UK: Developments In Finance Litigation

Disclosure In Work-Outs

Banks who are participating in a borrower "work-out" or negotiating an agreement whereby one bank will "take out" the other, should take note of a recent decision of the High Court in National Westminster Bank plc v Rabobank Nederland [2007] EWCH 1056 (Comm) in which the Court ruled on the duties of disclosure in such circumstances.

Rabobank Nederland ("Rabobank") and National Westminster Bank plc ("NatWest") made available an unsecured credit facility and overdraft facility to Yorkshire Food Group Plc ("the Borrower"), a public company in the business of the processing and sale of dried fruit and nuts, founded by a Mr Michael Frith ("Mr Frith"). Both these facilities were extended in March 1996 to a US$100 million credit facility and a £4 million overdraft facility.

By August 1996, the Borrower’s financial position deteriorated and Rabobank and NatWest therefore agreed to place the Borrower into a ‘work-out’, for the purpose of minimising the banks’ risk of loss. Rabobank and NatWest appointed Price Waterhouse to investigate and report on the Borrower’s position. In the light of reports produced by Price Waterhouse, both banks provided further loan finance to the Borrower. Despite this, the Borrower’s financial position did not improve.

Faced with this situation, a novation agreement was concluded in October 1997 ("the Deed of Transfer"), whereby NatWest assigned to a subsidiary of Rabobank its US dollar and sterling indebtedness at a discount. It was a term of the Deed of Transfer that Rabobank would release NatWest as agent in respect of the credit facility and from any obligations, liabilities and responsibilities in respect of any action taken or not taken in its capacity as agent under the credit agreement or any security documents ("the Release Clause").

NatWest’s Claim

NatWest brought a claim against Rabobank for damages for breach of contract on the basis that Rabobank, in breach of the Release Clause, had commenced a claim against NatWest in California. NatWest claimed the costs which it had incurred, but not recovered, in the US proceedings. The Judge held that NatWest was entitled to judgment on liability, with damages to be assessed at a later date.

Rabobank’s Counterclaim

Following the commencement of NatWest’s claim, Rabobank brought a counterclaim. From March 1996 to October 1997, NatWest had advanced to certain directors of the Borrower (who were also shareholders), substantial sums by way of personal loans secured on the directors’ shareholdings. The existence of these loans and other surrounding facts were not disclosed by NatWest to Rabobank. Rabobank’s case was that NatWest’s failure to disclose these facts constituted fraudulent misrepresentation or, in the alternative, misrepresentation contrary to Section 2(1) Misrepresentation Act 1967. Further, Rabobank alleged that the non-disclosure was in breach of an obligation for both banks to negotiate the Deed of Transfer in good faith. Finally, Rabobank alleged that NatWest had induced Price Waterhouse to breach its professional duty by not disclosing these personal borrowings in its reports.

The Misrepresentation Claim

Rabobank’s claim for misrepresentation was made on the basis that there was a common practice between banks involved in a "work-out" that each would disclose to the other all facts known to it which were relevant or material to the other’s decision making, such that one bank was entitled to infer that the only material facts that were known to the other bank were those that it had disclosed. Similarly, silence on the part of one bank to a "work-out" would amount to a representation to the other bank that it did not know of any material facts. NatWest contended that while this practice was a "normal practice" it was "not an invariable practice".

The only express misrepresentation pleaded by Rabobank related to statements made at a meeting in September 1997 between representatives of Rabobank and NatWest. It was Rabobank’s case that during this meeting, Mr Van Der Schrieck, the General Manager of Rabobank London, asked whether NatWest knew anything which Rabobank did not know and which was material to the proposed take out, and the representatives of NatWest answered that they did not.

The Judge held that, while the evidence showed that banks involved in a "work-out" considered it to be good practice to disclose information known to them, in the absence of an express contractual framework to the contrary, there was no legal duty to adhere to that practice. In the light of this, the Judge held that it was up to each bank to make its own enquiries and conduct its own due diligence in relation to the Borrower. A bank was not entitled to assume that the other bank had disclosed to it each and every piece of information which it or bankers generally might consider material. Similarly, in the appointment of an investigating accountant (such as Price Waterhouse), while it was good practice for banks involved in the "work-out" to disclose information which they considered material, there was no legal duty of disclosure.

