England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		25 July 2008

Section I: The Post-Default Claims	1
Introduction	1
Key Issues arising on the Post-Default Claims	5
Section II: The Failed Notes and their terms	6
Section III: Relevant background relating to the Post-Default Note Claims	30
Introduction	30
The pre-default position in Russia	31
The Russian Default Measures	32
The impact of the default on the market	47
Dealings between Springwell and Chase in the aftermath of the crisis	50
The first GKO exchange offer	74
The second GKO exchange offer	93
Post-exchange events	114
Chase's actual performance in respect of the Failed Notes	122
Section IV: The Payment Claim – issues 51 and 52	125
The respective arguments of the parties	125
Springwell's arguments	126
Chase's arguments	138
Analysis in relation to Issues 51 - 53	142
Estoppel	176
Conclusions	179
Section V: The Account Claim – Issues 55 - 58	180
The Sberbank Local Forwards	181
The CMBI Forwards	187
Conclusion	191
Section VI: The Damages Claim – Issues 59 - 61	192
Introduction	192
The scope of Chase's duty of care, and the meaning of gross negligence	194
Wilful Misconduct	206
The CMBI Forwards	207
The Damages Claim in relation to the non-CMBI risk forwards	207
The Damages Claim in relation to the CMBI risk forwards	213
Springwell's arguments	214
Chase's arguments	215
Analysis	216
Chase's conduct during the Moratorium	217
The allegation that Chase should have set up separate CMIL and CMBI negotiating teams	219
The allegation that CMSCI/CMIL acted with wilful misconduct or with gross negligence in declaring force majeure	225
The allegation that Chase was guilty of wilful misconduct or gross negligence in failing to place roubles in the S-Account	241
The Damages Claim in relation to the two VTB forwards	245
Conclusion in relation to the Damages Claim	248
Section VII: The Custody Fees Claim – Issues 47 - 50	249
Introduction	249
Analysis of the Evidence	254
Reliance	255
FS's Authority	257
Legal consequences of the representation	259
Conclusion in relation to the Custody Fees Claim	260
Postscript	261

Mrs Justice Gloster:

Section I: The Post-Default Claims

Introduction

1. This judgment follows on from my earlier judgment in this matter, handed down on 27 May 2008 ("the first judgment"). The first judgment sets out the parties and the necessary factual background for the purposes of this judgment. Definitions used in this judgment are the same as those used in the first judgment. This judgment deals with the Post-Default Claims made by Springwell, namely those arising out of the events of, and subsequent to, 17 August 1998 (the date of the Russian default) and their consequences.
2. The first category of Post-Default Claims is the Custody Fees Claim. Under this head, Springwell claims reimbursement or damages in respect of custody fees allegedly wrongly charged by Chase between March 2000 and March 2001 for holding collateral, in respect of a term loan granted by CMB to Springwell, in safe custody in Jersey. This claim is relatively minor in comparison to the other claims in this case; it is for $445,472.13 plus interest^[1]. Because of its lesser significance, I shall deal with it after my consideration of the second category of Post-Default Claims, namely the Post-Default Note Claims.
3. The Post-Default Note Claims comprise the following:

i) a claim that CMSCI was and remains obliged to pay Springwell the full amount of the Principal Amount plus Interest (as defined in the Note) allegedly due under the eleven GKO-Linked Notes (referred to as "the Failed Notes" or simply "Notes"), which Springwell held as at 17 August 1998; in aggregate this claim amounts to some $95,259,716 ("the Payment Claim")^[2]; this claim is made on the alleged basis that, because Chase failed to exercise options available to it under the terms of the Notes, the Redemption Amounts (as defined in the Notes) were due in sums equal to the Principal Amounts plus interest;

ii) in the alternative, a claim for a full account of sums received by CMSCI or any affiliate in respect of certain Transactions referred to in the Failed Notes ("the Account Claim");

iii) also in the alternative to the Payment Claim, a claim for damages in respect of CMIL's failure (acting on behalf of CMSCI) to secure value, alternatively greater value, from Designated Forward Transactions referred to in the Failed Notes between CMIL and CMBI, alternatively VTB ("the Damages Claim").

4. The Post-Default Claims arise independently of the Pre-Default Claims. Thus the fact that I have held that Chase is not liable in respect of any of the Pre-Default Claims does not affect the outcome of the Post-Default Claims. Likewise, given my decision in relation to the Pre-Default Claims, no issue arises as to whether, as Chase contended, quantum in relation to the Pre-Default Claims should be affected by the outcome of the Post-Default Claims.

Key Issues arising on the Post-Default Claims

5. The List of Issues sets out the following issues arising on the Post-Default Claims:

"4.1 Custody Fees

47. Did Chase by FS and Springwell by SP agree in the course of negotiating the Term Loan Agreement and the provision of collateral in relation to it that no custody fees would be charged to Springwell? What, in any event, was the scope of FS's authority?

48. If so, did Springwell enter into the Term Loan Agreement, Nominee Agreement and Security Interest Agreement in reliance upon FS's statement that no custody fees would be charged?

49. In the light of paragraphs 47 and 48 above

(1) Was there an agreement binding Chase that custody fees would not be charged to Springwell; or

(2) Is Chase estopped from asserting that it was entitled to deduct custody fees?

50. In the light of paragraphs 47 to 49 above, to what, if any, relief is Springwell entitled in respect of the custody fees charged to it in 2000/2001?

4.2 The Post-Default Note Claims

4.2.1 Payment Claim

51. What is the effect, upon CMSCI's obligations under the Failed Notes, of a failure of the GKOs, Designated Forward Transactions or (where applicable) Local Forwards to perform on their due dates?

52. Did the GKO-Related Payments discharge CMSCI's obligations under the Failed Notes?

53. Is Springwell precluded from claiming that anything is due under the Failed Notes because either CMB or Springwell itself became estopped from so asserting?

54. If the Payment Claim is well founded, how should credit be given for the GKO Related Payments (against the claim for the aggregate Note Redemption Amount of US$ 95,259,716 plus interest)?

4.2.2 Account Claim

55. Has Chase properly accounted for the Sberbank settlement, as regards (1) tax, (2) the fact that CMBI was "short" Sberbank NDFs, and (3) interest?

56. If not, what further sum should be paid or other relief granted?

57. Has Chase properly accounted in respect of the Chase Forwards?

58. If not, what further sum should be paid or other relief granted?

4.2.3 Damages Claim

59. What was CMSCI's obligation, under the Failed Notes, in dealing with the Chase and VTB Forwards?

60. Did CMSCI (acting by CMIL) act:

(1) in bad faith or with wilful misconduct or with gross negligence in failing to procure performance or a fair settlement of the Chase Forwards, and/or

(2) with gross negligence in failing to procure performance or a fair settlement of the VTB Forwards?

61. If so:

(1) What (if any) net value should have been realised from the Chase Forwards?

(2) How much more value (if any) should have been realised from the VTB Forwards?

(3) What (if any) sum should be awarded in damages?

Section II: The Failed Notes and their terms

6. As already described in the first judgment, by 17 August 1998, the date of the Russian Default, Springwell held 11 GKO-Linked Notes in its portfolio, with a total purchase cost of $ 87,837,270 and a nominal maturity, or redemption, amount of $ 95,259,716. The Failed Notes were purchased during the period from 23 November 1997 to 21 July 1998. Detailed information relating to the Failed Notes was set out in Appendix I to Springwell's closing submissions ("Appendix I"). As also already described in paragraphs 532 and 534 of the first judgment, because of the repo financing arrangements between Springwell and CMB, the Holder (as defined) of the Failed Notes was CMB, which effectively held them as security for Springwell's obligations under the GMRA. Subsequently, as described below, the Failed Notes were transferred into the name of Chase Nominees, as part of the security arrangements in respect of a term loan granted by CMB to Springwell.
7. The obligor under the Failed Notes was CMSCI. Each Note matured on a unique Note Maturity Date (as defined in the Note); on that date, pursuant to section 2(g) of each Note, and subject to the Note's other terms and conditions, an amount equal to the sum of the Principal Amount (as defined) and Interest stipulated in the Note ("the Redemption Amount" as defined) was payable. CMSCI paid nothing under any of the Failed Notes on their respective Note Maturity Dates. Springwell claims that the Redemption Amount relating to each Failed Note, in a sum equal to the Principal Amount and Interest, fell due and remains due.
8. The Failed Notes were dollar-denominated obligations of CMSCI that Chase "structured" by reference to an underlying designated investment in GKOs (defined in the Notes as "Designated GKO Assets"), with a separate foreign exchange hedge. CMSCI in fact never actually owned GKOs, but enjoyed contractual rights in relation to GKOs under one or more participation agreements. The Note was stated to "pass through" to the Holder the return and risks of investing in the Designated GKO Assets and converting payments from such assets to dollars, whether or not "Chase" (defined in the Note as "CMSCI acting directly or through its affiliate, CMIL") actually owned the Designated GKO Assets or actually engaged in the foreign exchange transactions. The Note thus designated in each case GKOs with a specified face amount and maturity date.
9. The Note also specified the foreign exchange contract or contracts that were relevant to the Note. In relation to all eleven Failed Notes, the first hedge comprised a forward foreign exchange transaction, conducted through the S-Account, between CMIL on the one hand, acting on behalf of CMSCI, and CMBI or, on two occasions, VTB, on the other hand. These were defined in the Notes as a "Designated Forward Transaction"; each was a dollar:rouble forward contract under which CMBI (or VTB) agreed to sell CMIL sufficient dollars to redeem the Note in return for the transfer to CMBI (or VTB) of the amount of roubles payable under the referenced GKOs. The nine forward contracts between CMIL and CMBI were referred to as "the CMBI Forwards". These were all S-Account Forward Contracts which I find as a fact were "deliverable" in the sense that they required the delivery of the roubles in the S-Account for conversion into dollars.^[3]
10. In the case of six, out of the eleven, Failed Notes, the hedge was double-layered in the sense that there was a further forward contract between CMBI and another local Russian bank. This involved CMBI hedging a defined percentage amount of its obligations under the Designated Forward Transaction by entering into a further, non-deliverable, forward contract ("NDF") with the local Russian bank as counterparty (referred to at trial and hereafter as "a Local Forward"), under which CMBI would sell roubles to, and purchase dollars from, the local Russian bank. Of these six Local Forwards, two were with Sberbank, two with Inkombank and two with Imperial Bank. They were referred to in argument as the "non-CMBI risk forwards". These Notes had a total principal face value of $42 million. In each case where there was a Local Forward, the Note would specify the local "Russian Bank Counterparty" and the "Hedged Percentage Amount" of CMBI's obligations under the Designated Forward Transaction that was to be hedged.
11. The two Notes where the Designated Forward Transaction was with VTB were not subject to a further Local Forward. They were referred to as the "VTB risk forwards". These Notes had a total principal face value of $15 million.
12. In relation to three of the nine Notes, where the Designated Forward Transaction was with CMBI, and there was no Local Forward, the risk lay with CMBI. They were referred to as the "CMBI risk forwards". These Notes had a total principal face value of $30.2 million.
13. For the purposes of this judgment it is convenient to set out the relevant terms of the Failed Notes, although certain of them have already been rehearsed in the first judgment. All of the Failed Notes were in the same or very similar terms (such that, in my judgment, nothing turns on any difference), save that the numbering of the clauses varied on some of the Notes. For present purposes, I refer to "Note 1" (as numbered in Appendix I to Springwell's submissions), which had a principal amount of $5 million, an investment date of 20 July 1998, a maturity date of 17 September 1998, and a Local Forward with Inkombank.
14. The primary obligation of CMSCI under the Note was to make payment of the Redemption Amount on the Note Maturity Date. This was stated in the opening clause of the Note:

"FOR VALUE RECEIVED, the undersigned [CMSCI], hereby promises to pay to [CMB] ("the Holder"), the registered holder of this GKO Linked (S-Account) Note ("the Note"), at the offices of [CMB], 270 Park Avenue, New York, New York, the Redemption Amount (as defined herein) on the Note Maturity Date (as defined herein) as determined in accordance with and subject to the terms and conditions set forth herein." [Emphasis added]

As stated, the obligation to make payment was expressly made subject to the terms and conditions of the Note, which were contained in the sections which followed.

15. Section 1 defined "Chase" as "CMSCI acting directly or through its affiliate, CMIL, as provided in this Note". Section 1 also defined the Note Maturity Date, as the date set out in section 2(a). It likewise defined the Redemption Amount as having the meaning set forth in section 2(g). This defined the Redemption Amount as follows:

"Subject to the terms and conditions contained herein CMSCI agrees to make a payment to the Holder on the Note Maturity Date, or if such date is not a Business Day, then on the next succeeding Business Day, in an amount equal to the Redemption Amount. The Redemption Amount shall be an amount which is equal to the Note Principal Amount plus Interest, less any taxes or fees or amounts otherwise to be deducted under the terms and conditions of this Note, subject to Sections 4 and 5 below. Upon payment of the Redemption Amount to the Holder in accordance with the terms and conditions in this Note, CMSCI's obligations under this Note will be fully discharged and the Holder will have no recourse against CMSCI or to any of its assets." [Emphasis added]

Thus the starting point for a calculation of the Redemption Amount was Principal plus Interest. However, there fell to be deducted from that sum "amounts otherwise to be deducted under the terms and conditions of this Note, subject to sections 4 and 5 below". Thus the obligation to pay the Redemption Amount was subject to all the terms and conditions of the Note. I should mention that not all of the Notes contained the last sentence of sub-paragraph (g), but it was common ground that this made no difference to the effect of the Note, nor had any bearing on the issues which I have to decide.

16. Section 1 defined "market value" as follows:

"'Market Value' means, with respect to the Designated GKO Assets, the market value of such assets as determined by CMSCI using any commercially reasonable method for such determination."

17. The Principal Amount was defined in section 2 as a specific sum in dollars. Thus, for example, for Note 1, numbered as per Springwell's Appendix I, the Principal Amount was $5 million. Interest on the Note was defined at a specified rate from the date of the issue of the underlying referenced GKO to the date of maturity of such GKO ("the GKO Maturity Date"), but was not to accrue thereafter.
18. Section 2 of the Note identified the Designated GKO Assets. Thus, for example, for Note 1, the designated GKO Assets were GKOs with a face value of Russian roubles 33,659,000 maturing on 16 September 1998. Section 2 of the Note also identified the percentage of the transaction which would be hedged by means of the hedge with the local Russian bank counterparty. In the case of Note 1, this was 100%.
19. Sections 2(h) and (i) made provision for other deductions from the Redemption Amount as follows:

"(h) Taxes and Fees: Any taxes (which shall be understood to include withholding, profits, income, turnover or other taxes of any kind) or fees (which shall be understood to include charges imposed by any third party to a Transaction or Chase under the terms of this Note) or amounts otherwise applicable, or which are or may be deducted, under the terms of applicable laws and regulations (currently existing, newly enacted, or newly interpreted) of the Russian Government or by third parties in connection with this Note or any Transaction or with respect to the Designated GKO Assets will be charged to the Holder in CMSCI's sole discretion and will be deducted from the Redemption Amount without prior notice. The Holder acknowledges that the taxes mentioned above include, but are not limited to (i) taxes which may be imposed on gains or losses from foreign exchange transactions, including the Designated Forward Transaction and (ii) with respect to the Designated GKO Assets, a 15% withholding tax on interest income (including discount income). In the event any tax is imposed and advance exemption under the UK-Russia tax treaty is not obtained, then such tax will be deducted from the Redemption Amount. The Holder acknowledges that the tax treatment of the Transactions and investments held through S-Accounts, as well as the practical ability to receive advance treaty exemption from taxes, may in some respects be unclear under Russian tax laws and regulations and further acknowledges that the Russian tax system is still under development and the tax treatment may be subject to changes in application or interpretation.

(i) Reserve and Other Charges: If prior to payment of the Redemption Amount, Chase anticipates in its sole opinion that it shall be required to make any payment or will be subject to any cost or deduction from amounts received in respect of Transactions for any reason whatsoever which could otherwise have been deducted from the Redemption Amount if such payment, cost or deduction had been incurred or suffered prior to the Note Maturity Date, then such amount will be charged to the Holder in CMSCI's sole discretion, and will be deducted from the Redemption Amount which shall be indicated in a notice given at the time of the payment of the Redemption Amount and, if such charge, cost or deduction is not actually incurred within one year, shall be paid to the Holder with interest at the overnight Federal Funds rate for such period. After payment of the Redemption Amount, if Chase is required to make any payment or is subject to any cost or deduction from amounts received in respect of the Transactions for any reason whatsoever which could otherwise have been deducted from such Redemption Amount if such payment, cost or deduction had been incurred or suffered prior to the Note Maturity Date, then the Holder agrees to return an amount equal to such payment, cost or deduction to CMSCI on demand, with interest at the overnight Federal Funds rate, from the date such payment, cost or deduction was incurred by Chase."

20. Section 3 of the Note was headed "Transactions". Section 3(a) stated the function and purpose of the Note as follows:

"This Note passes through to the Holder the return and risks of investing in the Designated GKO Assets and converting payments from such assets to US Dollars, whether or not Chase actually owns the Designated GKO Assets or actually engages in the foreign exchange transactions. Accordingly, this Note incorporates all transactions necessary and related to investing in the Designated GKO Assets (including, but not limited to, transactions previously entered into in the event that this Note relates to Designated GKO Assets sold by Chase from its portfolio of GKOs purchased in the primary or secondary market, all transactions directly or indirectly with the Designated Dealer, MICEX or the Central Bank of Russia, and the redemption and settlement of the Designated GKO Assets) and exchanging the rouble proceeds thereof to U.S. Dollars, which have been entered into pursuant to the Dealer Agreement or under applicable Russian laws or regulations, including S-Account Rules, or under existing market practices, as such may change from time to time, which transactions shall include, but shall not be limited to, the following:…" [My emphasis supplied.]

21. Section 3(a), at sub-paragraphs (i)–(v), then identified the various Transactions in respect of which the Note was passing through the return and the risks of the investment to the Holder of the Note. These Transactions included the purchase of Designated GKO Assets, the Designated Forward Transaction, and the Local Forward. The relevant provisions were as follows:

"(i) The application of roubles from Chase's S-Account to purchase the face amount of the Designated GKO Assets in a primary auction or in the secondary market through CMBI and MICEX or from Chase's portfolio of GKOs purchased in the primary or secondary market and payment of any applicable MICEX or dealer commissions and/or fees. The Designated GKO Assets settle using the clearing and settlement systems of the Central Bank of Russia and MICEX.

(ii) The Designated GKO Assets being delivered on behalf of Chase to CMBI, to be held in custody by CMBI with MICEX on behalf of Chase.

(iii) Chase entering into a forward foreign exchange transaction or transactions (together the "Designated Forward Transaction") with CMBI pursuant to which Chase will exchange the rouble proceeds of the Designated GKO Assets for an amount of U.S. Dollars sufficient to pay the Note Principal Amount plus Interest on the Note Maturity Date.

(iv) To the extent that pursuant to applicable Russian laws and regulations CMBI has entered or will enter into a forward foreign exchange transaction with the Central Bank of Russia to hedge a portion of the amount of the Designated Forward Transaction at an official exchange rate set by the Central Bank of Russia, then such forward contract shall be considered a Transaction under this Note and CMBI's performance under the Designated Forward Transaction shall be conditioned upon performance of the Central Bank of Russia.

(v) If applicable, CMBI hedging the Hedged Percentage Amount of its obligations under the Designated Forward Transaction by entering into a forward contract with the Russian Bank Counterparty and such forward contract shall be considered a Transaction under this Note. CMBI's performance under the Designated Forward Transaction shall be conditioned upon performance of the Russian Bank Counterparty under its forward contract with CMBI. The forward contract with the Russian Bank Counterparty may refer to a deliverable forward or non-deliverable forward and may be documented solely by means of a Reuters, Swift or similar communication."

The Note continued, at section 3(b), to confirm that Chase could pool the funds received from other clients and its own proprietary dealings in relation to similar transactions as those described in the Note; that it was not obliged to enter into the Transactions, but that the economic return under the Note would be earned, and the risks would be assumed, as if it had done so. Thus section 3(b) provided that:

"(b) The Holder acknowledges that at any time Chase may pool the funds received from other persons under transactions similar to that described in this Note and Chase's proprietary investments in transactions similar to that described in this Note in connection with any purchase of the Designated GKO Assets, or Designated Forward Transaction or any other Transaction. The Holder agrees that in computing any amount to be deducted from the Redemption Amount or in making any calculations with respect to Transactions hereunder Chase may pro rate such amount or calculation among the Holder and such other persons and Chase in any commercially reasonable manner. Except as provided in Section 4(b)(x) below, the Holder shall not have any interest in or right to the Designated GKO Assets or any of the other Transactions. Chase has no obligation to enter into the Transactions described in paragraph (a) above, and may not own the Designated GKO Assets at the GKO Maturity Date, but this Note is intended to operate as if Chase did enter into the Transactions and did own the Designated GKO Assets at the GKO Maturity Date. For the avoidance of doubt, the economic return and the risks profile with respect to this Note, including Transactions described in paragraph (a) above, will be earned or incurred by the Holder, including, but not limited to, the risk of fees or taxes on Designated GKO Assets or other Transactions or other risks outlined in Sections 4 or 5 herein, whether or not Chase actually owns the Designated GKO Assets or actually engages in any of the other Transactions."

22. Section 3(c) provided that:

"(c) In entering into or taking or refraining from taking any action with respect to, any Transaction, Chase shall be responsible for exercising only that degree of care which it exercises in relation to the administration of similar transactions for its own account, provided that Chase shall not be liable to the Holder with respect to anything Chase may do or refrain from doing with respect to this Note or any Transaction in the absence of the gross negligence or willful misconduct of Chase. In particular, CMSCI and CMIL shall not be deemed to have acted in a fiduciary capacity with respect to any Designated GKO Assets or any other Transaction or the administration of the Transactions. Chase shall not be responsible for the actions or misconduct of any party directly or indirectly involved with any Transaction (other than the gross negligence or willful misconduct of Chase or its affiliates), and the Holder agrees not to hold Chase liable or otherwise responsible for any loss, cost, expense, claim or liability arising therefrom. In performing its obligations hereunder, Chase will not be required to take any action or to refrain from taking any action which in Chase's opinion is contrary to or would infringe upon any law."

23. Section 4 of the Note was headed "Payment in roubles or GKOs." Its introductory words stated:

"This Note is unsecured and does not constitute a general obligation of Chase and, without limiting the generality of the foregoing, the following provisions shall apply…"

Again, I should say that these introductory words only appear in Failed Notes 1,2,3,5 and 11 (as numbered by Springwell). They do not appear in the remaining Notes. It was common ground as between Mr. Mark Hapgood QC, leading counsel for Chase, and Mr. Andrew Baker QC, second leading counsel for Springwell, who presented the argument in relation to the Post-Default Claims on Springwell's behalf, that, in context, the fact that Chase's obligation under the Note was not a "general" obligation, meant that CMSCI's obligation was not an absolute, unqualified obligation. I do not consider that the presence or absence of these introductory words in section 4 makes any, or any material, difference to my conclusion as to the construction of the Note.

24. Section 4 then contained two detailed provisions, which set out the circumstances of a Convertibility Event, as defined, and a Sovereign Event, as defined, and the courses of action open to Chase in either of those events:

"(a) In the event that the Russian Government takes any Governmental Action which is in existence or has effect on or prior to the Note Maturity Date which prevents or has the effect of restricting or limiting the exchange of roubles for U.S. Dollars or the transfer of roubles or U.S. Dollars out of Russia or in the event there is generally unavailable U.S. Dollars for exchange (converting roubles into U.S. Dollars) in any legal foreign exchange market in Russia in accordance with normal commercial practice or if for any reason foreign investors investing through an S-Account or Chase cannot sell roubles and buy U.S. Dollars with the rouble proceeds from the S-Account (any such occurrence being a 'Convertibility Event'), then CMSCI, at its option, may deliver to the Holder an amount of roubles equivalent to the rouble proceeds from the maturity of the Designated GKO Assets, less any taxes or fees or amounts otherwise to be deducted under the terms of this Note, adjusted as provided in paragraph (c) below, whereupon CMSCI's obligations under this Note shall be deemed fully satisfied.

