The decision of the High Court in Bear Stearns Bank Plc v Forum Global Equity Limited [2007] All ER 103 should be reassuring for City traders. The Court found that an agreement between two traders struck over the phone was an enforceable contract, despite the fact that some important terms were not agreed at that point but intentionally left for later.

Oral v written

The terms of the oral agreement reached over the phone were sent to the parties’ lawyers to be documented in accordance with usual City practice. However the documentation was never finalised. Forum attempted to withdraw from the deal, which by that time had become unfavourable to it. Forum argued that there was no contract because: (a) it was an agreement to agree and too uncertain to be enforceable; and (b) there was no intention to create legal relations. The Judge rejected both these arguments.

It is established law that an ‘agreement to agree’ is unenforceable where the terms left for agreement are so essential that the overall bargain is uncertain and incomplete without it, and there are no mechanics for it to be completed. The parties in the Bear Stearns case had not fixed a settlement date and had not reduced the orally agreed terms to writing.

The High Court decided that it was not essential to fix a settlement date. The Court could imply a term that a reasonable settlement date would be fixed i.e. promptly after documentation of the agreement.

It was not essential for a binding contract that the agreement first be reduced to writing. This has always been the law (apart from certain exceptions, most notably contracts for the sale of land). The written contract contemplated by the parties was merely a record of the terms already orally agreed.

The High Court also found that there was clear intention of the parties to create legal relations at the point they agreed terms over the telephone. Parties have historically found it very difficult to succeed in extracting themselves from commercial contracts on the basis of this cause of action. In the Bear Stearns case, there was evidence of established City market practice that the contract was struck at the point of agreement over the telephone. The Court referred to Loan Market Association standard documentation that supported this principle. Whilst the Judge did not go so far as to decide that the parties had incorporated those standard terms into their contract, these terms were evidence of relevant custom and practice.

The Bear Stearns case re-affirms established contractual law principles of offer and acceptance. The High Court has sanctioned the practice of City traders reflected in the LMA documentation. Those traders will take heart from this decision.