Financial Markets Disputes and Regulatory Update - January 2018 - Judgments

by Dentons


Court of Appeal upholds consistent interpretation of ISDA Master Agreement

Dexia Crediop S.P.A. v. Comune di Prato [2017] EWCA Civ 428

Dexia was appointed as Prato's adviser in relation to debt restructuring and interest rate swaps in 2002. In November 2002, Dexia and Prato entered into an ISDA Master Agreement (1992 version), containing English choice of law and jurisdiction clauses, pursuant to which they entered into six interest rate swap transactions. From late 2010, Prato stopped making payments due under the sixth (and only outstanding) swap and began a process of administrative self-redress in Italy. Dexia started proceedings in England, claiming the sums due to it. Prato defended the proceedings in the English court on bases including: (a) that the swaps were void as a matter of English law because of Prato's lack of capacity; and (b) Prato was entitled to treat the swaps as null and void, because of breaches by Dexia of mandatory rules of Italian law.

The aspect of this case which had considerable practical relevance was the superficially abstract question of the role of article 3(3) of the Rome Convention.1 Prato relied on article 3(3), which states that: "The fact that the parties have chosen a foreign law, whether or not accompanied by the choice of a foreign tribunal, shall not, where all the other elements relevant to the situation at the time of the choice are connected with one country only, prejudice the application of rules of the law of that country which cannot be derogated from by contract, hereinafter called 'mandatory rules'." Prato argued that article 3(3) was engaged, because the swap was only connected with Italy. It alleged that Dexia had breached a number of requirements of Italian law that were properly characterised as mandatory rules, with the consequence that the swap was voidable by Prato. The judge at first instance agreed, holding (in summary) that neither the use of a globally-accepted, standard form ISDA Master Agreement, or Dexia's use of banks outside Italy in order to hedge its own exposure, amounted to a connection with a country other than Italy. Dexia had therefore been obliged to comply with any mandatory rules of Italian law (which it had not). Please click here for our summary of the first instance decision.

In essence, therefore, the judge determined that "standard form" was not as standard as Dexia thought. In concluding an agreement with Prato, it had been obliged to take into account a number of Italian law requirements that the ISDA framework did not contemplate. If this judgment were correct, there would be both legal and commercial implications.

Only a short time after the first instance judgment in Prato, the Commercial Court came to a different view in Banco Santander Totta SA v. Companhia de Carris de Ferro de Lisboa SA [2016] EWHC 465 (Comm) (please click here for our summary of that judgment). In that case, the court held that it was enough to consider elements pointing away from the purely domestic, and there was no need to establish a connection with another specific jurisdiction (as the judge in Prato had appeared to consider necessary). This decision, while arguably preferable to that in Prato, appeared to conflict with it.

That conflict has now been resolved by the Court of Appeal in two judgments of 2017. The first upheld the decision at first instance in the Banco Santander case. The more recent, in the Prato litigation, applied the same principle to similar effect. The Court of Appeal in Prato was bound to follow the decision on appeal in Banco Santander as to the meaning of article 3(3). Consequently, it held that there was no need to establish a link to a specific jurisdiction other than Italy, provided that there were elements that lent an international flavour and pointed away from Italy.

In this regard, the judgment notes two elements, each of which would be sufficient to break the exclusive connection of the transaction with Italy:

  1. use of the ISDA Master Agreement, in particular its international nature, the fact that the use of the Multicurrency – Cross-Border form contemplates the involvement of more than one country or currency, and the fact that the agreement was signed in English (not the first language of either party); and
  2. back-to-back hedging of the swap by Dexia outside Italy, which was described as "highly significant".

Both judgments by the Court of Appeal should come as a relief to banks routinely using standard form documentation such as that provided by ISDA. They provide some comfort that English courts are likely to take a consistent approach to parties' obligations, irrespective of the jurisdiction in which the transactions actually happen and that, in most cases, parties will not have to build tailored local requirements into the standard forms they use.

1 The relevant contracts were all made between 1 April 1991 and 16 December 2009. The Rome Convention was replaced by Regulation (EC) No 593/2008 (Rome I), applicable to more recent commercial contracts, but Rome I largely replicates the provisions of article 3(3) (see recital (15) and article 3(3) of Rome I).

When can a note trustee lawfully adopt expenses incurred by noteholders?

UBS AG, London Branch v. GLAS Trust Corporation Ltd. and another [2017] EWHC 1788 (Comm)

A securitisation transaction took place in 2006, the subject of which was cashflows generated by a portfolio of sheltered housing. Such cashflows were to be used by the issuer of the notes in this case (the Notes) to repay its debts to the holders of the Notes (the Noteholders). The cashflows were also to be used in order to meet any payments due to UBS and another entity (together, the Issuer Swap Counterparties). Such payments arose as a result of swaps entered into by UBS and the issuer as part of the overall transaction. Cashflows generated by the portfolio became insufficient to pay both the Issuer Swap Counterparties and the Noteholders, who effectively became competing creditors. UBS terminated the swaps in October 2015, the termination amount being almost £312 million.

At around the same time:

  • an ad hoc group of the Noteholders (referred to throughout the judgment as the AHG) replaced the original note trustee with GLAS Trust Corporation Ltd. (the Note Trustee), apparently on the basis that it would be more "proactive";
  • the issuer failed to pay the interest due on the Notes; and
  • the Note Trustee directed the cash manager not to make payments under the swaps. 

In August 2016, the issuer purported to rescind the UBS swaps on the basis of alleged fraudulent misrepresentations (which UBS denies), but no proceedings were started in that regard. The parties have also been considering a restructuring of the transaction since 2015.

The AHG, in the meantime, had instructed Freshfields and N.M. Rothschild & Sons Ltd (together the AHG Advisers). Their combined fees for the year March 2015 to March 2016 were approximately £2.5 million (the AHG expenses). In March 2016, the Noteholders passed an Extraordinary Resolution to "authorise and direct the Note Trustee to execute a Fee Letter" with the AHG Advisers so as to pay the AHG expenses "as an expense of the Note Trustee which will be provided for and reimbursed by the Issuer to the Note Trustee…" As well as paying the fees already incurred, the Note Trustee proposed to pay the AHG Advisers for their work after March 2016 (which, in the case of Rothschild, included a £75,000 per month retainer and a £3.75 million transaction success fee). The AHG Advisers were not advising on the swaps dispute.

UBS argued that the Note Trustee had no power to incur and claim reimbursement of these costs. The practical significance for UBS was that, as would be expected, the transaction documents provided for a pre-enforcement payments waterfall. In that waterfall, UBS ranked above the Noteholders, but below the Note Trustee's right to recover its expenses. UBS took the view that the AHG was effectively trying to jump the queue, by getting the Note Trustee to pay for its advice.

The issue was one of construction – under the relevant clauses of the Issuer Deed of Charge (IDC) and the Note Trust Deed (NTD), the issuer was obliged to pay for certain costs properly incurred by the Note Trustee. The obligation arose in relation to all "legal fees" and "other costs, charges, liabilities, damages and expenses" which had properly been incurred by the Note Trustee in relation to four broadly described categories of activity by the Note Trustee. UBS disputed whether the fees of the AHG Advisers came within the scope of such clauses.

The judge described clauses dealing with trustees' expenses as typically widely drafted and to be given a "commercial and not artificially restricted meaning… This reflects the fact that the exercise of the trustee's powers may contain a substantial measure of judgement, may be controversial, and may have to be carried out speedily to enable resolution of the transaction. Of course, the position depends on the construction of the particular clause, but subject to that, the trustee should be able to fulfil its duties with confidence that if it acts in a commercially reasonable manner, it will be entitled to indemnification".

Having said that, the judge decided that the Note Trustee was not entitled to adopt the past and future AHG expenses "en bloc", on the basis that this would effectively surrender the trustee's duty to form an independent view as to whether the costs were properly incurred. He also noted a continuing lack of transparency as to what the costs related to, and a doubt as to the extent to which the Note Trustee could pay for advice on which it expressly could not rely. He added that "it is evident that the adoption of the expenses in such circumstances required a degree of careful scrutiny by the Note Trustee in order to form the opinion that the expenses were properly incurred".

The judge's conclusion on this point is not surprising, and the Note Trustee itself had conceded the point at trial. However, the judge was clearly not keen for unnecessary expense to be incurred in the Note Trustee and the AHG duplicating advice.

The practical difficulties facing the Note Trustee following this judgment (largely in assessing a significant amount of costs in order to determine whether they were properly incurred for these purposes) argue in favour of finding a different way of dealing with similar situations, which avoids the trustee becoming too enmeshed in the partisan interests of noteholders. There seems no reason why trustees and noteholders should not liaise on what advice needs to be obtained and from whom, and this case illustrates the risks of not doing so.

Who can sue for breach of the non-payment terms of a bearer note?

Secure Capital SA v. Credit Suisse AG [2017] EWCA Civ 1486

Secure Capital SA (SC) was the owner of the entire beneficial interest in a series of notes issued by Credit Suisse (the Notes). The Notes were governed by English law and issued in bearer form. SC held its interest in the Notes through Clearstream. It argued that a provision of Luxembourg law (under which Clearstream operates) gave it the right to assert a claim directly against Credit Suisse for breach of a term of the Notes, to the effect that Credit Suisse had taken all reasonable care to ensure that information it provided in relation to the Notes was correct, and that there were no omissions that would make the information misleading. Please click here for a link to our summary of the first instance decision.

The Notes were issued in bearer form, each one represented by a single Permanent Global Security which was held by Bank of New York Mellon (BNYM) as common depositary. Interests in the Notes were traded through Clearstream, between accounts held by its members (Account Holders), including, in this case, RBS Global Banking Luxembourg SA (RBSL). Payments due under the Notes would be made by Credit Suisse to Clearstream, and from Clearstream to the Account Holders, who would distribute any sums as appropriate to those of their clients who had an interest in the Notes (the Account Owners). Ultimately, and prior to the issue of these proceedings, RBSL held the whole interest in the Notes for the account of SC as Account Owner.

The Court of Appeal noted the "no look through" principle, under which this system operates. In other words, each link in the chain only has recourse against its immediate counterparty. On this basis, English law gives SC no right to sue Credit Suisse for a breach of the terms of the Notes. SC, however, relied on a provision of Luxembourg law, as the law applying to settlements under the Clearstream system. In particular, it relied on Article 8(1) of Luxembourg law dated August 2001 on the circulation of securities. That provision stated that "the investor may exercise or arrange to exercise corporate rights attached to the securities and the rights attaching to the holding of securities linked to the possession of the securities by producing a certificate drawn up by the relevant account holder attesting to the number of securities registered in its custody account".

SC did not argue that it was entitled to assert the rights of the bearer of the Notes (accepting that BNYM retained those rights), but said that it was entitled to assert a "parallel but independent right of action" that did not fit existing categorisations (such as contractual or proprietary) and should be treated sui generis. SC argued, in summary, that English law governed the question of whether there had been a breach of the Notes, but that the question of who was entitled to sue was for Luxembourg law as the law of the settlement system. Further, it argued that the relevant aspect of Luxembourg law was incorporated by reference into the terms of the Notes (an argument that the Court of Appeal rejected on the facts).

Lord Justice David Richards, giving the Court of Appeal's judgment, dismissed SC's appeal. He said: "Under English conflicts of law principles, the identification of the parties entitled to sue on a contract is governed by the proper law of the contract." In this case, that was English law and, on that basis, the only person entitled to sue Credit Suisse on the terms of the Notes was their holder, BNYM. He also rejected the argument that the "no look through" principle applied only to payment obligations. The Court of Appeal also stated that SC's approach could lead to a potentially "incoherent, if not chaotic" result. Clearstream is governed by the laws of Luxembourg, but there are other settlement systems governed by other laws, e.g. Euroclear (subject to Belgian law) and the DTC (subject to US law). On that basis, the issue of whether or not an issuer would be subject to direct claims from those having an interest in securities would depend on the system through which those interests were held.