(b) In the event that the Russian Government takes any Governmental Action which is in existence or has effect on or prior to the Note Maturity Date which modifies or changes, in the sole opinion of CMSCI, any of the terms of any GKOs, which results in the non-payment of any such GKOs or the Designated GKO Assets are not paid in full on the GKO Maturity Date (any such event being a 'Sovereign Event'), then CMSCI, at its option, may deliver to the Holder, (x) the Designated GKO Assets or a beneficial interest therein to the extent of Chase's interest in such assets or (y) an amount of roubles equivalent to the Market Value of the Designated GKO Assets on the Business Day preceding the Note Maturity Date, in each case less any taxes or fees or amounts otherwise to be deducted under the terms of this Note and adjusted as provided in paragraph (c) below, whereupon CMSCI's obligations under the Note shall be deemed fully satisfied."

25. Section 4(c) provided as follows in relation to the accounting obligations upon termination of any of the underlying Transactions:

"(c) The amount of roubles or Designated GKO Assets (or beneficial interest therein), as the case may be, delivered by CMSCI pursuant to paragraphs (a) or (b) above shall be increased or decreased, as the case may be, by an amount reflecting the amount received by or paid by Chase and its affiliates, if any, relating to terminating any Transaction. including, but not limited to, the Designated Forward Transaction. For the purposes of making such adjustment, if an amount is in U.S. Dollars, such amount shall be translated into roubles at the Spot Rate."

26. Section 4(d) provided as follows:

"If CMSCI is prevented, in its sole opinion, from delivering such amount of roubles, or a beneficial interest therein to the extent of Chase's interest in such assets, or the Designated GKO Assets or an interest therein pursuant to paragraphs (a) and (b) above, in a legal and commercially practicable manner to the Holder, or if CMSCI is prevented legally or de facto from paying to the Holder any Redemption Amount due on the Note Maturity Date, or if CMIL is prevented legally or de facto from paying any amount representing the proceeds of the Transactions to CMSCI (including without limitation if due to any direct or indirect party to a Transaction (such as CMBI) being prevented from performing for reasons beyond such party's control), then CMSCI's obligation to make such payment and delivery hereunder shall be suspended until such delivery may be made in compliance with all applicable laws and regulations and in a commercially practicable manner and CMSCI shall hold such roubles, the Designated GKO Assets or the Redemption Amount, as the case may be, on behalf of the Holder, with all costs related thereto being deducted from any amount paid to the Holder, including any costs of maintaining such assets on the balance sheet of Chase or a Chase affiliate. No interest shall accrue during the period of such suspension or in respect of any delay in receiving the amount due under this Note other than such amount that might be paid on the Designated GKO Assets itself or with respect to a Transaction."

27. Section 5 of the Note was headed "Other Risks Assumed by Holder". The section began with the following words:

"In addition to those risks assumed by the Holder as described elsewhere in this Note, the Holder expressly acknowledges and agrees that …."

These introductory words were followed by a series of detailed sub-Sections, including the following:

"(a) Transactions entered into in connection with this Note will be subject to the laws and regulations of Russia, including the S-Account Rules, currency regulations and tax laws, as such laws and regulations may be applied, interpreted, amended or changed from time to time, and the Dealer Agreement as amended or changed from time to time, which may affect the amount or currency or payment of the Redemption Amount or delay payment under this Note. [In bold in the original text.]

(b) The Russian legal system is still under development and Russian legislation and regulation change rapidly, and such changes may adversely affect the legality or enforceability of a Transaction or may make such Transaction more costly, which costs may be deducted from the Redemption Amount or which changes may otherwise affect the obligations of the parties under the Transaction ….

(c) The Holder assumes all risks of all Transactions entered into in connection with a Note. Payment of any Redemption Amount may be reduced or made in roubles or in Designated GKO Assets or interests therein, if payment is not made or if CMIL does not receive payment under the Designated GKO Assets or any of the other Transactions, or such payment may be reduced or delayed due to the non performance or default of any direct or indirect party to a Transaction (including CMBI and the Russian Bank Counterparty, if applicable) for any reason. The Holder also assumes the risk of the increased costs or expenses due to any replacement transaction entered into to replace a defaulting or non-performing party (including, entering into a market rate replacement foreign exchange transaction in the event of a default under a Designated Forward Transaction or the forward contract with the Russian Bank Counterparty (if applicable) or the costs or expenses of termination or unwinding any remaining Transactions. If any replacement transaction is entered into, then the Holder will bear the risk of the counterparty nonperformance or default in such transaction. [In bold in the original text.]

(d) It may be difficult, impossible or prohibitively expensive to obtain or enforce a judgment against any direct or indirect party to a Transaction. Chase and its affiliates shall not be obligated to bring any action against any party to a Transaction

(e) CMSCI has not made any representations and warranties whatsoever, either expressed or implied, including, without limitation, any representation or warranty as to (i) the due execution, legality, validity, adequacy or enforceability of the Designated GKO Assets or any other Transaction or any document relating thereto; (ii) the financial condition of any party to a Transaction or the performance of any party to a Transaction of any of their obligations related to any Transactions or that it has made, or will make, any inquiries concerning any such parties; and (iii) as to any tax matters related to the Transactions or investments in S-Accounts; and (iv) as to the content of or the applicability of the S-Account Rules. Chase shall not have any duty or responsibility to provide to the Holder with any credit or other information concerning the affairs or the financial or other condition or business of any party to the Transactions which may come into the possession of Chase.

(f) This Note has liquidity risk and is highly structured and nontransferable and there may not exist at anytime a market for this Note. Although Chase, at its discretion, may provide a re-purchase bid price for this Note if requested, Chase is under absolutely no obligation to do so and in any event, may be unwilling or unable to provide a bid due to disruptions or illiquidity in the Russian securities or foreign exchange markets, including changes in regulations, taxes or other government restrictions. In addition, any repurchase bid price for this Note would reflect all costs associated with any early termination of Transactions."

28. All of these risks were summarised in the risks disclosures attached to the terms and conditions sheets sent to Springwell at the time.
29. Section 9 provided that the Note was to be governed by, and construed and interpreted in accordance with, the laws of England. It also provided that any legal action or proceeding in respect of the Note was to be subject to the exclusive jurisdiction of the English Courts.

Section III: Relevant background relating to the Post-Default Note Claims

Introduction

30. I set out the relevant background relating to the Post-Default Note Claims, including, where relevant, my findings on the very limited issues of relevant fact which were in dispute.

The pre-default position in Russia

31. The financial and legal environment in Russia shortly before the default was, for the purposes of the Post-Default Claims, largely agreed. Thus, the parties' respective experts in relation to Russian law in the capital markets field (Andrey Novakovskiy, instructed on behalf of Springwell, and Dmitry Dobatkin, instructed on behalf of Chase) agreed that, by the time Springwell invested in the Failed Notes (i.e. November 1997-July 1998), the essential features of the Russian legal regime under which non-residents could invest in GKOs (as opposed to GKO-Linked Notes) were as follows:

i) GKOs were issued by the Russian government through auctions administered by the Moscow Interbank Currency Exchange ("MICEX"). Only primary dealers (including CMBI and VTB) could participate.

ii) GKOs were traded in a secondary market administered by MICEX.

iii) Only certain transactions could be undertaken with GKOs, such as sale, purchase and pledge transactions. In each case the transaction had to be registered with a depositary authorised by the CBR. The transactions were also required to be registered in the approved trading system.The transfer of title in GKOs between residents or non-residents without consideration was not permitted.

iv) Russian law did not recognize different levels of ownership. Accordingly it was not permissible to transfer a beneficial interest in a GKO without transferring it by means of a permitted sale, purchase or pledge transaction.

v) By virtue of the CBR Order No. 02-262 of 26 July 1996 "On the Procedure for the Investment of Non-Residents' Funds in the Russian State Securities Market", in respect of non-residents only an S-Account holder could be registered as an owner of GKOs. S-Accounts were special accounts opened with Russian banks by non-residents pursuant to certain Russian laws and regulations governing the establishment and use of S-Accounts.

vi) Roubles could be deposited into S-Accounts only through currency exchange transactions or the redemption or the sale of permitted state securities, including GKOs. Thus the rouble proceeds of matured GKOs would be paid into the owner's S-Account.

vii) S-Account roubles collected in the S-Account could only be used for the following purposes:

a) the purchase of foreign currency;

b) the purchase of permitted state securities, including GKOs;

c) the payment of expenses and taxes relating to investments in the permitted state securities, including GKOs.

viii) S-Account roubles could be transferred to and from another S-Account held by the same account holder at another Russian bank.

ix) If it was desired to convert S-Account roubles derived from GKO investments into foreign currency (e.g. dollars), that could only be done through currency term contracts, i.e. contracts for settlement later than 2 days forward. Such a contract had to be performed via an S-Account.

The Russian Default Measures

32. The actions and legislative measures taken and adopted by the Russian authorities on and after 17 August 1998 ("the Default Measures") are a matter of record. Their principal features were not in dispute as between the experts. The position may be summarised as follows.
33. On 17 August 1998, the Government and the CBR issued a joint announcement of certain measures, taken "in order to normalise financial and budget policy" ("the Joint Declaration"), which measures were also reflected in the decision of the Board of Directors of the CBR on 17 August 1998. These measures included:

i) the introduction of a new, broader currency corridor for the rouble/dollar exchange rate (this was later abandoned altogether);

ii) the exchange of certain state securities (including GKOs) maturing before 31 December 1999 for new securities, on terms which were to be announced;

iii) the suspension, until the completion of the exchange, of all official trading in such securities maturing before 31 December 1999 ;

iv) the imposition of a 90 day moratorium ("the Moratorium") on certain currency operations of Russian residents, payment of margin calls under loans secured on securities and payment under "term" FX contracts (such as S-Account forwards);

v) the introduction of a ban on non-residents investing in rouble-denominated assets with a maturity period of up to and including one year.

34. The Joint Declaration was not a "normative act" under Russian law. It had no binding force and required further implementation. It was followed by a range of operative legislation issued by the Russian government and the CBR which implemented the measures which had been announced. So far as GKOs were concerned, Government Resolution No. 1007 of 25 August 1998 confirmed the suspension of all operations in GKOs until their redemption, and set out the proposed basic terms of the restructuring of GKOs. This suspension had the effect of freezing the GKOs that were subject to the restructuring in the "depo" accounts of the holders. The suspension was never lifted, and trading in GKOs that were subject to the restructuring was never restored.
35. As the Russian law experts summarised the position in their joint memorandum:

"Following the commencement of the Moratorium, all operations involving GKOs were suspended until their redemption under the special procedure determined by the Government Resolution No. 1007 dated 25 August 1998 and subsequent enactments of the Government and of the Central Bank. …

It was no longer permissible to transfer title to GKOs other than by accepting the terms of the special exchange programme enacted by the Government."^[4]

36. The proposed terms of the restructuring contained in Resolution No. 1007 ("the first GKO exchange offer") were not implemented. Pressure from western banks forced the Russian government to revise the proposals. By Government Order No. 1787-R of 12 December 1998, the Russian government set out proposed revised terms ("the second GKO exchange offer"). The restructuring terms of the second GKO exchange offer, as finally implemented, envisaged payment of a proportion of the face value of defaulting GKOs through "transit" accounts. Pursuant to CBR Directives 403-U^[5] of 10 November 1998 and 425-U^[6] of 27 November 1998, the redemption funds were to remain in the transit accounts for 365 days before they could be credited to S-Accounts, with the rest of the redemption proceeds being reinvested in new rouble-denominated state securities of varying maturities. This GKO exchange did not affect foreign currency forwards.
37. The Moratorium was implemented by CBR Directive 320-U of 19 August 1998. This provided that, with effect from 17 August 1998 and for a period of 90 days (i.e. until 14 November 1998), Russian residents (including resident banks) were prevented from making payment of the following kinds to non-residents:

i) repayments of the principal amount of loans received from non-residents for a period of more than 180 days;

ii) payments of margin calls under loans secured by a pledge of securities, including repo transactions; and

iii) payments under "term" currency contracts (such as the S-Account forwards).

In other words, Russian residents were prohibited from discharging between 17 August and 14 November 1998 (inclusive) obligations owed to non-residents under foreign currency forward transactions.

38. The Moratorium did not apply to "current" currency operations of residents, including payment of interest and dividends, and did not restrict transfer of foreign currency (such as dollars) by non-residents to and from Russia. Directive 320-U also stated that the Moratorium did not relieve resident borrowers from performance of suspended obligations after the expiry of the Moratorium. The Moratorium also did not affect the performance of obligations under spot FX transactions (i.e. contracts for settlement within 2 days), and the spot market continued to function although the rouble continued to decline against the dollar. It was also effectively agreed between the experts that the Moratorium had no effect upon forwards maturing after 14 November 1998.
39. In their joint memorandum, the Russian law experts summarised the position as follows:^[7]

"Effect on Currency Forwards (Moratorium)

During the Moratorium, the obligations of Russian residents to pay out the foreign currency under currency term contracts (including deliverable and non-deliverable Forwards) in favour of non-residents were suspended….

During the Moratorium, residents were prohibited from performing currency term contracts (which included Forwards) using either accounts at authorised Russian banks or accounts at non-resident banks. No roubles were permitted to be paid by residents in relation to currency term contracts into rouble accounts of non-residents, including correspondent accounts opened by foreign banks at authorised Russian banking institutions…..

Effect on Currency Forwards (Post-Moratorium)

The restrictions imposed by the Moratorium on the performance of S-Account Forwards did not discharge resident obligors from the performance of obligations upon the expiry of the Moratorium…"

40. The Joint Memorandum further stated as follows^[8]:

"3.6 Moratorium Effect on the capacity of CMIL, CMBI and VTB to perform their obligations under S-Account forwards.

3.6.1 Mr. Novakovskiy specifically addresses in the AN Report the effect of the Moratorium measures on CMBI, CMIL and VTB particularly stating that during the Moratorium, CMBI and VTB were prohibited from paying any US Dollar amount due under S-Account forwards on the performance date either directly to CMIL or to any assignee of CMIL and to receive roubles from CMIL for the purpose of performing S-Account forwards during the Moratorium …. Furthermore, Mr. Novakovskiy states that after the expiry of the Moratorium and from 15 November 1998, CMIL was entitled to transfer roubles to CMBI and VTB for the discharge of obligations under the S-Account forwards which had been suspended during the Moratorium and CMBI and VTB were entitled to deliver US Dollars to CMIL for the discharge of obligations under the S-Account forwards which had been suspended during the Moratorium (para 9.7 of the AN Report) and there were no legal restrictions or limitations to which CMIL, CMBI and VTB would have been subject (except for the restrictions existing during the Moratorium) and which would have prevented them from performing S-Account forwards which fell to be performed after the expiry of the Moratorium.

3.6.2 Mr. Dobatkin does not dispute these statements but does not comment on them as they refer to specific parties and as such fall outside the scope of the DD Report. Mr. Dobatkin notes that these matters are covered in general terms in the DD Report and in paras 2.11 and 2.12 hereof."

41. On 4 September 1998, the CBR issued Directive No. 344-U "On Suspension by Residents of Payments to Non-Residents under the Term Currency Contracts". This set out the detailed terms of the Moratorium in relation to deliverable and non-deliverable FX forwards between residents and non-residents (including S-Account Forwards).The Moratorium did not apply to contracts between residents such as the local bank NDFs. In relation to such NDFs, the CBR issued Directive No. 380-U on 12 October 1998, which required Russian banks to supply the CBR with information about the terms of all "term" currency contracts (including deliverable and non-deliverable forwards) for the purposes of verification of the parties' mutual obligations. The Directive also recommended the suspension of payments under such contracts until the settlement of the banks' mutual obligations (which was supposed to take place by 1 January 1999). It also recommended that the Russian banks refrain from going to court over non-performed "term" currency contracts.
42. As a result of these measures, resident banks generally suspended performance of forward contracts (including both local bank NDFs and S-Account forwards). In addition, as a result of the default of the GKOs and a sharp devaluation of the rouble against the dollar, most Russian banks suffered an acute liquidity crisis which led to a general "non-payment crisis" in the banking system in the autumn of 1998. Many Russian banks, including some of the largest private banks such as Inkombank, Imperial Bank, Uneximbank and SBS-Agro, subsequently went into bankruptcy proceedings. Mr. Dobatkin's evidence was that a substantial majority of forward contracts entered into before the August 1998 crisis were never performed or settled.
43. The experts were agreed that, during the Moratorium and until 12 November 1998, it was possible to effect spot exchange transactions using S-Accounts, and further that it would have been lawful for an S-Account holder to receive roubles into its S-Account at any time until 12 November 1998, with a view to performance of a suspended S-Account Forward after the expiry of the Moratorium. During the course of the Moratorium, there was uncertainty as to what would follow upon its expiry. Until 12 November 1998, there had been no indication from the Russian authorities as to the course which they would take. In the event, on 12 November 1998, shortly before the expiry of the Moratorium, the CBR published in its official gazette Directive No. 407-U, dated 10 November and effective 12 November 1998. This Directive prohibited resident banks from purchasing foreign currency from non-resident in exchange for roubles to be deposited into S-Accounts.
44. The effect of this Directive was to place an immediate ban on the funding of S-Accounts. Non-residents were prohibited from obtaining roubles to place into the S-Accounts for the purpose of seeking to perform forward contracts. As part of this prohibition, the Directive also suspended the operation of article 3.5.1(a) of Instruction 72-I, which meant that roubles could be placed in an S-Account only: (i) where they comprised the maturity proceeds of certain state securities; or (ii) by way of transfer from another S-Account of the same non-resident. Equally, CMIL became unable to enter into a spot transaction for the purpose of funding the S-Account. Thus, as the experts recorded in their Joint Memorandum:^[9]

"After 12 November 1998, it was not possible to effect spot (cash) exchange transactions using S-Accounts to obtain roubles."

"After 12 November 1998 in the absence of GKO or other eligible state securities (including state non-market bonds) proceeds the only source of S-Account roubles would have been transfers from another S-Account."

However, if there were roubles in the S-Account, it was not illegal after the expiry of the Moratorium to sell those roubles in order to complete a suspended S-Account forward transaction, or one that matured after the expiry of the Moratorium, by exchanging those roubles for dollars.

45. Until March 1999, the S-Account regime continued to be regulated by Instruction 72-I, as modified by Directive 407-U, and as further modified by Directive Nos. 403-U, 425-U and 404-U (which provided for the transit account mechanism for payment of the proceeds of the GKO restructuring to S-Accounts). On 23 March 1999, the CBR issued Directive No. 523-U, which confirmed the continuation in effect of Directive 407-U, with some technical revisions. Directive No. 523-U remained in force until 27 June 2001.
46. The S-Account regime was revised in March 1999 by CBR Instruction No. 79-I, Regulation No. 68-P and Directives Nos. 520-U and 522-U, all dated 23 March 1999. Pursuant to this revision, S-Accounts were divided into "conversion" and "investment" segments. "Investment" segments could be used for the receipt of GKO restructuring proceeds, but not for FX conversion transactions, which could be carried out only through "conversion" segments. Funds from "investment" segments could be transferred to "conversion" segments only through transit accounts, where funds had to stay for 365 days. Roubles from the "conversion" segments could be used, inter alia, to buy foreign currency from authorised banks pursuant to "transactions entered into and performed in accordance with the requirements of [Instruction No. 79-I]". At the same time, and as an exception to the regime of "investment" S-Accounts, the CBR issued Regulation No. 69-P, which provided for periodic special auctions at which the CBR sold limited amounts of foreign currency in exchange for "conversion" and "investment" S-Account roubles.

The impact of the default on the market

47. The Russian default and the Default Measures precipitated a large devaluation of the rouble and a steep fall in the value of Russian paper. Contagion effect meant that values in other emerging markets also declined. Thus, Bloomberg data showed that, in the period 1 July - 14 August 1998 (inclusive), the dollar:rouble spot rate moved very steadily outwards, from 6.2000 to 6.2725; during the moratorium (17 August-14 November 1998 inclusive), in which period seven of the Failed Notes matured, the dollar:rouble rate fell from 6.4300 to 18.1100; by 19 November 1998, when two more of the Failed Notes matured, the rate was at 18.3500; and, by the time the last two Failed Notes matured, it had slid to around 23; thus, on 21 January 1999, it was 23.3000 and, on 28 January 1999, it was 22.7700.
48. The consequence of the Russian default was a catastrophic series of losses amongst major financial institutions which had invested heavily in Russia. Writing on 18 September 1998, Mr. Kraus, one of Springwell's experts on Russian Capital Markets commented on

"… how many exceedingly intelligent people got slaughtered – bankers, investors, businessmen …".

Likewise, a Bloomberg report dated 14 September 1998 contained a long list of major international institutions which had recorded substantial losses from their continued investment in Russia, including Chase (which was said to expect a $200 million loss from losses in Russia and Asia) and ML (which was said to have lost $13.5 million in trading bonds in July and August).

49. In addition, a number of Russian banks went bankrupt. They included Imperial Bank and Inkombank, referred to as counterparties under the Local Forwards in some of the Failed Notes. They did not include the other banks referred to in the Failed Notes, namely Sberbank, VTB and CMBI. There was no suggestion in the evidence that CMBI or VTB did not have the means to pay in full on the Chase or VTB Forwards respectively, if obliged or willing to do so. In the case of CMBI, there was clear evidence that CMB would have stood behind it, if necessary.

