No duty to obtain best price reasonable in a forced sale – upheld by Court of Appeal
(1) Rosserlane Consultants Ltd (2) Swinbrook Developments Ltd v. Credit Suisse International  EWCA Civ 91
This was the appeal of an unsuccessful claim against Credit Suisse International (the Bank), in which the claimants alleged that the Bank had failed to secure the best price reasonably obtainable when it exercised its powers of sale under a participation agreement (the Agreement) entered into between the parties.
The claimants had entered into a short-term loan of US$127 million with the Bank in December 2006, to refinance existing debt, and for future expenditure for Caspian Energy Group (CEG), a partnership between the claimants, which owned a stake in a company operating an oilfield (Shirvan).
The loan was secured, to be repaid upon a sale of the claimants' interests in CEG. The parties entered into the Agreement, pursuant to which the Bank was granted the right to force a sale of CEG if a sale of it or its related assets (including the stake in Shirvan) had not been achieved by mid- August 2007, provided that the sale proceeds were not less than US$180 million. The Agreement included an express duty on the claimants to use reasonable endeavours to achieve the best possible price but no such corresponding duty on the Bank.
The claimants failed to achieve a sale and the Bank enforced its right to sell CEG achieving a sale price of US$245 million in February 2008. The claimants alleged that there was an implied duty of care in the Agreement (similar to a mortgagee's duty to obtain the best price when exercising a power of sale over its security), which the Bank breached by selling CEG for less than its true value. It was said that the claimants had lost the chance to sell CEG to Gazprom Neft for US$650 million.
At the hearing in February 2015, the court refused to find that such a duty was owed by the Bank in relation to its right of forced sale, because the Agreement had: (i) been negotiated between sophisticated parties; and (ii) included an express duty owed by the claimants in relation to the sale price, but was silent as to any duty owed by the Bank. The court also concluded that the Bank had not been appointed as agent of CEG, and therefore owed no fiduciary duties to it. As to the loss of chance, the claimants could not establish that they had lost the chance of securing a sale to Gazprom Neft, because Gazprom Neft would not have made an offer without a site visit, which the claimants/CEG would have refused.
The appeal was heard by Lord Justice Christopher Clarke in February 2017 and concerned two issues: whether the judge was wrong to find that: (i) there was no implied duty; and (ii) the claimants would have refused a site visit.
Clarke LJ decided to hear argument on the second issue first. He found that the judge was entitled to reach the conclusions that he did, and accordingly he dismissed the appeal without it being necessary to consider the first issue. His reasoning on the second issue was based on three factual issues as to whether: (i) CEG had a policy about site visits; (ii) Gazprom Neft would have been treated as an exception to any such policy; and (iii) the Bank would have overridden that policy. Having considered the evidence on these matters, Clarke LJ decided that the claimants would not have permitted a site visit.
The judgment did not, however, address the wider point in the first issue as to whether the judge at first instance was wrong to conclude there was no implied duty in the Agreement. The first instance decision therefore remains good law, and reinforces the position that claimants may find it difficult successfully to imply terms into complex agreements negotiated by sophisticated parties.
Skilled Persons Reports need not be treated as the regulatory standard by FOS
Full Circle Asset Management Ltd v. Financial Ombudsman Service and others  EWHC 323 (Admin)
February 2017 saw the High Court dismiss an application for judicial review relating to a decision made by the Financial Ombudsman Service (FOS).
Full Circle recommended to a customer (Mrs King) that she should open an investment account which Full Circle would manage. On Mrs King completing an "attitude to risk and loss" questionnaire, Full Circle recorded her as a "medium risk investor". Mrs King lost £90,000 over 15 months and complained to FOS on the basis that investments were made into funds which were too risky for a standard retail client.
Section 228(2) of FSMA 2000 states that FOS must determine complaints by reference to what is fair and reasonable in the circumstances of the case. This must be read alongside the FCA's Dispute Resolution: Complaints sourcebook (DISP). DISP 3.6.4R (1)(b) states that the Ombudsman must take into account any relevant regulator's rules, guidance and standards when reaching a decision.
FOS upheld Mrs King's complaint on two grounds. The first was that Full Circle had personally recommended a portfolio that was unsuitable for Mrs King in her circumstances. In addition, the fact that Full Circle had obtained a Skilled Persons Report (SPR) (accepted by the FSA) stating Mrs King's portfolio was a "medium risk profile" did not detract from the finding that the portfolio was unsuitable for Mrs King.
Full Circle argued that FOS' decision should be quashed on numerous grounds. Notably, Full Circle argued that the SPR constituted a set of standards for the purposes of DISP 3.6.4R (1)(b). As the Ombudsman had departed from the SPR (and therefore the standards) without explaining why, Full Circle argued the decision should be quashed per R (Heather Moor and Edgecomb) v. Financial Ombudsman Service  EWCA Civ 642. Furthermore, Full Circle argued that FOS had considered issues, such as whether Full Circle recommended the portfolio, which were not envisaged in Mrs King's complaint.
The court roundly dismissed all aspects of Full Circle's application. Addressing Full Circle's complaint regarding the SPR, Nicol J held that the report did not constitute a set of standards for the purpose of DISP 3.6.4R (1)(b) as it had not been created to investigate a complaint such as Mrs King's. Mrs King's complaint was not that the portfolio was not "medium risk"; it was that the portfolio was not suitable for her personally. FOS had upheld the complaint and the SPR did not provide a legal basis to challenge this.
In respect of the argument that FOS should have limited what it considered to Mrs King's initial complaint, Nicol J held that the Ombudsman's first task when adjudicating is to determine the scope of the complaint. The judge noted the comments of Irwin J in R (Keith Williams) v. Financial Ombudsman Service  EWHC 2142 (Admin) that the Ombudsman's jurisdiction is "inquisitorial not adversarial". In addition, Nicol J held that the Ombudsman was not confined to the contents of the complaint form completed by Mrs King; it was the right of the Ombudsman to broaden the scope of his enquiries to the correspondence which Mrs King had provided. This exercise led the Ombudsman to conclude that Mrs King's personal circumstances (being over 60, not wanting sizeable cash holdings and seeking to obtain long-term income with the investments) meant that assigning any "medium risk" portfolio would not be sufficient.