One of the interesting aspects of the judgment is the pragmatic (and quite robust) approach of the Court of Appeal. It found that parties like SC knew that they were, in fact, trading in interests in securities, not the securities themselves. The limitations on direct action were part of an overall package of rights that a party in the position of SC chose to trade.

This decision is unsurprising, in that SC's arguments were somewhat ambitious set against the language of the Notes. However, the judgment is also welcome, in that any decision to the contrary would have opened the way for the chaotic result the Court of Appeal identified.

Commercial Court highlights the importance of how default interest clauses are drafted

The Law Debenture Trust Corporation plc v. Ukraine [2017] EWHC 1902 (Comm)

On 29 March 2017, Mr Justice Blair (the Judge) in the Commercial Court gave summary judgment for US$3 billion in proceedings relating to a Eurobond issue. The issuer was Ukraine, and the sole noteholder was the Russian Federation. The decision dealt with complex issues regarding conflicts of laws and non-justiciability. The Court dismissed Ukraine's arguments on capacity and alleged duress. That judgment attracted considerable attention.

Judgment was handed down in July 2017 in relation to a number of consequential matters. This judgment is significant in relation to its consideration of the appropriate rate of interest on the amounts Ukraine was ordered to pay to Law Debenture (the Note Trustee), and it highlights the importance of how the default interest provision is drafted. In case of late payment, the trust deed governing the relevant notes (the Trust Deed) specified interest, both before and after judgment, at 5 per cent or (if higher) the rate of interest on judgment debts for the time being provided by English law (presently 8 per cent). Ukraine argued that the judgment obtained by the Note Trustee was denominated in US dollars, and that there is no judgment rate in relation to foreign currency judgments, the question of the appropriate rate of interest being at the court's discretion. On that basis, Ukraine argued that it should only be ordered to pay 5 per cent. The Judge found that, by the clause as drafted, the parties had agreed to apply the judgment rate for sterling judgments to a non-sterling sum, and the court should enforce that bargain. On that basis, the Judge ordered that the higher rate of 8 per cent was applicable both pre and post judgment. In his reasoning, the judge acknowledged that Ukraine's point would have been valid, and the court's discretion would have come into play, had the clause not been drafted as it was.

The Judge took a contrasting approach to an unpaid coupon which fell outside the drafting of the default interest clause in the Trust Deed. Here, the court used its discretion to determine the appropriate rate of interest (held to be US dollar three-month LIBOR plus 2 per cent).

The decision, and the marked contrast between the rate of interest arrived at by using the contractual drafting as compared with the rate determined by the Judge at his discretion, illustrates the practical importance of drafting default interest clauses carefully. The court granted permission to both sides to appeal and the appeal is due to be heard in January.

No duty of care owed by banks to customers in relation to IRHP review

(1) CGL Group Limited; (2) Jacqueline Bartels and Adrian Bartels; (3) WW Property Investments Limited v. (1) The Royal Bank of Scotland plc and National Westminster Bank plc; (2) Barclays Bank plc; (3) National Westminster Bank plc [2017] EWCA Civ 1073

The Court of Appeal decided that banks do not owe a duty of care to customers in relation to their conduct of the review agreed between the banks and the Financial Conduct Authority (FCA) in relation to past sales of interest rate hedging products (the IRHP Review).

Each bank participating in the IRHP Review agreed with the FCA that it would assess its past sales to each eligible customer (within the terms of the IRHP Review) against regulatory requirements, and would make an offer of redress to customers where appropriate. The entire exercise, together with all determinations of redress, would be overseen by an independent reviewer that the FCA required each bank to appoint as a skilled person. All customers were to be contacted by letter (the Letter) in order to explain the IRHP Review, the role of the FCA and the role of the independent reviewer.

In each case before the Court of Appeal, the claimants believed that they had a claim against the relevant bank arising out of alleged misselling of an IRHP. In two cases, the bank had a limitation defence to certain of the claims made. The claimants in each case had participated in the IRHP Review carried out by the relevant bank, but had been dissatisfied with the outcome.

The claimants said that they had relied on the banks to undertake the IRHP Review competently, that the banks had failed to do this, and that it was fair, just and reasonable for a duty of care to be found to exist in a relationship that was akin to contract. They argued that the banks had assumed responsibility voluntarily, chiefly by means of the Letter. 2

Part of the judgment of Lord Justice Beatson considers the different tests applied by previous cases in determining whether a duty of care exists in relation to economic loss: the voluntary assumption of responsibility; the tripartite test in Caparo v. Dickman (foreseeability, proximity and "fair, just and reasonable"); and the so-called incremental approach. Having considered these tests, Beatson LJ concluded that the assumption of responsibility test was not the most appropriate, but that, considering all factors relied on in earlier authorities, such factors pointed away from the existence of a duty of care. He found that this conclusion was confirmed by applying the other tests, in particular the one in Caparo. The reasons for this conclusion included:

  • the regulatory context clearly weighed against the imposition of a duty of care, the Court of Appeal noting that it would be unusual for a common law duty to be imposed on a statutory one, particularly where the common law duty was more extensive;
  • it was artificial to characterise the IRHP Review as a purely voluntary exercise, and in addition, the Letters (on which the claimants relied to a significant extent) were required to be sent in the form they were by the FCA;
  • the role of the independent reviewer militated against the imposition of a duty of care and, in circumstances where the independent reviewer could not owe a duty of care (please click here for a summary of a related judgment), it was hard to see how the banks could;
  • applying the Caparo test, it was not fair, just and reasonable to impose a duty of care;
  • allowing the appeals would have the effect of allowing the claimants to litigate their time-barred causes of action "by the back door"; and
  • the Court of Appeal did not accept that the claimants had relied on the Letters or the IRHP Review, in that it was unclear what they would have done differently – their participation in the IRHP Review did not preclude them from pursuing their original claims.

The Court of Appeal's decision is not surprising. It would be strange indeed if so carefully designed a process as the IRHP Review, containing as it did a substantial dose of regulatory intervention, should be held to create a duty of care. There seems no reason why the court's conclusions in this case should not also apply in any future review agreed by firms as an alternative to enforcement action.

2 In the case of Mr and Mrs Bartels, it was also argued that the bank had voluntarily assumed responsibility by entering into the agreement with the FCA.

Acceptance of settlement offer as part of IRHP review precluded subsequent claim for consequential loss

Cameron Developments (UK) Limited v. National Westminster Bank Plc [2017] EWHC 1884 (QB)

In July, HHJ Moulder struck out a claim by a property developer (Cameron), for consequential losses allegedly incurred as a result of entering into an interest rate swap. The sale of the swap was reviewed as part of the Interest Rate Hedging Product (IRHP) review process conducted by the defendant bank (the Bank) (amongst other UK banks), pursuant to an agreement with the FCA. Having reviewed the sale of the swap, the Bank offered Cameron redress by way of an alternative product and a cash sum. Cameron was also invited to submit details of any claim it wished to make in relation to consequential losses not included in the initial offer of basic redress.

Cameron accepted the offer of basic redress. In doing so it acknowledged that acceptance represented "full and final settlement of any claims, liabilities, costs or demands that [it] may have against [the Bank] arising under or in any way connected with the sale of this IRHP as identified above. For the avoidance of doubt this applies to any past, present or future claims, actions, liabilities, costs or demands, regardless of whether or not you are aware of them at the date of this letter." Cameron subsequently submitted a claim to the Bank for consequential loss. The claim for consequential loss was rejected by the Bank.

Cameron subsequently made a claim for consequential loss in the courts. The claims brought by Cameron in the court proceedings alleged mis-selling; however, in view of the acceptance of the offer of basic redress, it was common ground between the parties that there could be no recovery of direct losses resulting from the sale of the swap. In order to pursue its claim for consequential loss, Cameron made allegations regarding the way in which the Bank conducted the review of the sale of the swap. The Bank applied to strike out the claim.

At the time the strike out application was heard (10 July 2017), a judgment of the Court of Appeal was anticipated in the case of CGL Group Limited v. The Royal Bank of Scotland plc, considered above whether the Bank owed a duty of care to customers when conducting the IRHP review. Whilst the CGL decision was awaited, it was agreed by all parties that it would be assumed for the purposes of the application that the Bank did owe a duty of care in relation to the IRHP review.3

The main issues left to be determined by the court included, first, whether there had been a contractual agreement in relation to the Bank considering consequential loss in the review. If there was such an agreement, there was then the question of whether a claim on such a contractual agreement (along with the hypothetically agreed duty of care claim) was precluded by the terms of the settlement. The third issue was whether the contractual claim should be struck out or summary judgment granted.

The judge found that there was no evidence of any dealing between the parties to support the assertion that the Bank entered such a contract. There was no link between the acceptance of the basic redress offer and the review of a claim for consequential loss given consideration of consequential loss was not contingent on acceptance of a basic redress offer. The judge noted that the FCA's website stated that all customers who "receive" (as opposed to "accept") a basic redress offer have the opportunity to make a claim for consequential loss. The FCA's website was said by the judge to contain several features which negated any suggestion of a contractual relationship with regards to the review, including: the fact that the FCA did not require banks to give details of how redress calculations were made, as these were reviewed by the independent reviewers; the fact that customers were informed that the review process was overseen by independent reviewers; and the fact that customers were cautioned in relation to using lawyers as costs are unlikely to be recoverable.

The court found that, even if a contractual agreement was found to exist, a claim based on breach of it would have been precluded by the settlement agreed by acceptance of the basic redress offer. The court found that the use of the words "in any way connected with" the sale of the swap, on a literal reading, brought Cameron's challenge within the settlement. As the judge put it, "No review would be necessary unless the claimant fell within those category of customers who had been sold a swap." The judge was also persuaded by submissions that the settlement between the parties caught not only claims in existence but also those arising in the future.

In addition to a literal interpretation of the meaning of the language used in the settlement agreement, the court also found that the commercial context and practical consequences of the IRHP review was consistent with an interpretation that the settlement agreement was intended to preclude future challenges to the review process (outside of the mechanisms prescribed by the review process). The view of the court was that any distinction between the initial review and the consequential loss review was illusory rather than real, as the final determination took into account both the basic redress and any consequential losses, to reach a single final outcome. As the review was in essence a single process, it was not irrational to have a single settlement agreement dealing with it in its entirety.

The court therefore held that both the alleged contractual claim and the hypothetically agreed duty of care claim were precluded by the language of the settlement agreement and should be struck out.

This is one of a number of recent court cases where customers who participated in IRHP reviews conducted by various banks sought to re-open, re-review or reverse the outcome of those reviews by asserting a right to bring the review process itself before a court. The court's decision provides some clarity and assistance to banks, particularly in circumstances where a customer has accepted an offer of redress.

