Case No: 7942 of 2008
Neutral Citation Number: [2012] EWHC 1072 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

Date: 27/04/2012

Before:

MR JUSTICE BRIGGS
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Between :

	IN THE MATTER OF LEHMAN BROTHERS INTERNATIONAL (EUROPE)
(in administration)

LEHMAN BROTHERS INTERNATIONAL (EUROPE)	

Applicant	
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	LEHMAN BROTHERS FINANCE S.A.	Respondent	

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Mr Iain Milligan QC and Mr Julian Kenny (instructed by Linklaters LLP) 
for the Applicant
Mr David Railton QC and Mr Jonathan Russen QC (instructed by Field Fisher Waterhouse LLP) for the Respondent

Hearing date: 5,6 March 2012
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Judgment
Mr Justice Briggs : 
Introduction
1.	This application for directions by the joint administrators of Lehman Brothers International (Europe) (“LBIE”) seeks the determination by the court of issues as to the consequences (if any) of a letter agreement dated 24 July 2006 (“the Side Letter”) upon the conduct and outcome of Close-out Amount determinations under section 6 of the ISDA Master Agreement between LBIE and Lehman Brothers Finance S.A (“LBF”) dated as of 18 May 1992, following the Automatic Early Termination of all the then current transactions made pursuant to it, at 6.45 a.m. (BST) on 15 September 2008.
2.	The Administrators originally sought directions not only in relation to the Master Agreement with LBF, but also in relation to similar agreements with other Lehman Group affiliates who were parties to letter agreements substantially the same as the Side Letter.  In the event, there remain active and commercially relevant issues only between LBIE and (1) LBF and (2) Lehman Brothers International Inc (“LBI”).  As between LBIE and LBI, those issues are to be determined (if they cannot be compromised) on a different occasion.
3.	  As will appear, the main issue between LBIE and LBF is whether the Side Letter is to be taken into account at all in the determination of the Close-out Amounts.  As to this, (and the subsidiary issues), the Administrators are by no means neutral.  They estimate that if the Side Letter is to be taken into account, this will be to the financial advantage of LBIE and its stakeholders, as against LBF, by an aggregate amount in the region of US $1 billion.  This application has therefore taken the form of a straightforward adversarial contest between LBIE, acting by the Administrators, and LBF, acting by its own insolvency office holders.  
The Facts
4.	The relevant facts are not in dispute and, as in several previous applications by the Administrators, this application is, by consent, proceeding on the basis of assumed rather than decided facts, it being the parties’ perception that the real facts are likely to prove to be sufficiently proximate to the assumed facts, for a decision on the assumed facts to be sufficient to resolve the outstanding issues.
5.	At the time when the Side Letter was signed, LBIE was carrying on business with third parties (i.e. counterparties on the street, rather than Lehman Group affiliates) dealing in OTC derivatives by transactions the terms of which were governed by ISDA Master Agreements.  An important class of those derivatives was equity OTC derivatives.  In respect of that class it was and had been for some years prior to 2006 Lehman Group policy that LBF rather than LBIE should manage the risk arising from equity OTC derivatives traded by LBIE and that LBF should, subject to internal re-distribution of profits and losses, both enjoy the benefits and incur the risks of that trading.
6.	In order to transfer those risks and benefits from LBIE to LBF, all (or almost all) OTC derivative transactions undertaken by LBIE with customers on the street were matched by automatically generated equal and opposite back-to-back transactions between LBIE and LBF.  All those back-to-back transactions were governed by an ISDA Master Agreement in the 1992 form between LBF and LBIE dated 18 May 1992, with a Schedule of even date, naming LBF as Party A and identifying Lehman Brothers Holdings Inc (“LBHI”) as a Specified Entity in relation to Party A for the purposes (inter alia) of Section 5(a)(vii) of the Master Agreement.  Part 1(e) of the Schedule disapplied Automatic Early Termination under section 6(a) in relation to Parties A and B.  For the purposes of Section 6(e) relating to payments on Early Termination, Part 1(f) of the Schedule specified Market Quotation and the Second Method.
7.	Ordinarily, the specific terms of Transactions (as defined) under ISDA Master Agreements are identified in Confirmations so that, in relation to any particular transaction, the totality of its terms is to be ascertained from the combination of the Master Agreement, the Schedule and the relevant Confirmation.  By contrast, the back-to-back transactions automatically generated for the purpose of transferring the risks and benefits of LBIE’s equity OTC derivatives business to LBF were not recorded in separate Confirmations.  Rather, they were recorded electronically in inter-company accounting entries.  For present purposes, their details do not matter.
8.	The Master Agreement was amended as between LBIE and LBF on 6 July 2000, but in a manner not material to the issues on this application.  Thus, the Master Agreement in the form which I have described continued to govern LBIE’s and LBF’s back-to-back transactions at the time of the making of the Side Letter on 24 July 2006.  It took the form of a simple letter from LBIE to LBF, signed by LBIE and then counter-signed on behalf of LBF as “Agreed and acknowledged”.  For a document which is said now to have a value in the region of US$1 billion, it is in commendably concise form, sufficient to be recited in full:
“This letter will confirm the agreement between Lehman Brothers International (Europe) (“LBIE”) and Lehman Brothers Finance S.A. (“LBF”) concerning transactions between LBIE and LBF (“Intercompany Transactions”) for which LBIE has an offsetting transaction on identical terms with a client (the “Client Transaction”) leaving LBIE with no market position risk.  In the event that a Client Transaction should terminate or be closed-out and a settlement amount be calculated in respect of that termination or close-out, LBIE and LBF agree that the related, offsetting Intercompany Transaction will also terminate or be closed-out contemporaneously, and a settlement amount determined as payable by LBIE under the Client Transaction will become payable by LBF to LBIE as a settlement amount under the Intercompany Transaction, and a settlement amount payable to LBIE under the Client Transaction will become payable by LBIE to LBF as a settlement amount under the Intercompany Transaction, but only to the extent LBIE actually receives that settlement amount from its client under the Client Transaction, it being the intent of LBIE and LBF that LBIE should not accept market risk or counterparty credit risk under any Client Transaction and that all risks under Client Transactions should be passed to LBF under the Intercompany Transactions.”
9.	The terms of the Side Letter itself have given rise to no difficulty of interpretation on this application.  Furthermore, apart from an immaterial minor dispute about the extent to which they were fulfilled, the purposes for which it was entered into are also reasonably clear.  The back-to-back transactions (referred to in the Side Letter as “Intercompany Transactions”) were, as I have said, designed to transfer from LBIE to LBF the risks and benefits of LBIE’s equity OTC derivatives transactions referred to in the Side Letter as “Client Transactions”.  The use of a back-to-back ISDA governed Intercompany Transaction for transferring the risks and benefits of a relevant Client Transaction was only an imperfect tool for that purpose.  Although it fully transferred the market risk in the Client Transactions from LBIE to LBF, it failed to transfer two further risks.  The first, sometimes known as basis risk includes a risk, known as valuation risk, that two otherwise identical ISDA governed derivative transactions between different parties may, if closed out, lead to close-out valuations by different parties in significantly different amounts.  This is because the valuation process admits a margin of differing but valid outcomes, when conducted by different persons all acting in good faith and (to the extent necessary) using commercially reasonable procedures in order to produce a commercially reasonable result (the formula imposed by the 2002 edition of the ISDA Master Agreement).
10.	The second risk not catered for by the simple use of a back-to-back transaction is the credit risk associated with LBIE’s street counterparty.  Thus, (and ignoring valuation risk) the close-out of a client transaction which left LBIE in the money would lead to LBF being similarly in the money as against LBIE under the Intercompany Transaction, but expose LBF to no adverse consequence of LBIE’s client proving to be unable to pay.