Dealings between Springwell and Chase in the aftermath of the crisis (other than in relation to the Failed Notes)

50. The detail of Springwell's reaction to the crisis and of its dealings with Chase thereafter (other than in relation to the Failed Notes) is of limited relevance to the Post-Default Claims, save in relation to the Custody Fees Claim. For background purposes, the post-default dealings between the parties, including the events leading up to the signing of the Term Loan can be summarised as follows.
51. JA telephoned AP early on the morning of 17 August 1998 to inform him of what had happened. He described it to him as "One of the worst mornings that'll go down in history". At that stage, and for a long time afterwards, there was great uncertainty as to what the outcome would actually be in Russia, and as to the steps that the Russian authorities would take. However, that the situation was critical was unmistakeable. JA told AP during this first conversation that the underlying GKOs were going to be restructured and so the forwards were worthless.
52. JA spoke to AP again on 18 August 1998. JA suggested to AP that he look at the assets in the portfolio and that he think about selling some of those that were priced in the high 90s. This was because, he thought, there was going to be some selling in the market and prices would fall. He went on to discuss the possibility of a margin call. Springwell's portfolio had been marked down, such that its equity stood at 27.5%. AP pointed out that the minimum equity level was 30% but that he had always put 40% down "because we wanted to keep a 10% in for situations like this". JA said that, because of that cushion, Springwell had not yet been margin called.
53. Later on the same day, and after having sent a fax with prices, JA spoke again with AP. He recommended that AP should start to sell some assets to give himself some liquidity, and there was discussion about possible candidates for sale. Shortly afterwards, JA rang AP again, to report the head trader's view that Springwell should sell immediately because there was likely to be news out of Russia which could send the market down. JA expressed the view that there was likely to be another round of "blood-letting" and a big margin call surge across the whole world, something which would include Springwell. He therefore thought that AP should sell some of the "crown jewels" (i.e. better rated assets in the portfolio) before everyone else did. AP asked how much the margin call would be. JA thought that it could be between $20 million and $40 million.
54. In the event, AP did agree to sell some of Springwell's assets at Chase and was thereby able to create some liquidity, although forced sales across the market resulted in ever decreasing prices. In the days that followed, Springwell sold a quantity of Brazilian and Venezuelan assets. As a result, Chase did not margin call Springwell in the immediate aftermath of the Russian default. An email from GG dated 19 August 1998 recorded that a margin call on Springwell had been waived, even though the equity in the portfolio had fallen to 11.72%. The email noted that JA was to advise of additional sales or a liquidation plan to restore minimum equity to 25%.
55. There is a measure of disagreement on the pleadings as to whether Chase did in fact issue a margin call on Springwell, although nothing turned on this point. Chase did not issue a formal written demand by way of margin call. But the parties proceeded on the basis that there had been a request for a $40 million margin call. As the crisis deepened, however, the value of Springwell's portfolio fell still further, and the negative equity increased notwithstanding the sales which were made. By 28 August 1998, Springwell was $67 million below the requisite 25% margin. However, because Springwell was making an effort to sell assets, Chase did not compel the selling down of further assets to meet the margin call. Attention instead became focused on the refinancing of Springwell's exposure, through the negotiation of a term loan.
56. The immediate pressure for Springwell was felt not so much through the declining equity value of the portfolio but in terms of liquidity. Whereas in the past, the Springwell portfolio had generated significant positive cash-flows, those cash flows dried up following the Russian default. According to AP's witness statement, the situation was "critical" by the end of August 1998. He accepted in evidence that he realised the gravity of the situation, when he discovered, some time between 20 and 30 August, that he could not transfer any money out of Springwell.
57. Sometime in or around the second week of September 1998, AP provided full details to SP of what had happened in relation to Springwell's portfolio and of the financial pressures which had arisen. From then on, SP took over direct control and management of the portfolio and of the relationship with Chase, and AP spent most of his time devoted to the shipping business, although he stayed involved with Springwell to a limited extent.
58. The Russian default did not bring an end to Springwell's investment activity. In the immediate aftermath of the default, Springwell sold certain assets to provide some liquidity in the portfolio. In addition, a volatile market also provided the possibility of limited trading at a profit. This was suggested by JA and taken up by AP. Thus, in the period September to December 1998, Springwell, as a result of discussions between JA, SP and AP, operated a limited trading strategy in respect of certain of the assets within the portfolio, with Chase's consent, in an attempt not only to achieve profits and reduce losses, but also to improve the credit quality of the portfolio.
59. From about 11 September 1998 negotiations began for the restructuring of the collateral for the Springwell portfolio by means of the grant of a term loan, to be secured by various securities held by Chase. By this stage, Springwell's portfolio was $78.7 million below the 25% margin threshold and $25.4 million in deficit, on a mark-to-market basis. The rationale behind the Term Loan Agreement was that Chase had taken a decision at an early stage and in relation to all its emerging market customers, that, rather than continue to margin call customers, thereby forcing them to sell in a declining market, it would negotiate a "terming out loan", so as to allow the market to recover in due course. Once this had been negotiated for one customer, it became the template for others, including Springwell.
60. A meeting took place in Paris on 1 October 1998. It was attended by AP and SP and, on Chase's side, by RC, JA and FS to discuss the terms of a possible restructure of Springwell's current financing arrangements because of the difficult market conditions. The outline proposal was for the conversion of the existing repo facility into a 3 year non-amortising loan, with an improving asset coverage ratio over the period. As at the date of the meeting, the Springwell portfolio was $40 million into negative equity and RC advised the brothers that, if an agreement acceptable to Chase was not reached in the next few days, they risked losing the portfolio. It was agreed that Chase would send the Polemises an outline of the terms and conditions that they had discussed, with a response being sought early the following week.
61. In his witness statement, SP described the situation at the time of this meeting as "desperate": Springwell owed Chase more than the value of its portfolio, and Chase's freezing of the portfolio and Springwell's Accounts meant that the shipping business was facing a potentially disastrous cash flow crisis. AP, in turn, said that he was by this stage "in a state of serious panic", and that he was "under tremendous pressure at this time" because he had no cash available to run the fleet of ships.
62. It is certainly correct to say that the situation was extremely serious and that Springwell had, on any commercial view, no choice other than to pursue the route of refinancing the existing repo arrangements through a term facility. Although it seems that the Polemises did speak to SBL about a possible refinance at some stage, no other bank was prepared to assist Springwell in the manner offered by Chase. Selling the portfolio was never an option and the only commercial route open to Springwell was to refinance through a term loan agreement.
63. In his oral evidence, SP said that "there was no other alternative".^[10] As he said:

"What was paramount in Springwell's through me, mind, was to salvage a very distressed portfolio and reduce the losses further, yes …. In order to do that, you have to hold something. If you sell it, you lose it."^[11]

64. Following the meeting, draft "Heads of Terms" were sent by Chase to Springwell on 2 October 1998. These proposed a three year non-amortising term loan facility, with additional collateral being provided to ensure 100% collateral coverage at the date of drawdown. Springwell provided a written reply to the draft Heads, sent by fax on 5 October 1998. In the fax, Springwell made various detailed responses to the terms set out in the draft Heads of Terms. These concerned principally the amount of additional collateral that would be added at the outset (Springwell wished to add only a maximum of $20 million), and the minimum collateral value clause.
65. The particular issues raised by Springwell were then subject to further changes. By internal email dated 8 October 1998, RC enclosed a memorandum setting out the background to the proposed term loan agreement. The memorandum noted that Springwell was $41 million in negative equity, but that Chase would be proposing additional collateral of only $20 million. A revised Heads of Terms was sent out on 12 October 1998 and was signed and returned by Springwell.
66. FS sent a draft term loan agreement to SP on 23 October 1998. Springwell responded with a series of detailed written comments on 6 November 1998. On 10 November 1998, FS sent a copy of a draft security interest agreement and a draft nominee agreement (in relation to the holding of collateral securities) to Springwell. FS and SP then had a series of long conversations in which they discussed the terms of the term loan agreement in detail. SP also sought a provision that Springwell should be permitted to withdraw excess coupons beyond those which were required for the payment of the quarterly interest charges and, ultimately, Chase agreed to this.
67. By fax dated 9 December 1998, Springwell sent to Chase its written comments on a further draft of the term loan agreement. It also included within this fax its comments on the first drafts of the security interest agreement and the nominee agreement. By the covering letter, Springwell noted that it had tried to keep its comments to a minimum and that it would like to agree and finalise the documents as soon as possible. There was, in fact, only one comment on the draft security interest agreement and the nominee agreement, and that concerned the governing law clause of those documents.
68. In a taped conversation on 10 December 1998, FS and SP mentioned in passing the draft security interest agreement and the nominee agreement. FS explained, in response to Springwell's query, why the governing law of the agreements was Jersey law. SP then commented that "I have read them", that they were "legalistic rather than commercial" and that "I understand as such they're OK".
69. The final draft of the term loan agreement was sent by FS to SP on 14 January 1999. In the event, the documents were signed and dated 15 January 1999. It seems that they were signed by Springwell on or about 25 January 1999. By the term loan agreement ("the Term Loan Agreement"), CMB agreed to provide to Springwell a loan of $263,128,687.38 ("the Term Loan"). This sum was to be used towards the payment to CMB of the amounts owed to it under the outstanding repo transactions. The loan was to be repaid in full on its third anniversary, although there were provisions in clause 7 for pre-payments.
70. By the nominee agreement, concluded between Springwell and Chase Nominees, ("the Nominee Agreement") and dated 15 January 1999, Springwell requested Chase Nominees to act as its nominee and to hold assets for it absolutely. By clause 7, in the event that Springwell created a security interest over any assets, Chase Nominees would hold title to or possession of the assets pursuant to the terms of any Security Interest Agreement, and the terms of the Security Interest Agreement would thereupon govern the operation of the facilities in respect of such assets. By a Security Interest Agreement ("the Security Interest Agreement"), entered into between CMB as secured party, Springwell as debtor and Chase Nominees as nominee, and dated 15 January 1999, Springwell granted security to CMB by assigning, transferring and otherwise making over to CMB its rights under the Nominee Agreement, including in respect of all assets or property held or to be held under the Nominee Agreement. By clause 7.2, Springwell provided CMB with a power of attorney to do any act necessary in order to give full effect to the purposes of the agreement.
71. The Term Loan Agreement provided, by clause 16.15, for the maintenance of a collateral percentage, measured as the market value of collateral held under the Security Interest Agreement. The percentage was to increase over time, from 90% from the date of the agreement up to its first anniversary, to 120% in the third year. Clause 16.16 of the Term Loan Agreement provided for the substitution of collateral in the following terms:

"The Borrower may substitute other cash and Securities acceptable to the Bank for the cash and Securities comprised in the Collateral with the prior written consent of the Bank, such consent not to be unreasonably withheld."

Thus the net effect of the Term Loan Agreement, and its related transactions, was that:

i) all of the outstanding repos with CMB were terminated, by means of the refinancing through the Term Loan Agreement;

ii) the assets held by Chase, including the assets formerly held on repo, were now held as collateral for the Term Loan Agreement, pursuant to the Nominee Agreement and the Security Interest Agreement; these assets included the Failed Notes.

72. Pursuant to the Security Interest Agreement, by letter dated 22 January 1999, CMB (as attorney for Springwell) requested IFI to substitute, on all Springwell GKO participations, the name of Chase Nominees. By further letter of the same date, addressed to both CMSCI and IFI, CMB requested CMSCI to waive the non-transferability provisions of the GKO-Linked Notes and to amend the Notes by transferring title thereto into the name of Chase Nominees. This occurred. In addition, Springwell transferred assets, valued at just under $20 million, from ML to Chase, which assets were also transferred into the name of Chase Nominees and held under the Nominee Agreement and the Security Interest Agreement.
73. The Term Loan was prepaid by Springwell on 16 January 2001. At the same time, the investments which had stood as security for the Term Loan (other than the Notes) were transferred at Springwell's direction to SBL.

The first GKO exchange offer

74. The joint declaration provided no details about the timing or terms of any exchange process for GKOs. The details of the first GKO exchange offer, as set out in Resolution No. 1007, were themselves complex and unclear in some respects. In brief, the offer gave investors in GKOs and OFZs two choices: (a) to do nothing, and on redemption of their existing instruments, the investor would receive new longer term instruments, either newly issued longer term OFZs or Sberbank CDs; or (b) to elect to participate in an early redemption of their existing GKOs and OFZs, in which event they would receive 5% of the nominal value of the bonds in roubles, 20% in a new dollar Eurobond, and the remaining 75% in the same package of longer term OFZs or Sberbank CDs. A clarification of the procedure was issued on 31 August 1998, by which it was confirmed that holders of GKOs and OFZs had to apply for early redemption by 18 September 1998.
75. The total exposure on GKOs/OFZs affected by the default was approximately $45 billion, of which foreign investors held approximately one-third. Chase's total GKO/OFZ positions totalled approximately $1.6 billion, comprising customer positions of around $1.35 billion and proprietary positions of approximately $250 million (held either by CMBI or through S-Accounts).
76. By fax dated 4 September 1998, CMSCI sent to Springwell an Election Notice in respect of the first exchange offer. The notice explained the terms of the exchange offer and included an Instruction Notice, by which Holders (i.e. holders of GKO-Linked Notes, such as Springwell), could instruct CMSCI to submit the underlying GKOs for early redemption. The Election Notice contained the following express warning:

"If Noteholder does not provide CMSCI with its instructions pursuant to this letter by the stated deadline, then the noteholder will only receive new OFZs at maturity and on any interest payment date of the designated assets. The instruction must be received by the Chase Manhattan Bank on behalf of [CMSCI] by 5.00 pm New York time on Monday, September 14, 1998."

Attached to the fax was an Instruction sheet, by which the Holder could instruct CMSCI to submit the necessary documents to the Russian government for early redemption. On the same date, CMSCI also sent to Springwell a memorandum prepared by Clifford Chance which gave further explanation as to the exchange offer.

77. Notwithstanding the announcement of the restructuring by the Russian government, the full situation and eventual outcome remained unclear and uncertain. Where there was information to give, Chase passed that information on to Springwell.
78. By fax dated 9 September 1998, JA sent to AP an update on the Russian GKO restructuring, and a few words surrounding the uncertain status of the forwards. This update summarised the terms of the restructuring, and explained that, in future, the GKO-Linked Notes would reflect the new OFZs issued at maturity or the instruments available through selection of the early redemption option. It also reported that many important matters relating to the restructuring remained unresolved and there were no assurances that the Russian government would in fact complete it.
79. The issue of the forwards was not dealt with at all in the first exchange offer. The update noted that there were no assurances that the Moratorium or foreign exchange controls would be lifted; moreover, political and financial conditions continued to change within Russia, which might impact the Moratorium, and also the restructuring, in a manner that could not be anticipated.
80. By fax dated 11 September 1998, CMSCI sent a further clarification of the dollar denominated bond option linked to the early redemption proposal. AP also spoke to Chase about the first exchange offer. In an internal call on 11 September 1998,^[12] David Torres recounted a recent conversation with AP. He described AP's approach as "pretty philosophical". He said that he told AP that Chase could not give any advice on which election to take but that Chase was probably going to take the dollar option for its own positions.
81. By 11 separate notices dated 14 September 1998, signed by JBAX, Springwell notified CMSCI as follows:

"We believe that as a Holder of CMSCI Notes (which is distinct and separate from holding Russian Securities) it would not be our responsibility, and as such we cannot be expected, to reach a decision on whether to select early redemption of the Russian Securities.

Accordingly, we do not believe it would be appropriate for us to complete the Instruction Sheet. However, we would expect CMSCI as the holder of the Russian Securities to act in the best interest of us, its Note holder, to diligently decide whether to select early redemption within the prescribed time limits and to agree to assume all risks in connection with the early redemption and/or Restructuring and the forward contract."

Chase never did agree (whether pursuant to this request or otherwise) to assume all risks in connection with the early redemptions and/or restructuring and the forward contracts. Its position was that such a course would have fundamentally altered the pass-through nature of the Notes.

82. By fax dated 15 September 1998, JA sent SP a further notice from CMSCI, in which it expressed its then belief that, if a Holder gave an instruction to CMSCI to submit an early redemption of GKOs or OFZs linked to a Note, the exercise of such early redemption would not affect the status of any relevant forward under the Note. Nonetheless, the notice continued, the political and financial circumstances in Russia, including the restructuring and the Moratorium, were subject to change on a daily basis and there were no assurances that the terms of the restructuring would not be altered in such a manner as to affect such relevant forward under the Note or that additional regulations or laws would not be enacted which affected such forward.
83. Also on 15 September 1998, JA spoke on the telephone with SP about the exchange offer. He said that he had suggested what Chase thought was probably the best course of action (i.e. early redemption). He was concerned, as he said, that Springwell might miss the deadline and therefore would not be able to take advantage of the early redemption option. As he said in his evidence:^[13]

"So I was wanting to make sure that Springwell did not get left out in the cold and whatever information was available, albeit incomplete information, was passed on, and if Chase was going to go into the restructuring that would have suggested to me that that was – that they had regarded that as the best course of action and I wanted to make sure that Springwell had the opportunity to do the same."

84. When JA spoke with SP on the subject on 16 September 1998, SP told him that Chase would be receiving signed instruction sheets for early redemption. However, they went on to discuss a rumour in the market that a group of banks was going to refuse to accept the restructuring proposal, and agreed to speak again about this. Later on the same day, JA rang SP to update him on developments with the banks and to discuss the impact of the banks' attitude on the early redemption option.
85. In fact, the major western banks were evaluating the terms of the first exchange offer at around this time and concluded that the proposed terms represented a poor deal, with little recovery value for investors. Shortly before the deadline of 18 September 1998, several of these banks, including Chase, Merrill Lynch, JPMorgan and CSFB, agreed to form a committee to seek to renegotiate the terms of the offer. This was reported in The Times (and other papers) on 17 September 1998.
86. In his evidence, SP described his first conversation with JA on 16 September as being "one of a series of telephone conversations in which Justin put pressure upon Springwell to go into the restructuring". But, in my judgment, the transcript does not reveal JA as exerting pressure on SP. The fact that there was a looming deadline imposed by the Russian authorities was not Chase's fault. JA was concerned purely to ensure that SP was aware of the facts and was able to make a decision, and that it did not miss any deadline.
87. Over time, SP grew more and more frustrated with what he perceived to be the inadequate service he was being given by Chase. However, in my judgment, that frustration was misdirected. The Russian default caused immense difficulties and uncertainties. Events moved at a fast pace and information was often lacking. As JA explained in his evidence,^[14] he and Chase did their best at all times to keep SP and other customers informed and to answer their questions. The fact that there was often no information and no answers fuelled SP's frustration but was not the fault of Chase. Springwell's expert, Mr. Kraus, himself described the situation as follows:

"… there was huge confusion at the time. They were - there was announcements which contradicted each other left, right and centre and packages were put forward, were pulled, new packages were put forward, and it was only about eight months later that we knew what the final restructuring was going to look like. This was a very badly mishandled restructuring."

88. By fax dated 17 September 1998,^[15] CMSCI sent a notice to Springwell informing it that the Russian government had extended the deadline for exercising early redemption. It also reported that it was very likely that the government would make changes to the terms of the restructuring and that Chase would therefore accept changes to any instruction notice by 23 September 1998.
89. By fax dated 21 September 1998, CMSCI sent a further notice to Springwell, informing it of the meeting of western banks and of the formation of a committee of GKO/OFZ holders, on which Chase expected to serve as a member. CMSCI also enclosed a translation of a letter which the banks had sent to the Russian government on 17 September 1998, informing it that the terms of the proposed restructuring were unacceptable.
90. On 23 September 1998, CMSCI sent a further notice to Springwell, giving it options in the light of the uncertainty prevalent at the time. Chase would accept changes in the Holder's instruction sheet, including withdrawal in its entirety. As an alternative, it would accept a contingent instruction, under which a Holder essentially followed the course taken by Chase: in the event that Chase chose not to elect for early redemption with respect to more than 50% of its own proprietary portfolio, then any instruction by the Holder for early redemption would be deemed withdrawn.
91. This notice was discussed by JA and AP on the morning of 24 September 1998. JA expressed the view that there would end up being a different deal, and that the best thing for Springwell to do would be to make the contingent election. On the same day, Springwell sent a letter to CMSCI. By this letter, Springwell confirmed that its position remained the same as stated in the earlier letters of 14 September. However, and "expressly upon a without prejudice basis as to all our rights", it enclosed 11 instruction sheets selecting the contingent election option.
92. By the beginning of October 1998, the Russian authorities had agreed to enter into negotiations with the western banks and so the deadline for the first exchange offer was deferred. On 2 October 1998, CMSCI informed Springwell that the deadline for the exchange had been postponed indefinitely so as to accommodate negotiations for a new restructuring plan.

The second GKO exchange offer

93. As indicated above, a group of western banks formed a restructuring committee in September 1998. This committee ("the large bank committee") comprised a large group of foreign banks, which first met on 16, 17 and 18 September 1998. Subsequently, the Russian authorities indicated that they wished to negotiate with a smaller committee, and this led to the establishment of the "small bank committee" in early October 1998. The small bank committee comprised Deutsche Bank, CSFB, Merrill Lynch, Chase, Lehmans and Credit Lyonnais. The chairman of the committee came from Deutsche Bank. Meetings were held over the following months between the representatives of the banks, the CBR and the Ministry of Finance. James Butler ("JB"), a senior representative from Chase IFI (New York and London) became the key representative from Chase on the committee, attending all the meetings. JB reported to senior management on the developments in the committee, and took the primary lead in negotiations on behalf of Chase during the meetings.
94. The first formal negotiations were held in London on 14-16 October 1998 and 20-22 October 1998. Initially, discussions centred around the possibility of a restructuring into dollar instruments, which restructuring would have also involved the forwards, but this was not favoured by the Russian authorities. On 6 November 1998, as indicated above, the committee tentatively agreed with the Russian authorities to go forward with a rouble restructuring deal for GKOs. Eventually, on 19 November 1998, the committee indicated its agreement in principle to the revised GKO restructuring, albeit that a number of important issues remained outstanding before full agreement could be reached.
95. On 16 December 1998, the Russian government and the CBR announced details of the second GKO exchange offer, which was to be carried out by 15 March 1999 (although this was subsequently postponed to 30 April 1999). This was not an agreed restructuring, in that the committee had still been seeking to negotiate terms over matters such as convertibility procedures and the use to which trapped roubles (i.e. roubles which could not be removed from the S-Account for a period of a year) could be put. Negotiations continued in a desultory fashion but the second exchange offer was essentially put by the Russian authorities on a take it or leave it basis.
96. JB summed up the position on 13 January 1999 in an internal email within Chase:

"The restructuring committee talks are effectively over since the Russians have been informed of the key issues for foreigners (clarify alternative investments and convertibility procedures) and the committee does not see much purpose in continuing to talk. There may be some informal meetings in Moscow regarding technical issues about equity investments but these would not be negotiations. There is a small group of banks that may try to advocate further negotiations with the Russians coupled with threats of litigation but the view of most banks, including Chase, is that there is little practical point to this."

97. In the first few months of 1999, some of the western banks expressed frustration at the second GKO exchange offer. One sub-committee of the large bank committee, chaired by Nomura, recommended the pursuit of an aggressive strategy involving the rejection of the proposal and the consideration of litigation. In the event, this course was not pursued and the western banks came gradually to accept the offer, as the best deal that was likely to be available. Thus, for example, JB reported on 2 March 1999 that JPMorgan, which had been a vocal critic of the proposal, had decided to enter into the exchange, and on 5 March 1999 it was reported that Credit Lyonnais had reached the same decision.
98. Pursuant to the terms of the second GKO exchange offer, GKOs and OFZs submitted for exchange would be exchanged for a package of new instruments. The amount was to be calculated by using a formula which discounted the originally scheduled cash flows of the instruments from their original maturity date back to 19 August 1998, using an interest rate of 50% per annum. The resulting amount was then allocated as follows:

i) 10% was the cash component, of which one-third was payable on exchange and the remaining two-thirds was paid in March and June 1999.

ii) 70% was the face amount of new Series A and B OFZs with maturities of 4 and 5 years respectively, with coupon rates of 30% in year 1, 25% in year 2, 20% in year 3, 15% in year 4 and 10% in year 5.

iii) 20% was the face amount of new zero coupon OFZs with a maturity of 3 years.

99. As already indicated above, changes were also made to the S-Account regulations, in connection with the second GKO exchange offer. In particular, the regulations imposed restrictions on the convertibility of trapped roubles: the two routes for conversion were: (a) fx conversion after a period of 365 days in a "transit" account; and (b) limited fx conversion through monthly auctions of dollars. By April 1999, only four monthly auctions had been announced, although some further auctions did take place.
100. With respect to its proprietary positions held through CMBI, Chase entered the exchange in mid-January 1999. Chase decided to place its proprietary S-Account investments held by CMIL into the exchange in late February 1999. This was before many issues relating to the exchange, such as convertibility procedures and the availability of alternative investments, had been clarified by the Russian authorities, but the Chase proprietary traders had concluded that they would take the risk of those issues.
101. In cross-examination of Chase's witnesses, Springwell sought to make three criticisms of Chase's decision on its proprietary investments none of which had been raised in the pleadings. I conclude that such criticisms were unfounded.

i) First, it was suggested that it was "extraordinary" that the decision was not dealt with by the working committee established in early December 1998 by Chase. However, JB explained, and I accept, that the fate of the proprietary investments was a matter for the proprietary traders and therefore did not fall within the remit of the working committee.

ii) It was then suggested by Springwell that, in deciding to place its own proprietary investments into the exchange, whilst at the same time giving Holders the option to decide what to do with their own referenced GKOs, Chase was consciously (and wrongly) treating its own proprietary GKOs in a manner different from the GKOs which were referenced in customers' Notes. No criticism can, in my judgment, be levelled at Chase's decision to allow customers to make a choice in a matter which affected their own economic interest. Chase was not dealing differently with the different types of GKOs. It was dealing in exactly the same way: allowing the party (whether it be Chase or the Holder) with the economic interest in the investment to make the choice.

iii) Finally, Springwell sought to make something of the fact that one of the reasons why Chase placed its proprietary positions into the exchange at an early date was to take advantage of a treasury benefit then permitted under local bank regulations, which benefit was not being made available to the Holders. There was nothing in this criticism. As JB explained, this was a very technical bank to bank treasury benefit, which could not be replicated in a form available to a customer and which could at any time be withdrawn (and, indeed, which Springwell accepted had subsequently been withdrawn).

102. By fax sent by JA on 22 January 1999, CMSCI provided notification to Springwell of the current state of the second exchange offer. In addition to outlining the terms of the voluntary novation of securities under the offer, CMSCI explained:

"If a holder of Eligible GKOs/OFZs does not enter the Exchange, it is not clear what will occur with respect to such securities. It may be that such securities will not be paid at maturity … or such securities may be paid but the Rouble maturity proceeds will be held in an account without bearing interest for an undefined period of time."

The Notice concluded by saying that only CMSCI had the right to decide whether to submit Designated Assets into the exchange offer. However, CMSCI had decided that it would take instructions from the holders of the GKO-Linked Notes as to whether such holders were in favour of such Designated Assets being submitted into the exchange.

