In Lehman Brothers Finance AG v Klaus Tschira Stiftung GmbH & Or (2019) Snowden J upheld the Enasarco judgment (that under the ISDA 1992 Master the standard of “reasonableness” required in the calculation of “Loss” was the lower, Wednesbury, standard of rationality but reminded everyone that rationality has its limits and does not mean carte blanche. Tschira owned shares in SAP and bought protection from Lehmans against a fall in their price via hedges done on the 1992 Master which were collateralized by the delivery of SAP shares to LBIE as custodian. “Loss” was the chosen close out method, and Automatic Early Termination applied, and was triggered when Lehmans collapsed, leaving Tschira to calculate the “Loss”. Tschira got indicative prices for replacement hedges, collateralized in the same way as the closed out hedges, within the following fortnight. Mediobanca quoted €17m and Goldmans €28m. However, to do the replacement hedges they needed to get the SAP shares back from LBIE, and in October the administrators refused, saying simply that this “would fall to be dealt with by the Joint Administrators in the due course of the administration”. And so they got revised quotes for an uncollateralized hedge and, since Tschira was not a good credit risk, these came to €511m, and Tschira then claimed that from Lehmans as its “Loss”. Snowden J began by pointing out that Wednesbury reasonableness did not allow the parties to rewrite the contract, and “Loss” essentially meant common law loss and it imported the usual common law principles about remoteness of damage (Hadley v Baxendale, 1854, as we all remember). So for a collateralized swap, it would have been within the reasonable contemplation of the parties that the “Loss” calculation would be based on a replacement collateralized swap and not an uncollateralised one. Snowden J considered that this was consistent with a line of cases including Anthracite Rated Investments (Jersey) Ltd v LBF in 2011 that held that under the ISDA Master loss of bargain should be valued on a “value clean” basis, ie
“…on an assumption that, but for termination, the transaction would have proceeded to a conclusion, and that all conditions to its full performance by both sides would have been satisfied, however improbable that assumption may be in the real world.”
And in addition, given that Tschira could never have found anyone to take its uncollateralized credit risk, a calculation based on an uncollateralized replacement hedge would have been irrational. So Snowden J rejected Tschira’s €511m and imposed his own finding of the loss, which he put at €22.84m.