Paul Nicholls looks at a recent judgment on a commercial transaction that gives legal effect to the deals which business people make


In the recent case of Bear Stearns Bank plc v Forum Global Equity Limited [2007] EWHC 1576, Mr Justice Andrew Smith gave a judgment which re-affirmed the basic legal and City principle that ‘my word is my bond’. The judge also demonstrated the extent to which the law seeks to uphold commercial transactions and is wary of technical attempts by parties to avoid their contracts.



The case concerned loan notes in respect of the distressed debt of an entity in the Parmalat group (the Italian group of companies that collapsed in 2003). The value of the notes lay in the dividend to be paid on the claims in the insolvency.



Forum Global commenced negotiations with Bear Stearns for the sale of the notes. There were several discussions in relation to their sale. The evidence about the key discussions was ‘less satisfactory than it might have been’ because of the absence of recordings of those conversations. It is clear that the parties did not reach an agreement on every term. The parties did, however, reach an agreement on price: $2.9 million (£1.4 million). There was some mention of a settlement date, but no specific date was agreed. In light of the agreement that the notes were to be sold for $2.9 million, matters were left in the hands of the lawyers.


Before the parties had reached final agreement on the documentation, Forum Global indicated that it had decided not to proceed with the transaction. In response to the claim of breach of contract which Bear Stearns brought in response, Forum Global sought to argue that, for a number of reasons, there was no binding contract between the parties.


Forum Global argued that:

l The parties had agreed to defer reaching an agreement about when there should be settlement of the trade and had therefore deliberately agreed to defer concluding a contract. There was, argued Forum Global, only an agreement to agree;

l The agreement was too uncertain to be an effective contract; and

l There was no intention to create legal relations.



The factual basis for each of these allegations was essentially the same: the relative vagueness and incompleteness of the discussions upon which Bear Stearns relied for the purposes of arguing that a binding agreement had been reached.



Judge Smith rejected each of these arguments. The manner in which he did so will provide a reassurance to business people because the judgment shows that the courts will strive to give effect to what appear to be agreements and not seek too readily to hold that there is no agreement.



The judge rejected the suggestion that there was a mere agreement to agree and therefore no binding contract. The essence of the contract had been agreed: the sale of the notes in return for a payment of $2.9 million. The judge held: ‘If the parties have shown an intention to be contractually committed, albeit while deferring discussion of some aspect or aspects of the deal, then the court will recognise a contract unless what remains outstanding is not merely important, but essential in the sense that without it the contract is too uncertain or incomplete to be enforced’



The judge cited comments from Pagnan SpA v Feed Producers Ltd [1987] 2 Lloyds 601, 619 to the effect that parties may agree to be bound even if they defer important matters to be agreed later.



He added that, even if the parties had never got around to reaching an express agreement about the date of settlement, the law would have implied a term that settlement would occur within a reasonable time. Such an implication would not be to insert into the contract a stipulation contrary to that for which the parties had bargained. It would simply be to imply a term to deal with a matter about which the parties had decided to defer an express contractual commitment, intending to return to it later.



The language used by the parties on the telephone was important. While the judge held that there was no obligation to use any specific form of words in order to create a contract, the fact that Bear Stearns had offered a ‘firm bid’ and indicated its wish to ‘finalise everything’ was the language of contract. When the ‘firm bid’ was accepted, there was a concluded contract.



The remaining conclusions can really be seen as following from this first decision. The judge rejected the argument that the contract was too uncertain. The essence of the contract – the sale of a product in return for a price – had been agreed. That the remainder was to be left to the parties’ legal advisers to conclude could not mean that the contract lacked certainty. As indicated, if express agreement could not be reached, implied terms could fill the gap. The judge accepted that it was not expected in the industry that a settlement date had to be agreed. This and other factors could be left for conclusion without leading to what had been agreed being

too uncertain.



There was an intention to create legal relations. The judge’s conclusion in this regard was a further indication of the law’s willingness to give effect to the reasonable expectations of business people. The fact that some points were to be agreed did not justify the conclusion that there was no intention to create legal relations and thus no contract. The judge noted that trades such as that in this case were often concluded orally. Therefore the language of a ‘firm bid’ which was accepted indicated an intention to create legal relations.



Bear Stearns is not a revolutionary judgment. But business people can take comfort from the law’s reaffirmation that it will give legal effect to the deals which business people make.



Paul Nicholls is a barrister at London chambers 11KBW