Recent Developments In Finance Litigation: The True Value Of A Diving Latin American Forward

In Socimer International Bank Limited (in liquidation) v

Standard Bank London Limited [2008] EWCA Civ 116, the

Court of Appeal gave useful guidance as to how to construe

valuation clauses which are silent as to the mechanics by which

such valuations are to be performed.

Background

Before it went into liquidation, Socimer International Bank

Limited ("Socimer") operated primarily as an

investment bank specialising in the trading of emerging market

bonds with its customers. In part, this trading was achieved

through the forward selling of emerging market assets. In order

to satisfy such sales, Socimer entered into a number of forward

purchase and/or repurchase agreements with other banks,

including Standard Bank London Limited ("Standard").

Under the terms of a November 1996 agreement with Standard

("the Agreement"), Socimer agreed to buy such

emerging market assets as it might trade from time to time

("the Designated Assets" - mainly Latin

American Debt Instruments) from Standard at a fixed price

("the Forward Value"). Although the amount of the

Forward Value was established when each transaction was agreed,

it only became fully payable on an agreed forward date

("the Forward Settlement Date"), which usually took

place 90 days after the trade date of the individual

transaction. Under the Agreement, Socimer was required to make

certain downpayments on Designated Assets, either on the trade

date, or between the trade date and the Forward Settlement

Date, meaning that only the balance of the Forward Value

("the Unpaid Amount") was due on the Forward

Settlement Date. Given that the amount of the Forward Value had

been determined as at the point of trade, Socimer took the risk

on the changing value of the underlying Designated Assets (i.e.

if, at the Forward Settlement Date, the value of the Designated

Assets was higher/lower than the Forward Value, then Socimer

would make a profit/loss on the purchase from Standard). For

its part, Standard effectively took the funding risk on the

Unpaid Amount for the period from the trade to the Forward

Settlement Date.

By early 1998, Socimer was experiencing financial

difficulties and, on 20 February 1998, Standard made demand of

Socimer for all outstanding Unpaid Amounts that it said it were

due under the Agreement (a figure which Standard put at

approximately US$24.5 million). Socimer was unable to pay the

Unpaid Amounts demanded and, on 3 March 1998, went into

liquidation. On 5 March 1998, Socimer gave...