The Full Circle case can be seen as useful guidance in the way the court deals with arguments regarding FOS determinations. Nicol J's judgment robustly defends the right of FOS to deal with a complaint in a manner it deems fair and reasonable. This right extends to broadening the scope of the initial complaint and considering additional evidence.
Any party applying for judicial review will also need to be cautious before attempting to interpret a "regulator's standard" too broadly for the purpose of DISP 3.6.4R. As can be seen from Full Circle, the fact the FCA approved a report into the status of Full Circle's portfolio did not mean it was a relevant document in the context of Mrs King's complaint. If the court holds that a document is not relevant for the purposes of DISP, the Ombudsman will not be under an obligation to provide reasons for departing from the reasoning in that document.
It is notable that Nicol J's judgment appears to rest on the finding of the Ombudsman that Full Circle recommended the portfolio to Mrs King. Full Circle did not contend this finding was an error in law; this meant the application proceeded on the basis that the Ombudsman was entitled to make that finding. It is arguable that this amounted to a large concession which left much of Full Circle's application without merit.
High Court confirms FOS may depart from the general law when determining what is fair and reasonable
Aviva Life & Pensions (UK) Ltd v. Financial Ombudsman Service  EWHC 352 (Admin)
The High Court has upheld an application for judicial review by Aviva, which had challenged a decision made by the Financial Ombudsman Service (FOS).
The decision made by FOS arose from Aviva's avoidance of a life insurance policy on the grounds that the policyholder, Mr McCulloch, failed to make relevant disclosures in his application. Mr McCulloch was suffering from a rare form of dementia; FOS determined that it was Mr McCulloch's illness that resulted in the non-disclosure rather than any carelessness or negligence on behalf of the policyholder. FOS also determined that Mr McCulloch's policy be reinstated. This ran contrary to the relevant law (s2 and s3 of the Consumer Insurance (Disclosure and Representations) Act 2012) which allows an insurer to void a policy in the event of a careless misrepresentation.
Aviva applied for judicial review on two grounds. The first was that, whilst FOS could depart from the law under s228(2) of the Financial Services and Markets Act 2000 (FSMA), the Ombudsman failed to follow the requirements set out in R (Heather Moor and Edgecomb Ltd) v. FOS  EWCA Civ 642 by failing to provide detailed reasons for the decision to depart from the relevant law. It is worth noting that FOS had already conceded it failed to comply with the requirements in Heather Moor. The second ground was that the Ombudsman had shown Wednesbury unreasonableness (i.e. that no rational person who had applied their mind to the case could have reached that conclusion) in departing from the relevant law.
The court concluded that FOS had not followed the procedure set out in Heather Moor and quashed the finding that Aviva should reinstate Mr McCulloch's policy. Despite this finding, Jay J held that Mr McCulloch's complaint remained live and would need to be redetermined by FOS.
The more significant finding was that the court disagreed with
Aviva that the Ombudsman had not demonstrated Wednesbury
unreasonableness in departing from the law. Whilst the court accepted Aviva had followed the relevant law and guidance, it was not irrational under the "unusual circumstances" for the Ombudsman to uphold Mr McCulloch's complaint. There was no evidence of carelessness or negligence on behalf of Mr McCulloch; it was his illness that led to his failure to comply with the law. The law did not make a provision for innocent misrepresentations; accordingly it was not implausible for FOS to believe that reinstating the policy would be fair and reasonable. The judge acknowledged that making such a finding may suggest that FOS was free to apply a general policy in contradiction with the law. To that end, Jay J indicated that FOS would likely have to explain its broader rationale for such a policy decision in the future. Interestingly, the judge expressed his personal concerns with the jurisdiction of FOS and its ability to depart from the established law. Apart from the Ombudsman being required to give detailed reasons when it decides contrary to the law, Jay J stated that he was not entirely satisfied that the relationship between what is fair and reasonable, and what the law lays down, has been sufficiently defined by the Court of Appeal. Further, the breadth of FOS' discretion under s228(2) does not absolve it from consistency when it comes to making decisions.
The decision in Aviva is significant for insurers even if the case appears to simply apply the law set out in Heather Moor. That is, any complaints upheld by FOS which involve a contradiction of the law will need to contain detailed reasons explaining why such a contradiction was fair and reasonable in the circumstances, and a failure to provide those reasons should result in that decision being quashed. However, insurers will need to be aware that this will not defeat a complaint entirely; it will lead to a redetermination of the complaint by FOS and may result in the same decision being made.
More significantly, the requirement for FOS to provide detailed reasons may open the decision up to a claim of Wednesbury unreasonableness if the decision can be shown to be so irrational that no other Ombudsman would have reached the same conclusion. Whilst that claim was unsuccessful on this occasion the facts in Aviva are unique; the case involved a party with unusual circumstances (a rare illness leading to a failure to disclose that illness) and it is likely be limited to its facts in future judgments. Further, whilst obiter, Jay J's concerns regarding FOS' powers under s228(2) FSMA 2000 may indicate that there is a gap in the law which requires further judicial clarity.
Bank's duty of care
Thomas & Anor v. Triodos Bank NV  EWHC 314 (QB) (2 March 2017)
This case concerns the scope of the duty of care owed by a lending bank to a retail customer. The borrowers, Mr and Mrs Thomas, who were partners in an organic farming business, switched some of their indebtedness from a variable to a fixed rate basis, for a term of 10 years. They alleged that the bank had misrepresented, or at least not adequately explained, the financial consequences which would follow if they tried to get out of the fixed rate before the expiry of the 10-year term.
