High Court dismisses claim against banks involving allegations of front running/trading ahead on stop-loss orders on limitation grounds

The High Court has dismissed a claim by a currency debt management firm against three banks in a banking group, which included allegations of front running and/or trading ahead in relation to the execution of certain stop-loss orders (SLOs) in 2006. In doing so, the court found that the claim was time-barred as the claimant failed to show that it had not discovered or could not with reasonable diligence have discovered the claim in the same year that the SLOs were triggered: ECU Group plc v HSBC Bank plc & Ors [2021] EWHC 2875 (Comm).

The decision highlights the difficult threshold for claimants to meet in proving that a bank has engaged in this type of market abuse (although this will always be fact-specific), and demonstrates how such claims may be effectively barred by the Limitation Act 1980 (LA 1980) in appropriate circumstances.

In the present case, the court was satisfied that in the year that the disputed SLOs were triggered, a senior officer of the claimant believed that the SLOs had been deliberately triggered by the banks and that this amounted to market abuse and front running. The court also considered that at the time, the claimant could with “reasonable diligence” have discovered the other claims now alleged (within the meaning of section 32 LA 1980), if it had pursued an application for pre-disclosure or the issue of a claim related to front running and/or trading ahead.

Even if the claim had not been time-barred, the court found (on an obiter basis) that the allegation of front running was not made out. In the court’s view, the claimant had not established that it was more likely than not that the banks had intended to trigger the SLOs. While the court’s finding on this aspect of the judgment does not have precedent value and is not binding, it may be persuasive in future cases with similar facts.

We consider the decision in more detail below.

Background

A currency debt management firm (the Firm) managed multi-currency loans for its customers. This involved placing large SLOs with a number of banks, including the second defendant, as a form of currency-damage limitation for the Firm and its clients to manage the risk of foreign exchange rates for a particular pair of currencies rising above an expected level. The second defendant would pass those orders on to entities within the same banking group. For simplicity, the defendant banks are referred to together as “the Banks” in this blog post.

If the relevant currencies rose above the expected level, then the stop-loss would be triggered and the Banks would buy/sell that currency pair to avoid further losses. If the relevant currencies did not rise above the predetermined ceiling, then no action would be taken on the order.

In January 2006, the Firm placed three SLOs. Each of these orders was triggered very shortly after they were placed. The Firm found this surprising, and expressed its concern to the Banks.  The Firm queried whether there had been front-running on those orders (i.e. whether the Banks had manipulated the markets by their own buying and selling activities in respect of the currencies so as to artificially push the relevant rates up causing the SLOs to trigger). The Banks conducted an internal investigation and responded that they had not found evidence of front-running or wrongdoing but rather that the currency movements were simply due to general market activity.

In February 2019, the Firm brought a claim against the Banks in connection with the loans and/or handling and execution of the SLOs. The Firm’s case was that:

  • the Banks had breached their contractual, tortious and equitable duties as they had engaged in the fraudulent front running of the SLOs, or some of them, to the detriment of both the Firm and the Firm’s customers; or
  • alternatively, the Banks had: (i) made misrepresentations to the Firm in connection with the SLOs; or (ii) failed to execute the SLOs in accordance with the duties that they owed to the Firm and in accordance with the Firm’s instructions.

The Firm also sought to rely on the postponement of the primary limitation period under section 32 of the LA 1980 on the basis that the Banks’ breaches of duty had been committed in circumstances where they were unlikely to be discovered for some time. Alternatively, the facts relevant to the Firm’s right of action had deliberately been concealed from it by the Banks.

The Banks denied the claim. The Banks’ case was that the claim was time-barred given that the material events had taken place between 13 to 15 years prior to the issue of the claim. The Banks also contended that there had been no front running or misuse of confidential information: any trading ahead of the SLOs that may have taken place was simply pre-hedging; this did not constitute a breach of confidence and was a legitimate order management technique that the Banks were entitled to adopt when executing the SLOs.

Decision

The court found in the Banks’ favour and dismissed the claim.

The key issues which may be of broader interest to financial institutions are examined below.

1. Limitation

Limitation legal principles

In its consideration as to whether the claim was statute barred, the court reviewed the authorities and highlighted the following key principles:

  • Under section 32 LA 1980, the limitation period on fraud or concealment does not begin until the claimant has discovered the fraud or concealment or could, with reasonable diligence, have discovered it.
  • One of the main reasons for the statute of limitation is to require claims to be put before the court at a time when the evidence necessary for their fair adjudication is likely to remain available (as per AB v Ministry of Defence [2013] 1 AC 78).
  • The test for discovery of the fraud or the concealment is the “statement of claim” test (as per OT Computers v Infineon Technologies [2021] EWCA Civ 501). This is met if the claimant has sufficient knowledge to plead the claim.
  • For the fraud to be known or discoverable by a claimant under section 32 LA 1980 (such that time will start running against them), it is not necessary that the claimant knows or could have discovered each and every piece of evidence which it later decides to plead (as per Libyan Investment Authority v JP Morgan [2019] EWHC 1452).
  • What reasonable diligence requires in any situation must depend on the circumstances. The question is not whether the claimants should have discovered the fraud sooner, but whether they could with reasonable diligence have done so. The question may have to be asked at two distinct stages: (1) whether there is anything to put a claimant on notice of a need to investigate; and (2) what a reasonably diligent investigation would then reveal. However, it is a single statutory issue, i.e. whether the claimant could with reasonable diligence have discovered the concealment (as per OT Computers).

Application of the limitation principles to the present case

The court held that the claim was time barred as the Firm had failed to show that it had not discovered or could not with reasonable diligence have discovered the claim in 2006.

In respect of the allegations of front running and trading ahead, the court commented that for the purposes of section 32 LA 1980, the Firm had sufficient knowledge in 2006 to plead the claim in relation to the SLOs. The court noted that it was satisfied that in 2006 a senior officer of the Firm believed that the SLOs had deliberately been triggered by the Banks and that this amounted to market abuse and front running. The court also said that, as far as knowledge was concerned, the knowledge of the senior officer could be attributed to the Firm and it was not necessary for the board of directors to have shared his belief for the Firm to have knowledge for the purpose of limitation. The evidence also showed that it was unlikely that the Banks’ response in 2006 would have been a barrier to concluding that there was credible evidence enabling a claim to be pleaded.

As to the remainder of the allegations, the court noted that the Firm had not shown in the circumstances that the exercise of reasonable diligence did not extend either to issuing proceedings for the claim in front running and/or trading ahead, or to making an application for pre-action disclosure. Had the Firm taken either of those routes, the Firm could with reasonable diligence have discovered the other claims now alleged within the meaning of section 32 LA 1980. In the court’s view, if the Firm had wanted to know what had happened and exercised reasonable diligence, it would have sought legal advice and taken steps to pursue the claims for trading ahead and front running, yet the Firm decided not to take any further steps in response to the Banks’ response in 2006 that there was no evidence of front running or wrongdoing. The court also noted that the Firm was a sophisticated commercial player with access to lawyers and there was no evidence that it would not have had the resources or the staff to pursue the claims.