11.	A third difficulty, as it seems to me, with the simple use of a back-to-back transaction is that, without further or special agreement, the close-out of a Client Transaction would not of itself trigger a close-out of the Intercompany Transaction at all.
12.	All these shortcomings in the structure which, until 2006, LBIE and LBF had used for the purpose of transferring to LBF the risks and benefits of LBIE’s OTC equity derivatives business were remedied, simply and save in one crucial respect effectively, by the Side Letter.  Thus the basis or valuation risk was transferred to LBF by treating the settlement amount determined under the Client Transaction as the settlement amount under the Intercompany Transaction.  The counterparty credit risk was dealt with by limiting LBIE’s obligation to LBF on close-out of the Intercompany Transaction (if out of the money viz a viz LBF) to payment of no more than it actually received from its client.  The third shortcoming was dealt with by providing a form of automatic early termination of the Intercompany Transaction upon any early termination of the Client Transaction.
13.	So far so good.  But the framers of the Side Letter appear to have given no thought to the question whether any specific provision should be made in the event that the Intercompany Transaction suffered early termination before the Client Transaction.  The Side Letter itself makes no express provision for such an eventuality, and nothing in the relatively brief exchanges of correspondence concerning the making of the Side Letter suggests that its framers within the Lehman Group gave any thought to that scenario as a real, rather than purely theoretical, prospect.  They may easily be forgiven for not having done so.  First, the Intercompany Transactions were, as at 2006, regulated by a Master Agreement and Schedule which dis-applied Automatic Early Termination for both parties.  Secondly, the most common form of trigger for early termination, namely some form of insolvency, was in 2006 visible, if at all, as something on the far horizon, no larger than a cloud the size of a man’s hand.
14.	For completeness, I should record that the Side Letter was one of a number of agreements made at the same time between LBIE and various of its affiliates, in each case for the same purposes, but in respect of different types of derivative business.  It appears from the contemporaneous email correspondence that this included derivative business where the Intercompany Transactions were governed by frameworks other than the ISDA Master Agreement.  Nonetheless, it is common ground that all the Intercompany Transactions between LBIE and LBF capable of being affected by the Side Letter were governed by the ISDA Master Agreement.  I infer that it is because of that wider purpose of the simultaneous affiliate agreements which included the Side Letter that it made no express reference to the Master Agreement itself.
15.	On 22 November 2007 LBIE and LBF made a further agreement (entitled Amendment Agreement) by which they applied Automatic Early Termination to Party B under the Master Agreement.  It was, I am afraid, a rather sloppily drafted document.  First, it described LBIE as Party A and LBF as Party B, contrary to the Schedule which gave them the opposite descriptions.  Secondly, by clause 2 it purported to dis-apply Part 4(d) of the Schedule whereas it should have dis-applied Part 1(e) thereof.  Nonetheless, it is now common ground that the object and effect of the Amendment Agreement was to apply Automatic Early Termination to LBF and not to LBIE for the purposes of Section 6(a) of the Master Agreement.  The evidence suggests (and it is not in dispute) that the reason for applying Automatic Early Termination to LBF was that Swiss insolvency law might invalidate optional early termination clauses in the event of  the insolvency of a Swiss company, such as LBF.
16.	On 29 August 2008 LBIE, LBF, other Lehman associates and a large number of unconnected banking entities worldwide made a mutual agreement, entitled the Close-Out Amount Multinational Agreement (“CMA”) whereby they agreed common amendments to the 1992 ISDA Master Agreements between them (therein described as Covered Master Agreements).  For present purposes, the most important amendments (contained in an Attachment to the CMA) had the effect, in general terms, of replacing the 1992 provisions for close-out and settlement amounts on early termination with the re-drafted provisions of the 2002 edition of the Master Agreement.  In bare outline, Section 6(e) of the 1992 edition enabled the parties to choose between four different bases for determining payments on Early Termination, by the adoption of either the First Method or the Second Method, and the use of either Market Quotation or Loss.  The 2002 equivalent substituted a single basis, which broadly equates with Second Method and Loss, although the formula uses and adjusts concepts and language to be found both in the definitions of Loss and Market Quotation in the 1992 edition.
17.	It is common ground that one effect of the CMA, as between LBIE and LBF, was to amend every existing Intercompany Transaction in the manner just summarised, and to constitute the amended basis for determining Close-out Amounts on early termination as the governing regime for all Intercompany Transactions between them thereafter.  The result is that all the Intercompany Transactions relevant to this application were governed thereafter by an amalgam of the 1992 and 2002 editions of the ISDA Master Agreement.  At my request, the parties provided in a single document an agreed version of Sections 6 and 14 of the 1992 edition, as amended by the relevant provisions of the CMA.  For convenience, and rather than setting out the relevant parts of those sections, I have appended the composite version to this judgment.
18.	Understandably, in the context of such a multi-party international agreement, its framers gave not the slightest thought to its consequences in connection with the Side Letter.  Of course, in the context of an early close-out of a Client Transaction expressly contemplated by the Side Letter, the amendments made to the Intercompany Transaction by the CMA would all be overridden by the Side Letter itself, since the close-out amount payable is determined by reference to the formula in the Client Transaction rather than in the Intercompany Transaction.  But the effect of the CMA on the Side Letter in the event of an early termination of the Intercompany Transaction was a matter about which, I have not the slightest doubt, no one gave a moment’s thought.  The result is that the necessarily objective determination of the true construction of the Intercompany Transactions which are the subject matter of this application takes place in an unusually perfect cognitive vacuum.
19.	It was scarcely more than a fortnight after the making of the CMA that the Lehman Group collapsed.  For present purposes, the relevant events were as follows.  First, at 06.45 BST on 15 September, Chapter 11 proceedings were started in New York in respect of LBHI.  Secondly, at 07.56 BST on the same day, an administration order was made in respect of LBIE.  Thirdly, insolvency proceedings in respect of LBF were instituted in Switzerland on 29 October.
20.	It is now common ground that the effect of the first in time of these events upon the Intercompany Transactions was as follows.  Since LBHI was LBF’s Specified Entity within the meaning of Section 5(a)(vii) of the Master Agreement, there occurred an Event of Default with respect to LBF at 06.45 BST on 15 September which, pursuant to Section 6(a), brought about an Early Termination Date in respect of all Intercompany Transactions because Automatic Early Termination had by then been specified in relation to LBF.
21.	The Chapter 11 event affecting LBHI may (and in most cases probably did) constitute an Event of Default under LBIE’s Client Transactions (since LBHI was probably LBIE’s Credit Support Provider thereunder, although the point has not been investigated).  Nonetheless, since Client Transactions did not provide for Automatic Early Termination in relation to LBIE, none of them terminated at the same time as the Intercompany Transactions.  It has become common ground therefore that all the Intercompany Transactions terminated before any of the Client Transactions for which they provided back-to-back offsetting support.
