UK: IFI Update, June 2009 - Part 1

Last Updated: 14 July 2009
Article by Andrew McKnight


Introduction to this Update

In this issue, we examine the following topics:

  • The implication of terms in contracts and other instruments
  • International supply contracts and exclusion clauses
  • Vicarious liability for the tortious acts of employees and other agents
  • Appropriation of security over financial collateral
  • CREST payments: provisions precluding legal set-off
  • Avoidance of cross-border transactions within an EU insolvency
  • Jurisdiction in tortious claims under the EC Regulation on jurisdiction and judgments and the right of an agent to enforce a contract for its own benefit under the Contracts (Rights of Third Parties) Act 1999
  • Jurisdiction in a claim against a foreign non-EU defendant: a contract governed by English law

The implication of terms in contracts and other instruments

The Privy Council has discussed the basis on which a term will be implied into a contract or other instrument. The particular case concerned the articles of association of a company, but it was made clear that the same approach should apply to the interpretation of contracts and statutory enactments. Lord Hoffmann delivered the advice of the Privy Council, on behalf of himself and Lord Roger, Lady Hale, Lord Carswell and Lord Brown. The case came before the Privy Council on appeal from the Court of Appeal of Belize.

In brief outline, the facts concerned provisions in a company's articles of association which gave the holders of certain classes of shares the right to appoint directors and gave further rights in favour of a particular shareholder to make appointments and exercise other controls whilst it retained specified levels of its shareholdings. The articles failed to deal with the situation where that shareholder ceased to keep its shares or reduced its holdings. It was argued that terms should be implied to the effect that the directors whom the shareholder had appointed would cease to hold office if such a situation occurred. The Privy Council agreed with that approach, overruling the decision of the Court of Appeal and restoring the decision of the judge at first instance.

Lord Hoffmann emphasised that the process of implying a term is an exercise in the construction of the instrument as a whole so as to ascertain its meaning. The implication of a term does not add to the instrument but simply says what it means. The meaning has to be ascertained objectively by reference to what the instrument would mean to a reasonable person having all the background knowledge reasonably available at the time the instrument was made, but without reference to the subjective intentions of the parties or how the actual parties would have reacted to the proposed implied term (see Lord Hoffmann in Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896, at 912- 913). The exercise is not simply an exercise in gap filling, just because the instrument is silent on a point, as "the most usual inference" to be drawn is that the parties did not intend to provide at all for what has occurred and, accordingly, that the loss which has been suffered should lie where it falls.

In each case, the question is whether the term which it is sought to be implied spells out in express words what the instrument, read as a whole, would reasonably be understood to mean when taken against the relevant background (see Lord Pearson in Trollope & Colls Ltd v. North West Metropolitan Regional Hospital Board [1973] 1 WLR 601, at 609) . The practical consequences of deciding what the contract means should be taken into account, including whether a construction one way or the other would frustrate the business purposes of the parties as objectively understood (see Lord Steyn in Equitable Life Assurance Society v. Hyman [2002] 1 AC 408, at 459). That is context for the "business efficacy" test that is sometimes used (see Bowen LJ in The Moorcock (1889) 14PD 64, at 68).

Similarly, the test that the proposed implied term "goes without saying" (see Shirlaw v. Southern Foundries (1926) Ltd [1939] 2 KB 206, at 227) is simply another way of emphasising the objective nature of the inquiry that should be undertaken. It shows that the proposed implication should spell out what the contract would reasonably be understood to mean. Given the objective nature of the exercise, it is irrelevant to consider how the actual parties would have reacted to the proposed implied term. It is also unnecessary that the need for the implied term should be obvious from the outset, as the need often becomes apparent only at a later stage, especially in a complicated instrument where the draftsman may have overlooked some of the possible contingencies that might arise, even though it might become obvious after a careful consideration of the express terms and the relevant background.

