England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
THE BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
COMMERCIAL COURT (QBD)
FINANCIAL LIST

		Royal Courts of Justice Strand, London, WC2A 2LL
		12/03/2018

Mr Justice Robin Knowles :

Introduction

1. This case involves a return to the subject of calculation of Close-out Amount under the 2002 ISDA (International Swaps and Derivatives Association, Inc.) Master Agreement. Is it open to a Determining Party to remake a determination of Close-out Amount? Did the change in wording from "reasonably determines in good faith" in the 1992 ISDA Master Agreement to "act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result" in the 2002 ISDA Master Agreement have the effect of replacing a requirement for a rational decision with a requirement for an objectively reasonable decision?
2. The particular transaction ("the LBSF Transaction") was a principal-only US dollar (US$)/Philippine peso (PHP) forward currency swap. It was made on 18 July 2007 under a 2002 ISDA Master Agreement dated as of 21 December 2016 and entered into on 5 April 2007 with accompanying Schedule.
3. Under the LBSF Transaction the Claimant ("LBSF") agreed to pay US$100 million to the First Defendant ("NPC") in 2028, and NPC agreed to pay LBSF the US$ equivalent of PHP 4.4788 billion in 2028 (PHP 4.4788 billion being the PHP equivalent of US$100 million when the LBSF Transaction was entered into). Semi-annual coupons were payable at a fixed rate by NPC to LBSF. An option ("the Option") was granted by LBSF to NPC under which NPC could choose to pay US$1 million on 15 May 2008 instead of paying the US$ equivalent of PHP 4.4788 billion in 2028.
4. NPC did not exercise the Option, although in May 2008 NPC had exercised options in two swaps with other counterparties.
5. Lehman Brothers collapsed in September 2008. LBSF itself filed for bankruptcy relief in the United States under Chapter 11 on 3 October 2008. These developments constituted events of default under the LBSF Transaction. The LBSF Transaction was terminated early in accordance with its terms, NPC serving notice of early termination on 17 October 2008. The designated contractual "Early Termination Date" was 3 November 2008.
6. It is common ground that it was then for NPC to determine the Close-out Amount payable where there has been early termination, and to do so using "commercially reasonable procedures in order to produce a commercially reasonable result".
7. In due course, on 26 January 2009, NPC demanded US$3,461,590.93, enclosing its calculations by way of an annex. LBSF contends that commercially reasonable procedures were not used to arrive at this figure and that it is not a commercially reasonable result. It is a feature of the case that NPC too wishes to ignore the sum demanded on 26 January 2009.
8. There is a wide disparity between the parties over what is or would be a commercially reasonable result. At one end of a spectrum NPC and its successor, the Second Defendant ("PSALM"), say that LBSF owes US$10,778,943 to NPC/PSALM, before interest. At the other end of the spectrum LBSF says that NPC/PSALM owes US$12,826,887 to LBSF, before interest. There are various other points on the spectrum. Different approaches have been urged, including through experts called by the parties.

The LBSF Transaction

9. NPC is owned and controlled by the government of the Republic of the Philippines. I was told in evidence of a board of NPC that comprised members of the Republic's Cabinet.
10. NPC had issued US$300 million of bonds maturing in 2028. The LBSF Transaction was part of a hedging strategy in connection with the bond issue. Its purposes included, broadly, to help provide to NPC, subject to the credit risk represented by LBSF, some protection against the risk of devaluation of the PHP and some clarity over the cost of paying US$ on the maturity of the bonds. It was, according to Mr Exequiel Cempron, manager of the capital markets division at PSALM, the first of its kind for a government corporation like NPC in the Republic.
11. The elements of the LBSF Transaction are summarised above. As set out in the relevant confirmation they:

a. required LBSF to pay NPC US$100 million 15 Business Days before 15 May 2028 ("the Termination Date");

b. required NPC to pay LBSF on the Termination Date the amount of US$ that could be purchased for PHP 4.4788 billion two Business Days prior to the Termination Date ("Party A Exchange Amount 2");

c. by the Option, allowed NPC to remove the obligation to pay Party A Exchange Amount 2 in 2028 by giving notice on 15 May 2008 to exercise the Option and paying US$1 million within two Business Days after that;

d. required NPC to pay LBSF a fixed rate of 2.687% of US$ 100 million per year, in semi-annual coupons from 15 November 2007 to 15 May 2026 inclusive.

12. NPC had the right to transfer its rights and obligations under the LBSF Transaction to PSALM. PSALM too is owned and controlled by the government of the Republic of the Philippines. The boards of NPC and PSALM have more recently passed resolutions confirming that NPC's rights and liabilities in respect of the LBSF Transaction have been transferred to PSALM. LBSF has accepted that PSALM is the correct defendant to the proceedings. For ease of reference I shall generally continue to use the abbreviation NPC in the remainder of this judgment to apply to NPC, PSALM or both.

The terms of the LBSF Transaction

13. Section 6 of the 2002 ISDA Master Agreement includes the following provisions:

"(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. …

…

(c) Effect of Designation.

(i) If notice designating an Early Termination Date is given under Section 6(a) …, the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing.

(ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 9(h)(i) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date will be determined pursuant to Sections 6(e) and 9(h)(ii).

(d) Calculations; Payment Date.

(i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations), (2) specifying (except where there are two Affected Parties) any Early Termination Amount [defined below] payable and (3) giving written details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation or market data obtained in determining a Close-out Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of the existence and accuracy of such quotation or market data.

(ii) Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable (1) on the day on which notice of the amount payable is effective in the case of an Early Payment Date which is designated or occurs as a result of an Event of Default …

(e) Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the "Early Termination Amount") will be determined pursuant to this Section 6(e) and will be subject to Section 6(f).

(i) Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non-defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party.

…

(v) Pre-Estimate. The parties agree that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and, except as otherwise provided in this Agreement, neither party will be entitled to recover any additional damages as a consequence of the termination of the Terminated Transactions.

9. Miscellaneous

(a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a party for fraud.

…

(h) Interest and Compensation.