22.	On any view, LBIE’s own entry into administration slightly over an hour later will have constituted an Event of Default under all its Client Transactions.  As at 15 September LBIE had 472 clients with which it had current Client Transactions.  302 of those clients terminated all their relevant Client Transactions with LBIE during the first week after the appointment of the Administrators.  42 clients did so in the second week.  All but a very few have terminated their Client Transactions subsequently.  In every case, the client was the Non-defaulting Party under those transactions and therefore, regardless whether they had been made under the 1992 or 2002 editions of the Master Agreement, the client was the party entitled and obliged to determine the relevant early termination payments.
23.	Since then, LBIE via the Administrators has agreed Close-out Amounts with 103 clients (of whom 29 were creditors and 74 debtors).  284 of the remainder have presented determinations of early termination payments payable under their Client Transactions but these have yet to be agreed by LBIE.  Of the balance of 85 clients, a few have not terminated at all, and the rest have not yet purported to determine a early determination payment.
24.	LBIE is, of course, the Non-defaulting Party under all the now terminated Intercompany Transactions and the task of determining the appropriate Close-out Amounts under those transactions has therefore fallen upon the shoulders of the Administrators.  Notwithstanding the requirement in Section 14 (as amended) to carry out that determination as of the Early Termination Date (if commercially reasonable), LBIE has not made a determination in relation to any of them, nor decided which ‘as of’ date it should use for that purpose.  The identification of the appropriate ‘as of’ date is one of the issues for determination on this application.
The Issues
25.	As originally issued, the Ordinary Application sought the court’s directions on 12 questions, a number of which were then sub-divided.  Happily, the parties have sensibly co-operated so as to have reached agreement on answers to most of the questions, leaving only one main issue, and four much shorter subsidiary issues (which arise only if LBIE succeeds on the main issue) for determination by the court.  It has been unnecessary for the Administrators even to seek the court’s blessing in relation to the answers to the questions which have been agreed, since the Administrators do not seek to treat the outcome of this application as binding on anyone other than LBIE and LBF.
26.	The main issue is whether, in determining Close-out Amounts under Section 6(e) of the Master Agreement (as amended) in relation to the Intercompany Transactions, LBIE is entitled or required to take into account the Side Letter (or what the Administrators describe as its value) at all.  The Administrators submit that LBIE may and should do so.  LBF submits that LBIE must not.
27.	The subsidiary issues are as follows, and arise if, but only if, LBIE succeeds on the main issue.  First, LBIE seeks directions as to the ‘as of’ date which it should use for those determinations.  It has become common ground that, if the issue arises at all, LBIE may properly use as its ‘as of’ date the date of the order made upon my determination of this application.  But LBIE submits that it may defer the ‘as of’ date in respect of any particular Intercompany Transaction until the final determination of the early termination payment payable under the corresponding Client Transaction.  Any deferment of the ‘as of’ date beyond the date of the court’s order is opposed by LBF.
28.	Next, the administrators ask whether, if LBIE is not entitled to postpone the ‘as of’ date as they contend, then, in relation to Intercompany Transactions where, in the corresponding Client Transaction the client has proposed, but LBIE has yet to agree, a Close-out Amount, LBIE should value the Side Letter on the basis of (i) the client’s proposed amount, (ii) LBIE’s estimate of a negotiated settlement of that amount or (iii) LBIE’s own stated estimate (in negotiation with the client) of what that amount should be.
29.	It is unnecessary for me to recite the parties’ opening positions in relation to that issue.  During the course of the hearing they agreed that I should simply identify the precise standard of commercially reasonable conduct to be applied by LBIE in addressing that question in relation to each relevant Intercompany Transaction, there being no universally correct choice between the three originally proposed alternatives.
30.	The final two issues boil down into a repetition of that same question as to commercially reasonable conduct.  In substance, the question is whether LBIE is constrained to act in a manner which is not Wednesbury unreasonable, or whether it is obliged to conduct each close-out determination in a manner which is objectively reasonable, using the supposed antithesis between those two standards identified by the Court of Appeal in Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, per Rix LJ, at paragraphs 66 to 68.
31.	Sometimes, a series of issues of construction may be inter-related, so as to require an iterative analysis, rather than their determination in a pre-arranged order.  In the present case, counsel were ad idem in inviting me to determine the main issue first. 
The Main Issue
32.	Section 6(e)(i) of the Master Agreement (as amended) provides that, if (as here) the Early Termination Date results from an Event of Default, then:
“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.”
Section 6(e)(i) then goes on to provide that if the Early Termination Amount is a positive number, then the Defaulting Party will pay it to the Non-defaulting Party, and vice-versa if it is a negative number.
33.	The present dispute concerns the Close-out Amount rather than the Unpaid Amounts.  There is no issue about Termination Currency Equivalents.  The expression Close-out Amount is defined in Section 14 (as amended) and set out in full in the annex to this judgment.  It requires the Determining Party to identify the losses or costs, or the gains, which it would incur or realise in replacing, or in providing for itself the economic equivalent of, two items.  They are: (a) the material terms of the Terminated Transaction or group of Terminated Transactions and (b) the option rights of the parties in respect of that Terminated Transaction or group of Terminated Transactions.
34.	In the present case the Terminated Transactions are the Intercompany Transactions which all terminated simultaneously on 15 September 2008 and which were all affected, to use a neutral term, by the Side Letter.
35.	The phrase “material terms” in part (a) of the formula is not separately defined, but is expressed to “include” (rather than merely comprise):
“the payments and deliveries by the parties under Section 2 (a)(i) in respect of the ….. 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).”
The phrase “option rights of the parties” is not the subject of definition, nor is there any non-exclusive identification of any of them.  They are merely rights “in respect of” the Terminated Transactions.  By Section 6(e)(iv) (as amended) it is agreed that an amount recoverable under Section 6(e) is a pre-estimate of loss and not a penalty.  Such a loss 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.”
36.	Mr Iain Milligan QC for the Administrators submitted that the value of the Side Letter fell to be taken into account in any determination of the Close-out Amount or Amounts on two broad grounds.  First, he said that the contents of the Side Letter constituted material terms of each of the Intercompany Transactions, so that the valuer was to assume that the replacing, or provision for LBIE of the economic equivalent, of the material terms of each Intercompany Transaction necessarily required it to be assumed that the replacement or equivalent would include the terms of the Side Letter, or at least the value to LBIE of those terms.
37.	Alternatively he submitted that if the terms of the Side Letter were not material terms in that sense, so that the replacement or economic equivalent of the Intercompany Transactions did not include its terms or their value, then LBIE would suffer a loss occasioned by that process equivalent to the value of those missing terms.
38.	For LBF Mr David Railton QC submitted, first, that for a number of reasons the terms of the Side Letter were not material terms (in the relevant sense) of any of the Intercompany Transactions.  Secondly he submitted that, even if they might have been material terms in abstract theory, the assumptions which the valuer was required to make as part of a “clean” valuation, which assumed continuation of each Intercompany Transaction to the end of its natural life, meant that the terms of the Side Letter were of nil value.  Thirdly he submitted that if the terms of the Side Letter were not be included as material terms, then the loss of their value could not be recovered as a loss falling within the meaning of the Close-out Amount because the formula supplied by the definition of that expression was an exclusive identification of the losses to be valued, which necessarily excluded any other kind of loss, as contemplated by the closing words of Section 6(e)(iv) set out above.