3 Following the hearing on 10 July 2017, on 24 July 2017 the Court of Appeal handed down judgment in CGL, confirming that the Bank did not owe a duty of care to customers when conducting the IRHP review agreed with the FCA

Agency, effect of a bribe on the enforceability of a contract by a third party, and the effect of a conflict of interest

UBS AG (London Branch) and another v. Kommunale Wasserwerke Leipzig GmbH [2017] EWCA Civ 1567

Kommunale Wasserwerke Leipzig GmbH (KWL) is the municipal water company of Leipzig. It was run at all relevant times by two individuals, Mr Heininger and Dr Schirmer. They became involved with two corrupt financial advisers acting through a Swiss company called Value Partners. As part of a restructuring of cross-border leasing arrangements, Value Partners induced KWL to enter into four single tranche collateralised debt obligations (STCDOs), all of which, in commercial terms, ultimately had UBS as their counterparty. Three of the STCDOs, however, were concluded with an intermediary procured by UBS (either Depfa Bank plc (Depfa) or Landesbank Baden-Württemberg (LBBW)), such that there was a "front swap" between KWL and Depfa/LBBW, and a "back swap" between Depfa/LBBW and UBS. Pursuant to the STCDOs, KWL sold credit protection in relation to a basket of reference entities either directly to UBS, or to Depfa/KWL who in turn sold it on to UBS for a relatively small intermediation fee. In exchange, UBS sold KWL credit protection in relation to the four institutions referred to as part of the cross-border leasing arrangements above.

The commercial outcome of the STCDOs was to release substantial sums to KWL in the form of premium payments (a net total of USD28.1 million plus €6.4 million), but expose KWL to a potentially massive liability if the reference entities underlying the STCDOs defaulted, as a number duly did during the financial crisis.

Underlying these complex transactions was a fraud on KWL, orchestrated by Value Partners. Value Partners succeeded in extracting almost the whole premium paid to KWL under the STCDOs, and bought Mr Heininger's complicity through bribes paid to him. At first instance, Mr Justice Males found that, while UBS did not know that Value Partners had bribed Mr Heininger, or how much of the proceeds of the STCDOs Value Partners extracted, UBS had been aware that Value Partners stood to make a large and disproportionate profit. He also found that UBS knew that Value Partners was dishonest, and UBS was content to use the services of Value Partners to bring "captive" clients such as KWL to it in order to conclude lucrative transactions, regardless of whether this was in the client's interests.

There were 10 issues on appeal. The key points of general interest are whether:

  1. Value Partners acted as UBS's agent in bribing Mr Heininger (as Males J held that it did);
  2. if not, the bribe meant that the STCDO with UBS was unenforceable in any event; and
  3. UBS's knowledge of conflict of interest on the part of Value Partners meant that KWL was entitled to avoid the STCDO with UBS and, specifically, whether Mr Heininger's knowledge that Value Partners was not acting as KWL's disinterested adviser was to be attributed to KWL in this context.

In relation to the first issue, the Court of Appeal considered the traditional elements of an agency relationship: the existence of a fiduciary duty owed by the agent to the principal; authority on the part of the agent to affect the principal's relationships with third parties; and control by the principal over the agent. The Court of Appeal accepted that the absence of any of these characteristics in this case was a "significant pointer" away from the existence of an agency relationship, but would not go so far as to accept that no agency could be found to exist where those three characteristics were not present. The Court of Appeal also noted earlier authority to the effect that the court should be wary of "forcing into an agency analysis a relationship better explained in some other way, in particular where the supposed agent is already an agent of another party to the contemplated transaction". In this case, of course, Value Partners was acting as KWL's agent, however poorly. In the circumstances, the Court of Appeal found that Value Partners was not UBS's agent.

The underlying question on the second issue was whether a party should be entitled to rescind a contract upon discovering that a fraud had been committed on him/her, on the basis that it would be inequitable for the other party to hold him/her to a contract procured in that way. It was common ground that the conscience of the party seeking to enforce the contract would need to be affected in some way in order for rescission to be possible. The issue was how to determine whether a party's conscience was affected, applying dicta of Millett J in Logicrose Limited v. Southend United Football Club Limited.4 The general position was held in Logicrose to be that a party's (A's) conscience is not affected by a bribe or other breach of fiduciary duty by its counterparty's (B's) agent, unless A actually knows or is wilfully blind to the fact of the breach. However, Millett J added, in what he described as a "reservation", that A's conscience would be affected, where A dealt secretly with B's agent, knowing that B was unaware of the fact, and that the agent might be looking to his own advantage.

In the view of the majority (Gloster LJ dissenting) in the Court of Appeal, UBS had demonstrably dealt with KWL's agent, Value Partners, behind KWL's back, and dishonestly assisted it in breaching its fiduciary duties to KWL so as to bring about the STCDO transactions. On that basis, having assisted in one aspect of Value Partners' breach of duty, UBS's conscience was sufficiently affected in relation to any other abuse (in this case the bribing of Mr Heininger) that Value Partners chose to employ. UBS could not say that its conscience was clear, and KWL was therefore entitled to avoid the contract.

In relation to the third issue, Males J found that UBS's arrangement with Value Partners, whereby Value Partners was to deliver captive clients to UBS for STCDO transactions, meant that Value Partners was subject to a conflict of interest and therefore in breach of its fiduciary duty to KWL. As UBS knew of and assisted in such breach, and KWL did not know of it, KWL had a right to rescind its STCDO with UBS. UBS challenged this conclusion, in part because Mr Heininger knew that Value Partners was not providing disinterested advice to KWL. UBS argued that, in the context of the STCDO between UBS and KWL, Mr Heininger's knowledge should be attributed to KWL, and KWL should therefore be taken to have consented to the conflict of interest on the part of Value Partners.

Lord Briggs and Hamblen LJ referred to Bilta (UK) Limited v. Nazir 5 and said that: "It can now be taken as settled law that, where a company claims against a third party in respect of that person's involvement as an accessory to a breach of fiduciary duty by one of its directors, the state of mind of the director who was in breach of his fiduciary duty will not, as a matter of policy, be attributed to the company". The majority in the Court of Appeal (Gloster LJ again dissenting) accepted that this case did not fall squarely within the categories of case described in Bilta, but found that the same policy considerations applied, such that Mr Heininger's knowledge of breaches of fiduciary duty by Value Partners ought not to be attributed to KWL.

In addition, there was extensive discussion in the judgment (which we do not cover here) of the way in which the court is entitled to exercise its discretion in relation to claims for rescission. While this case is unusual on its facts, the legal principles it raised are of more general application, and the case broke new ground in relation to each.

4 [1988] 1 WLR 1256

5 [2016] AC 1

Situs of the debt owed under letters of credit

Taurus Petroleum Limited v. State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64

In February 2013, Taurus Petroleum Limited (Taurus) obtained a final award in arbitration proceedings against State Oil Marketing Company of Iraq (SOMO). SOMO did not pay the sum that it was ordered to pay pursuant to the award. Taurus then learned that a company in the Shell group was to purchase two parcels of crude oil from SOMO, the purchase price for which was to be paid under Letters of Credit (LoCs) issued by Crédit Agricole. The relevant sums were to be paid into an account of the Central Bank of Iraq (CBI) at the Federal Reserve Bank in New York, designated the Oil Proceeds Receipts account.

The LoCs were subject to the Uniform Customs and Practice for Documentary Credits (2007 Revision) International Chamber of Commerce Publication No. 600 (UCP). They were addressed to CBI, but stated that they were "in favour of" SOMO. They also contained two unusual special provisions relating to payment that were crucial to this case.

Taurus applied for, inter alia, an interim third party debt order (TPDO) over the proceeds of sale to be paid pursuant to the LoCs, and the appointment of a receiver in relation to those funds. Crédit Agricole duly paid the sums into court. The interim TPDO and receivership order obtained by Taurus were set aside following a hearing, and the matter proceeded to the Court of Appeal and then the Supreme Court.

There were four broad issues before the Supreme Court:

  • what was the situs of the debts due pursuant to the LoCs?
  • what was the proper construction of the LoCs?
  • did the position of CBI mean that no TPDO should be granted in any event?
  • how much connection with the jurisdiction was needed in order for the court to make a receivership order?

The English court therefore generally lacks jurisdiction to make a TPDO in respect of debts situated outside the jurisdiction. In terms of determining where the debt was situated, there were two competing propositions. One was the general position, which is that a debt is situated where the debtor is resident, because that is the jurisdiction where the debt is recoverable. As the LoCs were issued by the London branch of Crédit Agricole, the provisions of the UCP meant that the London branch should be treated as a separate bank to the French arm of the bank, and the situs of the debt would be England. The other was based on settled law in a Court of Appeal decision, Power Curber International Ltd v. National Bank of Kuwait SAK,6 in which there was held to be an exception in the case of LoCs to the general position summarised above, on the basis that LoCs were "different from ordinary debts".

The Supreme Court agreed unanimously that Power Curber was wrong in principle, and that the ordinary means of identifying the situs of a debt should apply to LoCs too, Lord Neuberger adding that "such unreasoned distinctions do the common law, and in particular, commercial law, no favours". On that basis, the debt due in this case was situated in England.

Having found that it would be possible in principle to make a TPDO in relation to the sums payable pursuant to the LoCs, the Supreme Court had to decide whether to do so in practice. In this regard, there was a specific issue of construction of the special provisions contained in the LoC, on which the Supreme Court was split. We do not consider that issue in detail here, save to note that the majority held that, while the debt under the LoCs was due to SOMO, there was a collateral obligation to SOMO and CBI jointly, to pay the relevant amounts into CBI's account. SOMO argued that, because it had no interest in or rights over the account of CBI into which the LOCs provided that the debt should be paid, no TPDO was available to it. This argument was based on In re General Horticultural Co, Ex p Whitehouse,7 in which the court held that an order of that kind could only charge "what the judgment debtor can himself honestly deal with".

Lord Clarke (with whom the majority agreed) held that this did not create an independent principle in relation to honest dealing – looking at the circumstances of the case, it only reaffirmed that a TPDO could not be made in relation to property not belonging to the judgment debtor.

On the point of most general relevance in this case, the situs of debts due pursuant to LoCs, the Supreme Court was unanimous – it is the debtor's place of residence, not the place where the sums due under the LoC are payable. Lord Neuberger noted that 35 years of mistaken practice in this regard provided some argument for continuing with it, but not enough.

6 [1981] 1 WLR 1233

7 (1886) 32 Ch D 512

When and how dishonesty needs to be shown

Ivey v. Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67

In a much-publicised recent case, the Supreme Court has considered two issues: first, whether it is necessary to prove dishonesty in order to make out an offence of cheating under the Gambling Act 2005; and second, what the test for dishonesty should be.

Mr Ivey is a professional gambler. He played a number of games of Punto Banco at Crockfords over two days in August 2012, with the help of another professional gambler, Ms Sun. Punto Banco is played with six or eight packs of cards. It requires the dealer to deal two or three cards, face down, onto two positions on the table ("punto" and "banco"). The gambler places a bet on one of those positions, and if the total of the cards dealt is closer to nine than the other position (subject to the rules of the game), he or she wins.

There is an advantage to the gambler in knowing which cards are "high value" which, in this context, means cards with a face value of seven, eight or nine. That would not, of course, normally be possible. However, Mr Ivey sought to take advantage of a technique called "edge-sorting". This can be done where the manufacturing process means that the pattern on the back of the card is marginally closer to one long edge of the card than the other. The Supreme Court described the difference as "sub-millimetric". The difficulty lay in ensuring that the cards were sorted such that one type of long edge appeared for the high value cards, and not for the others. This was Ms Sun's role. As the cards were turned face up at the end of each coup, she indicated to the croupier which cards were "good" (asking her to turn them one way) and which were "not good", asking her to turn them the other (the croupier believing that Ms Sun was simply superstitious). The use of a shuffling machine (at the request of Mr Ivey) meant that the cards were not rotated when they were shuffled and Mr Ivey also asked to keep using the same cards. By the time the sorting process was finished, Mr Ivey's bets per coup increased. By the time he stopped playing, his success rate had risen markedly. His bets for the last three coups averaged £150,000 each time, and he ultimately won in excess of £7.7 million. Alarmed by the size of its loss, Crockfords reviewed its footage of the game, and the cards, and worked out how Mr Ivey had been so successful. It therefore refused to pay his winnings.

