View from City Road: Fears for City's old culture are misguided

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The Independent Online
In the Quadrex case, the British courts had already made a nonsense of Sam Goldwyn's famous assertion that 'a verbal contract isn't worth the paper it is written on' by finding against Samuel Montagu in its dispute with British & Commonwealth. Yesterday the courts went further, and inflicted damages on the merchant bank that must make those brief utterances by Ian McIntosh, then head of corporate finance, the most expensive couple of dozen words in British financial history.

Dire threats have been heard that this will undermine what is left of the City's old culture, and its ability to construct large deals informally on the basis of personal trust and word of mouth. Will everything be handed over to lawyers, New York style, so nobody will be able to give the time of day without checking with counsel?

These fears are misguided, on two counts. There are big businesses in the City such as foreign exchange that continue to deal very effectively by word of mouth, with contracts following later, and they throw up very few problems.

And far from destroying faith in verbal promises, the damages should restore some meaning to the near-obsolete phrase 'my word is my bond'. If a promise is to mean anything, it should be as rigorously checked out beforehand as if it were a written contract.

The penalty for Samuel Montagu of not doing so has proved a lot tougher than the blackballing that once enforced informal codes of behaviour in the City. In future, far from destroying the importance of the spoken word in negotiation, this might even reinforce it.

It is hard to imagine another corporate finance director making such a statement without being absolutely sure of his ground.

Of course, Mr McIntosh was found to have taken what can most politely be described as a leap of faith in saying his clients had funds available. There are many shades of grey between knowingly misleading and being misled by a client to make statements that prove wrong. But whether or not Samuel Montagu's appeal succeeds, the whole saga has underlined that any kind of assertion about a client must be backed up by diligent checking.

Incidentally, HSBC Holdings' shareholders must be feeling aggrieved by the size of the damages, given that in the company's listing particulars when it bid for Midland Bank and moved to London it repeated the assertion of the Midland directors that no provision for the litigation was required.

That statement was made after Samuel Montagu had been found liable by the courts, but before the damages hearing. It is reasonable for directors to refuse to quantify the damages they expect to pay, since that is evidence for the opposition. But even without a figure, it would have been better to tell shareholders that Quadrex might prove costly.