB 405 at 443/4 (Mustill J); and Alger, Brownless & Court Copyservices Ltd v. Thakrar at 11/12 (CA, 15 January 1999, unreported). The essence of these passages can perhaps be taken from Devlin J's judgment in Biggin v. Permanite at 438/9 where he said:

"Is the plaintiff to recover nominal damages only because he cannot prove against either defendant what part of the depreciation in value was due to his acts? It is one thing to say, as I have said, that this is the sort of situation which parties in contemplating the measure of damage would be glad to avoid, and it is another thing to say that it is one which must necessarily result in an injured plaintiff obtaining no satisfaction. I think that in such a situation the court is bound to do the best that it can do. It is no more difficult to estimate a plaintiff's loss than it is to estimate the loss of earning power caused by physical disablement. The third parties submit that the latter case is entirely different. I do not think the fundamental principle on which damages are awarded for breach of warranty of quality, namely, it "is the estimated loss directly and naturally resulting in the ordinary course of events from the breach of warranty", is any different in principle. It is only that where precise evidence is obtainable, the court naturally expects to have it. Where it is not, the court must do the best it can. In Chaplin v. Hicks, Vaughan Williams, L.J., said: "In the case of a breach of contract for the delivery of goods the damages are usually supplied by the fact of there being a market in which similar goods can be immediately bought, and the difference between the contract price and the price given for the substituted goods in the open market is the measure of damages; that rule has been always recognized. Sometimes, however, there is no market for the particular class of goods; but no one has ever suggested that, because there is no market, there are no damages. In such a case the jury must do the best it can, and it may be that the amount of their verdict will really be a matter of guesswork. But the fact that damages cannot be assessed with certainty does not relieve the wrong-doer of the necessity of paying damages for his breach of contract". Fletcher Moulton, L.J., said much the same thing in his judgment.

I do not think it would have assisted me much in this case if hypothetical buyers had been found to say what they might have paid in 1945 for a compound which they never saw and of whose defects they have learnt only at secondhand. It is a common practice in the commercial world to deal with this type of case by way of price allowance; and claims for damaged goods are constantly met to the satisfaction of both parties by the fixing of an allowance by an adjuster or some person skilled in the trade. I think that that method is a method which can legitimately be followed by the court where no more precise method of calculation presents itself; and, indeed, I should be sorry to think that in the commercial court it was thought preferable to award nominal damages rather than to have resort to it."

