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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Socimer International Bank Ltd v Standard Bank London Ltd [2006] EWHC 718 (Comm) (31 March 2006)
URL: http://www.bailii.org/ew/cases/EWHC/Comm/2006/718.html
Cite as: [2006] EWHC 718 (Comm)
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
| Socimer International Bank Limited (in liquidation) |
Claimant |
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| - and - |
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| Standard Bank London Limited |
Defendant |
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Stephen Auld Esq, QC (instructed by Jones Day) for the Defendant
Hearing dates: 8th - 10th June 2005; 13th – 16th June 2005; 20th, 22nd June 2005; 24th June 2005; 7th July 2005.
Further written submissions: 22nd July 2005; 30th August 2005; 1st September 2005;
14th October 2005
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Crown Copyright ©
- This is the second trial in this action in which the Claimant, Socimer International Bank Limited (in liquidation) ("Socimer"), claims the sum of some US $13.3 million odd from the Defendant, Standard Bank London Limited ("Standard"), under the accounting provisions of a forward sale agreement between them dated 8 November 1996 concluded on Standard's standard form terms and conditions ("the Agreement"). The Agreement was an umbrella agreement which governed the making and performance of individual forward sales transactions between Socimer as buyer and Standard as seller of emerging market assets at set future dates and set prices. The emerging market assets were Debt Instruments of one kind or another. The individual transactions were effected orally but evidenced by documentary Trade Confirmations, as defined in the Agreement.
- The first trial took place in May 2004 and on 11 May 2004 Cook J delivered a judgment ("the Judgment") in which he resolved a central issue of construction between the parties, which I explain in further detail below. This second trial concerns the valuation of these Designated Assets as at the date of the termination of the Agreement.
- In this second trial Socimer claims that Standard should account to it under clause 14 of the Agreement, following its termination on 20 February 1998, when Socimer defaulted in the payment of sums due thereunder. Socimer contends that the taking of the account involves:
- There are four principal matters in dispute:
- The Judgment contains a full exposition of the background to the relationship between Socimer and Standard, the nature and operation of the Agreement and the meaning of clause 14. I merely summarise the necessary facts for the purposes of this judgment. The summary is largely taken from the Judgment and the Claimant's opening submissions.
- Socimer was a bank incorporated, regulated and carrying on business in the Bahamas. Following the suspension of its banking licence on 25 February 1998 by the Minister of Finance, it went into voluntary liquidation on 3 March 1998 when Mr Paul Clarke, then a partner in Ernst & Young, was appointed liquidator. That liquidation was brought under the supervision of the Bahamian Supreme Court on 16 April 1998 and Mr Clarke's appointment was confirmed by that court. On 5 March 1998, Socimer notified Standard of its entry into liquidation and accordingly, the Agreement (and all extant trades thereunder) would have automatically terminated on that date, had it not already terminated on 20 February 1998 by reason of a prior default by Socimer in failing to make payments that were due on that date. Originally Socimer contended that termination had occurred on 5 March 1998, but by the date of the trial before me Socimer was prepared to accept Standard's case that the Agreement had indeed terminated on 20 February 1998, and this judgment proceeds on that basis.
- Socimer's primary business was as an investment bank specialising in emerging market bonds and other instruments, involving trading with its customers on margin. It did this by, inter alia, forward selling emerging market assets to such customers. In order to be able to undertake such transactions, Socimer itself entered into forward purchase and/or repurchase transactions with other banks, such as Standard. Socimer's relationship with Standard in respect of such trades from 8 November 1996 until and after termination was governed by the Agreement. Socimer was very experienced in both forward trading and in emerging market assets, particularly those originating in South America.
- Standard is an investment bank which carries on business in London and elsewhere. It is an English incorporated company with a substantial trading office in London. It is part of the Standard Bank Group, which is based in South Africa. The group also has operations in Hong Kong, New York, Singapore and elsewhere. Like Socimer, at the time Standard was very experienced in both forward trading and in emerging market assets, including various debt instruments and bonds, particularly those originating in South America. It traded both for its own proprietary book and for clients, for example by way of forward sales or financing.
- The relevant terms of the Agreement are as follows:-
- Thus it can be seen that, under the terms of the Agreement, Standard agreed to sell and Socimer agreed to buy the relevant emerging market assets as might be traded from time to time (the Designated Assets) at a fixed price payable (defined as the Forward Value) on an agreed forward date, generally 90 days following the conclusion of each individual sale agreement (which was evidenced by a trade confirmation, as defined). That forward date was defined in the Agreement as the Forward Settlement Date. Socimer paid a Downpayment (as defined) on the making of the trade. The market value of the Designated Asset was regularly monitored by Standard by marking the asset (or the sub-portfolio) "to market", and if the Downpayment was insufficient to cover the forward price by the agreed amount (half the remaining equity in the asset or sub-portfolio), then Standard could demand Additional Downpayments and Subsequent Additional Downpayments (as defined), rather like a margin call. The trade comprised in the trade confirmation was often preceded, both logically and chronologically, by a spot purchase of the Designated Asset by Standard from Socimer at a stated price, payable by delivery of the Designated Asset through Euroclear or Cedel. While the forward sale by Standard to Socimer was governed by the terms of the Agreement, the spot purchase was not.
- At the Forward Settlement Date, Standard was obliged to sell, and Socimer to purchase, the Designated Asset concerned, and Socimer was obliged to pay the Unpaid Amount (as defined); see clause 3(a). The Unpaid Amount was, in essence, the difference between (i) the Downpayment plus any Additional Downpayments made by Socimer and (ii) the Forward Value. Thus if, by the Forward Settlement Date, the market value of the Designated Asset had fallen as against the Forward Value, Socimer still had to pay the Unpaid Amount even though the Designated Asset was not worth what Socimer had agreed to pay for it and it made a loss. If, on the other hand, the market value of the Designated Asset had risen as against the Forward Value, then Socimer (although it still had to pay the Unpaid Amount) made a profit: it may be that Standard had to sell at a loss, depending on how it kept its own book. Socimer and Standard each took their own view of the forward price, and the projected performance of the market between the trade date and the Forward Date, when agreeing a Forward Value.
- There was no lending involved in the relationship governed or created by the Agreement, and the Designated Assets were not held by Standard as security for any loan by it to Socimer. Indeed, until the Forward Settlement Date (and subject to Socimer paying the Unpaid Amount), Socimer had no legal or equitable interest in the Designated Asset at all – it belonged absolutely to Standard; see clause 3(c). However, as explained in the Judgment, the contractual scheme which the parties agreed to operate following termination, i.e. clause 14 of the Agreement, included an obligation on Standard to transfer back to Socimer, as soon as practicable after termination, all Designated Assets not required to satisfy Socimer's monetary obligations to Standard then outstanding. Likewise, although, given the structure established by the Agreement, the relationship between the parties was not legally one of borrower and lender, as the judge said in paragraph 7(i) of the Judgment:
- Clause 14 of the Agreement provided for what should happen on the occurrence of an Event of Default. One Event of Default provided for was insolvency or entry into liquidation; see clause 14(ii); another was non-payment of any amount due under the Agreement; see clause 14(i)). As Cooke J held (see paragraphs 23 – 24 of the Judgment), all the obligations of Standard and Socimer under the Agreement and under the Trade Confirmations terminated upon an Event of Default or Socimer giving notice of its own default, save for Standard's rights under clause 14. On termination, clause 14 provided that Standard was entitled either to refund to Socimer any Additional Downpayments and Subsequent Additional Downpayments, after deducting the amounts due to it under the Agreement (see sub-clause l4(a)(aa)), or to reduce the debt owed to it by selling sufficient Designated Assets or retaining them and applying the proceeds, to the extent possible, to satisfy the Unpaid Amount (see sub-clause14(a)(bb)). As Cooke J held (see paragraphs 28-29 of the Judgment), Standard had to elect on the termination date, or as soon thereafter as was practicable, whether to retain the Designated Assets (or some of them) itself (i.e. by taking them on to its own books) or to liquidate them by sale to third parties.
- Until the Forward Settlement Date of a trade, the Designated Assets belonged to Standard and it could do with them as it pleased. Since the Forward Settlement Date was never reached in the case of those trades which were terminated, the Designated Assets remained the property of Standard and the effect of termination of the Agreement was that Standard was relieved of the obligation to sell them under the particular Trade Confirmation, and Socimer was relieved of the obligation to buy them (i.e. take delivery of them) at the forward date, unless Socimer was "in the money", i.e. unless there was a surplus of Designated Assets or cash in Standard's hands following satisfaction of the Unpaid Amount. In that event, Socimer would acquire the remaining Designated Assets without having to pay any further amounts for them. Thus it may be seen that Socimer's obligations in the event of termination by reason of its own default depended on which of the two options Standard elected to pursue, under sub-clause 14(aa) or sub-clause 14(bb) of the Agreement.
- Where a trade was cut short, by reason of termination, before the Forward Settlement Date had arrived, it was crucial for both parties to fix their true exposure to each other as at that date. Standard's exposure was, in respect of the Designated Asset the subject of that trade, any shortfall between the market value of the Designated Asset at that date and the Unpaid Amount. That became a debt owed by Socimer to Standard. Standard was then bound to elect between selling the Designated Asset to a third party or retaining it for its own account on its own books, and was no longer under an obligation to sell it to Socimer. If the market value of the Designated Asset was higher than the Unpaid Amount on or as at termination, then Standard was in the money, plus it kept the Downpayment, and (if it elected for clause 14(a)(bb)), any Additional Downpayments and Subsequent Additional Downpayments as well. If the market value of the Designated Asset had dropped, so that the value of the Designated Asset was less than the Unpaid Amount, then Socimer was indebted to Standard for that difference. Standard had to apply the proceeds of the sale to third parties (where it elected to sell) or the notional proceeds of sale from the valuation (where it elected to retain) in order to satisfy that debt, to the extent possible.
- As Cooke J held, not only did Standard, on the termination date, or as soon as practicable thereafter, have to elect whether to liquidate or retain the Designated Assets, but also Standard was bound to arrive at a value for the Designated Assets on or as at the termination date, either from an actual sale or from a notional valuation, for the purposes of determining the state of the account between Socimer and Standard, following termination of the Agreement; see paragraphs 26 to 30. In coming to this conclusion he relied on the words appearing in clause 14 (in the second sentence of the paragraph immediately after paragraph (bb)):
- As the Judge held, thereafter, following termination, Standard had, under clause 14, the sole and absolute discretion to sell any Designated Assets at such time and at such price as Standard deemed reasonable and appropriate, but that discretion only applied once Standard had exercised the election to retain the Designated Asset for itself and its value as at termination had been brought into account as between the parties.
- Prior to the Judgment, Standard had contended that it had a complete discretion to sell the Designated Assets as and when it liked, and to use the actual sale proceeds from sales whenever achieved, for the purposes of fixing the account as between itself and Socimer as at the termination date. It was clear from the evidence before me that, in February 1998, Standard did not appreciate that it had to elect to liquidate or retain the Designated Assets immediately on the termination date (or very shortly thereafter) or to value them as at that date. It certainly did not elect to retain them on that date nor did it value them. Mr Richard Millett QC, who appeared for the claimants, contends that Standard did, however, make a positive election to sell the TDA-Es, effectively as at the termination date or as soon as reasonably practicable thereafter, and that decision was made prior to 11 March 1998, but the sales were only finally completed by mid-October 1998. He makes the same contention in relation to the North Korea asset, which was sold on 4 March 1998. I shall have to go into greater detail, later in this judgment, as to what I hold that Standard actually did in relation to these particular Designated Assets, but there was no dispute that, so far as the remaining assets were concerned, it simply held on to them pending a decision to go into the market and sell. That decision was taken on 21 August 1998 (or slightly earlier in August 1998) in respect of all (except four) of the remaining Designated Assets other than the Socma DRs. Three further Designated Assets (Argentina Global bonds, Argentina Bocon Pre 4 and Argentina Bocon Pre 2 assets) were sold on 8 October 1998. The Sudan asset was sold in May 1999. So far as the Socma DRs were concerned, the decision to sell was taken on or shortly before 24 December 1999.
- However, Cooke J rejected Standard's contention that it had a complete discretion to sell the Designated Assets as and when it liked, and to use the actual sale proceeds from sales whenever achieved, for the purposes of fixing the account as between itself and Socimer as at the termination date. He decided the construction issue in favour of Socimer. As I have already explained, he decided:
- He also held (see paragraph 32 of the Judgment) that there was no difficulty in this approach from Standard's point of view, since the valuation exercise lay entirely in Standard's hands as at the termination date. It is worth setting out here paragraphs 27-33 of the Judgment in full:
- Before me a number of issues arose in relation to the valuation exercise under clause 14, in particular as to the approach which I should adopt in relation to such valuation and consequently as to the precise questions which I have to decide for the purposes of this trial. These issues can be summarised as follows.
- First, there was a dispute between the parties as to whether, given that Standard had not in fact applied the clause 14 contractual machinery at the relevant time, the Court should now (a) decide objectively, on objective criteria, what was 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; or (b) decide, in effect by reconstructing Standard's dealing room at the time, on the basis of evidence from those individuals then charged with exercising that discretion, what Standard would itself have done on 20 February 1998 had it understood and applied the Agreement as Cooke J decided it meant; in other words that the Court should decide what valuations Standard itself would have placed on the Designated Assets on that day.
- Mr Auld QC, on behalf of the defendants, submitted that the suggested dichotomy was in fact misleading. He submitted that the Court was indeed concerned with deciding what Standard would in fact have done. However, deciding what Standard "would" in fact have done must also necessarily take into account what it "could" have done in the sense that the Court was concerned with the real and very difficult situation which faced Standard on termination and in considering what was realistically possible. Moreover, he submitted, there was no difference between what Standard "would" have done in those circumstances under the contract and what it "should" have done because the obligation to determine value was absolute, and, on the assumption that it was complying with that obligation, it both "would" and "should" have determined the value contractually.
- Mr Millett contended that for the court to apply what he designated the subjective approach of reconstructing what valuation Standard itself would have put on the Designated Assets, in the exercise of its wide discretion, would introduce uncertainty, hindsight and one-sidedness; he submitted that the views of Standard's witnesses as to what they would have done at the time were necessarily partisan and not independent since they remained employees of Standard to this day, and their evidence was coloured by the litigation in which they had both been active participants, since they had apparently had input into what Standard's experts should say in their reports. He further complained that, until very recently, Standard, as well as Socimer, had appeared to be proceeding on the assumption that the exercise for the Court at this trial was to decide what was the value of the Designated Assets as at (or as soon as reasonably practicable after) 20 February 1998 and that Standard's stance at trial involved a change in position. He pointed out that Standard's reconstructed personal approach was never pleaded until the Re-Amended Defence was served on 21 April 2005, where it appears for the first time at paragraph 14.3. If the key question had really been what Standard would itself have done by way of valuation on 20 February 1998, submitted Mr Millett, then (i) one might have expected to have seen it pleaded earlier, and (ii) the role of its expert evidence would have been limited to verifying those valuations as reasonable and in good faith; but it was not until after the service of the expert evidence that Standard even pleaded its own positive case as to values. Furthermore, complained Mr Millett, Standard has tried to have it both ways in that it has adduced expert evidence both to provide an independent and objective valuation and also to bolster the subjective views of its own employees as to what with hindsight they say that they would have done.
- There is some cogency in Mr Millett's submissions as to the lateness of Standard's change of position and the subjective nature of much of the evidence of Standard's witnesses as to the values which they said that they would have attributed to the Designated Assets. 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. Those were (a) to decide either to liquidate or retain Designated Assets, and (b) having done so, to value in good faith and in compliance with such other obligations (if any) which it had in relation to that valuation, the proceeds of sale (or notional proceeds of sale in the event of a retention of Assets for Standard's own account – see paragraph 26 of the Judgment) and to bring into account the value so assessed as a credit against the amounts payable to Standard. 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. I turn in a moment to consider what, if any, obligations Standard had in relation to its valuation.
- In this conclusion I am supported by certain of the authorities cited by Mr Auld. These show 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 was reasonable. Thus, for example, in Cantor Fitzgerald International v Horkulak [2004] EWCA Civ 1287, an employee who had been wrongfully dismissed sought compensation which included a discretionary bonus which he might otherwise have been awarded. The Court of Appeal held that the proper approach to the assessment of damages was for the court to place itself in the position of the employer and decide whether, acting in good faith, the employer would have awarded a bonus. Potter LJ said at paragraph 48 that:
- In Lion Nathan Ltd v CC Bottlers Ltd [1996] 2 BCLC 371, a decision of the Privy Council on appeal from New Zealand, a seller of shares warranted in a share sale agreement that a revenue projection, which had the effect of determining the price of shares, had been prepared "in good faith, and on a proper basis". It was accepted that the revenue projection had been prepared in breach of this duty. The Privy Council held that the measure of damages payable to the buyer was the difference between the price that would have been calculated according to a properly prepared forecast and that which was actually paid on the basis of the negligently prepared forecast. No evidence was adduced as to how the seller would have prepared the forecasts, had it done so in good faith. In those circumstances, Lord Hoffmann said that in calculating the damages payable to the buyer, the court should determine what forecast the seller was most likely to have provided if it had complied with its contractual obligation:
- Given that I have to decide, in calculating Socimer's compensation, what valuation Standard would have reached on that date if the contract had been performed, it must follow that I am entitled to receive evidence from Standard as to how it would have gone about performing that valuation in compliance with its contractual obligations and the criteria if any it would have adopted. Having said that, I am also alive to the fact that necessarily, in circumstances where no such valuation was carried out at the time, there is a risk that any such evidence may be coloured by hindsight and the possibly partisan views of the Standard witnesses as to what they now say that they would have done at the time. Accordingly it seems to me that I am also likely to be assisted in reaching my conclusion by expert evidence as to what was the most likely outcome of the valuation exercise that should have been carried out. These are matters which I address when I come to consider the specific valuation evidence in relation to the various Designated Assets, the value of which is in dispute.
- In my judgment I do have to decide, as the first stage of the decision process, whether Standard would have elected to retain or liquidate any particular Designated Asset. Accordingly, I do not accept Mr Millett's submission that the effect of the Judgment is that, in the absence of a positive decision by Standard to liquidate (leaving aside the TDA-Es and the North Korea asset), Standard must be treated as having retained the Designated Assets; that was not an issue that was before the judge or one that he had to decide. This may not matter much as it was common ground that (leaving aside the TDA-Es and the North Korean asset) Standard did in fact retain the Designated Assets and either should be treated as having elected to retain them or that I should find as a fact that this is what it would have done, had it not been in breach.
- Mr Auld also argued that the Judgment was premised on the basis that the deemed retention of various Designated Assets was against the background of Standard's inability to sell them as at the termination date. I reject this submission. The Judgment did not proceed on this premise and there is nothing in the Judgment that requires the deemed retention to be assumed to be one chosen in the light of inability to sell. Accordingly it is a matter for me to decide, in relation to each respective Designated Asset, whether there was or was not an available market for the asset at the termination date, and if not, how that affected the valuation that should have been carried out.
- The next issue in contention between the parties, in relation to the approach that this Court should take to the valuation, was what, if any, were Standard's duties in relation to the exercise of its valuation under clause 14; in particular, what was comprised in its obligation to make such valuation in "good faith". Both sides presented detailed and lengthy submissions both oral and written on this point, with reference to a wealth of authority in widely diverging fields.