The parties agreed that there was an implied term in the contract between Mr Ivey and Crockfords that he would not cheat. There is also, as indicated above, a statutory offence of cheating. The Supreme Court held that cheating meant the same thing in either case.

Mr Ivey admitted edge sorting, but was adamant that this did not amount to cheating. It was said on his behalf that cheating necessarily involves dishonesty. In order for him to be held to be dishonest, the relevant legal test (in relation to the criminal offence) required Mr Ivey to have known that his conduct (viewed objectively) was dishonest. He did not see it as dishonest. He had therefore not cheated, and should recover his winnings.

The Supreme Court therefore considered two issues: (i) whether there was any requirement to show dishonesty; and (ii) if so, whether Mr Ivey was dishonest applying the proper test.

In relation to the first issue, the Supreme Court held that it is not necessary to show dishonesty, in order to prove that someone has cheated. Lord Hughes accepted that the concept of honest cheating is an improbable one. It is not, however, impossible. Lord Hughes provided several examples, such as tripping an opponent in a race, giving a horse too much water before it is due to run, or deliberate time-wasting in a number of sports. The Supreme Court emphasised the role of dishonesty in some cases as supplying the necessary element of "illegitimacy and wrongfulness", but that, in the case of cheating for example, the cheating itself carried its own inherent stamp of wrongfulness.

The Supreme Court went on to consider what the proper test for dishonesty was. In relevant criminal cases, judges have been required for the last 35 years to direct the jury to consider the so-called Ghosh test.8 The jury has been directed to consider dishonesty in two stages: (i) was the conduct complained of dishonest by the lay objective standards of ordinary, reasonable and honest people; and (ii) if so, whether the defendant must have realised that ordinary honest people would so regard his or her behaviour. The Ghosh test is therefore usually described as involving both an objective and a subjective test.

Lord Hughes, giving the judgment of the Supreme Court, identified six problems with the second, subjective limb of the test. These included the unintended effect that the more warped the defendant's standards of honesty are, the more likely he or she is to be acquitted, and the "unprincipled divergence between the test for dishonesty in criminal proceedings and the test of the same concept when it arises in the context of a civil action". He further held that the subjective limb of the test had been introduced on the basis of a misunderstanding of earlier authorities.

The Supreme Court therefore came to the conclusion that the subjective limb of the Ghosh test does not correctly represent the law. Going forward, in both civil and criminal cases, the test will be that currently used in civil cases – the judge or jury (depending on the type of case) will first have to ascertain the actual state of the individual's knowledge or belief as to the facts. Once that is established, the question of whether his or her conduct was honest or dishonest is to be determined by applying the standards of ordinary decent people. The test therefore retains a role for the state of mind of the individual defendant, but it removes the requirement for him or her to appreciate the dishonesty of his or her actions.

8 Derived from R v. Ghosh [1982] QB 1053

Application and rejection of the "Braganza Duty" in case of "classic abusive trading"

Shurbanova v Forex Capital Markets Ltd [2017] EWHC 2133 (QB)

In this case, the court considered whether the defendant's decision to revoke trades placed by the claimant was an exercise of a contractual discretion and therefore not to be exercised arbitrarily, capriciously or irrationally, or simply a contractual right and not subject to those conditions. It provides a further example of the careful analysis required in deciding whether a contract contains a right or a discretion, following the decision of the Supreme Court in Braganza v BP Shipping [2015] 1 WLR 1661, a recent case in the "Socimer" line of authorities (Socimer International Bank Ltd v Standard London Ltd [2008] EWCA Civ 116).

The defendant, Forex Capital Markets Ltd (FX), was an online broker. The claimant, Mrs Shurbanova, claimed FX had breached an implied duty of good faith in its terms of business when it revoked very profitable trades that she placed through a dealing platform FX operated for retail clients.

Mrs Shurbanova is a retired teacher from Bulgaria. On 8 November 2013 at precisely 8.30am New York time, data for the US Non-Farm Payroll (NFPD) was released. A positive NFPD result normally leads to a rise in the dollar and a decline in the value of gold. At 8:30.01am New York time, Mrs Shurbanova placed 25 orders to sell gold and 18 orders to buy US dollars (on a basket basis). Within 30 seconds, Mrs Shurbanova had closed out the same trades by giving instructions to buy back the gold and sell the dollars. The total amount committed by Mrs Shurbanova on these trades was US$130 million and her profit on the trades was US$463,410. Not too bad for less than a minute's work.

The FX platform used by Mrs Shurbanova is designed for non-professional traders and is structured such that the quoted prices react more slowly (in relative terms) to particular events, with the intention of allowing individual traders more time to think about the trades that they wish to make. With such "throttling" of quoted prices comes the potential for abuse.

FX revoked the trades later that day. Underlying FX's decision to cancel the trades was a concern that, by using a combination of software able to (i) process results of news events very fast and (ii) place appropriate buy and sell orders automatically according to predetermined settings, Mrs Shurbanova had been able to place trades that were not based on intelligent predictions of a particular news result, but in knowledge of what that result was. The trades abused the "price latency" which was built into the platform. Further, FX was concerned that Mrs Shurbanova was in fact acting as a front for her husband, Mr Shurbanov, whose activities had been restricted by FX previously, including for placing trades similar to the trades placed by Mrs Shurbanova, and/or for their son, whose trading activities had also previously been restricted by the broker. Mrs Shurbanova denied the allegations and brought a claim against FX for breach of contract.

In its defence, FX relied on two provisions within its terms which permitted it to amend or cancel trades. The first line of defence concerned a clause which allowed FX to amend a transaction where there was "Manifest Error". The judge held that the provision did not apply to the circumstances as there had been no pricing error or misquote in relation to the trades. As regards the pricing, the platform operated as intended.

The second line of defence concerned a provision in FX's terms allowing it to revoke transactions if there had been abusive trading. The question of whether FX was acting within its contractual right in revoking Mrs Shurbanova's trades required the judge to consider whether the act of revoking was the simple exercise of a contractual right, or the exercise of a discretion, such that FX was under a duty to conduct its determination in a way that was not arbitrary, capricious or irrational in the public law sense. The judge referred to these limitations on the exercise of a contractual discretion as the "Braganza Duty", alluding to the Braganza case decided in 2015.

In support of her argument that the contractual provision amounted to a discretion, Mrs Shurbanova identified that FX had a range of options open to it in the event of abusive trading (including revoking, amending or doing nothing). The judge did not find that characterisation to be correct; the clause conferred a simple and absolute right to revoke, and a separate right to make adjustments to the account. On the face of the clear words in the clause, it was for the court (and not for FX) to determine finally whether, as a matter of fact, there was abusive trading. Under its terms, if FX exercises its contractual power to revoke a trade, it runs the risk of "calling" the transaction wrongly by revoking based on abusive trading where the court later determines that there was none. The Judge drew the distinction between this situation and, on the other hand, a contractual power of the type considered in Braganza, that arises from the evaluation of some state of affairs which one party makes as decision-maker, but which affects both parties, thereby giving rise to a potential conflict of interest. As Asplin J put it in Property Alliance Group v. RBS, if a power depends on a decision requiring the contracting party to make some kind of assessment or to choose from a range of options, then it is the exercise of that power which renders necessary the implication of a term that it should not be exercised arbitrarily, capriciously or in an irrational manner.

Mrs Shurbanova further identified that the clause provided for FX to intervene at its "sole discretion" in relation to the operation of accounts tainted by abusive trading or "gaming". The judge found this to be a separate matter to any action that FX took in response to a particular trade, and that it did not affect the analysis of whether FX had a contractual right or a discretion to revoke abusive trades. The judge did note that the final part of the relevant clause provided that FX had sole discretion to resolve disputes arising from quoting or execution errors. The judge decided that this discretion could only relate to those isolated factors, and that it would run counter to the clear words of the clause for the discretion to apply to its entirety.

On consideration of all the evidence, including expert evidence from both sides, the judge was also clear that Mrs Shurbanova's trades were a case of "classic abusive trading". Mrs Shurbanova's case was not assisted by the presentation of the evidence to support her claim: her own testimony was described as implausible and inconsistent and therefore unreliable, as was (to a lesser extent) that of her son; and the absence of evidence from Mr Shurbanov, when he could easily have supported his wife's claim, was considered telling. The judge was satisfied that Mrs Shurbanova was a "front" for her husband and/or her son.

Whilst it was not necessary in the light of the above findings, the judge also found that Mrs Shurbanova had made a series of misrepresentations when opening her trading account with FX, with the result that FX could have claimed damages and, in so doing, cancelled out any liability on its part for damages due to Mrs Shurbanova had the judge found in her favour. The claim was dismissed in its entirety.

Fetters on contractual discretion

BHL v. Leumi ABL Limited [2017] EWHC 1871 (QB)

BHL was successful in its claim against Leumi ABL Limited (Leumi) on the basis that Leumi had not been entitled to charge a collection fee of 15 per cent under a receivables finance agreement (RFA). The issue was not whether Leumi was entitled to charge a collection fee, but rather what percentage Leumi could rationally charge to cover its likely costs and expenses. This decision has implications both for the receivables finance industry and, more widely, for the exercise of discretionary powers under a contract in a commercial context.

The owner and director of BHL was Lord Bilimoria, the founding shareholder of Cobra Beer Limited (Cobra). In April 2008, Cobra entered into the RFA with Leumi, pursuant to which Cobra assigned its unpaid invoices to Leumi at a discount for immediate cash. Cobra experienced financial difficulties and entered into administration on 29 May 2009. On the same day, Cobra Beer Partnership Ltd, in which BHL was a shareholder, acquired the Cobra business, and BHL gave an indemnity pursuant to which BHL agreed to indemnify Leumi in respect of sums due under the RFA.

Leumi then took over the collection of Cobra's invoices and, in doing so, charged certain additional fees under the RFA. One fee in particular, which lies at the heart of this case, was a "collection fee" of up to 15 percent on all invoices.

Leumi collected invoices to the value of £8.1 million, yielding a collection fee of £1.2 million. On 11 November 2010 and 9 May 2011, Leumi issued demands to BHL for outstanding collection fees of £400,000 and £550,000, respectively. BHL complained that the fees were excessive but, believing the payment to be due under the RFA, paid them. Leumi claimed this left a further sum outstanding of over £400,000 (later corrected to £271,382.69).

In April 2012, BHL issued its claim against Leumi, alleging that: (i) Leumi was not entitled to charge a collection fee at 15 per cent; (ii) BHL had paid £950,000 of collection fees by mistake of law; and so (iii) Leumi should repay the sum. Leumi counterclaimed for the balance of collection fees.

Accordingly, the court had to determine to what Leumi was entitled under the RFA (including whether the collection fee was an unenforceable penalty) and, if Leumi was entitled to less than the sum that had been paid, whether BHL had overpaid on the basis of a mistake of law.

The RFA entitled Leumi to charge "an additional collection fee at up to 15% of amounts collected", and stipulated that "such fee constitutes a fair and reasonable pre-estimate of Leumi's likely costs and expenses in providing such service". BHL alleged that this allowed Leumi to claim only its actual costs and expenses, which were to be calculated after the exercise had ended and were subject to a cap of 15 per  cent; whereas, Leumi contended that it was entitled to charge any fee it wished, subject only to a maximum of 15 per cent. As a matter of practice, in similar circumstances Leumi had always charged the maximum where an agreement provided that its fee could be up to a particular percentage, including in the present case.