Judge Havelock-Allan QC found it significant in this case that the bank had advertised to the borrowers that it subscribed to the Business Banking Code (BBC). The BBC contained a fairness commitment, including a promise that, if the bank was asked about a product, it would give the customer a balanced view of the product in plain English, with an explanation of its financial implications. There were no disclaimers, "basis" clauses or exclusions in the terms and conditions which applied between the claimants and the bank that would lead to the conclusion that the bank was not willing to assume responsibility for honouring that promise. In the circumstances, the judge found that, when the claimants enquired about fixing the interest rate on their borrowing, the bank owed them more than a duty not to mislead or misstate.
Rather, the bank had a duty to explain the financial implications of fixing the rate, in response to the claimants' enquiries. It was not a duty to volunteer information if not asked. What was required was an explanation in plain English of what fixing the rate entailed, and the consequences of such a decision. The bank was obliged, in the opinion of the judge, to provide an accurate description of how the agreement would operate in the event of an early repayment. A worked example was not necessary, but the ingredients of the calculation under each clause should have been made clear in terms which gave a balanced picture. In particular, the claimants should have been told that the earlier they repaid the loan during the fixed term the higher the redemption penalty might be. The judge termed this "the information duty". The information duty obliged the bank to follow the best practice set out in the BBC.
On the facts, the judge found that the borrower had told the bank that it seemed prudent to fix for 10 years and that in response Mr Price, who was a senior manager in the bank's food, farming and trade team, agreed. While the judge had some sympathy for Mr Price in this situation, because Mr Thomas was inviting endorsement of his view, the judge came to the conclusion that Mr Price probably did say something which conveyed to Mr Thomas that he was sensible to think of fixing for 10 years rather than five years or two years, because the 10-year rate was lower. Although Mr Price's statement did not cross the line between information on the one hand and advice or a recommendation on the other, it would have been misleading, and would have amounted to a misrepresentation because it only told half the story. Even if it was not a misrepresentation, the judge was in no doubt that it amounted to a breach of the information duty which the bank owed to the claimants. The judge found that Mr Price had not explained the potential downside to fixing for a longer period, nor the implications for the calculation of redemption penalties of a longer fixed term. Further, Mr Price's failure to disabuse Mr Thomas when he asked whether the maximum likely redemption penalty was in the range of £10-20,000 gave rise to a misrepresentation which influenced the decision to enter into the first fixed loan.
This case supports the view that there may be a mezzanine duty to explain financial products which goes beyond the Hedley Byrne duty not to mislead. The decision seems to be at odds with the High Court decisions in Green and Rowley v. RBS and Thornbridge v. Barclays Bank, although it may be distinguished by the drafting of the contractual documents and the reference by the bank to the BBC. A further decision clarifying the position may be necessary.
Effective service by fax and valuation of securities in repo transactions
LBI EHF (in winding up) v. Raiffeisen Zentralbank Österreich AG and Raiffeisen Bank International AG  EWHC 522 (Comm)
Following the decision in LBIE v. Exxonmobil referred to in our last update, Mr Justice Knowles CBE had to consider whether default notices sent by fax had been properly served, and how securities should be valued under the termination provisions in the Global Master Repurchase Agreement 2000 (GMRA) and Global Master Securities Lending Agreement 2000 (GMSLA), in particular as to the meaning of the words "fair market value".
The claimant bank, Landsbanki Islands hf (LBI), entered into trades with the defendants (RZB). When LBI failed in October 2008 there were several open positions between LBI and RZB: 11 repo trades on GMRA terms, and three securities lending trades on GMSLA terms. RZB had attempted to serve default notices in relation to these trades by fax on 8 October 2008.
Both the GMRA and GMSLA specified the fax number to be used (a number starting "0044207") and that service would be effective "at the time when the transmission is received by a responsible employee of the recipient". RZB's position was that it sent default notices by fax, and LBI's was that it could not trace receipt of any such notices.
RZB's transmission receipts were marked "OK", but contained the number for LBI starting "0207". Based on the fact that the number had been dialled previously for trade confirmations, the judge concluded it was more likely than not that the correct number was dialled and the receipt just showed the answerback of the machine reached.
LBI contended that "responsible employee" should be interpreted as meaning someone who would recognise what a default notice was. The judge felt this went too far, and would result in too much uncertainty, to have been the intention behind the contractual service provisions. An employee in the fax room is given responsibility for this task by their employer: accordingly, receipt by such an individual is sufficient. The fact that LBI had searched for the notices and been unable to find them did not mean they had not been delivered. The fact that LBI was not found to have a reliable system of recording or storing faxes evidently had a significant bearing on this conclusion.
In respect of the valuation point, LBI's position was that RZB's valuation of the transactions was incorrect. It argued that RZB did not serve a default valuation notice in time. In those circumstances, the GMRA provided for RZB to determine the default market value as an amount representing the "fair market value" of the securities, in the reasonable opinion of RZB.
LBI contended that the approach to fair market value should be informed by other valuation standards. In particular, it should be interpreted as excluding prices achieved in a distressed market. However, the judge considered this was inconsistent with other GMRA provisions.
LBI accepted that the court had to put itself into the shoes of RZB (as decision-maker) and ask what decision it would have reached, acting rationally and not arbitrarily or perversely. The judge found the approach of Blair J in the LBI v. Exxonmobil case helpful and concluded from it that he needed carefully to examine what RZB contended it would have taken as "fair market value" and why.
On dispatch of the default notices, RZB requested bids from 10 institutional counterparties. It also used algorithm-based prices from Bloomberg, but did not consider them commercially realisable in the volatile circumstances following Lehman's default. RZB used this combination of information, applying haircuts to the Bloomberg figures as it considered appropriate, to set the fair market value. The judge considered RZB's approach was rational and made in good faith. The availability of other valuation methods, or other information that RZB could have used but did not, did not render RZB's assessment irrational.
As with the Exxon case, the judgment is another reminder of the importance of following default provisions precisely. It is also a prime example of the difficulties in sending notices by fax. Firms would be well advised to consider whether it remains appropriate to include fax as a means of notification in their agreements and, if so, to review whether they have sufficiently reliable systems and procedures to receive, store and forward on faxes.
As to valuation, on the facts of this case, it appears that, provided non- defaulting parties act in good faith in determining valuations and their approach is not irrational, the court will be reluctant to intervene and impose any particular approach.