Further, the Judge held that where there is a take out of one bank by another bank, the duty of the bank to be taken out in disclosing information in response to questions from the other bank would depend on the terms of the questions and the circumstances in which they were asked. On the facts of the present case, the Judge found that Mr Van Der Schrieck’s question at the meeting of September 1997 would have been understood as confined to the viability of a particular proposal then under consideration, rather than the issue of the take out. The Judge held that, in this context, the answer given by the representatives of NatWest was not only honest, but true.

In conclusion, the Judge held that Rabobank’s case on misrepresentation failed as, to the limited extent that NatWest made representations, such representations were true.

Breach Of The Good Faith Agreement

Rabobank’s claim for breach of the good faith agreement also failed. The Judge held that the good faith agreement related only to the documenting of the take out agreement, which had already been arrived at in principle, and not to a general duty of disclosure. In any event, the Judge held that an agreement to negotiate in good faith would be unenforceable on the basis of uncertainty.

Inducing Breach Of Duty

The Judge found that the representative of NatWest who had requested that Price Waterhouse do not disclose the personal borrowings in the reports, did believe in truth that the directors’ personal borrowings were irrelevant to Price Waterhouse’s remit. On this basis, Rabobank’s claim failed as intention to procure breach of duty was a fundamental element of the cause of action. Further, the Judge held that Rabobank’s claim failed because Price Waterhouse’s terms of reference were framed such that a failure to disclose the directors’ personal borrowings would not amount to a breach of duty.

Banks participating in a "work-out" or seeking to enter into an arrangement whereby one bank will "take out" the indebtedness of another, should pay note to this decision. While the Judge acknowledged that it was good practice for banks to disclose all information which they considered material, there is no legal duty of disclosure in these circumstances. Banks should therefore ensure that they conduct their own due diligence as they are not entitled to assume that the other bank has provided full disclosure, unless there are express contractual terms providing for this.

Bank’s Liability In Conversion

In Uzinterimpex JSC v Standard Bank plc [2007] EWHC 1151 (Comm) it was held that the Defendant bank was liable in conversion in circumstances where its customer had obtained possession and control of consignments of cotton at the warehouse, but had not thereby acquired title to the goods. The measure of the Claimant’s damages was by reference to the market value of the goods at the date of conversion.

The Claimant cotton trading company ("Uzinterimpex") entered into a written sale contract with a cotton purchasing company ("AMJ") in 1997, pursuant to which Uzinterimpex agreed to sell, and AMJ agreed to buy, a series of consignments of cotton. The Defendant ("SBL") acted as banker to AMJ and was also the agent and issuing bank for a syndicate of banks (including itself) which had made a pre-export finance facility available to AMJ for the purchase of cotton from Uzinterimpex. The sale contract required AMJ to make an advance payment to Uzinterimpex in respect of 90% of the value of the cotton, with the balance of the payment to be by letter of credit. AMJ arranged an advance payment guarantee with the National Bank of Uzbekistan ("NBU") for the total value of the advance payment in favour of SBL. The advance payment guarantee expressly provided that the amount of the advance payment guarantee was automatically reduced by 90% of the value of each consignment of cotton that was delivered to AMJ on the basis of tested telexes sent by SBL to NBU. Delivery was to be proved by the presentation by NBU or by AMJ of the shipping documents and commercial invoices that were required by the letter of credit.

Various consignments of cotton were delivered by Uzinterimpex pursuant to the sale contract. Documents were presented at the counters of SBL in relation to those consignments and the amount of the advance payment guarantee was automatically reduced by the value of those consignments on the basis of the tested telexes sent by SBL to NBU.

Disputes subsequently arose between Uzinterimpex and AMJ in relation to the performance of the sale contract, which concerned, amongst other things, Uzinterimpex’s failure to meet the delivery dates under the sale contract and the continuing failure to correct the presentation of discrepant documents at SBL’s counters. As a result, SBL made a demand on the advance payment guarantee ("the Demand") and the amount demanded was paid to SBL by NBU. At the time that the Demand was made, AMJ had succeeded in obtaining possession and control of certain of the consignments of cotton ("the Received Cotton") in respect of which the Demand had been made. In some instances it did so by means of the issue of letters of indemnity to vessel owners which representatives of SBL had counter-signed. In other instances it did so by means of the issue by SBL of releases addressed to the operators of the warehouses where the Received Cotton was stored. However, SBL informed NBU that it rejected the documents relating to all the Received Cotton.