Lord Simon of Glaisdale, giving the advice of the Privy Council in BP Refinery (Westernport) Pty Ltd v. Shire of Hastings (1977) 180 CLR 266, at 282-283, had said that the following conditions, which he said might overlap, had to be satisfied if a term was to be implied in a contract, "

(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that it 'goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

Lord Hoffmann said that Lord Simon's list was,

"Best regarded, not as a series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they had explained why they did not think that it did so. [Lord Hoffmann had] already discussed the significance of 'necessary to give business efficacy' and 'goes without saying'. As for the other formulations, the fact that the proposed implied term would be inequitable or unreasonable, or contradict what the parties have expressly said, or is incapable of clear expression, are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant."

By way of comment, the problem with the approach taken by Lord Hoffmann is that it does not really help in providing a practical guide to assist in determining when a term will be implied in a contract or other instrument and how to go about it. It is not really satisfactory to say that it is just a matter of construing the contract to see what it means from an objective standpoint. By dint of the situation, one or other of the parties is saying that the contract has failed to deal explicitly with the situation that has arisen, which the parties may well have failed to envisage at all when they contracted. Indeed, Lord Hoffmann acknowledges that in most cases it is not appropriate to imply a term to cover the situation. It seems to beg the question to say that it is just a matter of construing the contract to discern what it says impliedly about a situation that the parties to it had failed expressly to address, to determine if they should be taken to have addressed it by implication.
Lord Hoffman also said that it might be possible to imply a term where the express terms of a complicated instrument were silent on the particular point in issue, because the draftsman may have overlooked the contingency giving rise to the point in issue. In reply, one might say that if the draftsman had overlooked the relevant contingency then it is difficult to understand how it might be said that the document should be construed as having addressed the point by implication.

There is also a difficulty in saying that the whole thing should be approached from an entirely objective standpoint, without reference to the subjective intentions of the parties and how they might individually have reacted to the proposed implied term. Such an approach gives no scope to a party to say that it had actually thought about the situation and decided, for its own purposes, not to raise the matter because it did not wish it to be covered. In other words, that it had wished any loss that might arise to lie where it happened to fall (probably with the other party).

In contrast to what Lord Hoffmann said, it is instructive to bear in mind what Sir Thomas Bingham MR said (on behalf of himself and Stuart-Smith and Leggatt LJJ) in Philips Electronique Grand Public SA v. British Sky Broadcasting Ltd [1995] EMLR 472, at 480 to 482 (which was quoted with approval by Rix LJ in Socimer International Bank SA v. Standard Bank London Ltd [2008] EWCA Civ 116, [2008] 1 Lloyd's Rep 558, at [105]). The Master of the Rolls said that the courts, when they implied terms, were going further than just engaging in an exercise of interpretation of the contract, as:

"The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is potentially so intrusive that the law imposes strict constraints on the exercise of this extraordinary power."

The Master of the Rolls went on to say, however, that in some cases the courts routinely implied terms, particularly where the contracts were oral or in short form. He gave as examples the implication of an obligation to exercise reasonable care and skill in a contract to perform professional services and the implication of obligations as to quality and description in a contract for the sale of goods (although, in the case of a sale of goods, his Lordship appeared to overlook the point that the implication arises by virtue of statute). He then said that,

"It is much more difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully-drafted contract but have omitted to make provision for the matter in issue. Given the rules which restrict evidence of the parties' intention when negotiating a contract, it may well be doubtful whether the omission was the result of the parties' oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur....

[There might be straightforward cases where there could be only one answer as to what should be implied]. But this may not be so where a contract is novel, known to involve more than ordinary risk and known to be more than ordinarily uncertain in its outcome. And it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown that one of several possible solutions would without doubt have been preferred..."