2. Front running/misuse of confidential information

Front running/misuse of confidential information principles

In the event that the front running claim had not been time barred, the court in its consideration as to whether there had been front running noted the following key principles:

  • Front running involves a claimant establishing on a balance of probabilities that: (i) for the relevant trade there was trading ahead of the order which was not legitimate; and (ii) the trader(s) involved intended by trading ahead to trigger the SLO.
  • The court had to consider whether it was satisfied on the balance of the probabilities in relation to the individual trades in issue that: (i) trading ahead of the SLO occurred; (ii) such trading was not for legitimate purposes; (iii) such trading had a material effect on the triggering of the order; and (iv) the trader intended to trigger the order by trading ahead.
  • There was a distinction between a trader taking a position ahead of an order (pre-hedging) and front running. The latter would be trading behaviour that was deliberately intended to trigger the stop-loss to the detriment of the client.
  • The experts were agreed that even if there had been a valid instruction to a bank not to trade ahead, trading to fill customers’ orders or to adjust the trader’s own position was legitimate.
  • It was common ground that if the trading ahead had been deliberately intended to trigger the SLOs that would amount to a misuse of confidential information.

Application of front running/misuse of confidential information principles to the present case

The court said that the Firm had not established that it was more likely than not that the Banks had intended to trigger the SLOs and thus the allegation of front running was not made out.

The court noted that there was no trading data and no evidence that the Banks traded ahead. Even if the Banks had traded ahead, there was no evidence as to why such trading ahead occurred, its impact on the market or the motive of the trader. Any such trading ahead could have been to reduce slippage or for other legitimate purposes.

The court commented that the guidance in the regulatory code at the time (relied upon by the Firm in support of its case that there had been illegal front running), the Non-Investment Products Code on FX trading, was aspirational and did not represent actual best practice at the time.

The court also rejected the submission that an adverse inference as to widespread misconduct and systemic failures in the Banks’ FX business should be drawn from subsequent regulatory findings/foreign proceedings in relation to the misconduct of a particular rogue trader.

Finally, the court said that in any case any alleged front running or trading ahead did not affect the rate at which the SLOs were executed since the rate was specified by the Firm when it gave the orders to the Banks and remained a constant; it only affected the time when the SLOs were triggered. In addition, the Firm could not prove that any wrongdoing would have changed the subsequent trajectory of the market for the relevant currency pair.

The court also noted that there was no fiduciary relationship between the Firm and the Banks or between the loan customers and the Banks, so any comparison that the Firm sought to draw with cases concerning the misuse of trust property was inapposite.

Accordingly, for the reasons given above, the court dismissed the claim.

Rupert Lewis
Rupert Lewis
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Karen Anderson
Karen Anderson
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Nihar Lovell
Nihar Lovell
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Jon Ford
Jon Ford
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High Court dismisses fraudulent misrepresentation claim relating to loan notes investment on limitation grounds

The High Court has dismissed a claim by the assignee of an investment fund against a financial advisory firm (and associated parties) for losses arising out of alleged fraudulent misrepresentations made in relation to the financial position and prospects of a business which had induced the investment fund to subscribe for £11 million in loan notes in 2011 and to later make a follow-on investment of £4.25 million: European Real Estate Debt Fund v Treon [2021] EWHC 2866 (Ch).

The decision will be of interest to financial institutions faced with fraudulent misrepresentation claims in relation to certain investments which: (i) have been brought more than 6 years after the date of the disputed investment; and (ii) seek to postpone the start of the statutory limitation period. It highlights the difficulties for claimants in pursuing fraudulent misrepresentation claims where they do not satisfy the requirements of section 32(1) Limitation Act 1980 (LA 1980), especially where it is clear that the claimant discovered the fraud or could with reasonable diligence have discovered it before the expiry of the statutory limitation period.

In the present case, the court found that the claim was statute-barred. The court highlighted that although it is well known that fraudsters cannot avoid liability for fraud by pleading that their victim failed to take reasonable care to detect the fraud, this did not necessarily mean that claims based on fraud brought outside the primary limitation period were entitled to invoke the special statutory postponement of the limitation period. If a claimant could reasonably have discovered the fraud by virtue of events and circumstances occurring before it actually suffered a loss, there was no principled rationale for allowing it the indulgence of more than the normal six years’ period to bring its claim. The court said that a reasonably diligent investor, such as one in the position of the investment fund’s adviser, in reviewing the financial information provided to it before the investment was made, would have been put sufficiently on inquiry to ask some basic questions and demand further information. The court also noted that if the investment fund’s advisers had asked the further questions it would have discovered sufficient facts to enable the investment fund to plead a statement of claim within the primary limitation period of six years.

We consider the court’s decision in more detail below.

Background

In 2011, an investment fund (the Fund) made a principal investment of £11 million in a care homes business. The Fund’s advisers then discovered in early March 2012 that the financial information about the business and its prospects that had been provided as part of the discussions leading up to the investment was false and misleading. In July 2012, in order to mitigate its losses, the Fund made a follow-on investment of £4.25 million in the business. The business went into administration in 2014 and the Fund lost the entire value of its investment.

Subsequently, the assignee of the Fund (the claimant) brought a damages claim against the founder of the business, a financial advisory firm, and a director of the financial advisory firm (together, the defendants). The claimant alleged that the defendants had fraudulently misrepresented the financial position of business and had induced the Fund to subscribe for £11 million in loan notes in June 2011. The claimant’s case was that the Fund and its advisers had relied on certain trading numbers and projections as accurate and current, and that defendants conspired to mislead the Fund. In addition, the claimant also alleged that the business’ founder was responsible for various representations made by the issuer of the notes in a loan note agreement of June 2011. The claimant also relied on section 32(1) LA 1980 in seeking to postpone the start of the limitation period for its claim.

The defendants denied all liability and in addition said that the action was statute-barred given that it had been commenced more than six years after the date of the principal investment.

Decision

The High Court found in favour of the defendant and dismissed the claim for the reasons explained below.

Limitation legal principles

In its consideration as to whether the claim was statute barred the court noted that section 32(1) LA 1980 had been considered in a number of cases which were reviewed in OT Computers Limited v Infineon Technologies AF [2021] EWCA Civ 501 and highlighted the following key principles:

  • The state of knowledge which a claimant must have in order for it to have discovered the concealment has for the most part been regarded as the knowledge sufficient to enable it to plead a claim. This is known as the statement of claim test. Test Claimants in FII Group Litigation v Revenue and Customs Commissioners [2020] UKSC 47 suggested a more liberal test in that time should begin to run from the (possibly earlier) point when the claimant knows, or could with reasonable diligence know, about the mistake with sufficient confidence to justify embarking on the preliminaries to the issue of proceedings.
  • As per Paragon Finance Plc v DB Thakerar [1999] 1 ALL ER 400 the question is not whether the claimant should have discovered the fraud sooner but whether they could have done so with reasonable diligence. The claimant must therefore establish that they could not have discovered the fraud without undertaking exceptional measures, which they could not reasonably have been expected to take. In considering what would constitute exceptional measures, the court will consider how a person carrying on a business of the relevant kind would act if they had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency.
  • As per OT Computers, the question of what reasonable diligence requires may have to be asked at two distinct stages: (i) whether there is anything to put the claimant on notice of a need to investigate; and (ii) what a reasonably diligent investigation would then reveal. However, there is a single statutory issue, which is whether the claimant could with reasonable diligence have discovered the concealment.
  • Section 32(1) LA 1980 is only relevant once there is a complete cause of action because that is when the primary limitation period would commence, and the purpose of that section is to postpone that period. However, it does not follow that the court investigating the claimant’s state of mind must ignore events, communications or things known to the claimant before then. There may be cases where the claimant is aware (or could with reasonable diligence have been aware) of facts before it suffered any loss which would have enabled it to write a letter before action. Consequently, the court must examine all of the facts and should not artificially restrict itself to events or circumstances arising only after the cause of action had completely accrued. As per OT Computers, the ultimate question under the section is whether the claimant has or could have “discovered” the fraud and that may turn on events before as well as after loss was suffered.
  • It is well known that a fraudster is not entitled to plead that his victim failed to take reasonable care to detect the fraud (as per Redgrave v Hurd (1881) 20 Ch.D.1.). However, the question under section 32(1) LA 1980 is not whether the claim is defeated by the careless failure of the claimant to spot the fraud. It is quite the distinct issue of whether the claimant who brings his claim outside the primary limitation period for a fraud claim (6 years) is entitled to invoke the special statutory postponement of the limitation period. Such postponement is available to a defrauded claimant who could not normally have discovered the facts, but it is not available to all victims of fraud, however careless they may be in attending to and asserting their rights. If a claimant could reasonably have discovered the fraud by virtue of events and circumstances occurring before it actually suffered a loss, there is no principled rationale for allowing it the indulgence of more than the normal six years’ period to bring its claim.

Application of the limitation principles to the present case

The court held that the claim was statute-barred as the claimant had failed to satisfy the requirements of section 32(1) LA 1980 to postpone the start of the limitation period.

In its analysis, the court commented that in approaching the exercise under section 32(1) LA 1980, it had to be careful to avoid the dangers of hindsight and to examine events as they would have appeared at the time and in their proper context and sequence. The court also noted that a reasonable investor in the Fund’s adviser’s position could reasonably be expected to approach potential investments with a careful eye and appropriate degree of professional care, i.e. it could be expected to undertake professional due diligence.

The court then examined the financial information that had been provided to the Fund’s adviser (whose knowledge was considered to be the same as the Fund) by the business, keeping in mind the two stage test in OT Computers.

With respect to whether there was anything to put the Fund’s advisers on notice of a need to investigate, the court’s view was that a reasonably diligent investor, when it reviewed the financial information provided to it before the investment, would have been put sufficiently on inquiry to ask some basic questions and demand further information. The court disagreed that there was nothing in the financial information provided to the Fund’s advisers to trigger these questions or requests for further information on the basis that these basic questions would have been prompted by the information provided to the Fund’s advisers and by the passage of time. Seeking this further information would not have been an exceptional measure which a reasonably diligent investor could not be expected to take. It would have been a routine part of due diligence.

The court then considered what would have happened if the Fund’s advisers had raised further questions with the defendants. It concluded that if the Fund’s adviser had asked the further questions it would have discovered sufficient facts to enable the Fund to plead a statement of claim within the primary limitation period of six years.

Accordingly, the court dismissed the claim.

Natasha Johnson
Natasha Johnson
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Nihar Lovell
Nihar Lovell
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Mannat Sabhikhi
Mannat Sabhikhi
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Know your limits: the increasingly high bar for claims to extend the limitation period

Herbert Smith Freehills LLP have published an article in the New Law Journal on recent authorities clarifying the application of the Limitation Act 1980 and the high threshold for claimants to postpone the limitation period under s.32 or s.14A of that Act.

The litigation market is well known to be counter-cyclical – an uptick in disputes usually follows market turmoil. The 2008 global financial crisis was no exception, and disputes with their factual roots in this period are still heard by the English courts today. As an inexorable consequence, the court must grapple with complicated limitation arguments, and recent decisions fleshing out the law demonstrate the judiciary’s willingness to consider time-barred claims on a summary basis, in circumstances where, traditionally, such cases have been less amenable to a strike out or summary determination.

In our article, we examine recent authorities focusing on the operation of the deliberate concealment extension under section 32(1)(b) of the Act and the alternative 3-year extension mechanism for negligence actions under section 14A(4)(b).

The article can be found here: Know your limits. This article first appeared in the 9 July 2021 edition of the New Law Journal.

Chris Bushell
Chris Bushell
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Ceri Morgan
Ceri Morgan
Professional Support Consultant
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High Court strikes out time-barred claims holding that banks did not deliberately conceal facts so as to extend the limitation period

The High Court has granted applications by two banks to strike out claims brought against them after the primary limitation period for the claims had expired. This decision provides a helpful summary of the case law surrounding the operation of section 32(1)(b) Limitation Act 1980 (LA 1980), a provision that we are increasingly seeing claimants seek to rely on in order extend the life of financial services disputes that have their factual roots in the global financial crisis of 2008: Dixon v Santander Asset Finance plc & Anor [2021] EWHC 1044 (Ch).

Section 32(1)(b) LA 1980 provides that, where a fact relevant to the claimant’s claim has been deliberately concealed, the limitation period will not begin to run until the claimant has discovered, or could with reasonable diligence have discovered, the concealment.

In this decision the court highlighted certain challenges claimants will face when seeking to rely upon section 32(1)(b) LA 1980. In particular, the facts that are alleged to have been concealed from the claimant must be those that are essential for the claimant to prove in order to establish its prima facie case.

In reaching its decision, the court was careful to distinguish between concealed evidence on the one hand (which will not be sufficient to trigger section 32(1)(b) LA 1980) and concealed facts without which the claim is incomplete on the other (which will be).

Background

The claims were brought by Mr Richard Dixon, the sole director and shareholder of a vehicle purchase/hire company, Just Vans Self Drive Ltd (Just Vans). Just Vans’ activities were financed by Santander Asset Finance plc (Santander) and Handelsbanken plc (Handelsbanken).

In 2008 both banks demanded repayment of all outstanding liabilities. Neither Just Vans nor Mr Dixon discharged the liabilities. Just Vans was subsequently placed into administration by Handelsbanken on 25 September 2008, and was ultimately liquidated on 22 September 2009.

Mr Dixon claimed that Santander had: (a) breached its contract with Just Vans, on the basis that Santander had terminated its contract with Just Vans during an agreed moratorium; and (b) provided Handelsbanken with a spreadsheet containing negligently inaccurate information about Just Vans (the Spreadsheet) shortly before Handelsbanken demanded repayment of outstanding liabilities by Just Vans, which amounted to a negligent misstatement.

Mr Dixon also brought a claim in contract against Handelsbanken, claiming that it was not open to Handelsbanken to call in its loans and appoint an administrator when it did so. In particular, Mr Dixon alleged that Handelsbanken had represented to Just Vans that it would not take steps to put the company into administration until it had received a report from an accountant on the company’s viability (the Report), but that Just Vans was placed into administration prior to receipt of the Report.

Santander and Handelsbanken denied the claims brought against them, and sought to strike out the claims on the basis that they were time-barred and had no real prospects of success.

