Molton Street Capital LLP v Shooters Hill Capital Partners LLP & Anor

A disclaimer stating that trades were not good trades without express consent of a firm’s principals operated as a condition precedent to contract formation. Until that consent was given, no binding contract existed. A trade ticket was evidential and did not itself necessarily form the contract, but it could incorporate a condition precedent. The putative proper law of a securities sale was determined under article 4 of the Rome I Regulation. The escape clause required a clear and decisive connection with another country. On the assumed alternative basis that a contract existed, the court also held that the pleaded regulatory, mistake and implied-term defences failed. Any recoverable loss of profit would have been limited by reasonable foreseeability, while an indemnity claim was barred by the claimant’s fraudulent conduct.

Molton Street claimed damages from Odeon after Odeon cancelled a sale of illiquid mortgage-backed securities. The transaction had been negotiated through Shooters Hill, which lacked authority to contract as principal, and Odeon was to become Molton Street’s counterparty. Molton Street had resold the securities to Morgan Stanley at a substantially higher price.

Odeon disputed contract formation, relying on a disclaimer requiring express consent from its principals. It alternatively relied on United States securities legislation, unilateral mistake, an implied term concerning upstream delivery, remoteness and illegality. The central issues were when the contract was formed, its applicable law, and the effect of the disclaimer.

1. Formation. In the absence of contrary contractual wording, a firm and unequivocal bid or offer in this market could be accepted so as to form a contract before trade tickets were exchanged. A trade ticket normally collected agreed terms and assisted settlement. Here, however, Shooters Hill was not intended to be Molton Street’s contractual counterparty. The contract between Molton Street and Odeon would, subject to the disclaimer, have been formed when Molton Street confirmed the purchase to Odeon on Bloomberg.
2. Applicable law. Applying article 4 of the Rome I Regulation, the contract was governed by New York law. The securities, their substantive rights, payment and delivery were closely connected with New York. Article 4.3 required a manifestly closer connection with another country, and the English factors did not clearly and decisively outweigh the New York connections.
3. Disclaimer. The words that trades could not be considered good trades without express consent of Odeon’s principals unambiguously created a condition precedent to formation. The provision was neither meaningless nor limited to Bloomberg messages. It did not require Odeon to disavow the transaction within a reasonable time. No principal had given consent. The disclaimer therefore provided a complete answer to the claim. Earlier dealings, the trade tickets, the cancellation and the settlement agent’s confirmation did not establish waiver by estoppel.
4. Alternative issues. Assuming a contract existed, the alleged omissions did not breach the relevant provisions of the United States Securities Exchange Act 1934. The transaction was domestic for the purposes of the territorial test, but there was no relevant duty to speak, scienter or materiality. The unilateral mistake defence failed because the matters withheld were not a basic assumption on which Odeon relied. No term excusing Odeon from delivery if its seller failed to deliver was necessary, obvious or reasonable under either English or New York law.
5. Loss and illegality. A loss of profit exceeding a 1% resale mark-up was not reasonably foreseeable. An indemnity claim might otherwise have been foreseeable, but an indemnity was inappropriate before Morgan Stanley advanced a formulated claim. The loss of profit and indemnity claims were also inextricably linked to Molton Street’s fraudulent procurement of the Morgan Stanley sale for the purposes of the ex turpi causa issue. The claim failed, and judgment was entered for Odeon.