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Lehman v National Power Corporation (2018) – No second bite of this calculation cherry

Lehman Brothers Special Financing Inc v National Power Corporation & Another [2018] EWHC 487 (Comm) (12 March 2018)


This case, heard in the High Court, concerned good faith in the exercise of discretion when calculating a close-out amount under the 1992 ISDA Master Agreement. There was a disparity between the two parties over what would be considered a ‘commercially reasonable amount’, and how to calculate it.

Original trade: Claimant (LBSF) would pay NPC USD100m in 2028 and NPC (now PSALM, although still a Philippines state-owned firm) would pay LBSF USD equivalent of PHP4.4bn (Philippine Peso).

LBSF granted NPC an Option to pay USD1m on 15/05/08 instead of the 2028 PHP figure, although it was not exercised before it expired.

Early Termination

LBSF’s parent company Lehman Brothers collapsed Sept 08. LBSF filed for Chapter 11 bankruptcy in the USA on 03/10/08. This constituted the Transaction’s Events of Default. NPC served notice of Early Termination on 17/10/08, with the contractual Early Termination Date being 03/11/08.

As NPC served notice of ET, it fell to them to determine the Close-Out Amount payable, which had to be done ‘in good faith and us[ing] commercially reasonable procedures in order to produce a commercially reasonable result’ (2002 ISDA 14. ‘Definitions’; ‘Close-Out Amount’). NPC duly demanded US$3,461,590.93 on 26/01/09. This was calculated based on the cost of a replacement transaction that would have been executed with another investment bank (UBS Group).

At court, NPC alleges that LBSF owes them (or, now, their successor company PSALM) a revised calculation amount of US$10,778,943, based on other quotations. They acknowledged that their initial demand was not conducted correctly, failing to account for certain aspects of the original Transaction, and that, as the non-defaulting party, they were then able to make a fresh determination.

LBSF, on the other hand, argued that they were owed US$12,826,887 by NPC.

Defendant and claimant argued for the use of two different standards of ‘reasonableness’:

Defendant (NPC) – ‘rationality’. A decision would only fall short of this standards if it was one which no reasonable decision-make would have reached.

Claimant (LBSF) – ‘objective reasonableness’. A duty to take reasonable care and is assessed with objective criteria. A higher standard than basic rationality.

The Court held that the original UBS-based calculation for $3.5m did comply with Section 6(d) 2002 ISDA’s requirements for calculation of Close-Out Amount. While there were two non-crucial errors in the calculation, which had to be taken into account, the original (adjusted) calculation was the correct one, and the defendant could not entirely change the valuation to another one obtained through a different method (i.e. the $10.7m figure). If the original figure was erroneous, it could be adjusted through agreement with the counterparty, or through the court, but could not be unilaterally rescinded and replaced by an entirely separate valuation.

While the court recognised that there is not one perfect value, and a range of answers to the section 6(d) calculation might be acceptable, the Determining Party could not pick and choose between figures, especially if they had already announced to the counterparty that they had decided to use one of them.


It is useful to know that the courts will not allow for unilateral rescinding and reissuing of Section 6(d) calculations. Companies must act in good faith both while making the original calculation and then in not attempting to rescind that calculation in favour of a more favourable one.

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