In Lehman Brothers Special Financing Inc. v National Power Corporation and another , 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:
- Can a determining party make a second determination of a close-out amount?
- 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)?