Contracts made over the telephone are binding
26/07/2007
The High Court has ruled that an oral contract made over the phone was binding.
The claimant was Bear Stearns Bank Plc, the Irish subsidiary of an investment bank and securities and trading business based in New York and London. The defendant was an investment fund company incorporated in the British Virgin Islands, Forum Global Equity ("Forum").
Bear Stearns argued that it had concluded a contract with Forum to acquire some distressed debt by way of notes issued by companies in the Parmalat group. The contract, they alleged, was concluded in July 2005 during the course of a telephone conversation.
The Parmalat group had been declared insolvent in December 2003. In November 2004 Forum filed claims in the administration to be admitted to the list of creditors of the two Parmalat companies (Parmalat SpA and Parmalat Netherlands BV) in which it held notes. Its claims were accepted and in early October 2005 the debt represented by the notes was converted into equity by way of shares in a new company which became Parmalat SpA. Forum then declined to honour the sale to Bear Stearns and began trading the shares in Parmalat it had received as part of the administration process, selling half of the shares to Morgan Stanley. The claimant brought proceedings to enforce the contract, seeking damages based on the value of the shares issued in the administration of the Parmalat group.
The defendant argued that although they had agreed a price for the notes in July 2005, they had only made an "agreement to agree", the agreement was uncertain and the parties had not intended to create legal relations.
The High Court ruled that the terms agreed were sufficiently precise. Whilst no specific settlement date was agreed at the time, there was an implied term that the parties would execute the contract within a reasonable time. Similarly, although the parties had not agreed upon the form of purchase, this did not render the contract void or unenforceable.
The decision reaffirms the well established principle of contract law: (a) that a binding contract may be concluded orally and need not be in writing (contracts for the sale of land being the most important exception); (b) that provided the essential terms are agreed, a court can imply terms to give effect to the contract, to the extent required to give business efficacy; and (c) pleading that there was no intention to create legal relations is unlikely to hold sway in a commercial context.
(Bear Stearns Bank Plc v Forum Global Equity Ltd [2007] All ER (D) 103 (Jul), [2007] EWHC 1576)
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