103. On 19 February 1999, JA sent to SP two Exchange Notices from CMSCI, dated 17 February 1999, in connection with the second GKO exchange offer. The notices, referring specifically to Chase Nominees and to Springwell, were re-sent by FS on the same day. CMSCI explained in these Notices that, although the general terms of the exchange were proposed in December 1998, Chase had been waiting to send the Exchange Notice because of the numerous issues that needed clarification by the Russian government, and that many issues remained to be clarified.
104. SP discussed the Exchange Notices with JA on 19 February 1999. This was an acrimonious conversation, in which SP seemed particularly upset that Chase was asking for his instructions. He saw this as "an insult … this is unfair. This is illegal. It is unethical. It is ridiculous". JA and SP had a further conversation on 2 March 1999, in which also SP made no decision. The Notes were, of course, held in the name of Chase Nominees and charged to CMB under the Security Interest Agreement. On 2 March 1999, Chase Nominees signed the Exchange Instruction Notices, agreeing to the submission of the underlying GKOs into the exchange.
105. Following the changes in the S-Account regulations in late March 1999, the Exchange Notice was replaced by a further Notice dated 7 April 1999, which was sent by FS to SP on 14 April 1999.
106. In the event, and as in response to the previous Notice, Exchange Instruction Notices were completed for each of Springwell's Failed Notes by Chase Nominees. Under the terms of each Exchange Instruction Notice, Chase Nominees, exercising CMB's powers under the Security Interest Agreement, agreed that, effective upon the date of final settlement of the exchange, the GKO-Linked Note would be amended and supplemented as follows:

i) The definition of the defined term "Russian Securities" was amended to mean GKOs and OFZs and any other investments or securities or instruments which were permitted to be invested in under S-Account regulations or Russian law and regulations and any rouble cash received as redemption or coupon or sale proceeds or other distribution in connection with any investments permitted by the definition.

ii) The definition of the term "Designated Assets" was amended and supplemented to include the new rouble denominated bonds and rouble cash ("the New Instruments") received by way of exchange for the former Designated Assets set forth in the Note in connection with the exchange offer announced by the Russian government.

iii) The definition of the term "Transactions" was amended and supplemented to have the meaning set forth in the Note and to include, without limitation, all actions and transactions entered into directly related to submitting and exchanging the Designated Assets for the New Instruments received in the Exchange offer and investing in, holding and trading the New Instruments and other Permitted Investments.

Chase Nominees also confirmed in the Notice that:

"… the Note as amended and supplemented by the Exchange Instruction Notice is in all respects confirmed and preserved and the Note and this Exchange Instruction Notice shall constitute a single agreement."

107. The decision to put the Notes into the exchange was taken by the Chase credit department in conjunction with business officers. It was based on several factors. Springwell had no legal or beneficial interest in the underlying GKOs and, though consulted, had refused to express a preference. As JB explained in evidence, Chase's view was that there was no doubt that going into the exchange was the best choice for protecting and enhancing the value of the Notes, which were collateral for the liabilities owed to CMB by Springwell, and in relation to which CMB was entitled to exercise control pursuant to the terms of the Security Interest Agreement.
108. By fax dated 19 April 1999, Springwell referred to the recent Exchange Notice and said that:

"We believe that as Holders of CMSCI Notes it would not be our responsibility, and as such we cannot be expected, to reach a decision on whether to select early redemption of the Russian Securities.

… for numerous reasons, including the lack of documentation, we do not believe that we are in a position to evaluate the proposed restructuring of the Russian Securities and hence it would not be appropriate for us to complete the Instruction Sheets.

However, we would expect CMSCI as the holder of the Russian Securities to act in the best interest of us, its Noteholders, to diligently decide whether to submit the Designated Assets in the Exchange Offer within the prescribed time limits and to agree to assume all risks in connection with the Exchange Offer. In particular we would expect any such decision to have no adverse impact or limitation on the forward contracts."

109. This was a very similar approach to that which had been taken by Springwell in September 1998 in relation to the first exchange offer. In essence, it sought to abdicate any responsibility for any decision being made and to put responsibility for the decision entirely onto Chase, with the underlying threat that Chase would be responsible should its decision, in the event, not work out in a way favourable to Springwell.
110. Chase responded to Springwell's letter of 19 April 1999 by letter dated 18 June 1999, explaining the basis upon which the decision was taken to place the relevant GKOs into the exchange:

"Under the Term Loan Facility Agreement ("Facility Agreement") entered into by Springwell with The Chase Manhattan Bank ("the Bank"), the Notes are Collateral for a Loan as defined in the Facility Agreement and the Bank has a security interest and control of the Collateral pursuant to the Security Interest Agreement entered into in connection with the Facility Agreement. The Bank gave Springwell an opportunity to submit instructions that were in Springwell's interest. Since Springwell did not submit instructions the Bank exercised its rights under the Facility Agreement and the Security Interest Agreement.

…. We do not agree with your assertion that Chase should assume all risks in connection with the Exchange Offer. Since the Notes pass through all risks related to the Designated Assets including the risk of Russian Government action affecting the Designated Assets, the risks related to the Exchange of the Designated Assets which are a consequence of the Russian Government action are likewise appropriately assumed by Springwell."

111. Ultimately, the vast majority of Chase's customers elected for the exchange. Customers deciding against the exchange represented less than 4% of Chase's total customer positions. These numbers were generally reflective of the market response to the exchange. According to a statement issued by the Russian government and the CBR on 13 July 1999, 95% of domestic holders restructured their GKOs and OFZs and the corresponding number of non-resident holders was 88.5%.
112. It is instructive to note that, in late 1999, those investors who did not go into the exchange were allowed to do so, on the same terms as the original exchange. The terms announced for foreign investors who did not enter the exchange were very unattractive: proceeds of maturing paper not exchanged were blocked for five years and could only be used to invest in new state securities from the Ministry of Finance at face value, not market rate. I accept Chase's contention that, given the overwhelming participation of foreign creditors in the exchange and the fact that non-exchange GKOs were treated much less favourably, there is no doubt that entering the exchange was commercially in the interests of Springwell, and also of Chase, as its secured creditor.
113. In fact, and consistent with the threat contained in Springwell's letter of 19 April 1999, Springwell did sue Chase in respect of the decision to place the GKOs into the exchange. In the present proceedings, it was originally alleged that Chase was not entitled to submit the GKOs into the exchange without Springwell's consent, and further that in doing so it acted in breach of alleged fiduciary and contractual duties owed to Springwell. This claim was abandoned in 2006, and no longer forms an active part of the action. It is thus not part of the issues which I have to resolve.

Post-exchange events

114. By Notice dated 7 May 1999, sent by FS to SP on 12 May 1999, CMSCI notified Springwell of the result of the GKO exchange, which had been completed. The Notice continued:

"As a result of the completion of the Exchange and as provided in the Exchange Instruction Notice, the Note(s) have been amended as of April 30 1999 so that the Designated Assets in connection with such Note(s) now refer to the Reference Instruments received in the Exchange. Attached as Annex B is a Reference Instruments Report which shows the types and notional amounts of Reference Instruments and the amended Notes are now linked to the return and performance of a notional investment in such Reference Instruments."

Attached as Annex B, as indicated, was a schedule of the New Instruments and their rouble redemption proceeds, which were now referenced in Springwell's GKO-Linked Notes.

115. By Notice dated 12 May 1999. CMSCI gave notice of the first payment on the New Instruments. The notice identified the amount paid in roubles and confirmed that such roubles would be included in the definition of Designated Assets subject to the terms and conditions of the GKO-Linked Notes. The Notice was addressed to Chase Nominees, as the Holder of the Notes, but was also passed on to Springwell.
116. On 20 May 1999, Chase sent a fax to Polembros explaining the mechanism by which the rouble proceeds would be paid to and received by Springwell; in summary, the fax explained that the regulations had provided for three accounts to be operated, an investment account, a transit account and a conversion account. Maturing rouble payments had to be paid into the investment account, where they would remain until the client instructed Chase to invest them in securities or to transfer them into the transit account. All roubles in the investment account would be placed in the proposed monthly dollars auctions, unless the client instructed otherwise, as the only means to convert roubles to dollars without going through the transit account. The transit account was a blocked account, in which roubles were to be held for 1 year, following which they could be transferred to a conversion account and used to purchase foreign currency. By fax dated 2 June 1999, Springwell instructed Chase, following the latest monthly auction, to transfer the balance of paid roubles into its transit account. By fax dated 4 June 1999 (again, addressed to Chase Nominees but sent also to Springwell), Chase gave notice of exactly how much of the rouble proceeds had been converted into dollars at the auction and how much was being transferred across to the transit account. By fax dated 10 June 1999, Springwell instructed Chase immediately to transfer rouble proceeds received in June 1999 into the transit account.
117. So began a regular process, under which CMSCI notified Chase Nominees and Springwell of rouble payments on the New Instruments as and when the payments were made, and Springwell instructed Chase how to deal with those payments. The instruction was, subject to the auctions, to place them in the transit account. CMSCI also obtained from Chase Nominees its signed agreement to the transfer of funds and to the consequential amendment of the Notes to reflect that transaction.
118. Similarly, when roubles were in fact converted through the dollar auctions, Springwell instructed that the dollar proceeds be credited directly to its account. By way of example, by fax dated 7 September 1999, Springwell complained that certain proceeds had not been so credited, and demanded that they be credited to its account with a value date 5/6 August 1999. In the same fax, Springwell also asked, as regards the roubles in the transit account:

"Finally, we have been requesting the exact date when Roubles belonging to us were first received by Chase. Could you please let us have the date without any further delays?"

119. The first roubles paid into the transit account were due to become unrestricted on 8 June 2000. By fax dated 5 June 2000, Springwell requested that roubles 70 million from the account be used to perform two of the forwards referenced in the Failed Notes. In the fax, Springwell said:

"We have been advised that, on June 8, 1999, 88,702,214.77 roubles belonging to Springwell Navigation Corporation ('Springwell') and which represent proceeds from transactions involving Russian government securities, were transferred from an 'S' type account to a 'Transit Account' maintained at [CMBI]… We hereby request that 70,802,000 rubles from the Transit Account be delivered to CMBI to complete the foreign exchange forward contracts and that the United States Dollar proceeds be credited to the Springwell account with [CMB]."

120. But the date of performance of the two Forwards had long since passed. A similar request was made in respect of further rouble funds on 3 July 2000. These requests were the source of substantial further friction between SP and Chase. Chase was able to convert the rouble funds into dollars, but only at the spot rate. This led to a further acrimonious exchange of correspondence and discussion. Eventually, in April 2002, but reserving its rights, Springwell instructed Chase to convert all of the rouble funds falling unrestricted into dollars at the spot rate and by this process Chase accounted to Springwell for all sums received under the New Instruments. During this period, Chase also provided to Chase Nominees, and to Springwell, updated tables showing the rouble payments and the process of accounting.
121. The precise mechanics of the accounting process has been compiled as part of the agreed trading history. Nothing turns on the detail. In summary, the following amounts were received through the GKO exchange and accounted for to Springwell:

Description	Amount (roubles)	Amount (dollars)
Cash amounts	56,304,498	1,950,286
Coupon received on restructured OFZs and interest received on restructuring	379,870,253	12,710,536
OFZ maturity proceeds	506,753,799	16,212,853
TOTAL EXCHANGE RECEIPTS	942,928,550	30,873,675

Chase's actual performance in respect of the Failed Notes

122. In summary, it was common ground that on the relevant Note Maturity Dates (as set out in Appendix I) the GKOs defaulted and that the forwards did not fully perform^[16]. It was also common ground that Chase did not pay or deliver anything to the Holder, CMB, or to Springwell, on those Note Maturity Dates.
123. It was also common ground that, between June 1999 and July 2004, Chase made a number of payments ("the GKO-Related Payments") to Springwell (the dates and amounts of which were agreed^[17]) totalling $38,000,377.31. As set out above, the greater part of this amount derived from the securities for which Chase exchanged the GKOs underlying the GKO-linked Notes. The balance derived from the forward contracts underlying some of the Failed Notes.^[18].
124. So far as receipts from the forwards were concerned, the position was as follows:

i) the total payment received by Chase from VTB (as a result of a compromise settlement) was $21,886,504.79. This was apportioned by Chase between the customers who had invested in GKO-Linked Notes which were referenced to the VTB forwards, in proportion to the dollar value of their maturities. The result was that Springwell was allocated a total of $5,804,968 from the VTB settlement sum. The VTB settlement sum was transferred to Springwell in early May 2004. By this stage, interest had increased the amount to $6,843,893.80.

ii) The total payment received by Chase from Sberbank (again as a result of a compromise settlement) was roubles 26,480,000. This was allocated amongst the customers with GKO-Linked Notes which had Sberbank risk, by reference to the rouble face value of each customers' position. The total allocated to Springwell was roubles 12,995,035.03, although after tax (as to which, see below) the sum payable was roubles 7,407,169.10. In July 2004, Chase transferred to Springwell $258,512.86, being the dollar value of the rouble amount, using the exchange rate on 3 March 2001 (the date after the date of receipt by CMBI of funds from Sberbank on 2 March 2001^[19]).

iii) The sums set off against Inkombank totalled $227,747.90. This was allocated amongst the customers with GKO-Linked Notes which had Inkombank risk, in proportion to the dollar value of their maturities. The total allocated to Springwell was $24,338.30. In July 2004, Chase transferred this sum to Springwell.

iv) Nothing was received from Imperial Bank in respect of the Springwell-referenced Local Forwards.

v) In the event, nothing was received from CMBI in respect of the CMBI risk forwards, which is a topic with which I deal below.

Section IV: The Payment Claim – issues 51 and 52The respective arguments of the parties

125. The respective arguments of Chase and Springwell as to the effect, upon CMSCI's obligations under the Failed Notes, of a failure of the GKOs, Designated Forward Transactions, or (where applicable) Local Forwards, to perform on their due dates and as to whether the actual payments made by Chase in relation to the underlying GKOs, discharged CMSCI's obligations under the Failed Notes, may be summarised as follows.

Springwell's arguments

126. Springwell's case, as presented by Mr. Andrew Baker QC, was that each Failed Note was an obligation that matured, once and for all, on the Note Maturity Date. Except only where section 4(d) applied, and was invoked by CMSCI, there was no provision in the terms of the Note that called for, or permitted, performance by CMSCI otherwise than by a payment or delivery on the Note Maturity Date. On that date, the Redemption Amount was payable by the Issuer unless the Issuer was granted under the terms of the Note, and exercised, an option to discharge the Note by alternative means. The only substantive provision, defining the circumstances in which the Issuer was entitled to discharge the Note otherwise than by paying the Redemption Amount on the Note Maturity Date, was section 4. Thus Chase's argument (that it was an implied condition precedent to payment of the Redemption Amount that the referenced Transactions had performed in full and on time), was wrong. On Springwell's case, unless section 4 was engaged, CMSCI had an obligation to pay a Redemption Amount that was equal to the full amount of the Principal Amount plus Interest on the Note Maturity Date. There was thus no question of CMSCI ever being able "just to walk away" at the maturity of the Notes.
127. In relation to this primary point, Mr. Baker submitted that:

i) sections 3 and 5 did not define the Issuer's obligations, but purported to describe or indicate the effect of the Note, or risks involved in the Note; thus the operative provisions defining CMSCI's payment obligations were contained in sections 2 and 4;

ii) the terms of sections 3 and 5 were consistent with Springwell's construction of the Note, and, in particular, of sections 2 and 4;

iii) even if inconsistent with Springwell's construction, they were (to that extent) an inaccurate statement of the effect of the operative provisions of the Note, or the risks involved in the Note;

iv) the condition precedent alleged by Chase was inconsistent with the express terms of the Note and would render section 4 otiose; thus there would be no point in the options set out in section 4, if CMSCI was automatically released from its payment obligation by, or to the extent of, the failure of any of the Transactions to perform in full and on time.

128. Mr. Baker further submitted that, if Springwell were correct in its argument that sections 3 were 5 were merely "descriptive", and that section 4 was the only relevant and operative section, then, in order to maintain a defence in relation to the Payment Claim, Chase would have to rely on section 4 of the Notes. But section 4 of the Notes came into play only if there was a Convertibility Event (section 4(a)) or a Sovereign Event (section 4(b)). If there was, then the Issuer was entitled to perform other than by making payment of the Principal Amount and Interest. Thus, if Chase exercised its option under (a), it could deliver, on the Note Maturity Date,

"an amount of Roubles equivalent to the Rouble proceeds from the maturity of the Designated GKO Assets less any taxes or fees or amounts otherwise to be deducted under the terms of this Note, adjusted as provided in paragraph (c) below.."

whereupon CMSCI's obligations under the Note were to be deemed fully satisfied. Likewise, if Chase chose to exercise its option under (b), it could deliver, on the Note Maturity Date,

"(x) the Designated GKO Assets or a beneficial interest therein to the extent of Chase's interest in such assets or (y) an amount of roubles equivalent to the Market Value of the Designated GKO Assets on the Business Day preceding the Note Maturity Date, in each case less any taxes or fees or amounts otherwise to be deducted under the terms of this Note and adjusted as provided in paragraph (c) below,"

whereupon CMSCI's obligations under the Note were to be deemed fully satisfied. If (which it had not) Chase had elected for one of the alternatives under (a) or (b), performance could be suspended pursuant to paragraph (d), but none of the relevant triggers stated in that paragraph were in point here, and, moreover, Chase had not, in accordance with section 4(d), held "such Roubles, the Designated GKO Assets or the Redemption Amount" on behalf of the Holder until payment or delivery (as the case might be) could be effected.

129. It was common ground that a Sovereign Event had occurred in respect of each of the Failed Notes (since, by reason of Governmental Action, the Designated GKO Assets were not paid in full on their respective Maturity Dates). However, Mr. Baker submitted that no Convertibility Event had occurred. In outline, he submitted that section 4(a) was designed for the case where the rouble was rendered inconvertible; not merely where devaluation took place. In particular, Springwell submitted that section 4(a) only applied where rouble GKO proceeds were paid at maturity and none of the "triggers" specifically described in section 4(a) had occurred.
130. Mr. Baker further submitted that Chase had to elect, or exercise the option, to engage section 4 and that it had not done so. In other words, CMSCI had not elected to provide the alternative performance envisaged under section 4(a) or (b). It had simply failed to operate the machinery of the Note in accordance with its terms and thus was liable to pay the Principal Amount, even though the GKOs and the Designated Forwards had defaulted. Moreover, he submitted, the alternative performance envisaged under section 4(a) or (b) would not have resulted in a nil payment by Chase.
131. Further Mr. Baker submitted that CMSCI's obligations under the Failed Notes were not discharged under section 4(a) or (b), either by means of section 4(d) (which Chase contended operated so as to suspend forever CMSCI's obligations) or by means of the GKO-Related payments. Mr. Baker submitted that, where performance under section 4(a) or 4(b) had been elected by CMSCI, section 4(d) provided that in certain circumstances CMSCI's resulting obligation was

"suspended until such delivery may be made in compliance with all applicable laws and regulations and in a commercially practicable manner".

132. But, submitted Mr. Baker, it was always possible for CMSCI to effect the deliveries (either of roubles or of its interest in the GKOs) required to discharge the Failed Notes under section 4(a) and (b). In particular, that was possible on the Note Maturity Date for each Failed Note. Section 4(d) could not, therefore, afford CMSCI any defence. It mattered not whether Springwell would have regarded performance under section 4(a) or (b) as an acceptable discharge of the Failed Notes, nor whether it was possible to transfer GKOs or a beneficial interest in GKOs, since section 4(b)(x) only required delivery "to the extent of Chase's interest in [the GKOs]". In any event, none of the section 4(d) "triggers" occurred, viz.

i) that CMSCI was prevented (in its opinion) from making a delivery to the Holder required by section 4(a) or (b) in a legal and commercially practicable manner;

ii) that CMSCI was prevented "legally or de facto" from paying to the Holder any Redemption Amount due; or

iii) that CMIL was prevented "legally or de facto" from paying to CMSCI "any amount representing the proceeds of the Transactions".

133. He submitted that, whichever limb of section 4(a) or (b) was under consideration, CMSCI could indeed have effected the delivery referred to on the Note Maturity Date for each of the Failed Notes. But there was no evidence of CMSCI forming any opinion that it was unable to effect a delivery called for by section 4(a) or (b). Moreover, CMSCI was not prevented from paying the Redemption Amount to the Holder. That would have been a simple $ payment between two Chase entities outside Russia. Further CMIL was not prevented from paying an amount representing the proceeds of the Transactions to CMSCI. The GKO default affected what proceeds were generated by the Transactions, but that was a different matter.
134. Mr. Baker's arguments on section 4(d) did not end there. Section 4(d) went on to provide that where CMSCI's obligation was "suspended",

"CMSCI shall hold such roubles, the Designated GKO Assets or the Redemption Amount, as the case may be, on behalf of the Holder …"

Mr. Baker submitted that, if CMSCI wanted to take advantage of section 4(d), then it had to hold the assets, delivery of which was suspended, for the Holder. CMSCI elected not to do that, and did not do that in fact. Section 4(d) therefore afforded CMSCI no defence to the Payment Claim.

135. Mr. Baker submitted that, even if Chase's case on section 4(d) survived all of the above hurdles, CMSCI was estopped from asserting that section 4(d) or section 5(c) operated, because of Springwell's reliance upon statements by CMSCI that the Designated GKO Assets were held for the sole benefit of CMSCI. He pointed to the evidence of reliance set out in SP's second witness statement which, he contended, went unchallenged. He submitted that Chase had, by its conduct, asserted that Springwell had no direct interest in the GKOs, and that this affected SP's views as to what he could do, in particular his decision that Springwell should leave CMSCI to make its own decision as to whether to put the GKOs into the exchange. He submitted that SP might have acted differently if Chase had told him that the GKOs were in fact held for Springwell, and so an estoppel was alleged.
136. If, as Springwell contended, section 4(d) did not operate to give CMSCI any defence to the Payment Claim, then Chase contended that the GKO-Related Payments (in aggregate about $38million) discharged CMSCI's obligations under the Failed Notes. However, Mr. Baker submitted that that contention failed, because those Payments were not what was called for by section 4(a) or (b). As was common ground, they were accepted by Springwell without prejudice to CMSCI's obligations "under reservation of rights". Thus, submitted Mr. Baker, the payments could not have been performance of any obligation under the Failed Notes because they were not made to the Holder^[20]. Further, he submitted that, even if that was wrong, the GKO-Related Payments were voluntary payments, paid by Chase without acceptance of liability, and therefore could not amount to payments discharging its liability.
137. Finally Mr. Baker submitted that Chase's estoppel arguments (to the effect that Springwell was estopped from its current claims), were without merit, both factually and legally.

Chase's arguments

138. Chase's primary defence to the Payment Claim was that, by the express terms of the Notes, in particular sections 3 and 5, the obligation to pay any sum to the Holder was dependent upon the performance of the underlying Transactions. If the Transactions performed in full, and there was no other limiting or restricting feature, then Chase had to pay the full Principal plus Interest. However, in the event that the Transactions did not perform, then Chase's payment obligation^[21], pursuant to sections 3 and 5 of the Note, was to pass through such proceeds of the Transactions as it did in fact receive (or would have done, had it entered into them).
139. Mr. Hapgood QC, on behalf of Chase, submitted that this result came about, independently of section 4. Thus it was not necessary to undertake a contorted analysis of section 4 of the Notes, in order to determine whether or not CMSCI had an obligation to pay the Principal plus Interest in full. That was never the purpose of section 4. Springwell was wrong in its contention that sections 3 and 5 were merely "descriptive", and that section 4 was the only relevant and operative Section. On Springwell's case, namely that, unless section 4 was engaged, CMSCI had an obligation to pay the full Principal plus Interest, was wrong.
140. It was thus not necessary to go down every alleyway of section 4, or to take expert evidence on, for example, the valuation of GKOs in a defaulted market and the Russian law on beneficial interests, in order to determine a fundamental question such as whether there was an extant obligation to pay the Principal plus Interest in full even if the underlying Transactions defaulted. Such an approach, Mr. Hapgood submitted, was commercially absurd. It was inconceivable that section 4 could have been intended to create such an intense layer of complexity on what was, at the end of the day, a straightforward concept of a pass-through Note.
141. Alternatively, if it was necessary for Chase to invoke section 4, in order to avoid liability to pay the full Redemption Amount, then:

i) There had indeed been a Convertibility Event and/or a Sovereign Event which provided Chase with alternative payment options, on a permissive basis, by which it was able to satisfy its payment obligation, confirmed in sections 2, 3 and 5, to account to the Holder for what it received. Accordingly, its liabilities under the Failed Notes were discharged under sections 4(a) and/or (d).

ii) Contrary to Springwell's arguments, there was no need for Chase actively to elect, or exercise an option, to take advantage of a Convertibility Event and/or a Sovereign Event, or to communicate that election, or exercise, to Springwell. The correct construction of section 4 was that both a Convertibility Event and a Sovereign Event were engaged as soon as they happened.

iii) In the alternative, even if Chase were wrong about all of the above, Mr. Hapgood submitted that it did not matter, because Chase did in fact do enough to constitute such "election" as may have been required. This was done either (a) by way of express notification to Springwell or (b) by way of performance amounting to de facto election.

iv) The suspensory provisions contained in section 4(d) were indeed engaged and Chase utilised them.

v) There was no factual basis for the alleged estoppel relied upon by Springwell, as described above. Springwell's conduct would not have been, or could not have been, any different if the "election" had been given in the manner which Springwell contends it ought to have been given.

vi) Furthermore, if necessary, Chase was entitled to contend that Springwell, on its part, was estopped from making its present claim. The thrust of Springwell's claim was that it was open at all times to CMSCI to "elect" a form of alternative performance; that, had it done so, then it would have been able to discharge its obligation under the Notes, by the payment to Springwell of that which it in fact paid; that, essentially, it was Chase's bad luck or bad judgment that it did not do so, because the consequence is that its obligation to pay Principal plus Interest has remained. But, submitted Mr. Hapgood, at no stage did Springwell seek the payment of Principal plus Interest, a claim which would have been entirely divorced from the underlying assets referenced to the Notes. Thus Chase submitted that Springwell's conduct throughout was fundamentally inconsistent with the Payment Claim now being made.

