The English High Court in Lehman Brothers International (Europe) (In Administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch) found it necessary to imply a term to a debt security trade agreement that was otherwise unworkable. It is generally uncommon for a Court to imply terms into a commercially negotiated agreement given the restrictive nature of the relevant test, although this is more often seen in the case of an oral agreement as in this case. This is even more so in the context of the securities market.


In 2014, Lehman Brothers International (Europe) (In Administration) (“LBIE”) entered into a trade of Peruvian government-issued bonds (otherwise known as, Peruvian Government Global Depository Notes (“GDN”)) with Exotix Partners LLP (“Exotix“) by oral agreement.

The parties were, however, mistaken as to the nature and value of the debt securities being traded. In particular, the parties incorrectly thought that the securities involved were of insignificant value. The perceived value of the GDN was approximately US $7,000 but the securities were, in fact, worth over US $7 million. The parties were blind-sided by the fact that the GDN were issued in Peruvian Nuevo Sol, the local currency in Peru, and did not realise that the coupon payments accrued under the securities were in US Dollars. For this reason, their valuation was over 1,000 times off the mark.

Eventually, Exotix realised the mistake when it received a coupon payment vastly greater than what it had expected. Instead of notifying LBIE of their mistake, however, Exotix sold the GDN and profited massively from the sale.

The Court’s analysis

The court considered the true meaning and effect of the bargain struck between LBIE and Exotix. In doing so, the court looked at the objective intentions of the parties on the transaction. The court had to decide whether the parties agreed to trade: (a) a specific number of GDN (Exotix’s case); or (b) a number of GDN equating to a particular value in the currency that they were issued (LBIE’s case).

The court found that the parties’ intention was most likely the latter i.e., the parties had intended to trade securities worth approximately US $7,000 as opposed to a specific number of GDN. Accordingly, it could not have been the objective intention of the parties to trade with over US $7 million at stake.

For this understanding to work, however, a term that enables the delivery and trade of a fraction of a GDN must be implied. A trade of an integer quantity of GDN would amount to a value exceeding the approximate US $7,000 traded, and would also contradict the court’s finding that the parties intended to trade on a value as opposed to a quantity.

In making the decision, the court relied on the Supreme Court case of Marks & Spencer plc v BNP Paribas [2015] UKSC 72 (“Marks & Spencer“), a leading authority on when an implied term should be read into the relevant contract. There, the court held that the relevant question is whether the term is so obvious and necessary to provide commercial and practical coherence to the agreement that it must be implied for the sake of business efficacy.

The court was understandably hesitant in finding that the proposed implied term was clearly obvious and necessary. At the same time, it noted that proper understanding of the parties at the time when the transaction was entered into would have led the parties to realise the blatant mistake they had made. This rendered the problem between the parties a misunderstanding as opposed to an omission (which would otherwise have likely led the court to find that the contract was fundamentally defective and void).

Relying on Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2 (“Nazir Ali“), another Supreme Court case, the court applied the principle that a term may be implied if the contract would otherwise lack commercial or practical coherence. In short, the term must be necessary to ensure that the agreement is workable.

Following the court’s analysis, it held that the trade agreement could only be made to work if an implied term for the settlement of a fraction of GDN was found. The court recognised that the law prefers giving effect to the parties’ agreement as opposed to dismissing the parties’ bargain altogether. For this reason, the court’s finding that the issue before it was due to a misunderstanding between parties rather than an omission of the parties was paramount to the court in finding in LBIE’s favour.

As relief, LBIE was awarded restitutionary relief on the basis that Exotix would have otherwise been unjustly enriched by the value of GDN it had received and the profit that it made from that amount.

Relevance to Hong Kong

While the impression is often that the courts will decline to enforce an agreement where obligations are omitted or ambiguous, the English High Court case serves as a helpful reminder that the courts can also be sympathetic and imply necessary terms into contracts where there is a genuine agreement between the parties. The case highlights the preference of the courts to uphold the parties’ bargain as opposed to dismissing the parties’ mutual understanding in its entirety.

References to Marks & Spencer and Nazir Ali in the High Court’s decision emphasises the relevance of these English Supreme Court authorities. It demonstrates a consistent approach taken by English courts when considering the matters of contractual interpretation.

Although the same authorities have not been considered by the Court of Final Appeal in Hong Kong, the application of principles derived from these cases provide a helpful indication as to the direction the Hong Kong courts are likely to take when similar issues are argued before them.

Take the Privy Council decision in Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, for example, this case has been considered by the Hong Kong courts in Guo Jianjun v Dragon Fame Investment Ltd [2016] 2 HKC 213 and Tadjudin Sunny v Bank of America, National Association [2016] HKEC 1128 with the former being a Hong Kong Court of Appeal case. It would not be surprising to find the authorities of Marks & Spencer and Nazir Ali being discussed and applied before the Hong Kong courts in the near future.