All of NBU’s rights and interest in any rights of action it might have against SBL were assigned to Uzinterimpex, which subsequently issued proceedings against SBL on the following grounds:

1. The Demand was fraudulent as to its amount, on the basis that it was excessive to the knowledge of SBL (or alternatively that representatives of SBL were reckless as to whether or not the Demand was excessive) in that those same representatives knew that some of the Received Cotton had been delivered to, accepted and sold by AMJ, such that AMJ was not entitled to reject those consignments or the documents relating to them. Uzinterimpex alleged that NBU was induced by SBL’s false representations to make payment under the advance payment guarantee, such that Uzinterimpex (as assignee of NBU) had a claim in deceit;
2. In the alternative, a term should be implied into the advance payment guarantee that, in the event that any demand made should be found to have exceeded the loss sustained by AMJ or SBL or was otherwise excessive, SBL should repay that excess;
3. SBL had converted certain consignments which formed part of the Received Cotton on the basis that if, contrary to its primary case, AMJ and/or SBL had validly rejected the documents in respect of the Received Cotton, the Received Cotton belonged to Uzinterimpex. Uzinterimpex also alleged that SBL asserted title to or retained the documents relating to other consignments of the Received Cotton;
4. In selling part of the Received Cotton but refusing to waive discrepancies in the associated documents, AMJ had become constructive trustees of the proceeds of sale and SBL was in knowing receipt of those proceeds.

Uzinterimpex’s claim in deceit against SBL failed, as the Court considered that Uzinterimpex had fallen well short of proving to the necessary standard that either or both of the signatories to the Demand had no honest belief in the legitimacy of the figure demanded. The claim against SBL in constructive trust also failed as Uzinterimpex relied on the same matters as were said to form the claim in deceit.

Uzinterimpex’s alternative claim as regards an implied term in the advance payment guarantee was also rejected for a number of reasons, including that the requirement for clarity and certainty in relation to performance bonds greatly limited the scope for implication of terms.

The Court found, however, that the conversion claim against SBL succeeded. It was clear that the mechanics of the sale of the cotton had involved the passing of property upon payment against documents and not on delivery. Until payment, it was to be inferred that Uzinterimpex had retained a right of disposal. AMJ may have obtained possession and control of the goods at the warehouse but it did not thereby obtain title. Uzinterimpex was entitled to damages from SBL by reference to the market value of the cotton as at the date of conversion and to recover legal fees that were incurred as a result of the conversion as they were not unforeseeable.

Limitations Of Liability (2)

In the March 2007 edition of Legal Eye, we reported on the decision of the High Court in IFE Fund SA v Goldman Sachs International [2006] EWMC 2887 (Comm). In that decision, the High Court held that an arranger of a syndicated credit facility was not under a duty to inform an investor of facts which merely raised the possibility that financial information which it had previously received from the arranger might be misleading. This decision has now been reviewed by the Court of Appeal.

In May 2000, the Claimant ("IFE"), an investment fund, bought from the Defendant ("Goldman Sachs") €20 million worth of bonds and warrants issued by Autodis SA ("Autodis"), a leading French distributor of automotive parts. The transaction was part of a syndicated credit facility made available to Autodis to take over Finelist Group Plc ("Finelist"), an English company which specialised in the supply of automotive parts to garages in the United Kingdom. The transaction was arranged and underwritten by Goldman Sachs. Goldman Sachs had, in its capacity as arranger, circulated an Information Memorandum to potential investors, who included IFE. Shortly after IFE invested, it became clear that Finelist had deceived its auditors by presenting false audited accounts that did not accurately reflect the group’s true financial position. In fact, Finelist was in serious financial difficulties and in October 2002 it was put into receivership.

IFE claimed that its decision to invest in Finelist was based on the information contained in the Information Memorandum and two Arthur Andersen reports dated 21 December 1999 and 11 February 2000 ("the First and Second Reports"). Goldman Sachs had sent the Information Memorandum to IFE and also had arranged with Arthur Andersen for IFE to receive copies of the First and Second Reports. Arthur Andersen produced two further reports dated 19 and 26 May 2000 ("the Third and Fourth Reports") in which they referred to the difficulties they had encountered in obtaining relevant information from Finelist. However, these reports were never provided to IFE.

Under the heading "Important Notice" in the Information Memorandum there was a notice stating that Goldman Sachs had "not independently verified the information set out … accordingly no representation, warranty or undertaking, express or implied, is made and no responsibility is accepted by Goldman Sachs … as to or in relation to the accuracy or completeness or otherwise of this Memorandum … or any other information made available in connection with the Facilities. Neither the arranger not any of its respective directors shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement contained in this Memorandum."

