| CONTRACT — Construction — Forward sales of securities — Forward sale transaction agreement terminated on bank’s default — Defaulting bank owing creditor bank for purchase of portfolio of securities — Creditor bank’s obligation to value defaulting bank’s assets at termination — Whether creditor bank obliged to conduct reasonable objective valuation of true market value — Whether honest but otherwise subjective valuation sufficient
Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd [2008] EWCA Civ 116; WLR (D) 58
CA: Laws, Rix and Lloyd LJJ: 22 February 2008
Where a commercial agreement obliged a creditor bank to determine the value of the assets of the defaulting debtor bank at the date of termination, the creditor bank’s obligation was to carry out an honest, but otherwise subjective valuation.
The Court of Appeal so held in a reserved judgment, allowing an appeal by the defendant, Standard Bank London Ltd (now Standard Bank plc), from the order of Gloster J dated 19 February 2007 that, inter alia, the claimant, Socimer International Bank Ltd (in liquidation), have judgment for US $15,215,232⋅02 including interest.
The claimant bank, subsequently in liquidation, was in default of an agreement with the defendant bank, with whom it had been trading in the securities of emerging markets. On the relevant termination date the claimant owed the defendant US $24⋅5 m in unpaid amounts in respect of a portfolio of forward sales of securities which it had bought. Under the agreement the defendant had a discretion to liquidate or retain the portfolio to satisfy the amount due to it, but it was obliged to determine the value of the portfolio on the date of termination. Rather than valuing the assets on that date the defendant sold them piecemeal, not crediting the proceeds to the claimant until sale. The claimant’s liquidator issued proceedings against the defendant alleging that, having regard to valuations as at the termination date, the defendant owed the claimant sums in excess of $13⋅8 m. The defendant denied the claim and asserted that it was still owed money in the liquidation. At the trial on valuation Gloster J accepted the claimant’s submission that, as a matter of contractual implication, or alternatively as a matter of equity by analogy with the duties of a mortgagee with a power of sale, the defendant was bound to take reasonable care to find the true market value. She rejected the defendant’s unchallenged evidence on valuation and produced a valuation greatly in excess of the defendant’s case. The defendant appealed.
RIX LJ said that the clause in question provided that “the value of any designated assets liquidated or retained and any losses, expenses or costs arising out of the termination or the sale of the designated assets shall be determined on the date of termination by seller.” When a contract allocated to one party a power to make decisions under the contract which might have an effect on both parties, it was plain from the authorities that the decision-maker’s discretion would be limited, as a matter of necessary implication, by concepts of honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality (as understood in the Associated Provincial Picture Houses Ltd v Wednesbury Corpn [1948] 1 KB 223 sense): see Abu Dhabi National Tanker Co v Product Star Shipping Ltd (No 2) [1993] 1 Lloyd’s Rep 397; Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd’s Rep IR 221; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299; Paragon Finance plc v Nash [2002] 1 WLR 685; and Horkulak v Cantor Fitzgerald International [2005] ICR 402. An implied term, beyond that of good faith and rationality, was neither necessary nor sufficiently certain. The defendant was compelled by its buyer’s default to retain what it never sought, save to the extent that it could immediately liquidate the assets on the termination date. The decision remained that of the defendant, not of the market or the court, and in coming to its assessment, subject to the limitations of good faith and rationality, it was entitled primarily to consult its own interests. The requirements of good faith and rationality were a sufficient protection to guard against abuse caused by self-interest. The analogy of the position of a mortgagee in equity was not apposite. The defendant’s position was governed by its commercial contract, not by the law of equity. This was the world of sophisticated investors, not that of consumer protection. These merchants in the securities of emerging markets had made an agreement which spoke for the need for a spot valuation, not the more leisurely process of taking reasonable precautions, such as properly exposing the mortgaged property for sale, designed to get the true market price by a correct process. Meanwhile, the assets involved were those of the defendant, not of the claimant, and the underlying background was that where the buyer defaulted he lost both the right to complete his purchase and his down-payment. It followed that the judge had erred in construing the valuation sentence as requiring an objective inquiry into the true market value of the designated assets, or as imposing a duty of reasonable care upon the defendant.
LLOYD LJ, delivering a concurring judgment, said that it was important to draw a distinction between a transaction which was a mortgage and one which was not a mortgage as a matter of true legal analysis. The duties to which a mortgagee was subject were no guide at all on the question whether it was legitimate to imply into the contract, which was not a mortgage, such a term as the judge found.
LAWS LJ agreed with both judgments.
|