…

(ii) Early Termination. Upon the occurrence or effective designation of an Early Termination Date in respect of a Transaction:-

(1) Unpaid Amounts. …

(2) Interest on Early Termination Amounts. If an Early Termination Amount is due in respect of such Early Termination Date, that amount will, to the extent permitted by applicable law, be paid together with interest (before as well as after judgment) on that amount in the Termination Currency, for the period from (and including) such Early Termination Date to (but excluding) the date the amount is paid, at the Applicable Close-out Rate.

(iii) Interest Calculation. Any interest pursuant to this Section 9(h) will be calculated on the basis of daily compounding and the actual number of days elapsed."

14. Section 12 of the ISDA Master Agreement provides for when notices are "deemed effective", according to the medium used to give the notice and the incidence of Local Business Days.
15. The material definitions under Section 14 of the 2002 ISDA Master Agreement include the following:

""Close-out Amount" means, with respect to each Terminated Transaction or each group of Terminated Transactions and a Determining Party [defined later as "the party determining a Close-out Amount"], the amount of the losses or costs of the Determining Party that are or would be incurred under then prevailing circumstances (expressed as a positive number) or gains of the Determining Party that are or would be realised under then prevailing circumstances (expressed as a negative number) in replacing or in providing for the Determining Party the economic equivalent of (a) the material terms of that Terminated Transaction or group of Terminated Transactions, including the payments and deliveries by the parties under Section 2(a)(i) in respect of that Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date (assuming satisfaction of the conditions precedent in Section 2(a)(iii)) and (b) the option rights of the parties in respect of that Terminated Transaction or group of Terminated Transactions.

Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result. The Determining Party may determine a Close-out Amount for any group of Terminated Transactions or any individual Terminated Transaction but, in the aggregate, for not less than all Terminated Transactions. Each Close-out Amount will be determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates following the Early Termination Date as would be commercially reasonable.

Unpaid Amounts in respect of a Terminated Transaction or group of Terminated Transactions and legal fees and out-of-pocket expenses referred to in section 11 are to be excluded in all determinations of Close-out Amounts.

In determining a Close-out Amount, the Determining Party may consider any relevant information, including, without limitation, one or more of the following types of information: -

i. quotations (either firm or indicative) for replacement transactions supplied by one or more third parties that may take into account the creditworthiness of the Determining Party at the time the quotation is provided and the terms of any relevant documentation, including credit support documentation, between the Determining Party and the third party providing the quotation;

ii. information consisting of relevant market data in the relevant market supplied by one or more third parties including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other relevant market date in the relevant market; or

iii. information of the types described in clause i or ii above from internal sources (including any of the Determining Party's Affiliates) if that information is of the same type used by the Determining Party in the regular course of its business for the valuation of similar transactions.

The Determining Party will consider, taking into account the standards and procedures described in this definition, quotations pursuant to clause i above or relevant market data pursuant to clause ii above unless the Determining Party reasonably believes in good faith that such quotations are not readily available or would produce a result that would not satisfy those standards. When considering information described in clause i, ii or iii above, the Determining Party may include costs of funding, to the extent costs of funding are not and would not be a component of the other information being utilised. Third parties supplying quotations pursuant to clause i above or market date pursuant to clause ii above may include, without limitation, dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of market information.

Without duplication of amounts calculated based on information described in clause i, ii and iii above, or other relevant information, and when it is commercially reasonable to do so, the Determining Party may in addition consider in calculating a Close-out Amount any loss or cost incurred with its terminating, liquidating or re-establishing any hedge related to a Terminated Transaction or group of Terminated Transactions (or any gain resulting from any of them).

Commercially reasonable procedures used in determining a Close-out Amount may include the following:-

(1) application to relevant market data from third parties pursuant to clause ii above or information from internal sources pursuant to clause iii above of pricing or other valuation models that are, at the time of the determination of the Close-out Amount, used by the Determining Party in the regular course of its business in pricing or valuing transactions between the Determining Party and unrelated third parties that are similar to the Terminated Transaction or group of Terminated Transactions; and

(2) application of different valuation methods to Terminated Transactions or groups of Terminated Transactions depending on the type, complexity, size or number of the Terminated Transactions or group of Terminated Transactions."

16. Section 14 also defined "Unpaid Amounts" with the language of the definition including the following:

"… The fair market value of any obligation referred to in clause (b) [of the definition] will be determined as of the originally scheduled date for delivery, in good faith and using commercially reasonably procedures, by the party obliged to make the determination under Section 6(e) …"

Sources of evidence at trial

17. Broadly I agree with the submission of LBSF that the best guide to what happened in the present case is the documentary record, although that too is not complete and not always clear.
18. A small number of witnesses of fact were called. In all cases their evidence suffered from the passage of time (it is now 10 years from the Lehman collapse) and in some cases from the fact that they were not directly involved in events.
19. Each party called expert evidence, from Mr Antoine Abdini and from Mr Anthony Nahum. I am grateful for the contribution made by each. It gave useful context. In the event I found the assistance they could give to the resolution of the material issues in this particular case was very limited. With little exception, the issues in this case were, in the event, for the court directly rather than for the court to choose between the opinions of two experts. There was very little common ground between them and this showed the room for difference of opinion. It was not an adverse reflection on them.

Mark-to-market (MTM) valuations

20. LBSF provided mark-to-market ("MTM") valuations on the LBSF Transaction. On 16 July 2008 the MTM valuation provided was US$11,492,280 in LBSF's favour as at 14 July 2008. On 17 September 2008 the MTM valuation was US$16,559,935 in LBSF's favour as at 12 September 2008, revising an earlier figure.
21. An NPC memorandum of 12 September 2008 recognised that NPC was "currently (as of July 2008) out-of-the-money in the swap." NPC calculated, including by a consultant, some MTM values as at dates in September, October and November 2008 and these too showed substantial figures in LBSF's favour.
22. Although he was at times determined to argue NPC's case I nonetheless accept from the evidence of Mr Cempron that MTMs were seen by NPC as of limited value, as theoretical and having the limitation of being based on simulations. In impressively straightforward evidence, Mr Ferdinand Florendo (Manager of the Capital Markets and Risk Management Department at PSALM from 2007 to 2013) accepted he could not really recall his reaction to MTMs or contribute greatly in his evidence about what reliance was placed on MTMs, save to say that they were used to try to understand the position.
23. As LBSF points out, two things are shown by the NPC MTMs. First, throughout the process of entering into the UBS Transaction (see below) and reaching a determination of Close-out Amount NPC had available to it MTM valuations that it regarded as reliable showing a transaction value substantially in favour of LBSF. Second, in valuing the PHP cashflow under the LBSF Transaction NPC was prepared to derive a 20 year rate from available data by working from a 10 year rate from Bloomberg.