The judge did not agree with either party's interpretation, however. Instead, relying on the wording of the clause and what he deemed to be the "target" of the provision, the judge determined that Leumi had a discretion to charge a fee based on estimated or actual costs, but which could go no higher than 15 per cent. This discretion was to be exercised, following the principle in Braganza v. BP Shipping [2015] 1 WLR 1661, in a way which was not arbitrary, capricious or irrational in the public law sense (the Braganza Duty).

The judge's decision on the construction of the clause brought into play BHL's secondary argument that the collection fee was an unenforceable penalty. However, the court disagreed on the basis that: (i) the collection fee was not akin to a sum payable instead of damages and therefore was a primary and not a secondary obligation; (ii) even if it was a secondary obligation, it was not a fixed sum but a fee to be arrived at in the exercise of discretion and, in any event, there was a legitimate interest in being compensated for costs; and (iii) Cobra was a large commercial entity that had negotiated the RFA on an arm's-length basis. Accordingly, the clause in question was not a penalty.

Having found Leumi was acting under a discretion, the court considered whether Leumi had properly exercised that discretion. The court found, broadly, that Leumi (i) did not attempt to calculate the likely costs and expenses of the collection exercise; (ii) did not consider whether the collection process would be carried out by third parties and charged under an alternative clause in the RFA; and (iii) acted too quickly in setting the charge. Accordingly, the court considered that Leumi did not exercise the discretion granted under the relevant clause at all and that, even if it did, its exercise of the discretion was wholly defective.

On that basis, it was then left for the court to consider what Leumi would have been entitled to had it properly exercised its discretion. The court first considered what Leumi's actual costs were. This was not because the clause provided for actual costs but in order to provide a useful sense-check for the exercise of discretion. In the absence of any contemporary records, the court relied on a salary-implied hourly rate to conclude that the actual costs were £33,260.

The judge then had to determine the highest percentage fee which Leumi could have charged without being in breach of its Braganza Duty. Taking a holistic approach and giving Leumi the benefit of the doubt, the judge held that 4 per cent was the maximum Leumi could have charged. Accordingly, BHL had overpaid by £735,000 and Leumi was owed nothing for its counterclaim.

Having determined that Leumi was entitled to less than what was actually paid, the court had to consider whether BHL had overpaid on the basis of a mistake of law. The contemporaneous correspondence showed that BHL believed that the collection fee was payable, and Lord Bilimoria gave oral evidence to the effect that he was mistaken. Further, the mistake was a plausible one to make, and BHL was given advice confirming that the collection fee was payable. Accordingly, the court found that there was a mistake and, but for the mistake, the payments would not have been made. BHL was therefore entitled to recover £735,000 from Leumi and was awarded interim payment on account of costs of £780,000.

Collection fees have been the subject of much controversy in the receivables finance industry. Whilst this case is unlikely to quiet the debate, the days of flat-rate collection fees of up to 15 percent are likely to be over.

More broadly, this case is an interesting example of the increasing extent to which courts are willing to challenge the exercise of discretionary powers in a commercial context. Whilst the law in this area is not yet settled, commercial entities should be aware that, if there is any optionality in a contract (for example, charging collection fees of up to 15 percent), the courts may scrutinise the course of action ultimately taken. On that basis, businesses would be well advised to document thoroughly any decisions made in relation to elective contractual rights so that they can demonstrate a rational basis for their actions.

Unwinding a loan participation where the deadline for meeting a condition has expired 

VR Global Partners, L.P. v. Exotix Partners LLP [2017] EWHC 2620 (Comm)

In October, the High Court held that the buyer of a portion of a loan facility was entitled to unwind its participation where the deadline for meeting a condition had expired.

In 2007 Citibank arranged a US$55 million loan facility to Ukranian borrowers. In 2014, CVI EMCVF Lux Securities Trading SÀRL (CVI), a participant in the facility, transferred a US$10 million portion of its participation to an inter-dealer broker, Exotix Partners LLP (Exotix), which transferred the participation to VR Global Partners, L.P. (VR).

The transactions were subject to the condition that the National Bank of Ukraine issued a registration certificate relating to the loan transfer (NBU Registration). Under the terms of the transaction, if the NBU Registration had not been obtained by 30 November 2014, VR was entitled to unwind the transaction via a multilateral netting agreement (MNA) returning the parties to the positions they were in prior to the transaction. The contractual terms also stated that the parties may review the situation and agree a further review period, and that VR would, in good faith, take all reasonable actions to assist in obtaining NBU Registration. In addition, the LMA's standard terms, which were incorporated into the transaction, required VR to take any action as may reasonably be requested to effect the transaction.

Ultimately, NBU Registration was not obtained by the deadline, the market moved against VR and VR sought to exercise its option to unwind the transaction. Exotix agreed to enter into the MNA, but CVI refused, alleging broadly that: (i) VR had failed to take reasonable steps to agree an extension; (ii) in exercising its option to unwind the transaction, VR had not acted in good faith; and (iii) as the market had moved since the transaction date, it was not possible for the parties to be returned to the position they were in prior to the transaction.

The court rejected CVI's arguments and found in favour of VR.

The allegation that VR ought to have agreed an extension was advanced on the basis that there was an implied term that VR would take reasonable steps to agree a further review period. However, the court found that the meaning of the relevant clause was clear and that no party was under an obligation to agree to extend the deadline.

In relation to the contractual requirement of good faith, the judge found that it related to the process of unwinding rather than the exercise of the option to unwind. Even if the purpose of VR having the option to unwind was to provide VR with a hedge against the regulatory risk of non-registration, there was no absence of good faith in VR exercising the option when that regulatory risk had not been removed by the agreed date.

Finally, the court found that the parties could be returned to the position they were in prior to the transaction, despite the market moving between the transaction date and the exercise of the option. The position the parties were in prior to the transactions was that CVI owned the asset and Exotix and VR owned the purchase money. The option simply cancelled the sales.

Claim for breach of mandate and failure to operate stop loss protection upheld against discretionary fund manager

Rocker v. Full Circle Asset Management Ltd [2017] EWHC 2999 (QB)

This case concerned the claims of Mr Rocker (a successful businessman) against Full Circle Asset Management Limited (FCAM) for breach of contract, breach of statutory duty and negligence. FCAM provided discretionary portfolio fund management (DFM) services in respect of a £1.5 million investment in its Inner Circle portfolio in 2009 (the IC Portfolio). By 2014, the capital value had more than halved. Mr Rocker sought to recover both the capital loss and the amount by which he argued his investment would have appreciated had FCAM adhered to its instructions (his "opportunity loss").

In particular it was alleged that (i) FCAM invested significant portions of the £1.5 million in highly risky investments which took the overall risk of the portfolio above the agreed risk limits; (ii) the reference to an APCIMS benchmark required FCAM to adopt equivalent asset allocation in the IC Portfolio or achieve equivalent returns; and (iii) FCAM failed to operate a "stop loss" policy that would have limited losses. FCAM's defence was based on having agreed with Mr Rocker a "bear" strategy for the IC Portfolio. It was contended that (i) the portfolio did not exceed the agreed risk profile; (ii) the benchmark was simply a means by which to assess performance; and (iii) there was no obligation to operate a stop loss policy and in any event this was not breached.

Breach of mandate/COBS claims

In the period in dispute, Mr Rocker's customer risk profile and that of the IC Portfolio was "medium". During this same period, the actual risk profile of the IC Portfolio exceeded the agreed risk profile on nine monthly occasions. Where this occurred, FCAM acted in breach of mandate and/or COBS 9.3.1R and accordingly Mr Rocker was entitled to damages for losses arising as a result of these breaches.

Mr Justice Morris (the Judge) also found that, in breach of COBS 9.2, FCAM did not do enough to ascertain adequately Mr Rocker's attitude to risk, but that this failure did not cause any additional loss. Mr Rocker raised a number of additional COBS rules FCAM had allegedly breached, in particular COBS 2.2, 4.5.2 and 14.3.2 (as regard the adequacy of information provided) and COBS 9.5 (in respect of record-keeping). However, the Judge held that these additional allegations were either unfounded or caused no additional loss.

Benchmark claim

The IC Portfolio agreement provided for an APCIMS benchmark against which to measure performance. Mr Rocker argued that it was implicit from this that FCAM would adhere to the asset allocation in that benchmark – failure to do so resulted in losses in breach of contract and COBS 6.1.6. The Judge swiftly dismissed this claim for several reasons. In particular, it was clear from the wording of Mr Rocker's agreement with FCAM that the purpose of the benchmark was as a performance measure and not as a guarantee of a certain level of performance or asset allocation.

Stop loss

The dispute in relation to Mr Rocker's "stop loss" claim focussed on: (i) whether FCAM was under any legal obligation to operate a "stop loss" protection system; and (ii) if so, what the content of that obligation was.

In relation to the former, the promises FCAM made in respect of operating a "tight" or "aggressive" "stop loss" system were in its suitability letter and made orally in meetings. The Judge agreed with Mr Rocker that it was an express term of the agreement relating to the IC Portfolio, alternatively a collateral contract (but not an implied term) that FCAM was required to operate a "stop loss" system.

Regarding (ii), the Judge also favoured Mr Rocker's view that "stop loss" protection indicated a system by which, where the specified stop loss level was reached, this would trigger a near automatic sale of the investment to prevent further losses, on the basis that it was supported by the natural meaning of the words and dictionary definitions, and was consistent with the limited case law. He rejected FCAM's argument that "stop loss" is an investment management tool used as an internal alert for the portfolio manager to review the investment and consider actively whether to sell or continue to hold it. The trigger point for a "tight" or "aggressive" stop loss policy as promised by FCAM was 5 per cent. Accordingly, FCAM was in breach of the "stop loss" term in any case where an investment fell by more than 5 per cent and was not sold at the time when it reached that point.


In respect of the "opportunity loss" damages sought by Mr Rocker, the Judge agreed with FCAM that these were "misconceived". The compensation required was intended to put him in the position he would have been in but for the specific breaches that occurred (e.g. the failures to operate the "stop loss" properly). It was not to put him in the position he would have been in had he been in a totally different investment portfolio.


Although the Judge's findings in respect of the client mandate/COBS breaches were unhelpful to FCAM, the conclusions in relation to the benchmark claim will generally be of comfort to providers of DFM services both in refusing to impose any requirement as to asset allocation or performance and refusing to award "opportunity loss" damages.

Firms that offer a DFM service and whose agreements or other materials contain references to "stop loss" protections would be advised to give careful consideration to how these provisions are worded and operated in practice, especially if they use these as an internal management tool rather than triggering an automatic sale.

The judgment is also notable in its acknowledgement of both the tensions in applying the COBS provisions around suitability to a DFM service and the pragmatic approach to quantifying losses on a DFM portfolio. To the extent any DFM providers are not applying COBS 9 requirements, this judgment is a clear indicator that they should be.

