April 2017

A ‘Trade is a Trade’: Why It Matters Here and in Markets Around the World

A recent case before the New York State Court of Appeals ruled that a “trade is a trade” if an informal agreement exists even though a formal document has not been signed. Martin Eisenberg represented Stonehill Capital Management in this case that has international ramifications and creates stability in the marketplace.



Martin Eisenberg, Principal, Law Offices of Martin Eisenberg

Martin Eisenberg, Principal, Law Offices of
Martin Eisenberg

An old adage dating back centuries underscores the importance that integrity plays in life and in business — your word is your bond.

Perhaps that’s why the London Stock Exchange inscribed these words in Latin, Dictum Meum Pactum, on its coat of arms in 1923. Both the motto and the exchange have withstood the test of time — surviving several world wars, recessions and depressions and many other global and domestic challenges. It’s an important reminder that our words and our bonds really do matter.

Across the world, in markets, banks and on trading floors, people understand that principle all too well. So too do industry professionals who operate by another common principle, a trade is a trade, which effectively means buyers and sellers abide by rules in which they first verbally agree to terms and then confirm the deal in writing. In ever-changing markets, where billions can be won or lost in moments, such commonly accepted practices remain in place to prevent the markets from spiraling into chaos. Such rules are necessary.

New York’s highest court, the State Court of Appeals, firmly established this principle as a rule of law in late December, after centuries of seeing it honored as an unwritten rule. This decision will likely save trading markets from the potentially serious disruptions and disorder brought on by institutions — or rogue players — that don’t necessarily respect the time-honored adage.

Email and Conversations Are Binding

The landmark decision regarding the case Stonehill Capital Management vs. Bank of the West (BOTW) overruled a surprise New York Appellate Court ruling. It essentially concluded that “a trade is a trade,” meaning a sale, purchase or trade is executable as long as the material terms and conditions — through emails and conversations — are spelled out and mutually accepted, even if a formal agreement has not yet been signed. The decision also raised the bar on oftenused escape clauses that were designed to give one party an ability to back out for any reason it deemed fit. That’s not how our markets function best, and the court understands that.

The court sided with Stonehill, which I represented. The case stemmed from the auction sale of an $8.7 million distressed mortgage loan; the case made its way through three New York courts dating back to 2014.

BOTW had accepted Stonehill’s offer to purchase the mortgage loan by accepting its bid and agreeing to use a standard industry form as the loan sale agreement. But BOTW pulled out of the deal when the market changed in its favor (earning it millions), saying it was not bound to sell the loan to Stonehill because it didn’t have a signed agreement that was “subject to the mutual execution.” BOTW also maintained that it was not bound to sell the loan to Stonehill because, under the auction terms, the bank had the sole discretion to withdraw the loan from the sale at any time.

Court of Appeals Overrules

Fortunately, the Court of Appeals disagreed with that argument and the lower court’s decision, ruling that the failure of BOTW to sell the loan to Stonehill was a breach of contract. The appeals court wrote in its decision that the language in the bid acceptance confirmation that the sale was “subject to the mutual execution of an acceptable loan sale agreement” did not clearly express an intent by the bank that it would not be bound to sell the loan unless and until the loan sale agreement was signed. The court stated, “Less ambiguous and more certain language is necessary to remove any doubt of the party’s intent not to be bound absent a writing.” The court also ruled that the bank could not withdraw the loan from the sale once it accepted Stonehill’s bid.

In other words, a trade is a trade, even if a contemplated formal agreement is never signed, as long as the parties have agreed to the material terms of the transaction.

The Court of Appeal’s unanimous decision was forward-looking, practical and based on common sense and practice. Because it is not subject to appeal, it puts an end to any doubt as to when a deal is actually a deal. The decision will reverberate across the country and around the world as New York is considered the gold standard of governing laws in commerce and finance.

Some trade groups, such as the Loan Syndications & Trading Association (LSTA), which works to increase transparency, education, fairness and order in the loan markets, are calling this a “watershed” moment. Why?

Because oral agreements — a person’s word — ensures the order of the financial markets.

“The LSTA has long advocated for efforts to promote certainty and fairness in the execution of trades, and we believe it’s necessary to honor and enforce oral agreements and correspondence between parties,” said Elliot Ganz, general counsel for the LSTA. “Treating oral agreements as binding is a watershed moment and necessary to protect against chaos and ensure the order of the financial markets.”

Impact on the Markets

Had the lower court decision prevailed, the integrity of the U.S. debt and equity markets would have been in serious jeopardy going forward, with parties having carte blanche to back out of agreed upon trades arbitrarily or because of changing market conditions. That not only could have affected institutional markets, but could have trickled down to unsettle trading markets that comprise investments in 401Ks, mutual funds and any number of other financial accounts where both large and small investors save for college, retirement, homes and the like.

Markets demand a platform of absolute confidence. This decision not only restores that platform, it permanently defines and protects it going forward. “A trade is a trade” or “your word is your bond,” are concepts to live by — in business and in life.