High Court confirms current scope of Quincecare duty is limited to protecting corporate customers and does not extend to individuals

In a recent decision, the High Court has granted reverse summary judgment in favour of a defendant bank on the basis that the so-called Quincecare duty of care did not operate in the context of an authorised push payment (APP) fraud, where a third party fraudster tricked the bank’s customer willingly to instruct the bank to transfer large sums out of her account, which were then misappropriated: Philipp v Barclays Bank UK plc [2021] EWHC 10 (Comm).

The judgment is the latest in a line of judgments concerning the parameters of the Quincecare duty, which arises where a bank has received a payment mandate from an authorised signatory of its customer, and executed the order, in circumstances where (allegedly) there were red flags to suggest that the order was an attempt to misappropriate the funds of the customer. This recent decision is important and helpful for financial institutions, because it confirms that existing authorities limit the Quincecare duty to protect corporate customers or unincorporated associations such as partnerships (i.e. where the instruction to the bank has been given by a trusted agent of the customer). The decision confirms that the Quincecare duty does not currently extend to individual customers. On the facts of the present case, the court was not persuaded to extend the Quincecare duty to protect an individual customer in the context of an APP fraud, saying to do so would be contrary to the principles underpinning the duty.

There has been an unfortunate proliferation of APP frauds over recent years which has seen a staggering increase in the accompanying sums that individuals are therefore out of pocket. While this decision closes one avenue by which banks were said to be liable for compensating victims, it will only be of relevance when the circumstances of the fraud cause it to fall outside of the voluntary Contingent Reimbursement Model Code, which seeks to compensate victims of APP frauds and is funded by banks for this purpose.

Background

In March 2018, the claimant was the victim of an APP fraud. As part of an elaborate deception by a third party fraudster, the claimant transferred £700,000 in two separate tranches from her account with the defendant bank (Bank) to international bank accounts, in the belief that the money would be safe and that she was assisting an investigation by the Financial Conduct Authority (FCA) and the National Crime Agency (NCA).

The claimant brought a claim against the Bank to recover damages for the loss she suffered by making the two payments, alleging that the Bank owed and breached a duty of care to protect her from the consequences of the payments. In this context, the claimant relied upon the Quincecare duty of care (first established in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 343), saying that the extent of protection afforded to a customer through a bank’s observance of the Quincecare duty, required the Bank to have certain policies and procedures in place by March 2018 for the purpose of:

  • Detecting potential APP fraud;
  • Preventing potential APP fraud;
  • Stopping potential APP fraud; and
  • Stopping or reversing or reclaiming monies the subject of a potential APP fraud.

The claimant brought an alternative case based upon loss of a chance, on the basis that if the international transfers had at least been delayed by the Bank, she would have had the chance of recovering the monies before they reached the hands of the fraudster.

The Bank denied the claim and brought an application for strike out / reverse summary judgment, arguing that it did not owe a legal duty of the kind alleged by the claimant and that (even if such a duty was owed and breached) the claimant’s case on causation was fanciful.

Decision

The court held that that Bank did not owe the claimant a duty of care in respect of the APP fraud and granted summary judgment in favour of the Bank.

Suitability for summary judgment

The application turned upon the interpretation of the Bank’s alleged duty of care, i.e. whether or not the Bank should, in March 2018, have had in place a system for detecting and preventing the APP fraud perpetrated upon the claimant. The court was satisfied that this was a case giving rise to a short point of law or construction, and that the factual platform was sufficiently clear and stable, to enable it to grasp the nettle and decide the matter before the costs of the litigation increased further (applying the seventh proposition in EasyAir Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch)).

Scope and nature of the Quincecare duty of care

The difference between the parties arose from the extent of protection afforded to a customer through a bank’s observance of the Quincecare duty. This duty was first encapsulated in the decision from Steyn J in the case of the same name, in which he said as follows:

“…a banker must refrain from executing an order if and for so long as the banker is “put on inquiry” in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate funds of the company…And the external standard of the likely perception of the ordinary prudent banker is the governing one.”

The question for the court was whether or not the Quincecare duty owed by the Bank required it to have in place the policies and procedures alleged in the particulars of claim, for the purpose of detecting and preventing the APP fraud or for recovering any monies transferred by the claimant as a result of it.

In this context, the court made three important observations about the nature of the Quincecare duty from previous authorities including Quincecare itself, Lipkin Gorman v Karpnale Ltd  [1987] 1 WLR 987 and Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, as follows:

  1. The purpose of the Quincecare duty is to protect a bank’s customer from the misappropriation of funds, carried out by a trusted agent of the customer who is authorised to withdraw its money from the account.
  2. The Quincecare duty is subordinate to the bank’s contractual duty to act upon a valid instruction (whether the payment of cheques, acting on oral/written instructions to transfer monies, or automated bank payment methods). The Quincecare duty is both ancillary and subject to that primary duty.
  3. The operative standard of the ordinary prudent banker enables a claimant customer to hold a defendant bank to objective (or industry) standards of honesty; it is not a test based on subjective dishonesty or “lack of probity” on the bank’s part (see Singularis).

The court found that it was clear from all three previous authorities that the particulars of claim amounted to an invitation to the court to extend the scope of the Quincecare duty beyond its established boundaries. Central to this conclusion was the court’s acceptance that the existing authorities limited the Quincecare duty to cases of attempted misappropriation by an agent of the customer. It emphasised that the present case concerned an authorised push payment fraud, i.e. the claimant herself gave authorisation for the international payments to be made and so there was no agent involved.

Suggested extension of the Quincecare duty

The case therefore raised a novel point of law, as to whether the Quincecare duty should be extended in the context of APP fraud.

The court adopted the approach in Gorham v British Telecommunications plc [2000] 1 W.L.R 2129, considering whether the alleged duty could be established through a process of appropriate incremental development of the common law by reference to circumstances not addressed in earlier cases considering the duty. The court confirmed that it would approach the question of incremental development of the Quincecare duty as follows:

  • While expert evidence might be required to assist the court in deciding whether the Bank fell short in the performance of its duties to the claimant, the court would not be assisted by expert evidence on the question of what those duties were – expert evidence was therefore irrelevant to the Bank’s application.
  • Various materials were published in relation to APP fraud prior to March 2018, but these materials did not support the conclusion that the Bank owed the claimant the duties alleged.
  • The decision as to the true scope and nature of the Quincecare duty turned, therefore, upon an analysis of the principles underpinning it.

