Lehman Brothers International (Europe) ((in Administration)) v Exotix Partners LLP
| Jurisdiction | England & Wales |
| Judge | Mr Justice Hildyard |
| Judgment Date | 09 September 2019 |
| Neutral Citation | [2019] EWHC 2380 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: 1407 of 2017 |
| Date | 09 September 2019 |
[2019] EWHC 2380 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Rolls Building,
7 Rolls Buildings,
Fetter Lane, London
EC4A 1NL
Mr Justice Hildyard
Case No: 1407 of 2017
HC-2017-001407
Daniel Bayfield QC and Alex Riddiford (instructed by Linklaters) for the Claimant
Guy Morpuss QC and Christopher Charlton (instructed by Macfarlanes LLP) for the Defendant
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This judgment relates to a dispute as to the terms of a sale (the “Trade”) of Peruvian Government Global Depository Notes (each referred to as a “GDN”). The Trade was entered into in early 2014 by the Claimant, Lehman Brothers International (Europe) (“LBIE”) as vendor and the Defendant, Exotix Partners LLP (“Exotix”) as purchaser.
A GDN or global depository note is a debt instrument created and issued by a depository bank (in this case Citibank) which evidences ownership of a local currency-denominated debt security. Such a note emulates the terms of the underlying debt security, which comprises government-issued bonds (such as the interest rate and maturity date), in this case issued by the Republic of Peru. However, unlike the underlying bonds, each GDN provides for payment of interest and principal in US dollars and can be settled through Euroclear and Clearstream. The detailed terms of the GDNs are set out in a document prepared by Citibank called “the GDN Supplement”. The depository bank holds the underlying bonds on behalf of the GDN holders.
The Trade of GDNs which is the subject matter of these proceedings was entered into orally, but on a recorded telephone line, and there is an agreed transcript of what was actually said. It is accepted by the parties and their experts that the Trade was concluded by the traders on the telephone. However, the exchanges between the traders were somewhat informal; they were not in legal language although they were intended to have legal effect.
Ordinarily, it might be thought that, once settled, the subject matter of the Trade should not be in doubt. But in this case it is the subject of dispute. It seems plain that in settling the trade LBIE appears to have materially misunderstood what it was delivering, whilst Exotix had no expectation of receiving assets of such a value as in fact were thus delivered to and received by it. LBIE thought that its holding of GDNs amounted to ‘scraps’ having a value of some $7,000; Exotix did not expect more and paid some $7,438. In fact, LBIE's holding had a true aggregate value of over $7 million; and it delivered all its holding to Exotix, which, after some internal hesitation, decided to sell on the entirety and pocket a windfall.
In such circumstances, the principal dispute that has arisen is as to the true meaning and effect of the bargain struck further to an oral agreement between the traders.
The dispute is further complicated because LBIE's interpretation of the bargain struck between the traders would result in LBIE's delivery commitment being for more or less than a whole number of GDNs; and there is an issue as to how such a commitment could be effected in circumstances where there is no express provision for fractional entitlements in respect of GDNs, and whether terms would fall to be implied to enable the Trade to be performed.
Further, and more generally, there is in such circumstances also an issue as to whether LBIE as claimant is entitled to any, and if so what, relief given that the Trade has been settled long since.
As both parties accept, it is the effect of the bargain made as expressed in the words used that is to be determined. The Court must resist any temptation to mend a bad bargain: rectification is not sought, and the contract must be given effect according to its true construction, unless impossible of performance or incapable of legal effect, in which case the matter is governed by the law of restitution.
The Parties
LBIE scarcely needs introduction. It was the primary trading company within the Lehman Group of companies in the UK and Europe. It entered into administration on 15 September 2008, the same day as the ultimate holding company of the Lehman Group filed for protection under Chapter 11 of the US Bankruptcy Code. The collapse of the Lehman Group is well-known: it shook the financial world, and its reverberations are still being felt more than a decade later.
The facts relevant to the dispute took place within the context of the administration of the LBIE estate. The GDNs which were the subject of the Trade were part of a basket of miscellaneous assets in LBIE's estate which its Joint Administrators viewed as ‘scraps’ and which they were seeking to realise by sale to third parties.
Exotix is a broker for fixed income and equity securities. Exotix states in its Defence that it does not trade securities on its own account except in certain limited circumstances, where it facilitates the execution of client orders.
