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

Last Updated: 18 September 2008
Article by Edward Davis and Sue Millar

In Socimer International Bank Limited (in liquidation) v Standard Bank London Limited [2008] EWCA Civ 116, the Court of Appeal gave useful guidance as to how to construe valuation clauses which are silent as to the mechanics by which such valuations are to be performed.


Before it went into liquidation, Socimer International Bank Limited ("Socimer") operated primarily as an investment bank specialising in the trading of emerging market bonds with its customers. In part, this trading was achieved through the forward selling of emerging market assets. In order to satisfy such sales, Socimer entered into a number of forward purchase and/or repurchase agreements with other banks, including Standard Bank London Limited ("Standard"). Under the terms of a November 1996 agreement with Standard ("the Agreement"), Socimer agreed to buy such emerging market assets as it might trade from time to time ("the Designated Assets" – mainly Latin American Debt Instruments) from Standard at a fixed price ("the Forward Value"). Although the amount of the Forward Value was established when each transaction was agreed, it only became fully payable on an agreed forward date ("the Forward Settlement Date"), which usually took place 90 days after the trade date of the individual transaction. Under the Agreement, Socimer was required to make certain downpayments on Designated Assets, either on the trade date, or between the trade date and the Forward Settlement Date, meaning that only the balance of the Forward Value ("the Unpaid Amount") was due on the Forward Settlement Date. Given that the amount of the Forward Value had been determined as at the point of trade, Socimer took the risk on the changing value of the underlying Designated Assets (i.e. if, at the Forward Settlement Date, the value of the Designated Assets was higher/lower than the Forward Value, then Socimer would make a profit/loss on the purchase from Standard). For its part, Standard effectively took the funding risk on the Unpaid Amount for the period from the trade to the Forward Settlement Date.

By early 1998, Socimer was experiencing financial difficulties and, on 20 February 1998, Standard made demand of Socimer for all outstanding Unpaid Amounts that it said it were due under the Agreement (a figure which Standard put at approximately US$24.5 million). Socimer was unable to pay the Unpaid Amounts demanded and, on 3 March 1998, went into liquidation. On 5 March 1998, Socimer gave notice to Standard to terminate the Agreement. This represented an event of default under the terms of the Agreement which triggered a provision whereby Standard was required to offset amounts owed to it by the value of the Designated Assets that it held for Socimer, such valuation to be determined as follows:

"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 [Standard]."

Socimer's position was that, upon the termination, Standard should have carried out an immediate valuation of the Designated Assets and credited Socimer with that valuation amount. Socimer submitted that, as at the date of termination, the value of the Designated Assets (on the basis of Socimer's own valuation) was sufficiently high such that their sale proceeds would have exceeded any amount owed by Socimer to Standard, and such that Standard should account to it for the balance (a figure of approximately US$13.8 million). In April 2003, Socimer's liquidators brought a claim to this effect.

For its part, Standard submitted that the Agreement allowed it to sell the Designated Assets, at its discretion, and over an extended period. Indeed, in the period following Socimer's termination, Standard had not performed a snapshot valuation as at the termination date but had instead proceeded to sell the Designated Assets over a number of months. Consequently, and as a result of a downturn in the market, the sale proceeds did not, in fact, cover the Unpaid Amounts that Standard said it was due under the Agreement. Consequently, Standard countered that Socimer still owed it a balance on the Unpaid Amounts.

Preliminary issue and first instance decisions

The point was decided at a preliminary issue hearing in May 2004 by Mr Justice Cooke who held that Standard was obliged: (1) to value the Designated Assets as at the date of termination of the Agreement; and (2) to credit the valuation amount (rather than the amount of the actual sale proceeds) of the Designated Assets against the Unpaid Amounts owned by Socimer.

The matter then proceeded to a hearing in the summer of 2005 before Mrs Justice Gloster in relation to a number of valuation issues that followed from the preliminary issue judgment of Mr Justice Cooke. In essence, Socimer sought to suggest that, in performing its valuation, Standard was bound (either by an implied contractual term, or as a matter of equity by analogy with the duties of a mortgagee with a power of sale) to take reasonable care in finding "the true market value" of the Designated Assets as at the date of termination (the so-called "should have" case). In response, Standard submitted that the answer depended not on what a reasonable, objective, valuation should have produced, but on the honest but otherwise subjective valuation which Standard itself would have performed, if it had been alive at the time to the true meaning of its contract (the so-called "would have" case).

At first instance, Mrs Justice Gloster found in favour of Socimer in relation to the manner of the valuation. Standard appealed the point (and others) and the matter came before the Court of Appeal in December 2007.

Decision of the Court of Appeal

A key issue at the Appeal hearing was whether it was appropriate to imply a term into the Agreement to the effect that Standard's valuation as at the termination date should be objective and undertaken with reasonable care. Standard argued that such an implied term ran against the vein of the Agreement as a whole and that the context of the market (volatile and illiquid emerging markets) and the trigger of the valuation (Socimer's default) made it unfair and uncommercial for Standard to be subject to the implied term sought by Socimer. In response, Socimer submitted that the implied term was necessary for business efficacy and that the fact that Standard could opt to retain Designated Assets meant that Standard was in a conflicted position (in that Standard could ascribe a low value and then sell on at a higher value) and, as such, its valuation ought to be on a objective basis.

The Court of Appeal found in favour of Standard's "would have" case and held that the implied term to the Agreement sought by Socimer was neither necessary, nor sufficiently certain. The test to be applied was a subjective test and the valuation given by Standard could only be impeached if they were arbitrary, capricious, perverse or irrational. The Court ordered that there be a new trial on the valuation issue to determine what Standard's honest but otherwise subjective valuation would have been at the termination date.

Practical implications

Banks and other financial institutions should take care in the drafting and reviewing of valuation clauses in standard agreements. If possible, the timing of the valuation and the basis of that valuation should be agreed and expressly stated in agreements. Where valuation clauses are silent on these matters, the Courts are likely to give the party carrying out the valuation a wide discretion (i.e. only to carry out the valuation honestly).

This article was written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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