High Court restricts re-calculation of termination amount and interprets Close-out Amount under ISDA Master Agreement

In Lehman Brothers Special Financing Inc. v National Power Corporation and another [2018] EWHC 487 (Comm), the High Court considered how a Close-out Amount should be determined and considered whether a Section 6(d) statement of a net termination amount could be withdrawn and replaced.

Executive summary

Where a Determining Party has served a net termination amount statement under Section 6(d) of the ISDA Master Agreement, it cannot withdraw and re-serve that statement on a unilateral basis. To the extent that the original Close-out Amount was based on erroneous calculations, any correction is a matter for the court or to be resolved by agreement.

In determining a Close-out Amount under the 2002 ISDA Master Agreement, the requirement to use “commercially reasonable procedures in order to produce a commercially reasonable result” imposes a purely objective standard that can be measured against, and ultimately replaced by, the calculation of the court.


In July 2007, the National Power Corporation (NPC), a Philippine government entity, entered into a principal-only forward currency swap with Lehman Brothers Special Financing (LBSF) under a 2002 ISDA Master Agreement.

Following Lehman Brothers’ collapse in September 2008 and LBSF’s insolvency, the transaction was terminated and, as the Determining Party, NPC served a Section 6(d) net termination statement demanding payment of approximately $3.5m. NPC had calculated its Close-out Amount based on the cost of a replacement transaction offered by another investment bank.

NPC later commenced proceedings and in 2016 sought to withdraw the original $3m Section 6(d) net termination statement and instead claimed a revised amount of approximately $10.8m (based on the cost of a previous indicative bid from the other investment bank). In response, LBSF claimed that a net termination amount of approximately $12.8m should be payable by NPC.


Is a party entitled to remake a Close-out Amount calculation?

The court held that, as a matter of interpretation, the delivery of a termination notice under the ISDA Master Agreement causes a debt obligation to arise and the subsequent delivery of a Section 6(d) net termination statement gives rise to an obligation on the relevant party to pay. The court described these as “significant contractual events” and ruled that “once they have arisen the relationship between the parties is thereafter affected, and not reversible”.

As a result, the court decided that where a Determining Party serves a Section 6(d) net termination statement then it cannot withdraw and remake that statement on a unilateral basis.

However, if there is an error in the determination of the Close-out Amount, then the parties could agree to correct such error, with the court being the ultimate arbiter as to what the Close-out Amount would have been without that error. In doing so, the court may use any revised statement as merely evidence in its determination as to what the Close-out Amount should have been.

Calculation of the Close-out Amount: Rationality vs Reasonableness

The 2002 ISDA Master Agreement requires a Determining Party to calculate the Close-out Amount “in good faith” using “commercially reasonable procedures in order to produce a commercially reasonable result”. The court drew a distinction with the language of the definition of Loss in the 1992 ISDA Master Agreement under which a party may claim what it “reasonably determines in good faith to be its total losses and costs”.

The court held that the language of the 1992 ISDA Master Agreement only required that relevant party calculate its Loss in a rational manner (ie a Wednesbury1 unreasonableness standard of “a determination which no reasonable non-defaulting party could come to”).

In contrast, the court ruled that the obligation under the 2002 ISDA Master Agreement to use “commercially reasonable procedures” and to produce a “commercially reasonable result” meant that the Close-out Amount and the underlying calculations are to be assessed against a higher and purely objective standard. If the Determining Party does not meet this standard, then the court will have the right to perform the calculation itself.

The court went on to reject the argument that such an objective standard would deprive the Determining Party of the benefit of discretion given by the ISDA Master Agreement and stated that it was “not convinced a "discretion" is given [in the ISDA Master Agreement].”

The court did acknowledge that there can still be a “range” of results that can fall within the category of being commercially reasonable, but was of the view that the fact that there is a range does not mean that the Determining Party can simply choose the result within the range that suits them best.


This case is interesting for its ruling that a Section 6(d) net termination amount statement cannot be withdrawn and remade on a unilateral basis, even in the case of erroneous calculations.

As a practical matter, Determining Parties often serve Section 6(d) net termination amount statements with explicit reservation of rights language in an attempt to enable them to subsequently revise their calculations. This judgment throws doubt on the effectiveness of such a practice.

In effect, Determining Parties must now be certain that they are getting their Close-out Amount right first time as there will be no opportunity to adjust, on a unilateral basis, that calculation in the event that it discovers there are other losses or costs to be accounted for.

The ruling of the court in respect of the objective standard to be applied in calculating a Close-out Amount under the 2002 ISDA Master Agreement, and the distinction with the standard of “rationality” in the definition of Loss under the 1992 ISDA Master Agreement is also interesting.

However, the court probably went too far in expressing its doubt as to whether there is any room for any discretion to be applied by a Determining Party in calculating a Close-out Amount. In particular, the definition of Close-out Amount does also state that if the Determining Party “reasonably believes in good faith”, it can disregard quotations and market data in determining a Close-out Amount, which appears to apply a rationality standard rather than an objective one.

Finally, for parties who want the objective standard of reasonableness to apply, as opposed to a standard of rationality, the court stated that more may need to be done than “just [using] the word "reasonable".” Whilst he states that the 2002 ISDA Master Agreement satisfies this test, it would be prudent for market participants to bear this in mind when using other contractual documentation.

1 Associated Provincial Picture Houses Ltd v Wednesbury Corporation (1948) 1 KB 223

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.