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Contractual notice provisions and the ‘close of business’

27 January 2017

Lehman Brothers International (Europe) v ExxonMobil Financial Services B.V. [2016] EWHC 2699 (Comm), 28 October 2016

When serving notices in deteriorating market conditions, beware more haste and less speed. A recent High Court case on the close-out valuation of a repo transaction under the GMRA 2000 highlights the difficulties that both parties can face when seeking to give valid contractual notices and provides important clarification of the meaning of ‘close of business’

Lehman Brothers International (Europe) (Lehman) entered into a sale and repurchase (ie repo) agreement with an ExxonMobil subsidiary (Exxon). The agreement was under the standard terms of the 2000 Global Master Repurchase Agreement (the GMRA). Under the terms of the repo agreement, Exxon purchased a portfolio of securities (both equities and bonds) for USD 250 million, with Lehman agreeing to repurchase the portfolio seven days later. The repo agreement was rolled over multiple times – until mid-September 2008, when Lehman’s financial difficulties became widely known.

On Monday 15 September at 7:56 am, Lehman entered administration. Exxon faxed a purported Notice of Default to Lehman at 9:22 am (the First Notice). However, this notice did not specify an Event of Default under the GMRA. Exxon then sent a second Notice of Default which did (the Second Notice). Unfortunately, by this point the specified Lehman fax number was overloaded as other creditors around the world sought to serve similar notices. Service of the Second Notice was eventually made by email at 9:41 am on 16 September 2008.

Exxon then had a window in which to serve a Default Valuation Notice (DVN). The DVN allowed Exxon (as the non-defaulting party) to specify close-out values of the portfolio’s securities in accordance with the GMRA.

Lehman’s case relied on a number of grounds. In summary, Lehman argued that: (i) the Second Notice was invalid as it was sent to an email address; (ii) the DVN was invalid as it was sent to the wrong fax number; (iii) the DVN was sent after the ‘close of business’; and finally (iv) that the definition of ‘Appropriate Market’ under the GMRA also required that the DVN be sent prior to close of dealing in each individual market where the relevant securities were traded.

Exxon argued that its First Notice was invalid as it did not specify an Event of Default (this would have given Exxon a later window in which to serve the DVN). Exxon also rejected each of Lehman’s arguments. Together, the issues impacted the close out value of the portfolio under the GMRA by some USD 5.3 million.

The content of a Notice of Default

Exxon argued that the First Notice had not specified the relevant event (i.e. administration) necessary for it to constitute a formal Notice of Default.

Blair J appeared sceptical of a party disputing the effectiveness of its own notice for what could be considered tactical reasons. He agreed with Lehman’s argument that a notice “stating that an event shall be treated as an Event of Default” did not require a specific event to be identified. Further, even if it had been necessary, given that Lehman’s demise was global front page news that morning, “there cannot have been any doubt” about the event to which the First Notice was referring.

Wrong number, right office

Two issues between the parties centred on whether notices had been sent via the correct means of communication.
Firstly, the Second Notice was sent by email, not fax. As the court had held Exxon’s First Notice effective, it was not necessary to decide whether the Second Notice (emailed by Exxon on 16 September 2008) was valid.

However, obiter, the court indicated that it would have held notice by email effective given the inclusion of email addresses as contact details in Appendix 1 of the GMRA.

Secondly, the DVN was sent to a fax number different from the one specified in the GMRA (the specified number being overloaded). Lehman argued this rendered it invalid. Interestingly, Blair J suggested, notwithstanding the potentially commercial undesirability of such a stringent approach, that in order for a notice to be effective it might indeed need to be sent to the specified number.

However, in a case (such as this) where a notice was sent to an incorrect number but still received by a responsible employee, the receiving party should raise any objections promptly. On the facts, Lehman had not raised objections to the DVN’s validity at the time. The issue had only been identified as the matter came to trial. This was, in Blair J’s words, six and a half years too late. Lehman had waived any such notice requirement either by inaction and/or failing to challenge the DVN’s validity in its initial particulars of claim.

Close of business

As the First Notice was valid, the DVN had to be served by the close of business on the fifth dealing day after Lehman’s insolvency (ie close of business, London time on 22 September 2008). Exxon’s fax containing the DVN was received at 6:02 pm that day.

Lehman argued that ‘close of business’ for the purposes of serving the DVN under the GMRA meant 5:00pm. Exxon contended it meant 7:00pm. Lehman, however, failed to provide meaningful evidence of the earlier deadline to the court. Based on Exxon’s expert evidence and with a nod to the “more all consuming hours worked by investment bankers, commercial lawyers and the like”, Blair J held close of business could mean 7:00pm in this particular case.


Validly serving contractual notices under standard form agreements (eg the GMRA, ISDA Master Agreement and GMSLA) is a perennial pitfall for clients. Even a minor delay in effecting notice can have serious financial consequences. While some of the guidance here is obiter, there are many practical lessons to be drawn from the case.

First, at the drafting stage, ensure counterparties identify multiple contacts for the receipt of notice. For older standard form agreements it may also be helpful to include email addresses. In contrast to this case, in Greenclose Ltd v National Westminster Bank PLC [2014] EWHC 1156 (Ch) no email addresses were included in the relevant Appendix to the ISDA Master Agreement and the notice was therefore invalid.

Secondly, if disputing a notice, do so promptly. This is particularly important where valid service of a later notice is contingent on the earlier notice.

Thirdly, focus on the technical requirements of the notice (eg does an event of default need to be specified and where must it be delivered). In this case, Exxon was only partially successful in its claim. This was because it was also required to serve the DVN prior to close of business in the ‘Appropriate Market’. The court held this meant service was required not just in London but by close of business in each country where there was a relevant market on which the portfolio securities were traded.

In determining what close of business meant, the court was clearly wary of setting a wider precedent. Nonetheless, it is an encouraging confirmation of the English courts’ willingness to take a sensible approach when dealing with sophisticated commercial parties.

Finally, although Exxon’s DVN was only partially effective for other reasons, it was valid despite being received late in the day and to a different fax number. The value of persistence when having difficulty serving notice should not be underestimated.