June 15, 2017
Communicating Intent in Trading Documentation: Lessons from Stonehill

An important decision related to the trading of bank loans was issued recently by New York State’s highest court. To the relief of the loan trading market, the decision reaffirms market practice surrounding the formation of binding obligations to close a trade.

In Stonehill Capital Management et al v. Bank of the West, the New York Court of Appeals unanimously ruled that when a party enters into an agreement that is “subject to documentation,” the party still has a binding agreement to settle the trade as long as the totality of circumstances indicates that the parties intended to be bound to a transaction.

Because the purchase of loans is a core component of many turnaround strategies, this ruling is of great interest to turnaround professionals and investors in distressed loans. Additionally, this case establishes that documentation between parties and even internal communications may be used as evidence to prove parties’ intent and, therefore, also demonstrates the importance of being careful with such communications. Particularly with regard to trade claims, parties should use this case as reason to more clearly state that they intend to have a binding obligation.

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