A question of identification – interpreting s393 of FSMA 2000
In March 2017, the Supreme Court overruled a much-publicised 2015 Court of Appeal decision, and determined the proper interpretation of s393 of the Financial Services and Markets Act 2000 (FSMA). It held that the Financial Conduct Authority (FCA) had not identified Mr Achilles Macris in notices served on his former employer, JP Morgan Chase Bank NA (JP Morgan), on 18 September 2013.
In 2012, JP Morgan reported trading losses within its Synthetic Credit Portfolio (SCP) of US$6.2 billion. The SCP was part of JP Morgan's Chief Investment Office (CIO) in London and New York, and the head of SCP reported to Mr Macris. As well as considering the causes of the losses, an investigation by the FCA also found that JP Morgan had not been as open with the FCA as it should have been when the FCA first started enquiring about the matter.
The FCA served notices on JP Morgan in September 2013, in which it criticised the actions of "CIO London management" and stated that it had been misled by the actions of CIO London management. Mr Macris argued that references to CIO London management referred specifically to him and therefore under s393 of FSMA he, as a third party, should have been served with a copy of the notices to enable him to make representations to the FCA.
In the Upper Tribunal, Mr Macris produced two witnesses who stated they could identify him from the reference to CIO London management. He also relied on a report published by the US Senate Committee on SCP's losses prior to the notices. The report, which was available on the internet, identified Mr Macris by name and quoted from emails also referred to in the FCA's notices, leading Mr Macris to argue that anyone reading the report and the notices could deduce that references to CIO London management were references to him. Judge Herrington upheld Mr Macris' complaint and held that he was entitled to be treated as third party for the purpose of s393.
The Court of Appeal, while departing from the reasoning of Judge Herrington, reached the same conclusion. Lady Justice Gloster formulated a two-stage test of whether an individual is identified for the purpose of s393. First, the allegedly prejudicial statements in the notice, when read alone, must refer to a person (other than the one to whom the notice is addressed). Second, and based on the law of defamation, the relevant words must be such as would reasonably lead a person acquainted with the individual, or who operates in his or her sector of the financial services industry, to believe that he or she is the person identified. In considering this second stage, recourse to material not contained in the notice was held to be permissible. Applying this test, it was held that Mr Macris was identified by the notice.
Before the Supreme Court, the FCA argued that a person is identified in a notice only if the terms of the notice would reasonably lead the ordinary reader to conclude that the notice unambiguously identifies the individual. Lord Sumption adopted an even narrower test. He concluded that a person is identified in a notice under s393 only if he or she is identified by name or a synonym, such as a job title or office such as "chief executive". If the identification is by synonym, it must be apparent from the notice alone that the synonym could only apply to one person and that the person could be identified by the contents of the notice or from publicly available information. Such publicly available information can be used only to interpret, not to supplement, the contents of the notice. Lord Sumption also stated that the relevant audience for a s393 notice is the public at large. Applying this test, Lord Sumption allowed the appeal, finding that reference to CIO London management was insufficient for the ordinary person to conclude that it was a synonym for Mr Macris.
The decision was not unanimous with Lord Wilson dissenting and stating that the decision of the Supreme Court did not strike a fair balance between the implications of identification for the FCA and an individual wrongly criticised in notices. His alternative formulation of the test was also a two-stage test: first, the notice alone must refer to an individual; and second, the words of the notice would cause a person in the same sector of the market, not personally acquainted with the individual, and by reference only to information in the public domain, to conclude the individual is the person referred to in the notice. Although Lord Mance agreed with Lord Wilson's legal analysis, he reached the same conclusion as the majority.
The judgment is a significant one for the FCA, which had faced a number of similar references of FCA notices to the Upper Tribunal following the Court of Appeal's decision. The practical effect of the decision is that, applying the extremely narrow interpretation of s393, it is unlikely the FCA will ever be found to identify an individual in a notice unless it expressly intends to do so.
SAAMCo revisited: the Supreme Court judgment in BPE Solicitors v. Hughes- Holland  UKSC 21
The Supreme Court has reinforced the principles set out in the landmark professional negligence case of South Australia Asset Management Corporation v. York Montague Ltd  A.C. 191 (known as SAAMCo), a case often misunderstood and misapplied. The Supreme Court found that, although a firm of solicitors had been negligent in failing to identify the correct purpose of the loan, the loss suffered did not flow from the solicitors' negligence, but from a poor commercial decision to lend money for which the solicitors were not liable.
The facts of this matter were that Mr Gabriel had lent £200,000 to his friend, Mr Little, assuming that the purpose of the loan was to finance the redevelopment of a disused heating tower (the Tower). Mr Gabriel retained BPE Solicitors (BPE) to draft the loan documents for the transaction, but BPE was instructed by Mr Little, and did not seek confirmation or clarification from Mr Gabriel directly. Rather than using Mr Gabriel's money for the development of the Tower, Mr Little used it to discharge an existing charge over the Tower. The transaction was a failure and Mr Gabriel lost all his money.
In a unanimous decision, with Lord Sumption providing the sole judgment, the Supreme Court found that although BPE had negligently drawn up the loan facility agreement by stating an incorrect purpose, its instructions were only to draw up the loan documents and it was only liable for losses which flowed directly from its negligence in this regard. Therefore BPE was not liable for the losses which flowed from Mr Gabriel's own commercial decision to lend the money.
In coming to his decision, Lord Sumption clarified and reinforced the well-known SAAMCo principle, which arose from the House of Lords' decision in SAAMCo. SAAMCo concerned a negligent overvaluation of a property – damages were held to be limited to the difference between the negligent valuation and the true value at the time. The lender claimant was not entitled to recover more than the amount it would have lost had the valuation not been negligent.
As the SAAMCo principle has not always been correctly understood, Lord Sumption's clarification of it is welcomed. Lord Sumption drew a distinction between advisers who advise on the merits of taking a particular course of action and those who provide information on a limited aspect of that course of action:
- Adviser: in this situation, the adviser is responsible for taking into account all factors which will impact on the decision to take a particular course of action. If a factor is negligently ignored or misjudged, and proves to be paramount to the decision to take that course of action, the client will be entitled to recover all losses flowing from taking the course of action. The negligent Adviser of Action is liable for the overall riskiness of the transaction.