Decision

There was no dispute that the primary limitation period had expired prior to the date on which the proceedings were brought. However, Mr Dixon argued that the limitation period had been extended by virtue of the operation of section 32(1)(b) LA 1980.

As set out above, section 32(1)(b) LA 1980 holds that, where a fact relevant to the claimant’s claim has been deliberately concealed, the limitation period will not begin to run until the claimant has discovered, or could with reasonable diligence have discovered, the concealment. Mr Dixon claimed that three relevant facts had been deliberately concealed, and that he had brought his action within six years of his discovery of those facts (which he could not, with reasonable diligence, have discovered any earlier).

The three relevant facts alleged by Mr Dixon were, in summary:

  1. Mr Dixon gained possession of a letter which allegedly documented the moratorium agreed with Santander (the Moratorium Letter).
  2. Mr Dixon gained possession of the Spreadsheet.
  3. Mr Dixon was notified that Handelsbanken had placed Just Vans into administration prior to receipt of the Report, and was provided with the true reasons why Handelsbanken had placed Just Vans into administration (at least one of which, Mr Dixon alleged, was the provision to Handelsbanken by Santander of negligently inaccurate information).

In order to successfully defend the banks’ strike out application, Mr Dixon had to demonstrate that his claims regarding the concealed facts, and the operation of section 32(1)(b) LA 1980, were more than merely arguable.

The banks contended both that: (a) there was no real prospect of Mr Dixon establishing that any of the allegedly concealed facts were relevant to his cause of action; and (b) even if the facts were relevant, there was no real prospect of Mr Dixon successfully establishing they were not discovered or reasonably discoverable until the date on which Mr Dixon alleges the six-year limitation period began to run.

Relevance

In answering the first question, as to the relevance of the allegedly concealed facts, the court reiterated the well-established position that, in order to fall within section 32(1)(b) LA 1980, the facts that have been concealed must be “those which are essential for a claimant to prove in order to establish a prima facie case”. The test will not be met if the facts only make the claimant’s case stronger. The court emphasised the need to distinguish between concealed evidence on the one hand and concealed facts without which the claim is incomplete, on the other (as per Kimathi v FCO [2018] EWHC 1169 (QB)).

Discovery

In relation to the second question, regarding what is meant by “discovery” of the facts, the court relied upon the recent judgment in In Granville Technology Group Ltd v Infineon Technologies AG [2020] EWHC 415, which held that “a claimant can be said to have discovered a fact when the claimant is aware of sufficient material to be able to properly plead that fact”.

Application to the facts

In relation to the breach of contract and negligent misstatement claims brought against Santander, the court held that Mr Dixon had the facts that were essential for the claims to be brought more than six years before the claims were in fact brought, even if he lacked the evidence itself:

  • Even though Mr Dixon did not have the moratorium letter, the moratorium had been referred to by Mr Dixon in a witness statement in earlier proceedings and the fact of it was something he had always “asserted vigorously”.
  • Mr Dixon’s own evidence established that he was aware of the Spreadsheet since 2009, and both (a) the existence of the Spreadsheet; and (b) the effect the Spreadsheet had on the thinking of Handelsbanken, have been consistently asserted by Mr Dixon. It was immaterial therefore that Mr Dixon received the evidence in support of the allegation (i.e. the Spreadsheet itself) subsequently.

In relation to the claim against Handelsbanken, the court found that Mr Dixon’s claim for breach of contract was pleadable absent knowledge of the allegedly concealed fact. Indeed, Mr Dixon had in fact pleaded his claim against Handelsbanken in these proceedings without reference to that fact.

Ultimately, the court therefore held that there was no real prospect that Mr Dixon could establish that the allegedly concealed facts were essential to his claim (and therefore “relevant” for the purposes of section 32(1)(b) LA 1980). Accordingly, the claims were time-barred.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Sarah Penfold
Sarah Penfold
Senior Associate
+44 20 7466 2619

Court of Appeal clarifies requirements for establishing deliberate concealment to postpone limitation period

The Court of Appeal has found that a defendant creditor could not rely on a limitation defence to a borrower’s claim that its non-disclosure of a very high rate of commission rendered the relationship “unfair” within the meaning of s.140A of the Consumer Credit Act 1974, as the borrower could establish deliberate concealment to postpone limitation under s.32 of the Limitation Act 1980: Canada Square Operations Ltd v Potter [2021] EWCA Civ 339.

Section 32(1)(b) of the Act provides that, where any fact relevant to a claimant’s right of action has been deliberately concealed by the defendant, limitation does not begin to run until the claimant has discovered the concealment (or could with reasonable diligence have discovered it). Section 32(2) provides that, for these purposes, deliberate commission of a breach of duty in circumstances where it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.

The Court of Appeal’s decision is of interest in confirming that s.32 does not require “active concealment”. It may apply to cases of non-disclosure and, in such cases, there is no need for the court to consider whether there was a pre-existing contractual, tortious or fiduciary duty to disclose. Precisely when the court will find there was a sufficient duty is not altogether clear, however. The decision suggests that the obligation may arise from “a combination of utility and morality”, which is not the most straightforward of benchmarks. The upshot is that claimants may be able to postpone the limitation period due to (deliberate) non-disclosure, even where the non-disclosure is not actionable in itself.

The decision also clarifies what is meant by “deliberate”, for both deliberate concealment under s.32(1)(b) and deliberate commission of a breach of duty under s.32(2). It shows there is no need for the claimant to establish actual knowledge or wilful blindness on the part of the defendant. Recklessness is sufficient, in the sense that: (a) the defendant realised there was a risk (that they ought to disclose the information, or that their conduct amounted to a breach of duty); and (b) it was objectively unreasonable to take that risk. Again, this may make it easier for claimants to postpone time running, as there is no need to show a defendant was aware of its wrongdoing so long as it took an unreasonable risk that what it was doing was wrong.

For more information, please see this post on our Litigation blog.

High Court strikes out s.90A FSMA claims for failure to comply with pre-service joinder rules following expiration of arguable limitation period

The High Court has struck out certain of the claims brought against G4S under section 90A Financial Services and Markets Act 2000 (FSMA), in a judgment which emphasises the risks inherent in issuing complex group litigation shortly before the expiry of an arguable limitation period: Various Claimants v G4S plc [2021] EWHC 524 (Ch). The decision brings into sharp relief the need for claimants to balance the tension between the crucial practice of book-building and awaiting regulatory investigations on the one hand and limitation periods on the other. Ultimately, in this case, the court had little sympathy for claimants who had failed to get theirducks in a pen, let alone in a row” prior to the expiry of the limitation period.

The successful application will have a significant impact on the proceedings, with approximately 90% of the quantum of the claims being struck out.

The claims were primarily struck out on the basis that new claimants cannot be added to an existing claim form using CPR 17.1, which allows a party to amend its statement of case before it has been served. The Court also held that, in order for new claimants to be properly added to an existing claim form, a separate document recording their written consent must be filed with the court pursuant to CPR 19.4(4). The filing of an amended claim form, signed by the claimants’ solicitor, does not constitute such consent.

The Court further considered whether to grant the claimants permission to amend the claimants’ names where certain claimants were incorrectly identified on the claim form. The judgment provides a helpful reiteration of the legal principles which apply when the Court is considering whether to exercise its discretion to amend party names following the expiry of a limitation period.