- Mr Millett, on behalf of Socimer, contended that the statement by the Judge that Standard can in effect apply its subjective views about liquidity or nature of a particular Designated Asset when reaching its valuation, provided that "the assessment is in good faith and is not challengeable on any other basis" imports an objective requirement of reasonableness into the valuation process. Socimer further contended that a good faith valuation, in the context of clause 14 of the Agreement and the Judgment, is one done in an honest attempt to arrive at a valuation which most fairly and reasonably reflects the value of the Designated Asset in question at the termination date. This, submits Mr Millett, means that Standard is bound to perform the valuation exercise not only in good faith but with reasonable care, by reference to objective criteria existing at the time. In support of this submission Mr Millett advanced the following arguments:
- Mr Auld, on the other hand, submitted that where a party has a contractual discretion, the law makes no stipulation, whether by way of implied term or principle of construction, that such discretion should be exercised reasonably with regard to the interests of the other party. Thus, whilst Standard accepted that, as Cooke J found, that valuation had to be exercised in good faith, that did not import any concept of reasonableness, because that would be inconsistent with the complete and absolute control and discretion which Standard had in relation to the determination of value when faced with Socimer's repudiatory breach. He submitted that in making the qualification that the power had to be exercised in good faith, Cooke J was doing no more than identifying an implied term of the contract that Standard Bank's discretion would be exercised honestly. He contended that, on the basis of the authorities relating to implied terms, there was no justification of necessity or otherwise for implying the alleged terms. He submitted that an implied term that a discretion will be exercised in good faith does not mean that it will be exercised with equal reference to the interests of both parties. He relied on the fact that both parties were experienced in emerging market asset trading and in forward sales as a form of financing; that the immediate consequence of Socimer's default as found by Cooke J was that Standard Bank immediately assumed risk where there had been none; that as the Agreement recognised, emerging market trading/assets are notoriously volatile and risky; that the whole underlying purpose and intention of the Agreement, in the context of its underlying financing purpose, was to give to Standard Bank a complete and absolute discretion in all the key areas including, for example, in relation to determination of "market value" under Clause 6. He argued that in a detailed written commercial contract of this sort between substantial commercial parties operating in a specialist and high risk area of business, well known to both of them, there is no basis for seeking to impose obligations on one of the parties in wide and, in reality, meaningless terms such as "unreasonableness". The only basis in law where the Court would contemplate such an implication is where there was some defined market practice to that effect. He further submitted that the determinations by Standard of Market Value and, similarly, the Certificate produced by it pursuant to Clause 14, are not open to challenge by Socimer and thus that the determination of value is absolute subject to good faith. He relied upon the minimum performance principle (i.e. that a court will assume that a party would have performed its obligations in the manner least onerous to himself) to support his argument that the court was entitled to assume that of the various valuations available Standard would have chosen the lowest as the one least unfavourable to itself.
- Further, he submitted that Socimer's attempt to rely on implied terms is contrary to the case advanced by it before Cooke J., has never been pleaded and is not open to Socimer to attempt to argue now. He argued that if Socimer had made these allegations at the outset, the entire course of this case would have been different; there would have been separate evidence concerning the implication and/or underlying market practice. Not only has this not occurred, but none of Standard's witnesses, whether witnesses of fact or expert, have been asked to address this issue. Mr Beckman's evidence explaining the market and its practices is entirely contrary to the implication of the alleged terms.
- As to the alleged analogy to the position of a mortgagee, Mr Auld submitted that such principles have no application to the Agreement; as Cooke J held, the whole point of Clause 14 is that Standard is on risk from the date of termination/valuation; it can have no recourse to Socimer if the market falls in relation to an asset which it has had to retain; the fact that Standard is required by the Agreement to value immediately as best it can in very difficult circumstances means that it can be subject to no such duty analogous to that imposed on a mortgagee; to do so would be to completely rewrite the contract between the parties.
- In my judgment, the position is simpler than the detailed submissions suggested. I conclude that, in doing its valuation, Standard was obliged to act honestly and reasonably and to arrive at a value which properly reflected the actual value of the Designated Assets as at the termination date. Of course, in doing its valuation, Standard was entitled to have regard to the fact that, in the case of retention, it bore the risk that the retained assets might depreciate in value; that it was entitled to be paid its indebtedness in full (or, as Cooke J said, to be made "whole"); that there were illiquidity, volatility and other risks necessarily associated with the assets; and that it was obliged under the provisions of clause 14 (as Cooke J has decided) to value as at the termination date, and to do so on that date or shortly thereafter, so that it did not have time to wait and see how the market developed or to engage in lengthy detailed research as to whether buyers were available. All these factors point to the conclusion that a reasonable counterparty in Standard's position might well adopt, and be entitled to adopt, an extremely conservative approach to the question of valuation. But they do not lead to the conclusion that Standard did not owe any obligation to act reasonably. Nor does the fact that the certificate produced by Standard pursuant to clause 14 certifying the deficiency was "conclusive and binding on the Buyer, in the absence of any manifest error" mean that Standard did not have an obligation to act honestly and reasonably in arriving at its valuation. My reasons for reaching this conclusion may be summarised as follows:
- I reject Mr Auld's submission that the argument in relation to an implied term comes too late and that, had the implied term point been raised earlier, the course of the litigation would have been different because there would have been evidence about the implied term or underlying market practice. 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 which expressly recognised that the valuation might be challenged on the grounds that it was not conducted in good faith or for other reasons. Moreover, it is clear from the authorities, such as The Product Star [1993] 1 Ll Rep 397, that it is not right that to say that the only basis of implication of a term of reasonableness in a contract of this sort is where there is a defined market practice. If there is to be an implication of such a term, it arises here, as Mr Millett submitted, from the terms of the Agreement, the nature of the Designated Assets, the relationship between the parties and the circumstances in which the Assets are valued – namely to establish the ultimate deficiency or surplus - and not because of any further extraneous considerations that are required to be proved in evidence. All of these matters have been extensively canvassed in evidence and argument. In my judgment any further so-called evidence of "market practice" (which, in so far as it went beyond the evidence already given, was wholly unidentified by Mr Auld) would not operate as any aid to construction of the Agreement.
- Although a term that a party (who has a contractual discretion which is otherwise capable of exercise to the detriment of the other) must exercise that discretion not only honestly and in good faith, but also reasonably and not capriciously, will not automatically be implied into a commercial contract, the cases show that the courts are not slow to imply such a term where the circumstances require it. There is a helpful summary of the correct approach in commercial cases in Cantor Fitzgerald International v Horkulak supra. Giving the judgment of the Court, Potter LJ said at paragraphs 26-30:
- Paragraphs 62 to 66 of the judgment of Mance LJ in Gan Insurance v Tai Ping Insurance [2001] EWCA Civ 1047 [2001] 2 All ER (Com) 299, referred to by Potter LJ, are also instructive.
- In my judgment there is a business necessity here dictated by the terms of the Agreement, the nature of the Designated Assets, the relationship between the parties and the circumstances in which the Assets fall to be valued, which gives rise to the implication of a reasonableness term in the manner which I have formulated in paragraph 36 above. 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 a proper value of the Designated Assets as at the termination date given all the constraints to which I have already referred. In so concluding I rely on the analogy which Mr Millett sought to draw with the position of a mortgagee and a mortgagor, although, as he correctly conceded, legally the structure of the Agreement is not one of mortgage or charge. However, commercially the position is very similar as the terms of the Agreement make clear. I did not find any assistance from the cases concerning valuers, as the legal position of an independent third party valuer gives rise to very different considerations.
- I reject Mr Auld's submission that the implication of such a term drives a coach and horses through the idea that the purpose of clause 14 is to achieve certainty on a date certain. There is nothing that undermines certainty in requiring Standard to undertake a valuation exercise as at the termination date that may, in the case of illiquid assets, take a very short time longer than the 24 hour period of the date of termination. I accept Mr Millett's submission that it cannot have been the parties' intention that the requirements of certainty were so stringent that if no bid for a Designated Asset could be found during trading hours on the termination date, or the next trading day if the termination date was not a trading day, then that conclusively predicated that Standard could fairly value that Asset at nil. Whether or not it was appropriate to value an Asset at nil if there was no ability to sell on a particular date (i.e. no liquidity on that day) must in my judgment be a matter of fact in each case. The fact that there is not a purchaser for a particular asset on a particular date, whether it be a security, real property or other commodity, does not predicate that the asset has no value on that date. Thus the fact that Standard was exercising a contractual discretion which was only challengeable in limited circumstances did not mean that it is now entitled to say, in circumstances where it in fact carried out no valuation, "we would have honestly valued these Designated Assets at nil", if the evidence showed that the proper value of such assets that would have been attributed to such assets by the hypothetical reasonable financial institution in its position was far greater; see Lion Nathan Ltd v CC Bottlers Ltd supra.
- The mortgage cases to which both parties referred clearly show (a) that in selling or valuing the mortgaged assets a mortgagee can have regard to his own interests, but nonetheless in doing so he must take account of the interests of the mortgagor and others interested in the mortgaged property; (b) that the duties imposed on a mortgagee exercising his powers were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor (and others interested in the equity of redemption); (c) that these duties are not inflexible, and therefore what a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case; (d) that in deciding whether the mortgagee has taken reasonable precautions to obtain the true market value when exercising his power of sale "the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line"; see Cuckmere Brick Co v Mutual Finance Ltd. [1971] Ch 949, [1971] 2 All ER 633, at p 969 of the former report; see also Medforth v Blake [2000] Ch 86; Meftah v Lloyds TSB Bank plc (No 2) [2001] 2 All ER (Comm) 741; Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54, [1983] 1 WLR 1349. A useful guide in relation to the principles governing the mortgagee's obligations in relation to the exercise of his power of sale is to be found at paragraph 9 of the judgment of Lawrence Collins J in Meftah v Lloyds TSB Bank plc supra:
- In my judgment, 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. I reject Mr Auld's submission, based upon the observations of Sir Richard Scott V-C in Medforth v Blake supra as to the origins of the mortgagee's duties in equity, that such a duty cannot be implied here, because the mortgagee's obligations in equity derive from the mortgagor's continued interest (represented by the equity of redemption) in the mortgaged property and that, given that Socimer had no such interest, no such duty arose. I prefer Mr Millett's approach, namely that although Socimer, as he accepts, had no such proprietary interest in the Designated Assets, nonetheless, given its rights to have the Designated Assets returned to it to the extent that the Unpaid Amount was satisfied out of the liquidated or retained Designated Assets, and Standard's obligation to fix the deficiency (if any) by reference to its valuation of the Designated Assets, there is every reason for the implication of a duty closely analogous to that of a mortgagee.
- I also accept Mr Millett's submission that the fact that, as is well recognised, a mortgagee can decide whether and when he exercises his power of sale is of no impact in this case since both of those matters are predetermined by clause 14. That does not mean that Standard, having undertaken, as it was bound to do, the valuation exercise, could decide how it did it so free from any considerations of reasonableness. On the contrary, it could not. Neither does the fact that, as Mr Auld submitted, these were "sophisticated commercial parties engaged in a complex financial transaction" undermine Standard's duties in this respect. Mr Auld also relied upon Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409; [2004] 1 BCLC 359 (Aldous, Tuckey LJJ and Lightman J). That was a case where there was no dispute that the receiver had obtained the best price available for the mortgaged land in its current state. However, the mortgagor contended that, because the receiver had investigated the possibility of obtaining planning permission for the land, he was obliged to proceed with the application, and seek to enhance the value of the land. The Court (per Lightman J) rejected this argument and held that the mortgagee was under no obligation to improve the land or increase its value. Moreover, it also rejected the claimants' argument that the mortgagee was under a duty of care as to when it should exercise its power of sale. It stated:
- I agree with Mr Millett that paragraph 19 of this judgment 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.
- There is no dispute that the total (gross) Unpaid Amounts on all of the Designated Assets themselves was US $24,505,881.17 as at 20 February 1998. The dispute is whether that total Unpaid Amount is to be used for the accounting exercise under clause 14 of the Agreement. Standard contends that it is. Socimer contends that it is not, and that the proper Unpaid Amount figure for that purpose is much lower, i.e. US $20,382,063.24 as at 20 February 1998. Socimer contends that the Unpaid Amount figure of US $24,505,881 is not the appropriate amount for the purposes of the accounting to Socimer because:
- The quantum of these three credits is not disputed. However, Standard says that it was not obliged to apply them in reduction of the Unpaid Amount in carrying out the accounting because they are not Designated Assets and because they are not obliged to set off credit balances derived from non-Designated Assets against Unpaid Amounts on Designated Assets. In particular Mr Auld submitted that, as at 20 February, not only had the settlement date not arrived but also Standard understood there was substantial uncertainty as to their true beneficial owner, and that the Spot Trade Balances were an account payable to a company called Hemisferio, for whom Socimer had acted as agent. Standard also submitted that Socimer is out of time on limitation grounds for claiming the balances due in respect of the Spot Trade Balances and the Vnesh Asset.
- 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. I reject Standard's contention that there was in reality any genuine concern that the monies were payable to Hemisferio or that the correct accounting entry in Standard's books for the Spot Trade Balances was to show them as an account payable to Hemisferio. I likewise reject Standard's contention that, accordingly, on the hypothesis that it had been complying with its obligations under the Agreement it would not have applied the Spot Trade Balances against the Unpaid Amounts as at the termination date, because Mr Feld's evidence was subject to the "concerns" about the Hemisferio problem. It is not necessary for me to set out in any great detail the evidence relating to this topic, which is rehearsed extensively in the parties' written submissions. What is clear is that there was no contemporaneous transaction document which shows that Hemisferio was the true principal to the spot trades or the assignee or beneficiary of the choses in action comprising the Spot Trade Balances. I find as facts, based on the evidence given in cross-examination by Mr Jeffrey Clifford, an employee of Standard (who was in charge of the forward sales business from 1994-1997 and from July 1998 onwards), and the relevant contemporaneous documentary material that:
- Moreover I reject Standard's submission (to the extent that it remained in play before me) that it had available limitation defences in relation to the Spot Trade Balances. It is quite clear from the correspondence to which I have referred and Standard's proof in Socimer's liquidation (which was in respect of a single net balance of US $1,037,060.52, after application of set-off of what was clearly the credit balance on the Socimer running account from 25 February 1998, which contained the Spot Trade Balances), that Standard acknowledged such indebtedness and utilised it for the purposes of its account with Socimer. In such circumstances it is not now open to Standard to contend that limitation prevents a claim for these amounts. The fact is that payment was made by Standard of these amounts when set off took place because Standard has actually applied the Spot Trade Balances against and in reduction of the actual Unpaid Amounts due to Standard in respect of Designated Assets, albeit much later than the date when Standard was obliged to conduct its valuation exercise. The issue which I have to determine, in the context of Socimer's claim for damages in respect of what Standard should and would have done as at the termination date if it had appreciated its contractual obligations, is to decide whether, in circumstances where Standard had the power to set off, but not the obligation to do so, it would in fact have set off these amounts. I have already held that it would have done so. In such circumstances I do not see that issues of waiver or estoppel arise. If they had, I would have decided them in Socimer's favour.
- Socimer contends that Standard has failed to give credit for the sum of US $700,422.37 held by it in relation to amounts derived from two Designated Assets, namely the Vnesh Asset and a Brazil Bco BMG Coupon paid on 27 December 1997 (referred to as the "Other Balances" in the Re-Amended Particulars of Claim). Balances in relation to each of those were held by Standard as at 20 February 1998 and had accrued due as at that date. The two "Other Balances" are set out (as at 20 February 1998) at paragraph 10B(b)(ii) of the Re-Amended Particulars of Claim and are as follows: Brazil Bco BMG Coupon paid 27 December 1997 USS 24,686.73; the Vnesh Asset US$675,735.64.
- Socimer contends that these ought to be set off in reduction of the Unpaid Amount to reflect the fact that they were held for Socimer's account, and that they derived from Designated Assets under the Agreement. It also contends that any Designated Assets and cash proceeds of any liquidated Designated Assets over and above those required to satisfy Unpaid Amounts etc must be transferred or paid to Socimer, under the accounting provisions of clause 14 of the Agreement, and thus are bound to go to reduce the deficiency the subject of any putative certificate; it submits that, unlike the Spot Trade Balances, Standard has no discretion whether to set-off the Other Balances against the total Unpaid Amounts when settling the account as between Socimer and Standard: it must do so. It also contends, for the further reasons which Socimer contends apply in relation to the Spot Trade assets, that whether or not Standard was required in law to set off these Other Balances, it had the right to and it exercised that right and it cannot now reverse the exercise of that right. It likewise relies upon the evidence of Mr Feld.
- Standard, on the other hand, contends that these other balances are not Designated Assets notwithstanding that they derived from Designated Assets, that it was not obliged to set them off in reduction of the Unpaid Amount, and it accordingly has a limitation defence in relation to these claims.
- I accept Mr Millett's submissions in relation to the Other Balances. I do not see that Standard has any basis for an argument that the Brazil Bco Coupon should not be set off against the Unpaid Amount. So far as the Vnesh Asset is concerned, the facts are slightly more complicated. In January 1998, Standard sold forward to Socimer under the Agreement US$9,000,000 of the Vnesh Asset. This was done in two tranches: the first was US $7 million on 20 January 1998 and the second was US $2 million on 28 January 1998. On 5 February 1998, Standard then entered into a series of four acceleration transactions with Socimer in relation to parts of the Vnesh Asset, with the effect that US$6,450,000 was bought back early by Standard from Socimer. The effective date of the acceleration transactions was 20 February 1998. As at 20 February 1998, therefore, US$2,550,000 of the Vnesh Asset remained the subject of a live forward sale between Socimer and Standard. That part of the asset is claimed by Socimer along with the other Designated Assets held by Standard as at the date of termination. The result of the acceleration transactions in relation to the other US$6,450,000 of the Vnesh Asset was that US$675,735.64 was owing to Socimer. That arose because at the time of the transactions the Unpaid Amount due from Socimer to Standard in relation to that part of the Vnesh Asset was US$3,028,140.40 and the buy-back price due from Standard to Socimer for that part was US $3,708,876.14. The balance of US $675,735.64 formed a credit in favour of Socimer. This appears to have been accepted by Standard. Had this transaction not been closed out on that date then it would have clearly been a Designated Asset and taken into account as such. As it was, as at 20 February 1998 Standard held a balance from the acceleration transaction in favour of Socimer of US $675,735.64, which was credited to Socimer's running account with Standard. Standard does not dispute that it held that balance for Socimer as at 20 February 1998. In my judgment, these proceeds were in effect the proceeds of Designated Assets and were thus subject to the compulsory set off provisions at termination under clause 14 of the Agreement. If that is wrong, then I find as a fact that had it appreciated its valuation obligations Standard would have set off these amounts as at that date and indeed Mr Feld's evidence was to this effect.