The UBS Transaction

24. As mentioned, NPC served notice of early termination of the LBSF Transaction on 17 October 2008. The designated contractual "Early Termination Date" was 3 November 2008.
25. It is sufficiently apparent to me from the evidence at trial, including that of Mr Cempron, that by 3 November 2008 and probably before, NPC was looking to replace the resulting gap in its hedging strategy in connection with its bond issue, and reinstate the protection it had enjoyed (on the face of the LBSF Transaction) against the risk of devaluation of the PHP and the clarity it had had (again on the fact of the LBSF Transaction) over the cost of paying US$ on the maturity of the bonds.
26. Consistently, on 3 November 2008 NPC requested and received indicative quotations from UBS, Deutsche Bank and Goldman Sachs. The request for these quotations included the following wording: "This is not the official bidding. NPC is currently simulating that bid of the Principal Only Swap (POS) replacement in preparation for the actual bidding, the date of which will be determined by our respective principals.".
27. Even though under the LBSF Transaction the date for exercise of the Option had passed without exercise, all three banks were asked to provide indicative quotations for both a transaction with a pre-payment option for the obligation to pay PHP and a transaction without. All three provided the former and one (UBS) the latter. UBS quoted 3.88% with an option; 3.68% without. However as regards the latter, the next day UBS wrote that it had not reached a view on valuing what it termed the PHP "leg".
28. On 5 November 2008, an internal communication within UBS advised that they could price "without the PHP 4.478bn, just replace it with a US$1mm one-time payment in Nov 2009."
29. On 6 November 2008 a bank appears to have suggested that NPC prepay "the entire PHP leg at … 34% of USD notional".
30. On 7 November 2008 NPC requested and received firm quotations from UBS, Deutsche Bank and Goldman Sachs. All three banks were again asked to provide quotations for a transaction with pre-payment option (although now at two differing exercise dates) and a transaction without. All three provided the former and two the latter. Deutsche Bank quoted 3.025-3.03% for a transaction with an option (depending on exercise date) and 3.02% without. UBS quoted 2.96% for a transaction with an option (at either exercise date) and without.
31. On 14 November 2008 NPC entered into a transaction with UBS ("the UBS Transaction"). The UBS Transaction was "as of" 12 November 2008, with an "Official Indicative Bid Date" of 7 November 2008. It included an option with an exercise date of 16 November 2009. Although there was the best part of a year to go before the option would fall for exercise, on 28 November 2008 NPC gave UBS a year's advance irrevocable notice of exercise of the option on 16 November 2009.

Subsequent events

32. As mentioned, on 26 January 2009 NPC demanded US$3,461,590.93 from LBSF, enclosing its calculations by way of an annex. NPC filed a proof of claim for the payment of the Early Termination Amount in LBSF's bankruptcy proceedings. On 12 September 2014, NPC withdrew the proof of claim.
33. NPC served what it terms a revised calculation statement on 27 October 2016. By then these proceedings had been commenced. The revised calculation statement included what NPC has termed a "Primary Determination" and an "Alternative Determination".
34. The former was of US$10,778,943.12 and the latter was of US$2,140,482.60, in each case payable by LBSF to NPC. The former figure was based on the 3 November UBS indicative quotation of 3.68% for a transaction without an option, rather than on the UBS Transaction.
35. However the latter, the Alternative Determination, was based on the UBS Transaction (ie on the transaction that was entered into, and not on an indicative quotation, but on a transaction with an option). The Alternative Determination simply subtracted from the amount demanded on 26 January 2009 an amount intended to represent a sum due to LBSF under the LBSF Transaction from 15 May 2008 to 15 November 2008 that had accrued prior to the effective date of the UBS Transaction (the "Accrued Amount").

Approach to interpretation

36. The ISDA Master Agreement "… is one of the most widely used forms of agreement in the world. It is probably the most important standard market agreement used in the financial world.": Lomas v JFB Firth Rixson Inc and Others (ISDA intervening) [2010] EWHC 3372 (Ch); [2011] 2 BCLC 120 at [53] per Briggs J (as he then was).
37. In interpreting a contract the court is concerned to identify the intention of the parties by reference to what a reasonable person having all the background knowledge that would have been available to the parties would have understood them to be using the language in the contract to mean; the court focusses on the meaning of the words in their documentary, factual and commercial context: see Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 at [14] per Lord Hoffmann; Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [15] per Lord Neuberger; Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 per Lord Clarke; Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] 2 WLR 1095 per Lord Hodge.
38. As Gloster LJ said in Videocon Global Ltd v Goldman Sachs International [2016] EWCA Civ 130, [2017] 2 All ER (Comm) 800, at [50]:

"It was common ground that commercial contracts had to be interpreted as a whole in the light of the commercial purpose of the document and the transactions which it documented. This approach is particularly pertinent to the case of a commercial contract such as the ISDA Master Agreement. Thus for example in Re Sigma Finance Corp [2009] UKSC 2; [2010] 1 All ER 571 (para [37]), Lord Collins reiterated the principle that an instrument:

'must be interpreted as a whole in the light of the commercial intention which may be inferred from the face of the instrument and from the nature of the debtor's business. Detailed semantic analysis must give way to business common sense.'

And in para [35] he observed that courts have been cautioned against an 'over-literal interpretation of one provision without regard to the whole [which] may distort or frustrate the commercial purpose'. In the same case, at para [12], Lord Mance highlighted the importance of understanding a contract's 'overall scheme and [of] a reading of its individual sentences and phrases which places them in the context of the overall scheme.'"

