The GMRA and the GMSLA: High Court rules on the meaning of "responsible employee" and "fair market value"

Knowles J held that a lack of compulsion was not within the meaning of "fair market value" in the context of the GMRA, as the concept of fair market value is required to work in a range of factual scenarios, including where the non-Defaulting Party sells the securities in a distressed market. The exercise in determining fair market value is therefore a broad one. The suggested "lack of compulsion" requirement was difficult to reconcile with the fact that, under paragraph 10(e)(i) of the GMRA, the non-Defaulting Party may sell the relevant securities in a distressed market and determine the Default Market Value on the basis of the prices obtained, provided that it acts in good faith.

Citing LBIE v Exxonmobil, the Judge determined that the court must ask itself how RZB as the non-Defaulting Party, acting honestly and rationally, would have determined the fair market value of the securities at the Default Valuation Time (i.e. on 15 October 2008). The Judge held that RZB's valuation met the requirement for a rational, honest determination of fair market value. Contemporaneous algorithm-based prices displayed by Bloomberg were used for RZB's internal purposes, but at the time and in the prevailing circumstances those prices were not considered by RZB to represent a practical and commercial realisable value. This view was based on experience from the Lehman Brothers default in September 2008.

Instead of using the Bloomberg figures, RZB had asked for bids from 10 institutional counterparties immediately after sending its default notice (on 8 October 2008), and also enlisted its own traders and sales people to help sell the positions. The only activity on 15 October 2008 itself was one bid and one order for two of the 11 bonds. RZB therefore put forward the 15 October Bloomberg screen prices, but made adjustments based on price information available on other days. The Judge set these out in an Annex to his judgment, and held that the figures put forward by RZB met the requirements of rationality and good faith. He noted that given the contemporaneous circumstances, any assessment of fair market value would have been imperfect because the circumstances at the time were imperfect - but RZB as the non-Defaulting Party was nonetheless entitled to make its own assessment of fair market value.

Were the default notices effectively served?

The court also considered whether the default notices had been effectively served under the GMRA and the GMSLA. According to RZB, it served default notices on LBI under both agreements on 8 October 2008³. For the purposes of the hearing, LBI was unable to locate the notices or trace any receipt of them and sought to challenge RZB's assertion that they had been validly delivered.

The relevant provisions of the GMRA and the GMSLA both provide that notices given by fax are effective when the transmission is received by a responsible employee of the recipient in legible form. Both agreements also provide that the burden of proving receipt is on the sender and is not met by a transmission report generated by the sender's fax machine.

The judgment does not consider delivery of the notices in much detail, other than to remark that transmission receipts marked "OK" were adduced as evidence and that this, along with other evidence, led the court to conclude that, on the balance of probabilities, the faxes were received in legible form.

What is a "responsible employee"?

The meaning of "responsible employee" is analysed in more detail. LBI maintained that, in this case, "responsible employee" meant an employee "with responsibilities relevant to the default", meaning someone who was able to recognise a default notice for what it was and know what steps to take thereafter. Knowles J did not agree with this and said that LBI was reading "far too much into the phrase". He decided that it was more likely than not that the faxes were collected, and by an employee with responsibility for collecting them – i.e. a responsible employee.

Comment

Valuations: this case confirms that the definition of "fair market value" under the GMRA extends to prices obtained in a distressed market and that adjustments can be made to take account of that distressed market. In these circumstances, a significant degree of discretion may be afforded to the non-Defaulting Party, provided that it acts in a rational, honest and commercially reasonable manner.

Delivery of default notices: the case re-iterates the point that whether or not a notice has been effectively delivered is largely a question of fact. Market participants should be aware that a successful transmission receipt alone is not sufficient to evidence delivery by fax, but can be a helpful indication when combined with other evidence. The case also provides some useful commentary as to the meaning of "responsible employee" under the GMRA and the GMSLA and the wide interpretation of this term by Knowles J should provide some comfort to firms when delivering notices.

Notes

1. Lehman Brothers International (Europe) v Exxonmobil Financial Services BV [2016] EWHC 2699 (Comm)
2. LBI EHF (in winding up) v Raiffeisen Zentralbank Osterreich AG & Anor [2017] EWHC 522 (Comm)
3. The parties agreed that service by fax was permitted under the GMRA and the GMSLA and in both cases fax numbers had been specified, so the delivery method was not in dispute (see our earlier briefing for a discussion of valid service methods under the GMRA).