Analysis in relation to Issues 51 - 53

142. My conclusions in relation to Issues 51-53 and my reasons for reaching such conclusions may be summarised as follows.
143. The Notes have to be construed against the matrix that their clear commercial purpose, as expressly stated in section 3, and as is implicit from many of their other provisions (including, in particular, the definition of "Transactions"), is to pass through to the Holder the economic returns and risks of the Designated GKO Assets and of Transactions as defined. As the first sentence of section 4 (where it appears) underlines, and as is obvious from the other terms of the Note, the nature of CMSCI's obligation is not an unqualified one to pay the Principal Amount on the Note Maturity Date. Sections 4 and 5 of the Note clearly spelled out the wide range of risks which the Holder was assuming by investing in the Notes. Thus, the starting point of any construction exercise has to be that the economic concept of the Notes was plainly to pass through to the Holder all the risks involved in the Designated GKO Assets and Transactions underlying the Notes. This was not merely apparent from the terms of the Notes themselves, but also reiterated in the terms sheets accompanying every transaction, which, as I have already described in the first judgment^[22], contained a risks disclosure sheet, which set out a list of "Key Risks to Investor". These included, inter alia, all default, loss or other risks in relation to the underlying transactions, default risk of the Russian government on the underlying GKOs, default risk of CMBI and the Russian bank counterparty on the forward contracts, custody risk, and the risk of the imposition by the Russian government of changes in law and regulations. These were all risks that were identified and referred to in the terms of the Notes themselves.
144. Approaching the construction of the Notes with their concept and purpose (viz. that of a risk pass-through instrument) in mind, one might be surprised to find, in circumstances where it is common ground (or virtually common ground) that the GKOs defaulted and the forwards did not fully perform, that Springwell contends, nonetheless, that CMSCI remained under an obligation on the Maturity Date and thereafter to pay the Principal Amount and Interest. This is perhaps why, in oral argument, Mr. Brindle QC, first leading counsel for Springwell, frankly described its arguments on the Payment Claim as somewhat "counter-intuitive".
145. I do not accept Mr. Baker's primary submission, that the only "operative" provisions of the Note defining CMSCI's payment obligations are sections 2 and 4, and that sections 3 and 5 are merely "descriptive" provisions. Section 2(g), in its introductory words, expressly provides that CMSCI's agreement to pay the Redemption Amount is "subject to the terms and conditions contained herein". Moreover, the description of how the Redemption Amount is to be calculated is expressly said to be "subject to sections 4 and 5 below".
146. Whilst section 3 does not expressly address how CMSCI is to perform on the Note Maturity Date or thereafter, or how the Redemption Amount is to be calculated, it is nonetheless apparent that the section has operative effect, at least in the sense of: defining all relevant Transactions (whether actual or synthetic) in relation to which CMSCI's obligations fall to be defined (see section 3(b)); delineating the extent of CMBI's obligations in respect of local forward contracts (section 3(a)(v)); and stating the extent of Chase's duties of care (section 3(b)).
147. However, I accept that the first sentence of section 3 is merely descriptive in setting out the function of the Note and that, accordingly, Chase could not simply point to that sentence to escape liability that was otherwise imposed under an express provision of the Note. But, it is, as I have said, an important statement as to the commercial purpose of the Note, which necessarily affects the construction of the Note's other provisions.
148. Section 4 is not, in my judgment, a provision which exclusively defines the payment obligations of CMSCI. Nor does it set out an exhaustive regime as to the circumstances in which CMSCI is excused from paying the Principal Amount and Interest on the Note Maturity Date. Thus, I reject Mr. Baker's argument to the effect that, in order to excuse payment of the Principal Amount on the Note Maturity Date, CMSCI had to show that it could bring itself, and had brought itself, within the provisions of section 4(a) or 4(b) and section 4(d).
149. Section 4 is not expressed as a section which exclusively defines the payment obligations of the issuer. On the contrary, (where the words appear) the section begins by pointing out that the Note is unsecured and does not constitute a general (i.e., unqualified) obligation of Chase and that section 4 shall apply "without limiting the generality of the foregoing". Further, section 4 plainly does not define the limits of CMSCI's payment obligations. The heading "Payment in roubles or GKOs" indicates that it is concerned instead with means of alternative performance which CMSCI may choose to take up in certain specific circumstances. Those specific circumstances are:

i) first, under sections 4(a) and (b), two scenarios involving "Governmental Action" (a defined term, meaning any action taken by the government by means of any law, regulation, ruling, directive or interpretation) either restricting the ability to exchange roubles into dollars (a "Convertibility Event"), or resulting in confiscation or non-payment of GKOs (a "Sovereign Event");

ii) second, a situation (other than a 4(a) or 4(b) situation), where CMSCI is prevented legally or de facto from paying to the Holder any Redemption Amount due on the Note Maturity Date (see the second subordinate clause in section 4(d)); and

iii) third, a situation (other than a 4(a) or 4(b) situation), where

"… CMIL is prevented legally or de facto from paying any amount representing the proceeds of the Transactions to CMSCI (including without limitation if due to any direct or indirect party to a Transaction (such as CMBI) being prevented from performing for reasons beyond such party's control) …" (see the third subordinate clause in section 4(d).

150. In any of those defined circumstances:

"… CMSCI's obligation to make such payment and delivery hereunder shall be suspended until such delivery may be made in compliance with all applicable laws and regulations and in a commercially practicable manner and CMSCI shall hold such roubles, the Designated GKO Assets or the Redemption Amount, as the case may be, on behalf of the Holder, with all costs related thereto being deducted from any amount paid to the Holder, including any costs of maintaining such assets on the balance sheet of Chase or a Chase affiliate. No interest shall accrue during the period of such suspension or in respect of any delay in receiving the amount due under this Note other than such amount that might be paid on the Designated GKO Assets itself or with respect to a Transaction." (see the remaining sentences in section 4(d))

151. Thus, in my judgment, and, contrary to Mr. Baker's submissions, the suspensory regime in section 4(d) quoted above did not merely come into play in a section 4(a) or 4(b) scenario; it also came into play in the wider set of circumstances which I have described in subparagraphs (ii) and (iii) above, where there might not have been any Sovereign or Convertibility Event (I take the view that "hereunder" means generally under the Note, and not merely under section 4).
152. Nor do I accept that section 5 is a mere descriptive provision. It is headed "Other risks assumed by the Holder". The opening words make it clear that its purpose is to set out risks which are assumed by the Holder "… in addition to those risks assumed by the Holder as described elsewhere …". Each of sections 5(a), (b), (c) and (d) are, as a matter of drafting, operative provisions which impact upon the payment obligations of the issuer. Further, sections 5(a), (b), (c) and (d) go substantially wider than, and thus by definition are not descriptive of, sections 2 and 4. By way of example:

i) section 5(a) concerns changes in the S-Accounts, currency regulations and tax laws. A change in the S-Account rules might or might not amount to a Sovereign Event or a Convertibility Event under section 4. A change in the tax laws might well not do so. Thus section 5(a) contemplates and provides for a change in the payment obligation of the Issuer, which differs, or potentially differs, from that provided for in section 4.

ii) Section 5(c) is also substantially wider than section 4. It deals generally with the consequences of default or non-payment "for any reason". Thus, for example, custody loss or straightforward counterparty default would fall under section 5(c) not section 4.

153. In the second or third scenarios described in section 4(d), it is unlikely that the financial ability of either CMBI or the local Russian bank to perform under the forwards would fall within the definition of being "prevented legally or de facto from paying any amount". Therefore, in my judgment, Springwell's principal submission, namely that section 4 provides the exclusive regime which permits non-payment of the Principal Amount on the Note Maturity Date, must be wrong.
154. If, as Springwell submits, the operative provisions defining Chase's payment obligations were contained only in sections 2 and 4, then CMSCI would have to pay the full Principal plus Interest:

i) if the GKOs were lost in custody, such that no payment was ever made to Chase under them; or

ii) if the forward counterparty went into liquidation and was unable to perform its obligations to pay dollars.

155. As Mr. Hapgood submitted, these are ordinary pass-through risks which were by the clear terms of the risks disclosure statements passed through to the Holder. Therefore Springwell's construction cannot be right. If sections 3 and 5 are construed as merely descriptive provisions which do not affect the payment obligation, then the Notes would not be what they purport to be, and what all parties would reasonably understand that they were, namely pass-through instruments. Thus, it follows that I reject Springwell's submission that the terms of sections 3 and 5 are consistent with Springwell's construction of the Note.
156. I also reject Springwell's argument that the construction advanced by Chase is inconsistent with section 4 or would render section 4 otiose. Consistently with sections 3 and 5, section 4 provides express alternative payment options, which CMSCI may or may not decide to take up, in certain specific events where the ordinary payment process is impeded by government action. Section 4 is therefore providing supplementary, optional means of performance, in specified circumstances. There is no inconsistency between that section and sections 3 and 5 because: (a) it is always a matter for CMSCI to decide whether it will or will not pursue any of the alternative means of performance; and (b) nothing in section 4 obliges CMSCI to pay a Holder any more than it has in fact received. The fact that section 4 is supplementary and permissive rather than mandatory is apparent on the face of its wording. There is nothing in the section to indicate that the various means of performance which are elaborated must be taken up by CMSCI. On the contrary, under each of sub-paragraphs (a) and (b), these are matters which "CMSCI, at its option, may" do. Nothing in section 4 is intended to impose a payment obligation where no such obligation exists by virtue of sections 3 and/or 5. Nor is section 4 otiose. It is a helpful and commercially relevant provision which sets out a variety of ways in which CMSCI can choose to perform its payment obligation, if certain government action is taken. Absent section 4, there would be nothing to say that CMSCI could perform by, for example, transfer of underlying GKOs. That power may be implied into section 5(c) but is expressly granted by section 4(b). Section 4 can without difficulty and without any strained interpretation live alongside, and serve a legitimate purpose in addition to, sections 3 and 5. Accordingly, I reject Springwell submission that sections 4(a) and 4(b) must be read as if they if they comprised an exclusive list of what Chase must do, if it is not otherwise to be obliged to pay the Principal Amount plus Interest in full. There is nothing in the wording of sections 4(a) and 4(b) to suggest that that is what is intended; the actual words used are inconsistent with such a construction. Thus, Springwell's construction is not consistent with the wording of sections 2, 3 and 5; and it is not consistent with the concept of a pass-through Note.
157. Thus, in my judgment, irrespective of the options open to it under sections 4(a) and 4(b), CMSCI was entitled to, and clearly did, invoke the provisions of section 5(c). On the facts, payment was clearly not made under the Designated GKO Assets (i.e. the GKOs defaulted), nor did CMIL receive full payment from CMBI by virtue of the defaults under the Local Forwards. Likewise, CMBI did not perform under its forwards. In the circumstances, CMSCI was, in my judgment, under the terms of section 5(c) entitled to wait and delay payment of the Redemption Amount, and then only do so in a reduced amount which, pursuant to clause 3(a), reflected the true economic risks and return of the Transactions.
158. Moreover, the definition of "Transactions" in section 2, and the terms of section 5, which refer to "any replacement transaction entered into to replace a defaulting or non-performing party" were, in my judgment, clearly wide enough to cover the New Instruments which CMSCI received through the exchange, as well as the spot transactions necessary to convert the proceeds of the New Instruments into dollars. Even if I were wrong about this, the fact is that CMB, as holder of its security interest in the Failed Notes under the Security Interest Agreement, was entitled to agree, and did in fact agree, to the amendment of the Notes to include the New Instruments.
159. Furthermore, even if I were wrong in the above analysis, and CMSCI was, under the provisions of the Notes, obliged to bring itself within the provisions of section 4 of the Notes in order to avoid payment of the Principal Amount and Interest on the Note Maturity Date, I accept Mr. Hapgood's alternate submission that section 4(d) was engaged and effectively enabled CMSCI to wait and see.
160. My analysis may be summarised briefly as follows.
161. It was common ground that a Sovereign Event, as defined under section 4(b) had occurred, and was in existence or had effect on or prior to each of the Note Maturity Dates of the Failed Notes, since, by reason of Governmental Action, the GKO Designated Assets did not pay on the GKO Maturity Dates.
162. In my judgment, a Convertibility Event also occurred and had effect on or prior to each of the Note Maturity Dates. That was because at least one or two of the triggers specified in section 4(a) was engaged. Thus:

i) the Moratorium and Post-Moratorium S-Account Amendments had the effect (at least) of restricting the exchange of roubles for dollars. Under these regimes, certain types of forward currency exchange were either expressly prohibited or effectively precluded and so this was a clear restriction on the exchange of roubles for dollars.

ii) Because the Moratorium prohibited the performance of certain forwards, and the Post-Moratorium S-Account Amendments prohibited the placing of dollars into S-Accounts for the purpose of performing such forwards, there was an unavailability of dollars for exchange in a legal foreign exchange market in accordance with normal commercial practice.

iii) Because the GKOs defaulted, there were no rouble proceeds in the S-Account. Hence, foreign investors investing through an S-Account with Chase, were, in effect, not in a position to sell roubles to buy dollars with such rouble proceeds. During the Moratorium, even if there had been rouble proceeds, foreign investors and Chase would have been prohibited by the terms of the Moratorium from selling those roubles and buying dollars. Although, as the experts agreed, after the expiry of the Moratorium if there were roubles in the S-Account, it was not illegal to sell those roubles for dollars in order to complete a suspended S-Account Forward Transaction, or one that had matured after the expiry of the Moratorium, there was, because of the unavailability of convertible roubles in the S-Accounts, nonetheless an effective restriction or limitation on the exchange of roubles for dollars.

iv) The fact that no restrictions were placed on the operation of the spot market did not mean that there was not a Convertibility Event. Indeed, the only circumstances in which the question of convertibility arose under the Notes was in the performance of forward transactions, and so the various triggers in section 4(a) must of necessity refer (at least) to convertibility through forwards and in the forwards market.

163. I agree with Mr. Baker that there was no actual discharge of CMSCI's obligations on the respective Note Maturity Dates through the alternative modes of performance envisaged under section 4(a) and 4(b), for the simple reason that CMSCI did not deliver to the Holder anything on those dates. However, that did not mean that a Sovereign Event or a Convertibility Event had not occurred.
164. However, as I have already explained above, section 4(d) enabled CMSCI to delay or suspend performance in three defined circumstances, only the first of which was tied to the situation where CMSCI was prevented in "its sole opinion" from delivering the alternative performance under section 4(a) and 4(b). I do not consider that in order for section 4(d) to be engaged, Chase needed to make an formal election or decision to take advantage of the section's provisions, let alone formally to notify such elections. On the wording of section 4(d), CMSCI's obligations were automatically suspended upon the happening of one of the defined events. Springwell's arguments to the contrary were, in my view, uncommercial.
165. Moreover, as a matter of fact, by its communications with Springwell in the period from 4 September 1998 to May 1999 (prior to the Note Maturity Dates of the Failed Notes) Chase informed Springwell that CMSCI was not going to be paying the Principal Amount and Interest, but that Springwell would instead be receiving an alternative means of payment, consistent with the pass-through nature of the Notes. There is thus no factual merit in the point, even if some sort of decision on CMSCI's part was necessary. CMSCI's decision to proffer alternative performance was implicit in its conduct.
166. On the relevant Note Maturity Dates, at least some of the conditions specified in section 4(d) as the trigger for the suspension of CMSCI's obligations had been satisfied. Thus:

i) There was an obvious impediment to the alternative performance under section 4(a): the Designated GKO Assets had defaulted and so it was impossible to deliver an amount of roubles equivalent to the rouble proceeds from their maturity. I agree with Mr. Hapgood's submission that this was precisely the sort of circumstance that was envisaged under section 4(d). The result, in my judgment, was that the payment alternative under 4(a) was suspended pending the restructuring.

ii) There were also impediments of the type envisaged in section 4(d) to the alternative performances under section 4(b). In this context, I construe section 4(d) as only requiring CMSCI to be prevented from achieving one mode of alternative performance in a "legal and commercially practicable manner"; in other words it did not have to be prevented from discharging all modes of alternative performance. This reflects not only the disjunctive wording of paragraph (d) but also the fact that CMSCI had an option under section 4(b) as to what alternative assets it would deliver in discharge of its obligations. Thus:

a) CMSCI was prevented from delivering the Designated GKO Assets in a legal and commercially practicable manner because this was not permitted under Russian law. This was agreed, as a matter of Russian law by the Russian experts, as title could not be transferred other than by accepting the terms of the exchange programme.

b) CMSCI was equally prevented from delivering a beneficial interest in the GKO Assets in a legal and commercially practicable manner, because Russian law did not recognise different levels of ownership and so it was not possible to transfer a beneficial interest in GKOs. This, too, was agreed under Russian law.^[23]

c) CMSCI was prevented from delivering an amount of roubles equivalent to the Market Value of the Designated GKO Assets on the "Business Day preceding the Note Maturity Date" in a legal and commercially practicable manner, because trading on GKOs was suspended, there was no market in them, and they had no legal or commercially practicable objective market value.

iii) There were also impediments of the type envisaged in section 4(d) that were independent of the alternative performance provisions of section 4(a) and 4(b). Thus CMIL was prevented de facto from paying any amount representing the proceeds of the Transactions to CMSCI as it did not have the funds with which to do so from CMBI or the local Russian banks.

167. Springwell contended that the suspensory provisions in section 4(d) were never engaged because:

i) CMSCI was not prohibited from delivering roubles on the Note Maturity Date.

ii) CMSCI was not prohibited from delivering its own interest in the GKO Assets, because its own interest was a contractual back-to-back participation interest or arrangement with CMIL.

iii) CMSCI was not prohibited from paying the Principal Amount plus Interest in dollars on the Note Maturity Date.

iv) CMIL was not prohibited from paying an amount representing the proceeds of the Transactions to CMSCI. According to Springwell "The GKO default affected what proceeds were generated by the Transactions, but that is a different matter."

168. Largely for the reasons advanced by Mr. Hapgood, I reject Springwell's submissions. Before dealing with the detail, I emphasise that section 4(d) expressly states that whether or not CMSCI is prevented from doing anything depends on the "sole opinion" of CMSCI. Further, the suspensory provisions of section 4(d) apply if certain steps cannot be taken "in a legal and commercially practicable manner". The section thus falls to be construed in a robust and commercially sensible manner. Furthermore, as I have already pointed out, the section is engaged even if only one of the various impediments is established. It is not necessary to establish them all and it is irrelevant that, if other impediments were established, there might still be some different means of performance available. As Mr. Hapgood submitted (and as I accept):

i) The fact that CMSCI was not prohibited from paying roubles to the Holder is true but irrelevant. The specified impediment was not the inability to pay roubles, but rather the inability (in a legal and commercially practicable manner) to pay an amount of roubles equivalent to the rouble proceeds from the maturity of the Designated GKO Assets. On the GKO default, that impediment was plainly engaged.

ii) The point about CMSCI's back-to-back arrangement with CMIL is also irrelevant:

a) Under the terms of the Note, CMSCI is specifically referred to where that entity is the relevant entity. Where the reference is broader, i.e. to CMSCI acting through CMIL, the reference is to "Chase". In section 4(b) itself, CMSCI is referred to in line 7, but, in line 9, the reference to a beneficial interest in the GKO Assets is to "the extent of Chase's interest in such assets." This is a reference not to CMSCI's back to back arrangements but rather to CMIL's interest in the underlying GKOs.

b) This is further apparent from the context of the phrase as a whole. What is to be delivered is "a beneficial interest therein to the extent of Chase's interest in such assets". The back to back arrangement between CMSCI and CMIL was simply a contractual arrangement (as Springwell itself submits) which gave no beneficial interest in the underlying asset at all. Thus, the phrase in the Note cannot be a reference to that back to back arrangement, as it is not a "beneficial interest therein".

c) This is, indeed, the only proper context for the reference to a beneficial interest. The investment in a GKO-Linked Note was intended to reflect the returns and risks of direct investment in the underlying GKO. The alternative performance was, and was obviously, directed to the transfer of the GKO or an interest in it. There is nothing in the Note about any back to back arrangement between CMSCI and CMIL, and it is inconceivable that the Note would contemplate opening up, for a customer, part of an internal bank arrangement such as this.

169. Springwell's submission that CMSCI, as a Jersey-incorporated company, was not prevented from paying the Principal Amount plus Interest in dollars was also in my judgment, misplaced. The opening words of section 4 make it plain that the Note does not constitute an unqualified obligation of Chase. If the only issue were whether CMSCI could legally pay dollars to the Holder by crediting dollars to the Holder's account with Chase regardless of events in Russia, then section 4 as whole would be otiose. Such a submission is wholly inconsistent with the commercial purpose of a pass-through note.
170. Finally, the submission that the GKO default merely affected the amount of proceeds, but that CMIL was not prevented from paying the proceeds (whatever they might be) to CMSCI conflicts, in my view, with the express wording of section 4. The relevant impediment in section 4(d) is stated to include a situation where "any direct or indirect party to a Transaction (such as CMBI) [is] prevented from performing for reasons beyond such party's control". Thus, the impediment does not focus merely on whether CMIL was prevented from passing on whatever proceeds it in fact received. By referring expressly to the performance of other parties, including the party which has to pay CMIL, the impediment undoubtedly includes a situation where CMIL is not paid in full. Thus, if CMBI does not pay at all, or of it pays only a portion, then the impediment will be engaged.
171. Springwell also submitted that it was possible to ascribe a market value to the defaulted GKOs, and that accordingly this further impediment was not engaged. Springwell relied on its expert evidence in support of that submission. I do not accept that argument, for the following reasons:

i) The evidence of Chase's expert, Mr Dobatkin, was that, in the absence of trading, it was difficult to ascribe any objective market value to defaulted GKOs, especially as the proposed terms of the restructuring were continually being revised.

ii) Mr Kraus's evidence (on behalf of Springwell) did not in reality undermine this. He accepted that valuing a defaulted asset would always be a difficult exercise, but suggested that value can be ascertained by some means. He pointed to his experience of Dresdner Bank having valued defaulting GKOs. But a valuation for internal purposes (which is what that was) is very different. In his report, Mr. Kraus referred to an internal valuation of 10%, which he then explained orally was for internal risk management purposes. However, he accepted in evidence that for the purpose of his own book, the GKOs were valued at nil.

iii) But, as Mr. Hapgood submitted, the issue in any event is not whether it is possible for a bank to ascribe a value to a defaulted asset for internal purposes. The issue is whether it was, or could reasonably have been perceived by CMSCI as being, possible to ascribe a market value to defaulted GKOs, "in a legally and commercially practicable manner". Where there was no functioning market, where the proposed exchange terms were constantly changing and uncertain and where, as Mr Kraus accepted "there simply was not a clear and objective way of valuing GKOs" the impediment was, in my judgment, plainly engaged.