Accordingly, the court proceeded to consider the principles underpinning the Quincecare duty, as articulated at numbered paragraphs 1-3 in the scope of duty section above.

(i) Purpose of the duty: corporate customers vs individuals

In the court’s view, the observations of Lady Hale in Singularis (in particular on corporate attribution and causation) about the purpose of the duty, did not sit comfortably with the extension of the Quincecare duty to an individual customer. The Supreme Court said nothing about a bank protecting an individual customer (and her monies) from her own intentional decision. Considering the factual context of Singularis, the court observed that “even a sole shareholder can steal from the company for whom he is a signatory at the bank” but the claimant in this case “could not steal from herself”.

It commented that, where the bank’s customer is an individual (and not a corporation or unincorporated association which is dependent upon individual representatives and signatories who have the potential to go rogue), the customer’s authority to make the payment is not only apparent but must also be taken by the bank to be real and genuine. As between the individual and the bank, the payment instruction will be no less real and genuine in relation to the intended destination of the customer’s funds because it has been induced by deceit.

The court highlighted another contrast between the position of an individual vs corporate customer, considering the effect on how legal title passes. In the present case, the claimant gave valid instructions to the Bank to make the transfers (albeit those instructions were procured by fraud), and therefore they remained valid in legally passing title to the monies to the fraudster. In contrast, where an agent of the bank’s customer misappropriates the customer’s monies, then a constructive trust will be deemed to have arisen at the moment of receipt (provided legal title to the funds can be asserted).

(ii) Duty subordinate/ancillary to primary duty to act on customer’s instruction

Concerning the interaction between a bank’s mandate to comply with customer instructions and its Quincecare duty, the court held that it should resist the claimant’s attempt to elevate the Quincecare duty to a position where it ceased to be ancillary or subordinate to a bank’s primary duty of acting upon its customer’s instructions. To do so, would “emasculate the primary duty”, by a supposedly subordinate duty assuming a heightened set of obligations. The court said that such an outcome should be avoided as it would “involve the triumph of unduly onerous and commercially unrealistic policing obligations over the bank’s basic obligation to act upon its customer’s instructions”.

The court further noted that banks “cannot be expected to carry out such urgent detective work, or treated as a gatekeeper or guardian in relation to the commercial wisdom of the customer’s decision and the payment instructions which result”.

(iii) No clear framework for extended duty to operate within

Additionally, the court considered that no clear framework existed by which such an extended duty could in practice sensibly operate. It noted that the Quincecare duty concerns the general concept that a bank will adhere to the “standards of honest and reasonable conduct in being alive to suspected fraud”, which Steyn J himself noted was not “too high a standard”.

The court held that the Quincecare duty is inherently a creature shaped by the conception of knowledge (actual or constructive) and not a negligent failure to adhere to an amorphous “code” of which the terms are not clearly defined. If the duty was to be extended beyond that general concept, it would have to be by reference to: “industry-recognised rules from which a bank could identify the particular circumstances in which it should not act (or act immediately) upon its customer’s genuine instructions”.

Loss of a chance

Given the court’s finding that the legal duty asserted did not arise, it was not necessary to consider the claimant’s anterior arguments, including her claim for loss of a chance in recovering the monies from the UAE; one which the court accepted could not have been determined summarily.

Chris Bushell

Chris Bushell
Partner
+44 20 7466 2187

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Scott Warin

Scott Warin
Associate
+44 20 7466 2479

Supreme Court hands down judgment in FCA’s Covid-19 Business Interruption Test Case

The Supreme Court has today handed down judgment in the Covid-19 Business Interruption insurance test case of The Financial Conduct Authority v Arch and Others. Herbert Smith Freehills acted for the FCA who advanced the claim for policyholders.

The Supreme Court unanimously dismissed Insurers’ appeals and allowed all four of the FCA’s appeals (in two cases on a qualified basis), bringing positive news to policyholders across the country that have suffered business interruption losses as a result of the Covid-19 pandemic.

At first instance the FCA had been successful on many of the issues, and now the Supreme Court has substantially allowed the FCA’s appeal on the issues it chose to appeal. The practical effect is that all of the insuring clauses which were in issue on the appeal will provide cover for the business interruption caused by Covid-19.

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

High Court considers entitlement of investment firm to terminate Bitcoin trading account due to alleged money laundering concerns

The High Court has found in favour of a claimant investor in a dispute arising from the termination of her Bitcoin trading account with an online trading platform and concurrent cancellation of open trades (as a result of an alleged money laundering risk): Ang v Reliantco Investments Ltd [2020] EWHC 3242 (Comm). Although the claim relates to an account used to trade Bitcoin futures, the decision will be of broader interest to financial institutions, given the potential application to other types of trading accounts and accounts more generally.

The judgment is noteworthy for the court’s analysis of the defendant’s contractual termination rights in relation to the account and open trades. While the Customer Agreement provided the defendant with the right to terminate the account, the court found that the defendant remained under an obligation to return money deposited in the account (which was held under a Quistclose trust). As to the related open trades, the court found that the defendant only had a contractual right to close out the trades rather than to cancel them (or alternatively, the court said that the same result would be required under the Consumer Rights Act 2015 (the Act), as the investor was a “consumer” for the purposes of the Act).

The decision illustrates the risks for financial institutions seeking to terminate relationships with their customers, particularly in circumstances where there are money laundering or other regulatory compliance concerns. Often accounts may need to be closed without notice (as per N v The Royal Bank of Scotland plc [2019] EWHC 1770; see our banking litigation blog post). Claims against banks by customers in this type of scenario can be significant, and not limited to claims for money deposited in the account, extending to gains on outstanding trades and the loss of future investment returns but for the termination of the account. In the present case, the court found that the claimant was entitled to recover the loss on her investment returns, as it was deemed to be within the reasonable contemplation of the parties when they contracted that, if the defendant failed to repay the claimant sums which she had invested, she might lose the opportunity of investing in similar products.

In order to manage the litigation risks, it may be prudent for financial institutions to review the relevant contractual documentation associated with trading accounts to ensure that it: (i) allows for termination of the account in the relevant circumstances at the absolute discretion of the bank; and (ii) confers an appropriate contractual right to deal with any deposits and open trades. This is particularly the case where the customer is a consumer for the purposes of s.62 of the Act, as there will be a risk that any term in the contract consequently deemed unfair will not be binding on the customer.