- Socimer submits that all coupon interest accrued on the Designated Assets as at the date of termination of the Agreement was held by Standard for Socimer's account and should be set off in reduction of the Unpaid Amount, and that, as at 20 February 1998, coupon interest payments had accrued, but were unpaid, in the amount of US $302,914.63. It relies on the fact that Standard's document "the Accounts of Socimer at SBLL in 1998" shows the coupon interest payments actually being credited to Socimer's account with Standard from 4 March 1998 onwards; in other words that that document shows that all of the coupon payments claimed by Socimer had accrued as at 20 February 1998 but the payment of those sums into Socimer's account with Standard did not start until 4 March 1998. Socimer calculated what the accrued coupon payments were as at 20 February 1998 by reference to the Accounts of Socimer document and, in relation to the Vnesh Asset, by reference to the interest shown on a Standard Trade Ticket document in relation to the acceleration of part of that asset. Socimer calculated the accrued coupon interest as at the termination date by calculating the amount of coupon interest accruing each day and multiplying that figure by the number of days from the last coupon payment on the asset to the date of termination. Socimer submits that it had an entitlement to coupon interest under clause 8 of the Agreement. It further contends that, whether Standard was obliged to set off the coupon interest against the Unpaid Amount or not, it did in fact set off those amounts in the running account. Having exercised its right to set off those amounts, Socimer contends that Standard cannot now reverse that election and relies on its earlier arguments on election, estoppel and waiver, which apply equally to Standard's set off of the Accrued Coupon Interest. In the alternative it submits that, even if the Accrued Coupon Payments are not to be set off as against the Unpaid Amount, the accrued coupon interest on each of the Designated Assets was part of its intrinsic value. Accordingly, it was worth more in the market with an accrued coupon than without it, and, as such, the state of the account between Socimer and Standard required by Clause 14 of the Agreement must reflect the proper value of the Designated Assets "cum-coupon".
- Standard's arguments on this point may be summarised as follows. It accepts that, pursuant to clause 8 of the Agreement, Socimer was entitled in appropriate circumstances to coupon interest in relation to the Designated Assets prior to an accelerated settlement date. However, it submits that this provision has no application where the Agreement was terminated as a result of Socimer's default. It further submits that, in any event, Socimer was only entitled to coupon interest which had actually been received by Standard and then only on payment by Socimer of the Unpaid Amount. It denied that, as at the termination date on 20 February 1998, any such coupon interest had been received by Standard other than that which had already been paid. Accordingly, it contends that, in the circumstances, Standard was not liable to account to Socimer in relation to any coupon interest at or after termination.
- In my judgment, as at the termination date, pursuant to clause 8 and clause 14, Standard was only obliged to set off as against the Unpaid Amount coupon interest which had actually been received by Standard as at that date. However, I find as a fact, by reference to Standard's document "the Accounts of Socimer at SBLL in 1998" and Mr Feld's evidence, that, had it appreciated its obligation to do a valuation exercise as at the termination date, on the balance of probabilities it would have set off accrued amounts in respect of coupon interest (even though not actually received) as against the Unpaid Amount as at it did in March 1998. If I were to be wrong about that, then I accept Mr Millett's alternate submission that the accrued coupon interest on each of the Designated Assets was part of its intrinsic value and that, because it was worth more in the market with an accrued coupon than without it, the state of the account between Socimer and Standard required by Clause 14 of the Agreement must reflect the proper value of the Designated Assets "cum-coupon".
- 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 in fact have deducted:
- In circumstances where (as I have found) the Unpaid Amount was, or should have been, US $20,382,063, Socimer goes on to contend that, even accepting Standard's values for the other Designated Asset, it was "in the money" as at termination. The phrase "in the money", according to Socimer, means that the aggregate values of the Designated Assets (even on the assumption, as against Socimer, that Standard's case as to the value of assets known as the TDA-Es were to be accepted), excluding the Socma DRs, exceeded the Unpaid Amounts, as reduced by the above set-offs, in respect of all the Designated Assets, including the Socma DRs. The position stated numerically is as follows: on Standard's values (which attribute a nil value to the Socma DRs and a figure of US$ 5,458,000 to the Brazil TDAs (based on the valuation of Standard's expert, Mr Quintero, in his supplemental report, rather than on Standard's own witnesses' evidence), as compared with Socimer's figure of US$ 9,964,000) the total value of the Designated Assets as at 20 February 1998 was US$ 20,612,892.86, i.e. some $230,829.86 more than the Unpaid Amount. The consequence of Socimer being in the money, submits Mr Millett, is that Socimer is able to advance its primary case in relation to the Socma DRs, which I set out below. (There was an alternative basis put forward by Mr Millett to support his argument that Socimer was in the money so as to be able to advance its primary case on the Socma DRs. That was that, even if Socimer were held to be wrong in its arguments in relation to the Unpaid Amount, if nonetheless the Court were to accept its case as the highest values for the Brazil TDA-Es, then it would have still been in the money. I deal with this alternative case below when I come to address the value of the TDA-Es.)
- Socimer's primary case is that, given that the values of all of the other Designated Assets in the portfolio as at termination (i.e. excluding the Socma DRs) exceeded the Unpaid Amount for all the Designated Assets (including the Unpaid Amount for the Socma DRs), the Unpaid Amount could have been satisfied without the need for the Socma DRs to be liquidated or retained and valued by Standard under clause 14 of the Agreement; accordingly Standard was under an obligation thereunder to hand the Socma DRs back to Socimer; Standard failed to do so and therefore must account to Socimer for the value that the Socma DRs would have had in Socimer's hands under the clause 14 accounting provisions. Socimer contends that that value, as supported by Socimer's expert Mr Tether, was in the range of US $8,172,217 - US $8,424,966, regardless of the value that the market might have placed on the Socma DRs in the light of any rumour that Socimer might be insolvent. Mr Millett submitted that the Socma DRs were worth a figure approaching their full face value in the hands of Socimer (less any amortised amounts) because of the particular nature and structure of the instrument.
- Socimer's secondary case was that, although it is correct that, in reality and as a matter of law, and with the benefit of hindsight, the Socma DRs were indeed exposed to the risk of Socimer's insolvency, that fact was not known at the time of termination nor for some years afterwards; the market perception, which was shared by Standard, was that the Socma DRs were not exposed to Socimer's insolvency. Furthermore, Socimer contended, it was not at all clear to what extent the market in general knew of Socimer's insolvency as at 20 February 1998, or indeed whether Socimer was in truth insolvent at that date. On its secondary case, Socimer therefore contended that the market value of the Socma DRs, as supported by Socimer's expert evidence, was US $7,582,469.40 at 20 February 1998.
- Standard, on the other hand, submitted that, on the figures, it had no obligation to hand the Socma DRs back to Socimer; it contended that Mr Clifford, as the person with direct responsibility, would have conducted the contractual valuation and arrived at a figure of $926,753, which he would have reported to the Bank's senior management; and that, as explained by Mr Feld, the Bank's senior management would have considered Mr Clifford's analysis and would have arrived at a value of US $463,376.50 for the Socma DRs. Mr Auld further contended that, as per Standard's independent experts, Mr Ian Beckman and Mr Sebastian Doyhambehere, the actual value that should have been placed on the Socma DRs was zero or close to zero. He further contended, in relation to Socimer's primary case, that even if the Court were to accept that the Socma DRs should have been handed back to Socimer, the value in Socimer's hands would not have been US $8,424,966 as Socimer maintains, but only the amount which Socimer would avoid paying out as a liability to third party holders of the asset in its liquidation, i.e. the actual value of a claim for the assets in its own liquidation, being approximately 19 cents in the Dollar to date (after seven years).
- For the purposes of this judgment it is necessary to give a short description of the nature of the Socma DRs. In summary the Socma DRs were a derivative instrument created by Socimer in order to make a market in its own asset, namely its right to receive proceeds under its participation in a loan by International Finance Corporation ("IFC") to Socma Americana SA ("Socma"), a company unrelated to Socimer. The Socma DRs themselves represented debt owed by Socimer to the holder in an amount equal to whatever Socimer might receive under its participation in the loan.
- The nature and structure of the instrument was not in dispute between the parties. A more detailed description is as follows. By two investment agreements dated 2 March 1995 and amended on 27 March 1997 IFC (as lender) made various loans to Socma and to others in its group, including two B loans totalling US $60 million. These "B" loans were guaranteed by Socma's parent company, Socma SA. Socma was an Argentine based industrial and financial conglomerate whose interests included chemicals, IT and motor vehicles. It appears to have had a reasonable credit rating. By two participation agreements dated 3 April 1997, IFC granted to Socimer a participation in part of the "B" loans in the amount of US $30 million, in two tranches, US $13,695,000 and US $16,305,000 (together "the IFC participation"). Under the IFC participation: Socimer agreed to, and did, pay US $30 million to IFC, and IFC granted to Socimer the Payment Rights as defined therein, namely the right to be paid an amount of money equivalent to the sum which IFC was paid by Socma (or Socma SA) by way of repayment of the B loans, as and when it was received by IFC. The Payment Rights were not in the nature of a trust interest and gave the participant no proprietary interest in the sums received by the other party from the original debtor. Accordingly, Socimer's rights against IFC under the IFC participation were as an unsecured debtor in respect of any amount that IFC received from Socma under the original "B" loans. Socimer had no direct payment rights against Socma or Socma SA, but only as against IFC. By a sub-participation agreement dated and effective 8 April 1997 ("the sub-participation agreement"), Socimer granted to Handelsfinanz-CCF Bank International Limited ("Handelsfinanz") a sub-participation in the whole of its US $30 million interest in the IFC participation. Under the sub-participation: it was agreed that the relationship between Handelsfinanz and Socimer would be one of debtor-creditor and that Handelsfinanz would have no ownership rights in the US $30 million subject loan and that Socimer would not act as agent or trustee for Handelsfinanz in respect of the Payment Rights (i.e. the proceeds of the IFC participation); and Handelsfinanz, instead of paying Socimer US $30 million in cash, gave consideration for the Payment Rights by issuing and depositing into the Euroclear system a Global Depositary Receipt with a face value of US $30 million. No money changed hands between Socimer and Handelsfinanz, apart possibly from a fee payable to Handelsfinanz. The Global Depositary Receipt was in a form agreed under the Deposit Agreement, also dated 8 April 1997 between Socimer and Handelsfinanz. Under it the sub-participation was in effect conditional upon entry into the IFC participation and the payment by Socimer to IFC of the US $30 million and also entry into the sub-participation; Handelsfinanz was to issue the Global Depositary Receipt to Socimer against transfer to it of the Payment Rights (defined as the right to receive payment of the principal and interest in respect of the US $30 million of B loans); the Global Receipt was to be a bearer instrument representing an amount of US $30 million. It was to be delivered to the Common Depositary (i.e. Chase Manhattan as owner of the clearing system, Cedel and Euroclear) and it was to represent the Receipts as defined. The Receipts were to be issued by Handelsfinanz in denominations of US $10,000, all represented by the Global Depositary Receipt (definitive receipts were not to be issued). They were actually placed in 300 denominations of US $100,000, tradable in lots of US $10,000. The Socma DRs were the Receipts under the Deposit Agreement. They represented the right to receive from Handelsfinanz pro rata any amounts actually received by it from Socimer in respect of the Payment Rights. Handelsfinanz would act as agent for the Receiptholders in collecting from Socimer the actual payment in respect of the Payment Rights. The Receipts themselves were governed by terms and conditions, which inter alia provided that, in the event that no payment in respect of the Payment Rights was received by Handelsfinanz, the Receiptholders had no right of recourse against Handelsfinanz.
- The economic effect of this structure was that Socimer was able to make a market in its own receivable, i.e. its right to receive payment in respect of the IFC participation. That was achieved by Socimer by creating a debt in favour of Handelsfinanz derived from the amounts received from IFC, and then allowing that debt, represented by the Global Depository Receipt and the derivative Receipts, to be traded in the market through Euroclear. In other words, instead of being paid cash by Handelsfinanz, Socimer aimed to recoup the US $30 million it paid to IFC under the IFC participation by means of sales of the Receipts (i.e. the Socma DRs). Ordinarily, the Socma DRs would trade at a value that reflected the value of the underlying Socma debt itself. However, the sub-participation element did, as was ultimately decided by the Privy Council in 2002 in its opinion in the Bombril case (which involved a ruling in relation to a Brazilian bond on similar terms arranged by Socimer), add an exposure to Socimer's insolvency risk. That is because Socimer was not the fiduciary or trustee for the Receiptholder in respect of amounts actually paid to it by IFC, but simply a debtor. If Socimer became insolvent, then the Receiptholder had only a provable debt claim, through Handelsfinanz as his agent, under his Socma DR, in an amount equal to the pro rata amount of what Socimer had received from IFC.
- Socimer placed all of the Receipts into Euroclear, but did not sell the entirety of the US $30 million of Receipts. Socimer sold some of those Receipts to third parties and retained some of the Receipts for its own account or sold them as either spot sales or forward sales to its own clients under forward sales contracts or master financing agreements. Socimer also bought in Socma DRs onto its own book in the market. Out of the Socma DRs that Socimer held on its own book, US $10,110,000 of them were sold spot to Standard and then bought forward from Standard under the Agreement. Those are the Socma DRs in this case. There were three such forward sales by Standard to Socimer:
- The Socma DRs were in fact agreed to be sold by Standard in late December 1999 and actually sold on or about 12 January 2000 to MFC Merchant Bank SA ("MFC") for $2 million, in circumstances where it was likely, as Mr Feld accepted, that MFC had been told, that this was a claim on a bankrupt Socimer. This represented just under 40% of the amortised face value of the Socma DRs.
- The first sub-issue that arises under this head is whether, as Mr Millett contended, Standard was, in the events which happened, indeed obliged to transfer the Socma DRs to Socimer as at the termination date. Mr Auld submitted that Socimer's case was "wholly unreal" and had emerged for the first time only in September 2004. He contended that there was no basis in the contract (or the Judgment) for an allegation that Standard Bank was somehow obliged to "segregate" assets like the Socma DRs; and that there was no basis on the facts for asserting that it would have done so (or even why it should have done so). He further submitted that even if the Court were able to accept Socimer's primary case in theory, Socimer had wholly failed to prove its alleged loss. He contended that the value of the Socma DRs in Socimer's hands was not US $8,424,966, as Socimer maintained, but only the amount which Socimer would avoid paying out as a liability to third party holders of the asset in its liquidation, i.e. the actual value of a claim for the assets in its own liquidation, being approximately 19 cents in the Dollar to date (after seven years). He further contended that there was a lack of any credible evidence to support Socimer's alleged value and that Socimer had not properly explained or proved the documents which it had disclosed in relation to the Socma DRs.
- It is necessary at this juncture to explain the evidence relating to market perception at the time as to whether the Socma DRs were subject to Socimer insolvency or credit risk, as well as to Socma risk. There is no dispute that in fact, and as a matter of law given the terms and structure of the derivatives, the DRs carried Socimer risk as well as Socma risk. That was because, as described above, under the terms of the Depositary Receipts, if Socimer became insolvent, then the Receiptholder had only a provable debt claim, through Handelsfinanz as his agent, under his Socma DR, in an amount equal to the pro rata amount of what Socimer had received from IFC; in other words, the relationship between Socimer and the Receiptholders was debtor/creditor and not of a fiduciary nature. However I find as a fact that as at 20 February 1998 that was not the perception either within Socimer, or within Standard or in the market generally.
- As Mr Fernando Canzani, an employee of Standard, who had formerly been an employee of Socimer, said in evidence, the view within Socimer at the time was that the Socma DRs carried no Socimer credit risk and that the relationship between Socimer and Handelsfinanz was fiduciary; in other words that Socimer held the proceeds of its recoveries from its participation in the IFC loan to Socma as trustee for Receiptholders. A similar view prevailed within Standard's Credit Committee and Credit Department at the time. M Jean-Louis Dazin, Head of Customer Finance, reviewed the instruments for the purpose of the forward sale and did not form the view that they contained any Socimer credit risk. Likewise Mr Feld gave extensive evidence about the approval process for the Socma DRs and said, in particular, that no thought was directed to Socimer's role in the Socma DRs transaction and that the only relevance of Socimer's creditworthiness at the time in the context of the deal was counterparty risk, not as to Socimer's place in the asset structure of the derivative. Both the factual witnesses and the expert witnesses also gave evidence to the effect that the rest of the market shared the same view about the Socma DRs in February 1998, i.e. that they carried no exposure to Socimer's credit risk. In particular, Mr Sebastian Doyhambehere, Standard's expert, confirmed that the market thought it was Socma risk alone.
- Mr Clifford, on the other hand, gave evidence to the effect that, although he was not involved either in the purchase of the Socma DRs or in the analysis of the credit risk, and did not see the Term Sheet until some time after July 1998, he took the view when he saw the relevant documents that the relationship was a debtor/creditor one and that accordingly the Socma DRs were subject to Socimer credit risk as well as to Socma risk. However, it appears that even when he expressed his views, the views in Standard remained divergent about whether it was a fiduciary or debtor/creditor relationship, and thus, when he spoke out, he was something of a lone voice. However, I accept his evidence that, had he appreciated Standard's contractual obligation to value Designated Assets on termination, Standard and he would, in all the circumstances, particularly given the common perception in the market, within Standard and indeed within Socimer, that Socimer was in a fiduciary position as a mere paying agent, have wanted to have thoroughly investigated the Socma structure including taking legal advice, not least because, if it was applying that asset towards payment of Unpaid Amounts, it was effectively taking on the risk of that asset for its own account. It is instructive that, when in fact Standard (Mr Feld and Mr Clifford) obtained legal advice in October 1998 from its New York legal department, it was to the clear effect that the relationship between Socimer and Handelsfinanz/Receiptholders was one of debtor/creditor. However the legal department also advised that Standard should explore whether a fiduciary relationship could be "deemed" to exist under Bahamian law and that there was a hearing in Court shortly on a very similar situation (namely the Bombril case). Apparently pursuant to this advice, for the whole of 1999 Standard kept its options open, and considered joining an group action to make a fiduciary claim, awaiting the outcome of the Bombril litigation. It also maintained its proof of debt in Socimer's liquidation on two different bases, one of which was effectively based on a proprietary claim.
- Although the litigation in relation to the Bombril case only became public knowledge after the termination date, it is evidence that there was a respectable body of opinion in favour of the view that the relationship between Socimer and the Depositary under Socimer-arranged instruments on these terms was indeed fiduciary. Standard's attitude to that litigation post-termination also serves as evidence of how it might have acted in reaching its decision as to which assets to value and retain, and which assets to retransfer to Socimer, had it appreciated its obligations to this effect under the Agreement. Bombril was heard at first instance in late 1999 by Sawyer CJ in the Supreme Court of the Bahamas and her judgment was delivered on 30 December 1999. The judgment was carefully reasoned and was arrived at after consideration of the Bombril deal documentation and the expert opinions of Edward Davidson QC and John Mowbray QC, in relation to the English law of trusts. The Chief Justice decided that the relationship between Socimer and Chase (the Depositary, who was in an analogous position to Handelsfinanz under the Socma transaction) was fiduciary, so that the amounts received by Socimer from Bombril in relation to the relevant participation were held on trust, outside the insolvent estate, by Socimer for Chase (and hence the Receiptholders). That decision was appealed by the Socimer liquidator to the Court of Appeal of The Bahamas. The appeal was heard in September 2000 and the decision of the Court of Appeal was delivered on 29 January 2001. The Court of Appeal allowed the appeal by a majority, with a reasoned dissent from Ganpatsingh JA. That decision was then appealed and the case then went to the Privy Council, who by an opinion delivered on 29 May 2002 dismissed the appeal. Until late 1999, the Bombril dispute was carefully monitored by Standard, who kept asking Mr Clarke, the Socimer liquidator, for updates. Standard took the position in correspondence that Socimer was a fiduciary for Handelsfinanz, but that its own action to recover the IFC payments would await the outcome of the Bombril decision. In the end, Standard decided that, "given the uncertainty of our entitlement to proceeds from Socma (viz. the fiduciary versus debtor creditor debate)", it was going to accept a third party offer for the Socma DRs. As I have already said, Standard sold the Socma DRs for US $2 million on about 12 January 2000.
