Bear Stearns Bank plc v Forum Global Equity Ltd [2007] EWHC 1576 (Comm) 


  • A purported oral agreement for the purchase of distressed debt constituted a binding contract in circumstances where certain terms remained to be fixed.
  • This is a significant judgment since it endorses perceived market practice in relation to the method of execution and documentation of trades in the distressed debt market.
  • The decision is a reminder for firms to ensure that their trading procedures are sufficiently robust should counterparties seek to renege on agreements prior to settlement and to ensure that records of telephone calls and other records are preserved pending the resolution of any dispute.
  • The court has given useful guidance also given on the approach to measuring loss for breach of a contract for the sale of shares.

Business impacts

  • The practice of concluding agreements by telephone was examined in some detail in this case. Helpfully, the court's decision affirms the effectiveness of the practice of reaching agreement orally, even if, as is typically the case, many details are left to be settled in a written confirmation or for negotiation between lawyers. Although in this case sufficient key terms had been agreed for a binding contract to have been reached, Forum made strong arguments to the contrary: it remains good practice to issue and agree written confirmations promptly (in accordance with any applicable standard trading terms) to minimise the risk of disputes.
  • The incorporation of industry standard terms will depend on the parties making clear which terms they wish to incorporate. Absent such clarity, the courts will be reluctant to find that such terms were part of the contract.
  • When entering into 'string' or back-to-back contracts, ie, where assets are purchased with a view to their on-sale to a customer, consideration should be given to whether this can and should be disclosed to the seller to ensure (in the event of default by the seller) that the inability to perform the on-sale contract can give rise to a claim in damages.
  • The case reinforces the importance of taking immediate steps to preserve records of telephone conversations once a potential dispute arises, in order to protect valuable and potentially supportive information and to avoid suspicion that unhelpful evidence may have been suppressed. Traders should be discouraged from conducting calls by mobile telephone, since firms will not have records of the calls made.


The claimant, Bear Stearns, negotiated the purchase of some distressed debt from the defendant, Forum, a BVI incorporated investment fund company. The debt consisted of credit-linked notes issued by Merrill Lynch. Underlying them were notes issued by the Parmalat group. The value of the notes lay in the holder's claims in Parmalat's administration, following its financial collapse in 2003.

The contract was purportedly concluded over the telephone in July 2005. The price of the trade was agreed but the settlement date was not, as Bear Stearns required that certain documents necessary for its participation in the administration be produced beforehand.

In the following weeks the parties' lawyers were unable to agree details as to the structure of the transaction, namely whether Bear Stearns would take a participation in the claims in Parmalat's administration represented by the notes, or a transfer of the notes themselves by way of assignment.

By October 2005 the contract had not been performed. The debt represented by the notes was converted into shares in a new Parmalat vehicle. Shortly afterwards, Forum notified Bear Stearns that it did not wish to proceed with the sale. Forum sold the new Parmalat shares to third parties. Forum stated that it was not proceeding with the sale to Bear Stearns because of the failure to agree the structure of the deal and the failure of Bear Stearns to pay by the settlement date (which date had not been agreed).

Bear Stearns issued proceedings for specific performance of the contract, based on the oral agreement. However, upon learning that Forum had sold the shares, it amended its claim to seek damages. In its defence Forum argued that there was no binding agreement reached on the telephone – that this amounted merely to an 'agreement to agree', which was too uncertain and that the parties had not intended by their telephone conversation to create legal relations.

Judgment – existence of oral agreement

In his judgment Mr Justice Andrew Smith held that the parties had concluded a binding contract by telephone in July 2005, notwithstanding the lack of agreement as to the settlement date or the precise structure of the transaction.

The court had regard to industry practice in the distressed debt market. Evidence showed that parties typically agree not only on the price and the particular asset, but also upon the trade date and form/structure of the purchase, where appropriate. The judge recognised that the market "almost always" operated on the basis of oral agreement, with details confirmed later in writing. The absence of agreement as to the settlement date did not mean that no trade has taken place.

The judge concluded that a contract would be recognised unless what remained outstanding is not only important but essential in the sense that without it the contract is too uncertain or incomplete to be enforced. In the circumstances there was an implied term that settlement take place within a reasonable time.

Incorporation of standard trading terms

The European distressed debt market commonly utilises the Loan Market Association (LMA) standard trade and settlement documentation. Although the parties agreed to trade on 'standard terms' the court found that the LMA standard terms had not been incorporated by this reference, since 'standard terms' could mean other industry terms or standard legal documentation. For the LMA terms to be incorporated there would have to be certainty that this is what had been intended.

Measure of damages

The case addressed two issues of interest in relation to the measure of damages for breach of a share sale agreement.

Firstly, the issue arose as to whether losses arising from Bear Stearns' agreement to sell on part of its interest in the notes to Morgan Stanley could be recovered in damages from Forum. Ordinarily, damages are to be assessed as at the date of the breach or contract. In the case of shares for which there is a liquid market, the market value of the shares will ordinarily determine the level of damages recoverable. The court found that although it was reasonable to infer that the parties might have contemplated the possibility, as professional traders in the relevant market, that the purchaser might have made an on-sale commitment, this was not enough for damages in connection with that on-sale to be recoverable. The seller would have to know of the existence of the on-sale obligation for such damages to be recoverable. Bear Stearns was therefore limited to recovering losses assessed by reference to the market value of the shares.

Secondly, the court considered whether damages should be assessed at the date of the breach of contract, ie, when Forum notified Bear Stearns of its intention not to deliver the Parmalat shares (which had replaced the notes) or at the later date on which it became clear to Bear Stearns that Forum would not be able to perform the contract in any event because it had sold the shares to third parties, such that a claim for specific performance was no longer possible. The court considered that since Bear Stearns had acted diligently in seeking to protect its position after Forum's initial refusal to perform the contract, the usual rule that damages are to be measured at the date of breach would be unfair: Bear Stearns should be entitled to a higher level of damages based on the value of the shares at the later date, when it became clear that performance of the contract was impossible.