Background

In early 2017, the claimant individual opened an account with an online trading platform (UFX), owned by the defendant investment firm. Through this account, the claimant traded in Bitcoin futures. The claimant’s husband (a specialist computer scientist and researcher with cybersecurity and blockchain expertise, and alleged inventor of Bitcoin) also opened accounts on UFX; however, these were blocked when the defendant identified though its compliance checks that he had previously been accused of fraud in 2015.

The claimant made substantial profits trading Bitcoin futures, which were then withdrawn from the UFX account. In late 2017, the defendant terminated the claimant’s UFX account and cancelled all related open transactions, apparently as a result of an alleged money laundering risk.

The claimant subsequently brought a claim alleging that the defendant did so wrongfully and seeking to recover: (i) the remaining funds in the account; (ii) the increase in the value of her open Bitcoin positions; and (iii) the sums from her proposed reinvestment of those funds.

The defendant sought to resist the claim primarily on the basis that the account had actually been operated by the claimant’s husband rather than the claimant and the claimant had provided inaccurate information to the defendant in her “Source of Wealth” documentation.

Decision

The claim succeeded and the key issues decided by the court were as follows.

Issue 1: Entitlement of defendant to terminate UFX account

The defendant argued that it was entitled to terminate the UFX account because: (i) there was a breach of certain clauses of the Customer Agreement relating to access to the UFX account – there had been misrepresentations during the course of the existence of the claimant’s account; and (ii) the claimant had made misrepresentations in her “Source of Wealth” form and documents – this constituted a breach of a warranty the claimant had given as to the accuracy of information she had given to the defendant.

The court held that the defendant was contractually entitled to terminate the UFX account on the basis that the claimant’s husband did have some access to the account, which must have involved breaches of the Customer Agreement.

However, the court found that the statements made by the claimant in the “Source of Wealth” documentation were not untrue or inaccurate. The court said that the alleged misrepresentations in relation to: (i) the “Source of Wealth” form was not pre-contractual and could not have induced the making of the Customer Agreement; and (ii) access to the UFX account failed on the facts – the UFX account did not belong to and was not solely or predominantly operated by the claimant’s husband.

Issue 2: Sums deposited in the UFX account

The defendant accepted that there was the equivalent of a Quistclose trust in respect of these amounts and that it did have an obligation to return them.

The court held that even if there was no Quistclose trust, the defendant was obliged to return the amounts in any case pursuant to the terms and conditions (incorporated into the Customer Agreement between the claimant and the defendant) and that there was no suggestion that any amount needed to be withheld from those amounts in respect of future liabilities.

Issue 3: Unrealised gains on the claimant’s open Bitcoin positions

The court highlighted that the terms of the Customer Agreement obliged the defendant to close out (rather than “cancel”) the open positions, realise the unrealised gain on the Bitcoin futures and pay the balance to the claimant.

However, the court added that if this construction of the Customer Agreement was wrong and the defendant did have discretion to “annul or cancel” open positions, then the relevant clauses would be unfair, as they would cause a significant imbalance in the parties’ rights and obligations to the detriment of the consumer, contrary to the requirement of good faith. In the court’s view such clauses would have the effect of permitting the defendant to deprive the claimant of what might be very significant gains for trivial breaches. The clauses therefore would not be binding on the claimant by reason of s.62 of the Act.

Issue 4: Loss of investment returns

The claimant argued that she was entitled to claim what she would have earned had the monies to which she was entitled been paid to her upon the termination of her account.

The court held that the claimant was entitled to succeed on this aspect of her claim as the defendant had breached the Customer Agreement by not closing the open positions, realising the gain and paying the balance to the claimant. In the court’s view, remoteness of damage was not an issue as it was plainly within the reasonable contemplation of the parties when they contracted that if the defendant failed to pay the claimant sums which she had invested in (and/or made from investing in) Bitcoin futures, she might lose the amount which she might gain from investing in similar products.

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Nihar Lovell

Nihar Lovell
Senior Associate
+44 20 7466 2529

Claire Nicholas

Claire Nicholas
Senior Associate
+44 20 7466 2058

High Court provides further insights on the risks of Quincecare claims against banks

The High Court has recently handed down another interesting decision on the so-called Quincecare duty: Roberts v The Royal Bank of Scotland plc [2020] EWHC 3141 (Comm).

Quincecare duty claims typically arise where a bank received a payment mandate from an authorised signatory of its customer, and executed the order, in circumstances where (allegedly) there were red flags to suggest that the order was an attempt to misappropriate the funds of the customer. The recent uptick in Quincecare duty claims against financial institutions is striking, perhaps a culmination of years of increased regulation which has raised the expectation of firms to identify potentially fraudulent activity. Accordingly, insights from the court on the risks associated with processing client payments will be welcomed by the sector. You can find our blog posts on previous Quincecare decisions here.

Roberts involved a classic breach of Quincecare duty (and breach of mandate) claim, in respect of which the court granted the defendant bank’s application for reverse summary judgment on the basis that the claims were time-barred under the Limitation Act 1980. It highlights the court’s approach to a limitation defence to resist claims alleging breach of Quincecare duty and breach of mandate claims. The decision confirms that the court will (in appropriate cases) take a robust approach in dismissing such claims which on the facts are clearly time-barred; this will especially be the case where the necessary facts required to plead a prima facie case of breach were within the claimant’s knowledge at an earlier date than contended.

However, in doing so the court concluded that a prima facie case for breach of the Quincecare duty could be pleaded by the claimants from inference, i.e. simply being inferred from the fact of payment. While this was helpful in the context of the bank’s limitation defence, it is potentially less helpful to the extent that it suggests a low threshold applies to the pleading requirements in Quincecare cases.

We examine the decision in more detail below.

Background

In early 2006, an advertising company set up a business account with the defendant bank (Bank). The Bank was authorised to accept instructions from any two signatories as set out on the authorised signatories sheet attached to an original mandate.

In mid-2006, the company hired a temporary accounts clerk. Shortly thereafter, a form was sent to the Bank apparently authorising that clerk as a full and additional signatory of the company’s business accounts. Between 2006 and 2007 the Bank paid cheques presented to it (totalling £265,000), which had the clerk’s signature and which were in favour of the company’s majority shareholder. In 2008, the company went into administration and was subsequently placed into compulsory liquidation.

In late 2015, the liquidators assigned the company’s claims to the claimant individual who issued a claim in 2019 (more than 12 years after the last cheque had been paid), alleging that the company’s administration and compulsory liquidation was a consequence of the Bank honouring the cheques presented to it. The claimant’s case was that the Bank had breached its Quincecare duty and the mandate in place between the Bank and the company.