- In my judgment, on the balance of probabilities, had Standard appreciated as at the termination date, Friday 20 February or shortly thereafter, say by Monday 23 February, what its obligations were under the Agreement to sell, or retain and value, the Designated Assets, it would have returned the Socma DRs to Socimer pursuant to the Agreement's terms. My reasons for this conclusion may be summarised as follows:
- It follows from my conclusion above that Socimer has a claim in damages for breach of contract, or alternatively for an account, in respect of Standard's failure to retransfer the Socma DRs to Socimer. What is the correct measure of Socimer's loss in such circumstances? In my judgment that must be the value of the Socma DRs in Socimer's hands, not an objective market value based on what a third party might have paid for the instruments at that time, in circumstances where there were (as I find as a fact) clearly rumours circulating in the market about Socimer's insolvency as at the termination date, and a wrong market perception that the Socma DRs did not carry Socimer risk. Nor, in my judgment, should the quantum of damages be based upon what one might call the "true" value of the instruments in the hands of third party Receiptholders; that so-called "true" value would have reflected the amount that the Receiptholder could have recovered from Socimer (through Handelsfinanz, as the Receiptholder's agent) as at 20 February 1998 and thus would be reflective of the market's perception of the likely amount of a dividend payable to the Receiptholders, assuming that Socimer had been paid by IFC in full (or could be so paid).
- Nor in my judgment should such a value be based on what Standard might reasonably and conservatively have concluded, as unpaid Seller, was the value to ascribe to the Socma DRs for the purposes of its valuation and retention under clause 14 of the Agreement. Given my conclusions above, that contractual exercise should not, and would not, have been undertaken by Standard in circumstances where there were sufficient other assets to discharge Socimer's indebtedness and it came under an obligation to hand back the Socma DRs. Indeed Mr Auld did not seek so to argue. As I have already stated, what he submitted in relation to Socimer's primary case was that the value of the Socma DRs in Socimer's hands was not US $8,424,966 (as Socimer maintained), but, rather, only the amount which Socimer would avoid paying out as a liability to third party holders of the asset in its liquidation, i.e. the actual value of a claim for the assets in its own liquidation, being approximately 19 cents in the dollar to date (after seven years).
- I was not referred by counsel to any authority on this point. Some assistance may however be derived from an analogy with the rule relating to the quantum of damages in actions for the conversion of negotiable instruments, such as cheques, where the face value of the instrument is prima facie the measure of damages, at least where the drawer has sufficient funds to his credit; see Morison v London County & Westminster Bank [1914] 3 KB 356 CA, at page 379 per Phillimore LJ; and McGregor on Damages 17th Edition, paragraphs 33-041-042. However this rule has been described as merely a presumptive rule and that the true rule is that the claimant may only recover to the extent that there was a reasonable prospect of the instrument being actually paid or enforced; see Clerk and Lindsell on Torts 19th Edition at paragraph 17-35. In circumstances where, for example, the drawer was a bankrupt, a claim in conversion by the payee of a cheque in the sum of £1 million, would obviously not succeed. Cases such as Brandeis Goldschmidt & Co Ltd v Western Transport Ltd [1981] QB 864 (CA), BBMB Finance (Hong Kong) Limited v EDA Holdings Limited [1990] 1 WLR 409 (PC) and Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883, however, provide useful guidance to the quantification of damages in circumstances where a claimant has wrongfully and permanently been deprived of an asset. I refer to the summary of the relevant principles to be derived from these cases by Laddie J in Malkins Nominees Limited v Société Financiere Mirelis SA and others [2004] EWHC 2631 at paragraphs 28 – 34 which I adopt for the purposes of my approach to the quantification of damages in this case, albeit that this claim is a contractual claim. Laddie J said:
- The simple reality here, as Mr Millett submitted, is that the retention of the Socma DRs in the hands of third parties exposed Socimer, because of its debtor/creditor obligations as obligor thereunder, to a liability in a sum equal to the full face value of the notes (less any amortised amounts), which liability could have been entirely removed from its balance sheet had the instruments been returned. In effect, therefore, once Socimer had recovered the Socma DRs from Standard, Socimer would have been in a position simply to cancel the debt under the sub-participation to the extent of the amount represented by the Socma DRs that it held. Thus, once it held the Socma DRs, Socimer would have been its own creditor in respect of the amount of the Payment Rights as against IFC, to the extent represented by the Socma DRs and could have removed from its balance sheet 100% of the liability to Receiptholders represented by those Socma DRs. That would have served to reduce the overall deficiency as regards unsecured creditors, and raise proportionately the amount of the dividend payable in the insolvency.
- The actual facts, relating to the net economic effect of the position that would have prevailed had Socimer had the Socma DRs returned to it, are considerably more complex. But in my judgment they support the analysis which I have set out above. They demonstrate that, contrary to Standard's contentions, there is no double recovery if Socimer were to recover the value of the Socma DRs from Standard, notwithstanding that, post-liquidation, it received the value of the Payment Rights from IFC in the sum of $23,934,627.29, of which a proportionate part would have reflected payment of the rights attributable to the $10,110,000 face value of Socma DRs held by Standard as at the termination date. The actual position was as follows.
- Standard did not re-transfer the Socma DRs to Socimer, but sold them in early 2000 to third parties. Those third parties are Receiptholders of those particular Socma DRs and they have provable claims against Socimer in its liquidation, through Handelsfinanz as the Depositary, in respect of the Payment Rights. Their claims form some part of Handelsfinanz's proof admitted in Socimer's liquidation for US $23.93m (being, as I have said, the amount actually received by Socimer from IFC in respect of the Payment Rights under the participation). Had Standard not sold the Socma DRs away, but transferred them to Socimer, Handelsfinanz's proof would be for proportionately much less (i.e. the proportion of the US $23.93m that the Socma DRs held by Standard bore to the whole of the issued Socma DRs).
- Of the US $10,110,000 of Socma DRs which Socimer had bought forward from Standard under the Agreement, some US $9,200,000 of Socma DRs had been sold forward in turn by Socimer to its own customers for their full face value or at a slight discount thereto under master financing agreements or forward sales agreements. If, therefore, Socimer had received the Socma DRs back from Standard on or shortly after 20 February 1998, Socimer could not therefore have "torn up" those Socma DRs but would have been obliged to sell and deliver them to its clients at the Forward Settlement Date (or close out the deals). However, and critically, Socimer was only obliged to do so as against full payment of the balance of the forward settlement price from those clients. Accordingly, on or as at 20 February 1998, the Socma DRs held by Standard had a real value to Socimer in its hands because:
- Thus the net economic effect of Standard's failure to transfer the Socma DRs to Socimer (but instead to sell them on to third parties) was to expose Socimer to double liability in respect of one set of Socma DRs. Socimer would have sold the Socma DRs to its clients for the full value and been paid, and then have owed them (as Receiptholders through Handelsfinanz) the amount of the debt represented thereby. However, Standard in effect superimposed a further liability by not transferring the Socma DRs to Socimer, namely an exposure to the new holders of the Socma DRs (through Handeslfinanz) as Receiptholders. By reason of Socimer not having available to it the US $9,200,000 face value of the Socma DRs re-transferred from Standard, Socimer could not deliver them to its clients. That exposed Socimer to at least US $7,385,000 of potentially provable claims as the liquidator's evidence showed. If the clients could have paid the balance of the forward settlement price, then Socimer would have been able to sell and deliver the Socma DRs and been paid in full. Although the underlying debt represented by those Socma DRs (i.e. the debt to Handelsfinanz as agent of those clients under the terms of the Socma DRs) would have remained in existence, Socimer would have been able to recoup the amount of that debt from those clients under the forward settlement agreements. If the clients did not pay the balance of the forward settlement price, then Socimer could have 'torn up" the relevant Socma DRs and reduced its liability to Handelsfinanz (as their agents under the terms of the Socma DRs) accordingly, and thereby absorbed the loss represented by the non-payment. Either way, had it had title to the Socma DRs, Socimer would have been able to use the full face value of the Socma DRs to square its positions with its clients who had bought them forward. But, as I have said, Standard did not re-transfer the Socma DRs, but sold them in early 2000 to third parties.
- Accordingly, I accept Mr Millett's submissions that had Standard re-transferred the Socma DRs that would (i) have reduced Socimer's liabilities and at the same time (ii) have prevented Socimer from being exposed to a second proof, from Handelsfinanz, in respect of the same Socma DRs. Applying the principles of quantification articulated in Brandeis Goldschmidt & CO Ltd v Western Transport Ltd supra, BBMB Finance (Hong Kong) Limited v EDA Holdings Limited supra and Kuwait Airways Corporation v Iraqi Airways (Nos 4 and 5) supra, I conclude that Socimer is entitled to recover from Standard the full face value of the Socma DRs, less the amortised amount without taking into account its own insolvency, notwithstanding that that value might have been in excess of the market value as at the termination date, i.e. the price that an independent third party might have been prepared to pay for the Socma DRs. I quantify that the value of the Socma DRs in Socimer's hands on a face value basis was US $8,424.966 as at 20 February 1998, which is based upon the evidence of Socimer's expert, Mr Tether, who was not challenged on this figure by Standard in cross-examination. That figure represents 100% of the amortised amount of the face value of the instruments.
- If I were wrong in that conclusion, and the quantum ought to be calculated by reference to the value of the avoided third party provable claims, then I find, based upon the liquidator's evidence, that that figure is US $7,385,000, being the figure in respect of which proofs have actually been submitted. It follows that I reject Mr Auld's submission that the value of the third party claims is to be calculated by reference to the dividend receivable upon such proofs; in my judgment the avoided liability is not a liability to pay a dividend but to pay 100% of the proof of debt, on which a dividend then falls to be paid.
- In the circumstances it is not necessary for me to reach a conclusion in relation to Socimer's secondary case. However, I heard a lot of valuation evidence as to what was the appropriate value for the Socma DRs and it is right that I should express my view very briefly in relation to that matter. Given my conclusion that there were market rumours as to Socimer's possible insolvency as at 20 February 1998, and that Standard would, had it investigated the position, have appreciated that there was a real possibility that the instruments were subject to Socimer risk, albeit that there remained an argument that it was acting purely in a fiduciary capacity and thus the instruments were merely subject to Socma risk, I do not consider that a value based on a market perception of purely Socma risk is appropriate. I therefore do not accept the valuation of Socimer's expert, Mr Tether, in the sum of US $7,582,469.40 which was based on that assumption, although I found him to be an experienced and satisfactory witness.
- However, nor do I accept the evidence of the Standard witnesses to the effect that Standard could justifiably have ascribed a zero valuation to the Socma DRs. I did not find Mr Doyhambehere to be a very helpful expert witness. He was unimpressive when he was pressed about precisely when, according to his report, "the market in Socimer-arranged assets immediately dried up". He had to accept that there were movements in the Socma DRs in and after February 1998 (indeed right through 1998), which might have been (or might not have been) trades in the Socma DRs, but that if they were cash trades, as he acknowledged was possible, then that would show that the trades in the Socma DRs had not dried up as of February 1998. Mr Doyhambehere accepted that the fact that Socimer, as the market-marker, was affected by rumours about its solvency might have been a negative, but that did not mean that the Socma DRs were worthless. Although he insisted that the fact that Socimer was not providing bids meant that there was no market at all (because international brokers call Argentina), he did accept that CSFB, Bear Sterns and other banks who had bought Socma DRs in February 1998 had clients. He admitted that the time frame for conducting his valuation was within 24 hours of 20 February 1998, but he provided no sensible basis for his view that in all the circumstances and despite some evidence of trade, a nil valuation was appropriate.
- Mr Beckman did not have relevant experience in these instruments. His evidence was based on Mr Doyhambehere's views. I did not regard Mr Beckman's view in relation to the Socma DRs, namely that, if there was no bidder for an asset on valuation day, then it was right to value that asset at zero, even though there had been bidders in the days and weeks before that date, as credible. Illiquidity, in the sense of the absence of any buyer on a particular day, does not necessarily predicate that the asset must be worthless. But that was Mr Beckman's position. It was put to him that a zero valuation was not justified simply because it might take time to get prices or perform initial soundings. His answer was that that depended on the time-frame under which one was being asked to value the asset and if one had to value an asset on a particular day that justified a zero valuation of the Socma DRs.
- In conclusion, I consider, having heard all the evidence both generally and in relation to the limited trades that were being conducted at the time, that on the balance of probabilities, and knowing what it would have known about Socimer's possible insolvency, and the uncertainties surrounding the instrument, Standard would have been likely, acting cautiously as it was entitled to do, to have ascribed a value of approximately US$ 3 million to the Socma DRs. I am supported in this conclusion by the actual price of US$ 2 million that was achieved subsequently when Standard sold the instruments on 12 January 2000.
- The portfolio of TDA-Es comprised 243,842 bonds classified in 163 series with 73 different maturities. The TDA-Es are denominated in the Brazilian local currency, the Real or Reais in the plural (BRL, or R$). The following description is based upon the evidence of Socimer's expert, Professor Luis Paulo Rosenberg, although much of it was not in dispute between the parties. TDA-Es are Titulos da Divida Agraria-Escritural. They are registered and traded Brazilian Government bonds. From the mid-1960s, the Brazilian Government had compulsorily acquired unoccupied agrarian land and compensated landowners with TDAs. These were agrarian debt securities issued (until 1992) by INCRA, the National Institute for Agrarian Reform and Colonisation, part of the Brazilian Government. After June 1992, responsibility for administering them passed to the National Treasury Secretary (the STN). The quality of these instruments as security improved, and they were perceived as Brazilian Sovereign debt, which therefore attracted a premium over the yields of similar US Treasury bonds of the same maturity, to reflect the risk of default by the Brazilian Government. TDAs have a maturity of up to 20 years, which is longer than most STN issued securities, and so traded at a larger discount to par. TDA-Es are a series (series E) of TDAs. They were issued after June 1992 solely by STN at the request of INCRA to pay for the acquisition of land. Their maturity dates vary from 2 to 20 years. They are indexed to the inflation reference rate (the TR) and yield a fixed annual interest of 6% above the inflation-adjusted value, and thus carry an inbuilt defence to inflationary pressure.
- There is demand for TDA-Es from mutual funds and from private persons who can use them as deposits in challenges against the Brazilian Government to social security or tax charges. Since September 1997, TDA-Es were accepted by the Brazilian Government as a means of part-paying social security contributions, and to that end there were monthly auctions to fix the price. Accordingly, from September 1997, the liquidity and market value of TDA-Es increased significantly. TDA-Es were also used as payments for shares in privatisations. By early 1998 there was a great deal of activity in the TDA-E market – in March 1998, the market transacted R $155.8 million of trades.
- I accept Professor Rosenberg's evidence that in 1998 TDA-Es were not "extremely illiquid", as Standard contends, and that there was, in 1998, a healthy market for these instruments. They were (and are) registered and monitored by CETIP, a clearing house created by the Central Bank of Brazil. The market in TDA-Es was and is regulated by the Central Bank of Brazil and the CVM, the Brazilian Securities and Exchange Commission. CETIP held and holds records of the numbers of transactions and the price spreads of transactions on any given day. Although there are no "on screen" negotiations, the market is on a daily basis aware of all TDA-E transactions that occur. CETIP information began to be available on the Internet in June 1997. By way of comparison, the average liquidity of TDA-Es at the time of termination of the Agreement was four times higher than that of the average stock traded on Bovespa, the Sao Paulo Stock Exchange, in November 2004.
- I likewise accept Professor Rosenberg's view that TDA-Es are not a volatile asset. They are fixed income Sovereign debt, and their value at any time is dependent largely on the macro-economic conditions in Brazil, which at the time of termination were stable. Due to the fact that TDA-Es were issued to every farmer who had his land compulsorily acquired by the Brazilian Government, there was a constant (if fluctuating) supply of TDA-Es which was independent of the performance of the market.
- Professor Rosenberg expressed the view, which I accept, that TDA-Es were of medium liquidity because of the then lack of new issues rather than a shortage of buyers. It was common ground between him and Mr Ricardo Quintero, Standard's expert witness in relation to the TDA-Es, that the entire portfolio could have been disposed of without affecting the price within 10 business days after termination. In fact, 20 February 1998 was a day on which there was a considerable volume of TDA-E transactions; and although not advisable, it would appear that the entire portfolio could theoretically have been sold in toto on 20 February 1998. This was borne out by Mr Feld's evidence that the TDA-Es turned over approximately 0.5% of their total issue every day, i.e. some US $10 million on an issue of US $2 billion.
- Before I analyse the detailed and lengthy evidence given by the experts and the Standard witnesses as to valuation, it is useful to set out some actual figures in relation to TDA-Es, because, as Mr Millett submitted, they are hard numbers as opposed to opinions, and form a useful reality check against which the Court can judge the reasonableness of the various valuations put forward by the parties. The relevant figures are as follows:
- The approach to the methodology of valuation was the subject of some argument between the parties. Mr Millett, in his closing submissions, submitted for the first time (albeit that he had foreshadowed the possible argument in opening) that, because the evidence of Mr Clifford showed that Standard did in fact in early March 1998 elect to sell the TDA-Es very soon after termination, and put in train the steps that eventually yielded just over US $9 million in proceeds in the first half of October 1998, Socimer should be entitled to advance an alternative case on the TDA-Es to the effect that it is the actual sales proceeds (net of disposal costs) that should be brought into account, not a hypothetical valuation figure as at the termination date. This is because, submits Mr Millett, on the facts as they have now emerged, there was no retention by Socimer, but rather an election to liquidate. I reject this submission. The decision to sell, whenever it was precisely made, was clearly made an appreciable time after Standard should, in compliance with its obligations under the Agreement, have taken the decision to sell or value and retain. The fact that, as Mr Clifford's letter of 11 March 1998 stated, all of Socimer's positions were in the process of being liquidated, does not amount in my judgment to an actual election to sell the TDA-Es at or about the termination date. It follows that I approach the question of the valuation of the TDA-Es on the basis that Standard must be regarded as having elected to retain the assets.
- Mr Millett also 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 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 was 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. Accordingly the Court is not bound to accept the valuation figures put forward by the Standard witnesses as their after the event opinion as to the values at which they would have arrived.
- I should also say that I was not assisted by the evidence of Mr Ian Beckman, one of Standard's expert witnesses, in relation to the valuation of the TDA-Es. He was not an expert in relation to, and had no experience of trading or financing, TDA-Es or the Brazilian local capital market. I did not regard his evidence (which sought to support Standard's own witnesses as to the approach, appropriate discount rates and other matters) in this respect as anything more than the expression of his opinion that was not based upon any relevant expertise or experience, other than his general experience as a London based investment banker. Even if (which I doubt) it could be correctly characterised as expert, I found it to be tendentious in so far as it sought to support the views of Mr Feld and Mr Clifford.