Herbert Smith Freehills acts for the defendant, G4S, in this matter.

Background

The applications arose in the claims brought by shareholders in G4S under section 90A and schedule 10A FSMA in relation to allegedly false and misleading statements or omissions made by G4S regarding its billing practices between 2011 and 2013.

The claim form was issued on 10 July 2019 and was subsequently amended 6 times to add or remove claimants before it was served on 30 April 2020. The claimants added on or after 11 July 2019 (the Additional Claimants) were purportedly added pursuant to CPR 17.1, which provides that “A party may amend his statement of case at any time before it has been served on any other party”.

93 claimants were listed on the claim form which was served on 30 April 2020, of which 64 were Additional Claimants. In addition, a number of the claimants (including some original claimants) listed on the claim form did not appear to be legal persons capable of bringing a claim (the Unidentified Claimants).

G4S applied for the claims of the Additional Claimants to be struck out on the basis that:

  1. CPR 17.1 does not permit the addition of claimants before service either generally or where there is said to be an arguable limitation defence; and/or
  2. Under CPR 19.4(4) a party cannot be added as a claimant unless it consents in writing and the consent is filed with the court. The requirements of CPR 19.4(4) had not been met and therefore the claimants had not been validly added.

G4S also applied for the claims of the Unidentified Claimants to be struck out on the basis that they were not properly identified on the claim form and / or were not legal entities with appropriate capacity to sue.

The claimants applied for permission to amend the names of the Unidentified Claimants. The amendments sought ranged from the correction of typos to the substitution of claimants for other entities.

G4S also sought to have claims relating to publications by G4S from 2006 to 2011 struck out of the Particulars of Claim on the basis that the claim form limited the relevant time period to publications made from 2011 onwards.

The decision

The High Court (Mann J) struck out the claims of the Additional Claimants, which accounted for approximately 90% of the quantum of the claims, and refused the Claimants’ amendment application (save for a correction to the name of one claimant).

Addition of claimants pursuant to CPR 17.1

Mann J considered whether the Additional Claimants could be joined to the claim form prior to service without the Court’s permission under CPR 17.1, and whether G4S was right to bring a challenge to the addition of those claimants under CPR 3.4.

G4S argued that CPR 17.1, on its true construction, applies only to an existing party amending their own statement of case, and therefore an amendment which seeks to introduce a new claimant does not fall within this rule.

Mann J agreed, noting that the natural meaning of “his statement of case” does not include an amendment to plead another claimant’s entirely separate case. Instead, this is bringing in a new party with a distinct claim. In such circumstances, rather than seeking to amend the original claim form, the Additional Claimants should commence their own separate proceedings and later apply for the claims to be consolidated. The claims of the Additional Claimants therefore fell outside the scope of CPR 17.1 and had not been validly added to the claim form.

Given the above, Mann J considered G4S’s decision to challenge the amendments via a strike out application under CPR 3.4 to be the correct approach. However, he also dealt with the case in the alternative, assuming he was wrong in respect of the use of CPR 17.1. In doing so he held that, if the amendments to the claim form in order to add the Additional Claimants had been validly made under CPR 17.1, any challenge to the addition of the Additional Claimants would need to be made under CPR 17.2 within 14 days of service of the claim form. In this case, G4S’s strike out application could stand as an application under CPR 17.2, but the fact that it was issued outside the 14 day period meant relief from sanctions would be required.

In applying the three stage test from Denton v White and other appeals [2014] EWCA Civ 906 in respect of the relief from sanctions application, Mann J found the 8 week delay between service of the claim form and issuing G4S’s application to be significant. However, Mann J did not consider that G4S’s failure to invoke CPR 17.2 was deliberate.

The most significant factor in this case was proportionality; if relief were refused, and the amendments allowed, the Additional Claimants would be deemed to have brought their claims on the date of issue of the original claim form. G4S argued this was the last day of the limitation period, and it would therefore be deprived of the benefits of the Limitation Act 1980. This was considered to outweigh any prejudice that may be caused to the claimants if relief were granted. Mann J noted that the matters in issue had come about due to “an apparent failure to get all the claimant’s ducks in a pen, let alone in a row”. Accordingly, relief from sanctions was granted.

Mann J then went on to find that, in reliance upon Chandra v Brooke North [2013] EWCA Civ 1559, in circumstances where there is an arguable limitation point in relation to the Additional Claimants, the challenge under CPR 17.2 would succeed. This is because of the finding in Chandra that, if on an amendment application it appeared that there was an arguable limitation point, then the appropriate course was not to decide it but to refuse permission and leave it to the claimant to issue fresh proceedings in which the limitation point could be tried.

Additional Claimants – consent under CPR 19.4(4)

CPR 19.4(4) provides that:

“Nobody may be added or substituted as a claimant unless –

(a)        he has given his consent in writing; and

(b)        that consent has been filed with the court.”

The Claimants’ submitted that (i) CPR 19.4(4) did not apply to the joinder of the Additional Claimants pre-service, and (ii) in any event, filing an amended claim form signed by a solicitor as agent for the claimants constituted such consent. Mann J considered it impossible to think of a reason why this rule should apply post-service and not pre-service, and found therefore that it plainly did apply to addition of the Additional Claimants. Further, applying Court of Appeal authority Kay v Dowzall [1993] WL 13726011, Mann J held that consent impliedly expressed by a solicitor signing a claim form on behalf of the claimants cannot count as a consent under CPR 19.4(4). The rule requires a separate document from the sort of pleading the claimant (or someone on their behalf) would have to sign anyway, and this separate document would need to be filed before the addition of a party which takes effect via an amended claim form. The claims of the Additional Claimants were therefore not properly added to the claim form.

“Unidentified” Claimants

Parties can apply to amend a claim form to correct the name of a claimant or defendant under 17.4(3) if there has been a genuine mistake as to the name of that party which would not cause reasonable doubt as to the identity of the proper party. Alternatively, if a limitation period has expired, a party can be added or substituted under CPR 19.5 if the limitation period was current when the proceedings started and the amendment is necessary. An amendment will be “necessary” under CPR 19.5 if (a) the original party was named in the claim form by mistake, or (b) the claim cannot be carried on without the new party.

In considering these provisions, Mann J applied the following principles:

  1. Under both CPR 17.4 and CPR 19.5, the mistake must be as to name and not identity.
  2. CPR 19.5 refers in terms to a substitution. However, in reality CPR 17.4(3) has also been interpreted so as to allow what is, in fact (and law) a substitution.
  3. That is because the concept of a “mistake as to name” is interpreted generously.
  4. Generosity is achieved by looking to the description of the claimant or defendant (as the case may be) in the claim form (and perhaps Particulars of Claim if served with it). If the correct claimant or defendant matches the description in the claim form, the mistake may constitute a mistake as to name, rather than identity.
  5. If a description is to be relied on as saving a misdescribed party it must be sufficiently specific to allow identification in the circumstances. A successful amendment will very often be a case where there is an intention to sue in a certain capacity (for example, landlord, tenant, shipowner).
  6. The true identity must be apparent to the litigation counterparty under 17.4(3), where it is a requirement that the mistake would not have caused reasonable doubt as to the identity of the party intending to sue. While there is no “reasonable doubt” requirement under CPR 19.5, it may be a significant factor to the Court when exercising its discretion.