The bank applied for reverse summary judgment and/or strike out of the claims made against it on the basis that the claims were time-barred and that the claimant had no real prospect of establishing that the limitation period had been extended under section 32 of the Limitation Act 1980.

Decision

The court rejected the claimant’s arguments and granted the Bank’s application for reverse summary judgment.

The claimant argued that the limitation period did not start running until late 2017 as it was only then that certain facts were discovered, having been deliberately concealed by the Bank until then. The facts relied on by claimant included, in respect of the breach of the: (a) Quincecare duty claim, “the knowledge whether the defendant conducted an inquiry on any of the cheque payments and if it did not why”; and (b) mandate claim, certain paperwork such as that relating to the mandate and the authorised signatory form.

The court noted that section 32(1)(b) of the Act does allow for the postponement of the commencement of the relevant period of limitation where “any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant”. That postponement will be until the time when “the plaintiff has discovered the fraud, concealment or mistake or could with reasonable diligence have discovered it”. However, the court said that (as per Arcadia Group Brands Limited and others v Visa Inc and others [2014] EWHC 3561) not every broadly relevant fact would qualify; the only facts that would count for this purpose would be those facts which the claimant would need to plead in a statement of case to plead a prima facie case.

In the present case, the court said that what really mattered was whether there was knowledge sufficient to plead that the Bank had reasonable grounds for believing that the payment was part of a scheme to defraud the company such that the Bank came under a duty to refrain from making the payment. The court concluded “without hesitation” that a prima facie case of breach could be pleaded by inference from the fact of payment, if the prior steps could be pleaded (i.e. that the company was a customer of the Bank, that the authorised signatory instructed the Bank to make payment etc.). The court noted that this was, in fact, the way the claimant had pleaded the case.

The court held that the facts giving rise to the claims were plainly within the company’s knowledge at a very early stage – far earlier than six years ago, therefore there could be no deliberate concealment which has a real as opposed to a fanciful prospect of success. The claims were therefore time-barred and the court granted reverse summary judgment in favour of the Bank.

Harry Edwards

Harry Edwards
Partner
+44 20 7466 2221

Chris Bushell

Chris Bushell
Partner
+44 20 7466 2187

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Nihar Lovell

Nihar Lovell
Senior Associate
+44 20 7466 2529

High Court finds no breach of duty by bank in exercise of enforcement rights under finance agreements

The High Court has granted a claim brought by a bank against two companies (and the managing director of one of them) to recover outstanding sums due under a USD 9 million loan agreement and related security agreements (the Finance Agreements): Aegean Baltic Bank SA v Renzlor Shipping Ltd & Ors [2020] EWHC 2851 (Comm).

In doing so, the court confirmed that the bank owed an equitable duty in exercising its enforcement rights under the Finance Agreements. However, that duty was capable of amendment and constriction by contractual agreement and, on the facts, there had been no breach by the bank of its equitable duty.

In light particularly of the complex impact of the current COVID-19 pandemic on borrowers including the likely increase in default and therefore enforcement, this decision will be of significance to financial institutions considering the exercise of contractual rights. The decision provides a helpful reminder of the extent to which: (a) a duty can be imposed on a bank in respect of the exercise of its enforcement rights under various finance agreements; and (b) certain actions linked to the exercise of enforcement rights will not be considered to be in breach of such a duty. Please also see our previous blog post on a related decision considering whether a bank would have a duty of care akin to that which a mortgagee would have when exercising a power of sale over its security.

Background

The claimant bank entered into Finance Agreements with two shipping companies and the managing director of one of the shipping companies (together, the defendants). The purpose of the Finance Agreements was to enable the financing of repairs and provide liquidity for a shipping vessel.

Following damage to the vessel – which was abandoned – in 2015 the defendants ceased to make repayments due under the loan agreement. In 2018, the bank subsequently sent a notice of default and acceleration notice demanding full repayment under the Finance Agreements. The bank also issued a claim for outstanding indebtedness under the Finance Agreements.

The defendants sought to resist the claim on the basis that the bank had acted negligently or otherwise in breach of duty in its conduct of certain insurance claims following damage to the shipping vessel in 2015.

Decision

The court granted the bank’s claim.

The key issues which are likely to be of broader interest to financial institutions are summarised below.

Issue 1: Was a duty owed when exercising rights under the Finance Agreements?

The defendants argued that the bank owed duties of care at law and/or equity towards the defendants to exercise its rights under the Finance Agreements to ensure a fair and reasonable recovery of insurance proceeds. The defendants said these duties arose: (a) by way of implied term; (b) as a duty of care at common law; and (c) as a duty in equity.

The court held that the bank did owe a duty in equity (as a matter of law and by reason of its status as security holder) in respect of the exercise of its relevant rights under the Finance Agreements, though not at common law or by way of implied term.

In the court’s view, the position of the bank under the security documents was akin to that of a mortgagee seeking to exercise its rights over security, and the bank’s enforcement of the defendants’ claim under the relevant insurance policy was analogous to the exercise of a power of sale over a mortgaged property. This gave rise to an equitable duty.

The court remarked that the equitable duty was owed to the defendants. As per Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, such an equitable duty would involve: (a) the exercise of powers in good faith and for a proper purpose; and (b) if exercising a power of sale, taking reasonable care to obtain a proper price.

However, the court underlined that such a duty was capable of amendment and constriction by contractual agreement. The court held that on the facts of the present case the parties by contract had restricted the bank’s liability for any breach of duty in the exercise of its rights under the security agreement to losses caused by the wilful misconduct of its officers and employees.

Issue 2: Was there a breach of duty?

The defendants argued that the bank had breached its equitable duty as it had entered into a wholly unreasonable settlement with an Italian insurance company on the basis that it was for less than 50% of the constructive total loss value notwithstanding that a full and proper recovery was possible. Additionally, the defendants argued that the settlement contained false and unreasonable admissions, the bank had failed to make a recovery within a reasonable time, and the bank had excluded the defendants from participation in negotiations with the insurers.

The court rejected the defendants’ submissions and held that the bank had not breached the equitable duty it owed to the defendants.