172. I also reject Springwell's argument that, although Chase did in fact account to Springwell for the proceeds of the GKO Exchange, that was not a sufficient alternative performance pursuant to section 4(a) or 4(b) to discharge Chase's obligations under the Notes.^[24]
173. The first point made by Springwell was that the payments made by Chase to Springwell were made without acceptance of liability, and were instead voluntary payments. This is not factually correct. Chase at no stage suggested to Springwell that, in accounting for the proceeds of the GKO Exchange, it was in some way acting on a voluntary basis. Nor can Springwell have thought that this was the position, as Springwell insisted on its entitlement to those proceeds. The fact that Springwell accepted each payment "without prejudice to its rights" does not affect the position.
174. Springwell's second submission under this head was that, because the payments were made to Springwell rather than to the Holder of the Notes (i.e. Chase Nominees), this "could not have been performance of any obligation under the Failed Notes because they were not made to the Holder." This submission is factually wrong. By the date of the first payments, Chase Nominees effectively held the Notes to the order of CMB as holder of a Security Interest under the terms of the Security Interest Agreement. Thus, CMSCI notified Chase Nominees of the rouble proceeds and obtained the consent of Chase Nominees to the transfers to Springwell. The GKO proceeds were not required for payment of the Term Loan Agreement, and thus they could be released to Springwell under clause 16.17(a) of the Term Loan Agreement. But, in reality, the payments were made to Springwell at the direction of CMB, as the Holder of the Notes under the terms of the Security Interest Agreement. As such, the payment were clearly made in discharge of CMSCI's obligations under the Notes. Such payments as were made after the termination of the Term Loan Agreement were clearly paid to Springwell as Holder.
175. I also reject Springwell's submissions that CMSCI cannot show that it satisfied the requirements of section 4(d), because it did not hold, or elect to hold, the Designated GKO Assets, delivery of which was suspended, "on behalf of the Holder" of the Notes. These submissions, to my mind, had an air of unreality. The fact was that CMB, until the signing of the Term Loan, on or about 15 January 1999, was the Holder under the terms of the GMRA. Thereafter, the Holder of the Notes was Chase Nominees, on behalf of CMB, as holder of a security interest in the Notes, under the terms of the Security Interest Agreement and the Nominee Agreement. In the exercise of its rights in such capacity, CMB was clearly entitled to direct CMSCI to submit the Notes into the Exchange (as it did) and CMSCI clearly held the new Designated GKO Assets, the Redemption Amount (as redefined) and the released roubles on behalf of Chase Nominees/CMB. At CMB's direction, the proceeds of the New Instruments were duly paid to Springwell's order, and held, as appropriate, in the transit account on Springwell's behalf. In those circumstances, I see no reason to conclude otherwise than that the GKO Assets were held to the order of the Holder.

Estoppel

176. Springwell's argument under this head again appears to me to be positioned at a remote remove from the commercial reality of the situation. The submission was that Chase by, notices and conduct, asserted that Springwell had no direct interest in the GKOs, and that this affected SP's views as to what he could do, in particular his decision that Springwell should leave CMSCI to make its own decision as to whether to put the GKOs into the exchange. It was thus submitted that SP might have acted differently if Chase had told him that the GKOs were in fact held for Springwell, and accordingly Chase is estopped from claiming the benefit of section 4(d) or section 5(c).
177. In my judgment, this argument fails for the following reasons:

i) Chase did indeed tell Springwell that, "Under the terms and conditions of the Note, the Customer has no ownership interest in the Designated Assets…" and therefore the ultimate right to decide whether to submit the assets into the exchange rested with CMSCI. That was accurate, under the terms of the Notes and under Russian law. At the same time, however, what Chase said was that it would take "instructions" from the customer (i.e. Springwell). This reflected the fact that Chase accepted that the ultimate economic interest in the GKO lay with the customer. That was entirely consistent with section 4(d) of the Note and fully reflected the fact that, within the constraints of Russian law, the economic interest in the underlying GKOs was in fact being held for the account of the Holder, i.e. at the first level, CMB, and, subject to its Security Interest, for Springwell.

ii) I find as a fact that there was no realistic prospect that, had Chase said anything different, that would have made any difference to SP's decision about the GKO Exchange. The highest the case is put, in Springwell's pleading, is that "it is not now realistically possible to say how Springwell would have acted" if it had been told that the GKOs were now held for the account of the Holder.^[25] That, in my judgment, does not amount to detrimental reliance.

iii) Even if it could have done so, I do not accept that SP would have acted differently. The documents show that, in the post default period, SP consistently left all decisions to Chase and was not himself prepared to take any different decision. He did not want to take any step which might, in the future, be seen to have prejudiced his position. In my judgment, there is no evidence that SP would otherwise have decided not to place the GKOs into the Exchange.

iv) Nor is there any evidence to show that Springwell suffered any detriment or loss by allowing the Designated GKO Assets to be submitted into the Exchange. JB's evidence, which I accept, was that Springwell would have been worse off financially if the GKOs had not been submitted into the Exchange. The evidence which I have set out in the narrative sections of this judgment shows that the overwhelming majority of holders tendered GKOs into the Exchange.

178. In the circumstances, it is not necessary for me to consider in any detail Chase's alleged counter-estoppel, namely that Springwell's conduct throughout was fundamentally inconsistent with the claim now being made, namely that CMSCI was not entitled to have performed as it did. In my judgment, irrespective of any conduct on the part of Springwell, CMSCI is entitled to point to the conduct of CMB, the actual Holder of the Notes at all times up to the GKO exchange, and thereafter as the Holder of the New Instruments, either directly or in its own name (under the terms of the GMRA) or, as a result of the Term Loan Agreement, through Chase Nominees as its nominee. Any claim for payment of the Principal Amount and Interest on the Note Maturity Date would have been a claim by CMB/Chase Nominees. CMB, like Springwell, also proceeded in its dealings with CMSCI on the basis that CMSCI was entitled – and indeed, instructed – to effect alternative performance by putting the Notes into the Exchange. Indeed, as I have already described above, the decision to do so was taken by the Chase credit department, taking account of CMB's own interests as Holder of a Security Interest in the Notes, as well as those of the ultimate owner, Springwell. Had CMB/Chase Nominees subsequently attempted to sue CMSCI for the Principal Amounts plus Interest, CMSCI would, in my judgment, have been justifiably entitled to contend that CMB was prevented by an estoppel from doing so. As effectively successor in title to CMB/Chase Nominees, Springwell's claim is also precluded.

Conclusions

179. Accordingly, I find against Springwell in relation to the Payment Claim. Subject to consideration of the Damages Claim (as to which see below), the GKO-Related Payments discharged CMSCI's obligations under the Failed Notes. If necessary, I would also hold that Springwell is precluded on the basis of estoppel from claiming that anything is due under the Failed Notes, because of Chase Nominees/CMB's conduct, as holder of a Security Interest in the Notes, in giving instructions to CMSCI to lodge the Notes in the Exchange.

Section V: The Account Claim – Issues 55 - 58

180. If, as I have held, the Payment Claim does not succeed, then Springwell maintains the Account Claim and the Damages Claim. At this stage of the argument, it was common ground that the entitlement of the Holder of the Failed Notes, and CMSCI's obligations as Issuer, depended on what happened to the underlying Transactions. Under this head, Springwell "remains concerned" that Chase has not fully accounted to Springwell in respect of: (i) the two Local Forwards between CMBI and Sberbank ("the Sberbank Local Forwards"); and (ii) the CMBI Forwards.

The Sberbank Local Forwards

181. As I have already described, Sberbank and CMBI eventually, by agreement dated 28 February 2001, agreed settlement terms in respect of forwards open between them in 2001. Under this agreement, the forwards were cancelled and Sberbank paid Chase roubles 26,480,000. The sum was received by CMBI on 2 March 2001, at an implied settlement rate of 7.50 roubles to the dollar. After its initial stance that such settlement had nothing to do with Springwell, Chase paid Springwell a sum in respect of the Sberbank Forwards which was calculated on the basis of the amount received by CMBI from Sberbank, on the basis that CMBI had paid 43% tax on that amount, and on the basis that Chase had deducted certain amounts to reflect the fact that it had gone "short" on the Sberbank Forwards. This meant that the gross recoveries which CMBI received from Sberbank under the settlement agreement were short because CMBI had decided to enter into (in value terms) only about $ 25 million in forward contracts with Sberbank, when in fact, in face value terms, CMBI had "sold", or passed through, about $ 33 million in face value terms to Holders of the risk of Sberbank performing as Russian Bank Counterparty in respect of the Hedged Percentage Account.
182. Springwell's concerns in relation to the Sberbank Local Forwards were threefold: first, that it did not understand the basis upon which Chase had deducted the 43% tax; second that it claimed that Chase was not entitled to make any deductions in respect of its decision to short the Sberbank Local Forwards since this was at CMBI's own risk, rather than CMIL's risk; and third, it claimed that Chase should have paid interest on the amounts outstanding.
183. By the time of the oral closing submissions, only the tax issue in reality remained in contention^[26], although Mr. Baker argued that Springwell was correct in its legal analysis on the other two issues. This was because, by letter dated 28 September 2007, Clifford Chance (Chase's solicitors) informed Reed Smith Richards Butler (Springwell's solicitors) that, given the relatively minor amounts involved in this part of the claim, Chase was prepared, without admitting liability, to account to Springwell both in respect of the "short" issue and the claim for interest. There may remain an issue in relation to the rate of interest payable over the relevant period. For this reason, and given that no argument was addressed by Chase on these two points, although Chase's payment was made without admission of liability, it is right that I should proceed on the basis that, as Mr. Baker submitted, Chase was indeed obliged to account to Springwell in respect of the pro rata deduction which Chase made from the recoveries on the grounds of CMBI's decision to short the Sberbank Local Forwards and was obliged to pay interest.
184. In relation to the tax issue, Mr. Baker submitted that there should have been a tax-neutral flow of funds from CMBI to CMIL, since CMBI must have recognised a liability to pass through any recoveries from Sberbank to CMIL. Mr. Baker submitted that Chase called no evidence and produced no disclosure showing that CMBI had in fact paid tax on its receipt from Sberbank or that it had not, as one would have expected received relief against tax on passing the receipt through to CMIL. He also referred to the fact that the contemporaneous calculation of what needed to be paid (made by a Mr. Caelim Parkes) made no deduction in respect of tax, since Mr. Parkes was not told to make one and had not seen anything indicating that there needed to be such a deduction. He submitted that the tax advice from Price Waterhouse Coopers, which Chase received at about the date of the settlement with Sberbank, simply said that the net settlement amount would be treated as CMBI's income for tax purposes. But, he submitted, that simply did not address the point whether the payment could have been treated simply as a pass-through, so that it would have been tax free.
185. I reject Springwell's argument under this head. It was clear from Price Waterhouse's advice to Chase dated 19 February 2001 that the settlement amounts received from Sberbank would indeed be subject to a profits tax at 43%. A settlement on that basis was approved by Chase's tax department on 28 February 2001. This led to the settlement signed between CMBI and Sberbank, on a principal to principal basis. On the balance of probabilities (based on the advice of Price Waterhouse, the statement in Clifford Chance's letter dated 1 July 2004, and CMBI's tax return), I find that the tax was indeed paid by CMBI. I do not find it proved, on the balance of probabilities, that CMBI could have avoided tax under Russian law by "passing through" the liability to CMIL, given that the settlement with Sberbank was on a principal to principal basis. If that argument was to be pursued, then Springwell should have raised the point as a matter of Russian tax law. Moreover, section 2(h) of the Notes makes it quite clear that whether tax is to be paid is entirely a matter for CMSCI's discretion. Therefore, even if there might have been, technically, a means of avoiding the payment of tax, that is irrelevant in circumstances where CMSCI decided that the tax should be paid.
186. Accordingly, save to the extent conceded by Chase, Springwell's Account Claim in relation to the Sberbank Local Forwards fails. Accordingly, I will not order an account in relation to this matter.

The CMBI Forwards

187. Under this head, Springwell claims an account in respect of the amounts actually received in respect of the CMBI Forwards. Mr. Baker submitted that, despite Chase's assertion that nothing was paid under the CMBI Forwards, the reality is that there:

"… remains positive evidence suggesting that sums were paid by CMBI to CMIL for which no account had been made under the Failed Notes and that Chase is likely to have the further evidence (in particular the account statements) that would allow a final conclusion to be reached."

He further submitted that, on the evidence, certain SWIFT messages appeared to confirm that payment had indeed been made. He relied on the evidence of Mr. Parkes in this respect.

188. In response, Chase took various pleading points, including the point that:

"… it has never been an issue between the parties that the CMBI forwards did not in fact perform. This is agreed on the pleadings."

189. Reference was then made to paragraph 175 of Springwell's Reply. However, in that paragraph, all that was admitted was that none of the relevant forwards paid on maturity, so that admission does not actually address the point. Chase further submitted that even if this ever had been a legitimate issue, it was long since dead. In February 2005, Springwell asked various questions about the SWIFT messages. In a detailed Further Information Response dated March 2005, Chase explained that they were automatically generated messages from within the SWIFT system and that none of the transactions had in fact performed. There the matter lay. Springwell took no issue on the point, raised no further allegations about it and made no reference to it in any of its pleadings. Accordingly, Mr. Adrian Beltrami QC (then first junior counsel for Chase, now second leading counsel) submitted; that Chase assumed, and was entitled to assume, that the point, if there was any point, had disappeared; that it was therefore surprising that Springwell's opening statement for the trial, over two years after the point had been answered, stated that Springwell harboured a concern about it; that that was not a basis to claim an account for something which has already been explained and on which there is no pleaded issue. In any event, submitted Mr. Beltrami, the evidence was clear that the CMBI Forwards had not in fact performed and so the concern, even if there ever had been any genuine concern, had been dealt with.
190. I have carefully considered the evidence relating to this issue and, in particular, that in relation to the evidence of Mr. Parkes and the SWIFTS. Even leaving to one side the pleading points, I do not consider that the evidence justifies an order for the taking of an account under this head. The evidence, in my judgment, establishes, on the balance of probabilities, that the CMBI Forwards did not in fact perform.

Conclusion

191. Accordingly, I rule against Springwell's claim for an account in respect of the CMBI Forwards.

Section VI: The Damages Claim – Issues 59 - 61

Introduction

192. In its Damages Claim, Springwell contends that CMIL, acting on behalf of CMSCI, acted in breach of section 3(c) (or an implied term required to give meaning and effect to section 3(c) in relation to: (i) the nine CMBI Forwards (i.e. both the three CMBI risk forwards and the six non-CMBI risk forwards); and (ii) the two VTB risk forwards. In relation to the CMBI Forwards, Springwell contends that CMSCI was in breach of the duty of care which it owed to Springwell because it acted with "gross negligence" and with "willful misconduct". In relation to the VTB risk forwards, Springwell contends merely that CMSCI acted "with gross negligence". Springwell contends, in essence, that CMSCI, acting by CMIL, failed to make a proper efforts to procure performance of the forward contracts or to secure a fair settlement of the counterparty's obligations.
193. I agree with Mr. Baker that, since the relevant contractual test is "with wilful misconduct" or "with gross negligence", it is not useful or relevant to address the question (irrespective of whether it is, or is not, a separate question), whether Chase acted "in good faith". I do not do so, although it is right to record that Springwell's pleadings and submissions contained allegations of "bad faith" in this context.

The scope of Chase's duty of care, and the meaning of "gross negligence"

194. There was some debate as to what was the extent or precise nature of CMSCI's duty under section 3(c). Chase accepted that the section imposed on CMSCI/CMIL a duty of care in relation to the transactions. It was common ground that: (i) the standard of care was limited to "only to that degree of care which Chase exercises in relation to the administration of similar transactions for its own account"; and (ii) Chase would only be liable to the Holder in the event of its wilful misconduct or gross negligence. However, there was considerable argument as to precisely what those two provisions meant in context, with extensive citation of authority. There was also argument as to the scope of Chase's duty of care.
195. In my judgment, the two concepts are clearly related. As Romer J, as he then was, explained in Re City Fire Insurance Company^[27], the concept of a standard of care to act with the same degree of care as one would when administering one's own affairs is historically very well known in English law. It was, traditionally, the standard to be applied to the conduct of gratuitous agents and gratuitous bailees. It was also the standard applied to trustees and company directors as an incident of their office.
196. The reason why it was applied to these particular groups of persons was that it was a low standard of care, the corollary of which was that such persons would be liable only for "gross negligence". By and large, the common law has moved on, such that there is now a more objective standard of care in these areas of the law, but the historical position is clear. Thus, in the case of gratuitous agents, the position is summarised in the current edition of Bowstead.^[28] Under the heading "Standard of Care", the authors summarise the position as follows:

"It was formerly customary to state, and old editions of this work did state, that the duty of care owed by a gratuitous agent was one of such skill and care as persons ordinarily exercise in their own affairs. This idea, which is similar to the diligentia quam suis rebus of Roman law (where different contracts had different prescribed levels of care) was derived in English law from old cases on bailment, which suggested (in like manner) that whereas a contractual bailee was liable for negligence, a gratuitous bailee was only liable for gross negligence. But as Rolfe B remarked in 1843, gross negligence can be said to be no more than negligence with a vituperative epithet; and the determination of fixed standards for different types of care is not a technique now used by English law."

197. The same type of analysis obtained in the past in respect of company directors. In The Overend & Gurney Company v Gibb,^[29] the Lord Chancellor described the relevant question in a directors' context as follows:

"… because the question is then simply reduced to this, - whether or not the directors exceeded the powers entrusted to them, or whether if they did not so exceed their powers they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into? Was there crassa negligentia on their part which, though not charged in words, is, it is argued, shewn by the facts, so that they should be fixed with the loss of the fund intrusted to their hands for the purpose of making the acquisition of the business; was the acquiring of that subject-matter, through the medium of those funds, with the amount of knowledge which the directors had attained, an instance of crassa negligentia?"

198. In Re City Fire Insurance Co,^[30], as I have said, Romer J explicitly drew the link between the two concepts:

"In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company's business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances, and is not inconsistent with any express provisions of the articles of association. In discharging the duties of his position thus ascertained a director must, of course, act honestly; but he must also exercise some degree of both skill and diligence. To the question of what is the particular degree of skill and diligence required of him, the authorities do not, I think, give any very clear answer. It has been laid down that so long as a director acts honestly he cannot be made responsible in damages unless guilty of gross or culpable negligence in a business sense. But as pointed out by Neville J. in In re Brazilian Rubber Plantations and Estates, Ltd. (2), one cannot say whether a man has been guilty of negligence, gross or otherwise, unless one can determine what is the extent of the duty which he is alleged to have neglected. For myself, I confess to feeling some difficulty in understanding the difference between negligence and gross negligence, except in so far as the expressions are used for the purpose of drawing a distinction between the duty that is owed in one case and the duty that is owed in another. If two men owe the same duty to a third person, and neglect to perform that duty, they are both guilty of negligence, and it is not altogether easy to understand how one can be guilty of gross negligence and the other of negligence only. But if it be said that of two men one is only liable to a third person for gross negligence, and the other is liable for mere negligence, this, I think, means no more than that the duties of the two men are different. The one owes a duty to take a greater degree of care than does the other: see the observations of Willes J in Grill v General Iron Screw Collier Co. (1) If, therefore, a director is only liable for gross or culpable negligence, this means that he does not owe a duty to his company, to take all possible care. It is some degree of care less than that. The care that he is bound to take has been described by Neville J. in the case referred to above as "reasonable care" to be measured by the care an ordinary man might be expected to take in the circumstances on his own behalf. In saying this Neville J. was only following what was laid down in Overend & Gurney Co. v. Gibb (2) as being the proper test to apply, namely: "Whether or not the directors exceeded the powers entrusted to them, or whether if they did not so exceed their powers they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into?"

199. As with the case of the gratuitous agent, the law now imposes a more objective standard of care on company directors, and the concept of liability only for gross negligence has not survived. In referring in section 3(c) to an obligation upon Chase to exercise "only that degree of care which it exercises in relation to the administration of similar transactions for its own account", the Notes did not (contrary to Mr. Baker's submissions) impose a substantive duty on CMSCI to treat every Transaction in exactly the same way as it did with its own proprietary transactions, let alone to ignore the existence of the Notes. This part of section 3(c) merely defines the standard of care to be applied to Chase's conduct, which was reflective of the standard of care which was applied to these categories of persons. It is a standard of care which, in the words of Romer J (supra) is "not… to take all possible care. It is some degree of care less than that."
200. My conclusions as to the scope of CMSCI's duty of care (whether acting itself or through CMIL) may be stated as follows. In my judgment, when construed in the commercial context of the Note, CMSCI's primary obligation was simply to exercise appropriate care (i.e. subject to the limitation on the standard duty of care imposed by section 3(c) and elsewhere) to maximise recoveries under the relevant Transaction for the economic benefit of the ultimate Holder. If that was not Chase's obligation, it is difficult to identify the function to which its (admitted) duty of care attached. If, as the Note envisaged, there were situations where the Redemption Amount would not be paid on the Note Maturity Date, and positions would not be closed out on that date, but Chase would continue to retain the GKO Designated Assets and the Transactions for the ultimate economic interest of the Holder, then the administrative activity envisaged in section 3(c) in relation to Transactions can be no more than taking steps to maximise recoveries from such Transactions. Such duty did not impose any fiduciary obligations on Chase, as that would be inconsistent with the second sentence of the section. However, I reject Mr. Baker's submissions that Chase must act in relation to each Transaction in exactly the same way as it would with its own similar proprietary Transactions and must treat the transaction "as though the Note did not exist". Not only is there no basis for such an approach in section 3(c), but it is inconsistent with the commercial purpose of the Note: i.e. the pass through of risk and benefit to the Holder.
201. However, the corollary of Chase's duty to exercise appropriate care to maximise realisations from Transactions must be, in my judgment, that Chase is not free (despite the fact that it is not a fiduciary) in the administration of the Transactions, simply to disregard its primary function (to achieve economic return from Transactions for the benefit of the Holder) and to decide, for its own separate economic benefit, or that of the wider Chase group of companies, not to attempt to do so, in circumstances where a reasonable person, acting on his own account, would have done. Thus CMSCI (acting by CMIL) would not be entitled, for example, voluntarily to release CMBI from its obligations under a Designated Forward Transaction simply for the purpose of reducing CMSCI's payment obligations under the Notes, or of reducing CMBI's financial obligations and in the "wider interests" of the Chase Group.
202. Contrary to Mr. Beltrami's submissions, neither the proviso in section 3(c) as to the standard of care, nor the "non-fiduciary" provisos in the second sentence of the section entitled CMSCI/CMIL to act from the perspective of, or in the interests of CMSCI/CMIL where that perspective or interest was at odds with the underlying commercial purpose of the Note, viz. that recoveries in respect of Transactions should be maximised. In my judgment, the fact that CMSCI/CMBI were not to be treated as fiduciaries (section 3(c), second sentence) did not mean that they could act in such a way as, for example, deliberately to deprive a Transaction of value, because in their own wider, Chase group interests it might suit them not to enforce a particular transaction against CMBI. To permit that to occur would effectively undermine any duty of care on CMSCI's behalf and be contrary to the purpose of the Note.
203. I further agree with Mr. Baker that if, as happened here, CMSCI did not exercise either the section 4(a) or the section 4(b) option, to pay out, or deliver on the Note Maturity Date, the various assets there described, by way of substitute performance, but rather, pursuant to section 4(d) and/or 5(c), decided to delay performance and, effectively, retain the GKO Assets and the benefit of the Transactions until such time as value would be achieved from them, then, subject to the restrictions on the duty imposed by section 3(c), CMSCI had a duty of care to attempt to maximise the recoveries from the Transactions in the economic interest of the ultimate Holder, here Springwell. Thus, if and insofar as Chase contended that any obligation concerning the Transactions automatically fell away because the GKOs did not pay on the Note Maturity Date, that contention was wrong.
204. Like Romer J in Re City Fire Insurance (supra), I have some difficulty in defining precisely what is meant by "gross negligence", once the duty of care has been articulated by reference to the lesser standard of care that the obligor exercises in relation to his own affairs. It could be said that, by definition, necessarily, any breach of that lower level of duty of care involved "gross negligence". Mr. Beltrami, however, submitted that there was, in the contractual context of the Notes, a meaningful difference between "negligence" and "gross negligence", even in a situation where Chase was in breach of the lower level duty of care. He relied upon certain obiter remarks in the judgment of Mance J (as he then was) in the Hellespont Arden^[31] to support the approach that in the contractual context of section 3(c) "gross negligence" must mean something more than a "mere" beach of Chase's lower level duty of care and must involve "serious" negligence on Chase's part. Mr. Baker, on the other hand, submitted that these remarks were inconsistent with the older authorities and that Mance J's comments breach Lord Goddard CJ's injunction not to import the law of manslaughter into the realms of common law negligence liabilities: see Pentecost v London District Auditor^[32]. Mr. Baker submitted that the older authorities were not cited to Mance J, and his remarks should not be followed.
205. I have to confess to finding this debate a somewhat sterile and semantic one. As Mr. Beltrami submitted, ultimately a liability for "gross negligence" is just the other side of the coin to "what is the duty owed". Experience would suggest that the term "gross negligence" derives from United States commercial contracts, rather than English ones. I propose to proceed by: (i) identifying factually what Chase is alleged to have done or failed to have done; (ii) deciding whether that was in breach of its lower level duty of care; and (iii) deciding whether such breach amounts to "serious" negligence. Whether questions (ii) and (iii) are in fact the same question may well not matter.