39.	Before setting out my conclusions on the main issue, I must first, as did counsel, address the authorities on the meaning and effect of the ISDA early termination payment provisions.  They have, in the aggregate, firmly established a principle that the process of valuation is to be ‘clean’ rather than ‘dirty’.  They form a coherent and consistent body of judicial opinion to that effect.  They are however all cases about the early termination payment provisions of the 1992 version of the ISDA Master Agreement.  There is, so far as counsel are aware, no reported authority on the meaning and effect of the replacement provisions in the 2002 edition, inserted by the CMA into the Master Agreement for the purposes of the Intercompany Transactions.
40.	There are now six relevant authorities, namely (1) Australia and New Zealand Banking Group Ltd v Societe Generale  [2000] CLC 833, (2) Peregrine Fixed Income Ltd (in liquidation) v Robinson Department Store plc [2000] CLC 1328, (3) Britannia Bulk plc (in liquidation) v Pioneer Navigation Ltd [2011] 2 Lloyd’s Rep 84, (4) Pioneer Freight Futures Co Ltd v TMT Asia Ltd [2011] 2 Lloyd’s Rep 96, (5) Anthracite Rated Investments (Jersey) Ltd v Lehman Brothers Finance SA (in liquidation) [2011] 2 Lloyd’s Rep 538, and (6) Lomas & Ors v JFB Firth Rixson [2012] EWCA Civ 419.  The last of those decisions was handed down by the Court of Appeal only after the conclusion of the hearing in the present case, and this judgment has, with the parties’ agreement, been delayed pending its outcome.
41.	In the Anthracite case I attempted a summary of the emerging ‘value clean’ jurisprudence as follows:
i)	Loss and Market Quotation are, although different formulae, aimed at achieving broadly the same result, so that outcomes derived from one may be usefully tested by way of cross-check by reference to the other: see per Mance LJ in the Australia case at paragraphs 2, 15 and 22.  This derived from a concession in that case, but has subsequently been reaffirmed after adversarial argument in the Peregrine case at paragraph 30, in the Britannia Bulk case at paragraphs 44 to 46 and 51, and in the Pioneer case at paragraphs 98 and 105.  It is one of those sensible concessions which has hardened into hornbook law.
ii)	The identification of the non-defaulting party’s loss of bargain arising from the termination of the Derivative Transaction requires a ‘clean’ rather than ‘dirty’ market valuation of the lost transaction.  This means that the loss of bargain must be valued on an assumption that, but for termination, the transaction would have proceeded to a conclusion, and that all conditions to its full performance by both sides would have been satisfied, however improbable that assumption may be in the real world: see in the Australia case at paragraphs 5, 22 to 27 and 30-31, the Britannia Bulk case at paragraphs 11 to 14 and 34-35, and in the Pioneer case at paragraphs 112 to 117.
iii)	The termination payment formulae under Section 6(e) are not to be equated with, or interpreted rigidly in accordance with, the quantification of damages at common law for breach of contract.  They are methods of calculating close-out positions on the termination of a derivative transaction or series of transactions: see the Britannia Bulk case per Flaux J at paragraph 37.  This is, in particular, because the Second Method works both ways, and may lead to a close-out payment due to the defaulting party.
That summary was approved by the Court of Appeal in the Firth Rixson case, at paragraphs 129 to 131.   I am (now) bound by it.
Analysis
42.	The first question is whether the contents of the Side Letter constitute terms of the Intercompany Transactions at all.  Mr Railton advanced two reasons why they did not.  His first was that the Side Letter was better viewed as a collateral agreement, rather than as something operating by way of amendment of then existing Intercompany Transactions and, prospectively, forming part of the framework for those entered into thereafter.  He drew attention to the definition of ‘Transactions’ at the beginning of the Master Agreement, as including the Master Agreement itself, the Schedule and any Confirmation.  He pointed to the contrast between the Side Letter and those more formal amendments of the Master Agreement to which I have referred above.  He relied upon the contemporaneous email correspondence as suggesting that the Side Letter (and its equivalents between LBIE and other Lehman affiliates) really amounted to a separate arrangement, lying outside the Intercompany Transactions, and affecting them only in the circumstances specifically stated, namely early termination of a corresponding Client Transaction, while the Intercompany Transaction remained on foot.
43.	I consider that this submission confuses form with substance.  It is best addressed by considering the effect of the Side Letter upon a hypothetical single Intercompany Transaction made, for example, in December 2005.  Until July 2006 it contained only the standard 1992 ISDA provisions for early termination and would, as a matter of contractual obligation between LBIE and LBF, have continued to run its course undisturbed by any early termination of the corresponding Client Transaction.  In practice, I expect that LBIE and LBF would voluntarily have decided to close out an Intercompany Transaction once it no longer provided back-to-back cover for a terminated Client Transaction, but that is neither here nor there.
44.	After 24 July 2006, the effect of the Side Letter was to introduce into that hypothetical Intercompany Transaction an additional provision for automatic early termination upon the termination of the corresponding Client Transaction, with its own bespoke regime for the determination and payment of a settlement amount.  Viewed as a matter of substance rather than form, I consider it impossible to regard the Intercompany Transaction as not having undergone an important amendment by virtue of the Side Letter.  It was an amendment of a similar type to the introduction of Automatic Early Termination, as affecting LBF, by the amendment made in November 2007.  It was, quite simply, an important new term introduced by amendment into all pending Intercompany Transactions, and an important term from the outset of all Intercompany Transactions made thereafter.
45.	Mr Railton pointed to the (apparently agreed) fact that whereas all the Intercompany Transactions were governed by New York law, the Side Letter was governed by English law.  Again, this seems to me to be a matter of form rather than substance.  The only potential relevance of the choice of a different law to govern the side agreement might be, in the present context, that issues as to the interpretation of the Side Letter would fall to be determined by reference to different principles than those to be applied in the interpretation of the Master Agreement and Schedule.  But there are not in the present case any issues of interpretation of the Side Letter itself, nor is it suggested that such differences in the techniques of interpretation of commercial documents as may exist between English and New York law are of any relevance to the main issue, which is essentially a matter of interpretation of the Master Agreement.
46.	Mr Railton next submitted that, even if (as I have concluded) the contents of the Side Letter did, from July 2006, become terms of all pending and new Intercompany Transactions, nonetheless the Side Letter was wholly overridden by the CMA in August 2008, just before the Lehman group collapsed.  His submission ran as follows:
(i)	Unlike Automatic Early Termination under Section 6(a), early termination under the Side Letter operated strictly on a transaction by transaction basis, affecting only the Intercompany Transaction lying back-to-back with a Client Transaction that had terminated early.
(ii)	The substituted settlement amount inserted by the Side Letter did not altogether displace the provisions of Section 6(e) of the 1992 Master Agreement, in the circumstances where the Side Letter applied.  It operated by way of amendment to Section 6(e) by substituting the settlement amount under the Client Transaction for the Settlement Amount referred to in Section 6(e)(i)(3), and defined in Section 14.  It left intact and in full operation, in the event of an Early Termination brought about by the Side Letter, the provisions in Section 6(e)(i)(3) relating to Unpaid Amounts (as defined in Section 14).
(iii)	Since therefore settlement amounts under the Side Letter were to be determined, immediately prior to  August 2008, by the application of a partially amended version of Section 6(e), rather than by its dis-application, it followed that the wholesale replacement of Section 6(e) by the CMA necessarily also replaced those provisions incorporated by virtue of the Side Letter.  There was, he pointed out, no reservation in the CMA so as to preserve those provisions of Section 6(e), inserted by the Side Letter, from destruction.