Upon discovering the true financial state of Finelist, IFE brought a claim against Goldman Sachs for misrepresentation, under section 2(1) of the Misrepresentation Act 1967, and negligence. In relation to misrepresentation, IFE alleged that by issuing to it the Information Memorandum and procuring the First and Second Reports for the purpose of enabling it to consider whether or not to take part in the syndication, Goldman Sachs had impliedly represented that it was not aware of facts which showed that statements about Finelist’s financial performance contained in the Information Memorandum or in the Arthur Andersen reports were or might be incorrect in any material way, and that this representation continued until completion of the syndication. IFE contended that the representation was incorrect following receipt of further financial information by Goldman Sachs after the date it had circulated the Information Memorandum but before IFE purchased the bonds.

The claim in negligence was on the grounds of either negligent misstatement or breach of a duty of care to inform. In particular, IFE claimed that Goldman Sachs owed to it a duty to take reasonable care to inform it if Goldman Sachs became aware of any facts which showed that information in the Information Memorandum was or might be materially incorrect.

The First Instance Decision

At first instance, Mr Justice Toulson held that in determining whether there had been an implied representation by Goldman Sachs, the right approach was to consider the meaning of the Information Memorandum to "financially sophisticated entities" operating in the syndicated mezzanine finance market. He said that "in the specialised world of syndicated finance there is everything to be said for leaving the participants to determine the respective responsibilities and risks … and for respecting their decisions". An implied representation of the scope contended by IFE would, he said, require Goldman Sachs to carry out an evaluation that was inconsistent with the wording of the Information Memorandum. The Judge said that only if Goldman Sachs had actual knowledge that information previously supplied was misleading would they be under a duty to investigate the matter further or to advise IFE. The Judge did however comment that there was an implied representation by Goldman Sachs that in providing the Information Memorandum it was acting in good faith (i.e. not knowingly putting forward information likely to mislead) and that this was a continuing representation.

The Judge also held that Goldman Sachs did not owe IFE a duty of care to inform it of the information contained in the Third and Fourth Reports and commented that the parties’ rights and obligations were clearly defined in contractual documents drafted by specialist lawyers and "in such circumstances, the court should be very slow to superimpose any obligations in negligence going beyond those carefully defined in the contractual documentation".

The Court Of Appeal Decision

The two main issues on appeal were whether the Judge had been correct in concluding that Goldman Sachs had not made the alleged implied representations and whether Goldman Sachs owed a duty of care in negligence to IFE.

The Court of Appeal held that on the facts there had been no representations by Goldman Sachs as alleged by IFE. The contractual terms between the parties under which Goldman Sachs sold the bonds to IFE ruled out any representation that the information would be reviewed prior to the purchase of the bonds by IFE. By the "Important Notice" in the Information Memorandum, Goldman Sachs had made it clear that it had no obligation to carry out such a review. Waller LJ considered that, whether or not Goldman Sachs had made any such representations, they were not aware of any matters which showed that the facts in the Information Memorandum or First and Second Reports "were or might be untrue". He said that an implied representation of the scope contended for would potentially require Goldman Sachs to do an evaluation contrary to the express terms of the Information Memorandum.

Gage LJ considered that "… the only implied representation made by Goldman Sachs arising out of the [Information Memorandum] was as the judge found one of good faith. There was, in my judgment, no implied representation that the information provided in the [First and Second Reports] annexed to the [Information Memorandum] was accurate. There was an express statement that Goldman Sachs would not review or check the information contained in the [Information Memorandum]. In my view it follows that it is only if Goldman Sachs actually knew that it had in its possession information which made the information in the [Information Memorandum] misleading that it could be liable for breach of the representation of good faith, provided the necessary intention was proved. In effect this would amount to an allegation of dishonesty."

The Court of Appeal also found that IFE’s argument in negligence must fail in circumstances where it was clear from the Information Memorandum that Goldman Sachs was not assuming any responsibility towards IFE. Walker LJ said that "where the terms on which someone is prepared to give advice or make a statement negatives any assumption of responsibility, no duty of care will be owed".

Bank Charges – The Debate

Recent decisions in cases such as Kevin Berwick v Lloyds TSB Bank Plc: Michael Haughton v Lloyds TSB Bank Plc (15/5/07) in the Birmingham County Court, and Michael James Gillin v Lloyds TSB Bank Plc (26/6/07) in the Coventry County Court, have shown the courts’ willingness to interpret ‘unfair’ charges complained of by customers as legitimate charges, which the banks are contractually entitled to make in return for the provision of services. However, these County Court decisions are not binding, and in an effort to resolve definitively the issue of whether or not charges made by banks are excessive, a number of banks have agreed with the OFT to take a test case to the Commercial Court.

