Latest Lehman judgment reassures end users on Close-out Rights

It is undeniable that the legal complexities, and unprecedented facts, of the long running Lehman Brothers saga have generated a wealth of legal principal, most notably through the Waterfall series of litigation.

Against the background of administration, this trilogy (creatively named Waterfall I Application, Waterfall I Appeal and the upcoming Waterfall II) has generated both legal precedent and gems of dicta in relation to a broad range of matters.  To name a few, the Waterfall cases have covered issues as varied as the ranking in insolvency proceedings of subordinated debt, foreign currency claims, non-provable debts, statutory interest and unlimited companies and look set to continue to be a breeding ground for legal authorities for the foreseeable future.

The Waterfall trilogy may have grabbed the lions share of media attention but we should be careful not to overlook the importance of the other judgements elicited from the Lehman administration, most recently in the matter of Fondazione Enasarco v Lehman Brothers Finance S.A. and another [2014] EWHC 34 (Ch).

If the Waterfall trilogy are the blockbusters, then at first glance the Fondazione case may appear to be the indie film that appeals to a limited audience whose interests lie in the more boutique markets of structured products and derivatives. It considered the loss mechanism used to determine the financial effects of the early termination of a derivative subject to the 1992 edition ISDA Master Agreement and you could be forgiven for questioning the mass market appeal of this issue until you learn that this document has been described as ‘probably the most important standard market agreement used in the financial world‘ (courtesy of Judge, Briggs J in yet another piece of Lehman litigation, Lomas & Ors v JFB Firth Rixson Inc & ors [2010]).

Given the ensuing status of the 1992 ISDA Master Agreement as the “go to” agreement for transactions of this nature and its resulting prevalence in the financial arena, the application of the judgement in Fondazione could be far reaching in the wider financial markets. The subject matter may not be as headline friendly as other Lehman offspring but it is a significant case in its own right .