Thus, Exotix does not have the regulatory permissions necessary to purchase and hold assets for its own book; thus, it could only trade acting as a broker and where it has put in place an onward sale for any assets purchased by it (a “matched principal basis”). In this way, the asset purchased is transferred back-to-back on the day of settlement and Exotix is not exposed to market risk.
However, in some cases, Exotix may, where it has not yet found a third-party buyer for a matched transaction, transfer assets purchased to an associated “warehousing” entity; and that is what it did, on 31 January 2014, in the case of the Trade. It seems clear, however, that Exotix would not knowingly have contracted to take onto its own book and, having in place no matched transaction, “warehoused” assets having so much more than the ‘scraps’ value attributed to the GDNs the subject of the Trade.
The documentary record of the genesis and express terms of the Trade
Though there was considerable dispute as to the admissibility of other evidence, there is no dispute as to the admissibility of the pre-contract factual matrix evident from the documentary record, except in relation to the documents referred to as the LBIE Sign-Off Pack and its attached spreadsheet mentioned in paragraphs [21] and [22] below.
The Trade was agreed during a telephone conversation on 31 January 2014 between Mr Ignatios Radicopoulos (“Mr Radicopoulos”, commonly known as Billy Radicopoulos), who was in the employ of LBIE at the relevant time, and Mr William Michael Hutton (“Mr Hutton”) of Exotix. The background to the Trade, and the documentary record of it, are described next.
On the morning of 24 January 2014, Mr Andrew Hall of LBIE (“Mr Hall”, one of Mr Radicopoulos's juniors who thus initially set up the Trade) invited Mr Hutton of Exotix to participate in a conversation on the Bloomberg instant message platform (commonly known in the industry as “Chat”). Chat enables participation on a recorded line by a number of persons who may join and leave as they please, with each such event and the conversations between all participants being recorded.
During the course of that Chat, Mr Hall sent Mr Hutton an email setting out a list of six different securities being offered for sale by LBIE to Exotix. These are set out below, although the email did not include the “ISIN” and “Description” headings and was not in the tabular form produced below:
(The GDNs are the third item on the list with ISIN USPB87324BE10.)
| ISIN | Description |
| BRVALEDBS028 | VALE SA CONV BOND VAR PERP |
| US40090AAC80 | GRUPO IUSACELL CELULAR 9.0 30JUN17 |
| USPB87324BE10 | REPUBLIC OF PERU 6.900% 20370812 SERIES# |
| USP78954AA52 | PETROLEUM CO OF TRINIDAD & TOBAGO LTD 6 |
| XS0029484945 | VENEZUELA GOVERNMENT CNVBND#USD VAR 15Ap |
| USP25625AE74 | CAP SA 7.375% 20360915 SERIES# REGS |
At this initial stage (24 January 2014), LBIE did not disclose the size of its GDN or any of its listed positions.
Following further exchanges between LBIE and Exotix regarding the securities listed above, on 29 January 2014, at 16:43, Mr Hall sent an email to Mr Hutton stating “As discussed we will require a bid on all of the following by 4.00 pm London time 31/01/14, reserve levels apply”, and then setting out the portfolio of securities available for sale in the following table (the “Portfolio”). The headings used in the table below are as set out in Mr Hall's email.
| ISIN | Description | Notional | LBIE View of Settlement Location |
| US40090AAC80 | GRUPO IUSACELL CELULAR 9.0 30JUN17 | 731,211 | EUROMARKET |
| XS0029484945 | VENEZUELA GOVERNMENT CNVBND#USD VAR 15Ap | 232,145 | EUROMARKET |
| USP78954AA52 | PETROLEUM CO OF TRINIDAD & TOBAGO LTD 6 | 40,000 | EUROMARKET |
| USP25625AE74 | CAP SA 7.375% 20360915 SERIES# REGS | 30,000 | EUROMARKET |
| USY68851AK32 | PETROLIAM NASIONAL BHD 7.625% 20261015 S | 21,000 | EUROMARKET |
| USPB87324BE10 | REPUBLIC OF PERU 6.900% 20370812 SERIES# | 22,955 | EUROMARKET |
The one material difference between this table and the initial list of securities provided by Mr Hall on 24 January 2014 (produced at paragraph [17] above) is that the securities with ISIN BRVALEDBS028 had been replaced with securities with ISIN USY68851AK32. The GDNs are in the final row of the table in paragraph 19 above.
Exotix, as a securities broker, then sought bids from third parties on the securities in the Portfolio. In doing so, Exotix's communications seeking bids from third parties typically referred to “PERU 6.9 08/12/37...
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