In Lehman Brothers v Exotix Partners, the parties to an oral trade in Peruvian government global depository notes were both mistaken as to their value, resulting in the buyer receiving a windfall which it was effectively ordered to repay.
Lehman Brothers and Exotix, a securities broker, entered into a trade by telephone on a recorded line. Lehman Brothers thought its holding of Peruvian government global depository notes amounted to “scraps” with a value of around USD 7,000. Lehman Brothers produced a pre-trade internal “sign-off pack” before the conversation which in one column showed the true extent of its holding. After the sale, Exotix sent Lehman Brothers a summary of terms (or VCON) recording the sale of 22,955 notes at a price of USD 7,707 (91.5% of their nominal value). Exotix discovered the true value of the notes was over USD 7m, after which it obtained a windfall by selling all notes to a third party without notifying Lehman Brothers.
In finding for Lehman Brothers, the court held as follows:
- Internal vs. exchanged documents: The court distinguished (i) documents recording and evidencing the contract, which the parties exchanged as part of the contractual process, and (ii) post-contractual internal records created for accounting, regulatory or other reasons. Only the telephone recording of the offer and acceptance and the summary of terms (or VCON) were intended to have contractual effect. Nothing suggested that the parties intended terms to be gathered from other sources. Documents intended for internal use (like the sign-off pack) and evidence of subjective intention (what the parties thought the par value of the notes was) or post-contract behaviour (eg the letter before action) were not admissible to determine the subject matter of the claim.
- Express terms: In the absence of anything sufficiently indicating otherwise, the objective intention of the parties was most likely to agree the sale of notes with a face value of PEN 22,955 at a dollar price of 91.5% of that nominal value.
- Implied term: However, this contract would be unworkable, since it required delivery of a fraction of a note. The court therefore read an implied term into the agreement, which was “obvious and necessary to provide commercial and practical coherence” (M&S v BNP Paribas) for settlement of the fractional entitlement in cash.
As Exotix was unjustly enriched, the court recommended payment to Lehman Brothers of “so much of the price it obtained” from the on-sale as was attributable to the over-delivered number, alongside a sum equaling the applicable coupon payments.