Successful claim for damages for breach of FCA rules in relation to advice and whether a decision said to amount to "financial suicide" should affect causation

Mahmoud Haji Haider Abdullah (and others) v. Credit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited [2017] EWHC 3016 (Comm)

This claim related to investment advice allegedly given in breach of FCA rules. The claimants were a wealthy Kuwaiti family comprising a father and his three sons, although the judgment indicates that only two of the brothers dealt with Credit Suisse for present purposes. Each was entitled, as a private person within the meaning of section 138D of FSMA, to seek damages for breach of FCA rules. The bare facts of the case are that the family invested in notes (Structured Capital-At-Risk Products or SCARPs) issued by Credit Suisse and, in one case, another bank (the Notes). Such investments were made pursuant to the advice of a Mr Zaki, employed at the time by Credit Suisse.9 The investments were also leveraged and when, following market turmoil in October 2008, Credit Suisse made a margin call in relation to the Notes, the family decided not to meet it, in the knowledge that its positions would be liquidated. This decision, referred to contemporaneously by Mr Zaki as "financial suicide", cost the claimants US$21 million as against retaining the Notes they held to maturity and meeting the margin call (and any future ones).

The issues arising were therefore: (a) whether Credit Suisse had breached the FCA rules as alleged; and (b) even if it had, whether the claimants' refusal to meet the margin call was so unreasonable as to amount to a failure to mitigate loss or a break in the chain of causation.

Breaches of FCA rules

The rules said to be relevant in this case were: (i) COBS 9.2.1R, requiring a firm to take reasonable steps to ensure that any personal recommendation is suitable for the client, including associated information gathering duties; (ii) COBS 9.2.2R, requiring a firm to have a reasonable basis for believing that any specific transaction recommended meets the client's investment objectives and is such that he/she has the necessary experience and knowledge to understand the risks involved; and (iii) COBS 4.2.1R, requiring a firm to ensure that a communication or financial promotion is clear, fair and not misleading.

There were three relevant Notes for the purposes of the claim, and the judge considered the claimants' investment objectives to be different in relation to each. The judge found that they had accepted the second of these Notes (the 19th they had traded with Credit Suisse) as higher risk. The final Note was intended as a restructuring to try to avoid further losses being incurred on previous Notes. In relation to the first of the relevant Notes (Note 18 in the judgment), however, the judge found that the claimants were willing to accept a notional risk to their capital, but only if the events that would give rise to a capital loss were very unlikely to occur. He did not find them to be aggressive investors.

One of the more interesting aspects of the judgment is the judge's consideration of how an adviser should deal with recommending a product that is riskier than one the client has previously traded. The judge said that, in this regard, there was no reason why an adviser could not present such a product, but that he or she would need to take great care in doing so. He added that, "as a practical reality, if a riskier product is presented to an advisory client without its riskier nature being brought squarely to the client's attention and explicit confirmation being obtained from him … that he is content to be exposed to the greater level of risk, there will be a real prospect that the COBS suitability duties will not have been discharged". In this case, the judge found that the claimants relied on Mr Zaki and trusted his assessment as to the likelihood of a capital loss arising. He declined, however, to find that any incentives available to Mr Zaki in relation to sales of the Notes made it more likely that he would breach the relevant rules.

The judge also found Credit Suisse to have breached COBS 4.2.1R in relation to the last Note sold, in that it led the claimants to believe that the restructuring which resulted in its purchase would not require the injection of new funds from them. This was not, as it turned out, the case, as a result of the way in which the replaced Notes had been marked to market.

Financial suicide/deliberate liquidation of the Notes

Before turning to this issue, the judge conducted an extensive exercise in determining what the claimants would have done had Note 18 not been sold to them, which of the outstanding Notes would have proceeded to maturity, and what (if any) margin calls would have been made in relation to them.

In relation to the decision not to meet the margin call that was actually made, Credit Suisse argued that this was an irrational decision taken by the claimants (and one of them in particular) in a fit of temper. While agreeing that a decision not to meet a margin call can, in principle, break the chain of causation, the judge held that, in this case, the claimants' decision was reasonable. They had been asked to inject a further US$12 million, in circumstances where the worst might not be over. They had also lost confidence in Mr Zaki's advice (and he advised them strongly to meet the margin call). The judge held that it was reasonable for them to decide not (potentially) to throw good money after bad.

Other issues

The judgment makes interesting reading, particularly on the points above, but there are some interesting issues on which it does not touch (because it did not need to). One is that the judge made express criticisms of the fact find process undertaken by Credit Suisse, which he held to be inaccurate in a number of respects. The judgment does not explore the extent to which this was relevant to liability, perhaps because there was no suggestion in the judgment that Mr Zaki actually misunderstood either the claimants' financial knowledge or their objectives. Second, the judge noted on a number of occasions that the claimants advanced their claims en bloc, and he therefore treated them as such. There was therefore no separate consideration (beyond the judge mentioning it with disquiet) of Credit Suisse's effective failure to engage with two of the claimants.

9 The adviser and product type are the same as those considered in Zaki v. Credit Suisse (UK) Ltd [2011] EWHC 2304

Meaning of financial institution and right of a party already in default under an ISDA Master Agreement to terminate for the default of the other party

In the matter of Olympia Securities Commercial Plc (in administration) – Grant (and others) v. (1) WDW 3 Investments Limited and (2) Arazim (Gibraltar) Limited [2017] EWHC 2807 (Ch)

This claim was brought by the joint administrators of Olympia Securities Commercial Plc (the Company), a property developer. The dispute, however, was in reality between the two defendants. The second defendant (Arazim) was the ultimate beneficial owner of the Company and one of its unsecured creditors. The first defendant (WDW) was a secured creditor of the Company.

The dispute related to finance agreements entered into by the Company and (formerly) Anglo Irish Bank Corporation Limited, which is now Irish Bank Resolution Corporation Limited (IBRC). The relevant agreements were a floating rate facility agreement (the Facility Agreement), three interest rate swaps concluded under an ISDA Master Agreement (the Swaps) and a debenture securing amounts due under both the Facility Agreement and the Swaps (the Debenture).

Various assignments of these agreements took place as part of the restructuring and eventual liquidation of IBRC, the details of which are not necessary for present purposes save as set out below. The assignments gave rise, however, to various arguments on the part of Arazim.

First, it argued that the Facility Agreement could not have been validly assigned to WDW (as it purportedly had been) because WDW was not a "financial institution" as the Facility Agreement required. Arazim argued that, in order to be a financial institution, an entity would need to operate on its own behalf in the field of regulated finance. The judge rejected this argument. He referred to an earlier authority, and said that an assignee would need to have "a legally recognised form or being, which carries on its business in accordance with the laws of its place of creation and whose business concerns commercial finance". The judge held that this definition was wide enough to include WDW. He also rejected Arazim's specific criticisms that: WDW was not trading at the time of the assignment; it had a share capital of only £1; and it should be viewed as a "vulture fund", on the basis that it had taken assignment of the debt at a discount to its face value. Finally, the judge emphasised the fact that, where money is due under a loan, it is due, and it should not matter overly to the borrower to whom.

The second argument advanced by Arazim related to the terms of the ISDA Master Agreement governing the Swaps. The Swaps were terminated by IBRC on 30 June 2014 because the Company did not repay the Facility Agreement. Arazim argued that it was not open to IBRC to do that, because it had itself suffered a bankruptcy event of default on 7 February 2013, and could therefore not be a "non-defaulting party". The judge, unsurprisingly, rejected this argument in short order. He held that the Company could have terminated the Swaps for IBRC's bankruptcy event of default, but had chosen not to do so. It was entirely possible, in those circumstances, for a non-defaulting party itself to go on to commit an event of default which gave rise to a right of termination by the other party. The judge noted, however, the significance of IBRC having terminated because of cross-default provisions, rather than for non-payment of the Swaps (the payment obligation having been suspended upon IBRC's bankruptcy).

There was a further issue as to whether the amount due on Early Termination (within the meaning of the ISDA Master Agreement) was secured by the Debenture. While this was an issue of considerable importance to the parties, it is specific to the terms of the Debenture, and to the particular series of assignments in this case, so we do not consider it here.

The judge's conclusions on each of the points before him are unsurprising, particularly, perhaps, because the issues raised essentially went to the design of the liquidation of Anglo Irish. The judgment reiterates, however, some useful points of construction in relation to fairly standard terms.

Substantially negotiated LMA facility agreements not caught by section 3 of UCTA

African Export-Import Bank (and others) v. Shebah Exploration & Production Company Limited (and others) [2017] EWCA Civ 845

In June, the Court of Appeal handed down judgment in an appeal that considered whether section 3 of the Unfair Contract Terms Act 1977 (UCTA) can catch facility agreements based on the Loan Market Association (LMA) standard form. Section 3 of UCTA prohibits a party from relying on an exclusion clause where such clause is contained within standard written terms, unless such a clause is reasonable. It had been argued that the claimant banks, in using an LMA form agreement, were dealing on their written standard terms.

The appeal concerned an application for summary judgment in favour of three lenders, African Export-Import Bank, Diamond Bank and Skye Bank (the Banks) against the first defendant (Shebah) and its two guarantors. Summary judgment was given in favour of the Banks following Shebah's defaults. The defendants accepted that the sums claimed by the Banks were due and payable. However, they also asserted that they had counterclaims against the Banks such that they were entitled to set off.

The Banks, in response, relied on provisions in the facility agreement and guarantee which stated that all payments had to be made without set-off or counterclaim. Shebah, in order to bring into question the reasonableness of the provisions relied on by the Banks, and thus make the matter inappropriate for summary judgment, sought to rely on section 3 of UCTA.

The judgment of the court highlighted that the LMA form of the syndicated facility agreement had merely been a starting point for negotiation between the parties. It was also significant that the LMA's own user guide made it clear that it would not be possible to use the form without amendments and additions. Both the court at first instance and the Court of Appeal noted that there had been multiple discussions and drafts of the facility agreement passing between the parties and their respective solicitors. The Court of Appeal held that the fact that there were detailed negotiations "render it impossible to say that either the LMA model form was, or the terms ultimately agreed were, the claimants' standard terms of business".

The court added that the negotiations between the parties do not need to relate specifically to exclusion clauses in order for section 3 of UCTA to be inapplicable. As such, where parties begin with a standard form agreement (such as the LMA), it is not the case that the particular clause which a lender later seeks to rely on must have been specifically negotiated. Regardless of amendments to individual terms, it should suffice to demonstrate that the final contract agreed was not on standard terms. In such circumstances, section 3 of UCTA will not be applicable.

The court highlighted that facility agreements do not usually contain traditional exclusion terms "in the same way that traditional sale contracts … often do." Notwithstanding that, in the present case, a no set-off clause was interpreted as an exclusion clause.

Unfair relationships under the Consumer Credit Act 1974

Clydesdale Bank Plc v. (1) R Gough (t/a JC Gough & Sons) (2) Anne Michelle Gough [2017] EWHC 2230 (Ch)

In this case, the High Court considered: (1) whether the claimant (the Bank) was estopped from exercising its right to demand repayment and enforce security over the Defendants' assets by virtue of the alleged assurances it had given the defendants; and (2) whether the court had the power to make an order pursuant to section 140B of the Consumer Credit Act 1974 (the CCA) to affect the relationship between the first defendant and the Bank, if the relationship between the second defendant and the Bank under a guarantee was found to be unfair.

The first defendant, Mr Gough (trading as "J C Gough & Sons"), was a potato farmer with an extensive holding in Worcestershire. The second defendant, Mr Gough's wife, assisted him with certain matters in relation to the farm.

During November and December 2012, Mr Gough (and Mrs Gough in relation to a charge over one property that was jointly owned) entered into two loans totalling £4.25 million, an overdraft facility for £650,000, and a legal charge in favour of the Bank over a number of properties. Mrs Gough gave a personal guarantee to the Bank up to the sum of £4,910,000 plus interest. The farm continued to experience financial difficulties, such that the overdraft facility was formally extended a number of times, and by November 2014 Mr Gough had overdraft facilities of more than £1 million more than the original size of the overdraft. Eventually the Bank decided that it no longer wished to support the farm, and on 25 November 2014 it sought repayment from Mr Gough of all sums outstanding under the various facilities, and on the same date the Bank also made demand upon Mrs Gough under the guarantee in an amount of £4,910,000.

