Lehman Brothers International (Europe) v Exotix Partners LLP [2019] EWHC 2380 (Ch)

03 Oct 2019

The High Court considers an unusual case in which the ‘natural meaning’ of the contract, contested following a substantial windfall to the Defendant flowing from a common mistake, also rendered performance legally impossible.  The decision to imply a term on the basis of necessity to make the contract workable – some years after the contract had been performed – demonstrates that, where the parties have ostensibly reached consensus, the courts will strive to uphold their agreement.


On 31 January 2014, the Claimant (“LBIE”) entered into a sale (“the Trade”) as vendor with the Defendant (“Exotix”) as purchaser of Peruvian Government Global Depository Notes (“GDNs”).  Both parties entered into the Trade on the common understanding that the GDNs were low-value assets, described by LBIE in the negotiations as “scrappy lehman positions” and “the sh*t in the end which I don’t care for.” The consideration paid by Exotix was therefore some US$7,438.00.

Three weeks after settlement, Exotix received the first coupon payment in respect of the GDNs in the sum of US$276,321.25.  Having immediately considered that there had been an error, internal investigations revealed that there had been a common misapprehension as to the face value of each GDN: the market value of the holding was actually in excess of US$7 million; Exotix had therefore acquired the assets at 1/1000th of their true value.  LBIE was not informed of the error and did not find out about it until over a year later – and through a third party – when Exotix itself sold on the assets, thereby obtaining a substantial windfall.

The Trade and its Terms

The key dispute between the parties was whether the terms agreed expressed the subject matter and price in terms of:

  • a fixed number of units of GDNs, at a fixed price; or
  • a number of GDNs to the equivalent of a fixed face value in Peruvian Sol (PEN), at a price calculated as an agreed percentage of the face value reflecting the current market price of the GDNs, expressed in US Dollars (USD).

An agreed transcript of the telephone call during which the Trade was orally concluded and standard post-trade documents were held admissible as part of the contract.  These respectively showed the subject matter and price to be:

  • the 22 just on the shy of 22.. 23 thousand er [Peruvian] sol’] erm at 91 and a half [percent] which is around 7,712… [US] dollars“.
  • the sale of “22.955 (M)” GDNs at a price of “91.500000 [percent]”
  • Quantity: USD 22,955.00; Price: 91.500000%; Total Consideration: USD 7,707.93

Exotix contended for the first interpretation of these terms, which reflects the practice commonly used for trading in warrants, shares, and, strictly speaking, also GDNs, which have no face value.  The terms of the sale were, therefore, simply 22,955 GDNs for a price of USD 7,707.93.

LBIE contended for the second interpretation, reflecting the common practice for trading in bonds: the subject matter was the equivalent number of GDNs to a face value of PEN 22,955 on the basis that the reference to “USD” was obviously wrong and “PEN” should be inserted instead (i.e., 22.955 GDNs at a face value of PEN 1,000 each); at a price of 91% of the face value expressed in USD (i.e., USD 7,707.93).   In the alternative, LBIE contended that, if the subject matter were 22,955 GDNs, the price was still to be calculated by reference to the current trading price of 91% of the face value.  The total consideration was, therefore, USD 7,707,930.00.

The Findings

Having considered the broader matrix of admissible evidence, Hildyard J found a “common thread” which demonstrated that the objective intention of the parties was as LBIE contended: “to sell GDNs with a total nominal, face or par value of PEN 22,955 for a USD sum equivalent to 91.5% of that value.”

It then fell to be considered whether this “most natural” interpretation of the words used was displaced by the difficulties that:

  • The obligation on LBIE to deliver of a fractional number of GDNs, i.e., 22.995 of them, is impossible;
  • LBIE had, in fact, delivered 22,955 GDNs;
  • both parties understood the subject matter of the sale to be ”‘scrappy lehman positions” and certainly not assets to be sold for consideration in excess of USD 7 million. Exotix’s own regulatory authorisations did not permit it lawfully to acquire and hold anything other than low-value assets; Hildyard J further considered that if the parties had known the true position, the parties would most probably have wished to dissolve their agreement.

To counter these issues in part, LBIE contended for an implied term that LBIE would deliver 22 whole GDNs and pay the cash equivalent of the remaining 0.995 GDN.  Two bases for such implication were advanced:  (i) as reflecting market practice, for which Crema v Cenkos Securities Plc [2011] 1 WLR 2066 was identified the leading authority; or (ii) as being “obvious and necessary” to provide “commercial and practical coherence” to the agreement, following Marks & Spencer plc v BNP Paribas [2015] UKSC 72.

Hildyard J first considered Crema and considered there was insufficient evidence to establish that the process of rounding down to the nearest whole value and paying the fractional balance in cash, even if it applied to trading in GDNs, was a market practice “invariable, certain and notorious” such as to satisfy the strict Crema test.  At most, it represented “good (and usually expected) behaviour” in the bond markets.

Turning then to Marks and Spencer, Hildyard J found that, in applying “primary test usually put forward,” a difficulty arose in that the term to be implied was not one “so obvious as to go without saying” but one which, if the parties had thought to include as an express term, would have “jolted” them into recognising that they were under a fundamental misapprehension.  The implication, therefore, in this case “would be to save the contract from a misunderstanding rather than an obvious omission.”

The only basis upon which the term could be implied was, therefore, the alternative test of necessity to give the contract commercial or practical coherence: Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2.

Considering that “coherence” includes workability, as had been recognised in The Moorcock (1889) 14 PD 64, Hildyard J found that the only way in which the Trade could be made to work was to imply a term for settlement of the fractional entitlement to 0.995 of a GDN in cash.

Restitutionary relief was, therefore, ordered in favour of LBIE. The correct measure was provisionally found to be so much of the price Exotix obtained when it on-sold the GDNs as was attributable to the over-delivered whole number of GDNs, together with a sum equal to the aggregate of the various coupon payments it received up to the date on which Exotix sold the GDNs, plus interest.


Notwithstanding the logic of the solution adopted, Hildyard J nevertheless acknowledged “hesitation” and “concern” given the obvious “conundrum”:  the facts clearly disclosed a compelling case for finding the Trade void for mistake negating the parties’ apparent consensus.

The difficulty was recognised as being the tension between the objective approach required for implying a term and the subjective expectation of the parties at the time of agreement: assessment of the “reasonable expectation of the parties” was found to depend critically on whether, upon recognition of their mistake, the parties would have sought to give effect to the contract or abandon it.  As already stated, Hildyard J considered that the parties would most probably have opted to abandon.

LBIE had not initially pleaded mistake but upon a late application to do so, Hildyard J considered the case for mistake in detail before finding that, if he had been wrong that the term could fall to be implied, the contract would have been void and unenforceable for failure of consideration.  The judgment merits reading in full for this analysis, however, it is also worth noting, certainly from a practical perspective, that Hildyard J had also considered a policy point for implying the term:

“the law usually baulks at [finding that apparent consensus has been negated by common mistake] and prefers to give effect to what the parties ostensibly have agreed.”


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