The “reasonable doubt” test is an objective one, and such doubt could not be removed by the possibility that the identity of the proper claimant might be apparent from G4S’s share register or other transactional information shared by the claimants’ solicitors after the date of the mistake – the “resolving of any doubt…should not depend on the defendant having to put together a jigsaw out of material provided for a different purpose”.

Even if the above requirements were met, the claimants still needed to satisfy the court that it should exercise its discretion in their favour to allow the amendments. Mann J noted that the claim was hastily put together in the knowledge that a limitation period was approaching. Had the litigation been put in train earlier, there would have been fewer mistakes or more time to correct them. The court’s discretion is not intended to encourage or assist “such disorderly litigation”, and Mann J refused to exercise it in the claimants’ favour (save for in respect of one claimant which had been identified by its former name in the original claim form).

Claim for losses prior to 2011

The claim form was limited to claims from 2011 onwards, but the claimants’ Particulars of Claim included claims going back to 2006. It was accepted that an amendment to the claim form was needed and, in circumstances where a limitation defence arguably applies, any amendment application would have to satisfy the requirements of CPR 17.4(2) (which states that the court may allow an amendment whose effect will be to add a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings).

Mann J considered it impossible to maintain that claims from 2006 onwards arose out of the same or substantially same facts as the claims limited to 2011 onwards. While the facts giving rise to the original claim may have to be investigated in the earlier period, any claim in relation to that earlier period would require additional investigations into any statements made by G4S in that period, the alleged falsity of those statements, the effect on the market of those statements, and the way in which the claimants reacted to such statements. These may be the same type of facts as the original claim, but were in reality different facts. As such, G4S’s application to strike out claims based on publications prior to 2011 succeeded.

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High Court strikes out two IRHP mis-selling claims on the grounds of abuse of process, limitation and underdeveloped allegations of fraud

The High Court has dismissed two IRHP mis-selling claims by claimant investors against various defendant banks for losses alleged to have been suffered as a result of fraudulent misrepresentation or a unlawful means conspiracy: Boyse (International) Limited v Natwest Markets Plc and The Royal Bank of Scotland Plc [2020] EWHC 1264 (Ch); and Elite Properties and Ors v BDO LLP [2020] EWHC 1937 (Comm).

These decisions will be of broader interest to financial institutions as they show that the courts are willing (in appropriate cases) to deal with opportunistic claims alleging fraud on a strike out or summary judgment basis. Traditionally, such cases have been less amenable to a strike out or summary determination.

The decisions confirm that cases involving fraud: (a) need to meet a high bar in order for their pleadings to be satisfactory; (b) may be struck out on the basis of limitation if there is a clear and compelling case that the claimants had the requisite knowledge to bring such claims prior to the expiry of the relevant limitation period; and (c) which attempt to run a collateral attack on previous court findings will be struck out for abuse of process.

Boyse (International) Limited v Natwest Markets Plc and The Royal Bank of Scotland Plc [2020] EWHC 1264 (Ch)

Background

The claimant trust company entered into two interest rate hedging products (IRHPs) in August 2007 and November 2008 with the defendant banks (together, the Banks). In 2012, the IRHPs were deemed by the Financial Services Authority (as it was then) (FSA) to have been mis-sold. In 2014, the claimant was offered a redress payment by the Banks as part of its past business review compensation scheme (PBR), which it accepted. In 2015, the Banks rejected the claimant’s claim for consequential loss in their PBR.

The claimant subsequently brought a damages claim in 2019 against the Banks for: (a) fraudulent misrepresentation/breach of contract (for LIBOR manipulation) (the LIBOR Claim); and (b) negligent and fraudulent misrepresentation made in relation to the suitability of the IRHPs (the IRHP Misrepresentation Claim).

The Banks applied to strike out and/or obtain summary judgment on the claim, and the claimant cross-applied to amend its Particulars of Claim (POC).

Decision

The court granted the Banks summary judgment and struck out the claim in its entirety, and dismissed the claimant’s application for permission to amend its POC.

In reaching its decision, the court considered two issues:

  • whether to strike out or grant summary judgment on the claimant’s LIBOR Claim on the ground that it was time-barred; and
  • whether the undeveloped fraud part of the IRHP Misrepresentation Claim met the minimum pleading requirements for such a claim.

Issue 1: Was the LIBOR Claim time-barred?

The Claim Form was issued on 19 February 2019, which (the Banks argued) was more than six years after the claimant could with reasonable diligence have discovered the alleged fraud relating to LIBOR manipulation referred to in the FSA’s Final Notice (published on 6 February 2013), and related publicity.

The claimant argued that the LIBOR Claim was not time barred on the basis that:

  • The knowledge of Mr and Mrs Sharma (the two principals of the claimant) should not be attributed to the claimant for the purpose of s.32(1) of the Limitation Act 1980 (the Act), as they were not directors and the focus should be on the claimant’s knowledge. It was also suggested that the directors of the claimant could not reasonably have been expected to read, or read about, the Final Notice or to have known about the LIBOR scandal from reports in the press.
  • The 13 day gap between the date of the Final Notice and the date on which, six years later, the claimant’s Claim Form was issued, could be bridged by the need for the claimant to get expert advice on the published information to transform that information to relevant knowledge for the purpose of starting the clock under s.32 of the Act.

The court rejected both arguments and held that the claimant’s LIBOR Claim was time barred. It gave two key reasons for its decision:

  • It was impossible for the purposes of s.32(1) of the Act to treat Mr and Mrs Sharma as mere agents of the claimant and not attribute their knowledge to it. The claimant’s relationship with the Banks was formed and developed on the basis of Mr and Mrs Sharma’s dealings with them. Through those dealings, Mr and Mrs Sharma had been made aware of LIBOR and its purpose, they had dealt with the Banks in relation to the IRHPs and the alleged express LIBOR representation was made to Mrs Sharma. In the court’s view, there was no distinction between the knowledge of the directors of the claimant and Mr and Mrs Sharma.
  • Whilst accepting that for the purpose of time running that there had to be some appreciation of what the knowledge meant, the court stated that a person who has the relevant knowledge does not need to know how to plead express and implied representations which are later said to have been made dishonestly. The language in the Final Notice which addressed the FSA’s findings in relation to LIBOR was not technical and could have been understood by any person of reasonable sophistication. The claimant did not need to have developed its case or obtained advice before time started to run. The claimant’s LIBOR fraud case would have been apparent from the Final Notice and other findings. The claimant was aware that the IRHPs used LIBOR and that something had gone wrong from the widespread publicity given to the findings of the manipulation of LIBOR. In the court’s view, a “reasonably diligent person” in the claimant’s shoes would have been alert to the widespread publicity about LIBOR before 6 February 2013. The Final Notice was a trigger that started time running.

Issue 2: Was deceit in relation to the IRHP Misrepresentation Claim adequately pleaded?