In reaching its conclusion, the court cited the following factors, amongst others, as influential in its decision on this particular issue:

  • there was no allegation that the bank did not exercise its powers in good faith;
  • there was no allegation that the bank acted with wilful misconduct;
  • although a creditor must exercise its powers in good faith and for a proper purpose, it does not owe a duty as to when to exercise its powers, even if the timing of the exercise or non-exercise may occasion loss and damage to the mortgagor (as per China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536);
  • compliance with an equitable duty did not require the bank to engage in litigation at its own financial risk, i.e. it was entitled to look after its own interests (as per General Mediterranean Holding SA SPF v Qucomhaps Holdings Ltd [2018] EWCA Civ 2416, in which the Court of Appeal observed that a creditor would not be obliged to incur any sizeable expenditure or to run any significant risk to preserve or maintain a security); and
  • there was nothing in the Finance Agreements requiring the bank to call for, or permit, the active participation of the defendants in any negotiations it chose to conduct, nor was there any evidence to suggest that the defendants’ participation would have had a beneficial effect in influencing the Italian insurance company in relation to the constructive total loss claim.

For further legal analysis and insights in relation to COVID-19, and how we expect the crisis to operate as a catalyst for change, please visit our Catalyst Hub.

Natasha Johnson

Natasha Johnson
Partner
+44 20 7466 2981

Nihar Lovell

Nihar Lovell
Senior Associate
+44 20 7466 2529

US Sanctions and the right of borrowers to withhold repayment: Commercial Court signals return to orthodoxy

The Commercial Court has granted summary judgment in favour of a bank seeking to recover payments under Credit Agreements entered into with the Venezuelan state-owned oil and gas company, Petroleos De Venezuela SA (PDVSA), finding that the defaulting borrower had no real prospect of successfully defending the claims on the basis of certain US Sanctions imposed on Venezuela which post-dated the execution of the Credit Agreements: Banco San Juan Internacional Inc v Petroleos De Venezuela SA [2020] EWHC 2937 (Comm).

The court rejected all of the arguments put forward by PDVSA as to why it was prevented from making repayments as a result of the imposition of US sanctions (PDVSA is now a US Specially Designated National (“SDN”)). In particular, the court made the following findings, which will be of broader interest to global lenders with exposure to borrowers facing sanctions risk:

  1. No “normal course” to suspend payment obligations where there is a risk of US Sanctions

In interpreting the sanctions clause in the Credit Agreements, the court rejected the suggestion that the Court of Appeal’s recent decision in Lamesa Investments Limited v Cynergy Bank Limited [2020] EWCA Civ 821 demonstrated that it is perfectly normal and sensible in commercial agreements to suspend payment obligations where payment would otherwise be in breach of US sanctions (see our banking litigation blog post). It found that this authority (and others) were simply decisions on their (very different) facts. On the facts of the present case, the court concluded that the relevant clause provided no basis for a suspension of the repayment obligations (and in any case it was not clear that it would in fact be a breach of sanctions for PDVSA to make payment).

This represents a move back to orthodoxy in cases of this kind, emphasising the importance of the contractual construction of the particular wording of the clause in each case. Lamesa v Cynergy was a surprising decision in part because the party with the payment obligation in that case was (if payment was made) only at risk pursuant to US secondary sanctions. Here, US primary sanctions were in play to some extent, given that the payment was to be made in US dollars and to a US account. Nonetheless, the court found that PDVSA’s payment obligation was not suspended. As such, it appears that the outcome in Lamesa v Cynergy does not have broader application – instead, as the court itself observed in Lamesa, each case will turn on the  interpretation of the particular contract in question.

2. Impossibility vs impracticability of repayment

On an obiter basis, the court expressed the view that it was merely impracticable and not illegal for PDVSA to make payments in USD to a US bank account, because: (i) it was not illegal for PDVSA (a non-US entity based outside the US) to initiate payment; and (ii) it was possible for the parties to vary the Credit Agreements and make payment in euros to a bank outside the US. Accordingly, the court doubted that PDVSA could rely on the “very narrow gateway” in Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287 (providing that English law governed contracts are unenforceable where performance is prohibited in the place of performance).

3. Burden of proving that US Sanctions prevent contractual performance

Even if the US Sanctions prima facie rendered the performance of PDVSA’s payment obligations necessarily illegal at the place of performance, the court found that PDVSA had an obligation under the Credit Agreements to apply for a licence from the US Office of Foreign Assets Control (OFAC) in order to make the payments, which it had failed to discharge. As an important point of general application, the court stated that (absent any contractual provision to the contrary or a statutory reversal), the legal burden to obtain the necessary licence to effect the repayments was on PDVSA (as the debtor and the party bound to perform).

The decision is considered in more detail below.

Background

PDVSA is a Venezuelan state-owned oil and gas company, exclusively operating the Venezuelan oil and gas reserves, which are among the largest in the world. In 2016 and 2017, PDVSA borrowed sums under two Credit Agreements that it entered into with the Puerto Rican bank, Banco San Juan Internacional Inc (the Bank). On PDVSA’s case, this was part of a broad trend by which Venezuelan business interests were moved away from the mainland US financial system to Puerto Rico (an unincorporated territory of the US) as a result of political pressure from the US on Venezuela.

PDVSA defaulted on payments under both Credit Agreements, which contained English law and exclusive jurisdiction clauses in favour of the courts of England and Wales.

The claims

The Bank brought two claims in debt against PDVSA in this jurisdiction:

  1. 2016 Credit Agreement: A claim for US$48 million comprising overdue principal and accrued default interest and costs; and
  2. 2017 Credit Agreement: A claim for US$38 million comprising the loss of anticipated profits under the agreement, accrued default interest and costs. By way of brief explanation, following PDVSA’s payment defaults under this agreement, the loan was accelerated on 3 December 2018 and monies in certain trust accounts were used to discharge the overdue principal and interest then owed under the agreement. The liability under this agreement therefore rested on Clause 3.04(c) of the 2017 Credit Agreement to compensate the Bank for “the loss of anticipated profits equal to the Present Value of all fees and interest payable to [the Bank] through the Final Maturity Date of each Loan“.

The Bank applied for summary judgment on both claims. PDVSA argued that it had a real prospect of successfully defending the claims, primarily because of the effect of certain US Sanctions imposed on Venezuela which post-dated the execution of the Credit Agreements (in particular Executive Order 13850 and Executive Order 13884, detailed below). In the alternative, PDVSA argued that the sum claimed under the 2017 Credit Agreement was a disproportionate penalty, and that the sums claimed by way of costs and expenses under the terms of the Credit Agreements were not reasonable and within the scope of the indemnity.