- Provider of information: here the adviser is contributing a limited part of the information enabling the client to make a decision. The process of considering other relevant factors and assessing the overall commercial merits of the transaction are matters for the client. The adviser's duty does not extend to the decision itself, and therefore the negligent adviser is only liable for the financial consequence of the particular information he or she is under a duty to provide being wrong.
Lord Sumption held that BPE had not assumed responsibility for Mr Gabriel's decision to make the loan – its instructions were limited to drawing up the loan documents. BPE had negligently confirmed in the loan facility agreement that the intended purpose of the loan was the redevelopment of the Tower. Even if the loan had been used for that purpose, the evidence showed that Mr Gabriel's loss would have been the same, as the value of the Tower would not have increased. Therefore, Mr Gabriel's loss was the result of a poor commercial decision to lend Mr Little's company £200,000. This was a decision taken by Mr Gabriel and fell outside the scope of BPE's duty of care.
Although there are often difficulties in the mathematical calculation of the damages, as acknowledged by Lord Sumption, the SAAMCo principle nevertheless remains crucial in determining the quantum of damages in negligence cases against all types of professionals in commercial transactions.
Disclosure of the identity of third party funders and existence of ATE insurance
RBS Rights Issue Litigation  EWHC 463 (CH)
In the RBS Rights Issue Litigation (RBS later settled with the relevant action group at the start of the trial period), the High Court set out important principles with respect to the circumstances in which the court may order disclosure of the identity of third party funders, and the details of any ATE insurance.
The defendants sought disclosure of: (1) the names and addresses of any third party funding the claimants' litigation; and (2) a copy of any ATE insurance policy, or confirmation that neither the claimants nor any third party funder would seek to rely upon such a policy in opposition to an application for security for costs.
The defendants argued that they were unable to make an informed decision as to whether to apply for security for costs in the absence of information as to the claimants' ATE arrangements and funders, which the claimants had refused to provide. Such application would potentially be pointless if adequate ATE cover was in place.
The claimants argued that the court should not exercise its discretion to make the disclosure order because: (1) it was not certain that any application for security for costs would be made; and (2) any such application would have no real prospect of success, largely due to delay. The claimants also argued that the ATE policy was privileged.
Application in relation to third party funder
The judge granted disclosure, holding that an application for security limited to a third party funder was not "so unrealistic or hopeless" that the defendant sought not to be granted some latitude. The judge in this judgment was not encouraging as to the prospects of success of such application, particularly if it were to imperil the trial or its preparation, although an order for security for costs was in fact later made.
He commented that an application for security for costs should come as no surprise to a commercial third party funder, particularly in the context of a group litigation order, where the claimants' several liability for costs makes enforcement against multiple claimants difficult. Funders provide the "nearest and deepest pockets" and "stand in the front-line".
Application in relation to the ATE policy
With respect to disclosure of the ATE policy the judge rejected the argument that it was by its nature privileged, although he accepted that some parts of it may attract legal advice privilege and require redaction.
Despite conflicting case law on the point, the judge held that the court has power under CPR 3.1 to order disclosure of an ATE policy when that disclosure is necessary to enable the court proportionately and efficiently to exercise its case management function.
The judge said the key question was whether, on true analysis, the defendants were seeking to invoke a case management power in aid of the proportionate, expeditious and efficient management of the proceedings, or whether they were in reality seeking disclosure with a view to enforcement or some other objective. The judge concluded that it would be inappropriate to make the order for disclosure of the ATE policy in this case, finding that the defendants' primary objective was enforcement.
Supreme Court determines proper construction of an indemnity clause in a sale and purchase agreement
Wood v. Capita Insurance Services Ltd  UKSC 24
In March 2017 the Supreme Court interpreted an indemnity clause in an agreement between Mr Wood (and two others) and Capita, for the sale and purchase of the entire share capital of an insurance brokerage company (the agreement).
Following the purchase, the company's employees raised concerns about the company's sales processes, leading the company to conduct a review, which identified that a number of customers had been missold insurance-related products in the period preceding the agreement. In compliance with its regulatory obligations, Capita reported the misselling to the (then) FSA. The FSA agreed with the company, and Capita, that a remediation scheme to provide redress to the customers affected would be implemented.
Capita alleged that the company's misselling had caused it losses of some £2.4 million, and sought to rely in its claim against Mr Wood (the former managing director of the company) on an indemnity clause in the agreement. Mr Wood disputed certain of the allegations in relation to the company's misselling, and argued that Capita's losses fell outside the scope of the indemnity, on the basis that they were caused by Capita's (and the company's) own reporting to the FSA, rather than by claims or complaints made by customers.
Lord Hodge delivered the Supreme Court's judgment, in which he stated that there had been no change in the court's approach to contractual interpretation between the judgments in Rainy Sky SA v.Kookmin Bank  1 WLR and Arnold v. Britton  AC 1619. The judgment went on to state that both a textual and contextual analysis can be used to assist interpretation of a particular clause. In the opaque and poorly drafted clause before it, the Supreme Court first considered the text and then went on to consider the context of the clause as whole, examining whether the wider factual matrix could give guidance to its meaning.
The court considered that the text supported Mr Wood's position, and also found the context to be significant in this case. The court noted that the indemnity was in addition to detailed warranties that covered the misselling, and that these warranties were time limited (the time having lapsed by the time Capita made its claim).
Further, the parties were sophisticated and experienced in the relevant market, and, whilst Capita may not have been aware of the sales processes in place at the relevant time, that would not assist the court to determine the scope of the indemnity clause. The court found that it was not contrary to business common sense for parties to agree wide-ranging warranties, subject to a time limit, and also to agree a further indemnity not subject to a time limit, but triggered only in certain circumstances.
