Commercial Contracts: Implied Terms

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No term would be implied into a contract, requiring a bank to use reasonable care to obtain the best price it could when asserting its right of forced sale of a limited partnership, the UK’s High Court has said.

No term would be implied into a contract, requiring a bank to use reasonable care to obtain the best price it could when asserting its right of forced sale of a limited partnership, the UK’s High Court has said. The expert commercial litigation team at Bahamas law firm ParrisWhittaker is highly experienced in advising and representing businesses on commercial contracts and the extent of their obligations to each other.

What’s the Background?

In this case, the general partner and a limited partner in a limited partnership (CEG) owned a 51% stake in a company operating an oilfield. When CEG was urged by its bank to repay or refinance its existing indebtedness, it took $127m short-term finance from Credit Suisse International (CSI). This allowed CEG time to sell its stake in the company to raise funds to pay its debts.

The finance documents included a “participation agreement” dealing with the “equity upside” of a sale of CEG (or related assets), and security over its stake in the company. When no buyer for the stake could be found, CSI exercised its right within the agreement to force a sale of CEG – subsequently selling it for $245 million on an involuntary basis.   The two CEG partners began legal proceedings against the bank on the basis that the price obtained for CEG was considerably less than its value – and claimed for the loss of a chance of procuring a sale at a greater price.

What Were the Issues?

A mortgagee exercising a power of sale has a general duty to obtain the best price reasonably obtainable for the mortgaged property at that time. The claimants in this case argued that the bank had an obligation to take reasonable care to obtain the best price for CEG (equivalent to a mortgagee’s duty) on the basis that it had served its trigger notice under the participation agreement and begun a forced sale process.

On the evidence, the judge found that CSI was exercising its right to effect a sale in the owners’ name granted to it under a self-standing commercial agreement freely negotiated between the parties. The court noted that the participation agreement had been varied to require CEG to use “all reasonable endeavours” to procure a sale at the best price obtainable to maximise the “upside” payment to the bank. However, there was not such an obligation imposed on the bank under the participation agreement.

There was, therefore, no rationale on which to imply terms into the participation agreement. The court was loath to impose obligations on the bank such as those which existed between mortgagor and mortgagee.

What Does This Mean?

This case is a useful reminder of the principles behind mortgagees’ duties and to what extent similar duties may or may not be imposed in, for instance, finance related agreements. It’s also a cautionary lesson for those negotiating and drafting contracts: it is imperative that the contract expressly includes the terms required by the parties rather than risk relying on the court to apply a term into the contract in the event of a future dispute.

How Can We Help?

The commercial litigation lawyers at Bahamas law firm ParrisWhittaker have years of experience advising commercial organisations on their commercial contracts and the extent of their duties. Contact us straightaway for urgent, strategic advice.