By way of further comment and looking at the matter from a different perspective, it must also be remembered that that the judges have already said they will do their best to make commercial contracts work, particularly where one or other of the parties has acted on the basis of the contract. They will do this to aid the survival of contracts, rather than to frustrate their operation (see Lord Goff, writing extra-judicially in Commercial Contracts and the Commercial Court [1984] LMCLQ 382, at 391. This was approved judicially by Lord Stein in Homburg Houtimport BV v. Agrosin Private Ltd, The Starsin [2003] UKHL 12, [2004] 1 AC 715, at [57]). In line with that approach, the court may take the view that a contract has gaps which need to be filled, bearing in mind that it is not necessary that all of the terms of a contract should be agreed at the time of contracting; it is only the essential terms that must be agreed, so that other matters may be left to be worked out at a later time (see Lloyd LJ in Pagnan SpA v. Food Products Ltd [1987] 2 Lloyd's Rep 601, at 619). Indeed Rix LJ in Mamidoil-Jetoil Greek Petroleum Co. SA v. Okta Crude Oil Refinery AD [2001] EWCA Civ 406, [2001] 2 Lloyd's Rep 76, at [69], set out a summary of the bases on which the courts would be willing to take action to save a contract, such as by the implication of terms, particularly in a commercial setting where the parties had acted on the basis that they were bound by a contract. An approach along these lines contemplates a more active role for the courts in saving contracts, rather than just setting about a rather restricted process of construction to see if a term might be implied.

With respect, it is submitted that on the facts of this case the Privy Council really took more of an interventionist role than it was prepared to admit. It did this by implying terms into the articles of association to deal with a fairly major matter, being the enforced retirement of the relevant nominated directors. This was done in spite of the fact that there was already a provision in the articles which dealt explicitly with the grounds on which a director had to retire from office. It did not address the issue that had arisen. Similarly, the provisions which gave the right to nominate the appointment of directors were carefully worded. They omitted to make any mention of an obligation on a nominated director to retire. Whilst the concomitant obligation to retire might, with hindsight, make commercial sense, there must be doubt that there was enough in the explicit wording of the articles as to justify the implication of an obligation to retire, if the matter was to be assessed purely as an exercise in the objective construction of the articles taken as a whole.

Attorney General of Belize v. Belize Telecom Ltd [2009] UKPC 11 (18/3/2009).

International supply contracts and exclusion clauses

The Court of Appeal has considered S. 26 of the Unfair Contract Terms Act 1977, which relates to "international supply contracts" concerning the sale or supply of goods in an international context. The case is important to equipment financiers who are involved in cross-border transactions, as it concerns the circumstances in which a supplier of goods in a such a transaction (including a person in the position of a financier) might be able to exclude or limit its liability in matters concerning the goods or other matters relating to the contract, including for precontractual representations.

The wording of S. 26 is notorious in its obscurity. Speaking generally, the section provides that the restrictions on the effectiveness of exclusion clauses, addressed elsewhere in the Act and which include the need, when it arises, to satisfy the requirement of reasonableness in S. 11 of the Act, do not apply in the case of "international supply contracts" (as defined by S. 26).

The court considered the following issues: (i) whether S. 26 applied only to exclusion clauses addressed in the Act itself, or whether it also applied to exclusion clauses concerning misrepresentations under S. 3 of the Misrepresentation Act 1967; and (ii) the types of international supply contracts that fell within S. 26. The leading judgment was delivered by Moore-Bick LJ, with which Arden LJ delivered a short concurring judgment. Waller LJ agreed with both of them.

The facts of the case concerned leases of two aeroplanes. The leases were entered into by the parties in the UK with the intention, which was not expressed in the contract, that the aeroplanes would be delivered in the UK and then flown for use in India. The lessee alleged that the aeroplanes were defective and that their condition had been misrepresented to it, which entitled it to rescind the leases, recover the rentals it had already paid and claim damages for breach of the contract. The lessor sued for unpaid rental arising after the purported rescission. It relied on an exclusion clause which purported to protect it from the matters complained of by the lessee. The lessee said that the clause was subject to S. 3 of the Misrepresentation Act, which provides that an attempt to exclude or restrict liability for a pre-contractual misrepresentation is only effective if it satisfies the requirement of reasonableness as set out in S. 11 of the 1977 Act. In response, the lessor said that as the case involved an international supply contract, the exclusion clause was not subject to that requirement.