- The written and oral evidence given by the experts and the factual witnesses in relation to the value of the TDA-Es was extensive and detailed. There were numerous different figures given at various times, on varying bases and calculated in accordance with different methodologies. The differences between the respective approaches of Professor Rosenberg and Mr Quintero were mainly attributable to (i) Mr Quintero's assumption that he was to perform a forced sale valuation on 20 February 1998, and (ii) the fact that he did not "unbundle" the average bundle prices when calculating his prices and unwinding discount. This meant that in his calculations he did not take account of the fact that the TDA-Es were in many instances traded in lots, or bundles, which have to be unbundled when performing a valuation. The effect of trading TDA-Es of different maturities for a single average price is that, because that price is an average or lot price, it cannot be applied meaningfully to TDA-Es of different maturities to arrive at a meaningful yield to maturity (YTM) for each bond within the lot. It is the bundle or lot price that CETIP carries in the register of prices, not the price per maturity (unless it is traded as a singleton). To arrive at the actual price per TDA-E within the portfolio, they must be "unbundled", i.e. the historical average or lot price has to be converted back to an individual price per maturity. Mr Quintero's calculations do not do that. There are two consequences of not unbundling traded lots which, as Professor Rosenberg explained, may affect value:
- The range of disputes about the value of the TDA-Es can be summarised as follows.
- Professor Rosenberg, Socimer's expert, originally valued the TDA-Es at US $9,964,000 as at 20 February 1998; see his first report dated 25 November 2005, paragraphs 6.22, 8.8 and 8.9. That was based on medium liquidity and adjusted (i.e. unbundled) data. The corresponding figure, based on low liquidity and adjusted data, which he said reflected the value of a forced sale or liquidation of the portfolio, was $9,378,000; see paragraph 2.6 of his second report. He also gave figures in his second report, as explained in cross- and re-examination, which showed the original US $9,964,000 based on medium liquidity and adjusted data, adjusted to a figure of US $9,453,345 to take account of discounts for tax, inconvertibility protection or currency hedge costs and foreign exchange costs. A similar discount applied to his figure of $9,378,000 based on low liquidity (which reflected the value of a forced sale or liquidation of the portfolio) would produce a figure of US $ 8,897,378. In his evidence in chief he produced a table showing exactly what the market values of each of the maturities in the Socimer TDA-E portfolio were on 20 February 1998, using prices on that date or the next earliest price for each maturity working back in time. The figure of US $9,458,024 was near to his own valuations: the prices which he used in that exercise were averages and had not been adjusted (i.e. unbundled). His evidence was that they represented a "simple-minded" picture of the true "market value" (unbundled) of the whole portfolio on that day, although he personally (if he had been marking to market) would have gone on to unbundle the data on his computer. He described the exercise as a "standard" (i.e. conventional) way of valuing the TDA-E portfolio on a mark to market basis which he would have used at the time. He went further in his reports and simulated what the actual value would be if there was a sale over the period required (10 business days). Finally he expressed the view that the most appropriate figure for a valuation in all the circumstances was a figure between US $ 9.3 and 9.4 million, after taking into account approximately 2% transaction costs.
- Mr Quintero, Standard's expert, valued the TDA-Es at US $5,458,000, as at 20 February 1998, in his second report dated 25 April 2005; see paragraph 21, which revised upwards slightly the figure which he had given in paragraph 24 of his first report of $5,432,849. These figures took account of transaction costs, discounts for tax, inconvertibility protection or currency hedge costs and foreign exchange costs. Despite having expressed these figures as his professional view of a forced sale valuation as at the termination date, he then appeared to assert in his evidence that they would have to be yet further discounted to reflect an "immediate valuation".
- Mr Clifford's evidence was that he, as the person with direct responsibility, arrived at values for the Brazil TDA-Es of US $4,743,886.83 which he would have reported to Standard's senior management.
- Mr Feld's evidence was to the effect that Standard's senior management would have considered Mr Clifford's analysis and would have arrived at a value of US $3,500,000 for the Brazil TDA-Es.
- In my approach to ascertaining what figures Standard would have arrived at for the TDA-Es:
- Before analysing the witnesses' evidence it is appropriate, given the wide divergence in valuations and methodologies, that I say something about their relative experience, expertise, demeanour and creditability.
- Mr Auld criticised the relevance of Professor Rosenberg's experience and expertise. He contended that, as a Professor of Economics at the Aeronautics Institute of Technology on a part-time basis, and otherwise a consultant devoted to analysing macro-economic environment, Professor Rosenberg was an "ivory tower academic". Mr Auld compared him unfavourably with Mr Quintero and contended that he had not provided a "real world" valuation. Mr Auld submitted that Professor Rosenberg was not a broker, trader or dealer in the financial market and that his experience, in so far as the present case was concerned, was tangential. I reject these criticisms. I found Professor Rosenberg to be an impressive and compelling witness, who was well aware of the demands and vicissitudes of the market place. He is now a partner in a consulting firm in Brazil, which not only analyses the macroeconomic environment and the financial prospects for business enterprises, especially in Latin America, but also advises investment banks and other investors on the opportunities for, and risks in, financial operations in the Brazilian markets. In the period 1994-2000 he had actual experience of doing valuations of this kind while a partner and executive director at Linear Asset Management ("Linear"). At Linear, he and his three partners had about US $1 billion of assets under management. He supervised operations involving negotiations of several types of Brazilian and foreign stocks and bonds, including TDA-Es. These particular bonds represented a small but significant part of the funds administered by Linear (in average numbers, Linear's TDA-E portfolio was close to R$ 10 million, out of a total portfolio of R$ 800 million, during the period 1996 to 1998). He was jointly responsible for approving the basis of any transaction involving these and other securities, i.e. setting the minimum and maximum acceptable prices to operate at any given day. He was actually in charge of the trading desk at Linear during the Asian crisis in 1997 and had a computer system all set up for it. He gave his evidence clearly and authoritatively, and was genuinely concerned to assist the Court, rather than to be partisan. He was also refreshingly prepared to accept points when put to him, where he saw the force of the argument against his views.
- Mr Quintero is an experienced market trader with fifteen years experience in Brazil of fund management and risk advisory services. As head of corporate sales at ING Bank in Sao Paulo he oversaw the liquidation in late 1997 of several emerging markets investment funds that were clients of ING. When a later employer, Bank of America, left Brazil in 2003, he was responsible for coordinating the unwinding and sale of approximately US$ 6 billion in derivatives and US $ 300 million in Brazilian assets. He now runs an asset management and risk advisory business. Although for the most part he gave his evidence in a frank and open manner, there were times when he appeared self-defensive and unnecessarily argumentative. In many cases he clearly deferred to the opinion of Professor Rosenberg. I also formed the strong impression that his second report had received considerable input as to content and conclusion from personnel at Standard. His second report spent some seven weeks being reviewed by Standard. Mr Quintero said that the input was to check his English, but not only did he speak English perfectly, but also Jones Day (Standard's solicitors) could have performed that task. He was unable to explain why Standard Bank's input was required. He said "They just sent it to make sure I was meaning what I wanted to mean or something like that". The checking of Mr Quintero's use of language does not explain the very substantial delay in finalising his report (which appeared to amaze Mr Quintero himself). It is clear from Jones Day's letter 1 June 2005 that Standard had indeed given input into the second report "in order to ensure that it addressed the relevant issues including the contractual valuation". I accept Mr Millett's submission that there must be a real doubt as to quite how independently of Standard Mr Quintero's second report was prepared, and what approach Mr Quintero was told to take to valuation. That doubt is augmented by the fact that in the Joint Memorandum, Mr Quintero had described Prof Rosenberg's approach as a "fair valuation", an admission which he heavily qualified in his second report. Mr Auld sought to suggest that the deficiencies in the manner in which he gave his evidence were attributable to the fact that Mr Quintero had flown overnight from San Paulo in order to testify and had landed in the UK approximately 2 hours before going into the witness box; thus, submitted Mr Auld, the reason why he began to lose his train of thought by the end of his long cross-examination was that he was so exhausted. I do not find that a convincing explanation for the inadequacies in Mr Quintero's evidence. It was his decision to return to Brazil in the middle of a long trial, and although he may have been tired, and every allowance was made for that fact, that did not prevent me from assessing his evidence in the normal way. Mr Quintero did not annex his full calculations or workings to either of his reports, which made his conclusions sometimes difficult to evaluate. Moreover Mr Quintero's cross examination revealed a number of areas in which his valuation approach and methodology were flawed. In re-examination he gave long and detailed answers which went far further than the re-examination questions he was asked. As a witness, although he did his best to assist the Court, he did not command the same authority and respect as Professor Rosenberg.
- I did not find Mr Clifford to be a satisfactory witness. He appeared to be too close to the case and was keen to argue it rather than give evidence as to what he knew at the time. He was prone to emotional outbursts (such as the suggestion that Professor Rosenberg and Mr Tether, Socimer's expert in relation to the Socma DRs, were guilty of "gross misrepresentations" – which was not an allegation that was (rightly) ever put to those experts). I found him to be over-rehearsed and much of his evidence appeared to have been coloured by his pre-reading of various documents, some of them obviously privileged, in preparation for his cross-examination. I found his explanation in relation to his alleged instruction to block Socimer's account as particularly unconvincing. No document to support his assertion that he instructed that a block be placed on Socimer's account was ever disclosed (even during the trial) and the accounting documents were squarely contrary to Mr Clifford's assertions in his witness statement that the Spot Trade Balances were paid into a blocked account. Although Mr Clifford accepted that there were no documents reflecting his alleged instructions, he nonetheless insisted that his instruction to block the account was carried out, and indeed that the account was blocked. I accept Mr Millett's submission that that assertion was not credible. The account into which they were credited/paid was obviously Socimer's running current account with Standard. I felt that I had to approach his evidence on the basis that there was a real risk that it might be self-serving and partisan.
- Likewise I did not find Mr Feld to be a persuasive witness. His evidence also gave the impression at times of being self-serving, partisan and argumentative. He was however more candid than Mr Clifford about the fact that the Spot Trade Balances were credited to Socimer on 25 February 1998, and said that he would have effected the set-offs on 20 February 1998, having performed the Designated Asset valuations.
- I did not find the evidence given by the Standard witnesses as to the valuation figure which they said they would have ascribed to the TDA-Es persuasive. Both Mr Feld and Mr Clifford admitted in cross-examination that neither of them, nor apparently anyone at Standard, had actually ever before done a retention valuation of the sort contemplated by the Agreement and the Judgment. Thus it was not a situation where retention valuations of Designated Assets following default were routinely carried out by Standard. There was no body of rules or established criteria governing such valuations, applied within Standard at the time, which might have assisted the Court in coming to its conclusion.
- It is a matter for comment that Mr Quintero, in his evidence, would not support either of Mr Clifford's or Mr Feld's valuations of the TDA-Es although he had stated in his second report that on their "stated respective bases" they were reasonable. Thus for example Mr Clifford used a method designed, as he himself said, to "justify the highest discount possible" and "to justify as low a valuation as the circumstances would reasonably have allowed". This discount approach was not one which Mr Quintero felt he could support in cross-examination. Indeed, Mr Quintero wondered whether Mr Clifford's valuation was "emotional because of a client failure". His own valuations of the TDA-Es were US $1 million higher than that of Mr Clifford and some US $2 million higher than that of Mr Feld. I accept Mr Millett's submissions that these are not minor differences, nor can they credibly be said to be consistent as all being within a range of reasonable valuations. The specific respects in which Mr Quintero did not support Mr Clifford's valuation (inflation discount and costs of inconvertibility protection) were also instructive. 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.
- Another unsatisfactory feature of Mr Clifford's evidence is that he did not show his workings based on his yield curves. His curves assume yields in the range of 70% to 39% per annum, which, according to Professor Rosenberg, were absurdly high given that the TDA-Es are inflation-proof and were traded with an average yield of 19%. By using a yield of twice the yield used in the market, Professor Rosenberg expressed the view, which I accept, that it is not surprising that Mr Clifford has come up with such a low valuation. 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 in fact have arrived had they appreciated Standard's obligations under the Agreement. And as statements of, effectively, hindsight opinion as to the correct valuation of the TDA-Es at the valuation date they are not convincing.
- Accordingly, it is to the experts' evidence that I now turn to determine the likely figure at which Standard would have arrived had it carried out a valuation as at the termination date. I find as a fact that it is highly likely that Standard would have contacted a local market trading professional or consultant, such as Mr Quintero, or indeed Professor Rosenberg, to obtain his immediate view as to the value. In the real world, as Professor Rosenberg pointed out in his First Report, Friday 20 February 1998 was the beginning of the carnival season in Brazil and, in reality, it would have been very difficult to obtain input/reference prices from valuers or market participants in Brazil on that day. However there was no reason to suppose that an opinion could not have been obtained over the weekend or early the next week as to the valuation as at the termination date, which would have complied with Cooke J's requirement that the valuation had to be conducted not only as at, but as soon as reasonably practicable after the termination date. It was also common ground that there would have been a need first to try to identify reference prices given that the TDA-Es do not appear on screens such as Bloomberg or Reuters. Thus the ordinary practice with liquid securities of using closing day prices from these sources was not possible. The process would have involved using the best trade price available for TDA-Es (or possibly other similar traded securities) and these prices would, in the case of the TDA-Es, have had to have been obtained from CETIP. The fact that Standard itself would not have had access to this material, save to a very limited extent, supports my conclusion that it would have obtained the assistance of a professional. I accept Mr Auld's submission that time constraints would not have permitted deployment of some of the more sophisticated techniques or calculations carried out by both Mr Quintero and Professor Rosenberg or the extensive research and calculations which both did to support their reports. However Professor Rosenberg clearly had sophisticated computer programmes available to perform "unbundling" or data cleaning exercises. Even if these techniques had been too complex to have been utilised within the time frame (which is far from certain), I have no doubt that, if they had received the assignment, both Mr Quintero and Professor Rosenberg would, within the time available, have adopted the same sort of approach to the problem as they displayed in their evidence, albeit not to the same level of calculation, research and cross-checking of data. Professor Rosenberg gave evidence that he could have done the valuation within a day, which I accept.
- Both experts agreed that the market as at 20 February 1998 was "definitely more attractive" than October 1998 when the TDA-E portfolio was sold for more than US $ 9 million. At that time, according to Mr Quintero, Brazil was "on its knees". He agreed that, as at February 1998, the trend was falling interest rates and that the market for TDA-Es in 1998 was "fairly lively". It was also common ground that in March 1998 there were 156 million Reais of trades in TDA-Es. Mr Quintero also agreed that the TDA-Es were illiquid as at 20 February 1998 only in the sense that because of the size of the portfolio it would take 10 days to sell. Mr Quintero's evidence was that as at 20 February, 10 days was the practicable period within which the portfolio of TDA-Es could be sold. Moreover, contrary to what Mr Quintero had said in his second report, in cross examination he made clear that he was not saying that in February 1998 the TDA-Es were trading at particularly unattractive prices.
- However I found Mr Quintero's approach to be flawed in certain respects. These deficiencies were explained by Professor Rosenberg. Examples were as follows:
- Taking all the evidence into account, both expert and Standard's own evidence, I conclude that, on the balance of probabilities, the following is the likely outcome:
- The dispute between the parties in relation to this asset is small. Mr Millett submits that Standard made the positive decision to sell the North Korean Asset on or very soon after 20 February 1998, and that accordingly, Socimer should be credited with the actual sale proceeds of the sale concluded on 4 March 1998: i.e. US $1,448,400. Alternatively, Mr Millett submits that the correct figure is US $1,517,751, based on the view of Socimer's expert, Mr Tether, that its value as at 20 February 1998 was the Standard mark-to-market figure, subject to a 2% discount.
- Mr Auld contends that US $1,361,530 is the correct figure to ascribe to this asset. Mr Beckman, Standard's expert, said in his report dated 7 December 2004 that the North Korea debt was an illiquid asset and it would not be appropriate to rely on Standard's margin report, that the proceeds of sale of the asset on 4 March 1998 should be used and that Standard would accept that amount. A valuation of US$1,448,400.90 was thus given by Standard in Schedule 1 to the Re-Amended Defence. However, Mr Beckman in his report dated 9 May 2005 referred to a price in the International Financing Review magazine, to which he applies a discount for forced sale of 3.5% arriving at a value on 20 February 1995 of US $1,361,530. Mr Beckman stated that that figure should be used if the parties do not agree on using the figure for the proceeds of sale of the asset on 4 March 1998, which he states was in fact US$1,436,899. Mr Beckman accepted in cross-examination that Mr Tether's view about its value as at 20 February 1998 (US $1,517,751) was not outside the range of reasonable, although it was at the "low end" and agreed that he had no basis for thinking that the actual sale proceeds obtained on 4 March 1998 could not have been achieved on 20 February 1998, since he did not know (and therefore could not say) that the market for that asset had climbed between 20 February and 4 March 1998.
- In my judgment, although I reject Mr Millett's submission that there was an election to sell this asset within the time frame contemplated by the Agreement, I conclude that in the circumstances the asset should be valued by reference to the actual sale price achieved as this is (as Mr Beckman accepted) the most likely guide to its value on 20 February 1998. There is some dispute between the parties as to wxhat is the correct exchange rate to apply to convert the agreed DM proceeds of the sale (DM 2,623,788.23) into US dollars. If the parties cannot agree as to the appropriate rate, I will resolve the matter when hearing submissions as to the terms of the final order.
- The position in relation to the Brazil LTN is as follows. Mr Auld contends that Standard Bank incorrectly admitted in paragraph 5.4.2. of its Re-Amended Defence that the Brazil LTN was a Designated Asset. He submits that as explained by Mr Hawkyard's witness statement the Brazil LTN was never a Designated Asset traded between Socimer and Standard under the Agreement. There are no trade confirmations or tickets in respect of this asset, and no Unpaid Amount exists in relation to it. Following Socimer's default and the termination of the Agreement on 20 February 1998, a coupon payment became due in respect of the portfolio of TDA-Es in early March 1998. He contends that due to the fact that Socimer had defaulted on 19 February 1998 and had been served with a default notice on 20 February 1998, the TDA-Es had become the property of Standard Bank. Socimer therefore instructed Indosuez to make the coupon payment due on 2 March 1998 to Standard Bank. Standard Bank then used the coupon payment it received from Indosuez on 2 March 1998 to invest in the Brazil LTN, a fairly liquid Brazilian government treasury bill. Standard Bank reinvested the funds in order to protect the value of the Reais received until they could be removed from Brazil in US Dollars. Standard Bank held the Brazil LTN until certain problems with the setting up of a new CC5 account with Banco Crefisul had been resolved at which time it could sell the liquid LTN, realise their value in Reais and successfully remit the funds abroad in US Dollars. Mr Auld contends that the LTN was therefore not purchased until after the Agreement terminated between the parties, could never have been a Designated Asset and that Socimer had no claim in respect of the LTNs on or as at 20 February 1998. In fact, in the original Particulars of Claim, Socimer valued the asset at zero. Having defaulted under the Agreement, Mr Auld contends that Socimer was no longer entitled to receive coupon payments in relation to the assets traded under it. Such coupon payments were due and owing to Standard Bank.
- Socimer contends that the Court should hold Standard to its pleaded admission and that it did not appear to be an issue on the Statements of Case. However, when Mr Clifford's third statement was served on 18 May 2005, he appeared to dispute that the Brazil LTN was a Designated Asset. Allen & Overy, Socimer's solicitors, then sought disclosure about the status of the asset, on 3 and 13 June 2005 but received no response from Jones Day at all. In those circumstances Mr Millett contends since Mr Tether was not cross-examined about his valuation of the Brazil LTN asset, and Standard has not adduced any evidence to contradict his valuation, Standard is obliged to bring into account US $129,526.34 in respect of the Brazil LTN.
- In my judgment Standard should be entitled to re-amend to withdraw its wrong admission. I agree with Mr Auld's analysis of the evidence on this point and that the Brazil LTN was not a Designated Asset.