Decision

The court granted summary judgment in favour of the Bank on both claims. We consider below the principal grounds of defence rejected by the court that are likely to have broader application.

Imposition of US Sanctions

PDVSA said that it wanted (and had the funds) to repay the Bank under the Credit Agreements, but that this was not possible because of the US Sanctions imposed on Venezuela.

PDVSA relied in particular on Executive Order 13850 (issued by President Trump on 1 November 2018, implementing blocking sanctions against persons operating in the gold sector of the Venezuelan economy, and creating an executive power for further sectors of the Venezuelan economy also to be blocked in due course) and Executive Order 13884 (issued by President Trump on 5 August 2019, a general blocking sanction freezing all property held by the Venezuelan government, including PDVSA).

As a consequence of the US Sanctions, PDVSA argued as follows (set out together with the court’s response):

1. The terms of the Credit Agreements, properly construed, suspended PDVSA’s payment obligations

The issue here was whether the sanctions clause in the Credit Agreements operated as a condition precedent to PDVSA’s liability (such that, if it was triggered, it would suspend PDVSA’s payment obligations – PDVSA’s case), or whether it was a negative covenant for the Bank’s benefit, but did not impact PDVSA’s liability to make payment (the Bank’s case). PDVSA relied on the decisions in Mamancochet Mining Limited v Aegis Managing Agency Limited [2018] EWHC 2643 (Comm) and Lamesa v Cynergy to argue that it is perfectly normal and sensible in commercial agreements to suspend payment obligations where payment would otherwise be in breach of unilateral US Sanctions.

The court found that these authorities were simply decisions on their (very different) facts.

The specific clause of the Credit Agreements relied on by PDVSA (Section 7.03), stated as follows:

“Sanctions. [PDVSA] will not repay Loans with the proceeds of

(a) business activities that are or which become subject to sanctions, restrictions or embargoes imposed by the Office of Foreign Asset Control of the U.S. Treasury Department, the United Nations Security Council and the U.S. Department of Commerce, the U.S. Department of State [sic] (collectively, ‘Sanctions’); or

(b) business activities in/with a country or territory that is the subject of Sanctions (including, without limitation, Cuba, Iran, North Korea, Sudan and Syria) (‘Sanctioned Country’)”.

This clause was contrasted with the relevant clause in Lamesa, which expressly provided for non-payment and was part of the payment obligation in the contract (unlike the present case, where there was no express mention of non-payment and the relevant clause was under the “Sanctions” heading). The court also noted that in Lamesa, the court of Appeal found good reasons for the existence of the non-payment provision.

Having found that the authorities did not suggest that it was a normal course for parties to contract to suspend payment obligations where there is a risk of US Sanctions, the court proceeded to consider the debate between the parties as to whether the clause was a condition precedent or a negative covenant. The court agreed with the Bank that the construction of the clause as a negative covenant was clear, in particular from the express wording of the clause and the structure of the agreement (under the “Sanctions” heading and separate from the payment obligations). The fact that the clause did not mention suspending the payment obligation was a notable contrast with another explicit suspension mechanism in the contract (in favour the Bank) and consistent with this construction.

The court therefore concluded that Section 7.03 provided no basis for a suspension of the repayment obligations by the terms of the Credit Agreements.

The court also went on to say that there were considerable doubts as to whether the relevant US Sanctions activated Section 7.03 at all (although it did not need to decide the point, given its primary finding). This will be interesting for those who wish to draft sanctions clauses which will be triggered by payment by a party who becomes an SDN. The doubt expressed by the court was on the basis that (a) the US sanctions against Venezuela were not country-wide; (b) the US sanctions were not such that PDVSA’s “business activities” were “subject to sanctions”, and (c) PDVSA had historical assets derived from its activities before the sanctions came into effect, held outside the US, and Section 7.03(a) would not apply to such assets.

2. By reason of the rule in Ralli Bros, English law governed contracts are unenforceable where performance is prohibited in the place of performance, which in this case was the US

PDVSA relied on the rule in Ralli Bros to assert that it could not perform the Credit Agreements in accordance with US law. Primarily, this was because PDVSA said it could not pay and the Bank could not receive funds into the “Stipulated Account”, which was located in the US. However, even if they could, PDVSA highlighted that the payments under the Credit Agreements were required to be made in USD, and a significant USD transaction would need to clear the US financial system (via a correspondent bank), from which PDVSA was excluded.

The court found that – even if the US Sanctions prima facie rendered the performance of PDVSA’s payment obligations necessarily illegal at the place of performance – PDVSA had no reasonable prospects of success on this ground of defence. This was because the prohibitions in the US Sanctions were qualified and PDVSA could have applied for a licence from OFAC in order to make the payment into the Stipulated Account. The court found that (absent any provision to the contrary in the Credit Agreements, or a statutory reversal), the legal burden to obtain the necessary licence to effect the repayments was on PDVSA (as the debtor and the party bound to perform). Further, in this case the court found that the Credit Agreements explicitly put the burden on PDVSA. However, PDVSA failed to show that it had discharged its obligation to apply for a licence, or that (had it applied) the application would have failed.

Although unnecessary given its finding on the licence issue, the court considered (obiter) whether making payments into the Stipulated Account would have been illegal, and therefore engaged the Ralli Bros doctrine. In this context, the court noted that the rule in Ralli Bros operates as a limited exception to the general rule that illegality under foreign law does not frustrate or otherwise relive a party from performance of an English law contract (see for example, Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) and our litigation blog post). The court emphasised that the doctrine offers a narrow gateway: the performance of the contract must necessarily involve the performance of an act illegal at the place of performance and will not apply where the contract could be performed some other way which is legal, or if the illegal act has to be performed somewhere else.

In contrast to these requirements, the court said the issue of making payment to the Stipulated Account in the US was not one of illegality, but rather impracticability: it was not illegal for PDVSA (a non-US entity based outside the US) to initiate a payment, and it was not clear that it was illegal for the Bank to receive it (if the funds were then blocked). In any event, in the court’s view there was plainly a possibility of payment being made in euros to a bank outside the US, by variation of the Credit Agreements, to which the Bank would have been amenable. Accordingly, the court doubted that the “very narrow gateway” of Ralli Bros was engaged.

3. Article 9(3) of Rome I (Regulation No 593/2008/EC) confers a discretion on the court to apply mandatory overriding provisions of the law of the place of performance (here, US law) to a contract governed by another law (English law) and that this discretion should be exercised in this case

The court concluded that there was no real prospect of success on this argument, particularly in circumstances where the Ralli Bros defence covered similar ground to Article 9(3), but operated without any discretionary element.