S. 26 of the Unfair Contract Terms Act 1977 provides as follows: "

(1) The limits imposed by this Act on the extent to which a person may exclude or restrict liability by reference to a contract term do not apply to liability arising under such a contract as is described in subsection (3) below.

(2) The terms of such a contract are not subject to any requirement of reasonableness under section 3 or 4.

(3) Subject to subsection (4), that description of contract is one whose characteristics are the following—

(a) either it is a contract of sale of goods or it is one under or in pursuance of which the possession or ownership of goods passes; and (b) it is made by parties whose places of business (or, if they have none, habitual residences) are in territories of different States (the Channel Islands and the Isle of Man being treated for this purpose as different States from the United Kingdom).

(4) A contract falls within subsection
(3) above only if either—

(a) the goods in question are, at the time of the conclusion of the contract, in the course of carriage, or will be carried, from the territory of one State to the territory of another; or

(b) the acts constituting the offer and acceptance have been done in the territories of different States; or

(c) the contract provides for the goods to be delivered to the territory of a State other than that within whose territory those acts were done."

S. 3 of the Misrepresentation Act 1967 (the wording of which reflects substitutions inserted by S. 8 of the 1977 Act) provides as follows:

"If a contract contains a term which would exclude or restrict—

(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or

(b) any remedy available to another party to the contract by reason of such a misrepresentation,

that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does."

The first question was whether S. 26 of the 1977 Act had any role to play in the context of an exclusion clause that fell within S. 3 of the 1967 Act. This question arose because S. 26(1) addresses "the limits imposed by this Act" in relation to a liability "arising under such a contract". It was argued that the limits concerning the effectiveness of exclusion clauses relating to a precontractual misrepresentation did not arise under "this Act" (ie. the 1977 Act), because they arose under S. 3 of the 1967 Act. In passing, it is worth noting that such an argument is supported by Treitel, The Law of Contract, 12th Edn, 2007, at para. 7-089. It was further argued that the liability did not arise "under" a contract because it concerned the right to rescind the contract for a pre-contractual misrepresentation. Both arguments were dismissed by the Court.

Moore-Bick LJ held that Ss 26(1) and 26(2) are intended to address contractual clauses which purport to exclude or restrict liability in general, not just contractual liability. In referring to, "The limits imposed by this Act on the extent to which a person may exclude or restrict liability by reference to a contract term", S. 26(1) intended to refer to the requirement of reasonableness which extended to terms excluding or restricting liability for a misrepresentation. This was consistent with the policy of excluding international supply contracts from statutory control and, in that regard, it did not make sense to distinguish between contractual liability and liability for misrepresentation. Such a distinction would create an unnecessary anomaly. As both Moore-Bick LJ and Arden LJ pointed out, such an anomaly would result in a party to an international supply contract being able to escape from liability for a breach of a contractual term relating to the description or the fitness or quality of the goods but not from a liability for a misrepresentation covering the same subject matter. That would frustrate the intention of Parliament. Arden LJ also pointed out that S. 1(2) of the 1977 Act provides that Part I of the Act, which includes S. 11 (which sets out the requirement of reasonableness), is made subject to Part III of the Act, which includes S. 26. Thus, S. 26 has primacy over S. 11 and this has the effect of giving additional weight to the provisions of Ss 26(1) and 26(2).

For much the same reasons as he had already advanced, Moore-Bick LJ held that the reference to a liability arising "under" a contract covered both direct contractual liability for breach of contract and liability for misrepresentation giving rise to a right to rescind the contract or to claim damages for the misrepresentation. In this, he was supported by Arden LJ, who pointed out that the wording of S. 26(1) must be read in light of S. 13 of the Act. S. 13(1)(b) provides that a reference to the exclusion or restriction of a liability extends to the exclusion or restriction of any right or remedy in respect of a liability. Thus, when S. 26(1) speaks of, "The limits imposed by this Act on the extent to which a person may exclude or restrict liability by reference to a contract term do not apply to liability arising under" an international supply contract, S. 13(1)(b) had the effect of giving the wording in S. 26(1) an extended meaning as including any right or remedy in respect of any liability arising with respect to an international supply contract.