- I will hear counsel at an appropriate time as to the precise form of the order and in particular as to the arithmetical consequences of my conclusions in relation to the various points that have arisen for determination. I will also hear any arguments as to interest. In summary, however, my conclusions are that Socimer is entitled to judgment by way of an account, or damages, from Standard under clause 14 of the Agreement for:
- Finally, I should express my gratitude to all counsel and the solicitors involved on both sides for the detailed and extensive written and oral arguments and the helpful presentation of the documentary materials. The fact that, necessarily, not every point that was taken in counsel's lengthy submissions has been expressly addressed in this judgment does not mean that it has not received consideration for the purposes of my determination.
Mrs Justice Gloster, DBE:
INTRODUCTION
i) Valuing, as at the date of Socimer's default, a number of emerging market bonds and debt instruments which had been bought forward by Socimer under the Agreement ("Designated Assets") which were still open at the date of termination ("the termination date");ii) valuing the amounts unpaid by Socimer in respect of those assets (the gross amount of which is not in issue); and
iii) deciding whether to bring into account, against those amounts unpaid by Socimer, certain credit balances which were due to Socimer from Standard as at termination.
(1) the correct amount of the Unpaid Amount (as defined under the Agreement), i.e. the amount of the debt owed by Socimer to Standard for the purposes of Socimer's clause 14 account claim against which the values of the Designated Assets, as found by the Court, are to be set;(2) the value of a holding of Designated Assets called the Socma Depositary Receipts ("the Socma DRs");
(3) the value of a holding of Designated Assets called TDA-Es;
(4) the value of two other Designated Assets, namely the Brazil LTN and the North Korea Debt. The differences between the parties on these values are very small indeed.
There is no dispute about the values of the remaining Designated Assets.
The parties
The Agreement
"1. DEFINITIONS
…
'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.
…
'Mark-to-Market Loss' means, on any day and for any Transaction, either of: (a) where (i) the Market Value is less than the Forward Value and (ii) the Policy Unpaid Amount is less than the Unpaid Amount, an amount determined by subtracting the Forward Value from the Market Value, or (b) where (i) the Market Value is greater than or equal to the Forward Value and (ii) the Policy Unpaid Amount is less than the Unpaid Amount, an amount determined by subtracting the Unpaid Amount from the Policy Unpaid Amount.
'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.
…
'Policy Unpaid Amount' means, for each Transaction, an amount determined by multiplying the Policy Unpaid Percentage by the Market Value.
'Policy Unpaid Percentage' means, for each Transaction, the maximum permissible Unpaid Amount (expressed as a percentage of the Market Value) determined by the Seller in its sole and absolute discretion.
…
'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.
…
2. DOWNPAYMENT
(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
(a) Additional Downpayments
If at any time there is:
(aa) where Buyer has elected calculation of Additional Downpayments by reference to a particular Transaction only, (i) a Mark-to-Market Loss and (ii) the Mark-to-Market Loss is greater than one half of the Remaining Equity; or
…, then
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 Payment'), … to the Seller as will result in the Unpaid Amount, Sub-Portfolio Unpaid Amount or Portfolio Unpaid Amount being equal to the Policy Unpaid Amount, Sub-Portfolio Policy Unpaid Amount or Portfolio Policy Unpaid Amount, as the case may be. Upon any such request by the Seller, the Buyer shall, within one (1) Business Day or two (2) Business Days if not in U.S. Dollars), make such payment to the Seller in the amount notified to the Buyer in such request.
[Similar provisions applied to the making of Subsequent Additional Downpayments for a particular transaction and for portfolio and sub-portfolio assets]
…
(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.
…
14. EVENTS OF DEFAULT
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
…
(ix) 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 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 of 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 such 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 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 sale of the Designated Assets shall be determined on the date of termination by 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 amount of 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.
(b) where such party is the Seller, then ….
15. TERMINATION EVENTS
(a) In the event that:
(i) due to the adoption of, or any change in, any applicable law after the date on which any Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful, impossible or impracticable for the Seller to deliver the Designated Assets in respect of such Transaction or for either party to perform all or any of its obligations under or to comply with any other material provision of these Standard Terms or any Trade Confirmation; or
(ii) due to the adoption of, or any change in, any applicable tax law after the date on which any Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable tax law after such date, either party is or will be required to pay any additional amount in respect of tax relating to any part of, or a withholding or deduction is made from any payment to be made with regard to each Transaction; or
(iii) a Non-Convertibility Event occurs;
then the Transaction or Transactions so affected shall terminate with immediate effect upon notice being given of such termination by the party affected to the other party. Upon such termination the obligations of each party with respect to that Transaction or Transactions only shall terminate, save as otherwise provided in these Standard Terms and other than obligations equivalent to those set out in Section 14(a), which shall apply to such termination.
…
16. ACKNOWLEDGEMENT BY THE BUYER
(a) The Buyer hereby acknowledges that:-
…
(ii) the Seller shall not be liable for any loss or liability involving any Designated Asset, 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.
…"
"i) The forward sale transactions entailed Standard funding the difference between the Market Value (as defined) of the relevant Designated Assets at inception of the Transaction and the Downpayment (or Additional Downpayments) during the period up to the Forward Settlement Date. Thus, in the circumstances set out in paragraph 5 of this Judgment, Socimer was effectively able to borrow the difference for its own commercial purposes and Standard received remuneration for that in the shape of the Forward Value, payable by Socimer on the Forward Settlement Date which took account of the costs of funding. "
Clause 14 of the Agreement
"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 seller."
The course taken by Standard
What the Judgment decided
i) that Standard had to elect to liquidate (i.e. sell to third parties) or to retain (for itself) the Designated Assets on the termination date or as soon thereafter as was practicable, if it was not practicable to do so on the termination date;ii) that the valuation, whether arrived at through actual sale or a notional valuation for retention purposes, had to be carried out as at the date of termination, and had actually to be done on that date, or if that was not possible, so soon as practicable thereafter as at that date; and that Standard had to bring into account the value so assessed as a credit against the amounts payable to Standard under the Agreement and Trade Confirmations; as the Judge said at paragraph 30 of the Judgment:
"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.";iii) that it followed that Standard was not entitled to bring into account the actual proceeds of sale of those Designated Assets for the purpose of its continuing obligations under clause 14(a).
"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, has to take place by that point.29. It follows therefore that the second sentence of the second sub-paragraph of (bb), which I have already set out earlier in this Judgment, 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 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 the 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 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 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. That is the essential assumption upon which sub-clause (b) 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 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 and absolute 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 sub-paragraph of sub-clause (bb) and the final paragraph of sub-clause (a)."
Issues arising in relation to the valuation exercise under clause 14
Objective/subjective approach to valuation
"The broad principle that a defendant in an action for breach of contract is not liable for doing that which he is not bound to do will not be applicable willy-nilly in a case where the employer is contractually obliged to exercise his discretion rationally and in good faith in awarding or withholding a benefit provided for under the contract of employment. Where the employer fails to do so, the employee is entitled to be compensated in respect of such failure".
He also said at paragraphs 51 and 72 that the Judge's 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. … The judge was correct to embark upon his examination taking account of the criteria which Mr Amaitis [President and CEO of Cantor Fitzgerald International] stated would have been adopted by the defendants and which were listed by the judge at paragraph 91 of his judgment … With no contractual signposts in relation to the formula for calculating the bonus payable, and no clear indications from the treatment of the claimant in previous years in relation to the payment of discretionary bonus, the task of the court is more difficult. No doubt in tackling that issue, the court will have in mind a range of possible outcomes. But in principle its task remains the same, that is to put itself in the shoes of the President, and decide what figure he would in the end have arrived at."
The Court of Appeal upheld the Judge's finding that a bonus would have been awarded on any rational or bona fide application of the President's criteria.
"The PRS had to be 'calculated in good faith' and therefore had to be a bona fide estimate made without regard to whether it would have produced a higher or lower price. There is accordingly no basis for calculating the damages on the assumption that the vendor was contractually entitled to choose the highest figure. All that can be said is that there would have been a range of possible figures. But there is no legal basis for assuming that the hypothetical figure would have been at the upper rather than the lower end of the range. … 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."
His Lordship noted that in that particular case there was no evidence to displace the assumption that the most likely forecast would have reflected the actual outcome. He said:
"[If] 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 in forecasting, the estimate could have been higher than the actual outcome. It could just as well have been lower. In such a case the purchaser is entitled to have damages assessed on the basis of the most probable outcome, which in the absence of contrary evidence, is that if the vendor had taken proper care, he would have got it right."
Should this Court decide whether Standard would have elected to retain or liquidate?
What, if any, were Standard's duties in relation to the exercise of its valuation under clause 14?
Socimer's arguments
i) Clause 14 contains no language at all which directs how the exercise of valuation on retention should be carried out by Standard. The word "value" is used in the critical sentence of the second sub-paragraph of clause 14(a)(bb). It is not a defined term, and can be contrasted with "Market Value", which is a defined term which governs the basis on which Standard may mark the asset to market. The definition of Market Value does expressly give Standard a very wide discretion as to how to value the Designated Asset for the purposes of the Mark to Market exercise. The fact that Standard chose not to use that definition in the critical sentence of the second paragraph of sub-paragraph (bb) strongly suggests that some other exercise was intended by the word value, without the same breadth of discretion. Socimer's case is that the word "value" plainly includes market value, but is not necessarily limited to market value: hence Socimer's primary case on the Socma DRs that value can mean value in the hands of Socimer.ii) As Mr Auld, on behalf of Standard, correctly submitted in opening, the first sentence of the second paragraph of clause 14(a)(bb), which contains language permitting Standard to sell on such terms and at such price as it deems reasonable, has no bearing whatever on the valuation exercise which follows the election to retain a Designated Asset. That first sentence is there only as a reminder that, following retention, Standard is the owner of the asset and can do what it likes with it. The logical consequence of that is that prior to retention, although Standard is the legal and beneficial owner of the Designated Asset, Standard has less freedom of action with it, and so a narrower discretion as to what to do with it.
iii) Accordingly, the Agreement contains no machinery for valuation on retention, and does not confer on Standard the broad discretion that it enjoys either when performing mark to market valuations or when it is selling a Designated Asset once it has retained it. The Agreement is completely silent as to the discretion that Standard has. Nor does the Judgment prescribe any standard that Standard must apply when valuing, other than that the exercise must be done in good faith and not be challengeable for any other reason (see Judgment paragraph 32). However, Cooke J was addressing a rather different question of whether Standard could not elect either to sell or retain but simply to hang on to the Designated Assets indefinitely, bringing in the proceeds once it got round to selling. He was not addressing how the valuation should be performed following retention.
iv) The rationale for the imposition of a duty on Standard to perform the valuation exercise not only in good faith but with reasonable care, by reference to objective criteria existing at the time was as follows. When Standard chooses to sell a Designated Asset following Socimer's default, it can be trusted by Socimer to do so for the best price it can get. That is because there is no real commercial advantage to Standard to seek any price for the Designated Asset other than the highest: and the highest price enures equally to the advantage of both Standard and Socimer. The interests of Socimer and Standard coincide. The whole scheme of clause 14(a)(bb) proceeds on the basic premise that the valuation exercise, if Standard elects to retain, will produce a value which replicates the actual proceeds which would be obtained had Standard elected to sell instead. However, when Standard chooses to retain and value, it is not selling the asset for itself and for Socimer's advantage. Standard is, in effect, buying the asset back from Socimer at a price which Standard itself determines (i.e. the value). In this situation, Standard's and Socimer's interests are potentially divergent: Socimer continues to want to have the highest value applied, consistently with the best price, but Standard now has a potential interest in valuing at as low as possible because it is acquiring the asset. One can easily see a situation in which Standard decides to retain, ascribes a low value to the Designated Asset with a consequentially larger uncovered deficiency, and then sells the Designated Asset on later for a profit which is greater than the Unpaid Amount and which Standard can pocket, while Socimer remains liable for the Unpaid Amount. That is the abuse from which Socimer needs protection by the imposition of a standard of reasonable care in the valuation process.
v) There were two possible legal sources of the duty imposed on Standard to take reasonable care in the valuation. The first was an implied term to perform the valuation with reasonable care. The circumstances set out above make such a term a necessity in order for the Agreement to work properly because:
a) a duty to act merely in good faith, but no more, does not protect Socimer from honest but unreasonable or unfair valuations; the need for protection from honest but unfair or unreasonable valuations stems from the fact that Standard is bound to have recourse to the Designated Asset or its value in order to satisfy the Unpaid Amount;b) under clause 14, the valuation of a Designated Asset will, once Standard has accounted for it in a certificate delivered to Socimer, be binding on Socimer save in case of manifest error. Thus Standard occupies the rare position of being both the valuer and the beneficiary of the unimpeachable nature of its own valuation. The line of authority on manifest error and the scope of possible challenge to expert valuations performed under contracts covers the situation in which the expert valuation which binds the parties save for manifest error is performed by an independent third party valuer, acting as expert and not as arbitrator (see, for example, Campbell v Edwards [1976] 1 WLR 403; Baber v Kenwood Manufacturing Co [1978] 1 Ll Rep 175; Burgess v Purchase [1983] Ch 216; Jones v Sherwood Computer Services plc [1992] 1 WLR 277). In those cases, the Court has always either stated or proceeded on the assumption that the party who considers that he has been the victim of a negligent (but not manifestly wrong) valuation by the third party by which he is bound under the contract nonetheless has a cause of action in negligence against the third party valuer: see Sutcliffe v Thakrah [1974] AC 727; Arenson v Arenson [1977] AC 405. In that way the hardship of being bound by a negligent valuation is mitigated. The only way in which to ensure that Socimer is protected from the harshness of the binding nature of the valuation is to provide that the valuation must be carried out by Standard owing the same duties to Socimer that it would if it were an independent third party valuer appointed by both parties under clause 14 to value the Designated Assets. The fact that the valuation is being done as a consequence of a default by Socimer is irrelevant to this analysis.vi) The second legal source of the duty imposed on Standard to take reasonable care in the valuation was an obligation in equity not to damage the residual interests of the mortgagor in the mortgaged property. Although in this case there is no actual relationship of lender and borrower, nor any consensual security arrangements, nonetheless the position of Standard under clause 14 following a default by the buyer was analogous to that of a mortgagee in possession. That is because Standard is holding the Designated Assets from which the Agreement requires the Unpaid Amount "to be satisfied to the extent possible", either by application of actual proceeds of sale or by application of notional proceeds of sale (i.e. valuation). In such circumstances, equity will impose a duty on Standard to carry out its functions vis-a-vis sale or valuation with due diligence and to take all reasonable precautions to obtain (or if valuing reflect) the market value on the relevant date. See Medforth v Blake [1999] 3 WLR 922; Meftah v TSB Bank plc [2001] 2 All ER (Comm 741); Silven Properties v Royal Bank of Scotland [2004] 1 BCLC 359; Den Norske Bank v Acemex Management Co [2004] 1 Ll Rep 1. As Lightman J (sitting in the Court of Appeal) said in Silven, once the mortgagee decides to sell, he comes under a duty to obtain the fair or true market value and cannot simply accept a knock down price in the interests of speed. Accordingly, although Standard owns the Designated Asset, as it did from the outset of the forward sale trade (in fact from the moment of the spot trade that preceded it, or beforehand if it already owned the asset), its ownership is subject to duties in equity akin to a mortgagee in possession; it is only once Standard retains, values and brings the value into account that it is free of those obligations and can deal with the asset entirely in accordance with its own wishes. The purpose of the first sentence of the second paragraph of clause 14(a)(bb)(2) is to state that position clearly, as Mr Auld for Standard accepted in opening.
vii) So far as the analogy with the position of a mortgagee was concerned, Mr Millett relied upon Welsh Development Agency v Export Finance Co [1992] BCC 270, in which the Court of Appeal said that it was "trite law" that, when determining the legal characterisation of an agreement, the Court looks at the substance and not the labels or form of the document (see per Dillon LJ at 278F-G). However, the Court of Appeal went on to hold that it could not (other than in a case of sham, which that case was not) ignore the language of the agreement altogether. The Court's task is to look at the agreement as a whole, but it can only discover the substance of the transaction by looking at the language used by the parties: see 279B-281B (per Dillon LJ); 302B-G (per Staughton LJ).
viii) The election under clause 14(a) to choose the clause 14(bb) route (i.e. to liquidate or retain) rather than the 14(aa) route (refund) puts Standard into a position where in substance it is, or is in an analogous position to, a mortgagee in possession of the Designated Assets. The following features of the Agreement (and in particular clause 14(bb)) are relevant to this characterisation of Standard's position:
a) In contradistinction to the words of the general part of clause 14(a), which confirm that, following termination, Standard is no longer obliged to sell the Designated Asset at the forward date, clause 14(bb) (where elected for) keeps that obligation on foot in respect of those Designated Assets not required to satisfy the debt to Standard (i.e. the Unpaid Amount, plus possible other amounts such as disposal costs, if there are any). The obligation on Standard to sell is not terminated (because, under the opening words of clause 14(a), it is "otherwise provided in these Standard Terms") in respect of those Designated Assets.b) Although (under clause 3(c)) Socimer never obtains legal and beneficial interest in the Designated Assets until the Forward Settlement Date, and accordingly Standard may do what it likes with the Designated Assets during the life of a trade (i.e. after contract but before the forward date), that is not true once the Agreement has terminated and Standard has elected to pursue the clause 14(bb) route. At that stage, Standard is not, or no longer, free to do exactly as it pleases with the Designated Assets, but is under an obligation (i) to elect to liquidate or retain them, (ii) to get on and liquidate or retain (and value) and (iii) to satisfy (i.e. reduce) the Unpaid Amount and other amounts due from Socimer from the actual proceeds of those Designated Assets or their value (i.e. notional proceeds) and (iv) to sell (i.e. transfer) to Socimer the Designated Assets that are not required to satisfy the Unpaid Amount, presumably at the Forward Settlement Date indicated in the relevant Trade Confirmation if that is practically possible.c) That aspect of the Agreement is not merely a sale and purchase agreement. The fact that Standard is not free to enjoy the Designated Assets following termination and its choice of clause 14(bb) strongly indicates that Standard is not the beneficial owner of the Designated Assets from that point, and that its legal title to the Designated Assets becomes subject to Socimer's rights to have them sold or valued by Standard to satisfy the debt and to have the balance sold (i.e. transferred) to Socimer. That is very close to, if not actually in substance, an equitable interest on the part of Socimer akin to an equity of redemption. Furthermore, if Standard, having elected for clause 14(bb) after termination, wishes to enjoy the full legal and beneficial interest in the Designated Assets that it had prior to termination, then it must retain them, having valued them and accounted to Socimer for the value: but Standard is only entitled to do so in respect of Designated Assets to the extent necessary to satisfy the Unpaid Amounts.d) The fact that, under clause 3(c) of the Agreement, Socimer acquires no legal or equitable interest in the Designated Assets until sale at the forward date does not defeat this analysis. The words of clause 3(c) are general words. They certainly apply prior to termination. They certainly apply after termination if Standard chooses the clause 14(aa) route. They must yield, however, to the substance of Socimer's rights and Standard's obligations created by clause 14(bb) if Standard elects the clause 14(bb) route. That is not to ignore the words, or labels, under clause 3(c), but to make sense of them in their proper context, allowing for the substance of operative parts of the Agreement. In this case, it is fair to say that although there is no express right on the part of Socimer to tender the debt and have all of the Designated Assets transferred to it, however, Socimer is expressly entitled to have sold (i.e. transferred) to it (for no further payment) the balance of the Designated Assets to the extent that they are not required to satisfy its debt.e) In a sale, if the purchaser sells the asset and realises a profit, he does not have to account to the vendor for it, whereas in a mortgage, if the mortgagee realises the property for more than sufficient to repay him (with interest and costs) he is bound to account to the mortgagor for the surplus. In this case that is exactly the effect of clause 14(bb). Likewise, in a sale, if the purchaser were to sell the purchased asset at a loss, i.e. which was insufficient to cover the price he paid the vendor, he cannot recover the balance from the vendor, whereas in a mortgage, if the mortgagee realises the property for a sum insufficient to cover the mortgage debt, then he is entitled to recover the shortfall from the mortgagor. In this case, again, that is exactly the commercial effect of clause 14(bb).ix) It is not an essential part of Socimer's case that Standard was in law a mortgagee of the Designated Assets, although, that is certainly a view at which the Court can arrive on the authorities and on the true construction of the Agreement. It is enough, for Socimer's purposes, that Standard occupied a position analogous to a mortgagee once it elected for clause 14(bb). There is therefore very powerful justification, and a sound basis in law, for holding Standard to a standard of care, in conducting a liquidation under clause 14(bb), that equity would impose on a mortgagee in possession. Since, as one of Standard's experts, Mr Ian Beckman agreed, the purpose of valuation is to replicate as close as possible the actual proceeds of sale, and not to permit Standard to acquire the Designated Assets at a discount, that standard must apply equally to Standard when conducting a valuation under clause 14(bb).
