In Lehman Brothers Special Financing Inc. v National Power Corporation and another [2018], the Commercial Court was tasked with evaluating the mechanism for calculating “close-out amounts” in transactions for derivatives under the 2002 International Swaps and Derivatives Association Master Agreement (“2002 ISDA”). The 2002 ISDA is a standard market agreement used to set out the standard terms in transactions for derivatives; this replaced the 1992 ISDA Agreement (“1992 ISDA”). The 2002 ISDA is used widely in international markets for sales of derivatives including bonds, stocks and commodities.

In this case, the Court was faced with two challenging questions:

  1. Can a determining party make a second determination of a close-out amount?
  2. Does the 2002 ISDA impose an obligation on the determining party to act in an objectively reasonable manner (as opposed to a “rational” manner as stated under the 1992 ISDA)?

The facts

In 2007, Lehman Brothers Special Financing (“LBSF“) and National Power Corporation (“NPC”) entered into a forward currency swap (the “Transaction”) under a 2002 ISDA. This was part of a hedging strategy to help safeguard against the risk of devaluation of the Philippine peso (“PHP”).

Under the Transaction, LBSF agreed to pay 100 million USD to NPC in 2028 in exchange for the equivalent value in PHP (fixed at the time of the agreement). An option was granted by LBSF to NPC under which NPC could choose to pay 1 million USD instead of paying the USD equivalent of PHP 4.4788 billion in 2028. NPC did not exercise this option; we will return to the significance of this.

Lehman Brothers collapsed in September 2008 and LBSF filed for bankruptcy. NPC terminated the transaction early in accordance with its terms in October 2008.

NPC was obligated under the 2002 ISDA to calculate the “close-out amount”, a sum of the losses incurred/gains made from the date of the Transaction until the date of termination. NPC was to calculate this in good faith and through “commercially reasonable procedures in order to produce a commercially reasonable result” (as per the terms of the 2002 ISDA).

In January 2009, NPC calculated the close-out amount at 3.46 million USD (following obtaining quotas for a replacement calculation transaction from wealth management companies) and filed a proof of claim in this amount as part of LBSF’s bankruptcy proceedings. However, NPC’s calculation did not take into account an accrued sum owed by NPC to LBSF. NPC withdrew the first proof and issued revised calculations. The new calculations comprised of (i) a primary determination of 10.7 million USD and (ii) an alternative determination of 2.1 million USD. The alternative determination was based entirely on a replacement swap transaction in which NPC had entered into with UBS, a third party, in order to meet its hedging needs following LBSF’s bankruptcy.

LBSF said that NPC breached the 2002 IDSA both in the act of issuing a revised statement some years later (arguing that there is no provision under the 2002 ISDA to withdraw and replace a close-out statement) and through NPC’s failure to follow a commercially reasonable procedure in calculating the close-out amount in this statement.

The decision

Remaking determinations

The Court held that whilst NPC should have included the accrued amounts owed to LBSF in its calculation of the close-out amount in the original statement, this omission was not a ‘manifest error’ that necessitated a new assessment, as was argued by NPC. Therefore, the first/original calculation statement (provided by NPC in 2009) fulfilled NPC’s obligation under the 2002 ISDA.

The Court highlighted that LBSF, unlike UBS, did not exercise the additional option offered in the contract, meaning that NPC could not pass the cost of this to LBSF when making its determination.

It was for the Court to decide whether a calculation/determination is correct, once it has been submitted. Therefore, the Court would prefer to see a simple correction of errors and not a new determination in circumstances where a party realises that it has made a calculation error.

Assessing loss

The Court clarified that the mechanism for assessing loss (the close-out) in the 1992 ISDA was re-drafted in the 2002 ISDA with the intention of improving both objectivity and flexibility. The Court noted that this represented a shift in responsibility from rationality to the higher standard of objective reasonableness.

In addition, the Court said that the 2002 IDSA must be interpreted in light of the background to the agreement including the 1992 IDSA, the 2002 ISDA’s user guide, as well as relevant standard form documents.


It is clear that determining parties can no longer rely on merely undertaking a rational calculation of a close-out amount; the 2002 ISDA imposes a higher standard of objective reasonableness. Therefore, parties must be prudent to ensure that the close-out process set out in the 2002 ISDA is followed.