In its draft POC, the claimant had included some limited references that hinted towards development of the deceit aspect of the IRHP Misrepresentation Claim. The Banks’ position was that this part of the claim was inadequately pleaded and did not meet the minimum requirements for a case on fraud.

The court agreed with the Banks: adequate particulars had not been given that the Banks knew the alleged IRHP suitability representation was false (and the claimant did not adequately identify the individuals at the Banks who it was alleged had such knowledge). The court noted the requirements of pleading a deceit case as set out in JSC Bank Moscow v Kekhman and others [2015] EWHC 3073 (Comm) and commented that in this case there was no distinct pleading of primary facts from which fraud could be inferred, nothing which “tilts the balance in the direction of fraud”, and no reason to believe that the claimant (given a further opportunity) could cure these defects.

Appeal

The claimant has filed an appeal against the court’s findings.

Elite Properties and Ors v BDO LLP [2020] EWHC 1937 (Comm)

Background

Two of the claimant companies entered into a number of IRHPs with a bank between 2006 and 2010. Subsequently, it was deemed that the bank had mis-sold those IRHPs and the relevant claimant companies became entitled to redress under a PBR agreed between the bank and the FSA in 2012. As part of the PBR, the bank agreed with the FSA an undertaking, that, absent exceptional circumstances, it would not foreclose on existing lending facilities without giving prior notice and issuing a final redress determination (the Undertaking). The bank also agreed with the FSA to appoint KPMG to the role of the “skilled person”, i.e. to act as an independent reviewer and oversee the PBR. Part of this role involved KPMG overseeing the bank’s compliance with the Undertaking; in practice, this entailed KPMG reviewing escalation requests from the bank and confirming whether “exceptional circumstances” existed which permitted the bank to foreclose on lending facilities, notwithstanding the mis-sale of the IRHPs.

In mid-2013, the bank wrote to two of the claimant companies stating that it had determined that both were unsophisticated customers for the purpose of the sale of the IRHPs and that under the PBR they were entitled to a redress payment (but the amount had yet to be determined and was not paid until late 2014). In late 2013, the bank submitted an escalation request seeking KPMG’s approval that “exceptional circumstances” existed that would permit the bank to appoint receivers over two of the claimant companies’ assets. KPMG allowed the bank to foreclose on the loan of one of the claimant companies, appointing BDO as receivers over various assets in September 2013.

The claimant companies subsequently brought a claim against BDO, alleging that they had sustained loss and damage due to an unlawful means conspiracy in which the bank and BDO conspired to mislead KPMG into allowing the bank to foreclose when in fact there were no exceptional circumstances justifying that course of action (the New Claim).

BDO applied to strike out or obtain summary judgment on the New Claim on the basis that:

  • it was an abuse of process in that it re-ran allegations which had been made by two of the claimant companies in a previous claim against the bank (see our previous blog post for further details on the background to this claim and the Court of Appeal’s decision) (the Original Claim);
  • it constituted a “collateral attack” on findings made by HHJ Waksman and the Court of Appeal in the Original Claim against the bank, which was an abuse of process; and
  • there were no reasonable grounds for bringing the claim or it had no reasonable prospect of success.

Decision

The court struck out the New Claim, holding that it was “quite clearly” (and indeed a “paradigm” case of) a collateral attack on the Court of Appeal’s findings and an abuse of process. It alleged the same conspiracy as in the Original Claim, where findings had been made that there was no reasonable prospect of the Original Claimants establishing that conspiracy.

The court highlighted that Hunter v Chief Constable of the West Midlands Police [1982] A.C. 529 underlined that it was an abuse of process to initiate:

proceedings in a court of justice for the purpose of mounting a collateral attack upon a final decision against the intending (claimant) which had been made by another court of competent jurisdiction in previous proceedings in which the intending (claimant) had full opportunity of contesting the decision in the court in which it was made.

Additionally, the court noted that  Panton & Anor v Vale of White Horse District Counsel & Anor [2020] EWHC 167 (Ch) emphasised that the fact a previous claim had been struck out, rather than having the issues decided at trial, was no bar to a second trial being struck out as an abuse of process.

Finally, the court found that the alleged new evidence, and further particulars on further unlawful acts relied upon in the New Claim did not establish the existence of a conspiracy between BDO and the bank to mislead KPMG into permitting the bank to foreclose.

Interestingly, the court also commented obiter that it would have granted reverse summary judgment on the New Claim, had it not struck it out, on the basis that the claim had no reasonable prospect of success.

John Corrie
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Nic Patmore
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Qadir v Barclays: High Court gives helpful guidance on limitation periods in IRHP mis-selling litigation

Following a series of decisions considering similar issues, the High Court has again granted a bank’s application to strike out an interest rate hedging product (“IRHP“) mis-selling claim on the grounds that it was out of time under the Limitation Act 1980 (the “Act“): Qadir & Hussain v Barclays Bank plc [2016] EWHC 1092 (Comm).

Finding in favour of the bank, the Court held that:

  1. There was no real prospect of the Claimants relying at trial on the three-year extension for negligence actions at section 14A(4)(b) of the Act, because the Claimants must have known the “essence of the claim” more than three years before they brought it: namely, that the IRHPs they acquired were lossmaking and that alternatives were available.
  2. There was no real prospect of the Claimants establishing at trial that the bank made a “clear and unequivocal” representation during its review of IRHPs that it would not rely on its right to assert a limitation defence. Even if the bank’s statements did amount to an unambiguous representation, the Court did not accept that the Claimants had relied on it to their detriment.

Damien Byrne Hill, Ben Worrall and Ceri Morgan consider the decision below. Continue reading

Wood v Sureterm: Court of Appeal considers limitations on the principle of business common sense as an aid to contractual interpretation

The recent Court of Appeal decision in Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd [2015] EWCA Civ 839 gives further guidance on the use of business/commercial common sense as an aid to contractual construction. In reversing the decision at first instance, the Court of Appeal found that an indemnity given by a seller under a share purchase agreement did not cover the buyer’s claim. The court reached this decision on the plain language used in the contract even though the effect was to make the indemnity uncommercial from the buyer’s perspective.

Citing the recent Supreme Court decision in Arnold v Britton [2015] UKSC 36, the Court of Appeal emphasised that the natural meaning of a provision should not be rejected simply because it appears uncommercial, since businessmen sometimes make bad bargains. This decision follows the recent trend of cases focusing on giving effect to the natural meaning of a contract and only using commercial common sense as an aid to construction if the words used are sufficiently ambiguous. However, whilst the legal principle is relatively settled, the frequency of appellate court involvement in the application of that principle suggests that this issue will continue to provide fertile ground for dispute.

Background

The first respondent, Sureterm Direct Limited (“Sureterm“), was a car insurance broker. In April 2010, the second respondent, Capita Insurance Services Ltd (the “Buyer“) acquired the entire issued share capital of Sureterm from the appellant, Mr Wood and other sellers (together, the “Sellers“) under a share purchase agreement (the “SPA“).

After the acquisition, various employees of Sureterm raised concerns to the Buyer about the company’s sales processes and potential misselling of its products in the period prior to completion of the SPA. Sureterm conducted a past business review and reported its findings to the then FSA. The FSA determined that Sureterm’s customers had been misled, that redress was due and the Buyer/Sureterm agreed to conduct a customer remediation exercise.