By the time of the litigation, neither Mr Gough nor Mrs Gough had made any payment to the Bank in respect of the sums owing, yet continued to live in properties subject to the Bank's charges (and derived an income from the same). The Bank brought proceedings seeking possession of the two properties to be given up to receivers, an order that Mr Gough repay the sums advanced under the facilities, and an order that Mrs Gough pay the sums under the guarantee.

Mr Gough's case against the Bank was that it agreed with him from the outset that he "…would have the opportunity to reduce his indebtedness to a sustainable level by the sale of assets, if the bank was not prepared to continue to support the business" and that the Bank was accordingly estopped from enforcing its rights to demand repayment of the facilities and enforce its security over the property assets. The court found that, on the particular facts, no particular representation or understanding arose in the parties' course of dealing and Mr Gough's defence accordingly failed.

In her defence to the sums claimed under the guarantee, Mrs Gough argued that, pursuant to section 140B of the CCA, the relationship between her and the Bank was unfair. The court found that, even if that relationship was unfair, that was irrelevant: the relevant relationship was that between the Bank and Mr Gough and Mrs Gough's defence would fail even if the relationship between her and the Bank under the guarantee was found to be unfair (which it was not).

Preliminary ruling on the requirement for "plain intelligible language" in consumer contracts

Ruxandra Paula Andriciuc and Others v Banca Românească SAC‑186/16, ECLI:EU:C:2017:703

The Court of Justice of the European Union (CJEU) has made a preliminary ruling in relation to the interpretation of Directive 93/13/EEC on Unfair Terms in Consumer Contracts (the Unfair Terms Directive). 

Under Article 3 of the Unfair Terms Directive, a term shall be unfair if "it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer". Article 4 provides an exception to this, in so far as: (i) the term is written in "plain intelligible language"; and (ii) the terms relate to the "main subject matter of the contract".

Between 2007 and 2008, Mrs Andriciuc and others (the Borrowers), whose income was denominated in Romanian lei (RON), entered into loan agreements with Banca Românească SA (the Bank) denominated in Swiss francs (CFH) (the Loans). Under the terms of the Loans, the Borrowers were to make monthly repayments in CFH. Subsequently, the CFH appreciated against the RON, and the Borrowers' obligations under the Loans (when converted into RON) significantly increased. The Borrowers argued that the Bank was in a position to foresee, but did not fully explain, this exchange rate risk. Further, it was said the Bank's presentation by which the Loans were sold was biased, emphasising the advantages but not the potential risks. 

The Borrowers argued that, following the appreciation of the CFH, there was a significant imbalance between the rights and obligations of the parties and, therefore, the requirement to make monthly repayments in CFH was an unfair term and was consequently invalid.

The referring court asked the CJEU for a preliminary ruling in relation to the following: (i) whether the term requiring repayment in CFH relates to the "main subject matter of the contract"; (ii) whether the requirement that a contract is written in "plain intelligible language" extends to the need to provide all possible consequences of the term as a result of which the price paid may vary; and (iii) whether the imbalance between the parties is to be assessed at the conclusion of the contract or whether it continues throughout the life of the contract.

First, the CJEU decided that the term requiring repayment in CFH did relate to the main subject matter of the contract, and so it could not be considered unfair, provided it was written in plain intelligible language. 

Second, the CJEU confirmed that the requirement that a contractual term must be drafted in plain intelligible language requires banks to provide borrowers with sufficient information"to enable them to take prudent and well-informed decisions". This information must be such that "the average consumer, who is reasonably well informed and reasonably observant and circumspect, would be aware both of the possibility of a rise or fall in the value of the foreign currency in which the loan was taken out, and would also be able to assess the potentially significant economic consequences of such a term with regard to his financial obligations". 

Finally, the CJEU found that the assessment of the unfairness of a contractual term "must be made by reference to the time of conclusion of the contract at issue, taking account all of the circumstances which could have been known to the seller or supplier at that time, and which were such as to affect the future performance of that contract".

As the reader will be aware, although the CJEU provides interpretation of EU law, the national court alone has jurisdiction to find and assess the facts in the case before it and to interpret and apply national law.

Effecting service of proceedings on uncommunicative defendants

(1) Citicorp Trustee Company Limited and (2) Golden Belt Sukuk Company BSC v. (1) Maan Al-Sanea and (2) Saad Trading, Contracting and Financial Services Co [2017] EWHC 2845 (Comm)

In this case, the High Court considered whether valid service had been effected upon two defendants based outside of the jurisdiction who had shown no willingness to be involved in the proceedings.

The main issue in these proceedings was whether valid service had been effected in circumstances where the defendants declined to participate in the proceedings. The relevant agreements nominated L A Investments Limited (L A Investments) as the agent for service of proceedings, whose address was specified as 16B Curzon Street, London. Two issues arose: L A Investments was in voluntary liquidation, and the address specified for service no longer existed and was now 15 Chesterfield Street (and in any event was now occupied by an unrelated company). The court found that the clause did not specify a particular address for service because the address was simply a means to identify the service agent, and service at 15 Chesterfield Street was therefore ineffective. The claimants' solicitors also identified the liquidators of L A Investments and served proceedings on them. The court held that valid service had been effected pursuant to the contractually-agreed method of service because the liquidators were acting as representatives of L A Investments for that purpose.

Although not necessary for his decision, the judge went on to consider what the position would have been if L A Investments had ceased to be the service agent. The relevant agreements provided that should L A Investments cease to be the service agent, the defendants must appoint a replacement agent for service and notify the claimants of the same within a specified time period. Failing that, the claimants were entitled to appoint an agent for service and notify the defendants of the same. The claimants had received no notification from the defendants that they had replaced L A Investments as agent for service and they went on to appoint an alternative agent for service with notification to the defendants. The judge held that this would also have been an effective method for service. For good measure, the claimants' solicitors had also attempted to bring the proceedings to the claimants' attention by a variety of means, including by courier to the addresses given in the leases, by facsimile, and also by email. The judge was satisfied that the claimants had done everything necessary to bring the proceedings to the attention of the defendants and that the proceedings (and also the application for summary judgment, which was served by the same methods) were validly served.

Duty of care owed by Arranger in relation to the execution of sukuk documents

Golden Belt Sukuk Company B.S.C. v. BNP Paribas and FCOF II UB Securities LLC and others v. BNP Paribas [2017] EWHC 3182 (Comm)

This case concerned the inability of the claimants to recover sums pursuant to a promissory note (the Promissory Note) which formed part of the transaction documents for a sukuk financing transaction (the Sukuk) for the Saudi Arabian Saad group, referred to by the judge in the case as "equivalent in economic effect to a Eurobond issue". The claimants were the issuer and trustee of the rights of holders of certain certificates issued as part of the Sukuk (Golden Belt) and funds which had invested in the secondary market, and were specialist investors in distressed debt (the Funds).

BNP Paribas (BNPP) was described as the Arranger and as one of the Lead Managers for the Sukuk. There was some discussion in the judgment as to what this role entailed, but the judge found as a matter of fact that it included the preparation and execution of the transaction documents. The judge declined, however, to find that disclaimers contained in the transaction document relating to BNPP's role as Lead Manager did not apply also to its role as Arranger, in view of the fluidity of use of these descriptions.

The claimants alleged (and the judge agreed) that it was a requirement under Saudi Arabian law (which governed the Promissory Note) that the Promissory Note be signed with a "wet ink" signature. In fact, microscopic investigation showed that the relevant signature had been added by a laser printer. The judge held that, had the Promissory Note been signed with a "wet ink" signature, Golden Belt would have obtained judgment on it in Saudi Arabia, although he also held that such judgment would not have been paid.

Golden Belt alleged that BNPP owed it (and certificate holders) a duty of care to exercise reasonable care and skill to ensure that the Promissory Note was properly executed – BNPP denied this. The judge considered some of the authorities dealing with the existence of a duty of care in this context. He drew from them the following two points: (1) that BNPP's client was Saad, and that the existence of contractual duties to one party generally meant that a bank would not undertake a duty of care to other parties in relation to the transaction; and (2) that the existence of carefully structured contractual relationships meant that the court should be slow to superimpose a tortious duty on those relationships. Nonetheless, the judge held that this was a case in which it was right to hold that BNPP owed a duty of care, although to certificate holders only, not Golden Belt, which had no economic interest of its own in the transaction. The reasons were, in summary, that:

  • unlike the earlier authorities, this case related not to investment advice or information provided to investors (which were covered by disclaimers) but to BNPP's performance of its own responsibilities as Arranger;
  • the relevant service performed by BNPP was specific, namely arranging for execution of the Promissory Note. It is interesting to note in this context that the judge stated obiter that he would be minded to find such duty included checking capacity or necessary board/shareholder resolutions, had such issues been relevant in this case;
  • it was particularly important that the Promissory Note was properly executed and "there was no room for any slip";
  • this service was carried out entirely for the benefit of certificate holders;
  • there was no hint that certificate holders were to bear the risk of invalid execution, and they had no independent means of checking this as a risk; and
  • BNPP was effectively telling investors that it would arrange the execution of the Promissory Note.

It is interesting to note that the judge rejected an argument that the imposition of such a duty risked putting banks such as BNPP in a position of potential conflict with their clients. He held that, in reality, there was no way that Saad could have given (or BNPP could have accepted) an instruction to execute the Promissory Note invalidly.

Similarly, he rejected an argument that a duty of care should not be found to exist to subsequent investors in the Sukuk, such as the Funds. The judge said that the existence of such a duty was neither for an indeterminate amount, for an indeterminate time, or to an indeterminate class, although he accepted that investors in the secondary market might struggle to prove reliance on BNPP to carry out the relevant service with reasonable care. In practice, however, the judge had no difficulty in finding such reliance on the part of the Funds.

As a matter of fact, the judge determined that BNPP had breached its duty of care. He found that it had not relied on its own legal advisers, but had left execution arrangements entirely to Saad. He agreed with BNPP, however, that the appropriate measure of damages was the difference between the Funds' recovery as matters stand and their recovery had the Promissory Note been validly executed. While quantum was left to a separate trial, it seems plausible that the Funds will recover little if anything by way of damages.

While the judge's reasoning was clear, his conclusions may come as something of a surprise to banks. BNPP is appealing the judgment. As matters stand, however, it is a reminder to banks acting as arrangers to take particular care with execution of documents. There is no reason, however, why the ratio of the judgment should not apply to services other than arranging execution (or, for that matter, outside the Islamic finance context), and it will be interesting to see whether this judgment results in broader drafting of the type of disclaimer that has previously focused on alleged investment advice.

Choice of English governing law upheld over arguments of non-Shariah compliance

Dana Gas PJSC (a company incorporated under the laws of the United Arab Emirates) v Dana Gas Sukuk Ltd and others [2017] EWHC 2928 (Comm)

In 2007, Dana Gas raised US$1 billion of financing (restructured in 2013) through the issue of Trust Certificates (Sukuk). These were structured to be Shari'ah compliant. Under the transaction, Dana Gas Sukuk Limited (the Trustee) entered into a UAE-law-governed mudarabah agreement (the Mudarabah Agreement) with Dana Gas. This provided that Dana Gas would invest the Sukuk issue proceeds in certain Shari'ah compliant assets (the Mudarabah Assets) in accordance with a pre-agreed investment plan, in order to generate sufficient income to enable the Trustee to make the periodic distribution of amounts to holders of the Sukuk. To ensure that the Sukuk would be redeemed in full on any scheduled or early redemption, Dana Gas and the Trustee also entered into an English-law-governed Purchase Undertaking. Under the Purchase Undertaking, the Trustee had the right following certain events, to require Dana Gas to buy the Mudarabah Assets for a pre-defined exercise price. Dana Gas was required to pay the exercise price into a specified transaction account (which was held on trust by the Trustee for the holders of the Sukuk), and the transfer of title to the underlying Mudarabah Assets was then to take place by way of a separate sale agreement (the Sale Agreement).