Wilful Misconduct

206. It was common ground that "wilful misconduct" involved a knowingly wrongful action or failure to act, or acting (or failing to act) "with reckless carelessness, not caring what the results of [the] carelessness may be"; see per Lord Alverstoke CJ in Forder v Great Western Railway^[33].

The CMBI Forwards

(i) The Damages Claim in relation to the non-CMBI risk forwards

207. In relation to these six S-Account forwards, which were hedged by CMBI with local bank NDFs (two each with Sberbank, Inkombank and Imperial Bank), Springwell's damages claim was, in my judgment, hopeless. There was no complaint against Chase in relation to its conduct in trying to enforce the Local Forwards. Thus it was not suggested that Chase could, or should, have obtained any more money that it in fact did from any of Sberbank, Inkombank or Imperial Bank^[34].
208. Under the express terms of section 3(a)(v) of the Notes, it was provided:

"CMBI's performance under the Designated Forward Transactions shall be conditional upon performance of the Russian Bank Counterparty under its formal contracts with CMBI."

209. The non-CMBI risk forwards were always sold as such. Thus, for example, JA would tell AP that he had a GKO-Linked Note with a Sberbank hedge, or an Imperial hedge or an Inkom hedge, as the case might be. These were in contrast to, and had a higher return than, Notes with only a CMBI risk forward. Likewise, the terms and conditions sheet would confirm the local bank risk. Thus, in relation to one of the Notes with Inkombank risk, by way of example, the terms and conditions sheet described the transaction in its heading as "CMBI S-Account with Inkom Bank Forward Risk", and went on to provide that:

"100% of CMBI's obligations under the International Forward Contract shall be hedged by CMBI entering into a forward foreign exchange contract… with Inkom Bank…CMBI's performance under the International Forward Contract shall pass through the default risk of the Russian Bank Counterparty under the Local Forward Contract".

The Risk Disclosure statements, attached to terms and conditions sheets, also recorded as a key risk to the investor "default risk of the Russian Bank Counterparty as counterparty to CMBI on the Local Forward Contract."

210. What was therefore important on these non-CMBI risk Notes was that, albeit that there were two forwards within the structure (i.e. the S-Account forward and the NDF with a local Russian bank), the customer was not obtaining the benefit of two independent forward contracts. The forwards were inter-dependent, not independent, and the customer was taking on the risk of the local NDF counterparty. Accordingly, for each of the non-CMBI risk Notes, as between CMSCI and the Holder of the Note, the CMIL/CMBI S-Account hedge had no independent economic value. It was itself purely a pass-through transaction, performance of which was entirely dependent upon performance of the NDF.
211. Mr. Baker sought to argue that, unless the actual S-Account forward between CMIL and CMBI expressly provided that CMBI's performance thereunder was conditional upon the performance of a local forward, it was irrelevant that the Note purported to excuse CMBI's performance in the event of non-performance of the local contract. I reject this argument. The terms of the Note make absolutely clear that the only economic interest which the Holder has was referable to the local forward performance. Whether or note, as a matter of contract between CMIL and CMBI, the S-Account forward was conditional upon the performance of the Local Bank Forward is irrelevant. The Holder had no entitlement to require independent performance of the S-Account forward and no economic interest in such independent performance. Thus, whether or not the S-Account forward was in fact dependent on the performance of the Local Forward is not a question that it is relevant to decide. Mr. Baker also took a pleading point in relation to this issue, which was not sustainable.
212. Given that there was no allegation that Chase should have recovered more on the NDFs (i.e. Local Forwards), Springwell's Damages Claim in relation to the non-CMBI risk forwards must, in my judgment, inevitably fail. That claim is focused purely on the performance or non-performance of the S-Account forward. The S-Account forward was of no independent economic value to Springwell in relation to the non-CMBI risk forwards.

(ii) The Damages Claim in relation to the CMBI risk forwards^[35]

213. The facts relating to the Damages Claim in respect of the CMBI risk forwards are complex, as are the allegations made by Springwell as to the conduct of Chase (i.e. CMSCI/CMIL) in relation thereto. The evidence was rehearsed, respectively, in Chapter 4 of Chase's closing submissions and, together with Springwell's arguments, in paragraphs 1285-1307 and 1310-1315 of Springwell's closing submissions. Although the underlying facts were not substantially in dispute, what the evidence actually demonstrated, in particular as to Chase's motives, was in contention.

Springwell's arguments

214. Numerous complaints were made by Springwell in relation to the CMBI risk forwards^[36]. The critical operative complaints which Springwell argued comprised wilful misconduct and/or gross negligence can be summarised as follows:

i) CMSCI (by CMIL) failed to identify CMBI as a solvent, "out of the money" counterparty to the CMBI risk forwards, to be dealt with as such at arm's length, and therefore failed to achieve a negotiated settlement with CMBI on such forwards which would have produced value for Springwell as Holder.

ii) In particular, during the Moratorium, when it was uncertain what the status and enforceability of the S-Account forwards would be after the Moratorium ended, CMSCI (by CMIL) should have conducted negotiations with CMBI to obtain value from the CMBI Forwards leveraged on the uncertainty as to what would occur post-Moratorium.

iii) Far from conducting any sort of negotiation with CMBI, to achieve value from the CMBI Forwards, CMIL, on 24 November 1998, sent CMBI a force majeure notice, pursuant to section 22 of the CMIL/CMBI Master Agreement dated 7 April 1997 (which governed their relationship with regard to these forwards). This notice referred to the Moratorium and to the subsequent Post-Moratorium S-Account Amendments and declared that these events constituted a force majeure event under section 22.1.2 of the Master Agreement, delaying performance of CMIL's obligations under the forwards entered into under the Master Agreement. CMIL indicated that it would notify CMBI if the force majeure event came to an end or if any further action of the Russian government affected CMIL's ability to perform the forwards.

Clause 22.1 of the CMIL/CMBI Master Agreement^[37] referred to the prevention or delay of performance, by reason of, inter alia:

"circumstances affecting the Trading System and its Bond Market Servicing Organisations, the Central Bank or the New York, London or Moscow currency markets generally (including without limitation the failure of the issuer of Bonds to redeem such Bonds on the due date for redemption)".

Pursuant to clause 22.2, if the affected party was excused performance of any obligation under clause 22.1 for a continuous period of 15 business days, then either party might elect to terminate the Agreement and all Transactions directly affected by the force majeure event.

Springwell contended that CMIL's decision to declare force majeure gave CMBI:

"the opportunity to cancel the [CMBI] forwards at no cost; although they were transactions on which CMBI was out of the money to the tune of $49 million.^[38]

Springwell contended that this was an extraordinary thing to do as being directly contrary to CMSCI/CMIL's and Springwell's interests as regards the CMBI forwards. It was further contended that this decision to "align CMIL with CMBI" was deliberate and aimed at ensuring that devaluation losses resulting from the Russian government's default measures should be borne by Chase customers outside the Chase group of companies, and not by CMBI. This force majeure notice, it was contended, subsequently enabled CMBI to terminate the CMBI Forwards on the basis of the force majeure declaration.

iv) Fourth, Springwell contended that CMSCI (by CMIL) was grossly negligent in failing to place its own rouble funds into the S-Account during the course of the Moratorium in order that it might, if the Moratorium was not renewed, and, instead, the Russian authorities then placed restrictions on the S-Account preventing the conversion of roubles in the spot market and their deposit into S-Accounts, be able nevertheless to seek performance of the forwards.

Thus, Springwell contended that the

"focus of any proper effort to secure value from the [CMBI] forwards should have been in ensuring that, notwithstanding the GKO default:

(a) there were sufficient roubles in CMIL's S-Account at CMBI for performance of each [CMBI] forward at maturity;

(b) those roubles were tendered to CMBI as soon as the Moratorium expired (for [CMBI] forwards with maturity dates during the Moratorium) or at maturity (for the rest)."

v) Springwell contended that, on the evidence, CMIL had sufficient S-Account roubles to meet its obligations under the CMBI Forwards.

vi) Alternatively, if CMIL did not have sufficient S-Account roubles to tender to CMBI against the CMBI Forwards, then it should, during the Moratorium, have acquired roubles, since an S-Account could be funded with roubles purchased spot with foreign currency at all times until 12 November 1998.

vii) In the further alternative, Springwell contended that Chase should have invited Springwell to fund the S-Account by the spot purchase of roubles so that CMIL would complete on the CMBI Forwards. It was Springwell's case that SP, if he had been given that option, would have given serious consideration to the possibility of purchasing roubles to fund CMIL's S-Account.

Chase's arguments

215. Chase's arguments were that on a proper analysis of the facts there was no wilful default or gross negligence on Chase's part.

Analysis

216. As set out above, I have concluded that there was, in the circumstances, and on the construction of the Note, an obligation imposed on CMSCI (acting by CMIL or directly) to take appropriate care to maximise recoveries from the Transactions. The question, in essence, is whether Chase's conduct during the relevant period showed that Chase wilfully disregarded that obligation or, with the appropriate degree of negligence, failed to discharge it. If CMSCI (acting by CMIL), in the wider financial interests of the Chase Group, had brought about a situation where CMBI was improperly released from its obligations to CMIL in circumstances where the enforcement, or threatened enforcement by CMIL of those obligations would have produced positive recoveries which could have flowed back through to Springwell (as the entity with the ultimate economic interest in the Notes), that would indeed have been a breach of its obligations under section 3(c), for which Chase would have been liable if the "wilful misconduct" or "gross negligence" criteria were satisfied. With that starting point, I state my conclusions in relation to the arguments raised.

Chase's conduct during the Moratorium

217. My first conclusion is that there can be no criticism of Chase's conduct during the Moratorium. During that time Chase was entitled to take the view that nothing could at that stage be practicably done and that it was necessary to await the expiry of the Moratorium. This was because: (i) during the Moratorium the forwards could not be performed; and (ii) there was great uncertainty as to what would follow the Moratorium.
218. I agree with Mr. Beltrami that such a view was reasonable. Having heard the Chase witnesses, I accept the evidential position as set out in the following extracts from Chapter 4, paragraphs 179–184 and 188 of Chase's closing submissions.

"179. In the wake of the Russian default, the fate of the outstanding forward currency contracts was a significant issue for Chase, other non-resident investors and the Russian banking system as a whole.

180. The total long (purchase) US dollar forward positions of non-resident banks and their Russian bank subsidiaries was several billion US dollars (exceeding $5 billion, although precise figures were difficult to ascertain). These positions were matched by short (sale) US dollar forward positions of local Russian entities. These forwards included cross-border forwards (S Account deliverable forwards, and some cross-border NDFs), as well as local futures and local forwards, including NDFs.

181. Chase had very substantial long US dollar forward positions, totalling in excess of $650 million, more than half of which represented proprietary positions ….

182. The Russian default and the imposition of the Moratorium had generated a number of complex questions relating to the forwards. Three questions in particular arose.

(1) First, what was to happen in respect of those forwards whose completion date fell during the Moratorium? A forward contract is, of necessity, a time-critical transaction. Its economic benefit and risk is measured by the state of the market on the date of maturity. If the transaction does not complete on maturity, then the moment has passed. The question arises whether the transaction can be resurrected at a later date and, if so, on what terms.

(2) Second, what would be the attitude and ability of Russian banks to perform on outstanding forwards, whenever they matured. The impact of the Russian default was catastrophic in the Russian banking market, and many banks were forced into insolvency. A fast declining rouble meant that the Russian banking sector was hugely exposed on forwards.

(3) Third, what attitude would the Russian government take to the forwards. This was wholly unclear. As indicated above, the first GKO exchange offer did not deal with the issue of the forwards. That there was a serious problem was self-evident. But it was not possible to predict whether and if so how that problem would be resolved. It was not known, for example, whether the Moratorium would simply be extended, whether the forwards would be wrapped up in a renegotiated exchange offer, whether some other means would be taken to ease the pressure on the banking sector, or whether this would all be left for bilateral negotiations between commercial parties.

183 The consequence of the Moratorium was that the performance of all S Account deliverable forwards was suspended until 14 November 1998. There was no equivalent suspension of the performance of local NDFs between Russian banks, but it quickly became apparent that most Russian banks were unable or unwilling to perform on any forwards, given the sharp devaluation of the rouble against the US dollar, and also the terms of CBR Directive No. 380-U.

184 In the aftermath of the Russian default, there was utter confusion and uncertainty as to what was to become of the forwards market. The default on GKOs (in which many Russian banks had invested), the general stresses in the economy and the collapse in the value of the rouble placed immense pressure on the banking system and on these forward transactions in particular. It was apparent at an early stage that something would need to be done to solve the problem upon the expiry of the Moratorium, but there was no clarity as to what could be achieved.

…

188. During the course of the Moratorium, particularly with the continued uncertainty as to the format of the eventual restructuring proposals which were still under negotiation, the future of the Moratorium and of the forwards themselves was unclear. From Chase's perspective, it was impossible to take any final view as to the parties' respective rights and obligations, at least until after the uncertainty created by the Moratorium had been resolved. As JB said: 'my recollection is that during the moratorium period we don't know what was going to happen and everyone was just sort of waiting until after the moratorium period was up to have better – more clarity.' He himself did not formally take a decision to that effect, and it appears likely that there was no formal decision as such. The view within the Bank was that, given the uncertainties at the time, nothing could realistically be done until after the period of the Moratorium had expired and the Russian authorities had indicated what they proposed to do next."

The allegation that Chase should have set up separate CMIL and CMBI negotiating teams

219. In the event, shortly before the expiry of the Moratorium, the Russian authorities instituted the changes to the S-Account regime which I have already described above^[39]. The effect of those changes was to make it, in practical terms, almost impossible to perform S-Account deliverable forwards. This was because the forwards required actual delivery by the foreign investor (e.g. CMIL) of roubles into the S-Account, in return for the payment by the Russian bank (e.g. CMBI) of dollars. There were no roubles available to S-Account holders from GKO or OFZ maturities (as these had defaulted), and the Post-Moratorium S-Account Amendments prevented foreign investors from placing other roubles in their S-Accounts by selling dollars and buying in cheap roubles^[40].
220. Subject to Mr. Baker's funding arguments (which I deal with below) the reality of CMIL's position, therefore, post-Moratorium, was that it simply was not in a position to deliver roubles so as to obtain the benefit of its forwards with CMBI. That remained the position thereafter. Indeed, on 23 March 1999, new S-Account regulations were issued by the CBR (Directive 523-U) which continued the regime imposed by the post-Moratorium S-Account amendments. By letter of the same date, CMBI sent a notice to CMIL terminating the CMBI Forwards.
221. Against that background, I reject Springwell's argument that CMSCI/CMIL was acting with wilful misconduct or was grossly negligent in failing to institute separate negotiating teams with CMSCI/CMIL on the one hand and CMBI on the other. It was clear from the evidence that, in December 1998, Chase (the group entity) established a working committee (which was UK-based) and a Senior Steering Committee (which was US-based) to deal with the Russian situation. I heard evidence from various members of these committees. The committees straddled the various business units within Chase, and appointed William Lawes ("WL"), the Chief Credit Officer for Europe, Middle East and Africa, as its chairman. These committees were clearly addressing the problems caused by the Russian default from a global Chase perspective. However, this necessarily included the consideration of the position of Chase clients. Although I find that, in certain respects, the evidence showed that certain members of the committees did not necessary appreciate the niceties of the separate obligations owed by CMSCI/CMIL to Holders of GKO Notes to maximise recoveries, and were keen, in the interests of the Chase Group, commercially to align CMSCI/CMIL with CMBI, I conclude that, contrary to Mr. Baker's submissions, Springwell did not establish that CMSCI/CMIL had acted in breach of CMSCI's duty of care, with wilful misconduct or with gross negligence, either in failing to conduct arms' length negotiations with CMBI or in the manner in which the CMBI Forwards were dealt with. Nor was there any evidence to support Springwell's contention that CMSCI/CMIL knew that it was in breach of its obligations under the Notes. In this context, I have revisited the evidence given by the Chase witnesses in this respect (in particular that of DP, WL, JA and A J Heath ("AJH") to support my conclusion. The fact was that, as Clause 3(c) provided, Chase had no fiduciary duty to Springwell. Its obligation was to use appropriate care in the maximisation of recoveries under the Transactions.
222. The reality, as Mr. Beltrami submitted, was that, in circumstances where CMIL could not perform its obligations under the CMBI Forwards to deliver roubles into the S-Account, there was very little that could have formed the subject of any negotiation. In fact, the outcome of Chase's approach was that it made two offers to Holders to buy back the Notes. Based on the strict legal position under the Notes, there was no obligation to make any offer, because the forwards could not be performed. Nevertheless, and for reasons of customer relations, the two offers were made, at prices which, I find as a fact, Chase genuinely believed were favourable to clients. The evidence showed that these two offers replicated, in economic terms, and were seen by Chase as replicating, the negotiated settlements which had been achieved with some of the Russian banks. Given the remote possibility that any sum could have been extracted through negotiation with CMBI (had so-called "separate" negotiating teams been set up), the sum offered was in fact better than the result which theoretically could have been achieved by the former route.
223. Finally, Springwell also sought to suggest that the two Chase offers, in January and June 1999, "confirmed CMIL's breach". However, this argument was based, first, on Springwell's erroneous contention that CMSCI had an obligation to treat the CMBI Forwards as if they were held for CMIL's own account and disregard the Holder's interest. There was nothing wrong or sinister in Chase proposing to make a payment to a Holder, whether or not it reflected an actual recovery on a forward. It was entirely consistent with the spirit of section 3(c) and the obligation to maximise recoveries. Second, Mr. Baker submitted that the offered value reflected a calculation by CMIL that the CMBI risk forwards indeed had positive settlement value, notwithstanding whatever arguments that CMBI might raise if the matter were being negotiated on an arm's length basis. However, the evidence showed that the offers were made for relationship reasons rather than as a reflection of any particular value in the forwards but, even if that were not so, it is difficult to see how this was a point in Springwell's favour.
224. Moreover, it is difficult to see what loss was caused by any breach on CMSCI's part, even if it had acted in breach. Had Chase taken the step of setting up independent negotiating teams on behalf of CMIL and CMBI, the negotiation would have been a short one. The circumstances surrounding any such negotiation were that the forwards could not in fact be performed; that everyone knew that the forwards could not be performed; and that all the other Russian banks proceeded on the basis that the forwards could not be performed. Unlike those other banks, CMBI had no relationship or other reason to curry favour with CMIL. Thus, in reality there was little prospect that CMBI would have agreed to pay any sum at all to CMIL in settlement of unperformable forwards.

The allegation that CMSCI/CMIL acted with "wilful misconduct" or with gross negligence in declaring force majeure

225. Springwell's case on this issue, which I have already summarised, was set out in paragraphs 1300 – 1305 of its written closing submissions. The evidence as to why CMIL (as opposed to CMBI) had served a force majeure notice on 24 November 1998, or who had actually taken the decision to do so, was not clear. WL was not himself directly involved in the initial force majeure letter. That was, as he said, "a legal-department driven exercise."
226. AJH, the Assistant General Counsel of the Bank with responsibility for managing Chase's Russian legal affairs, gave evidence that the notice was sent because the forwards were deliverable forwards subject to the Moratorium and the Post-Moratorium S-Account Amendments. As he noted in his email dated 2 December 1998, no decision had at that stage been taken whether, because of the force majeure circumstances, the forwards should be terminated. Thus the force majeure notice did not, of itself, cancel the CMBI Forwards. Indeed, CMIL itself never did terminate the forwards; that was effected by CMBI.
227. Springwell sought to make much of the fact that the force majeure notice was sent by CMIL to CMBI, rather than by CMBI to CMIL, in circumstances in which the forward contracts were potentially advantageous to CMIL and disadvantageous to CMBI: some Chase witnesses agreed with this; others did not. For example, JB considered that it would have been more logical for the notice to be sent by CMBI, but he was clear that there was in fact a force majeure event. AJH, on the other hand, was in no doubt that it was indeed appropriate for CMIL to have served the force majeure notice: he rejected Springwell's characterisation of the outstanding forwards as being "in the money" so far as CMIL was concerned, because CMIL could not perform and could not oblige CMBI to perform, and consequently concepts such "in the money" and "out of the money" were meaningless. He took the view that, following the imposition of the Post-Moratorium S-Account Amendments, CMIL was unable to perform its leg of the forward contracts, it was therefore contractually correct for CMIL to serve the force majeure notice; absent such a notice, CMIL would itself have been in default of its obligations under the forward contracts. As he said:

"Had CMIL not given a notice of force majeure it would have been in default… by having failed to perform, then how could it expect performance in return?"^[41]

In other words, his view was that the service of the notice by CMIL was in fact a means to preserve its position, when it would otherwise be in default.

228. In his written reply submissions, Mr. Baker criticised AJH's approach and contended that there was no contemporaneous evidence to support AJH's after-the-event rationalisation. But whether or not such was Chase's actual thought process at the time does not appear to me to matter much. The fact is that it was CMBI (which did not have any obligation to Springwell under the Note) who sent the actual notice of termination to CMIL. There is no doubt that, as Mr. Beltrami accepted, the decision in principle to send the notice of termination was, in practical terms, a collective decision taken by Chase through the working committee, albeit that the letter was actually sent by CMBI.
229. In any event, in my judgment, neither the initial declaration of force majeure, nor the subsequent termination notice was evidence of a breach of duty on the part of CMSCI/CMIL, or of wilful misconduct or gross negligence. That such a course was taken was not, in the circumstances, surprising. In my judgment, there was indeed a force majeure event, within the meaning of paragraph 22.1 of the CMIL/CMBI Master Agreement. Upon the failure of the Russian authorities to redeem the GKOs and upon the implementation of first the Moratorium and then the Post-Moratorium S-Account Amendments, these being circumstances which affected MICEX, the CBR and the Moscow currency markets generally, CMIL was prevented or delayed from performing its obligations under the forwards (and, these being deliverable contracts, CMBI was equally prevented or delayed from performing its own obligations for the same reasons).
230. Likewise, the reality was that the S-Account forwards could not in fact be performed. Thus, even if, as Mr. Baker submitted, there was no force majeure event, Chase was, in my view, reasonably entitled to take the view that there was. In such circumstances, it was not unreasonable for CMIL to serve a force majeure notice.
231. Absent such a notice, CMIL was in breach of contract. The purpose and effect of the notice was to excuse such breach, for the continuation of the force majeure event. Even if CMIL had not done so, CMBI could have issued a force majeure notice of its own. Alternatively, it could have sought immediate discharge of the CMBI Forwards for non-performance, since they were governed by English law.
232. Once it was confirmed in March 1999 that the Post-Moratorium S-Account Amendments were to continue, I accept that it was entirely reasonable and contractually appropriate for CMBI to have sent the notice of termination. Forwards are time-critical contracts. It was wholly commercially appropriate for CMBI to choose to close off these contracts which could not be performed.
233. In this context, it perhaps is appropriate to rehearse in some detail the evidence relating to the decision to serve notice terminating the CMBI Forwards, since Mr. Baker suggested that it showed clear evidence of impropriety on Chase's part, and thus supported Springwell's allegations of wilful misconduct. In the light of the new regulations, and the continuation of the regime imposed by the Post-Moratorium S-Account Amendments, the decision to terminate the CMBI Forwards was taken by senior management within Chase following consultations with WL and others. As AJH explained, the proposed, and subsequent actual amendments, constituted the expected major revision of the S-Account rules, and so it seemed unlikely that Directive No. 407-U would be repealed in the near future.
234. The background to the decision was summarised in an email sent by WL to the senior committee on 29 March 1999:

"In summary:

a. In November 1998 CMBI [sic] gave notice of a Force Majeure event under this agreement and reserved its rights to terminate forthwith on the basis that the directive 407U then issued prohibited CMBI as a Russian bank from performing foreign exchange transactions to buy foreign currency from non residents such as CMIL for roubles which could then be credited to the "S" accounts (in order to perform the CMBI forward).

b. On this basis our case for legal inability of CMBI [sic] to honour the foreign exchange contract within the GKO note sold to PBI clients is founded.

c. We now have knowledge that the new rules to be issued by the Russian Central Bank (we have seen the draft) WILL NOT rescind this prohibition. Thus CMBI [sic] still may not fund roubles into the "S" account in order to perform FX transactions under the note.

d. Thus after delaying the actual termination of the CMBI/CMIL dealer agreement we believe that, as sufficient time [h]as passed and that the prohibition is being reconfirmed, this dealer agreement should now be terminated.

e. We have taken this decision after consultation within the Working Committee including Legal and Special Loans group input, after which I discussed the situation and proposed action with David Pflug before going ahead.