Standard's submissions
Conclusion
"26. So far as commercial contracts are concerned, it has been rightly said that:
'… the authorities do not justify any automatic implication, whenever a contractual provision exists putting one party at the mercy of another's exercise of discretion. It all depends on the circumstances …' Gan Insurance v Tai Ping Insurance [2001] EWCA Civ 1047 [2001] 2 All ER (Com) 299 per Mance LJ at 322(e)
27. However, a number of authorities collected and considered in the Tai Ping case at 322 – 323 make clear the willingness of the court to read into a discretion the requirement or implied term 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 is conferred, it must not be exercised arbitrarily, capriciously or unreasonably.' see Abu Dhabi National Tanker Company v Product Star Shipping Ltd (The "Product Star") [1993] 1 Lloyds LR 397 per Leggatt LJ at 404.
28. In that passage, Leggatt LJ properly observed that any analogy of approach with that adopted in the judicial control of administrative action must be applied with caution to the assessment of whether a contractual discretion has been properly exercised. However, in the Gan Insurance case, Mance LJ was not in doubt 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.'
29. In a different context (the power of a mortgagee to set interest rates from time to time) Dyson LJ (with whom Thorpe LJ and Astill J agreed) recently endorsed this approach in Paragon Finance plc v Nash [2001] EWCA Civ 1466 [2002] 1 LR 685 at para 41. The court held that the power of a mortgagee to set interest rates was not completely unfettered and that, in order to give effect to the reasonable expectations of the parties, it was an implied term of each mortgage that the discretion to vary interest rates should not be exercised dishonestly, for an improper purpose, capriciously, arbitrarily or in a way in which no reasonable mortgagee, acting reasonably, would do.
30. It is pertinent to observe that, in cases of this kind, the implication of the term is not the application of a 'good faith' doctrine, which does not exist in English contract law; rather is it as a requirement necessary to give genuine value, rather than nominal force or mere lip-service, to the obligation of the party required or empowered to exercise the relevant discretion. 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 opposed to an empty or irrational, exercise of discretion. Thus the courts impose an implied term of the nature and to the extent described."
"(a) A mortgagee owes a duty of care to the mortgagor in respect of the manner in which the power of sale is exercised.
(b) The duty is to obtain what has been described as the true market value (Cuckmere Brick Co Ltd and another v Mutual Finance Ltd [1971] Ch 949, [1971] 2 All ER 633, at p 966 of the former report) or the best price reasonably obtainable at the time (Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54, [1983] 1 WLR 1349 at p 1355 of the latter report).
(c) A similar duty is owed by a mortgagee to a guarantor (Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938, [1982] 1 WLR 1410), because equity intervenes to protect a surety (China and Southsea Bank Ltd v Tan [1990] AC 536, [1989] 3 All ER 839, at p 544 of the former report).
(d) The bank is not required to advance further funds to support or underwrite the carrying on of the business by receivers and the duty of receivers to manage the property with due diligence does not require them to carry on the business previously carried on by the mortgagor: Medforth v Blake [2000] Ch 86, [1999] 3 All ER 97, at p 93 of the former report.
(e) In deciding whether the mortgagee has taken reasonable precautions to obtain the true market value 'the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line' (Cuckmere Brick Co v Mutual Finance Ltd. at 969).
(f) In particular, the mortgagee may take into account such matters as when rival bidders are prepared to complete, and how secure their funding is:
'The mortgagee has to balance a higher offer, which is not firm, against a lower firm offer which will be withdrawn if not accepted within a specified period' (Fisher and Lightwood, Law of Mortgage, edition Tyler, 1988, p. 390).
(g) The mortgagee can sell when it likes, even though a better price might be obtained if it waits, and even if the result of an immediate sale may be that instead of there being a surplus for the mortgagor the purchase price is only sufficient to discharge the mortgage debt: Cuckmere Brick Co v Mutual Finance Ltd. at 969; Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, 1355 (P.C.).
(h) The fact that the mortgagee can sell when it likes does not mean that it can ignore the consequence that a short delay might result in a higher price, and the bank and the receivers must fairly and properly expose the property in the market (cf. Cuckmere Brick Co v Mutual Finance Ltd. at 979; Standard Chartered Bank v. Walker [1982] 1 WLR 1410); it has been suggested that this is subject to qualification where there is a need for an urgent sale: Lightman and Moss, Law of Receivers and Administrators, 3rd ed 2000, para. 7-032. But it is probable that all that this means is that in the case of urgency the necessary degree of exposure to the market must be evaluated in the light of the circumstances."
"14. A mortgagee 'is not a trustee of the power of sale for the mortgagor'. This time-honoured expression can be traced back at least as far as Sir George Jessel MR in Nash v. Eads (1880) 25 SJ. 95. In default of provision to the contrary in the mortgage, the power is conferred upon the mortgagee by way of bargain by the mortgagor for his own benefit and he has an unfettered discretion to sell when he likes to achieve repayment of the debt which he is owed: see Cuckmere Brick Co Ltd v. Mutual Finance Ltd [1971] Ch 949 at 969G. A mortgagee is at all times free to consult his own interests alone whether and when to exercise his power of sale. The most recent authoritative restatement of this principle is to be found in Raja v. Austin Gray [2003] 1 EGLR 91, 96 paragraph 59 per Peter Gibson LJ. The mortgagee's decision is not constrained by reason of the fact that the exercise or non-exercise of the power will occasion loss or damage to the mortgagor: see China and South Sea Bank Limited v. Tan Soon Gin alias George Tan [1990] 1 AC 536. It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: he is not bound to postpone in the hope of obtaining a better price: see Tse Kwong Lam v. Wong Chit Sen [1983] 1 WLR 1349 at 1355B.
15. The Claimants contend that a mortgagee is not entitled to ignore the fact that a short delay might result in a higher price. For this purpose they rely on certain obiter dicta of Lord Denning MR in Standard Chartered Bank v. Walker [1982] 1 WLR 1410 1415G-H and 1416A. The mortgagee in that case, having obtained insufficient on the sale at auction of the property charged to recover the sum secured, applied for summary judgment against the mortgagor for that sum. The mortgagor resisted the application alleging that the mortgagee had sold at an undervalue on a variety of grounds one of which was that the sale took place at the wrong time of year. The Court of Appeal gave the mortgagor leave to defend on the ground that there was an arguable case that the sale had been negligently handled. It was common ground in that case that a mortgagee can choose his own time for sale: see Fox LJ at p.1418 F-G. Lord Denning accepted that there were dicta to this effect, but added that he did not think that this meant that the mortgagee could sell at the worst possible moment and that it was at least arguable that in choosing the time he must exercise a reasonable degree of care. The view expressed by Lord Denning cannot stand with the later authorities to which we have referred and which state quite categorically that the mortgagee is under no such duty of care to the mortgagor in respect of the timing of a sale and can act in his own interests in deciding whether and when he should exercise his power of sale.
16. The mortgagee is entitled to sell the mortgaged property as it is. He is under no obligation to improve it or increase its value. There is no obligation to take any such pre-marketing steps to increase the value of the property as is suggested by the Claimants. The Claimants submitted that this principle could not stand with the decision of the Privy Council in McHugh v. Union Bank of Canada [1913] AC 299. Lord Moulton in that case at p.312 held that, if a mortgagee does proceed with a sale of property which is unsaleable as it stands, a duty of care may be imposed on him when taking the necessary steps to render the mortgaged property saleable. The mortgage in that case was of horses, which the mortgagee needed to drive to market if he was to sell them. The mortgagee was held to owe to the mortgagor a duty to take proper care of them whilst driving them to market. The duty imposed on the mortgagee was to take care to preserve, not increase, the value of the security. The decision accordingly affords no support for the Claimants' case
17. The mortgagee is free (in his own interest as well as that of the mortgagor) to investigate whether and how he can 'unlock' the potential for an increase in value of the property mortgaged (e.g. by an application for planning permission or the grant of a lease) and indeed (going further) he can proceed with such an application or grant. But he is likewise free at any time to halt his efforts and proceed instead immediately with a sale. By commencing on this path the mortgagee does not in any way preclude himself from calling a halt at will: he does not assume any such obligation of care to the mortgagor in respect of its continuance as the Claimants contend. If however the mortgagee is to seek to charge to the mortgagor the costs of the exercise which he has undertaken of obtaining planning permission or a lessee, subject to any applicable terms of the mortgage, the mortgagee may only be entitled to do so if he acted reasonably in incurring those costs and fairly balanced the costs of the exercise against the potential benefits taking fully into account the possibility that he might at any moment 'pull the plug' on these efforts and the consequences for the mortgagor if he did so.
18. If the mortgagor requires protection in any of these respects, whether by imposing further duties on the mortgagee or limitations on his rights and powers, he must insist upon them when the bargain is made and upon the inclusion of protective provisions in the mortgage. In the absence of such protective provisions, the mortgagee is entitled to rest on the terms of the mortgage and (save where statute otherwise requires) the court must give effect to them. The one method available to the mortgagor to prevent the mortgagee exercising the rights conferred upon him by the mortgagee is to redeem the mortgage. If he redeems, there can be no need or justification for recourse by the mortgagee to the power of sale to achieve repayment of the debt due to him secured by the mortgage.
19. When and if the mortgagee does exercise the power of sale, he comes under a duty in equity (and not tort) to the mortgagor (and all others interested in the equity of redemption) to take reasonable precautions to obtain 'the fair' or 'the true market' value of or the 'proper price' for the mortgaged property at the date of the sale, and not (as the Claimants submitted) the date of the decision to sell. If the period of time between the dates of the decision to sell and of the sale is short, there may be no difference in value between the two dates and indeed in many (if not most cases) this may be readily assumed. But where there is a period of delay, the difference in date could prove significant. The mortgagee is not entitled to act in a way which unfairly prejudices the mortgagor by selling hastily at a knock-down price sufficient to pay off his debt: Palk –v- Mortgage Services Funding Plc [1993] Ch 330 at 337-8 per Nicholls V-C. He must take proper care whether by fairly and properly exposing the property to the market or otherwise to obtain the best price reasonably obtainable at the date of sale. The remedy for breach of this equitable duty is not common law damages, but an order that the mortgagee account to the mortgagor and all others interested in the equity of redemption, not just for what he actually received, but for what he should have received: see Standard Chartered Bank Limited –v- Walkers [1982] 1 WLR 1410 at 1416B."
Issue (1): The Unpaid Amount
i) Spot Trade Balances:Socimer contends that, whatever the precise legal position, the facts as established on the evidence are that, had the valuations of the Designated Assets been completed on or shortly after 20 February as they should have been, Standard would have set off or given credit for US $3,120,480.93 representing credit balances ("Spot Trade Balances") due to be paid to Socimer on spot trade transactions in respect of five assets that were not Designated Assets but which had been bought spot by Standard from Socimer on the trade date of 20 February 1998 and not yet paid for in full, the settlement date being 24 February 1998. The five assets were as follows:
Asset Credit balance after sale Brazil Ultragaz US $380,877.03 Russia Inkomfinance US $1,586,382.28 Argentina Pars US $381,720.43 Alpargatas SAIC US $598,930.75 Pesquera Austral US $172,570.44 ii) The Other Balances
Socimer also contends that Standard has failed to account or give credit for US $675,735.64 representing a cash sum due to Socimer in respect of the partial buy-back by Standard of a Designated Asset, namely the Vnesheconombank Restruct L/A ("the Vnesh Asset"). 20 February 1998 was the settlement date for this partial buy-back, on which date Standard was due to pay a net sum to Socimer of US $675,735.64 in respect of the buy-back. Standard admits that this sum was due and payable to Socimer from 20 February 1998, and that Socimer was credited with it on 27 February 1998. Socimer contends that Standard has also failed to account for US$24,686.73, which was a coupon payment in respect of another Designated Asset, the Brazil Bco BMG bond, which was paid on 27 December 1997.iii) Accrued Coupon Interest
Standard has failed to account or give credit for coupon interest which had accrued on Designated Assets of US $302,914.63 as at 20 February 1998.
i) The Spot Trade Balances
It was common ground at trial that the Spot Trade Balances were not due in respect of Designated Assets but that regardless of whether or not in law Standard was obliged to set off the Spot Trade Balances against the Unpaid Amounts in respect of the Designated Assets, it certainly had the right to do so (under clauses 8 and 9(c) of the Agreement) if the balance was payable to Socimer. It was also clear from the documentary evidence before me at trial:
i) that the payments of the Spot Trade Balances were credited unconditionally to Socimer's running current account with Standard (account no 100032155) on 25 February 1998 on settlement as a document entitled the "Accounts of Socimer" and Standard's internal ledger balance showed;ii) that Standard had in fact set off the Spot Trade Balances against Unpaid Amounts in respect of the Designated Assets in August and as at, or by the end of, September 1998 (once Designated Assets had been sold); see the correspondence between Socimer's liquidator and Standard in the period 29 April 1998 to 30 March 1999.
i) There was no pre-existing fiduciary relationship between Socimer and Hemisferio. Standard was minded to assist Hemisferio or Socimer's underlying clients in its attempt to create the relationship of agency between Hemisferio and Socimer in order to get the assets out of Socimer's estate and avoid the consequences of its liquidation, which intention (but not the actuality) was reflected in an email from a Miss Karen Acher-Howard (a Standard sales person) dated 20 February 1998.ii) But Standard's legal advice was that the transaction had to be principal to principal because otherwise the anti-avoidance insolvency legislation might be engaged. The documentation reflected that advice and the way that the transaction was structured was back to back, principal to principal.
iii) The payments of the Spot Trade Balances which were credited unconditionally to Socimer's running current account with Standard on 25 February 1998 on settlement were treated in exactly the same way as the Vnesh asset payment, which Mr Clifford admitted was owed to Socimer. Whatever Mr Clifford may have wanted, these monies were not paid into a blocked account or a suspense account but were credited to Socimer's "normal account", which had no restrictions. Nor were they netted off with the downpayments coming from Hemisferio under the back to back forward sales between Standard and Hemisferio. Hemisferio has never claimed those sums for itself, either from Standard or from Socimer.
iv) At best, Mr Clifford personally may have had some slight uncertainty about whether Hemisferio in law may have had a claim, given what he had been told by Miss Acher-Howard about what Hemisferio wanted to achieve, but I reject his assertion that because of this the Spot Trade Balances had been placed to the credit of a suspense account. The documents and Standard's conduct are inconsistent with that. Had Standard really thought that Socimer had entered these Spot Trades as agent for Hemisferio, Standard would have netted off the Spot Trade Balances owed to Socimer/Hemisferio against Hemisferio's down payment under its separate forward purchase trades. The trade confirmations with Hemisferio show that this did not happen.
v) Consistently with the deal documentation, Standard continued to treat Socimer as its principal in respect of the Spot Trade Balances. Thus, when it received claims from the underlying beneficial owners of various of the Spot Trade assets (i.e. Socimer's own clients) in and after March 1998, Standard told them, correctly, that Standard's relationship was with Socimer as principal.
(ii) The Other Balances
(iii) The Accrued Coupon Interest
Conclusion in respect of the Unpaid Amount
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.
The Socma Americana 10.5% Depositary Receipts ("the Socma DRs")
The nature of the Socma DRs
i) Trade confirmation reference 33634, dated 21 November 1997 (trade date 20 November 1997) for a face amount of US $1,800,000: this was traded at par with a settlement date of 24 February 1998;ii) Trade confirmation reference 36790, dated 6 February 1998 (trade date 4 February 1998) for a face amount of US $9,110,000. The settlement amount was shown on the trade confirmation as 97% of the amortised amount of US $8,350,833.03, namely US $8,268,369 (or 91.667% of face value). In fact, it was common ground that the true amortised face value of those Socma DRs was 83.33% of face value, being US $7,591,636.30 and not the figure of US $8,350,833.03, as shown on the relevant trade confirmations. The figure shown on the trade confirmations failed to take into account the scheduled repayment of 8.33% of face value on 30 November 1997, which brought the amortised value down accordingly;
iii) Trade confirmation reference 39647 which replaced the first trade by reflecting a prepayment of US $800,000 at Socimer's request, leaving US $1 million outstanding on that trade.
Socimer's primary case – the value of the Socma DRs in Socimer's own hands
First sub-issue – Should or would Standard have handed back the Socma DRs to Socimer?
i) Under clause 14(a)(bb), Standard was entitled to liquidate or retain only "sufficient" Designated Assets and to apply the proceeds of their sale "to satisfy to the extent possible" any amounts payable to Standard under the Agreement. It is clear from the last sentence of the third sub-paragraph of clause 14(a)(bb), which provides for the transfer of any surplus sale proceeds to the Buyer after satisfaction of all unpaid amounts, that Standard had some leeway in this respect, and would not have been in breach if it sold, or valued and retained, somewhat more Designated Assets than were strictly necessary to discharge the Buyer's indebtedness. However, properly advised, it would have appreciated that it needed to ensure that it did not purport to value and retain significantly more assets than were necessary to discharge Socimer's indebtedness, particularly in circumstances where, for example, there might be doubts as to the value of any asset, or a potential disagreement between the Buyer and Standard as to the values of a particular asset.ii) Standard, had it been aware of its obligations, would have appreciated that any Designated Assets remaining following the satisfaction of Standard's claims had to be transferred back to Socimer in the same manner as contemplated by the Agreement and the relevant trade confirmations as soon as practicable after termination. Standard, had it been aware of its obligations, would have appreciated not only that, if it went for the paragraph (bb) option it was only entitled to realize, or notionally realize, sufficient assets to satisfy the Unpaid Amount but also that it would have had a duty, albeit a limited duty, as discussed above, to value the relevant asset with reasonable care. It would also have appreciated on the figures that, since the Unpaid Amount for the Socma DRs would have been notionally paid or provided for, as a result of the valuation of the other Designated Assets, any re-transfer to Socimer of the Socma DRs would have been free of payment.
iii) In the circumstances, it would have also appreciated that, in relation to Designated Assets other than the Socma DRs, there was far greater transparency as to their value and therefore less likelihood for dispute with the Buyer as to the appropriate valuations to be ascribed to them. That was because Standard necessarily would have had very little time to form a view as to whether the Socma DRs also carried Socimer risk.
iv) Even if Mr Clifford's view and that of the New York legal department had been obtained in the time frame, I find as a fact that there would have remained a real doubt within Standard as to whether Socimer was indeed a fiduciary (as shown by Standard's subsequent conduct in 1998, 1999 and 2000, as described above), and therefore whether any valuation of the Socma DRs should only be based on Socma risk. In my judgment the overwhelming likelihood in such circumstances is that Standard would have adopted the pragmatic course of valuing and retaining assets whose values were not subject to such uncertainties, i.e. the other Designated Assets, which on Standard's own valuation would have produced sufficient to have discharged the Unpaid Amounts without any need to have recourse to the Socma DRs. It would then have handed back the Socma DRs to the liquidator. Indeed, even if, and perhaps particularly if, it had formed the view that the Socma DRs had a nil value, there would have been no logic, or indeed justification, in its retaining the Socma DRs in circumstances where the other assets were sufficient to discharge Socimer's indebtedness. If it had ascribed a nil value to the Socma DRs, it would necessarily not have applied their notional proceeds of sale towards discharge of the indebtedness owing to it and they would thus have been "Designated Assets remaining following the satisfaction of the Seller's claims" which Standard would then have been obliged to retransfer.