The question of allegedly ‘unlawful’ or ‘unfair’ bank charges has received a lot of publicity recently. Indeed, the number of claims issued against banks in relation to such charges has caused significant administrative problems for the County Courts. The Financial Ombudsman Service has claimed that up to 3,000 customers a day were contacting it to complain about ‘unfair’ bank charges.

The legal issues involved are not new. It was established in 1915 in the case of Dunlop Pneumatic Tyre Co. v New Garage and Motor Co that a difference had to be drawn between a liquidated damages clause and a penalty clause. The former was a genuine pre-estimate of the loss likely to flow from a breach of contract while the latter was a sum fixed more to penalise the party in breach. Only the former was enforceable. The difficulty had long been in distinguishing between the two. However, if the sum is not payable as a result of a breach of contract, then the rules on penalties do not apply.

In the case of Berwick v Lloyds the claimant claimed that the charges, imposed by the bank as overdraft excess fees (when the claimant went overdrawn above an agreed facility level) and as returned item fees (when a cheque or direct debit bounced) fell within the definition of a penalty clause. The District Judge’s response to this claim moved away from a debate over the distinction between a liquidated damages clause and a penalty clause described above. He found that there had been no express terms in the contract between the parties to prevent the claimant from going overdrawn. Similarly, he found that it was not necessary to imply any such term into the contract to give it full business efficacy. As such, since there could have been no breach of contract, it would be impossible for him to interpret the charges levied by the bank as being penalties. Instead, the claimant was left to rely upon his pleading in the alternative that the charges had exceeded the bank’s losses and that, accordingly, the clauses within the bank’s contract with the claimant, which made provision for these charges, were unfair and unenforceable under consumer protection legislation.

The District Judge pointed out that, in relation to the Supply of Goods and Services Act 1982, regard had to be had to the consideration given for the full service that was provided. When considering the service provided by the bank to its customer in its entirety, including the provision of bank statements and the facilities for carrying out direct debit transfers and standing orders, the Judge decided that there was no evidence to support a contention that the charges were unreasonable.

The Judge also considered the Unfair Terms in Consumer Contracts Regulations 1999, and in particular the requirement under Regulation 5 for a contract to avoid a significant imbalance in the parties’ rights and obligations, contrary to the requirement of good faith. However, Regulation 6(2) provides that, where the disputed term of a contract between the parties is in "plain and intelligible language", the Judge cannot look into the adequacy of the price for the services provided. Accordingly, the Judge held that the charges complained of were a legitimate part of the contract between banker and customer. The Judge disregarded the Unfair Contract Terms Act 1977 as only applying where the proponent of a contractual term sought to exclude its liability for breach. As discussed above, the Judge had found no breach of contract in this case.

This line of reasoning appears to have been followed elsewhere. The District Judge in the case of Michael James Gillin v Lloyds TSB Bank Plc (26/6/07) also found that charges imposed by a bank on a customer for exceeding his agreed overdraft limit were legitimate and pre-agreed charges for the provision of services, and not penalties for breach of contract.

In the hope of bringing some certainty to the situation, the Office of Fair Trading launched a test case in the High Court on 27 July 2007 for a declaration on the application of the law in respect of unauthorised overdraft charges. The OFT has entered into an agreement to facilitate an orderly and timely resolution of the legal issues in dispute with the other prospective parties to the proceedings, namely Abbey National, Barclays, Clydesdale, HBOS, HSBC, LloydsTSB, The Royal Bank of Scotland and Nationwide, who together account for approximately 90% of personal current accounts in the UK. The OFT considers that the test of unfairness as set out in Regulation 5 of the Unfair Terms in Consumer Contracts Regulations should be applied to unauthorised charges and returned item fees. The banks dispute this. In an effort to expedite the resolution of this dispute, the trial has already been listed to commence on 14 January 2008 with a time estimate of 8 days. In the meantime, the FSA has issued a waiver from its complaints handling rules that apply to complaints relating to allegedly unauthorised overdraft charges. Accordingly, until the test case is resolved, banks that apply for the waiver will not be required to handle complaints relating to unauthorised overdraft charges within the time limits set out in the relevant FSA rules. The Financial Ombudsman Service has adopted a similar approach.