39. The 2002 ISDA Master Agreement is to be interpreted in light of a relevant background that includes the 1992 ISDA Master Agreement, the applicable User's Guide, and the fact that the ISDA Master Agreement is a standard form document and is so widely used in international financial markets: Lehman Brothers International (Europe) (in administration) v Lehman Brothers Finance SA [2013] EWCA Civ 188, [2014] 2 BCLC 451 at [52]-[53] per Arden LJ; Videocon Global v Goldman Sachs (above) at [2] per Gloster LJ.
40. Hildyard J in Re Lehman Brothers International (Europe) (in administration) (No 8) [2016] EWHC 2417 (Ch) [2017] 2 All ER 275 at [48] summarised a number of principles as follows:

"In the context of the ISDA Master Agreements, and having regard to their intended and actual use as standard agreements by parties with such different characteristics in a multiplicity of transactions in a plethora of circumstances, the following principles are also relevant:

(1) It is 'axiomatic' that the ISDA Master Agreements should 'so far as possible be interpreted in a way that achieves the objectives of clarity, certainty and predictability, so that the very large number of parties using it know where they stand': Lomas v JFB Firth Rixson at [53] per Briggs J.

(2) Although the relevant background, so far as common to transactions of such a varied nature and reasonably expected to be common knowledge amongst those using the ISDA Master Agreements, is to be taken into account, a standard form is not context-specific and evidence of the particular factual background or matrix has a much more limited, if any, part to play: see AIB Group (UK) Ltd v Martin [2001] UKHL 63, [2002] 1 All ER (Comm) 209, [2002] 1 WLR 94.

(3) More than ever, the focus is ultimately on the words used, which should be taken to have been selected after considerable thought and with the benefit of the input and continuing review of users of the standard forms and of knowledge of the market: see Re Lehman Brothers International (Europe) v Lehman Brothers Finance SA [2013] EWCA Civ 188, [2014] 2 BCLC 451 (at [53] and [88]).

(4) The drafting of the ISDA Master Agreements is aimed at ensuring, among other things, that they are sufficiently flexible to operate among a range of users in an infinitely variable combination of different circumstances: Anthracite Rated Investments (Jersey) Ltd v Lehman Brothers Finance SA (in liq) [2011] EWHC 1822 (Ch), [2011] 2 Lloyd's Rep 538 (at [115]) per Briggs J: particular care is necessary not to adopt a restrictive or narrow construction which might make the form inflexible and inappropriate for parties who might commonly be expected to use it.

(5) …"

The designation of Early Termination Date and the determination of the amount payable

41. The Court of Appeal has made clear that the debt obligation in respect of an Early Termination Date "arises, or accrues due on, or as at" the Early Termination Date, and that the obligation to pay the relevant amount arises on the day on which notice of the amount payable, given in a manner described in Section 12 to the address or number provided in the Schedule, will be deemed effective in accordance with Section 12: Videocon v Goldman Sachs at [53], [56], [60], per Gloster LJ, dealing with the 1992 ISDA Master Agreement, but in this respect no less applicable to the 2002 ISDA Master Agreement.
42. The same authority makes clear that the notice will still be a notice even where there is a question over a calculation, or the notice is late, or the notice does not contain details of the relevant account to which any amount payable to it is to be paid.
43. The Early Termination Date that NPC designated by its letter dated 17 October 2008 was 3 November 2008. The debt obligation therefore arose on 3 November 2008. Notice of the amount payable pursuant to that debt obligation was effective when NPC's letter dated 26 January 2009 was delivered to LBSF by courier.
44. The notice dated 26 January 2009 stating that the amount payable was US$3,461,590.93 stated that the amount payable was "[p]ursuant to our calculations of the amounts due as contemplated under Section 6(d) of the Master Agreement, and as such calculations are performed in accordance with, including but not limited to, Section 6(e) of the 2002 Master Agreement …".
45. The calculation of the amount payable was solely based on the UBS Transaction as Mr Florendo for NPC accepted in his evidence. The notice was supported by an annex ("the Annex"), entitled "Replacement Cost as of Effective Date of the Replacement Swap (12 November 2008)". The Annex was described in these terms:

"Attached hereto as Annex A are the necessary supporting calculations used in deriving the amount stated above. Further, the above amount does not include any Expenses as defined in Section 11 of the ISDA 2002 Master Agreement, and our claim for Expenses shall be in addition to such amount."

Is a party entitled to remake a determination?

46. Mr Jasbir Dhillon QC and Mr Geoffrey Kuehne for NPC make clear that NPC does not rely on the Annex. NPC's case is that what it terms the Primary and Alternative Determinations are those in which NPC exercises the right and meets the obligation to determine the Close-out Amount in respect of the LBSF Transaction.
47. NPC acknowledges that what it terms its revised calculation statement (on which the Primary Determination is based) was served eight years after the Early Termination Date but says nothing turns on that.
48. NPC argues further as follows:

a. Section 6 and the definition of Close-out Amount make clear that the Close-out Amount (and Early Termination Amount) "will be determined" by the Determining Party; these words are an instruction to the Determining Party; the Close-out Amount must be determined by that party.

b. The amount stated in the Annex was not an amount equal to the Close-out Amount and any Unpaid Amounts. This is because the calculations then performed by NPC did not accord with the definition of Close-out Amount. In particular they failed to account for a portion of the semi-annual fixed sum payments.

c. Further, the availability of an indicative quotation on 3 November 2008 made it commercially reasonable to determine the Close-out Amount as of that date instead of 7 November 2008.

d. Because the calculations described in the Annex were not in accordance with the requirements of the Agreement, the determination of Close-out Amount by 26 January 2009 was invalid and not contractually binding as between the parties, and the service of the Annex left NPC's obligation as Determining Party to make a valid and binding determination of the Close-out Amount unfulfilled.

It is by later making the Primary Determination and the Alternative Determination and serving the revised calculation statement, that NPC has, it argues, now complied with its obligation under section 6 to make a valid and binding determination of the Close-out Amount.

