Innovatis Investment Fund Ltd v Ejder Group Ltd

A contract is determined objectively from the parties’ words, conduct and the surrounding circumstances, rather than from their undisclosed intentions. A person who contracts while acting for another is personally liable unless the circumstances show that personal liability has been expressly or impliedly negatived. Where an intermediary presents itself as owner and principal, later assertions of agency will not alter the objective construction of the transaction. The commercial character of an ancillary agreement is determined by the language used and the commercial context. Repeated use of the term “repo”, together with the transaction’s commercial purpose, supported a binding repurchase obligation rather than an option. Failure to repurchase in accordance with that agreement constituted a breach of contract.

Innovatis Investment Fund Limited agreed to purchase the entire holding of an illiquid Lehman Brothers note from Ejder Group Limited at 66 per cent of face value. The transaction was settled on 18 August 2008 after the note was transferred through the Sheikh’s bank to overcome settlement difficulties. The parties disputed whether Ejder had contracted as principal or merely as agent for the Sheikh, and whether the ancillary arrangement was a repurchase agreement or an option to repurchase. Ejder did not repurchase the note when required. Innovatis claimed damages for breach of contract.

1. Objective agreement. The existence and terms of the agreement were to be determined objectively from what the parties said, wrote and did. Their undisclosed states of mind were not decisive.
2. Capacity and agency. Applying Yeung Kai Yung v. Hongkong and Shanghai Banking Corporation [1981] AC 787, the person who makes an engagement is liable even when acting for another unless agency law shows that personal liability was expressly or impliedly negatived. Applying the analysis in Teheran-Europe v. ST Bolton Tractors [1968] 2QB 53, an agent may create privity between the third party and the principal alone, between both, or between the agent and the third party alone. The evidence showed that Ejder held itself out as owner and principal. Innovatis was not told that Ejder was acting as the Sheikh’s agent. The transaction therefore created contractual relations between Ejder and Innovatis as principals.
3. Nature of the ancillary agreement. The parties consistently used the term “repo”, and there was no evidence of a private meaning by which that term denoted an option. The commercial context also favoured a repo: Innovatis obtained the note and a guaranteed profit, while the Sheikh’s financing objective could be met without permanently losing the note. An option at the same price as the purchase, without a premium and over an illiquid asset, made little commercial sense.
4. The agreement was a repo requiring Ejder to repurchase the note between 14 and 18 September 2008 at 68.5 per cent of face value. Ejder’s failure to do so was a breach of contract. Judgment was given for Innovatis, with damages to be assessed by reference to the repurchase price less sums realised on the eventual sale.