The Commercial Court has dismissed a claim by a buyer of bonds for non-delivery against the seller.[1] The Judge had to decide how and when the contract was formed and what the governing law was. He found that the contract was governed by New York law and that a disclaimer allowed the seller to cancel the contract. Had the contract been governed by English law, the claim might also have failed as a result of the buyer’s deception during the trade. 

The case raises a number of practical points for market participants to consider for the future conduct of trades:

  1. The case is a reminder that a binding contract is not dependent on the issue of a trade ticket or other written document but can arise solely as a result of a telephone conversation. Traders should be careful not to make unconditional bids/offers or accept firm bids unconditionally if they do not wish to enter into a binding contract. It will be enough to say either verbally or in an email that a bid is "stc" [subject to a call] to prevent a binding contract.
  2. Traders should be careful to state clearly whether they are acting as principal or agent when making or accepting firm bids.
  3. Consideration should also be given as to whether a disclaimer allowing a trade to be cancelled in certain circumstances should be included in the contractual terms (either verbally or by email). When purchasing from a counterparty who has included such a disclaimer, it may be sensible to include a similar disclaimer in a downstream trade, allowing that to be cancelled too.
  4. Consideration should be given as to whether the governing law of the contract should be expressed. However, traders should be aware that even if, for example, it is agreed that the contract is governed by New York civil law, traders based within the UK may still be subject to UK criminal and regulatory law.
  5. UK traders should generally be aware of the potential criminal offences which can arise from their conduct during trades (e.g. section 89 of the 2012 Act referred to above).


Molton Street Capital LLP (“Molton”), an English regulated broker, entered into negotiations in London with another English broker, Shooters Hill Capital Partners LLP (“Shooters Hill”) for the purchase of Bear Stearns sub-prime residential mortgage bonds at 22% of their face value. Shooters Hill negotiated the purchase of the bonds from City & Continental Securities LLP (“C&C”), but since Shooters Hill did not have regulatory permissions to execute trades, it arranged for Odeon Capital Group LLC (“Odeon”), a broker dealer based in New York, to enter into the contracts with C&C and Molton. Following a failure of a seller further up the chain to deliver the bonds, Odeon issued a cancellation of the trade to both C&C and Molton.   Molton subsequently issued proceedings against Shooters Hill and Odeon on the basis that Molton had entered into a contract with Shooters Hill and/or Odeon and Molton had suffered loss as a result of the non-delivery because it had already sold the bonds on to Morgan Stanley at 35.5%. Molton claimed damages and an indemnity against liability to Morgan Stanley, on the basis that the illiquidity of the bonds meant that they could not be readily replaced.

Formation of the contracts

The Judge quickly held that Shooters Hill had not entered into a contract with Molton since all parties were aware at the time that Shooters Hill was only acting as agent for Odeon. Contracts between Molton and Odeon were formed at the moment of unequivocal acceptance of firm bids or offers, even before those accepted bids were confirmed by means of Bloomberg trade tickets. A trade ticket served a purpose both as a formal record of the trade and to allow the back office to process the trade but it did not form a necessary element of the conclusion of the contract.

Governing law

Molton claimed that its contract with Odeon was governed by English law whereas Odeon claimed that it was governed by New York law. In the absence of an express choice by the parties as to governing law, a contract is governed by the law of the country where the seller is habitually resident, unless it is clear that the contract is manifestly more closely connected to a different country.[2]

The Judge held that New York law applied because Odeon was habitually resident in New York and the bonds were issued by a bank with its headquarters in New York. The price was in US Dollars and the performance of delivery of the bonds would take place in New York, where the substantive rights attaching to the bonds were represented by a book entry in the Depositary Trust Company. The fact that negotiations had been between two English companies carried little weight since it was understood that Odeon would be the contracting party.


Odeon relied on a disclaimer included in a Bloomberg message and trade ticket sent by it to Molton. The disclaimer stated that “trades cannot be considered ‘good trades’ without express consent of the Principals of the firms”. Since the trader who concluded Odeon’s contract was not one of its two Principals, it was open to those Principals to exercise their right to cancel the trade at a later time.

The Judge held, on the basis of expert advice on New York law, that the disclaimer was valid. Although the contract had been formed at the time of acceptance of the firm bid, that acceptance was on the basis that all the contract terms would be brought together by the trade ticket and it was open to the parties to agree under those terms at what time they would be bound. The waiver in the contract therefore prevented a contract from being concluded and on that basis alone, the Judge dismissed the claim.

Molton’s deception

A striking feature of the case was that the Judge found that the Molton trader, Rajat Rohailla, had consistently lied to the other parties throughout the trade. He had lied:

  • to Morgan Stanley in saying that C&C were willing to sell the bonds at around 35% and not around 22%;
  • to Shooters Hill in saying that Morgan Stanley were willing to buy at around 22% rather than around 35%; and
  • to Shooters Hill that Morgan Stanley had already sold the bonds on when it had not.

The Judge held that, had the disclaimer not proved a valid defence, Molton’s fraudulent conduct against Morgan Stanley would, under New York law, have prevented it being able to claim an indemnity against any liability of Molton to Morgan Stanley.

Molton’s deception could also have led the Judge to find in favour of Odeon on the grounds that the contract was void for illegality. Even though New York law applied to the contract, the defence of illegality[3]was to be decided under English law. Since Odeon already had a valid defence because of the disclaimer, the Judge did not have to decide whether the defence of illegality was also good. However, he did comment that Mr Rohailla’s lies would have satisfied an illegality defence on at least one test set out by the Supreme Court.[4]


This judgment is particularly instructive because it is a rare example of a failed trade being litigated. Failed trades occur frequently in the financial markets but, in most instances, the parties manage to reach a commercial solution rather than resort to legal action. It is also notable that such contracts are deceptively simple, consisting of very brief telephone calls, confirmed by emails and Bloomberg trade tickets. However, the lack of documentation, particularly when deals are conducted internationally and involve intangible assets such as bonds, means that it is not always obvious how, when and on what terms the contract is formed.

Although the contract was found to be governed by New York law, the Judge noted that if English law had applied, Odeon might have had a defence on the basis that it was an implied condition of the contract that neither party had breached the prohibitions contained in part 7 of theFinancial Services Act 2012Section 89 of the 2012 Act makes it a criminal offence for a person to make false or misleading statements, made knowingly or recklessly, with the intention of inducing another person to enter into an agreement to sell “relevant investments”, which would include the bonds. The Judge expressed no view as to whether or not Molton’s false statements would have provided a successful defence on this basis.