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Deal struck on the phone is binding, rules High Court

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An oral contract over the phone is binding, the High Court has ruled in a multi-million pound case which threatened to undermine the way the world of high finance operates. The verbal agreement did not have to be in writing, the court found.

An investment fund, Forum Global Equity, agreed a deal over the phone with US investment bank Bear Stearns. It agreed to sell debt in troubled Italian food conglomerate Parmalat to Bear Stearns, and contracts confirming the deal were due to be signed at a later date.

Before they were signed, though, the Parmalat situation changed, and the deal became far less favourable to Forum. It tried to pull out of the transaction altogether.

Forum was selling notes of distressed debt issued by Parmalat which would, under certain circumstances, translate into a share of the company. The notes were bought after the company collapsed and went into administration.

Forum acquired the debt soon after the company went into administration, and it was later added to the official list of creditors of the firm. The market for distressed debt is based on the hope that the debt will translate into a share of any new company that grows out of the administration process.

Forum agreed on the phone to sell the debt to Bear Stearns in July 2005 after months of negotiations over price. They agreed on a final price of €2.9m.

In October 2005 the debt in question was converted into equity in a new Parmalat firm arising out of the administration proceedings. In that month Forum not only told Bear Stearns that it was not prepared to go through with the sale, but began trading the shares in Parmalat it had received as part of the administration process.

The High Court case centred on whether or not the phone conversation in July constituted a contract that was enforceable. Justice Andrew Smith concluded that it did.

"I conclude … that Forum concluded a contract for the sale of the notes on 14 July 2005," said Justice Smith in his judgment.

Justice Smith rejected Forum's arguments that an agreement that others could fix a definite time for the transfer to take place meant that no contract was agreed; that the agreement as a whole was too uncertain to be an effective contract; and that the parties did not intend to create legal relations.

The case was viewed with concern by the City in London, where complex and extremely time-sensitive trades are conducted on the telephone and treated as contracts, with the paperwork only being finalised later. A victory for Forum could have undermined that entire system.

Copyright © 2007, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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