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My Word is My Bond: Oral Contracts and Commercial Practice

In the recent English case of Bear Stearns Bank Plc v Forum Global Equity Ltd (2007) the court held that an oral trade between the claimant, a subsidiary of an investment bank, and the defendant was contractually binding.

This claim related to the distressed debt market and the standard terms of the Loan Market Association (LMA), the latter being intended to standardise the sale of loan assets and to establish standard settlement practices for players in the market.

The claimant (the plaintiff) was the subsidiary of an investment bank and trading business and the defendant was an investment fund company. The defendant acquired credit-linked notes due in 2005 with underlying assets which included notes issued by various companies within the Parmalat group. The Parmalat group had collapsed in 2003 amid allegations of fraud and corruption, and was declared insolvent in December 2003. In November 2004, the defendant filed claims to be admitted to the list of creditors of the two companies in which it held notes. Its claims were accepted and the relevant debt was converted into equity by way of shares in a new company, which took over the name of Parmalat SpA.

The claimant asserted that by virtue of a telephone call, the parties had concluded an oral contract, under which the claimant would acquire from the defendant the Parmalat notes. The claimant had purported to sell half of the shares to Morgan Stanley and continued to press the defendant for performance of that contract, until it learned that the defendant had sold the shares. The claimant then brought proceedings to enforce the oral contract, seeking damages in respect of the value of the shares issued upon the Parmalat group's administration. The defendant argued that although they had agreed the price, they had made only an "agreement to agree". This agreement was too uncertain to be deemed a contract and the parties had not intended to create legal relations.

The court held that on the facts, the LMA terms had not been incorporated into any agreement. It rejected the argument that the parties had merely formed an agreement to agree and held that they had intended to create contractual relations. The terms were sufficiently precise to achieve this. Accordingly, the essential obligation of the defendant was to ensure that the claimant obtained the commercial benefit of the notes, namely the benefit of claims in the administration that had been made, or might be made, by the holder of the notes. There had been sufficient intention to create such legal relations.

The court’s attitude demonstrates a willingness on its part to acknowledge the commercial realities that the parties were facing at the relevant time. It also highlights the importance of written confirmation of contracts because the LMA (or indeed other standard terms) will not necessarily apply unless expressly agreed. This judgment is of particular interest to parties who largely operate on the basis of oral trades.