In June 2017, Dana Gas announced that it had received a legal opinion to the effect that the Sukuk was not compliant with Shari'ah law, and that the Mudarabah Agreement and the Sale Agreement were therefore unenforceable under UAE law. The judge in the English proceedings accepted, for the purpose of the hearing before him, that this was correct.

Dana Gas asserted that, given the unlawfulness of the transaction under UAE law, the English-law-governed Purchase Undertaking was also unenforceable as a matter of English law, for reasons that: (i) on a proper interpretation of the Purchase Undertaking, the obligation to pay was conditional on a lawful transfer of assets; (ii) the Purchase Undertaking was void for mistake; and (iii) the Purchase Undertaking was unenforceable on the grounds of public policy.

The judge held that, while an English court would apply UAE law to the question of the validity and enforceability of the UAE law-governed agreements, it would apply English law to those issues as they related to the English law Purchase Undertaking.

Dana Gas argued that, as the Mudarabah Agreement was unenforceable, the Trustee never acquired title to the Mudarabah Assets, and that the Trustee's ability to transfer such assets was a condition to Dana Gas's payment of the relevant exercise price under the Purchase Undertaking. The judge disagreed, holding that the payment of the exercise price was a prior step to the transfer of the Mudarabah Assets and was not conditional on it.

Dana Gas also argued that the Purchase Undertaking was void for mistake because the parties entered into it on the mistaken assumption that the Mudarabah Agreement and Sale Agreement were lawful and enforceable under UAE law, and that the Trustee had valid rights to the Mudarabah Assets. The judge noted that, if the parties had expressly or impliedly agreed what would happen if a certain event occurred, there would be no gap in the drafting of the contract and the doctrine of mistake could not apply. On the drafting in this case, there was no gap in the contractual framework. The parties had agreed at the outset that the risk of events of this kind lay with Dana Gas. As such, an argument of mistake was not available.

Dana Gas argued that as a result of Article 9(3) of the Rome I Regulation, the court was required to take into account the enforcability (or otherwise) of the Purchase Undertaking in the UAE. Article 9(3) provides that …."Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful"…Dana Gas argued that all of the obligations under the Purchase Undertaking had to be performed in the UAE, and therefore UAE laws were relevant.

The judge disagreed, finding that the place of performance was in England. Accordingly, Article 9(3) was not applicable and the court did not need to consider any overriding mandatory provisions of UAE law when interpreting the Purchase Undertaking.

The case provides an interesting demonstration of how English courts deal with conflicts of laws where more than one legal system applies in relation to the same overall transaction, and there are undoubtedly points of interest for those drafting future sukuk agreements.

Quantum of damages where loan advanced on the basis of a negligent valuation

Tiuta International Limited (in liquidation) v. De Villiers Surveyors Limited [2017] UKSC 77

In what Lord Sumption described as a "perfectly straightforward" result, the Supreme Court has considered the approach to determining the quantum of damages in a case where a property was negligently overvalued.

In the present case, Tiuta was a specialist lender of short-term business finance, which later became insolvent. One of the projects it financed was a development in Sunningdale, in respect of which it entered into two facility agreements with the developer. Both facility agreements were made following valuations by De Villiers. There was no suggestion in the proceedings of negligence in relation to the first valuation (and Tiuta would have had no recoverable loss in that regard anyway, because the facility was discharged). Tiuta alleged negligence in relation to the second valuation, and this was assumed to be the case for the purposes of the summary judgment application that eventually reached the Supreme Court.

The issue here was that the second facility agreement was for a sum of £3,088,252. Almost all of this money was used to repay the first facility. Only £289,000 of the amount advanced was new money. De Villiers argued (and the Supreme Court agreed) that it was only liable in relation to the new money lent.

As Lord Sumption recorded, the basic measure of damages is that which is required to restore the claimant as nearly as possible to the position he would have been in if he had not sustained the wrong. In this case, had Tiuta not entered into the second facility in reliance on De Villiers' overvaluation, the advances it made under the first facility would not have been paid. It would therefore have lost that sum in any event, through no fault of De Villiers. Lord Sumption restated the need in cases of this kind to perform the "basic comparison" explained in Nykredit Mortgage Bank plc v. Edward Erdman Group Ltd (No. 2) 10 as "a comparison between the plaintiff's position had he not entered into the transaction in question and his position under the transaction".

The judgment considers this issue fairly briskly, and is worth reading for its review of the relevant considerations in cases of this kind. Also interesting are Lord Sumption's comments on the potential difference it would have made to quantum if there had been an allegation of negligence in relation to the first valuation. In that case, but for the second negligent valuation, the first loan would have been undischarged, and Tiuta could have sought to recover (much larger) damages in relation to the first (hypothetical) negligent valuation.

10 [1997] 1 WLR 1627

Application for summary judgment granted after nine-day hearing

Zumax Nigeria Limited v. First City Monument Bank Plc [2017] EWHC 2804 (Ch)

At first glance, it may seem something of a contradiction to hold a summary judgment hearing over nine days. In this case the court held that it would have been wrong to shy away from looking carefully into whether there was merit to the defences and other complaints raised by the defendant bank. The court decided that, save in relation to one issue, none of the defences had a real prospect of being established and a trial over many months and at substantial cost would have been wholly unwarranted.

The relevant background to this claim, brought by Zumax Nigeria Limited (Zumax) against First City Monument Bank Plc (FCMB), the successor in title to Zumax's main banker, IMB International Bank Plc (IMB), is: (i) in 2002, IMB had appointed receivers to Zumax over a dispute concerning a debenture, which was settled in 2005 and formalised in a consent order; and (ii) Zumax had brought Nigerian proceedings in 2009 against IMB's former managing director, who had also been a director of Zumax at the relevant time and who the parties agreed was a fraudster.

Zumax's claim against FCMB was that 10 money transfers, totalling approximately US$3.7 million, had been made from an account in the name of an Isle of Man-registered nominee entity to accounts at a third party bank that were in the name of IMB or entities under its control, but that those moneys were fraudulently diverted or retained by IMB.

In its defence, FCMB stated that (i) it had repaid the moneys by way of bankers' drafts; (ii) the claim was covered by the 2005 consent order; (iii) the claim had been assigned to IMB and charged to it under the terms of the debenture; (iv) the claim was time-barred; and (v) the claim was an abuse of process in that it should have been raised in the Nigerian proceedings. FCMB also brought a counterclaim for damages on the basis that Zumax had assisted the former director to breach his fiduciary duties to IMB by concealing the conflict of interest arising as a result of his dual role as managing director of IMB and director of Zumax.

The court held that FCMB's argument that the moneys had been repaid by bankers' drafts had no substance whatsoever. The limitation defence failed on the basis that the instructions for the transfers and the surrounding circumstances clearly gave rise to an express trust in Zumax's favour, therefore section 21(1) of the  Limitation Act 1980 applied. On the debenture argument, the Judge found that Zumax owed nothing to IMB at the time the receivership began in 2002, and that the appointment of receivers had been unjustified. There was in fact a credit due to Zumax from IMB at the date of the appointment, so there could be no valid assignment by Zumax of the funds that were the subject of the instant claim.

The court held that the consent order and settlement agreement were both unenforceable, because two fraudulent misrepresentations made by IMB underlay Zumax's entry into the agreement: it had been misinformed about the true extent of its indebtedness and about the moneys that had been recovered in the receivership. The court accepted that it was unusual for a finding of fraud to be made in the context of a summary judgment application but the Judge stated that, in his view, the finding was fully justified in the circumstances of this case.

The defence as to abuse of process was not arguable as the Nigerian proceedings had concerned an entirely different dispute over different moneys and neither FCMB or IMB had been a substantive party to those proceedings (the judge accepted that FCMB had been joined as a procedural formality to assist with enforcement against Mr Chinye, the managing director of IMB, who had also been appointed as a director of Zumax). The court also held that FCMB's counterclaim could not possibly succeed as it was plain that it had at all times been aware of, and had even approved, Mr Chinye's dual role.

Zumax was entitled to summary judgment in respect of the counterclaim and all but one of the 10 transfers (there was a lack of clarity on the documents over the position in respect of the third transfer that was claimed for).

The hearing required detailed analysis of the documents and written evidence, following which the court was able to conclude that the defences had no real prospect of succeeding and that there was no other compelling reason that the matter should proceed to trial.

Privy Council decision on pre-contract representations in a commercial borrower-lender relationship

Deslauriers and another v. Guardian Asset Management Limited (Trinidad and Tobago) [2017] UKPC 34

In November 2017, the Board of the Judicial Committee of the Privy Council (the Board) gave judgment on an appeal against, inter alia, liability under a commercial loan for TT$18.6 million brought by Mr and Mrs Delauriers from the Court of Appeal of Trinidad and Tobago (the Court of Appeal).

Mr and Mrs Deslauriers (the Appellants) are property developers based in Trinidad and Tobago. They entered into a loan facility with Guardian Asset Management Limited (GAM). GAM was a non-bank lender that administered pension, insurance and investment funds. The loan was repayable in full by 2 April 2009 and interest was payable in quarterly instalments. In 2008, the Appellants applied for further lending from GAM and, in 2009, GAM notified the Appellants that it would not advance a further loan to them. The Appellants made the interest payment due in January 2009 but made no further interest payments and failed to repay the principal by 2 April 2009.

The Appellants did not dispute their default under the loan or the moneys owed by them. They issued a counterclaim that essentially blamed GAM for their inability to access further borrowing. The essence of their claim wasthat, pre-contract, GAM should have told them that it had lending limitations, but that it failed to do so. The Appellants' claim was for loss suffered as a result of GAM's alleged misrepresentation and/or negligent misstatement. GAM refused their 2008 application for a second loan on the basis that such further borrowing would take them over lending limits. The Appellants said that, prior to entering the loan facility, they told GAM that the loan in question was only the first tranche of funding they required for a development project. They also said that they were aggressively pursued by GAM for their business, and that, when they asked GAM to compare the terms they were offering against those of other lenders, GAM should have told them that the terms on offer included lending limits.

GAM's case was that there had in fact been no discussion of future lending, except that Mrs Delauriers had told GAM that she planned to fund the development project from other resources. The Board upheld the decision of the Court of Appeal and first instance court to reject the Appellants' evidence. The Board affirmed that failure to say something that is immaterial is not a misrepresentation. The Board concluded that, as the first instance court had found that there was no evidence of any discussion of future lending, the Appellants' claim for misrepresentation had to fail. If future lending was never discussed, then it could not be a material subject. There was simply no opportunity for GAM to disclose its lending limits so they were irrelevant.

The Board went on to provide some unsurprising commentary on the relationship between a commercial lender and a commercial borrower. They restated that the relationship is an arm's-length one. It is not a relationship of adviser-client. They said it would be very unusual in such a relationship to assume that a commercial lender has a duty to disclose its internal policies or the external influences on its business practices. The Board said that it would still hold this to be the case, even where a borrower indicated that they intended to borrow further sums in the future.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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