Based upon the above, the Supreme Court dismissed Capita's appeal. In doing so it stated that whilst this may lead to the agreement being a poor bargain from Capita's point of view, it was not the court's role to improve that bargain.
The decision highlights the need for clear and precise drafting to avoid any uncertainties but also demonstrates the different tools available to the court when interpreting contracts.
Clarity provided by the Court of Appeal on the operation of the consent regime in POCA
The National Crime Agency v. N and Royal Bank of Scotland Plc  EWCA Civ 253
The Court of Appeal in this case provided further clarity for banks in relation to the money laundering suspicious activity regime contained in the Proceeds of Crime Act 2002 (POCA) and the ability of customers to challenge banks when bank accounts are temporarily frozen.
The background was, in summary, that the Royal Bank of Scotland (the Bank) suspected that the credit balance in certain accounts of its customer (N) constituted criminal property. Accordingly, it froze the accounts and made a suspicious activity report to the National Crime Agency (NCA) seeking consent to return the funds to N. N issued proceedings for an interim mandatory injunction requiring the Bank to operate N's accounts and for declaratory relief. On hearing the application, Mr Justice Burton made a series of orders requiring the Bank to make a number of specified payments. In order to protect the Bank, the court made an interim declaration that, in making payments, the Bank would not be required to make "an authorised disclosure" seeking consent from the NCA under POCA and would not commit a criminal offence by failing to make a disclosure or by complying with the injunction. The NCA appealed.
The Court of Appeal decided that:
- in Part 7 of POCA, Parliament had set out a procedure for the reporting of money laundering suspicions – where a bank suspects that money in its customer's account is criminal property, freezes the account and seeks consent to deal with the money, the court should not intervene during the course of the seven-working-day notice period and 31-day moratorium period;
- the jurisdiction of the court to grant interim relief was not completely ousted, but the statutory procedure was highly relevant to the exercise of the court's discretion, and could not be "displaced merely on a consideration of the balance of convenience as between the interest of the private parties involved". The public interest in the prevention of money laundering is, in most cases, likely to be decisive;
- earlier authority considering the regime predating POCA needed to be considered with caution and could not be regarded as providing general guidance;
- Mr Justice Burton's finding that there was no evidence that the monies were suspected to be, or were, criminal property was not borne out in his reasons or by the evidence; and
- no interim declaration or mandatory relief requiring the Bank to make payments should have been ordered. In considering the balance of convenience, Mr Justice Burton did not have regard to the important public interest in the prevention of money laundering as reflected in the statutory procedure.
This decision is important for banks and brings much-needed clarity. In the absence of very clear evidence that the bank has acted in bad faith, it is now clear that the customer will be unable to seek an order from the court to compel the bank to take any action, during the period when it has frozen an account and is waiting for a response to a consent request from the NCA. This should reduce the risk of an otherwise invidious position, whereby banks would be required to comply with their legal obligations to report money laundering (and where appropriate seek consent) on the one hand, whilst seeking to defend claims from customers on the other.
Court blocks ex-Keydata's cross- examination of witnesses Ford v. The Financial Conduct Authority  UKUT 147 (TCC)
In April 2017, the Upper Tribunal refused an application by the former chief executive of Keydata Investment Services Limited (KIS), Mr Ford, for witness summons or letters of request in respect of eight named individuals, including senior individuals from the FCA, FSCS and Luxembourg regulator the CSSF.
The application was made in connection with the references by Mr Ford and by Mr Owen, former sales director of KIS, to the Upper Tribunal of decision notices issued by the FCA. In the decision notice issued in respect of Mr Ford, the FCA seeks to impose a fine of £75 million, the largest ever financial penalty imposed by the regulator on an individual, for Mr Ford's role in the collapse of KIS.
The Tribunal noted that, whether by witness summons or letters of request, evidence should be compelled only if it is relevant and will materially assist in the determination of an issue, or issues, in the proceedings. As in Jefferey v. FCA (FS/2010/0039), the test is not whether the party making the application hopes that the evidence sought will assist its case; that would be in the nature of speculation, or a fishing expedition.
The Tribunal observed that, pursuant to s133(4) of the Financial Services and Markets Act 2000, the evidence which it can consider is any evidence relating to the subject matter of the reference which, in this case, is the conduct of Mr Ford. Conversely, the application in question sought evidence on the issue of consumer detriment. The Tribunal concluded that there is a link between the alleged misconduct and consumer detriment, but that it is not the consumer detriment (or its causes) that will determine whether Mr Ford's conduct amounted to misconduct. That was the principal question for the Tribunal and it would not assist Mr Ford to seek to characterise the FCA's case as something different, in order to assert that it was the cause of consumer detriment rather than him.
On that basis, the Tribunal refused seven of the eight requests, allowing only the request for a witness summons to Peter Johnson. Mr Johnson, former senior compliance officer and Chief Operating Officer of KIS, was himself the subject of a decision notice issued by the FCA and made a reference to the Tribunal, joining the present proceedings. However, that reference was subsequently withdrawn and a final notice issued in respect of Mr Johnson in May 2016. The Tribunal accepted that Mr Johnson would be able to provide relevant evidence regarding certain operational and compliance matters as regards KIS, and that such matters, so far as material to the misconduct allegations against Mr Ford, would be relevant and likely of material assistance to the Tribunal. Accordingly, the Tribunal provisionally acceded to the application in respect of Mr Johnson although Mr Johnson himself will be given the opportunity to object.
Interestingly, the judge considered, but did not determine, whether the Tribunal had the power to issue a letter of request for the taking of evidence from individuals outside the jurisdiction, under Council Regulation (EC) No 1206/2001(the Taking of Evidence Regulation). Ultimately the issue did not fall to be determined in this case given that the requests did not meet the initial test of relevance and material assistance, as set out above.
The judgment is a helpful reminder of the test that the Tribunal will impose when seeking to determine whether evidence should be compelled, and that it is necessary for applicants to demonstrate the relevance of the evidence sought; the Tribunal is unlikely to allow a request that it considers amounts to a fishing expedition.