47.	Sophisticated and ingenious though this argument is, I have not been persuaded by it.  I accept stage (i), but that does not seem to me to advance Mr Railton’s argument towards its conclusion.  I reject stages  (ii) and (iii).  I consider that the expression ‘settlement amounts’ where it appears (twice) in the Side Letter is intended to refer generally to the whole of the amount payable to or actually paid by the client under the terminated Client Transaction and to the whole of the amount to be paid by LBIE or LBF (as the case may be) by way of close-out of the related Intercompany Transaction.  That conclusion much better reflects the purpose and intent of the Side Letter, which is wholly to displace the early termination payment regime in the Intercompany Transaction in the event of an early termination of the associated Client Transaction, rather than to tinker with it.  I accept that this may leave a theoretical loophole in the event of Unpaid Amounts as between LBIE and LBF, but I doubt whether that loophole has any practical consequence.  The Side Letter was designed to operate typically in the event of an insolvency of the client, but where LBIE and LBF were discharging their mutual obligations punctually as they fell due.  Alternatively, it may be that as a matter of accounting practice, LBIE accounted to LBF under back-to-back Intercompany Transactions only for its receipts and payments with its client under the related Client Transaction.  In that case, unpaid amounts as between LBIE and LBF would precisely reflect any Unpaid Amounts as between LBIE and its client so that, again, treating ‘settlement amounts’ as encompassing the whole of the payments arising on termination rather than only the Settlement Amount as defined would give rise to no distortion or un-commercial consequence as between LBIE and LBF.  
48.	More fundamentally, I consider that this ingenious textual argument for the displacement of the Side Letter by the CMA produces, even if it had been correct, an outcome utterly at variance with any objective assessment of the reasonable intention of LBIE and LBF as parties to the CMA.  The purpose of substituting the 2002 regime for the determination of early termination payments for the earlier 1992 regime had nothing whatsoever to do with the preservation or destruction of the particular risk transfer purposes of the Side Letter.  In my view an objective assessment of the intentions of LBIE and LBF plainly leads to a conclusion that the very special regime constituted by the Side Letter was to remain intact and undisturbed.
49.	My rejection of Mr Railton’s first two submissions on the main issue clears the way for a direct analysis of the central question whether the terms of the Side Letter are ‘material terms’ within the meaning of the definition of “Close-out Amounts” in Section 14 (as amended) and, if so, with what consequence.  At first reading, the phrase “the material terms of that Terminated Transaction” provokes the question: material to what?  The natural answer would appear to be: material to the amount of the losses, costs or gains of the Determining Party that are or would be realised under then prevailing circumstances in replacing or providing the economic equivalent of the Terminated Transaction.  Putting it more simply, a term of the Terminated Transaction is material if its inclusion in the replacement transaction (or the economic equivalent of its value) would be relevant to the pricing of that hypothetical transaction.  Far from containing (as Mr Railton submitted) a coded message that certain terms potentially relevant to pricing should be excluded it is, at least at first sight, an invitation to the Determining Party to include all terms of the Terminated Transaction relevant to the price of its replacement or economic equivalent if therein included.
50.	But that is only a starting point.  Mr Railton advanced a series of submissions designed to confer a much more limited meaning on “material terms”.  First, he said that the expression was a pointer to the deal-specific terms of the particular Terminated Transaction, generally to be found in the Confirmation for that transaction.  That strikes me, again, as essentially formalistic.
51.	  Secondly, he submitted that whatever else might be included as material terms, terms providing for early termination were necessarily to be excluded since their inclusion as relevant to value would run counter to the requirement to assume satisfaction of the conditions precedent in Section 2(a)(iii).  The Side Letter is, of course, taken as a whole, a special provision for early termination.  It would he said fall within Section 2(a)(iii) as a “condition precedent specified in this Agreement” by which he meant that the obligations of LBIE and LBF under Section 2(a)(i) were conditional upon there being no early termination of the relevant Intercompany Transaction by reason of the terms of the Side Letter.  If the Determining Party’s assessment of cost, loss or gain is dependant upon an assumption that the Side Letter is not going to be triggered for as long as payments and deliveries remained to be made under Section 2(a)(i), then the Side Letter can have no economic effect upon the determination.
52.	Mr Milligan laboured long and hard, but I am afraid without success, to undermine this analysis.  First, he said that to confine ‘material terms’ to deal-specific terms of a particular Transaction likely to appear in its Confirmation would be contrary to the word “including” which introduces the terms as to payments and deliveries.  Plainly, he submitted, the intention is to widen rather than narrow the scope of potentially material terms.
53.	I agree.  In that respect Mr Milligan’s submission gains strength from the fact that the previous version of the formula (then part of the Market Quotation formula in the 1992 edition) referred only to the payments and deliveries and made no mention of material terms at all.
54.	Secondly Mr Milligan submitted that the express inclusion of the parties’ option rights in respect of the Terminated Transaction necessarily brought into the determination all elective (and therefore optional) early termination provisions.  If what was in substance an option to terminate early was to be included, then a fortiori an automatic early termination provision, such as that in the Side Letter, should also be included.
55.	This appeared initially to me to be a powerful point.  Elective early termination provisions are, as a matter of language, well within the general concept of option rights, and the inclusion of option rights is a novelty in the 2002 edition.  Again, it may appear at least at first sight to represent an intention to broaden the scope of items to be taken into account in the determination, by comparison with the 1992 regime.
56.	Mr Railton countered with the submission that if that was what ‘option rights’ meant, it would be flatly inconsistent with the assumption that the stream of payments and deliveries under Section 2(a)(i) would run their course.  For brevity I will refer to it as “the continuity assumption”.  He invited me to treat option rights as referring by way of example to options to take physical delivery rather than cash settlement, which he said (and this was not challenged) were a familiar feature of equity OTC derivatives.  In any event, he submitted that by parity of reasoning with the need to exclude early termination rights from the meaning of material terms, the same requirement arose in relation to option rights.
57.	Being satisfied (as I am) by Mr Railton that the expression option rights would not be deprived of useful meaning if treated as excluding early termination rights because of the continuity assumption, it seems to me that Mr Milligan’s reliance on them, however initially attractive, takes him no further.  His essential difficulty remained that to include anything which undermined the continuity assumption was to value dirty rather than clean.
58.	Mr Milligan submitted with some force that in certain important respects, the provisions of the 2002 regime for determining Close-out Amounts itself departed from a purely clean valuation.  For example, the Determining Party may consider third party quotations for replacement transactions which take into account the Determining Party’s own creditworthiness at the time when the quotation is provided, as well as credit support documentation between the Determining Party and the third party providing the quotation.  The creditworthiness of the Determining Party could only be relevant to the value of the Section 2(a)(i) stream of payments and deliveries if it gave rise to a risk of default by the Determining Party, and therefore the risk of early termination.  He said that there was nothing surprising in a formula which required the Determining Party first to value a stream of payments and deliveries clean, and then to apply adjustments or discounts referable to some risk that the payments stream would dry up, in the same way as the valuer of a freehold reversion would take into account the strength of the lessee’s covenant by way of a discount from the net present capital value of the promised rental stream.