This memo is therefore to keep the Senior Committee informed of this action."

235. WL's evidence was that he could not recall the issue of whether or not to terminate the forward contracts being a focus for either the Senior or the Working committee, and this was borne out by the fact that it was not a subject referred to in any of the minutes of any meetings or emails (other than that of 29 March 1999). This email, as he confirmed, set out, for the record, the reasons why Chase decided to terminate the forwards, in particular the fact that the situation in Russia was not going to change. I accept Mr. Beltrami's submission that, far from being evidence of bad faith, the termination notice was simply a reflection of the reality of the situation in Russia.
236. WL stated in his oral evidence that the email was written as confirmation of the decision which had been taken, and that the decision "would have been driven by the very strong advice of the legal department". He said, however, it was not the legal department which made decisions, and the ultimate decision to terminate was taken by the business side.
237. WL was very clear in his evidence, and I accept, that he did not understand that the decision to terminate the forwards would have potential legal ramifications vis-à-vis Chase's clients. That is because, and as is fully borne out by the documents, the process of negotiation with the clients continued. After the initial offer to Holders was made in January 1999, it was decided by the senior committee on 5 March 1999 that Chase would make a revised offer with a view to settling with the Holders. It was no part of Chase's consideration, and certainly no part of WL's consideration, that the termination letter should interfere with that process, and a revised set of offers were in fact sent out in June 1999. Indeed, as Mr. Beltrami submitted, the very fact (although Springwell also made complaint about this) that Chase did not inform Springwell about the termination of the forwards, demonstrated that it was not intended to be an aggressive step, nor even a significant step, as regards Chase's relationship with its clients. Although WL was rigorously tested in cross-examination on this evidence, he was a manifestly honest witness whose evidence I accept.
238. Although the email dated 29 March 1999 wrongly recorded that the original force majeure notice had been sent by CMBI rather than by CMIL, and seemed to confuse CMBI with CMIL, that was clearly a mistake. In cross-examination, Mr. Baker suggested to AJH that this in some way reflected a deliberate decision on the part of Chase to conceal the fact that it had been CMIL which had issued the force majeure notice. I reject that allegation. I accept AJH's evidence that there was no such decision and no such concealment, and that this was a simple mistake.
239. Accordingly, I conclude that the evidence relating to the force majeure notice does not demonstrate breach of duty, wilful misconduct or gross negligence on the part of CMSCI/CMIL.
240. Nor has CMSCI/CMIL's conduct in relation to the force majeure notice caused Springwell any loss in any event. It would not have made any difference had CMSCI/CMIL acted differently. The initial declaration of force majeure merely excused performance of an unperformable obligation and the termination notice closed off that unperformable obligation. Moreover, it is plain that, whatever Chase decided on a collective basis, CMBI could itself independently have declared force majeure, terminated the contracts for force majeure or simply obtained a discharge for non-performance. Thus, nothing CMSCI/CMIL did or did not do in respect of force majeure operated so as to prejudice Springwell in any way or to cause it any loss.

The allegation that Chase was guilty of wilful misconduct or gross negligence in failing to place roubles in the S-Account

241. Springwell's allegation is that CMIL was grossly negligent in failing to place its own rouble funds into the S-Account during the course of the Moratorium, in order that it might, if the Moratorium was not renewed and if, instead, the Russian authorities then placed restrictions on the S-Accounts preventing the conversion of roubles in the spot market for depositing into S-Accounts, be able nevertheless to seek performance of the forwards.
242. I reject Springwell's argument under this head, for the following reasons:

i) CMSCI/CMIL had no obligation under the Notes to place its own funds at risk in order to seek to ensure that a Transaction was performed. Its duty to take appropriate care to maximise realisations would not have included such an obligation in the absence of an express term to that effect.

ii) None of the extensive evidence on this topic suggested that anyone in the market adopted such a course, or that it would have been feasible or practicable in the circumstances, given the restrictions on funding S-Accounts. Certainly such a step was not a logical or obvious one, as Mr. Baker suggested.

iii) Even if roubles had been placed in the S-Account, it is very doubtful whether, for various reasons, that would have achieved performance in respect of time-critical forwards.

243. I also reject the argument that Chase should have suggested to Springwell that it should use its own monies to buy roubles to fund the S-Accounts. There was no obligation upon CMSCI to do so, and, in any event, there was no evidence that Springwell had available funds to do so.
244. Various other detailed arguments were presented under this head, with which it is not necessary for me to deal.

(iii) The Damages Claim in relation to the two VTB forwards

245. The claim in relation to the VTB forwards is a similar one, save that it is put on the basis of gross negligence. The only basis for the claim is that Chase ought to have placed roubles in the S-Account with VTB. Springwell alleges that it is "inexcusable" that it did not do so. All of the same funding arguments deployed in relation to the CMBI Forwards were deployed by Mr. Baker in relation to the VTB forwards.
246. In the case of VTB, the further point arises as to whether, had CMIL funded its S-Account during the Moratorium, this would have made any difference to the ultimate settlement figure. The opinion of AJH, who was directly involved in the negotiations, which I accept, was that it would not.
247. For reasons similar to those set out above, I reject this claim also.

Conclusion in relation to the Damages Claim

248. Accordingly, in relation to Issues 59 – 61, I conclude as follows:

"59. What was CMSCI's obligation, under the Failed Notes, in dealing with the Chase and VTB Forwards?"

Answer: as described above, to use appropriate care in the maximisation of recoveries under the transactions.

"60. Did CMSCI (acting by CMIL) act:

in bad faith or with wilful misconduct or with gross negligence in failing to procure performance or a fair settlement of the Chase Forwards, and/or

with gross negligence in failing to procure performance or a fair settlement of the VTB Forwards?"

Answer: No.

"61. If so:

What (if any) net value should have been realised from the Chase Forwards?

How much more value (if any) should have been realised from the VTB Forwards?

What (if any) sum should be awarded in damages?"

Answer: the issues do not arise.

Section VII: The Custody Fees Claim – Issues 47 - 50

Introduction

249. Under this head, Springwell claims from Chase the full amount of $ 445,472.13, which was charged by Chase by way of custody fees and debited from Springwell's account in the period from 15 March 2000 until the quarter ending 31 March 2001, purportedly pursuant to the provisions of clause 13(a) of the Nominee Agreement dated 15 January 1999, between Springwell and Chase Nominees. Clause 13(a) provides as follows:

"The Owner covenants:

(a) to pay the Nominees fees in accordance with the Nominee's scale of charges in force from time to time."

250. This provision was in virtually identical terms to Clause 13 of a previous Nominee Agreement dated 14 June 1994, between Springwell and Chase Nominees, which had been concluded at the time that the custodial service was transferred to Jersey. That earlier agreement had been signed by SP on behalf of Springwell. However, Chase did not charge custody fees to Springwell during the period during which Springwell's portfolio was actively traded. The view within Chase was that it was being adequately compensated by the substantial revenue on the portfolio so that it was not necessary to charge a custody fee as well.
251. It is Springwell's case that SP objected to this clause shortly after the draft of the Nominee Agreement was sent to him on 10 November 1998, during the course of the negotiation of the Term Loan Agreement and that he made a point of securing FS's confirmation that no custody fees would be charged, and that he relied on that confirmation.
252. In his witness statement SP said as follows:

"[Mr. Sheehan] told me that he … knew that no such fee had been charged to Springwell before. However, he asked me to leave [the clause] in saying it was a standard clause and that it would not in any event be relied upon. ... I clearly remember that [Mr. Sheehan] said that fees would not be charged to Springwell. He was very clear about this. I believed him and I did not insist that the clause be deleted"

Springwell submits that FS had actual or ostensible authority to warrant on behalf of the Private Bank (i.e. CMB) that Springwell would not be charged custody fees. On that basis, Springwell contends that the fees later charged are sums which CMB was not entitled to deduct, or, alternatively, is estopped from asserting that it was entitled to deduct from Springwell's Account; alternatively, it claims that CMB is in breach of contract in levying them. Springwell relies, in effect, on a contractual agreement collateral to the Nominee Agreement.

253. Chase's case is as follows:

i) The claim to an estoppel was legally unsupportable. Clause 13 of the Nominee Agreement conferred on Chase an express contractual right to charge fees (including custody fees) in accordance with Chase's scale of charges in force from time to time. There was no claim for rectification of the Nominee Agreement, and therefore the starting point is that, in charging custody fees, Chase was exercising an express contractual right. The most that an estoppel could achieve for Springwell was to preclude Chase from exercising its contractual right to charge fees save on reasonable notice (the High Trees principle). However, Chase gave ample notice of its intention to charge custody fees. Accordingly, Chase submits, the estoppel goes nowhere.

ii) Chase submitted further that, on the evidence, it is apparent that Springwell would have entered into the Term Loan Agreement in any event, whether or not FS made the alleged representation. This was a critical period for Springwell, and the Term Loam represented its only commercial option. SP himself accepted that the term was not a "dealbreaker." The possibility of future custody fees, which had not been imposed in the past and which would always have been a tiny fraction of the value of Springwell's portfolio (0.1% or 0.2%), would not have been a serious concern to SP and did not influence Springwell's decision to enter into the Term Loan Agreement. Furthermore, if Springwell had not entered into the Term Loan Agreement, its positions would have been closed out and it would have ended up worse off by a considerable margin. There was therefore, in any event, no detrimental reliance and there is no factual foundation for the alleged estoppel.

iii) The claim was dependent upon the establishment of a binding contractual agreement, collateral to the Nominee Agreement, that custody fees would not in fact be charged by Chase at any stage in the future notwithstanding the express term in Nominee Agreement. In a commercial context where parties with legal advisers have reduced their contract in a formal written agreement, the court will always be slow to find that the written agreement does not represent the actual agreement of the parties on the matters which it addresses. This was necessary both to promote commercial certainty, and to prevent parties from achieving what is effectively rectification without proving a continuing common intention to the high standard which the law demands.

Analysis of the Evidence

254. The principal dispute is whether SP and FS had the conversation that SP recalls. I find that such a conversation did take place. My reasons are as follows:

i) It was evident from both his written and oral evidence that SP had a firm, clear recollection of the episode. Chase did not suggest that SP had invented that recollection. Rather, it is submitted that the evidence given orally did not amount to any assurance having been given by FS. In my view, SP's written and oral evidence did support such an assurance. There is no reason why SP's honest recollection should be at fault; none was suggested to him in cross-examination. It is likely to be accurate: the point was one of some importance to him when he saw the custody fees clause in the draft Nominee Agreement; he adequately explained why the custody fees clause did not become a subject of the detailed drafting exchanges.

ii) SP was taxed at some length in cross-examination with his failure to mention FS's assurance sooner than he did in the context of Chase's much later attempt to move Springwell's Accounts out of Jersey to Geneva. However, the fact is Springwell did raise the point in a fax dated 28 March 2000 from JBAX to KW at CMB. Moreover, there is nothing in the timing point in any event: when, long after November 1998, the Geneva move was mooted, the facts were that: (a) Springwell had never been, and was not being, charged any fee out of Jersey; and (b) any custody service out of Geneva would have been a new service which Springwell could not have insisted that Chase Geneva rendered free of charge. Why Springwell was receiving a free service out of Jersey was of no relevance to the debate, until Chase suggested it could start charging for it. When that was first suggested (by KW in February 2000), SP understood Chase's intention was to rely upon an earlier 1994 Nominee Agreement, a proposition that did not seem right to SP and he therefore asked KW to check the position.

iii) When finally it became apparent that Chase was going ahead with levying a charge out of Jersey, Springwell sent the fax dated 28 March 200, referred to above, in which Springwell reminded Chase of the conversation with FS. SP had to chase for a response, at which point the conversation with FS was not denied internally. When a reply was eventually sent, it was merely "not accepted" that the conversation took place and no point was taken on the question of FS's authority.

iv) FS, by contrast, did not recall the conversation. He would not accept the possibility that it might have occurred, but I find that his evidence on this topic was unconvincing, and in places argumentative. Nor, as submitted by Chase, do I consider that the contemporaneous document supported his evidence. Although FS was an honest witness, with no personal interest in the litigation, I formed the impression that he had convinced himself that no such conversation had taken place.

v) Chase pointed to the fact that there was no transcript of the alleged conversation between SP and FS, and, although this fact was not determinative, it was significant, as the expectation must be that all FS's telephone conversations on that line with SP would have been taped and transcribed. But in my judgment, since it was accepted that the system was not foolproof, the absence of a transcript cannot undermine the clear evidence of SP on the topic. Chase also sought to make much of the facts that: SP did not make a contemporaneous note of the conversation, even though it was his practice to make manuscript notes of many of his conversations with Chase; that SP did not raise the point with his lawyers, or with AP; or as a drafting issue with FS during the course of the negotiations. But in my judgment, Chase attached too much importance to these matters. The fact was that, despite the express provisions of the earlier custody arrangement, Chase had never previously sought to charge or charged custody fees to Springwell, even in the period post-default when the account was not being actively traded. FS would have been keen to please SP in what was a difficult (and, for him, stressful) situation.

vi) In such circumstances, I find it highly probable that FS would have given the assurance which SP alleges that he did and that, given the previous conduct of Chase in not seeking payment of such fees, SP would not have considered it necessary to make a controversial issue of the point in negotiations, and would, in the light of the history of the matter, have been content to rely on FS's assurance. I have carefully considered Chase's meticulous analysis of the evidence relating to the custody fees claim, as set out in its written closing submissions. At the end of the day, and despite the numerous points raised by Chase, I accept SP's evidence on this point. I conclude that at the time, FS would not have regarded the matter as being of any great concern, but rather have seen it as simply a continuation of the status quo.

Reliance

255. It was clear from SP's unchallenged evidence that he relied on FS's assurance when signing the January 1999 agreement, including the Nominee Agreement. Chase contended, in the light of certain passages in SP's cross-examination where he frankly accepted that the point was not a deal-breaker, that he would have signed the Term Loan Agreement and other agreements in any event, even if FS had not given SP immediate reassurance about the custody fees, and that the claim therefore failed. But that misses the point. The unchallenged evidence of SP was that, if FS had refused to give the assurance, then he would have raised the point in negotiations, and sought to have to insisted that Clause 13(a) was removed. But there was no evidence called by Chase to the effect that Chase would not have agreed to Springwell's request in those circumstances. I find that, FS would very likely have done so. I also conclude that it was highly likely that in late 1998/early 1999, others at Chase, higher up the line, would have likewise agreed to waive such fees. The fact is that the suggestion that Springwell should be charged custody fees would never have been raised, had it not been for the proposal to move Springwell's accounts out of Jersey to Geneva, which was canvassed in late 1999/early 2000. Even at that later stage, the proposal that Springwell should not be charged custody fees was initially approved by the senior Chase lawyer involved, and only subsequently vetoed by Chase Geneva (which had not been involved at the earlier stage).
256. As Mr. Baker submitted, the fact that the promisor/representor need not have given the assurance in question, in order to induce the promissee/representee to sign, does not deprive a collateral warranty or estoppel of effect. It is sufficient that the promise/representation did in fact induce signature.^[42]

FS's Authority

257. Chase submitted that FS did not have authority to waive the custody fees on behalf of Chase, and in particular on behalf of Chase Nominees. I disagree. It is notable that when Springwell raised FS's reassurance in correspondence, Chase took no point on authority. Moreover, FS was Relationship Manager for Springwell in the Private Bank. As such, it is to be inferred that he had actual authority to agree such relatively small ancillary matters as fees and charges payable by Springwell. In any event, his designation as Relationship Manager conveyed that he had such authority. It is irrelevant for this purpose that the right to charge custody fees vested in Chase Nominees in Jersey and not the Private Bank (CMB) in London. SP did not deal with anyone from Jersey in relation to these matters. Moreover, CMB, the Private Bank, was the relevant Chase entity debiting the custody fees from Springwell's account, and would need to have the authority to do so. The relevant promise was that Springwell would not have to pay. Whether the Private Bank secured that benefit by directing/persuading Chase Nominees not to charge, or by covering any charges Chase Nominees made, was not discussed, and was not Springwell's concern. Nor do I regard it as relevant that FS subsequently intimated to SP that he needed approval from others within Chase and/or Chase's external lawyers in relation to the terms of the Term Loan documentation.
258. Further, FS was, at his own insistence, the conduit between Springwell and CMB's work-out unit and external lawyers. As such he was held out as the channel by which CMB's position in relation to the Term Loan documentation and matters arising in the negotiation of it would be conveyed. He therefore had ostensible authority to convey CMB's position in the terms he did, at least as regards this relatively minor point on custody fees raised by SP: First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd's Rep 194 (CA)).

Legal consequences of the representation

259. Chase submitted that, at best, the representation made by FS only had suspensory effect because it was in the nature of a promissory estoppel. I disagree. Here, the relevant action taken in reliance upon the representation or the agreed convention between the parties was the entry into the various 1999 agreements, including the Term Loan Agreement and the Nominee Agreement. This was not the case of a promissory estoppel within the context of an extant contractual relationship where one party states that he will forbear from exercising a right for a period of time. Here, the new contracts had been entered into on a certain basis; so long as those contracts subsisted, the unfairness of the party operating contrary to the representation which it has given subsisted. That position cannot be undone by the giving of notice to the effect that the representation no longer operates. Thus, whether the correct legal analysis is one of estoppel by convention or collateral contract matters not.

Conclusion in relation to the Custody Fees Claim

260. In my judgment, in the light of the collateral agreement, and/or the convention, upon the basis of which SP entered into the Nominee Agreement, the Term Loan Agreement (and, indeed, the Security Interest Agreement), CMB had no authority, or is estopped from claiming it had authority, to deduct the custody fees from Springwell's account in respect of the period from 15 March 2000 to 31 March 2001. Accordingly CMB is liable to reimburse Springwell or pay damages in the agreed sum of $445, 472.13, plus interest.

Postscript

261. Again, I want to record my gratitude for the considerable assistance which I received from the written and oral submissions prepared and presented respectively by leading and junior counsel and solicitors for the parties, and the efficient manner in which the trial in relation to the post-default issues was conducted.

Note 1    “$” or “dollars” refers to US dollars.    [Back]

Note 2    Springwell gives credit against this claim for the sums it actually received through the GKO exchange and by way of settlement of the relevant forward transactions.    [Back]

Note 3    See the first report of Chase’s expert in Russian law, Dmitry Dobatkin, paragraph 8.3(ii) and the Joint Memorandum signed by him and Springwell’s expert, Andrey Novakovskiy, paragraph 2.7.    [Back]

Note 4    Paragraphs 2.10.1 to 2.10.2 of the Joint Memorandum.    [Back]

Note 5    H1/159.    [Back]

Note 6    H4/22.    [Back]

Note 7    Dobatkin/Novakovskiy Joint Memorandum, paragraphs 2.11.1-2.11.2 and 2.12 .    [Back]

Note 8    Paragraphs 3.6.1 to 3.6.2 of the Joint Memorandum.    [Back]

Note 9    Paragraph 2.18.1-2.18.2 H5/17.    [Back]

Note 10    Day 20 (4/6/07) 50/17-18.    [Back]

Note 11    Day 20 (4/6/07) 51/17-22.    [Back]

Note 12    T776 (11/9/98) P96/1.    [Back]

Note 13    Day 31 (20/6/07) 83/21 - 84/3.    [Back]

Note 14    Day 31 (20/6/07) 58/8-15.    [Back]

Note 15    This was, of course, the maturity date of the first two Failed Notes, as numbered by Springwell.    [Back]

Note 16    There were some relatively minor issues between the parties as to precisely what Chase had received in respect of certain of the forwards and the amounts in respect of which it was obliged to account. These are addressed below in the context of the Account claim.    [Back]

Note 17    These were set out at a schedule at J4/058-059 in the trial bundles.    [Back]

Note 18    At the time of the trial Chase had recently intimated an intention to pay a further $109,433.70, which would take the GKO-Related Payments up to $38,109,811.01.     [Back]

Note 19    See paragraph 321 of Chapter 4 of Chase’s closing submissions.    [Back]

Note 20    The GKO-Related Payments were made to Springwell. Mr. Baker submitted that, even if Springwell became the Holder in March 2001, that was irrelevant: the pattern of GKO-Related Payments was set by then and Chase had asserted throughout that Springwell was not the Holder.    [Back]

Note 21    Chase accepted that there was also an obligation to act without wilful misconduct and gross negligence, which I deal with further below, in the context of Springwell’s Damages claim.    [Back]

Note 22    Paragraphs 320-321    [Back]

Note 23    This was also the paragraph (b)(x) option.    [Back]

Note 24    They were, in my judgment, in any event sufficient to discharge Chase’s obligations under section 5(c), but this is not the issue at this level of the argument.    [Back]

Note 25    Springwell’s Reply paragraph 177(f).    [Back]

Note 26    See Day 63, page 120, line 10 to page 121, line 9; Day 67 page 147 lines 20-22.    [Back]

Note 27    [1925] Ch 407, 427-428.    [Back]

Note 28    Bowstead & Reynolds on Agency (18th Edition Sweet and Maxwell, London 2006), 6.030.    [Back]

Note 29    The Overend & Gurney Company v Gibb (1872) LR 5 HL 480, 486-487.    [Back]

Note 30    Re City Fire Insurance Company [1925] Ch 407, 427-428.    [Back]

Note 31    Red Sea Tankers v Papachristidis [1997] 2 Lloyds Rep 547, 586-587.    [Back]

Note 32    [1951] 2 KB 751 at 766.    [Back]

Note 33    [1905] 2 KB 535at 536.    [Back]

Note 34    CMBI received nothing from Inkombank (apart from set-off rights) and Imperial Bank and a limited recovery from Sberbank under a settlement agreement the proceeds of which were passed through to Springwell.    [Back]

Note 35    In the light of my earlier conclusion in relation to the non-CMBI risk forwards, I deal only with the CMBI risk forwards in this section of my judgment. However, exactly the same criticisms were made by Springwell of Chase’s conduct in relation to these CMBI Forwards which were non-CMBI risk forwards    [Back]

Note 36    And likewise in relation to the non-CMBI risk forwards.    [Back]

Note 37    P28/86 110.    [Back]

Note 38    This figure included the non-CMBI risk forwards.    [Back]

Note 39    Directive No. 407-U    [Back]

Note 40    The suggestion made by Mr. Baker in cross-examination based on a letter dated 10 November from Mike Marrese, a senior researcher, to the CBR, that somehow Chase had been instrumental in bringing about this amendment so as to benefit Chase as against its clients was wholly without evidential foundation.    [Back]

Note 41    Day 44 (16/7/07) 40/17-25.    [Back]

Note 42    Chitty on Contracts, 29th Ed., paragraphs 12-005 to 12-007; Briko Investments Ltd v Carr [1979] QB 467 at 482H-483A per Lord Denning MR, 490D per Cumming-Bruce LJ; Downs v Chappell [1997] 1 WLR 426 at 433D, 441B per Hobhouse LJ (as he then was).    [Back]