Lehman Brothers International (Europe) v ExxonMobil Financial Services [2016] EWHC 2699 (Comm)

Global Publication February 2017

High Court delivers leading judgment on close-out valuation of repo transactions under GMRA 2000 and guidance on the meaning of ‘close of business’.


The English High Court has ruled on a number of key issues arising out of a disputed close-out under a standard form Global Master Repurchase Agreement (2000 version) (GMRA 2000), making the judgment the leading English authority on the interpretation of the close-out valuation mechanics under the GMRA 2000. It also addressed a number of issues, such as the meaning of ‘close of business’, service of notices by e-mail and the exercise of a contractual discretion regarding valuation, which are of wider relevance to finance contracts.

The outcome was that the majority of ExxonMobil Financial Services B.V.’s (EMFS) original or alternative close-out valuations were vindicated. The valuations which were argued for by Lehman Brothers International (Europe) (LBIE) were not upheld.


This was a dispute between LBIE and EMFS, a financial services arm of the ExxonMobil oil industry group, over the close-out valuation of a sale and repurchase (repo) transaction under the GMRA 2000. This followed LBIE’s default in September 2008.

A single repo transaction was outstanding at the time of LBIE’s default. Its commercial effect was in some respects similar to: (a) EMFS lending US$250 million to LBIE; and (b) LBIE providing EMFS with collateral in the form of a large and diversified portfolio of equities and bonds.

The dispute raised questions of some complexity as to the meaning and effect of the close-out valuation and notice provisions in the GMRA 2000, some of which are of wider application.

‘Close of business’

The GMRA 2000 (at paragraph 14(b)) deems a notice or communication received after ‘close of business’ (in the place where such notice or communication is to be given) to have been given at the open of business on the following business day. However, ‘close of business’ is not defined in the GMRA 2000 and one of the issues was therefore when the ‘close of business’ was in London (that being where LBIE, the recipient of the Default Valuation Notice, was based). This issue is of wider importance as the term ‘close of business’ is of course used in many other financial contracts, such as the 2002 ISDA Master Agreement, but is often undefined and thus far, there has been no definitive English law authority on its meaning.

Blair J ruled that the meaning of ‘close of business’ depends on the specific context. In this case, namely, repo financing extended by an major oil company to an international investment bank, he rejected LBIE’s submission that 5pm (at the latest) was the obvious answer, noting that a reasonable person might be surprised to hear that business closes at 5pm in such a context. LBIE having adduced no admissible evidence on this point and EMFS having adduced expert evidence to the contrary, this was sufficient to decide the point in favour of EMFS. EMFS’s Default Valuation Notice, which was received by LBIE at or shortly after 6:02pm London time, was therefore found to have been received prior to the close of business in London.

The term ‘close of business’ is thus context dependent and there is no one universal time that applies in all circumstances. In the context of transactions between sophisticated counterparties, which carry on business well into the night, one cannot simply assume that "close of business" occurs at around 5pm.

Service by e-mail

Another issue to be decided was whether e-mail was a valid method of service of contractual notices under the GMRA 2000. Whilst strictly speaking obiter, Blair J gave a very clear indication that, as EMFS had argued, e-mail would be a valid method of service under the GMRA 2000, distinguishing Greenclose Ltd v National Westminster Bank PLC [2014] EWHC 1156 (Ch). A key point of distinction was that LBIE had included e-mail addresses in Annex 1 to the GMRA 2000 setting out addresses for notices, whereas the Schedule to the ISDA Master Agreement in Greenclose did not specify any email addresses for notice purposes.

Approach to valuation

One of the methods of valuing securities under the GMRA 2000 involves a ‘Net Value’ concept to be determined (in this particular instance) on the date falling five dealing days after the Event of Default occurred. Net Value is defined as ‘the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value’. Where EMFS had not originally valued the securities under this method and it was decided that (principally because of other timing issues concerning the service of notices) EMFS was required to value some of the securities under this method, a question arose as to how the Court should approach the issue of valuation.

LBIE’s primary case was that the relevant securities should be ascribed their objectively reasonable fair market value. EMFS’s case was that they should be ascribed a fair market value in accordance with the opinion which EMFS (acting rationally) would have formed – had it conducted such a valuation exercise in accordance with the relevant terms of the GMRA 2000.

In short, Blair J accepted EMFS’s case. The leading authorities on the exercise of a contractual discretion (including Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116) established that the Court ought not seek to establish an ‘objectively reasonable’ fair market value to the securities. Instead, it ought to apply a (Wednesbury) rationality test to the discretionary decision. The application of an objective test would largely deprive the counterparty of the benefit of the discretion which the contract gives it.

In the absence of the exercise of the discretion by EMFS at the relevant time, Blair J went on to say that the Court was engaged with a ‘counterfactual’ scenario of what opinion EMFS would have formed had it conducted the applicable valuation exercise acting rationally and in accordance with the relevant terms of the GMRA 2000, which was largely a question of fact.

Issues specific to the GMRA 2000

In addition to the points of wider application above, the following issues, which are more specifically confined to the GMRA 2000, were also decided

  • It was sufficient that a valid Default Notice under the GMRA 2000 clearly conveyed to the recipient that an event is being treated as an Event of Default. It was not required to identify the specific event relied upon as the Event of Default.
  • The fax number stated in Annex 1 to the GMRA 2000 under addresses for notices had to be used for valid service and the use of a different number was prima facie invalid. However, on the facts, Blair J found that LBIE had waived this requirement in circumstances where EMFS had used another fax number (LBIE’s stipulated fax number having been busy), LBIE had in fact received the relevant notice and it had not taken issue with the point until some six-and-a-half years later in an amendment to its pleadings.
  • In the context of the large and diverse portfolio of securities in issue, it would not have been permissible to determine a single ‘global’ Appropriate Market for the entire portfolio of securities. (Appropriate Market is a term which under the GMRA 2000 is relevant to the determination of the time by which a Default Valuation Notice is to be served and the markets in which quotes are to be obtained 
for the purposes of a Default Valuation Notice.)


While some of the specific issues of construction will be of primary interest to users of the GMRA 2000, the guidance on the meaning of ‘close of business’, service by email and the approach to valuation is of general importance. The High Court took a commercial view of all these issues which will be welcomed by market participants.

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