59.	The entitlement to have regard to third party quotations which take into account the creditworthiness of the Determining Party is new in the 2002 edition.  Previously, under Market Quotation, the third party quotations were required only to take into account existing Credit Support Documents with respect to the obligations of the Determining Party.  To that limited extent, the 2002 edition builds out from a previously slightly narrower platform.
60.	At the heart of all Mr Milligan’s submissions on this point lay the undoubted fact that early termination provisions are, in the commercial world, relevant to the value of the transactions which contain them, such that their exclusion from the determination process will, subject to his alternative submission about loss, lead to a serious risk that the non-defaulting party will incur uncompensated loss, and therefore be worse off, by reason of the early determination of the transaction in issue.  He provided me with two colourful examples of early termination provisions which no valuer in the real commercial world could possibly ignore.  The first was a 10 year interest rate swap with early termination if rates exceeded a stated cap or fell below a stated floor.  The second was an oil-based derivative with provision for termination if war broke out between the USA and Iran.  To ignore such provisions would make a travesty of the notion that the purpose of the provisions for Close-out Amount determination was to leave the parties no better and no worse off than if the early termination of the transaction had not occurred.
61.	I recognise the persuasive commercial force of these submissions, taken in the abstract.  Nonetheless to give effect to them by permitting the early termination regime in the Side Letter to be taken into account in the Close-out Amount determination under the Master Agreement as amended by the CMA would, I consider, involve a radical departure from the ‘value clean’ principles thus far established by the authorities in relation to the 1992 edition.  As I see it, this could only properly be entertained (at least at first instance) if either the 2002 edition could be construed as having substantially abandoned that principle, or because the unusual purpose of the Intercompany Transactions (as a means of transferring risks and benefits undertaken under the Client Transactions) justified some wholly exceptional interpretation with no wider consequences.
62.	Mr Milligan sought to lead me down the first of those avenues, but not the second.  His first point was that the effect of the inclusion of option rights in the 2002 edition was specifically to reverse the decision in the ANZ case (supra).  There, the relevant Confirmation gave the defendant an option to substitute for payment in US dollars to ANZ a much less valuable payment stream, in certain stated events.  He pointed out that the outcome in ANZ had been criticised in Firth on Derivatives, at paragraph 11.134, as having disregarded a term that was fundamental to the economics of the transaction, where the provision which the Court of Appeal ignored was specifically designed to shift settlement risk from the defendant to ANZ.
63.	I am not persuaded that the inclusion of option rights was designed to, or did, dis-apply the value clean principle established in the ANZ case, in relation to the 2002 edition.  Mr Firth’s advice was not that ANZ was wrong, but that if parties wished to shift the economic consequences of a termination event from one party to the other, this needed to be addressed expressly.  More generally, the origin of the value clean principle, in the 1992 edition, is explained in the ANZ case as derived from the requirement, both under Market Quotation and (less forcefully) under Loss	, to assume the satisfaction of all conditions precedent, i.e. the continuity assumption.  The more rigorous version of that assumption found in the old Market Quotation formula has been transposed verbatim into the unified formula for determining the Close-out Amount in the 2002 edition with the obvious intent, and consequence, that the value clean principle is transferred in full force into the more modern formula.
64.	The ISDA User’s Guide to the 2002 edition of the Master Agreement states that the reference to option rights was included in the 2002 Agreement “as a matter of clarification”, but it does not explain the ambiguity that was thereby clarified.  Mr Railton suggested that it was an uncertainty whether, in the 1992 definition of Market Quotation, the reference to contingent obligations included options.  Whether that be correct or not, neither the User’s Guide nor any other material suggests that the inclusion of options was designed to put the 2002 edition beyond the purview of the value clean principle.
65.	Mr Milligan submitted that the value clean principle required no more than that the Section 2(a)(i) stream of payments and deliveries be valued clean first, before adjustment by reference to other economically relevant terms.  If that were the correct analysis of the principle, then it seems to me firstly that the ANZ case would have been differently decided, and the value of the US dollar payment stream heavily discounted by reference to the virtual certainty that Soc Gen would thereafter have elected to make payment by a different method.  Secondly it would, to my mind, create a pointlessly circular valuation approach.
66.	It is true that, literally speaking, the requirement in the 2002 definition of Close-out Amount to assume satisfaction of the conditions precedent in Section 2(a)(iii) is applied only to the valuation of the payments and deliveries, rather than to any other material terms.  But, again, it seems to me that if that assumption is to be dis-applied in relation to any other potentially economically relevant term in the Terminated Transaction, then in cases where it is obvious that there will be no further stream of payments or deliveries, or obvious that it will not persist to its natural conclusion, then the apparent requirement for the use of the continuity assumption becomes pointless.  In the Anthracite case (where the parties had chosen Second Method and Loss under the 1992 edition) I concluded at paragraph 116(2) that the whole of the valuation process should proceed upon the basis of the continuity assumption, however improbable that assumption might be in the real world.  I am not persuaded that anything in the linguistic changes by which the earlier Loss and Market Quotation alternatives were merged into one in 2002 had the effect of cutting down the importance of the continuity assumption, as the bedrock of a clean valuation, into a mere shadow of its former self.
67.	Mr Milligan did not, as I have said, seek to persuade me that the very special purpose of the Intercompany Transactions, and the making of the Side Letter for the more efficient fulfilment of that purpose, justified applying some exceptional and different interpretation to the 2002 definition of Close-out Amount than that which I have concluded flows as a matter of generality from its interpretation in accordance with established authority about its predecessor.  For completeness I have nonetheless asked myself whether a purposive interpretation, based upon the desire to transfer all risks and benefits of LBIE’s equity derivatives business to LBF, nonetheless justifies the inclusion of the value of the Side Letter in the event of the Automatic Early Termination of the Intercompany Transactions.  In my judgment it does not, for the reasons which follow.
68.	As Mr Railton forcefully observed, the express terms of the Side Letter had nothing whatsoever to do with adjusting the incidence of risk as between LBIE and LBF in the event of an early termination of the Intercompany Transactions ahead of any early termination of the Client Transactions.  Neither in 1992, when they adopted the 1992 edition of the Master Agreement nor in 2008, when they inserted the 2002 close-out regime by amendment, did LBIE and LBF expressly provide for anything other than the standard form consequences of early termination of the Intercompany Transactions ahead of early termination of the Client Transactions.  In my judgment the value of the Side Letter in that unexpected and un-provided for event fell to be determined by reference to the ordinary consequences of the successive adoption of those two standard forms of close-out formulae, in circumstances where, as pointed out by Mr Firth, the parties could, had they wished to do so, have made different express provision.