The second question concerned the definition of an international supply contract and, in particular, whether the leases met that definition. The relevant part of the definition was contained in S. 26(4)(a) of the 1977 Act. The lessee argued that they were not international supply contracts because they did not provide within their terms for the delivery of the aeroplanes across the boundaries of more than one State, as contemplated by S. 26(4)(a). The lessee also argued that the goods were not to be "carried" across such boundaries, because they would be flown by themselves under their own power and so would not be "carried" by any external means. It failed in those arguments.

Moore-Bick LJ said that S. 26(4)(a) did not require that the contract should expressly stipulate for delivery of the goods across State boundaries. It was sufficient that the parties contemplated that the goods would be transported from one state to another, not necessarily so as to fulfil the terms of the contract, but in order to achieve its commercial objective (see Mance LJ in Amiri Flight Authority v. BAE Systems PLC [2003] EWCA Civ 1447, [2003] 2 Lloyd's Rep 767, at [32], who also pointed out that S. 26(4)(a) was different from S. 26(4)(c) where there was an express requirement that the contract should provide for such a delivery to take place).

His Lordship went on to hold that S. 26(4)(a) applied as much to goods which were capable of moving under their own power as to goods which had to be carried in a physical sense by some external means. Hence, it applied to ships, aircraft and other goods acting under their own propulsion, just as much as to goods of another description. In this, he disagreed with the doubts expressed at first instance in the Amiri case.

Trident Truboprop (Dublin) Ltd v. First Flight Couriers Ltd [2009] EWCA Civ 290 (2/4/2009).

Vicarious liability for the tortious acts of employees and other agents

The Court of Appeal has considered the basis on which a principal, in this case a bank, may be made vicariously liable for the tortious acts of its employees and other agents (as opposed to questions concerning an agent's authority to contract on behalf of its principal). The leading judgment was delivered by Etherton LJ, with whom Sir Anthony Clarke MR and Keene LJ agreed.

The facts concerned a fraud that was perpetrated upon investors, who were induced to send a large amount of money to a bank account controlled by the fraudster, who then withdrew the money and made off with it. The investors believed that the account was a joint account in their names and the name of the fraudster's company and that withdrawals could not be made without their authority. In fact, the account was in the sole name of the fraudster's company. The investors claimed against the bank, alleging that they had relied upon a representation that had been made to them negligently by an employee of the bank. One of the questions that was considered was whether the bank was responsible for the negligence, if any, of its employee. The Court held that the employee had been negligent and that the bank was vicariously liable for the negligence of its employee. In the event, it was then held that although the representation had been made negligently, the investors had not relied upon it and so it was not the real cause of the loss that they had suffered, which meant that the claim against the bank failed.

Etherton LJ took the test for vicarious tortious liability from the decision of the House of Lords in Dubai Aluminium Co. Ltd v. Salaam [2002] UKHL 48, [2003] 2 AC 366 (which was actually a case involving partnership liability, but which also made reference to the position of an employer with respect to the actions of its employees). Etherton LJ referred, in particular, to what was said by Lord Nicholls in the Dubai Aluminium case, at [23], which he summarised as follows:

"The best general test is that the wrongful conduct must be so closely connected with acts the employee was authorised to do that the wrongful conduct may fairly and properly be regarded as done by the employee in the course of the employee's employment."