Second sub-issue – the value of the Socma DRs
"28. The first step is to determine how courts assess damages in cases of conversion in which there has been permanent deprivation. Three cases have been drawn to my attention on this issue. The first is Brandeis Goldschmidt & Co Ltd v Western Transport Ltd [1981] QB 864. In that case, the claimant used copper in its business of making cathodes. It acquired a consignment of that metal but it was wrongfully detained by the defendant haulage contractors. In summary proceedings the claimants had obtained an order for delivery up of the copper. The outstanding dispute was as to the damages which could be recovered by reason of the wrongful detention. During the period of detention, the price of copper had fallen. The claimant argued that it was entitled to the difference in value between the consignment when it bought it and that at which it was replaced together with interest due on overdrafts at its bank during the period of detention. At first instance this argument succeeded. It failed on appeal. Brandon LJ, giving the judgment of the court, said:
'Looking at the matter from the point of view of principle first, I cannot see why there should be any universally applicable rule for assessing damages for wrongful detention of goods, whether it be the rule contended for by the plaintiffs or any other rule. Damages in tort are awarded by way of monetary compensation for loss or losses which a plaintiff has actually sustained, and the measure of damages awarded on this basis may vary infinitely according to the individual circumstances of any particular case.' (p 870)
29. After considering a number of authorities he continued:
'The conclusion which I reach from a study of these authorities is that the view of the matter which I would arrive at on the basis of principle alone is not in any way shown to be erroneous, but rather to be well supported, by such authorities. I approach this case, accordingly, on the basis that it was for the plaintiffs to prove that they had actually suffered the two items of loss which they claimed.' (p 872)
30. Based on this approach, the Court of Appeal held that the claimant could not recover the fall in the value of the detained consignment. The claimant was not in the business of buying and selling copper. It was in the business of buying copper for use in its manufacturing processes. The loss in the value of the consignment would have been a proper measure of damage in the first case. It was not in the second. Because it was engaged in the business of using the copper rather than trading it, it was for the claimants to show what loss it had suffered by virtue of it being prevented from using it. It had failed to prove any such loss. It should be noted that this was treated as a case of temporary, not permanent, deprivation.
31. The second case is the BBMB Finance case in the Privy Council referred to above. There the plaintiffs were entitled to shares in a company. They were held in trust for it. The share certificate and executed blank transfers were deposited with the defendant who, wrongfully, converted them by selling the shares to a third party. Subsequently the defendant went into the market and purchased replacement shares for the claimant. This was treated as a case of permanent deprivation which, as noted already, appears to me to be consistent with the answer to Question I given above. On the issue of damage Lord Templeman said:
'Both the Brandeis case [1981] QB 864 and the Peel River case (1886) 55 LT 689 were concerned with damages caused by temporary deprivation of possession and use of the property. A different consideration will apply when the property is irreversibly converted and the plaintiff loses that property. The plaintiff loses the value of the property at the date of conversion and the general rule is that the measure of damages is the value thus lost.' (p 413)
32. The third case is Kuwait Airways Corporation v. Iraqi Airways (Nos 4 & 5) [2002] A.C. 883. This arose out of the removal of certain of the claimant's aircraft when Iraq invaded Kuwait. It appears that the case was considered as one of temporary deprivation. However Lord Nicholls drew no distinction between the principles of recovery of damages as they apply to cases of permanent and temporary deprivation. Thus, in expressing his views on this subject, he relied both on what was said in the Brandeis case (temporary deprivation) and in an Australian case, Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185, (permanent deprivation). It should also be noted that BBMB Finance was cited to their Lordships.
33. Having cited Brandon LJ's views in Brandeis that 'damages in tort are awarded by way of monetary compensation for a loss or losses which a plaintiff has actually sustained' Lord Nicholls said:
'66 A similar approach has been adopted by the High Court of Australia, in Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185. Damages for the eggs converted by the producer were assessed, not on their value at the time of the conversion, but upon the actual loss sustained by the defendant, namely, the profit the board would have made on a resale of the eggs.
67. I have no hesitation in preferring and adopting this view of the present state of the law. The aim of the law, in respect of the wrongful interference with goods, is to provide a just remedy. Despite its proprietary base, this tort does not stand apart and command awards of damages measured by some special and artificial standard of its own. The fundamental object of an award of damages in respect of this tort, as with all wrongs, is to award just compensation for loss suffered. Normally ('prima facie') the measure of damages is the market value of the goods at the time the defendant expropriated them. This is the general rule, because generally this measure represents the amount of the basic loss suffered by the plaintiff owner. He has been dispossessed of his goods by the defendant. Depending on the circumstances some other measure, yielding a higher or lower amount, may be appropriate. The plaintiff may have suffered additional damage consequential on the loss of his goods. Or the goods may have been returned.' (p 1090)
34. From these authorities, and in particular Kuwait Airways, it seems to me that the following propositions apply to the assessment of damages in a case of conversion. First, damages should be awarded which give the claimant just compensation for losses he has sustained. Second, the value of the converted asset is a suitable starting point for determining what that loss is. Third, the value of the converted asset is not necessarily a correct measure of the damages suffered since the claimant may have suffered greater or less loss than this."
i) to the extent that the Socma DRs held by Standard were not the subject of forward sales by Socimer to its clients, Socimer could "tear them up" and remove from its balance sheet the liability represented by such Socma DRs; in fact, as at 20 February 1998, Socimer had a proprietary position in Socma DRs with a face value of $910,000; andii) to the extent that the Socma DRs had been sold forward to its clients, Socimer would be entitled to the balance of the outstanding forward settlement amount that it could recover from its clients against delivery, plus the right to keep the downpayments, adding up to a total of the face value of the Socma DRs (or marginally below).
Socimer's secondary case in relation to the Socma DRs
The Brazil TDA-Es
i) the price for which they were actually bought by Socimer forward from Standard on 2 February 1998 was US $9,149,250, only two weeks or so before termination; the trade was confirmed on 17 February 1998, only three days before termination; this was the second rollover of the portfolio and there is no evidence that there was any demand for an Additional Downpayment made by Standard prior to 20 February 1998 to reflect any significant fall in the value of these TDA-Es; however the downpayment, originally at 30%, at the date of the first rollover in August 1997, was increased to 45 % at the date of the second rollover, no doubt reflecting the increased risk which Standard attached in relation to the realisation of these assets; accordingly one must approach the sale price as a value indicator with caution;ii) the value at which they were marked to market by Standard on 20 February 1998 was US $9,265,996;
iii) the price at which they were actually sold by Standard in October 1998, was US $9,015,873.55; according to Professor Rosenberg, whose evidence on this point I accept, these sales took place at a time when the economic situation in Brazil was beginning to deteriorate from the market stability which had obtained in and after February and March 1998 and at a time when both experts agree that the market for TDA-Es was less attractive than the market in February 1998.
i) There may be a single trade of a bundle of TDA-Es with different maturities at a single price, reflecting the average of the prices or values within the bundle. Thus TDA-Es of long maturity will have an underestimated YTM compared with the bundle price and those of short maturity will have an overestimated YTM. Professor Rosenberg demonstrated how not unbundling can skew the YTM estimate and produce over-estimations of the YTM values, and hence an undervaluation of the portfolio, if the preponderance of the bonds in each traded lot are those of short maturity (5 years or less), which they were in the instant case. The effect of Mr Quintero's treating the single (average) CETIP-registered price as the true value for each TDA-E in the lot was to ignore the differences in maturities for each, and thus to use the wrong (and in many cases misleadingly low) value as the driver for the YTM.ii) Not unbundling (i.e. continuing to apply a single lot price across a spread of different bonds with different maturities) creates divergent over-estimates and under-estimates for YTMs in a very wide spread.
Professor Rosenberg did not suggest that his unbundling exercise was a perfect reflection of the true value of each TDA-E within each lot, but stated that in his view it was a very much closer approximation to that reality than is achieved by simply ignoring the fact that the bundle price is an average and then applying it per TDA-E to arrive at its YTM.
i) I take into account the fact that Standard would have wanted to, and would have been entitled to, have adopted, an extremely conservative approach to its valuation, given that it was effectively taking assets on to their own books, which save for its involvement with Socimer, Standard had no proprietary interest in holding.ii) I also accept that the consequence of financing Socimer's portfolio of Brazilian TDA-Es (which involved Standard advancing US Dollars to Socimer against collateral (the TDA-Es) which was denominated in Brazilian Reais), meant that, when it came to Standard Bank being left with this asset upon Socimer's default, in order to ensure that its US Dollar lending was repaid in full, it would not only have had to sell the TDA-Es but also have had to exchange the Brazilian Reais into US Dollars and repatriate those US Dollars to its US Dollar bank account in New York. There were clearly complications in relation to hedging this type of local currency investment, potential problems associated with transferring money into and out of Brazil, and actual problems with the eventual sale process, which were foreseeable at the time, as Mr Steven Hawkyard, a proprietary trader in emerging market debt at Standard, explained. I also accept that, by 1998, investment returns were more attractive to Standard in Brazilian hard currency denominated debt than Brazilian local currency debt, and that, accordingly, Standard was in the process of ceasing its Brazilian local currency business at the relevant time.
iii) On the construction of the Agreement, I hold that in coming to its valuation Standard was entitled to take account of the potential future transaction costs, discounts for tax, inconvertibility protection, or currency hedge, costs and foreign exchange costs, that might be necessary to ensure effective repatriation of the funds and their conversion to dollars, once the TDA-Es had been sold in the future. Mr Millett submitted that the phrase in the second paragraph of sub-clause 14(a)(bb) "any losses, expenses or costs arising as a result of the termination or the sale of the Designated Assets" did not include such costs that were, he submitted, extraneous to the actual value of the TDA-Es. He contended that there was no possibility of determining them on the termination date, as the sub-clause directed, and in the case of a retention there was no sale in any event. In my judgment it is legitimate for any valuation to reflect the potential for such costs, since they are costs and expenses indirectly flowing from the termination. Alternatively, I see no reason why value in the context of retention should not reflect realisable value net of the costs of realisation, particularly where Standard clearly has a wide discretion as to value and even the definition of "Market Value" in the Agreement (which is used for the purposes of Mark to Market valuations, but not invoked in the context of clause 14) requires value to be determined by reference to the Payment Currency, as defined, namely US dollars.
iv) However, although I accept that Standard was entitled to approach the matter extremely conservatively, I do not accept, in the case of the TDA-Es, that it was entitled to approach the valuation, if it elected to retain, on a "forced-sale" basis. It had the option to sell on, or as soon as reasonably practicable after, the termination date. But if it did not do so, but elected instead to retain and value, I do not see why the choice of that option and the fact that the valuation not only had to be done as at the termination date, but on, or as soon as reasonably practicable after, that date, of itself entitled or required Standard to value the instruments as though it had sold them by means of a forced sale on the termination date. I do not accept, to its full extent, Mr Millett's submission that "a forced sale valuation on retention is most unlikely ever to be in good faith or fair and reasonable where there is a ready market for the Designated Asset". But I do accept the more limited proposition, that in the circumstances of this case, where there was a reasonably ready market for the TDA-Es, and the experts agreed that they could have been sold at market values within 10 working days, that it was not appropriate to value on a forced sale basis, viz. on the assumption that the instruments had all been sold in one batch, on 20 February 1998, in a forced sale, thereby no doubt depressing the market by the very size of the holding disposed of. To that extent I accept Mr Millett's submissions and reject those of Mr Auld.
Professor Rosenberg
Mr Quintero
Mr Clifford
Mr Feld
The evidence relating to the valuation of the TDA-Es.
i) Mr Quintero's whole valuation approach was based on the assumption that the valuation must be carried out by reference to a notional "fire sale/forced sale" in one day. That, he told the Court, "is the only way" that he does valuations, and sought to rely on a requirement in certain market regulations. These were not identified in his report and were only produced after the hearing. They cannot affect the exercise which he was asked to carry out for the purposes of this trial. However in cross-examination, he accepted that the valuation exercise did not have to be done and completed by the end of the termination day itself but could, according to the Judgment, take a period "as soon as practicable" after termination. He accepted that his valuation did not take that into account because he felt bound to value on one day. One suspects that this may have been because Standard had instructed him to approach it this way when giving its "input" into his second report.ii) Mr Quintero did not take into account the downpayment paid by Socimer on the TDA-Es in valuing the assets; he told me, however, that when he performs valuations in accordance with his usual practice, he would "definitely" take into account the fact that there had been a downpayment. In not following the methodology that he would have normally followed, doubts arose in relation to his valuation, since the amount of the downpayment was an important factor in any calculation of value.
iii) Mr Quintero used the unadjusted prices from CETIP on 20 February 1998 to calculate the gross value of the TDA-E portfolio on that day. There were only eight different series of TDA-Es traded on that day and so Mr Quintero had had to extrapolate/interpolate the figures. He likened this exercise to "like kids linking the points where you have observable prices". Four out of those eight different series (each with different maturities) were traded with identical lowest, average and highest prices, and therefore are very likely to have been traded in a bundle. According to Mr Quintero, two thirds (66%) of the CETIP trades were single trades for a bundle of TDA-Es with different maturities. He agreed that counting frequency of trades by references to series of TDA-Es instead of their maturities may well result in undercounting the volume of trades in TDA-Es of the same maturity; the effect would be that the trading would look less liquid than was actually the case.
iv) Indeed, as far as liquidity of the TDA-Es was concerned, Mr Quintero agreed that despite his saying in his first report that they were "thinly traded", he had counted the trades in series of TDA-Es rather than by maturity. Accordingly, he agreed that he had undercounted the frequency of trades of like maturity and therefore overstated the illiquidity of the TDA-Es on 20 February. He also agreed that applying a YTM curve derived from average bundle prices to the shorter maturities of TDA-Es under-estimated the value of those assets. Since the Designated Asset TDA-Es comprised a preponderance of the shorter maturities of TDA-Es, this would have undervalued the portfolio.
v) Mr Quintero agreed that unless the TDA-Es were unbundled and a real price applied rather than the average/composite price straight from CETIP then the yield curve produced would be skewed because there would be vastly widespread yields. His answer was that "that is how things are in life" but he had no answer for the fact that the yield curve would not be accurate by using unbundled prices.
vi) The raw price data contained in CETIP was using for the volatility calculation (which was calculated using standard deviation). But the calculation by Mr Quintero of the volatility standard deviation was based on data from the 21 days prior to 20 February 1998. The result was, as it emerged, that Mr Quintero's curve and his standard deviation were based on different price data, which meant that the calculation was not reliable.
vii) In order to calculate the liquidity discount (which Mr Quintero called the unwinding cost), Mr Quintero used the ten-day period (but 21 day data) in which it would take to sell the portfolio, so that his calculation was the volatility standard deviation multiplied by the square root of ten. Mr Quintero accepted that it would have been a statistically more appropriate method to estimate the ten-day standard deviation using data from ten-day data, rather than 21 days. This was a very significant flaw in his calculations. Professor Rosenberg said that when he applied Mr Quintero's methodology correctly using square root of ten, he calculated the unwinding costs to be less than one third of what Mr Quintero had calculated, which was not challenged by Mr Auld. In cross-examination, Professor Rosenberg said that the right approach should be square root of five, not of ten: that would have produced even lower unwinding costs.
viii) Mr Quintero used lowest traded prices on CETIP both to build his YTM and then to take the standard deviation and apply it to those lowest prices. Mr Quintero first said that he had not really thought about it, but then said that he had selected the lowest prices to take account of transaction costs, and thus it made no difference. This was a wrong approach because it results in a "double-discount", once when building the YTM curve and again when applying it. As Mr Millett submitted, there was an even greater impact on the standard deviation, because it is statistically inept to apply standard deviation to minimum prices.
ix) Mr Quintero accepted that he was taking the minimum prices from CETIP rather than the average price to take account of transaction costs. Despite adding transaction costs afterwards in his calculations, Mr Quintero did not see that as double counting. He also withdrew from his second report in which he said that he had taken the lowest prices in CETIP to reflect a risk of adverse deviation of prices from those achievable on 20 February 1998. He could not give a convincing rationale for picking the lowest prices except to say "how else do I account for transaction costs". In fact, having read a transcript of Professor Rosenberg's oral evidence on the flight from Brazil, it appeared that Mr Quintero did not dispute Professor Rosenberg's 2% for transaction costs.
i) Standard would have been advised by the professional whom it consulted that the likely valuation of the TDA-Es on the termination date, taking into account the risk of a 10 day or so period that would have been needed to liquidate the portfolio, discounts for tax, inconvertibility protection or currency hedge costs and foreign exchange costs and 2% transaction costs, was in a range of between US$ 9.4 million (Professor Rosenberg's figure based on medium liquidity) and US $ 8.9 million (his figure based on low liquidity). A reference check would have been provided by both the previous average traded price calculation of US $9,458,024 (as produced by Professor Rosenberg in chief) and Standard's own mark to market figure of $9.265 million.ii) Standard, out of understandable caution, would then have applied its own further contingency discount to reflect the fact that it was taking the risk of the assets on to its own book. The likelihood is that this would have been in the region of a further US $500,000, which, although not a scientifically calculated figure, is an amount that a reasonable bank in Standard's position could justify as a further buffer.
iii) Accordingly, I conclude that Standard, adopting a conservative and cautious approach, is likely to have valued the TDA-Es at a figure of US $8,500,000 for the purposes of clause 14. 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.
The North Korea Asset
The Brazil LTN
Conclusion
i) the valuations of the Designated Assets, as agreed by the parties' experts, other than the Socma DRs, the TDA-Es, the North Korea Asset and the Brazil LTN;ii) the value of the Socma DRs in accordance with Socimer's primary case, namely US $8,424,966;
iii) the value of the TDA-Es, which I hold that Standard would have arrived at, in the sum of US $8,500,000;
iv) the value of the North Korea Asset in the sum of DM 2,623,788.23;
v) nothing in respect of the value of the Brazil LTN;
vi) all of the above amounts must be brought into account against an Unpaid Amount of US $20,382,063.24.