Repo makes it 2-1 for Wednesbury

Less than a month after National Power Corporation this week had the 12-page CA judgment in LBI EHF v Raiffeisen Bank International AG. LBI, an Icelandic bank that went bust post-Lehman, had bought securities and repoed them out to Raiffeisen under a GMRA.  LBI defaulted, leaving Raiffeisen to value the securities it was holding, in effect as security for a loan by it to LBI. The GMRA required it to assess their “Net Value”, defined as ” the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources and methods… as the non-Defaulting Party considers appropriate”. In the thin post-Lehman markets, that was not much. LBI argued that it should have disregarded this and valued them on the basis of a willing buyer and seller, not on the basis of a distressed sale into a thin market: in effect, “mark to model” rather than “mark to market”. The FAQs for the GMRA suggest this is so, and there were Canadian and Australian cases that suggested (in different contexts) that this was the right approach. The CA disagreed: the GMRA expressly gave the non-Defaulting Party a wide discretion (subject only to it not acting irrationally, as Blair J had decided in the Exxomobil case, and there was no basis for limiting this by implication to a willing buyer and seller in a normal market. And so, summing up under the ISDA 1992 and GMRA, the determination is only subject to Wednesbury reasonableness i.e. must not be irrational or perverse; only the procedure must be reasonable; but under ISDA 2002, the determination procedure must be reasonable and so must the outcome (“in order to produce a commercially reasonable result”).