As part of the remediation, Sureterm paid £1.35 million in customer compensation, which the Buyer sought to recover from the Sellers. The Buyer relied upon the following indemnity in the SPA (the “Indemnity“):

The Sellers undertake to pay to the Buyer an amount…to indemnify the Buyer…against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by [Sureterm] following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against [Sureterm], the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product of service.”

The Sellers disputed the claim on the basis that the Indemnity was not engaged in circumstances where the obligation to pay compensation arose from Sureterm self-reporting potential mis-selling to the FSA.

High Court

Agreeing with the Buyer’s construction, the High Court considered that the words “following and arising out of claims or complaints registered with the FSA…” should be construed as only applying to “all fines, compensation or remedial action…” and not to “all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred“. Under this interpretation, the Buyer was entitled to recover what it had paid under the remediation scheme because it constituted a loss, cost, charge, expense or liability suffered or incurred falling within the first part of the Indemnity. The court concluded that this construction was to be preferred for three main reasons: (1) the construction was supported by the language used; (2) it was also supported by the commercial context and practical consequences of the rival constructions; and (3) a number of “more minor” linguistic and syntactical points.

Mr Wood appealed.

Court of Appeal

The Court of Appeal unanimously reversed the High Court’s decision, finding that no liability could arise under the Indemnity in the absence of any actual claim by Sureterm’s customers or any complaint being registered with the FSA/FCA or other relevant authority pertaining to any mis-selling or suspected misselling of an insurance or insurance related product.

In the leading judgment given by Christopher Clarke LJ, the Indemnity was interpreted as creating an obligation to indemnify against two categories of loss or events giving rise to loss: (1) “all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred“; and (2) “all fines, compensation or remedial action imposed on or required to be made by [Sureterm]“. The subject matters of the indemnity were then qualified by the requirement that they must be “following and arising out of claims or complaints registered with the FSA...”

The court held that it was necessary to look at the structure of the Indemnity read as whole in its original form, rather than dividing the clause into component parts. Whilst this was useful as an aid to construing the clause, the parties did not write their contract that way. However, we note that this appears inconsistent with the way in which the Court of Appeal read the clause as indemnifying against two categories of loss. The court recognised that the language used was capable of more than one meaning and in accordance with Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] CLC 1103, it considered in detail the words used in the clause and the effect of different interpretations (consistent with the approach taken by the Supreme Court in Rainy Sky SA and others v Kookmin Bank [2011] UKSC 50, see our blog post here).

The most striking part of the judgment is the way in which the court then dealt with commercial considerations. At first instance, Mr Justice Popplewell had regarded an exclusion from indemnity of compensation resulting from self-reporting as lacking any good commercial reason, and that this supported the conclusion he reached. The Court of Appeal took a very different approach. It considered alternative commercial factors supporting the Sellers’ interpretations, such as warranties against which the Buyer could claim, meaning that its entitlement to recover in respect of mis-selling was not dependent upon bringing the case within the Indemnity. With this in mind, the court concluded:

The fact that the deal may have been…from [the Buyer’s] view, a poor one, is not, in my view, a circumstance which should dictate a different interpretation from that which, for the reasons that I have stated, I derive from the words used.”

In arriving at its decision, the court was guided by the Supreme Court’s approach in Arnold v Britton [2015] UKSC 36 and the use of business/commercial common sense as a determinant of construction. Christopher Clarke LJ emphasised that businessmen sometimes make bad or poor bargains for a number of different reasons (e.g. weak negotiating position, poor negotiating or drafting skills, inadequate advice or inadvertence) and, if they do, it is not the function of the court to improve their bargain or make it more reasonable by effectively rewriting it and thereby undermining the importance of the natural language used. A balance has to be struck between the indications given by the language and the implications of rival constructions. The clearer the language, the less appropriate it will be to construe it to avoid a result which could be characterised as ‘unbusinesslike’.

Comment

This decision is a reminder that contractual interpretation starts with the words used in the contract and that the court will not read in a more business-like interpretation where clear, unambiguous language has been used, save only in instances of commercial absurdity. Only where there is ambiguity in the language used will the court be permitted to conduct an exercise of determining which of the competing interpretations represents the likely commercial outcome (of course, used as an aid to identify what the reasonable bystander would have understood the parties to have meant by the words used). Accordingly, a finding that an interpretation represents a bad bargain for one of the parties (even one that lacks any good commercial reason), will not be sufficient to defeat such an interpretation. That said, this case gives another example of the High Court and Court of Appeal coming to opposite conclusions on the language used in the clause, suggesting that drawing the line between ambiguity and certainty, as well as the necessary level of commercial absurdity, is far from easy in practice. It remains to be seen whether this decision will be appealed to the Supreme Court.

Harry Edwards
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Ceri Morgan
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High Court refuses to strike out claim for negligent sale of interest rate hedging product on basis of limitation defence

The High Court has refused to grant an application to strike out a claim relating to the alleged negligent sale of an interest rate hedging product. The application had been made on the basis that the claim was time-barred.

The decision shows that the High Court will be reluctant to prevent such claims from proceeding to trial where the respondent is seeking to rely on s.14A Limitation Act 1980 to extend the limitation period and there are factual issues about when the respondent should be deemed to have constructive knowledge of the elements giving rise to the claim.

Kays Hotels Ltd v Barclays Bank Plc (2014) QBD (Merc) (Hamblen J) 16/05/14

In 2005, the Respondent (K) entered into a loan agreement with the Applicant bank (B) to borrow £1.34 million. Before the end of 2005, K entered into a collar to hedge its interest rate exposure. Under the terms of the product, no payment was made by either side between 2005 and 2007. In 2007, as rates rose above a certain level, B made payments to K. In 2008, interest rates fell sharply and K began making payments to B. K issued a claim in 2012, alleging that the collar had been mis-sold.

B applied for summary judgment or to strike out the claim brought by K against it on the ground that the claim was time-barred, as the product was sold more than 6 years before the claim was issued. K sought to rely on s.14A of the Limitation Act 1980, which provides for an extended limitation period in negligence actions where there are facts relevant to the cause of action which are not known to the Claimant at the time when the cause of action accrued, in this case the point of sale. K’s main argument was that it did not have the requisite knowledge to bring an action until November 2009. B argued that K knew or should have known that it had a claim prior to that date, since it had made payments under the collar.

The High Court stated that the test for whether the Claimant could rely on s.14A of the Limitation Act 1980 was whether it had been alerted to the facts giving rise to the substance of the claim so as to enable him to take advice and issue proceedings. The determinative moment was when he had reason to begin to investigate. B’s approach to K’s knowledge was therefore too narrow: K had a real prospect of establishing that it could rely on s.14A and thus its claim could not be summarily dismissed on limitation grounds. Furthermore, determining when K could be deemed to have had constructive knowledge was a factual question and required consideration of the facts at trial.

The effect of this decision is to make it more difficult for banks to dispose of such claims summarily on the basis that they are time-barred where the claimant relies on s.14A of the Limitation Act 1980 to try to extend the limitation period.  However, this does not meant that all such applications will fail, or that the bank in this case will not ultimately be successful with its limitation defence at trial.

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John Corrie
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