Lehman Brothers International (Europe) v Lehman Brothers Finance SA

Lehman Brothers International (Europe) v Lehman Brothers Finance SA

The Side Letter is a material term of the Inter-company Transactions and must be taken into account in determining the Close-out Amount under the 2002 ISDA Master Agreement. The 2002 Agreement's express inclusion of 'material terms' and 'option rights' in the definition of Close-out Amount, together with the User’s Guide and commercial context, overrides the value clean principle as applied in the 1992 Agreement. The assumption of satisfaction of conditions precedent does not exclude the Side Letter from the valuation process.

Parties
Appellants: The Joint Administrators of Lehman Brothers International (Europe); Respondent: Lehman Brothers Finance SA
Jurisdiction
England and Wales
Judgment Date
14 March 2013
Procedural Posture
Civil Appeal / Appeal From High Court (chancery Division, Companies Court)
Outcome
Appeal allowed
Legal Topics
Interpretation of ISDA Master Agreement, Close Out Amount Calculation, Value Clean Principle, Material Terms in Derivatives Contracts, Automatic Early Termination, Option Rights in Financial Contracts
Insolvency Law Contract Law Financial Derivatives Interpretation of ISDA Master Agreement Close Out Amount Calculation Value Clean Principle Material Terms in Derivatives Contracts Automatic Early Termination +1 more

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Parties

The Joint Administrators of Lehman Brothers International (Europe)

Appellants

Lehman Brothers Finance SA

Respondent

Procedural Posture

Civil Appeal / Appeal From High Court (chancery Division, Companies Court)

Legal Issues

  1. 1 Whether the Side Letter between LBIE and LBF should be treated as a material term for the purposes of calculating the Close-out Amount under the 2002 ISDA Master Agreement upon early termination of intercompany derivative transactions.
  2. 2 Whether the 'value clean' principle or continuity assumption overrides the inclusion of the Side Letter as a material term in the valuation process.

Ratio Decidendi

The Side Letter is a material term of the Inter-company Transactions and must be taken into account in determining the Close-out Amount under the 2002 ISDA Master Agreement. The 2002 Agreement's express inclusion of 'material terms' and 'option rights' in the definition of Close-out Amount, together with the User’s Guide and commercial context, overrides the value clean principle as applied in the 1992 Agreement. The assumption of satisfaction of conditions precedent does not exclude the Side Letter from the valuation process.

Court Disposition

Appeal allowed

Orders

  • The appeal is allowed; the Side Letter must be taken into account as a material term in determining the Close-out Amount under the 2002 ISDA Master Agreement.