Court Of Appeal Delivers Judgment On The Correct Construction Of The Default Valuation Provisions In The GMRA (2000 Version)

LBI EHF v Raiffeisen Bank International AG [2018] EWCA Civ 719

Introduction

The English Court of Appeal has ruled on the correct construction of the default valuation provisions in the Global Master Repurchase Agreement (2000 version) ("GMRA") and, in particular, the meaning of "fair market value" in the definition of "Net Value".

LBI's claim

The claim was brought by LBI EHF. (formerly Landsbanki Islands hf) ("LBI") arising out of the close-out in October 2008 of repo and securities lending transactions entered into by Raiffeisen Zentralbank Österreich AG (now Raiffeisen Bank International AG ("RBI")) and LBI.

On 7 October 2008, following the collapse of the Icelandic banking system the Financial Supervisory Authority of Iceland appointed a Resolution Committee to manage the affairs of LBI. That was an event which RBI was entitled to, and did, declare an Event of Default under the GMRA1. At that point RBI had eleven open positions in securities (bonds and a Sukuk) sold to it by LBI against LBI's agreement to repurchase them on a variety of dates.

The GMRA gives the non-Defaulting Party the option of serving a Default Valuation Notice within 5 business days of the date on which the Event of Default occurred (the Default Valuation Time) and to deploy one of three alternative valuation methods.

In this case however no Default Valuation Notice (as defined by the GMRA) was served by RBI by the Default Valuation Time (of 15 October 2008). In those circumstances the GMRA provided, by paragraph 10(e)(ii) that:

"...the Default Market Value of the relevant Equivalent Securities ... shall be an amount equal to their Net Value at the Default Valuation Time; provided that, if at the Default Valuation Time the non-Defaulting Party reasonably determines that, owing to circumstances affecting the market in the Equivalent Securities ... in question, it is not possible for the non-Defaulting Party to determine a Net Value of such Equivalent Securities ... which is commercially reasonable, the Default Market Value of such Equivalent Securities ... shall be an amount equal to their Net Value as determined by the non-Defaulting Party as soon as reasonably practicable after the Default Valuation Time."

Paragraph 10(d)(iv) of the GMRA defines "Net Value" as:

"...the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources and methods (which may include, without limitation...