Court considers what the phrase “close of business” means

Many commercial contracts use the phrase “close of business”, when outlining the timescales for service of notices or the completion of a particular step under a contract. As fewer businesses now close at 17:00 each day, it can often be unclear what time “close of business” actually is.

In the recent case of Lehman Brothers International (Europe) v Exxonmobile Financial Services, the Court looked at the phrase “close of business” and considered what was meant by it.

What was the dispute about?

Lehman Brothers International (Europe) and Exxonmobil Financial Services had entered into a number of transactions, under which Lehman Brothers agreed to selll a portfolio of securities to Exxonmobil and then repurchase them on a specified future date (a “Repo Transaction”). The Repo Transactions were entered into under, and governed by the terms in, the standard form Global Master Repurchase Agreement (GMRA).

On 15 September 2008, Lehman Brothers went into administration. At this time, one Repo Transaction was outstanding.

Under the GMRA if one party defaulted, any outstanding Repo Transactions’ were accelerated and each party’s obligations in respect of delivering the securities were replaced with cash payment obligations based on the “Default Market Value” of the securities to be delivered. The Default Market Value was to be established by the non-defaulting party giving a written “Default Valuation Notice” to the defaulting party before the Default Valuation Time. Under the GMRA, this was defined as “the close of business in the Appropriate Market on the fifth dealing day after the day on which that Event of Default occurs”. If no Default Valuation Notice was served on the defaulting party before the Default Valuation Time, the Default Market Value reverted to the Net Value.

Lehman Brothers defaulted on entering into Administration. As a consequence, Exxonmobil served a default notice on the Lehman Brothers by fax on 15 September 2008.

The first default notice served, omitted to specify the nature of Lehman Brothers’ default. As such, later that day Exxonmobil served a second default notice on Lehman Brothers by fax, this time specifying the nature of the default in the notice. The second default notice did not arrive until 16 September 2008 because Lehman Brothers’ fax number was (unsurprisingly) busy. On service of the default notice, Exxonmobil had 5 business days to send a Default Valuation Notice under the GMRA.

Exxonmobil served a Default Valuation Notice on Lehman Brothers by fax on 22 September. It arrived at 18:02.

Lehman Brothers argued that Exxonmobil had not validly served a Default Valuation Notice under the GMRA because, amongst other things, the notice arrived after close of business on 22 September, which they argued was 17:00.

Exxonmobil claimed that their Default Valuation Notice had arrived in time, as “close of business” in London was approximately 19:00.

What did the Court decide?

The Court held that if a specific time for “close of business” was meant to apply, it would have been set out in the GMRA. As the GMRA was silent on this, the Court stated that a degree of flexibility and “commercial sense” should be applied to the timing requirements specified in the GMRA.

As such, and because the Court accepted that international commercial banks engaged in Repo Transactions closed at approximately 19:00, “close of business” in these circumstances meant approximately 19:00. The Court however stressed that this decision was very much based on the specific circumstances of the case.

What does this mean for business contracts?

It is clear from the Court’s commentary in this case that the phrase “close of business” can have a number of different meanings depending on the surrounding circumstances, the context of any dispute and, importantly, the nature of the businesses in issue.

This case therefore serves as a  useful reminder that, where commercially possible, uncertainty and ambiguity should be avoided by specifying exact timings for service of notices or the completion of any required steps in contracts and, more generally, avoiding the use of standard phrases which have indefinite meanings.