Whilst banks might have taken some comfort from the County Court decisions, the test case commenced in the High Court by the OFT promises to add some much needed certainty for banks and customers in this area.

Oral Trades

In Bear Stearns Bank plc v Forum Global Equity Ltd [2007] EWHC 1576, the Court has provided comfort and clarity to those involved in making telephone deals.

The case concerned the sale by Forum Global Equity Limited ("Forum") of distressed debt over the telephone to Bear Stearns Bank plc ("Bear Stearns"). Forum held distressed debt by way of loan notes issued by companies in the Parmalat group. The group was put into administration in Italy, and in November 2004 Forum filed claims in the administration which were accepted for approximately €24.7 million. A new ‘Parmalat’ company was created out of the administration, and in early October 2005 the debt represented by the notes was converted into equity by way of shares in the new company.

In March 2005 Forum contacted Bear Stearns and asked it to put in a bid to acquire the loan notes. Over the course of the next 5 months there were further discussions and Bear Stearns was asked to provide indicative bids, which Bear Stearns did and which Forum rejected. Whilst the focus of these discussions was the price, there was mention as to how such a deal would be documented. The options for such a deal were a straight transfer by way of novation or assignment, or a funded participation creating a debtor-creditor relationship. It was agreed that given the complexities of the deal, the precise nature of the transaction would be worked out by the parties’ lawyers, albeit Bear Stearns had referred to the trade taking place on "standard terms", without specifying which standard terms they were.

On the morning of 14 July 2005 Bear Stearns emailed Forum to say that by 1.45pm they should have the information they were awaiting so that "we can finalise everything". In reply, Forum concurred that they were seeking to "finalise everything". During a series of telephone calls later that day (some on the mobile phone of the trader employed by Bear Stearns) the parties got closer to reaching an agreement on price. Eventually the trader for Bear Stearns said: "if you come back to me with a level between 2.85 and 3 we will close" and during the next call a price of €2.9m was agreed. No specific settlement date was agreed.

Thereafter Forum and Bear Stearns both instructed lawyers who wrote to each other in relation to the draft documentation without marking any of their correspondence "subject to contract". Bear Stearns in the meantime completed internal trade notes and pursued negotiations to sell some of the loan notes on to Morgan Stanley.

The lawyers’ discussions had continued until 21 October 2005 when Forum’s lawyers wrote to Bear Stearns stating that Forum would no longer be proceeding to execute the agreement. After further correspondence Bear Stearns issued a claim against Forum, initially seeking specific performance of the contract but subsequently claiming damages for breach of contract.

The Court found that the key operative terms were agreed and that there was a legally binding contract. It was clear that the parties had intended that Bear Stearns have the benefit of the loan notes. It did not matter that the parties’ legal advisors had not worked out how this would take effect. The law would imply any terms necessary to give business efficacy to what was agreed. Whilst an agreement is not contractually concluded if it leaves significant matters subject to the parties’ future agreement, here the court found that the parties had shown an intention to be contractually committed, albeit whilst deferring discussion of some aspects of the deal. The Court will recognise a contract unless what remains outstanding is essential in the sense that without it the contract is too uncertain or incomplete to be enforced.

The failure to agree a settlement date did not mean that there was no concluded contract. The date of settlement had no bearing on the true value of the notes, which lay in the claims in the administration. That remained the case until the claims were converted into shares in October and it was always the parties’ expectation that the deal would be settled before the conversion took place.

Bear Stearns also argued that the Loan Market Association Standard Terms and Conditions for Distressed Debt Trade Transactions were incorporated into the trade. However, the Court found that they were not.

The market in which the parties were conducting negotiations was key to the decision. Indeed, the Judge pointed out that "the usual (although not invariable) "point of contract" for trading such assets is orally in a telephone conversation". It is also worth bearing in mind that unlike other trades such as derivatives trades which take place under master agreements, the sale of distressed debt occurs in a much more ad hoc manner.

Traders operating in distressed debt (and other) markets need to be fully aware that a binding agreement can be reached even if it is the parties’ intention subsequently to reduce the terms of the deal to writing. If it is not intended that a deal be struck, the trader must make this clear.

The case also highlights the need for traders to aim for clarity in agreeing the main terms and to make it clear what, if any, standard terms are to apply to a deal. Without agreement on the settlement date, the court here held that settlement would take place within a reasonable time. Similarly, in the absence of express reference to the LMA standard terms during the oral negotiations the Court held that no standard terms were to be implied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.