Settlement payment of £815 million by Société Générale SA to the Libyan Investment Authority
In May 2017, Société Générale SA (SocGen) and three companies within its group settled their dispute with the Libyan Investment Authority (LIA) by agreeing to pay €963 million to the LIA.
The LIA brought proceedings against SocGen alleging that trades involving the payment of US$2.1 billion by the LIA to SocGen and its affiliates were part of a fraudulent and corrupt scheme. The LIA claimed that this scheme involved the payment of US$58.4 million by SocGen to Mr Giahmi, the fifth defendant, via a Panamanian company, Leinada Inc., owned and controlled by Mr Giahmi. The claim related to events that took place between 2007 and 2009 when Libya was controlled by Colonel Gaddafi, although Libya was opening up to western investments after years of sanctions.
It was alleged that certain employees and officers of the LIA were influenced by the payment of bribes and the making of threats, which caused the LIA to enter the disputed trades. It was said that Mr Giahmi was able to effect this scheme through his links with the Gaddafi regime.
Shortly before the case was due to start, SocGen and the LIA reached a settlement. The terms of the settlement were confidential and SocGen had previously denied the claims, but, in a joint statement, it apologised to the LIA for "the lack of caution of some of its employees".
SocGen is still the subject of regulatory investigations in relation to the transactions which were the subject matter of the proceedings, initiated by various US authorities including the Department of Justice. Such investigations have led to a request for assistance from the Serious Fraud Office (SFO).
Tight controls on the extent of privilege
The Director of the Serious Fraud Office v. Eurasian Natural Resources Corporation Ltd  EWHC 1017
The High Court has given a strict interpretation on the issue of litigation privilege. The SFO started proceedings against Eurasian Natural Resources Corporation (ENRC) under Part 8 of the CPR, challenging ENRC's claim to privilege in respect of various documents. The documents were created in the context of an anticipated criminal investigation, and during the course of ENRC's engagement with the SFO in a self-reporting process in relation to allegations of fraud, bribery and corruption in Kazakhstan and Africa (which ENRC has denied).
In order for a document to attract litigation privilege, litigation must be in reasonable contemplation. The court ruled that a reasonable anticipation of a criminal investigation did not amount to reasonable anticipation of litigation. The policy that justifies litigation privilege did not extend to enabling a party to protect itself from having to disclose documents to an investigator. Documents that are generated at a time when there is no more than a general apprehension of future litigation cannot be protected by litigation privilege just because an investigation is, or is believed to be, imminent. Prosecution only becomes a real prospect once it is discovered that there is some truth in the accusations or, at the very least, that there is some material to support the allegations of corrupt practices.
The court found that one critical difference between civil proceedings and a criminal prosecution is that there is no inhibition on the commencement of civil proceedings where there is no foundation for them, other than the prospect of sanctions being imposed after the event. Criminal proceedings could only reasonably be in contemplation where the prospective defendant knew enough to appreciate that a prosecutor would realistically be satisfied following investigation that there was sufficient evidence for there to be a good chance of securing conviction. There was no evidence that the company was ever aware that it had any such problem, or of anything more tangible than a fear of criminal prosecution.
The court also considered whether the documents had come into existence for the sole or dominant purpose of conducting litigation. The court found that the dominant purpose of obtaining evidence from employees and ex-employees had not been to use the information for the purposes of constructing a defence, and the solicitors' role had not extended to giving advice in relation to the conduct of future criminal litigation.
Advice given in connection with the conduct of actual or contemplated litigation may include advice relating to settlement of that litigation once it is in train, and litigation tactics may include bringing them to an end by agreement. However, the judge rejected the notion that, by parity of reasoning, litigation privilege extends to documents created for the purpose of obtaining advice about how to avoid contemplated litigation.
Legal advice privilege
As regards the claim to legal advice privilege over interview notes, the court rejected this claim, on the basis that the individuals with whom solicitors communicated were not authorised by ENRC to obtain legal advice on its behalf, and were therefore not the client for these purposes. The court also rejected ENRC's case that the interview notes comprised lawyers' working papers.
This is another example of the court taking a restrictive interpretation of the rules of privilege. The approach taken with respect to criminal investigations when asserting litigation privilege is especially strict. Further, the rationale of the judge's decision in relation to documents prepared for the purposes of avoiding litigation is arguably difficult to follow, and may be difficult to apply in the future. It is understood that ENRC is appealing this decision.
High Court declines jurisdiction over ISDA declarations
Deutsche Bank v. Comune Di Savona  EWHC 1013 (Comm)
In May 2017, the Commercial Court upheld a jurisdictional challenge by the Italian local authority Comune di Savona (Savona) in the proceedings brought against it by Deutsche Bank.
The dispute concerns two interest rate swaps entered into by the defendant with Deutsche Bank pursuant to an ISDA Master Agreement which, in the standard form, was governed by English law and contained an exclusive jurisdiction clause in favour of the English court (the ISDA). However, prior to entering into the ISDA, the parties had entered into another agreement, pursuant to which Deutsche Bank agreed to provide advice in respect of Savona's existing derivative commitments, and in relation to restructuring its debts (the Convention). The Convention was governed by Italian law and contained an exclusive jurisdiction clause in favour of the Italian court.
Deutsche Bank commenced proceedings in England for various negative declarations in June 2016, and Italian proceedings were subsequently issued by Savona in February 2017. The focus of the Italian claim was the advice given by Deutsche Bank, and its role as adviser pursuant to the terms of the Convention. Accordingly, Savona sought to challenge the jurisdiction of the English court in respect of various declarations including, amongst others, that Savona had made its own independent decisions to enter into the swaps and that it did not rely on any communication from the bank as advice or a recommendation to enter into the swaps.
The court upheld Savona's challenge in respect of the five declarations in question. The first four of the declarations were founded upon various contractual estoppels in the ISDA, but the court did not consider that this necessarily meant that the dispute as to the declarations must be caught by the English clause. The court considered that an investigation into those issues could not be limited to narrow technical points but would inevitably stray into wider questions regarding the underlying advice given by Deutsche Bank, and whether it was acted upon. However, on the facts, this would have required incursion into the territory of the Italian clause. The final declaration, meanwhile, concerned any pre-swap obligation, howsoever it arose, and which caused Savona to enter into the swap. The court considered that this trespassed directly on the obligations which were the subject of the Italian claim and outside the scope of the English clause.