His Lordship said that what may "fairly and properly be regarded" etc. is a conclusion of law, based upon the facts. Lord Nicholls and Lord Millett in the Dubai Aluminium case had referred to the "Salmond" test (Salmond, Law of Torts, 1st Edn, p.83), which is to the effect that the master will be liable for the actions of his servant, whether done honestly or dishonestly, if done in furtherance of the master's business. On the other hand, if the acts were done by the servant for his own purposes "in a frolic of his own" then the master will not be vicariously liable for those acts, even if they were of a type that the servant was authorised to do. In applying these tests, no distinction is drawn between negligent acts and other types of tortious activity.

As already mentioned, the Court held that the investors could not recover against the bank because the negligence had not caused the loss that they had suffered. In that regard, Etherton LJ said that in matters of causation, it is sufficient if the defendant's (or its employee's) tortious actions were an effective cause of the loss, even if they were not the sole or only cause of the loss (see Edgington v. Fitzmaurice (1885) 29 ChD 459; JEB Fasteners Ltd v. Marks Bloom & Co. [1983] 1 All ER 587; County Ltd v. Girozentrale Securities [1996] 3 All ER 834). It is a question of fact whether the defendant's breach was an effective cause of the loss that was claimed. By way of example, one break in the line of causation could be the claimant's own recklessness, but that was not pleaded in sufficient time for it to be raised as an additional point in this case.

A further interesting point was discussed but not decided by Etherton LJ, because it was not raised in time in the pleadings. It concerned whether a receiving bank had a duty of care to the sender of a payment to deal with the payment in accordance with the sender's instructions or, if those instructions could not be met, to return the payment. The point arose because the investors, when they arranged for their payment instruction to be sent to the receiving bank by a SWIFT instruction, stated that the receiving account (which was identified by a specified number) was a joint account in their names and the name of the fraudster's company. In fact, the account was in the sole name of that company, although the account number corresponded to the number in the instruction. The bank credited the payment to the account and, as previously mentioned, the fraudster then withdrew the funds. Etherton LJ said that the only time that the point had been addressed in England (although it had been considered in Canada) was in the decision at first instance of Treacy J in Abou-Rahmah v. Abacha [2005] EWHC 2662 (QB), [2006] 1 Lloyd's Rep 484 (the point was not pursued in the appeal, reported at [2006] EWCA Civ 1492, [2007] 1 Lloyd's Rep 115). Treacy J had held that the receiving bank did not owe a duty of care to pay the money only to the payee mentioned in the sender's instructions.

Kevin So v. HSBC Bank PLC [2009] EWCA Civ 296 (3/4/2009).

Appropriation of security over financial collateral

The Privy Council has considered the steps that must be taken to constitute a sufficient "appropriation" of the security comprised in financial collateral, so as to meet the requirements of Reg. 17 of the Financial Collateral Arrangements (No 2) Regs 2003 (SI 2003/3226). The Regulations purport to implement the EC Directive on financial collateral arrangements (2002/47/EC OJ L168/43 27/6/2002). The advice of the Privy Council was delivered by Lord Walker on behalf of himself, Lord Hope, Lord Scott, Lady Hale and Lord Mance. The case came before the Privy Council on an appeal from the Court of Appeal of the British Virgin Islands. Rather unusually, the need for the courts of the BVI to consider the English legislation implementing the EC directive came about because the relevant security instrument was expressed to be governed by English law and it was accepted that the Regulations applied, including as to the remedies available on enforcement of the security, notwithstanding that the security was comprised of shares in BVI companies.

The security instrument was an equitable mortgage of shares in two BVI companies. The share certificates and accompanying executed blank transfer forms had been delivered to the mortgagee. The security instrument gave the mortgagee the right to appropriate the security in enforcement of the security. In purported pursuance of that right, the mortgagee had served a notice upon the mortgagor stating that it had exercised its right of appropriation and so had appropriated the shares to itself. It had not become registered as the holder of the shares. The judge at first instance had held that the mortgagee had not appropriated the shares. Her judgment was overturned by the Court of Appeal. One interesting feature of the case is that expert evidence as to the interpretation of the Regulations under English law had been provided by Lord Millett and by Professor (now Mr Justice) Cranston. Lord Millett was of the view that there had been a sufficient act of appropriation. Professor Cranston had taken the opposite view, which the judge at first instance had followed. The Court of Appeal had adopted the view of Lord Millett.