55. That is the expedient that Mr Nash says that the judge should have applied in this case. Indeed, Mr Nash says that it was perverse of the judge not to do so. As Devlin J said: the court must do the best it can, and should not turn away a claimant on the basis that no precise figure can be proved.
56. That is an attractive submission, and in the right context perhaps unanswerable. There are, however, other cases in which the court simply has to say that it is for a claimant to prove its loss and that he fails to do so. Thus that it is not always possible for the court to act in the way discussed by Devlin J is demonstrated by one of the cases cited, namely Ashcroft v. Curtin, where a figure of £10,500 "plucked out of the air" by Donaldson J in the trial court for loss of annual profits caused by an injury was held in this court to be unsustainable, but also improbable. However, the court was able to avoid the "unsatisfactory conclusion to which I have felt myself driven…that, while the probability is that some loss of profitability resulted from the plaintiff's accident it is quite impossible to quantify it" (per Edmund Davies LJ at 1738E). That was because the court approved a reformulation of the claim as one, not for loss of profits, but for permanent prevention from working as an engineer. On this separate basis, since grievous impairment in this respect was not in doubt, a sum of £2,500 was awarded (at 1738F/1739A).
57. In the present case, however, there were two formidable difficulties in WestLB's path apart from the reasoning adopted by the judge, which on its own terms, as it seems to me, carries great force. After all, even though the cases cited to this court were not cited to the judge, he was nevertheless willing to consider that a court was not barred from "embarking on the suggested exercise" provided that there was at least some evidence, even if not from the expert witnesses (as there was not), which might enable the court "to reach a view" (at [101]).
58. The first of these two obstacles is that, unlike all the cases cited to this court, in the present case the decision maker is not the court, with or without expert or other evidence to assist it: the decision maker, with an absolute discretion, is Nomura (whether Nomura International or Nomura Bank). In circumstances where it ought to have, but has not conducted a valid valuation exercise, the question, as the judge rightly put to himself, is how would Nomura have decided the matter, on or at least as at 30 September 2008, had it made a valid determination, honestly and rationally: Socimer at [65]-[66].
59. The judge did not lose sight of that question when dealing with Mr Nash's "discounted value" submission, but Mr Nash's submissions to this court effectively invited us to do so. What evidence was there that Nomura would have applied a discounted value approach, based on MITCO's declarations of NAV, to the question of its own valuation? There was only the argument relating to the physical delivery notice itself: but that the judge found gave WestLB no comfort. As Mr McKenzie-Smith had said in his e-mail to WestLB of 12 January 2009, "no representation was made as to the market or realisable value of the shares". Moreover, as of the valuation date, Nomura did not even know what was in the assets. In circumstances where the MITCO declarations were treated as unreliable, there was no comfort in the possibility of redemptions by the Fund, and the dealer polls had shown that there were no buyers in the market, where the assets in question were for the most part unquoted and exotic securities, and markets were in a calamitous state, there was no basis on which the judge could say, exercising his own judgment, that it was proved to be likely that Nomura would have assigned a value greater than a nominal 5% hope value.
60. In this connection it must be recalled that the structure of the transaction was that Nomura Bank, as issuer, was supposed to have no risk in the underlying assets. Thus, as discussed in Socimer, one of the purposes of giving to such a party to the transaction a complete discretion to value is to enable it to protect itself from risk. Of course it must value honestly and rationally, but within those parameters it is entitled to have an entirely proper regard for any danger to itself from valuing too optimistically. If, in the absence of a market valuation, or any genuinely potential purchaser, it were to speculate on a "discounted value" figure, it would be making itself obliged to undertake the risk of paying for assets which had no or negligible value. With the acknowledgment that in Socimer the situation under discussion was one in which the valuing bank's counter-party was itself in breach of contract, and it was that breach which had put the valuing bank into the position where it was obliged to value, a situation which does not apply in this case, I would nevertheless refer in general to the considerations there discussed at [110]-[124].
61. The second obstacle in principle to Mr Nash's submission is that, unlike the situations discussed in the cases on which he relied, it cannot be assumed as a given in this case that the Fund assets had any value. It is one thing to say that an injured claimant has suffered a loss which needs quantification. In such a case the injury has been proved, and at the fault of a defendant. Similarly, it is one thing to say that the mere fact that there is no "market" for damaged goods does not mean that they may not be presumed to have some value which the court has to assess, again in a case where damage to the goods has been proved, and at the fault of a defendant. Thus in Biggin v. Permanite it was plain that the defective goods had substantial value, and Devlin J's discount for the defect was only 15% of the purchase price (see at 440), meaning that the goods were worth 85% of their sound value. However, it is quite another thing to assume that a portfolio of mainly unquoted and exotic stocks and shares, at a time of a historic "credit crunch" in world markets, has any value (other than at most a 5% hope value). If it was reasonable to say that Nomura would have valued the portfolio at some discounted fraction of the MITCO NAV, then one would have expected the claimant's expert to have said so, and for that to be a pleaded and evidenced main plank in the claimant's case: even if he could not put any precise figure on it, or could only do so within a fairly wide margin of percentages, and even if his figure may have been squarely challenged by expert evidence on the other side: so that it might be said that precise assessment was impossible. As it was, the late submission advanced by Mr Nash in the last moments of the five day trial below had no support whatsoever in the case that WestLB had made or in the evidence with which it had come to court. One consequence of that was that Nomura's witnesses, both expert and lay, never had the opportunity of saying what they thought of such a submission. And, to return to my first main obstacle, in a case which turns on the question of what Nomura would have thought about value, not on what the court might think, that seems to me to be a fundamental defect in the advancing of such a point as a matter of fairness: and one which could not be overlooked.

Conclusion

62. For these reasons, in my judgment this appeal should be dismissed. In the circumstances, it is common ground that WestLB's subsidiary grounds (grounds 2 and 3) do not arise.

Lord Justice Etherton :

63. I agree.

Lord Justice Patten :

64. I also agree.