49. LBSF on the other hand argues that there is no entitlement to withdraw and replace a calculation once served under Section 6(d)(i) of the 2002 ISDA Master Agreement. LBSF points out that there is no provision in section 6(d) for a Determining Party unilaterally to withdraw a Section 6(d)(i) statement and replace it with another one.
50. The natural meaning of the language of the Section suggests, argues LBSF, that such a statement will be provided once. And there are other reasons, argues LBSF, that suggest the same interpretation. Thus, says LBSF, some constraint on the number of attempts that could be made must have been intended; it cannot have been intended that (as here) a replacement be made 8 years on and in the midst of litigation; and further, the process of determination of the Close-out Amount, including the role of the Determining Party, is one where the interests of both parties need to be taken into account (and in situations where there were two Determining Parties, the mechanism under Section 6(e)(ii)(2) must be allowed to operate effectively).
51. In my judgment on the true interpretation of the 2002 ISDA Master Agreement the position is as follows:

a. With its letter dated 17 October 2008 NPC caused a debt obligation to arise and with delivery of NPC's letter dated 26 January 2009 an obligation to pay arose.

b. These are significant contractual events and once they have arisen the relationship between the parties is thereafter affected, and not reversible (save by agreement, or in some cases an order of a court or tribunal).

c. NPC was required and permitted to make a determination.

d. NPC made a determination that US$3,461,590.93 (plus interest and aside from Expenses) was payable. The Annex showed how that determination had been calculated. This completed its obligation and right to make a determination.

e. If there is an error in the determination then (absent agreement) the court or tribunal chosen by the parties will be left to declare that and to state what the Close-out Amount would have been on a determination that was without error.

f. However, the Determining Party is also a party to the contract. It can make and accept proposals in its capacity as a party to the contract, including to correct an error in the determination.

g. The revised calculation statement may still serve as evidence to inform the question of whether there was an error, and the question what the Close-out Amount would have been on a determination that was without error. Evidence of this type is permissible when the matter is before a court or tribunal: see Socimer International bank Ltd v Standard Bank London Ltd (No 2) [2008] EWCA Civ 116; [2008] 1 Lloyd's Rep at [99] and [103] with reference to Lion Nathan Ltd v CC Bottlers Ltd [1996] 1 WLR 1438.

52. The position described respects the certainty that the parties can be taken to have required. Further, it is worth reflecting that had the parties put the determination in the hands of a third party, the third party's role would finish with the (one) determination. I see no reason to distinguish the position where the Determining Party is a party, especially where (as LBSF point out) there is no provision for a second attempt.
53. In his important work, Derivatives Law and Practice, Simon Firth expresses this opinion, at 11.175:

"Once a determination has been validly made of the … Close-out Amount, it will be final and binding on both parties. The determining party cannot subsequently change its mind (for example, on the basis that a mistake has been made). On the other hand, if the original determination was invalid (for example, because it was based on a misinterpretation of the Agreement), or (probably) it was founded on or infected by a manifest numerical or mathematical error [], the determining party should be able to make a fresh determination that complies with the requirements of the Agreement."

54. Mr Firth adds in a footnote to the second sentence the qualification to the effect that the determination will be invalid if the mistake involved the determining party failing to comply with the instructions set out in the Agreement. He adds in a footnote to his example of an original determination being invalid because it was based on a misinterpretation of the Agreement, that in such a case the determination will be of no effect, citing Shell UK Ltd v Enterprise Oil plc [1999] 2 All ER (Comm) 87, 108-9.
55. These might be seen as cases where what happened was not a determination within the meaning of the Agreement. I follow the argument that in that situation a later determination within the meaning of the agreement could be said to be the first such determination. However in my judgment great care should be taken here. As LBSF points out, the process could extend. What may be repeated remittance back to NPC to make a compliant determination cannot be the approach objectively intended under the contract.
56. There are examples, within and outside the field of financial instruments, where the courts have not remitted determinations back, consistently with the view that the parties should be taken to have contemplated that the court or tribunal would make the determination if the party required and entitled to make the determination did not; these include Lehman Brothers Finance SA v SAL Oppenheim Jr & Cie, KGAA [2014] EWHC 2627 (Comm) and Clark v Nomura International [2000] IRLR 766. The case of manifest numerical or mathematical error would still be a case for correction of the determination (by agreement or by court or tribunal, and in the respect where there was error) rather than a fresh determination.
57. In the present case the determination of which notice was given on 26 January 2009 falls for scrutiny on two counts (a) whether the Accrued Amount should have been taken into account and (b) whether the requirement for "commercially reasonable procedures in order to produce a commercially reasonable result" was complied with (good faith not being in issue).
58. As to (a), it is common ground that the Accrued Amount should be taken into account. In my judgment the determination is nonetheless a determination where the Accrued Amount was not taken into account. NPC says that its failure to take into account the Accrued Amount was a manifest error entitling it to make a fresh determination. In my judgment it is the type of error that simply admits a case for correction of the determination, by agreement or by court or tribunal, and only in the respect in which there was an error.
59. As to (b), I turn next to consider the requirement for "commercially reasonable procedures in order to produce a commercially reasonable result", and the consequences if this requirement was not complied with.

"Act[ing] in good faith and us[ing] commercially reasonable procedures in order to produce a commercially reasonable result"

60. The definition of Close-out Amount in the 2002 ISDA Master Agreement appears in full above. It includes the provision:

"Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result."

61. In Lehman Brothers International (Europe) (In Administration) v Lehman Brothers Finance SA [2012] EWHC 1072 (Ch) Briggs J (as he then was) held, in relation to the 2002 ISDA Master Agreement:

"[The provision] clearly imposes two objective standards. The first is that the procedures used should be commercially reasonable and the second is that the result produced should also be commercially reasonable. Plainly, that leaves a bracket or range both of procedures and results within which the Determining Party may choose, even if the court, carrying out the exercise itself, might have come to a different conclusion. It nonetheless imposes an objective standard which, if for example the Determining Party refused to determine a Close-out Amount at all, could be applied by the court itself, for example on the application of the other party, as in Sudbrook Trading Estate v Eggleton [1983] 1 AC 444, where the breakdown of an agreed valuation procedure due to the refusal by one party to co-operate in the appointment of a valuer nonetheless left the court free to carry out the process itself on the application of the other party."