It does not appear, at least in the appeal to the Privy Council, that anyone challenged the underlying assumption that English law should apply in such circumstances, so as to impose an enforcement remedy that was unknown to BVI law (and, indeed, was unknown to English law with respect to security over shares prior to the adoption of the Regulations). BVI law was the lex situs of the shares (assuming both that the BVI was the place of incorporation and the place where the share register was kept) and, under English principles as to the conflict of laws, that law would normally govern proprietary issues concerning such matters as the taking and enforcement of security (see Millett J in Macmillan Inc. v. Bishopsgate Investment Trust PLC (No 3) [1995] 1 WLR 978, at 990-991 and the Court of Appeal in the same case at [1996] 1 WLR 387). Perhaps BVI law did permit the matter to be determined by English law as the express law chosen by the parties. Lord Walker simply notes that the experts had agreed that the Regulations applied and that the security was within their scope.

Reg. 17 provides as follows:

"Where a legal or equitable mortgage is the security interest created or arising under a security financial collateral arrangement on terms that include a power for the collateral-taker to appropriate the collateral, the collateral-taker may exercise that power in accordance with the terms of the security financial collateralarrangement, without any order for foreclosure from the courts."

The requirements as to valuation of the collateral when the remedy of appropriation is exercised, and to account or make up for any positive or negative balance remaining, are addressed in Reg. 18. Within the terms of the Regulations, the mortgaged shares constituted the collateral and the security instrument was a security financial collateral arrangement. The collateral-taker was the mortgagee.

Lord Walker made various comments in his analysis of Reg. 17 and the concept of appropriation which it introduced. The concept of appropriation of security as a method of enforcement was novel to English law except, perhaps, with respect to security over cash balances: see Lord Hoffmann in Re Bank of Credit & Commerce International SA (No 8) [1998] AC 214, at 226-227. Before the introduction of the Regulations, it would have been open to attack as selfdealing and as a clog on the equity of redemption. Appropriation should be seen as a self-help remedy for enforcement of security and so it is much closer to sale than the ancient remedy of foreclosure, which needed an application to the court and was "now obsolescent". In effect, it amounts to a sale by the collateral-taker to himself (and, it might be added, would otherwise be inconsistent with the principle against such a sale).

His Lordship went on to say that it was necessary to take a pragmatic approach to the interpretation of the concept of appropriation as it was used in Reg. 17. Taking that approach, it was not necessary for the collateral-taker to become the registered holder of the shares. It was sufficient for it to obtain full equitable ownership, free of the equity of redemption, even if the nominal legal title remained vested in the mortgagor. Any other interpretation would mean that the collateral taker would not have the means of a "rapid and non-formalistic enforcement" of its security, which Recital (17) of the Directive contemplates.

Lord Walker did remark, however, that for reasons of commercial practicality there had to be an overt act evincing the intention to exercise the power of appropriation, which had to be communicated to the collateral provider. Whilst Art. 4(4) of the Directive precluded the necessity of giving "prior notice", it did not controvert the necessity for giving notice as part of the act of appropriation.

Lord Walker also referred in passing, but without comment, to the judgment of Moses LJ in Cukurova Finance International Ltd v. HM Treasury [2008] EWHC 2567 (Admin), which were related proceedings in which leave was sought before the English courts to challenge the validity of the Regulations on the grounds that they exceeded what was required by the Directive and so were ultra vires. The challenge was based on the fact that the Regulations apply to transactions between any two companies, whereas the Directive provides that one of the parties should be a particular type of institution or body. Leave was refused because of delay but Moses LJ did say that he thought the challenge was unlikely to have succeeded on its merits, had the case proceeded.

Cukurova Finance International Ltd v. Alfa Telecom Turkey Ltd [2009] UKPC 19 (5/5/2009).

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Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions