This is a summary of the most interesting banking litigation and regulatory developments in 2015. The selection is necessarily subjective and draws from a wide range of cases and developments that are of direct relevance to finance parties. Full coverage can be found in our monthly Litigation and Dispute Resolution Review.
Contract/misrepresentation
Disclaimers not effective to protect issuer from misrepresentation claim
Market standard disclaimer wording (in investor presentation slides) did not protect the issuer in Taberna Europe CDO II plc v Selskabet (formerly Roksilde Bank A/S) (In Bankruptcy) [2015] EWHC 871. The issuer of subordinated notes was liable to a secondary market professional investor for misrepresentations about non-performing loans made in investor presentation/roadshow slides and a quarterly results announcement. Any failures by the investor to carry out sufficient due diligence were insufficient to justify a finding of contributory negligence.
The decision is important because: (i) representations made in promotional material may be actionable by secondary market purchasers; (ii) it provides a meaning for “non-performing loan”. Eder J’s approach of treating a loan as non-performing when it is in sustained default, and not merely when it is attracting a reduced interest rate following an assessment of inability to service full interest payments, is likely to be the starting point when the parties have failed to specify a contractual definition. The decision is also a reminder that it is necessary only to show that the misrepresentation played a real and substantial part in the relevant decision; it does not have to play a decisive role. Appeal due November 2016.
New test for whether a provision is penal and therefore unenforceable
The rule against penalties most obviously arises in the context of liquidated damages provisions but its impact is wider than that. The UK Supreme Court has provided a new test for whether a provision is penal and therefore unenforceable. The new test is whether “the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.
We are producing a briefing on the practical impact of this lengthy and nuanced judgment (in addition to the case summary linked to below). The two key points are that the new test is more flexible and, in a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption will be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach. Liquidated damages are clearly secondary provisions under the new test. In practice a party’s legitimate interest will rarely extend beyond compensation for the breach. In this sense, arguably nothing has changed and the old question of whether there has been a genuine pre-estimate of loss will be a sufficient justification for a liquidated damages provision. However, the change from the previous position is that a party may, in certain circumstances, be able to point to a legitimate interest other than compensation to justify a provision. (Cavendish v Makdessi; ParkingEye v Beavis [2015] UKSC 67.)
Contractual interpretation – increased certainty
The Supreme Court in Arnold v Britton & ors [2015] UKSC 36 reasserted the importance in English law of the words used in the contract. It upheld the literal or “natural” meaning of the words used and rejected the argument that they should be given a different meaning in line with “commercial common sense” even where the consequence was a very harsh result for one of the parties. This decision improves contractual certainty for finance parties and lessens the chances of the court deciding what makes commercial sense.
Implied terms – a reminder of how difficult they are to imply
The UK Supreme Court has re-emphasised the stringent nature of the legal test which must be met before a term will be implied into a contract. The test is one of necessity. A more helpful way of putting it is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence. Fairness or reasonableness alone will not be sufficient, even if, as claimed unsuccessfully here, the result can be harsh. This case will undoubtedly be the starting point, in place of Lord Hoffmann’s test in the Belize case, when thinking about whether a term may be implied. On the one hand, this gives greater power to those who pay close attention to drafting their contracts, since the message from the Supreme Court in this case (as well as Makdessi above, and Arnold v Britton) points to upholding party autonomy and away from interfering with what the parties have said. On the other, this case means if a party does not have the benefit of an express term on a particular point of dispute it will be an uphill struggle to persuade the court to intervene on the basis of an implied term. (Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd & anr [2015] UKSC 72. Allen & Overy acted for the successful landlords in this case, the BNP Paribas companies as trustees for Britel Fund Trustees Ltd and WELPUT.) Click here for the article.
A claimant borrower failed to show that duties to achieve the best sale price possible should be implied into a contract for a bank’s forced sale of the claimant’s share in an oil field (Rosserlane Consultants Ltd & anr v Credit Suisse International [2015] EWHC 384 (Ch)). The claimant argued, unsuccessfully, that the share could have been sold at a higher price than that achieved by the bank. The ruling showed that courts will be very cautious before accepting that one commercial party owes implicit contractual duties to another commercial party, unless the contract gives good grounds for doing so, or there is a special form of relationship between them.
Contractual discretion (eg valuation) – fetters on how you can act
It has long been acknowledged that a party exercising a contractual discretion, for example to determine the value of something or to decide whether something is necessary, is not unfettered (almost regardless of what the contract says). This Supreme Court decision was a reminder that the party must make sure not only that a reasonable outcome is achieved, but also that the right matters have been taken into account in reaching the decision. To this, the Court added that “sufficiently cogent” evidence will be required to justify an unusual determination: Braganza v BP Shipping Ltd & anr [2015] UKSC 17. Although the decision was made in the employment context, it will apply in any situation where a commercial party is exercising a contractual discretion which affects both parties to a contract.
Good faith
Parties are continuing to run good-faith arguments in litigation
In Dennis Edward Myers & anr v Kestrel Acquisitions Ltd & ors [2015] EWHC 916 (Ch) the High Court refused to imply an obligation of good faith into a term allowing modifications of loan notes. The debtor had contractual rights to modify the notes and there was nothing to suggest that any modifications should be limited by a good-faith obligation.
Good faith arguments also failed in a project finance context in Portsmouth City Council v Ensign Highways [2015] EWHC 1969, where it was held that there was no implied duty owed by a public body to act in good faith when exercising its discretion under a service points regime in a long-term PFI contract. It had only to exercise its discretion honestly and on proper grounds, and not in a manner that was arbitrary, irrational or capricious. Service points regimes are a common feature of long-term PFI contracts and this case is the second (following Mid Essex Hospital Services NHS Trust v Compass Group [2013] BLR 265) to make clear that no obligations of good faith will be implied into their operation.
Following his judgment in Yam Seng holding that good faith applies in “relational contracts”, Leggatt J further extended the remit of “good faith” in English law in MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2015] EWHC 283 (Comm). In the face of a repudiatory breach, he held that the right to elect whether to terminate the contract or affirm and claim damages is not unfettered and the test is “essentially the same” as for the exercise of a contractual discretion, which must be exercised in good faith.
Forum selection (or where you can sue/might be sued)
At the disputes stage, ensuring that disputes are heard in our clients’ forum of choice remains a challenge as counterparties continue to act tactically in this area. Ensuring that these issues are considered at the outset remains key to achieving the right outcome.
Recast Brussels Regulation
A key development in 2015 was the coming into force of the Recast Brussels Regulation. From 10 January 2015 Member State courts began applying Brussels I (Recast) (Regulation (EU) 1215/2012) to proceedings issued after that date. The Recast reforms the much criticised lis pendens rules and reverses the “first in time” rules where there is an exclusive jurisdiction clause in favour of a Member State court. This means that, where commercial parties have agreed that the English courts have exclusive jurisdiction to resolve their disputes, there is a reduced risk of their claim being “torpedoed” – they will no longer be prevented by the rules from proceeding in England because their counterparty has commenced proceedings first before the wrong court. To see more key changes for commercial parties please see our earlier article.
Where on the web?
Hybrid jurisdiction clauses – further controversy in France
We have seen further controversy over the enforceability of hybrid (also known as asymmetric) jurisdiction clauses. Earlier this year, in ICH v Crédit Suisse, No. 13‑27264, the French Supreme Court found such a clause invalid under the Lugano Convention. The court followed its controversial 2012 decision, Ms X v Banque Privée Edmond de Rothschild, No 11-26.022, although its reasoning differed.
In November 2015, the French Supreme Court again considered an asymmetric jurisdiction clause, in eBizcuss v Apple Sales International, but in this case it found it to be enforceable as it was sufficiently foreseeable. The clause in question was different to the standard jurisdiction clauses generally seen in commercial documentation (and considered in ICH and Rothschild). It seems that the Supreme Court was willing to uphold it on the basis that it allowed the identification of the courts that would potentially have to resolve any dispute that may arise and that it therefore complied with the foreseeability principle.
Hybrid clauses are found in thousands of commercial contracts and these French decisions (while not binding on an English court) are likely to continue to have an impact on parties’ analysis of their dispute clauses and litigation tactics.
Uncertainty for banks about where they might be sued by secondary investors
The risk of a tortious claim being brought by an investor in a variety of jurisdictions was shown in a Court of Justice of the European Union (Fourth Chamber) ruling on jurisdiction in a prospectus liability claim. The claim concerned index certificates issued by a UK bank, and purchased by an Austrian investor (consumer) via a professional intermediary (Request for Preliminary Ruling: Kolassa v Barclays Bank plc [2015] EUECJ C‑375/13, 28 January 2015). The court ruled that under Article 5(3) Brussels Regulation (now Article 7(2) Brussels Recast) the “place where the harmful event occurred” includes any place in which an investor suffers loss. The CJEU held that the court at the place where the investor is domiciled has jurisdiction, on the basis of where the loss occurred, particularly when the loss occurred in the investor’s bank account in that jurisdiction.
Who can sue?
Negligent underlying property valuation in non‑recourse securitised loan:
In Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) [2014] EWHC 3106 (Comm) the High Court ruled that the transferee of a non-recourse securitised loan, rather than the noteholders, was the proper claimant in a claim against a valuer for losses caused by the negligent valuation of the underlying commercial property (which had been carried out for the original lender). The presence of a contractual obligation for the transferee to pass on proceeds of a successful claim to the noteholders, coupled with the loss suffered when the transferee purchased the loan for more than it was worth, were persuasive factors supporting the transferee’s right to bring a claim. Blair J noted that the complexity of securitisations meant that “the distribution of loss can be difficult to pin down”. For those involved in securitisations, disputes like this can perhaps be most easily avoided by ensuring that there are agreed and clear provisions in the documents. This decision was upheld on appeal.
Benchmark follow-on litigation
Benchmark regulatory findings and settlements have led to a number of follow-on civil claims against banks involved in benchmark setting. Although these cases have generated numerous interlocutory skirmishes (unsurprisingly many of which involve disclosure), there has yet to be a judgment on the substantive issues. Given that many of these skirmishes are in the process of being appealed, it will be a while before we have any such substantive judgment. Also awaited is the European Commission’s investigation into forex manipulation.
Regulatory
Backdrop of regulatory investigation enough for privilege claim
In this LIBOR follow-on case (Property Alliance Group Ltd v The Royal Bank of Scotland plc [2015] EWHC 3187 (Ch)), the defendant was able to claim legal advice privilege over confidential briefing memos produced by the bank’s external lawyers for the bank on the progress and issues in the regulatory investigations (including factual summaries of matters which would not otherwise be privileged) and which were to form the basis of discussions between them on strategy and legal advice. The backdrop of the active regulatory investigations was sufficient legal context to found a claim for privilege. While not exclusively containing legal advice, the documents were part of the “continuum” of communications between lawyer and client, the object of which was the giving of legal advice as and when appropriate. The documents were therefore privileged in their entirety. The decision provides useful and timely clarification on the extent of legal advice privilege in the context of regulatory investigations; an area sure to be the subject of ongoing interest in the coming years. The key message is that a claim to legal advice privilege depends on the relevance and purpose of the information contained in the broader context of the lawyers’ advisory role.