Penalty argument

PDVSA argued that the sum claimed under the 2017 Credit Agreement was a disproportionate penalty, imposed for breach of the primary sums due under the 2017 Credit Agreement, and despite the fact that the primary sums have already been recovered in full.

The court had no difficulty at all in concluding that the clause was not a penalty and that PDVSA’s argument had no real prospect of success. As this was in essence a question of construction, the court found it was an appropriate issue on which to come to a final conclusion on a summary judgment application.

It was common ground that the leading authority on penalty clauses is Makdessi v Cavendish Square Holding BV [2015] UKSC 67 (see our litigation blog post), which provides that to find that a provision is an unenforceable penalty, it must be: (i) a secondary obligation; (ii) triggered on breach of contract; which (iii) imposes a disproportionate detriment on the contract breaker.

In this case, the court said that the three limbs of the Makdessi test were intertwined. Looking at the contract as providing an overall agreement for a particular return over the lifetime of the contract, the court commented that “…not only does the mathematics inexorably drive the conclusion that the sum involved is in no way disproportionate, but also suggests that the obligation is a primary one and not a sum due (even in substance) on breach.”

The court therefore found that the clause was not a penalty and granted summary judgment in favour of the Bank on both the 2016 and 2017 Credit Agreements.

Susannah Cogman

Susannah Cogman
Partner
+44 20 7466 2580

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Commercial Court considers impact of force majeure clause on repayment obligation in sale of goods contract

In a decision earlier this year, the Commercial Court considered the impact of a force majeure clause on a repayment obligation in a contract for the sale of goods: Totsa Total Oil Trading SA v New Stream Trading AG [2020] EWHC 855 (Comm). (The judgment was given in March 2020 but the transcript has only recently become available.)

While the force majeure event in this case was unrelated to COVID-19, the decision will be of interest to financial institutions considering the ongoing impact of the pandemic. Although, under English law, force majeure is entirely a creature of contract, it is helpful to see further examples of the court’s interpretation of such clauses. Whether force majeure can be relied on, and the effect of such reliance, will depend on the proper construction of the contract and the particular circumstances of the case.

In this case, the court granted summary judgment on a buyer’s claim for repayment of an advance payment, in circumstances where (on facts assumed for the purposes of the summary judgment application) the seller had been prevented from delivering product due to a force majeure event, and the buyer had given notice terminating the contract. The court found that, on the proper construction of the contract, the repayment obligation kicked in if product was not delivered in accordance with the contract (and any agreed extension) for any reason whatsoever, including force majeure. However, where the failure to deliver was due to force majeure and that triggered an extension to the delivery timeframe, it could not be said that product had not been delivered “in accordance with the contract and any agreed extension” until the contract was actually terminated in accordance with its terms.

This decision illustrates that a valid claim to force majeure will not necessarily relieve a party of all of its obligations under the contract, such as obligations to repay advance payments for deliveries that are prevented due to force majeure. Parties negotiating force majeure provisions will wish to consider the extent to which any relevant obligations are to be affected by force majeure, and ensure the drafting is clear.

For a more detailed discussion of the decision, please see our litigation blog post.

For further legal analysis and insights in relation to COVID-19, and how we expect the crisis to operate as a catalyst for change, please visit our Catalyst Hub.

Commercial Court grants declaratory relief to bank relating to its rights under the 1992 ISDA Master Agreement

The Commercial Court has granted declaratory relief concerning a bank’s rights under an interest rate hedging arrangement governed by the 1992 ISDA Master Agreement: BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2020] EWHC 2436 (Comm).

This is the substantive English trial judgment in the long-running (and cross-jurisdictional) dispute between BNP Paribas S.A. (the Bank) and the Italian public-private partnership, Trattamento Rifiuti Metropolitani S.p.A. (TRM). The dispute relates to a 2008 loan provided by a syndicate of banks (led by the claimant Bank) to TRM, and the associated hedging arrangements, which TRM says the Bank negligently advised it to enter into.

The decision will be welcomed by market participants for providing an abundance of detailed and helpful commentary on key provisions of the ISDA Master Agreement, and more broadly by financial institutions for its analysis of non-reliance clauses, together with guidance for parties seeking declaratory relief. The key takeaways are as follows:

1. Non-reliance clauses in a financial services context

One of the declarations considered by the court tracked the Non-Reliance provisions at Part 5(d)(i) of the Schedule to the ISDA Master Agreement, and asked for a declaration that TRM had “made its own independent decision” to enter into the hedging transaction and was not relying on communications from the Bank as investment advice or as a recommendation to enter into the hedging transaction. A further declaration sought provided that these provisions gave rise to a contractual estoppel, so that TRM was estopped by the ISDA Master Agreement from contending, for example, that it had relied on any representations given by the Bank as investment advice or a recommendation to enter into the hedging transaction.

The court swiftly agreed to grant the declarations tracking the parts of the Schedule, but the question of contractual estoppel gave rise to more detailed analysis. Following Springwell Navigation Corpn v JP Morgan Chase Bank [2010] EWCA Civ 1221, the court confirmed that there is no distinction between: (a) warranties and undertakings (each of which TRM accepted could give rise to an estoppel); and (b) an acknowledgement or a representation (each of which TRM argued could not). The court referred to Leggatt LJ’s commentary suggesting otherwise in First Tower Trustees and another v CDS (Superstores International) Ltd [2018] EWCA Civ 1396, noting that this was obiter. The court also noted that the factual situation in First Tower was very different (since the case concerned the effect of an exclusion clause in a commercial lease and its effect vis à vis pre-contractual enquiries which misrepresented the position as regards asbestos on site). The court specifically noted that Leggatt LJ was not purporting to consider the effect of representations typically made in a financial services context.

The court also rejected TRM’s argument that the Non-Reliance provisions sought to exclude liability for misrepresentation under the Misrepresentation Act 1967, and so were subject to the requirement of reasonableness under section 11(5) of the Unfair Contract Terms Act 1977 (UCTA). This can be contrasted again with the decision in First Tower (which, interestingly, was not cited in the judgment on this point), as considered in our blog post: Court of Appeal finds non-reliance clause sought to exclude liability for misrepresentation and was therefore subject to UCTA reasonableness test.