62. NPC argues that the references in the definition of "Close-out Amount" to "commercially reasonable procedures" and a "commercially reasonable result" require only that the Determining Party use rational procedures in order to produce a rational result. Provided that what NPC terms "the discretion" is exercised within the limits of rationality "the decision as to which particular outcome is appropriate is a subjective matter for the decision maker". NPC says this is what Briggs J was saying and, if it was not, he was wrong and his decision should not be followed. Reasons, or full reasons, for the decision of Briggs J were not given, says NPC.
63. Reasonableness as a concept may be deployed in a contract to require from a decision maker either rationality or entirely objective criteria of reasonableness: Socimer (above) at [66] per Rix LJ. The former is often described as analogous to Wednesbury unreasonableness (that is, in an ISDA Master Agreement context "a determination which no reasonable non-defaulting party could come to": Fondazione Enasarco v Lehman Brothers Finance SA [2015] EWHC 1307 (Ch) at [53] per David Richards J (as he then was)). Reasonable care, reasonable price and reasonable time are often given as examples of the latter.
64. The reference just given from Socimer is to the following, frequently cited, passage in the judgment of Rix LJ:

"It is plain from these authorities that a decision maker's discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria: as for instance when there might be an implication of a term requiring the fixing of a reasonable price, or a reasonable time. In the latter class of case, the concept of reasonableness is intended to be entirely mutual and thus guided by objective criteria. Gloster J was therefore, in my opinion, right to put to Mr Millett in the passage cited at para 57 above the question whether a distinction should be made between the duty to take reasonable care and the duty not to be unreasonable in the Wednesbury sense; and Mr Millett was in my judgment wrong to submit that it made no difference which test you deployed. Laws LJ in the course of argument put the matter accurately, if I may respectfully agree, when he said that pursuant to the Wednesbury rationality test, the decision remains that of the decision maker, whereas on entirely objective criteria of reasonableness the decision maker becomes the court itself. A similar distinction was highlighted by Potter LJ in para 51 of his judgment in Cantor Fitzgerald. For the sake of convenience and clarity, I will therefore use the expression "rationality" instead of Wednesbury-type reasonableness, and confine "reasonableness" to the situation where the arbiter on entirely objective criteria is the court itself."

65. I start with the wording used in the 2002 ISDA Master Agreement. It is important to keep in mind the fact that in the case of the 2002 ISDA Master Agreement we are concerned with the express wording of the contract, and not (as in some of the authorities: see in particular Braganza v BP Shipping (above) at [1]-[2], [17]-19], [23]-[32] per Baroness Hale; see also [52]-[57] per Lord Hodge, and [100]-[106] per Lord Neuberger) with whether a term is to be implied (and if so what term), or other constraint applied, in connection with decision making by a party to a contract.
66. The wording of the contract in Socimer was very different from the wording in the present case. It should not readily be accepted that the different, and express, wording in the present case has an effect that is the same as the term (requiring rationality) that the court would imply when the parties to a contract did no more than place a discretion in the hands of a contracting party (take Clark v Nomura (above) as an example).
67. What of the fact that the wording makes a party to the contract the decision maker? On the wording of a particular contract and in context the choice of decision maker may to some degree inform the conclusion about the nature of the decision making intended by the parties. Barclays Bank plc v Unicredit Bank AG [2014] EWCA Civ 302 especially at [15]-[16] is perhaps an example. And whatever the nature of the decision making there is room for respect to be accorded to the decision of the contracting party by whom the parties have agreed a matter should be decided: consider Braganza v BP Shipping Ltd [2015] UKSC 17; [2015] 1 WLR 1661 at [105] per Lord Neuberger.
68. However the choice to make a party to the contract the decision maker does not, in my judgment, compel a conclusion that "reasonableness" is deployed to mean rationality. It will depend on the wording and the context. The question of the nature of the decision making required by the parties to a contract is not the same as the question of the parties' choice of decision maker. The fact that the role of decision maker may place a party in a position of conflict of interest does not mean that "reasonableness" can only mean rationality; the contract parties will have chosen to accept the conflict of interest. And conflict of interest is no less an issue if rationality is required.
69. At times in the course of argument I considered there might be misunderstanding over the references to the decision maker and the court in the passage from Socimer quoted at paragraph 64 above. On my understanding, the reference to the decision remaining that of the decision maker where rationality is involved, does not mean that the court is unable to decide what a rational decision by a decision maker who is a party to a contract would be, where the decision maker has not made a decision or is said to have made a decision not open to it. Further, the reference to the arbiter on entirely objective criteria being "the court itself" does not mean that the parties to a contract are unable by the contract to task a party to the contract to reach a decision on entirely objective criteria. In that latter situation the court will decide what a decision on entirely objective criteria would be, where the decision maker has not made a decision or is said to have made a decision not open to it.
70. Briggs J identified the wording "in order to produce a commercially reasonable result" in the 2002 ISDA Market Agreement as adding what he termed a second objective standard, viz. that the result produced should be commercially reasonable. The wording is not simply describing the aim of commercially reasonable procedures. In their written opening Mr Sa'ad Hossain QC and Ms Joyce Arnold for LBSF in my view explained correctly why Briggs J was correct in this. They pointed out that to read the words "in order to produce a commercially reasonable result" as meaning that the determining party must act "with a view to" producing a commercially reasonable result or must use procedures apt to produce a commercially reasonably result renders the words superfluous, following as they do the words "commercially reasonable procedures".
71. Mr Dhillon QC counters that when Briggs J refers to "an objective standard" being imposed by the wording, that "objective standard" is not the same as the "entirely objective criteria" form of "reasonableness" contrasted with rationality by Rix LJ in Socimer. It is true that there is objectivity in rationality, but it is plain to me, reading his decision on the point as a whole, that Briggs J was speaking of the "entirely objective criteria" form of "reasonableness". He had shortly before referred (at [81]) to a choice "between Wednesbury reasonableness (often called rationality) and objective reasonableness, as that distinction is explained in the Socimer case."
72. Is a provision containing, in terms, a requirement "to produce a commercially reasonable result" when determining the Close-out Amount very different in character to a provision requiring a decision on reasonable price? I do not think so. NPC points to the wording "fair market value" in the definition of "Unpaid Amounts" in Section 14 (see paragraph 17 above), suggesting that this shows a contrast with the meaning of "commercially reasonable result". For my part I consider the different wording used in the definition of "Unpaid Amounts" does not disturb the interpretation of the wording used in the definition of "Close-out Amount".
73. The focus of "a commercially reasonable result" is on outcome. As to outcome, it is valuable to reference the distinction drawn by Lord Sumption in Hayes v Willoughby [2013] UKSC 17; [2013] 1 WLR 935 at [14]. The context of the case as a whole is of course different, but having expressly noted that "rationality has in recent years played an increasingly significant role in the law relation to contractual discretions" and cited Socimer, Lord Sumption said:

"Rationality is not the same as reasonableness. Reasonableness is an external, objective standard applied to the outcome of a person's thoughts or intentions. The question is whether a notional hypothetically reasonable person in his position would have engaged …. A test of rationality, by comparison, applies a minimum objective standard to the relevant person's mental processes. …"

74. The wording of the express term in the 2002 ISDA Master Agreement dealing with the determination to be made on early termination changed from the wording seen in the 1992 ISDA Master Agreement. The 1992 ISDA Master Agreement defined "Loss" on early termination by including the words "an amount that party reasonably determines in good faith to be its total losses and costs".
75. That wording in its context in the 1992 ISDA Master Agreement requires rationality. The position was summarised by David Richards J (as he then was) in Fondazione Enasarco v Lehman Brothers Finance SA (above) at [53]:

"… the relevant authorities now quite clearly establish that in considering whether the non-defaulting party has reasonably determined its Loss, that party is not required to comply with some objective standard of care as in a claim for negligence, but, expressing it negatively, must not arrive at a determination which no reasonable non-defaulting party could come to. It is essentially a test of rationality …".

76. The change to the wording from the 1992 form to the 2002 form was material: "[f]or the first time, the calculation of the liabilities on closing out had to be carried out 'in order to produce a commercially reasonable result'.": Lehman Brothers International v Lehman Brothers Finance (above), at [10] per Arden LJ. (For completeness, the 1992 ISDA Master Agreement had also contained the words "produce a commercially reasonable result" but only in a separate definition of "Settlement Amount" where it was preceded by the words "(in the reasonable belief of the party making the determination)"; for the importance of the words that preceded in brackets see Peregrine Fixed Income Fund Ltd v Robinson Department Store Public Co Ltd [2000] Lloyd's Rep Bank 304 at [17] and [38]-[39] per Moore-Bick J.)
77. It is clear from the 2002 User's Guide supporting the 2002 ISDA Master Agreement that the change to the wording was specifically designed to include (greater) objectivity. The Guide stated, in relation to the "payment measure" that was the Close-out Amount:

"Balanced by the interest of increased flexibility was the need to ensure that the new provision incorporated certain objectivity and transparency requirements that were felt to be lacking, particularly in the definition of Loss in the 1992 Agreement."

78. Mr Dhillon QC and Mr Kuehne for NPC argued that a requirement for a "wholly objective approach would deprive the Determining Party of the benefit of the discretion which it is given" by the 2002 ISDA Master Agreement. I respectfully disagree. I am not convinced a "discretion" is given. And in any event the benefit is always there in terms of control of the decision making process and particularly its speed.
79. Both rationality and (wholly objective) "reasonableness" allow for a result that falls within a range. So here, even using the concept of (wholly objective) reasonableness a number of results may be commercially reasonable. On the other hand, the fact that there is a range does not mean that the Determining Party can simply take the result that suits it best at one end of the range: consider Lion Nathan (above) at 1446G-H per Lord Hoffmann, but noting Rix LJ in Socimer at [103].
80. It is material to note that, by reason of provisions of the 2002 ISDA Master Agreement that I have not set out in full in this judgment, a Close-out Amount may fall to be calculated where there is no forced situation of default. That said, if there is a forced situation of default each of (wholly objective) "reasonableness" and rationality (as to which see Socimer at [111]-[113] per Rix LJ) allow account to be taken of that forced situation.
81. Taking all of the above into account, in my view, the 2002 ISDA Master Agreement requires the Determining Party to use procedures that are, objectively, commercially reasonable in order to produce, objectively, a commercially reasonable result. If it does not do this the court or a tribunal will. This is also the view I understand Briggs J to have held.
82. Lord Sumption in Hayes v Willoughby (above) at [14] described the reason why rationality has played an increasingly significant role in the law in relation to contractual discretions as being because "the law's object is … to limit the decision-maker to some relevant contractual purpose". The recognition of rationality as a basic standard is an important and welcome development of the common law, but looking across the (now many) authorities I am left wondering whether the courts have at times - deflected perhaps by the fact that the role of decision-maker has been given to a party to the contract - rested too readily with rationality, at times confining their interpretation unduly to this now familiar minimum standard whilst the contract wording used by the parties might have a higher claim to a conclusion that a higher standard was intended. The 2002 ISDA Master Agreement has, in my judgment, wording that shows a higher standard is intended when that standard form is chosen by the parties.