Deutsche Bank sought to contend that the English jurisdiction clause contained in the standard terms of the ISDA should be given universal and consistent application across different cases. However, the judge concluded that, whilst this approach might be appropriate if no other jurisdiction clause was involved, where there were different clauses, the relevant context should not be ignored. Here, it was necessary to construe the English clause in light of the Convention and the pre-existing Italian clause. If this meant giving the English jurisdiction a narrower scope than it might otherwise have, there was no rule of English law to prevent that approach.
The court also considered the wording of the English jurisdiction clause itself, which covered "any suit, action or proceeding relating to this Agreement". It was common ground this would cover any dispute as to the performance of the parties' obligations under the swap. However, the court concluded that, whilst it was possible that this wording could also cover a wider range of disputes (including, for example, misrepresentation), that approach would ignore the relevant context. The Convention was concerned with Deutsche Bank as adviser, and the swaps were merely concerned with Deutsche Bank as counterparty.
Therefore, a dispute which was essentially concerned with Deutsche Bank's role as adviser was more naturally within the scope of the Italian jurisdiction clause.
Interestingly, the judge considered that the court should not strive to construe the two clauses as overlapping but mutually exclusive in scope – even if this caused jurisdictional fragmentation of a particular claim. The fact that some declarations might fall within the English clause and others within the Italian clause was not a consequence which must be avoided at all costs.
In addition, there was no presumption that the later clause was intended to cut down the earlier clause – again, even if that led to fragmentation. Whilst the ISDA was silent as to the earlier Convention, that did not mean the Italian clause was impliedly cut down as a matter of substance.
This is one of a number of similar cases currently going through the courts involving claims by municipal authorities against financial institutions in connection with interest rate swaps, and it will be interesting to see whether or not the jurisdictional points raised here will also be raised in the context of those claims. Further, judgment is an important reminder of the caution with which claimants should approach the issue of jurisdiction; clear wording in an ISDA will not be sufficient to ensure the jurisdiction of the English courts if there is a conflicting clause and the relevant context dictates otherwise.
Commercial Court decision regarding payment under letters of credit
Deutsche Bank v. CIMB  EWHC 1264 (Comm)
In May 2017, the High Court ruled against Deutsche Bank in its dispute with CIMB following a detailed Request for Further Information (RFI) in which CIMB sought details of a payment made to a beneficiary under letters of credit.
The dispute concerns a series of 10 letters of credit between the claimant (Deutsche Bank), the confirming bank (CB, the London branch of Deutsche Bank), and the defendant, the issuing bank (IB, the Singapore branch of CIMB, a Malaysian bank). In summary, CB seeks repayment of the sums it paid under the letters of credit, in the amount of some US$ 9.9 million. IB claims that the transactions in question were sham transactions, entered into for the purposes of obtaining payment under the letters of credit. It argues that the documents presented under the letters of credit were discrepant, were presented late and did not comply with the terms and conditions of the letters of credit. Further, IB does not admit that payment was made by CB to the beneficiary, Global Tradinglinks Ltd.
The issue that fell to be considered by the court arose out of a lengthy RFI made by IB, in which it sought information from CB regarding its claim that it had indeed made payment to the beneficiary under the letters of credit. CB argued that it was a question of principle whether or not the issuing bank can enquire at all as to whether the confirming bank had made payment or whether it must simply take the confirming bank's word for it.
The starting point in considering the issuing bank's undertaking to the confirming bank in such circumstances is Article 7(c) of the Uniform Customs and Practice for Documentary Credits (UCP 600), which provides that an issuing bank undertakes to reimburse a nominated bank that "has honoured...a complying presentation". CB had sought to read into Article 7(c) the words "states that" before "it has honoured", but this was rejected by the court. The court concluded that it was not correct, as a matter of principle, to construe Article 7(c) by writing in words that materially changed its sense. The UCP 600 is revised periodically, and that is the occasion for introducing changes, if thought desirable.
The court held that, on a true construction of Article 7(c), read with the definition of "honour" set out in Article 2, an issuing bank's undertaking to reimburse a confirming bank arose where the confirming bank had honoured a complying presentation by making payment under credit.
As to whether IB was entitled to the information sought, the court noted that, in its defence, IB did not admit payment by CB. Therefore, CB was put to proof that it had honoured presentations by the beneficiary under the letters of credit. Indeed, in its reply, CB pleaded a detailed case as regards payment, and it is that pleading that was the subject of the RFI seeking details as to how CB says it made the payment to the beneficiary. The court concluded that, the claimant having made assertions as to payment, the defendant was entitled to ask for further information in the usual way.
The court also noted that there was a significant qualification on the issue, and that the length and breadth of the RFI served by IB had something of an air of a fishing expedition. The court would not entertain requests seeking unduly to investigate the CB's payment arrangements in the hope that something by way of a defence would turn up. The judge indicated that the legitimate scope of what should be produced in response to the RFI had been explored in oral argument and that the parties should be able to agree the terms of the appropriate order amongst themselves.
The judgment in this case provides helpful clarification as regards the interpretation of Article 7(c) of the UCP 600, and serves as a reminder of the fact that the court will not readily accept an interpretation which requires writing wording into the UCP 600 which does not already exist.
Further, and of perhaps broader application, this case is a reminder that, irrespective of the points of principle that underlie an RFI, the Commercial Court will give short shrift to any attempt at a fishing expedition. The wording of the Admiralty and Commercial Courts Guide, which provides that the court will only order further information to be provided if it is satisfied that the information was strictly necessary, must be adhered to.
Thanks to Matilda Cox O'Brien, Karen Jacobs, Amandeep Khara, Ralph Kellas, Tom Kiernan, Beth Lovell, Rupal Nathwani and Lara Seabourne who contributed to this publication.
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