69.	In paragraph 115 of my judgment in the Anthracite case I referred to the overriding control tests of commerciality and reasonableness, as providing a measure of flexibility within the Master Agreement sufficient to enable it to be applied across a wide range of different types of transaction, in an infinitely variable combination of different circumstances.  In my judgment there is nothing unreasonable or un-commercial in a conclusion that LBIE and LBF should not be taken to have contracted to require the value of the Side Letter to be taken into account on a close-out following an early termination of the Intercompany Transactions caused, not by early terminating Client Transactions, but by the collapse of the Lehman Group.  The commercial reasons for the Side Letter had nothing to do with achieving perfect equity as between LBIE and LBF in a mutual insolvent collapse.  They were concerned with minimising LBIE’s regulatory burdens while carrying on business as a going concern.
70.	I have therefore concluded, precisely because the effect of the Side Letter is (where it applies) to bring about an early termination of the Intercompany Transactions, contrary to the continuity assumption underlying the 2002 determination of Close-out Amounts, that the contents of the Side Letter are not material terms for that purpose.  Alternatively, if they are material terms in theory, then the application of the continuity assumption means that they must be attributed a nil value.
71.	I turn to the alternative case advanced by LBIE, namely that if not material terms, then the omission of the terms of the Side Letter from the notional replacement transaction or economic equivalent means that LBIE should be recognised as having suffered a consequential loss.
72.	I can take this alternative much more briefly.  Mr Milligan’s analysis drew attention, again, to the statement in Section 6(e)(iv) that the amount recoverable under Section 6(e) is a reasonable pre-estimate of loss.  He pointed out that the Determining Party’s loss is not limited to the amount derived from the part of the formula relating to material terms and option rights, but includes costs of funding (if not otherwise included), and any loss or cost incurred in connection with terminating, liquidating or re-establishing any hedge related to a Terminated Transaction.  He pointed to the generally inclusive nature of the provisions as to the types of information and procedures which the Determining Party might use in conducting its determination.  Why, he asked, if funding costs and hedging costs may be included, should the value of the Side Letter be excluded?
73.	The answer to that rhetorical question is, as Mr Railton submitted, quite straightforward.  Section 6(e) (whether in the 1992 or the 2002 editions), is not a damages clause, but a formula for the contractual determination of Close-out Amounts: see the Anthracite case at paragraph 116(3) and 126.  The parties have chosen to include within that formula a list of specific items, some of which are mandatory and others permissive.   Thus material terms and option rights are mandatory, whereas funding costs and associated hedging costs and losses are permissive.  But the list simply does not include any other potential heads of loss which might be recoverable at common law, such as losses associated with the loss of the Side Letter rights.  As Section 6(e)(iv) (as amended) expressly provides:
“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.”
In addition, whereas the recovery as losses of funding costs and the recovery of losses in respect of associated hedges are not in any way inconsistent with the application of the continuity assumption which lies at the heart of the formula, the inclusion of an amount for the loss of the value of the Side Letter would be.  It is in my judgment both a loss expressly excluded by the requirement to value clean in accordance with the continuity assumption, and a head of loss which is not included and which therefore falls to be left out of account.
74.	For those reasons, the main issue is to be answered in accordance with the case presented for LBF.  The value of the Side Letter forms no part of the process of the  determination of the Close-out Amounts, nor is it otherwise to be included as part of LBIE’s loss.
The Timing Issue
75.	It is common ground that this issue arises only if, contrary to my view, the value of the Side Letter is to be included as a component in LBIE’s loss.  It would arise in those circumstances because of the difficulties in arriving at a reliable estimation of the settlement amounts arising on early termination of the Client Transactions, in advance of the determination of those amounts pursuant to the procedures incorporated therein.
76.	Since the outcome of this issue turns on no disputed questions of fact and since a higher court would, if it disagreed with my conclusion on the main issue, be as well placed as I am to answer this subsidiary question, I shall express my views about it briefly.
77.	It is common ground that, if this question arises at all, LBIE might properly have deferred its choice of the appropriate ‘as of’ date until the date of the order made in these proceedings.  The criteria for the qualified right to postpone the ‘as of’ date beyond the Early Termination Date is, first, that it should not be commercially reasonable to do so as of the Early Termination Date and, secondly, that a commercially reasonable later ‘as of’ date should be chosen.  In the event of an Early Termination Date applying to a group of Transactions, the provision for choice of ‘as of’ dates appears to permit different dates to be chosen for different Terminated Transactions.  
78.	The Administrators’ preference would be to defer the ‘as of’ date and the process of determination in relation to any particular Intercompany Transaction until final determination of the settlement amount payable under the corresponding Client Transaction.  This would, said Mr Milligan, resolve what would otherwise constitute crippling uncertainties in the process of informed guesswork to predict what those settlements amounts might be.  He acknowledged that it might be commercially unreasonable from LBF’s standpoint if a deferment were to extend beyond the date when LBF was otherwise ready to set a deadline for proofs in its insolvency process, and that it might be commercially unreasonable for a deferment to extend beyond any deadline for proofs of debt in LBIE’s administration.
79.	For LBF Mr Railton submitted that, in any insolvency process, it was beneficial to progress towards certainty in relation to assets and liabilities as soon as reasonably practicable.  He said that the current practical consequence of the unresolved close-out of the Intercompany Transactions was that it disabled the parties from knowing (on the hypothesis that the Side Letter was to be taken into account) for how much LBIE could exercise a disputed lien over assets of LBF.
80.	In my judgment, LBIE’s wait and see approach goes too far.  There comes a point when a desire to be certain rather than to predict becomes commercially unreasonable.  Had I concluded that the value of the Side Letter was to be taken into account, I would also have concluded that the date of my Order to that effect would, absent an appeal coupled with an application for a stay, have been a commercially reasonable ‘as of’ date.  Having concluded otherwise in relation to the value of the Side Letter, there seems to be no sense in requiring LBIE to adopt as its ‘as of’ date the date of my Order, since it would commit it to a hypothetical process which would only have objective reality if my Order was overturned on appeal.  I conclude therefore that the commercially reasonable ‘as of’ date would be the date upon which, by way of final determination of this application, some higher court may conclude (contrary to my view) that the Side Letter is to be taken into account.
The remaining issues
81.	The parties eventually came to a common view that the remaining issues could most sensibly be addressed by the identification of a single standard of reasonable conduct to be applied by the Administrators in their determination on LBIE’S behalf of relevant Close-out Amounts.  The choice, as I have said, lies between Wednesbury reasonableness (often called rationality) and objective reasonableness, as that distinction is explained in the Socimer case.
82.	For this purpose the governing language of the Master Agreement as amended is that:
“the Determining Party (or its agent), … will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result.”
In my judgment that requirement 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.
83.	Those are my conclusions on the issues for decision on this application.  I will hear submissions as to the form of an appropriate order.