The determination

83. NPC was not a bank or financial institution. It did not have a "regular course of … business in pricing or valuing transactions" between itself and "unrelated third parties that are similar to the Terminated Transaction …involved" (see clause (1) towards the end of the definition of "Close-out Amount"). The procedure it adopted was to take the price of the UBS Transaction.
84. The 2002 ISDA Master Agreement provides that the Close-out Amount "will be determined as of the Early Termination Date or, if that would not be commercially reasonable, as of the date or dates following the Early Termination Date as would be commercially reasonable".
85. The Early Termination Date was 3 November 2008. NPC had indicative quotations at that date, and it was not until 7 November 2008 that it had firm quotations including a quotation from UBS that led to the UBS Transaction "as of" 12 November 2008, with an "Official Indicative Bid Date" of 7 November 2008.
86. On the particular facts of this case, I heard no evidence that persuaded me that, especially in the market circumstances at the time, it would have been commercially reasonable to determine the Close-out Amount as of 3 November 2008. At that stage one or more indicative quotations only were available. NPC proposed to enter into a transaction and for that purpose would and did seek firm quotations a short while later. The indicative quotations were preparatory to that. I heard no evidence that persuaded me that it was other than commercially reasonable to make the determination, as NPC did, as of the dates of the firm quotation from UBS and the UBS Transaction. There is of course no question that UBS fell within the wide description of third parties who might supply quotations.
87. The calculation of Close-out Amount is directed to "replacing or … providing for the Determining Party the economic equivalent of (a) the material terms of that Terminated Transaction … and (b) the option rights of the parties in respect of that Terminated Transaction" As the Determining Party, NPC was required to "consider, taking into account the standards and procedures described in [the] definition [of Close-out Amount], quotations pursuant to clause i above … unless the Determining Party reasonably believes in good faith that such quotations … would produce a result that would not satisfy those standards."
88. Evidence was tendered by NPC that NPC calculated the Close-out Amount by reference to a UBS quotation without option. I reject this. NPC did not attach a quotation with its notice on 26 January 2009, and the Annex included a US$1 million "prepayment premium". The notice was plainly based on the UBS Transaction, which was in turn based on the firm UBS quotation with option.
89. The UBS Transaction should not have been relied on says LBSF. I disagree for these reasons:

a. LBSF points to the internal communication on 5 November 2008 within UBS advising that they could price "without the PHP 4.478bn, just replace it with a US$1mm one-time payment in Nov 2009." However in the event UBS did price with the PHP 4.478bn.

b. LBSF points to the MTM valuations. However, whatever may be the position in other cases, in the present case these were not the same as the price at which a replacement transaction could be achieved, and the Close-out Amount was concerned with losses or costs (or gains) "in replacing or in providing for the Determining Party the economic equivalent of … the material terms of th[e] Terminated Transaction". All banks who provided a quotation for a replacement transaction did so and their quotations showed that replacement transactions were available and that they would always be at a cost to LBSF rather than NPC.

c. MTMs and valuations using a discounting curve further do not necessarily mean that value would be forthcoming for the covenant of NPC in terms of PHP cash flow (its promise to pay PHP 4.4788 billion in 2028). In the real world at the time, there were a number of examples (including the pricing of the options, and the quotations) that no material value was forthcoming for the convenant of NPC in terms of the PHP cash flow.

d. Given that the available facts include the quotations and the Replacement Transaction, for much the same reasons I respectfully regard the modelling and individual opinions offered by the expert witnesses, Mr Abdini and Mr Nahum, as of no materiality to the resolution of the particular questions at issue in this case. This includes the contention that a valuation could usefully be implied from a Credit-Linked Zero Coupon Note issued in November 2007.

e. he apparent suggestion from a bank on 6 November 2008 that NPC prepay "the entire PHP leg at … 34% of USD notional" does not mean that NPC's covenant to pay PHP 4.4788 billion in 2028 had a present value to a purchaser of US$34 million.

f. NPC wanted a replacement transaction. Their commercial need for the hedging it offered continued. They had no commercial interest in entering into a replacement transaction, with a major institution, at a price higher than it had to be.

g. The 2002 ISDA Master Agreement expressly provides that "[i]n determining a Close-out Amount, the Determining party may consider … quotations (either firm or indicative) for replacement transactions supplied by one or more third parties" and that "those quotations may take into account the creditworthiness of the Determining Party at the time the quotation is provided….". Where a firm quotation existed from UBS it was appropriate to regard that as having superseded the indicative quotation from UBS. The firm quotations from Deutsche Bank (Mr Dhillon QC observed little was heard from LBSF about these) show that UBS was not alone in according little value to the PHP cashflow. Mr Abdini, the expert called by LBSF, accepted that NPC's credit risk at November 2008, a time of world financial turmoil, was greater than a year before and not easy to take on.

90. The UBS Transaction however replaced more than the LBSF Transaction, for it included an option that NPC did not have as at the Early Termination Date.
91. LBSF suggested that there was more to the option than has been revealed; that the early advance irrevocable notice of exercise of the option, on 28 November 2008, indicates an agreement or understanding before the UBS Transaction to do this. However I am not satisfied that that was the case. There is no documentation. Mr Alexander Japon, called by NPC, could offer no information about it.
92. Subject to the aspect that is the option, I conclude that NPC properly relied on the UBS Transaction in making the determination. As to the aspect that is the option, on the facts it made no or no material difference, save that NPC was not entitled to pass on to LBSF the option exercise price or "prepayment premium" of US$1 million.
93. As indicated, I understand the Accrued Amount to be common ground. If there are any issues over the details of calculation of any sum I will consider these when dealing with matters consequential on this judgment, including any question of interest.
94. Even if there was no determination, if the determination is left to the court the UBS Transaction should be used. The Primary Determination takes a single indicative quotation when a firm quotation and actual transaction was shortly to be available. I do not accept that the Primary Determination uses commercially reasonable procedures in order to produce a commercially reasonable result. NPC's actions at the time suggest that was its view too.

Concluding remarks

95. The present case perhaps shows the wisdom of ISDA making the change it did in the respect under consideration, from the 1992 ISDA Master Agreement to the 2002 ISDA Master Agreement. This was a case of an actual replacement transaction, or near equivalent, offered after early termination and by a major institution and not out of line with two others, and accepted by the non-defaulting party. With its Primary Determination, and in the expert evidence it adduced, NPC illustrated the type of outcome that a contracting party given the role of decision maker and limited only by a requirement of rationality might instead press for regardless of the fact of that actual replacement transaction.
96. The present case may also show the value of contracting parties being clear about what they expect when they make one contracting party the decision maker in certain events, and of thinking about the consequences. Given some of the authorities (and see paragraph 82 above), if contracting parties want objective criteria of reasonableness to apply, they may need to do more than just use the word "reasonable". Again, in my judgment sufficient was done in, and in the context of, the 2002 ISDA Master Agreement to achieve this.