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FORWARD SALE CONTRACTS: VALUATION AND IMPLIED TERMS
Soc/mer International Bank Ltd (In Liquidation) v Standard Bank London Ltd [2008] EWCA Civ 116 (Court of Appeal, Civil Division)
(Laws LJ, RixLJ, Lloyd LJ) (22 February 2008)
Whether a seller's responsibility to value forward sales of securities
on terniination of a contract is to be carried out on the date of
termination and whether that responsibility has any implied terms
as to thecare to be taken in its execution.
Background
Socimer International Bank Ltd ('Socimer') as buyer and Standard
Bank London Ltd ('Standard') as seller had entered into forward
sale transactions. Shortly before Socimer went into liquidation,
it owed Standard US$24.5m in unpaid amounts. Under the
agreement between the Banks, the relevant clause (the 'valuation
sentence') stated that Standard had to liquidate or retain a portfolio
(the 'Designated Assets') to satisfy the amount due to it and had
to value the portfolio on the termination date. However, instead of
complying with the valuation sentence. Standard sold what it could
over the ensuing months and credited the proceeds to Socimer
as and when the money was realised. In the meantime, Socimer
entered into liquidation. Two High Court hearings dealt separately
with the construction of the valuation sentence (before Cooke J)
and the value of the assets in question (before Gloster J). Standard
appealed against Gloster J's adverse judgment where, inter alia,
Standard had used an expert witness to justify its valuations of the
assets, which evidence was ignored by Gloster J.
Condusion
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The appeal was upheld, Socimer argued, on solely objective criteria,
that there was an implied term in the bank agreement to deliver the
true market value of the Designated Assets, sometimes expressed
Butterworths Journal of International Banking and Financial Law/
as an obligation to take reasonable care to arrive at the true market
value. However, true market value and taking reasonable care are
not the same terms. The valuation sentence neither required an
objective inquiry into the true market value of the assets in question,
nor did it impose a duty of reasonable care on Standard. A breach
of obligation to carry out a valuation with reasonable care would
not be proved by the mere fact that a preferred expert had arrived
a t a different answer, or adopted a different methodology, from that
of Standard's hypothetical valuation. Where it was not possible
to liquidate an asset on the termination and valuation date, it was
unreasonable that there should be any risk at all on Standard.
Furthermore, for Gloster J to disregard Standard's expert evidence
on value because she was judging against an erroneous objective
test of value was unfair when Standard had had no proper pretrial time to respond to what amounted to allegations of bad faith,
irra:tionality or negligentre.
Socimer had always owed Standard the unpaid amounts, so
Standard was entitled to set off Socimer's other credits againstits
greater liabilities. "There was nothing to suggest that Standard would
have credited Socimer with the value of the spot trade balances of the
forwards before the valuation exercise under the valuation sentence.
Rix LJ concluded his findings by noting that the consequences of
reversing Gloster J's decision would require further submissions from
both sides. Therefore, this case has yet to reveal its full ramifications
on the drafting ofclauses such as the valuation sentence.
•
Jonathan Lawrence and: Alexandra Mayson,
KSr-LGates
/
: wwiv.klgates.com
April 2008
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