SCHEDULE
Clauses 6 and 14 of ISDA Master Agreement 1992 Form 
as amended by the Close-Out Amount Multilateral Agreement
SIDE LETTER 
No 7942 of 2008
ISDA Master Agreement 1992 Form as amended by the Close-Out Amount Multilateral Agreement

6	Early Termination

(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. If, however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).

(b)	 	Right to Terminate Following Termination Event.
(i)	Notice. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require.
(ii)	Transfer to Avoid Termination Event. If either an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist.
If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i).
Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party’s policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed.
(iii)	Two Affected Parties. If an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event.
(iv)	Right to Terminate. If:-
(1)	a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or
(2)	an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party,
either party in the case of an Illegality, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions.

(c)	 	Effect of Designation.
(i)	If notice designating an Early Termination Date is given under Section 6(a) or (b), 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 2(e) 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 shall be determined pursuant to Section 6(e).

(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 (l) 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 payable and (3) giving 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 amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed.

(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 any Set-off.
(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.
(ii)	Termination Events. If the Early Termination Date results from a Termination Event:―
(1)	One Affected Party.  If there is one Affected Party, the Early Termination Amount will be determined in accordance with Section 6(e)(i), except that references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and to the Non-affected Party, respectively.
(2)	Two Affected Parties.   If there are two Affected Parties, each party will determine an amount equal to the Termination Currency Equivalent of the sum of the Close-out Amount or Close-out Amounts (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions, as the case may be, and the Early Termination Amount will be an amount equal to (A) the sum of (I) one-half of the difference between the higher amount so determined (by party “X”) and the lower amount so determined (by party “Y”) and (II) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to Y.  If the Early Termination Amount is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of the Early Termination Amount to Y.
(iii)	Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because Automatic Early Termination applies in respect of a party, the Early Termination Amount will be subject to such adjustments as are appropriate and permitted by applicable law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii).
(iv)	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..

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14	Definitions
As used in this Agreement:-
“Additional Termination Event” has the meaning specified in Section 5(b).
“Affected Party” has the meaning specified in Section 5(b).
“Affected Transactions” means (a) with respect to any Termination Event consisting of an Illegality, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions.
“Affiliate” means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, “control” of any entity or person means ownership of a majority of the voting power of the entity or person.
“Applicable Rate” means:-
(a)	in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;
(b)	in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate;
(c)	in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and
(d)	in all other cases, the Termination Rate.
“Burdened Party” has the meaning specified in Section 5(b).
“Change in Tax Law” means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into.
“Close-out Amount” means, with respect to each Terminated Transaction or each group of Terminated Transactions and a Determining Party, 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 data 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 or relevant market data 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 data 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) or (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 in connection 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.
“consent” includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent.
“Credit Event Upon Merger” has the meaning specified in Section 5(b).
“Credit Support Document” means any agreement or instrument that is specified as such in this Agreement.
“Credit Support Provider” has the meaning specified in the Schedule.
“Default Rate” means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum.
“Defaulting Party” has the meaning specified in Section 6(a).
“Determining Party” means the party determining a Close-out Amount.
“Early Termination Amount” has the meaning specified in Section 6(e).
“Early Termination Date” means the date determined in accordance with Section 6(a) or 6(b)(iv).
“Event of Default” has the meaning specified in Section 5(a) and, if applicable, in the Schedule.
“Illegality” has the meaning specified in Section 5(b).
“Indemnifiable Tax means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organised, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document).
“law” includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any relevant governmental revenue authority) and “lawful” and “unlawful” will be construed accordingly.
“Local Business Day” means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located and, if different, in the principal financial centre, if any, of the currency of such payment, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction.
“Non-affected Party” means, so long as there is only one Affected Party, the other party.
“Non-default Rate” means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount.
“Non-defaulting Party” has the meaning specified in Section 6(a).
“Office” means a branch or office of a party, which may be such party’s head or home office.
“Potential Event of Default” means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default.
“Relevant Jurisdiction” means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organised, managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment, from or through which such payment is made.
“Scheduled Payment Date” means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction.
“Set-off” means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer.
 “Specified Entity” has the meanings specified in the Schedule.
“Specified Indebtedness” means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money.
“Specified Transaction” means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation.
“Stamp Tax “ means any stamp, registration, documentation or similar tax.
“Tax” means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax.
“Tax Event” has the meaning specified in Section 5(b).
“Tax Event Upon Merger” has the meaning specified in Section 5(b).
“Terminated Transactions” means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if “Automatic Early Termination” applies, immediately before that Early Termination Date).
“Termination Currency” has the meaning specified in the Schedule.
“Termination Currency Equivalent” means, in respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the “Other Currency”), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Close-out Amount is determined as of a later date, that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in the city in which such foreign exchange agent is located) on such date as would be customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties.
“Termination Event” means an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event.
“Termination Rate” means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts.
“Unpaid Amounts” owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties.