The recent case of Lehman Brothers Finance AG (in liquidation) (“LBF”) v Klaus Tschira Stiftung GmbH and Dr H C Tschira Beteiligungs GmbH & Co KG (the “Tschira Parties”)[2019] draws attention to the issue of the amount of discretion a non-defaulting party has when calculating loss under a 1992 ISDA Master Agreement. This is a hotly debated topic that has already been the subject of a number of prior judgments, in both the English and US courts, including the notable cases of Fondazione Enasarco v Lehman Brothers Finance SA [2015] EWHC 1307 andLBHI v Intel Corporation(2015).This case provides some much needed clarification on the approach a non-defaulting party takes in its determination of ‘loss’.

The concept of loss and its calculation is only of relevance to ISDA Master Agreements up to the 1992 version; the 2002 ISDA Master Agreement contains instead a definition of a ‘close-out amount’, which includes different methods of calculation.


In May 2007, the parties entered into variable forward sales and purchases transactions which were undertaken pursuant to 1992 ISDA Master Agreements. In order for Tschira Parties toprotect themselves against volatility regarding uncertain shares prices they owned, theyentered into a series of collateralised equity derivatives with one of LBF’s entities, Lehman Brother International Europe (“LBIE”) based in Switzerland.

Following LBFs’ bankruptcy on 15 September 2008, the automatic early termination clause was triggered and the derivatives trades were brought to a close. However, the position of the Tschira Partieswas made more complicated by the fact that as they had deposited their shares as collateral for the equity derivatives transactions with LBIE, the shares got caught up in the insolvency process under a Joint Administrator. As a consequence, the shares were unavailable for the Tschira Partiesto be used as collateral in order to replace the closed out derivatives with a different bank.

In a situation when they did not know when, or even whether, the shares used as a collateral would be returned to them, in December 2008 the Tschira Parties eventually calculated their loss on the basis of uncollateralised transactions as at 16 October 2008.


The court found that the Tschira Parties were not permitted to calculate its loss in the way they had done. In particular, the court stated that, while a non-defaulting party does have discretion as to the method of calculating loss, its discretion did not extend to what should fall within the definition of loss.

Instead, the court held that the term “loss”, and thus the correct interpretation of the contract, was that loss should be calculated in accordance with the usual common law principles applicable to the assessment of contractual damages, including in relation to remoteness.

In this particular case, applying the usual test for remoteness meant that it was not within the reasonable contemplation of the parties that the shares deposited with LBIE would be inaccessible in the event of a default by LBF; as a result, the Tschira Parties could not calculate their loss on the basis of uncollateralised transactions.

The court then had to determine what the Tschira Parties should have done in order to calculate their loss correctly. It rejected LBF’s submission that, where a non-defaulting party was relying on indicative valuations, it must always do so using indicative valuations as at the early termination date, because that would not always be possible (for example, in case there was no available market at the time of the early termination date).

In this particular case, the court determined that the Tschira Parties should have determined loss based on quotations or indicative valuations for collateralised replacement transactions as of a date as soon as reasonably practicable after the early termination date.


As the 1992 ISDA is still of extensive use within financial counterparties for derivatives transactions, this decision further clarifies the scope of a non-defaulting party’s discretion when determining its “loss” when a party defaults under an ISDA, thus reducing the risk for uncertainty and consequent litigation. So while a non-defaulting party has the discretion and flexibility to determine the method by which they calculate loss, they must do so acting reasonably and in good faith and not arbitrarily.

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