A recent High Court decision has found that it was necessary to imply a term into an otherwise unworkable debt security trade agreement: Lehman Brothers International (Europe) (In Administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch). The approach of the court towards implying terms into a contract is highly restrictive (see our litigation blog post) and implied terms are particularly unusual in the securities market, so this decision will likely be of interest to financial institutions.

In the present case, following a “colloquial” and “imprecise” oral agreement, both parties were mistaken as to the nature and value of the securities being traded. Having considered the contractual interpretation of the trade agreement, the court found that the correct interpretation required an implied term in order for performance to take place. Without this implied term, the trade would have been impossible to fulfil.

The court found that the implied term was not “obvious, because the implication of the term would have alerted the parties to their mutual misunderstanding. The term was instead implied solely on the basis that, without the term, the contract would lack commercial or practical coherence. In the court’s view, this included “workability”. This conclusion was not reached without some (understandable) hesitation from the court, in particular because – if the parties had been asked at the time of the transaction – they would likely have realised the shared misapprehension and dissolved the trade.

One of the most interesting points arising from the judgment is the legal gymnastics undertaken by the court in order to reach an ostensibly fair decision. The court notably criticised the defendant’s failure to notify its counterparty when it discovered the significant trading error. Indeed, the court found the defendant’s “commercial morality” to be “frail” at best. Against this backdrop, the court appears to have been motivated to claw back the defendant’s windfall gain of circa US $7 million.

It is worth noting that, had the agreement been made in writing as opposed to orally over a recorded line, the difficulties experienced by the court could have been avoided because rectification would have been a possible remedy. The Court of Appeal’s recent decision in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361 sets out the test for rectifying terms following common mistake and further consideration of the case can be found in our banking litigation blog post. However, rectification is not possible for oral agreements and therefore was not available here.


In early 2014, Lehman Brothers International (Europe) (In Administration) (“LBIE”) entered into a trade of Peruvian Government Global Depository Notes (“GDN”) with Exotix Partners LLP via an oral trade agreement. A GDN is a debt instrument created and issued by a depository bank evidencing ownership of a local currency-dominated debt security (in this case, Peruvian government-issued bonds). Each GDN provided for payment of principal and interest in US dollars (unlike the underlying bonds, which were issued in Peruvian Nuevo Sol, or “PEN”).

The oral agreement was colloquial and imprecise. Both parties were mistaken as to the value of the trade. Indeed, each party was under the misapprehension that they were trading “scraps” worth approximately US $7,000 when in fact LBIE’s holding was worth over US $7 million. LBIE delivered its holding to Exotix which, upon the receipt of a larger than expected coupon payment, identified the error and, following some internal discussions, sold on the GDNs and pocketed the windfall without notifying LBIE.


The principal dispute was the true meaning and effect of the bargain struck further to the oral agreement, focusing on the contractual construction of that oral agreement and whether or not it contained an implied term.

Contractual construction

Applying the now well-established principles of contractual construction, the court considered the objective intention of the parties as to the subject of the trade and price. The key question was whether the parties had agreed to the sale and delivery of: (a) a specific number of GDNs (Exotix’s case); or (b) the number of GDNs equating to a face value in PEN (LBIE’s case).

The court found that the most likely meaning was (b) above, with the face value in PEN equating to approximately US $7,000. Accordingly, the performance (namely transferring a holding worth approximately US $7 million as opposed to US $7,000) was not in accordance with the objective interpretation of the trade agreement given the facts known at the time and the words used in the trade.

However, this interpretation presented a problem, because it required LBIE to deliver a non-integer quantity of GDNs. LBIE sought to cure this by way of an implied term.

Implied term

LBIE argued that as (i) fractions of the GDNs could not be transferred in practice and (ii) both parties were aware of the approximate trade value of US $7,000, the agreement must include an implied term which provided for and enabled delivery of a fraction of a GDN.

Finding in favour of LBIE, the High Court held that in order for the contract to be workable, a term must be implied into the trade agreement in respect of transferring fractions of GDNs.

In doing so, the court made the following key observations:

  • The court noted that the case of Crema v Cenkos Securities plc [2011] 1 WLR 2066 is the leading modern authority on the implication of terms based on clear trade practice. However, it held that there was not enough evidential basis to establish an “invariable, certain and notorious” practice relating to the delivery of a non-integer number of GDNs, and therefore this test was not satisfied. Even equating GDNs with bonds (for which it was accepted by both sides’ experts that trades might give rise to a fractional entitlement), the court could not properly extrapolate an implied term from the evidence when the issue of fractions of bonds is not common.
  • The court referred to the leading authority of Marks & Spencer plc v BNP Paribas [2015] UKSC 72 on the question of whether the pleaded implied term should be read into the trade on some other basis, in particular that it was obvious and necessary to provide commercial and practical coherence to the agreement and (in other words) to give the trade business efficacy.
  • The court noted that the difficulty in this case with saying that the term was so obvious as to go without saying, was the likelihood that knowledge of the term at the time of entering into the trade would have “jolted [the parties] into recognising the real problem”. So the implication of the term would have saved the contract from a misunderstanding rather than an obvious omission.
  • However, the court held that did not exclude the possibility of implying a term to ensure the workability of the agreement, i.e. that the implied term was necessary. The court emphasised that terms may be implied on the alternative bases of being obvious or necessary, and that although the outcome of either approach will usually be the same, that is not invariably the case. On this point, the court relied upon Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2, which confirmed that a term may be implied if, without the term, the contract would lack commercial or practical coherence. In the court’s view, this included workability: a term may be implied if it is necessary to ensure that an agreement is workable.
  • Given the court’s conclusions on contractual construction, and the obligation to deliver a fraction of a GDN, the court stated that the only way in which the trade agreement could then be made to work was by implying a term for settlement of the fractional entitlement in cash, which was the implied term sought by LBIE.
  • The court acknowledged its hesitation in reaching this conclusion. It noted that, if the parties had been asked at the time, they likely would have made enquiries that revealed a shared misapprehension as to the nature of GDNs and dissolved the trade (this was intended to be a deal for scraps). However, the court stated that the law usually stops short of dissolving an agreement, preferring instead to give effect to what the parties appear ostensibly to have agreed (although the court considered LBIE’s argument that the contract was impossible to perform in the absence of the implied term, discussed further below).


The parties agreed that if LBIE succeeded in its primary case in respect of the contractual interpretation of the trade agreement and the implied term on fractions of GDNs, it would be entitled to restitutionary relief on the basis that Exotix would have been unjustly enriched by the over delivery of GDNs and coupon payments made on that amount.

The court held that the appropriate remedy for LBIE was monetary and this was the correct means of restitution (reference was made to Menelaou v Bank of Cyprus UK Ltd [2016] AC 176 (SC)).

In the event an implied term was not found, the court stated that the natural consequence would be that the contract was impossible to perform. It held that, in this event, LBIE would have been entitled to restitutionary relief on the basis there was a failure of consideration which would make the agreement void and unenforceable.

Harry Edwards

Harry Edwards
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Ceri Morgan

Ceri Morgan
Professional Support Lawyer
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Elizabeth Court

Elizabeth Court
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