Subjective expectation versus objective intention; when will a term be implied into a contract?

30 September 2019. Published by Alan Williams, Partner and Harriet Evans, Associate

The High Court has implied a term into a contract for the sale of Peruvian Government Global Depository Notes (GDNs) by Lehman Brothers International (Europe), in order to make the contract workable.

The Facts

The claim relates to a dispute over the terms of sale of Peruvian GDNs by Lehman Brothers International (Europe) (Lehman) in early 2014, to the Defendant, Exotix Partners LLP (Exotix). Lehman requires little introduction; it was the primary trading company within the Lehman Group of companies in the UK and Europe.  Exotix is a broker for fixed income and equity securities.


A GDN is a debt instrument created by a depository bank, (in this instance, Citibank) that evidences ownership of a local currency denominated debt security.  GDNs emulate the terms (interest rate, maturity date, credit quality etc.) of particular local currency-denominated bonds, in this case issued by the Republic of Peru.  However, unlike the underlying bonds, they trade, settle and pay interest in US dollars.[1]

The Trade

The trade took place within the context of the administration of Lehman's estate.  The GDNs were part of a package of miscellaneous assets which Lehman described as "scraps", which it wanted realise by sale to third parties.[2]  The trade of the GDNs in this case, was made orally on a recorded telephone line.  The parties agreed a transcript of what was said, which recorded that the trade was made on the basis it was:


"the 22 just on the shy of 22…23 thousand er sol at 91 and a half [meaning that the GDNs were currently trading at 91.5% of their par value] which is around 7,712…dollars"

The claim turns on what was meant by this because, although the agreed purchase price was only $7,712, Lehman went on to deliver to Exotix GDNs worth in excess of $7 million, around 1000 times more than was paid. 

Exotix did not appreciate the true value of the GDNs it had acquired until it received, some three weeks later, a coupon payment on the GDNs of a sum much higher than anticipated.  Despite an employee flagging that he considered that there had been an error on the payment, a Exotix kept the GDNs.  A year later, Exotix sold the entirety of the GDNs for a total of US$8.5million and kept the windfall.

The Dispute

Lehman sought restitution on the basis that Exotix had been unjustly enriched. However, in order to achieve this, Lehman recognised that a term needed to be implied into the contract that would recognise fractional sales, so as make the trade workable. This is because if the trade proceeded on Lehman's pleaded interpretation (i.e. the transfer of 22,955 units of GDN) this would see their delivery commitment being for more or less than a whole number of GDNs and this is impossible, as GDNs can only be delivered in full integers.  Lehman contended therefore, that a term needed to be implied that required it to:


(1) Deliver 22 GDNs to Exotix; and

(2) Pay Exotix the cash equivalent of 0.955 GDNs.

Exotix presented the problem of delivery for a fraction of a GDN as its trump card, stating that it was unclear as to how such a commitment could be effected where there were no express provisions for fractional entitlements.  Exotix argued that an interpretation which would lead to the impossibility of performance, clearly required reconsideration as to whether it could be truly correct.[3]


Although accepting that Lehman was mistaken as to the value of the assets it wished and agreed to sell, Exotix said that this was as a result of "extraordinary lack of care".  Exotix maintained that as a matter of strict law, both delivery and the price paid were in accordance with the trade on its objective interpretation and that it had paid what it had contracted to pay.  Exotix therefore maintained that Lehman was not entitled to any remedy.

The principal issue for the court to decide was therefore the true meaning and effect of the bargain struck during the oral agreement between the traders.  This boiled down to:

(1) what the parties agreed to trade (either:

(a) 22,955 GDNs or

(b) a number of GDNs having a face value of PEN 22,955); and

(2) at what price (US$7,707.93, or by implication, US$7,707,926.69).

In short, there were issues as to both subject matter and price.

Save for limited exceptions, subjective evidence of the parties' intentions must be ignored by the court. At the same time, the court has to resist temptation to mend a bad bargain.[4]  In this case, there was no claim for rectification and so it was for the judge to determine the effect of the contract according to its true construction. If it was impossible of performance, or incapable of legal effect, the matter would be governed by the law of restitution.[5]



The judge found in favour of Lehman and implied a term for settlement of the trade of the fractional entitlement in cash. However, he noted that it was not an entirely straightforward decision , because had the parties realised that they were both under a shared misapprehension with regard to the true nature and value of the GDNs, they would probably have dissolved the agreement, since neither party was considering trading anything more than "scraps".  However, taking into account the law's reluctance to negate a contract, the judge chose to give effect to what the parties had (in his finding) objectively agreed, as without it, the contract was unworkable. 

It was common ground that if Lehman succeeded in its primary submission as to the interpretation of the trade and the implication of a term to give the contract business efficacy, then Lehman would be entitled to restitution on the ground that Exotix would (on that basis) have been unjustly enriched by the over-delivery of GDNs.

If he was wrong in allowing the implied term, the judge considered Lehman to be entitled to restitutionary relief on the basis that without the implied term, the trade could not be fulfilled in accordance with the terms and there would be a failure of consideration such as to make the contract void and unenforceable.

The appropriate remedy was monetary[6] and, whilst open to the parties agreeing some other measure, the appropriate measure would be for Exotix to reverse its own unjust enrichment by paying to Lehman the price it obtained when it on-sold the GDNs to Deutsche Bank, as attributable to the over-delivered whole number of GDNs, plus interest.

Finally, the judge noted that based on the facts, his finding accorded with both overall commercial good sense and commercial morality.


This decision is of interest because it considers how the courts should address a situation where the subjective expectation of the parties at the time is clear, but the objective intention apparent from their bargain is more difficult to determine, particularly where the objective interpretation may lead to a contract being incapable of being performed.  It also demonstrates the importance of clarity in the subject matter and price in a contract and shows how in the commercial world, the two are often closely connected. 



[2] Lehman Brothers International (Europe) (In administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch), paragraph 21

[3] Lehman Brothers International (Europe) (In administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch), paragraph 149

[4] Lord Bingham MR, Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 at 482

[5] Lehman Brothers International (Europe) (In administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch), paragraph 8
[6] Lord Neuberger of Abbotsbury, Menelaou v Bank of Cyrpus UK Ltd [2016] AC 176 (SC) at [81].

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