Although the court considered these arguments in the context of the 1992 ISDA Master Agreement, its findings would also be relevant for a bank relying on the non-reliance language in the 2002 ISDA Master Agreement.

2. Entire Agreement clause in the ISDA Master Agreement

The court rejected TRM’s argument that the standard ISDA entire agreement clause was not effective and that TRM was able to rely on separately negotiated terms of the Financing Agreement as prevailing over the ISDA terms. The court said that the meaning of the entire agreement clause in the ISDA Master Agreement is “clear and unambiguous” on its face, and that TRM’s approach would sit uneasily with, while the Bank’s argument was harmonious with, the dicta in the authorities as to the importance of certainty and clarity in interpreting the ISDA Master Agreement (see for example Lomas v Firth Rixson [2010] EWHC 3372).

3. Guidance for applications for negative declaratory relief

The court provided helpful guidance on the correct approach to applications for negative declaratory relief, which are common in these types of cross-border disputes. As set out in more detail below, the court found that the Bank in this case met the threshold requirements for such relief. In particular, the court noted that in such applications, the touchstone will be whether there is any utility in the claimant obtaining the negative declarations sought. It also noted a number of specific limitations on the grant of declaratory relief, including that the court should not entertain purely hypothetical questions and there must be a real and present dispute between the parties as to the existence or extent of a legal right between them (which need not fall within the jurisdiction of the English court).

A more detailed analysis of these issues and further questions of more general application for financial services institutions, is set out below.

Background

In 2008, a syndicate of banks led by the claimant Bank, entered into a loan agreement (the Financing Agreement) with TRM, an Italian public-private partnership, to fund the building of an energy plant. The Financing Agreement was governed by Italian law and contained a jurisdiction clause in favour of the Italian court.

The Financing Agreement included an obligation for TRM to enter into an interest rate swap with the Bank to hedge the interest rate risks associated with the loan. In 2010, pursuant to that obligation, the parties executed a swap pursuant to a 1992 ISDA Master Agreement (the ISDA Master Agreement). The ISDA Master Agreement contained an exclusive jurisdiction clause in favour of the English court.

In correspondence in July 2016, TRM alleged that the Bank negligently advised TRM to enter into the hedging transactions, which (among other things) TRM said were mismatched with its real hedging requirements, generated a significant negative cash flow, and had a negative mark-to-market value.

In September 2016, the Bank issued proceedings in the English Commercial Court against TRM seeking declarations of non-liability in relation to the hedging transaction, in most cases tracking the wording of the ISDA Master Agreement. In April 2017, TRM sued the Bank before the Italian court and then issued an application in the Commercial Court to challenge its jurisdiction.

Jurisdictional challenge

The Commercial Court found that the proceedings for declaratory relief brought before the English court were governed by the jurisdiction clause in the ISDA Master Agreement, finding that this clause was not displaced or restricted by the apparently competing Italian jurisdiction clause in the Financing Agreement (see the first instance decision). This was despite a provision in the Schedule to the Master Agreement that, in the case of conflict between the terms of the ISDA Master Agreement and those of the Financing Agreement, the latter should “prevail as appropriate”. See our blog post for more detail: High Court holds ISDA jurisdiction clause trumps competing jurisdiction clause in separate but related agreement.

The Court of Appeal agreed (see the Court of Appeal decision), finding that there was no conflict between the jurisdiction clauses, which were found to govern different legal relationships and were therefore complementary, rather than conflicting (such that the conflicts provision was not in fact engaged). The Court of Appeal emphasised that factual overlap between potential claims under the ISDA Master Agreement and the related Financing Agreement did not alter the legal reality that claims under the two agreements related to separate legal relationships. See our blog post for more detail: Court of Appeal finds ISDA jurisdiction clause trumps competing clause in related contract.

Decision

The Bank succeeded on the majority of its claim for declaratory relief, with the court (Mrs Justice Cockerill DBE) granting a significant number of the declarations sought. This blog post provides a summary of the court’s analysis below, focusing on the key points for financial institutions seeking negative declaratory relief and the points of interest in relation to the ISDA Master Agreement.

Preliminary issue: correct approach to applications for negative declaratory relief

Before turning to the substantive issues in dispute, the court considered a preliminary point on the correct approach to applications for negative declaratory relief.

The court noted that its power to grant such relief lay in section 19 of the Senior Courts Act 1981, which appears to be unfettered, but said that the grant of a declaration remains a discretionary remedy (see Zamir & Woolf, The Declaratory Judgment, Fourth Edition at 4-01). While the court acknowledged the authorities indicating that a court should be cautious when asked to grant negative declaratory relief, it was not persuaded by TRM that there should be a reluctance in cases involving foreign proceedings. The court confirmed the following general principles to be applied when considering negative declarations:

  1. The touchstone is whether there is any utility in the claimant obtaining the negative declarations sought.
  2. Negative declarations should be scrutinised by the court and rejected where they would serve no useful purpose.
  3. The prime purpose is to do justice in the particular case, which includes justice to both the claimant and defendant.
  4. The court must consider whether the grant of declaratory relief is the most effective way of resolving the issues raised and consider the alternatives (as per Rolls Royce v Unite the Union [2010] 1 WLR 318).
  5. Limitations on the court include: (i) it should not entertain purely hypothetical questions (see Regina (Al Rawi) v Sec State Foreign & Commonwealth Affairs [2008] QB 289); (ii) there must be a real and present dispute between the parties as to the existence or extent of a legal right between them (see Rolls Royce); and (iii) if the issue in dispute is not based on concrete facts the issue can still be treated as hypothetical. This can be characterised as “the missing element which makes a case hypothetical”.
  6. Factors such as absence of positive evidence of utility and absence of concrete facts to ground the declarations may not be determinative. However, where there is such a lack (in whole or in part) the court should be particularly alert to the dangers of producing something which is not useful and may create confusion.

The court confirmed that it would apply these general principles when considering each of the declarations sought.

Application of general principles for negative declaratory relief

TRM made the overarching submission that the general principles applicable to negative declaratory relief (as outlined above), precluded such relief from being granted in this case. The court found that the application met the threshold requirements for declaratory relief, considering the following two key principles, in particular:

No hypothetical questions / real and present dispute between the parties

TRM argued that the “dispute” on which the Bank relied to bring the claim for negative declarations did not arise in the English court, pointing out that no claims had been brought or intimated by TRM in this jurisdiction, and that the Bank was not able to identify what claims TRM might bring before the English court. Accordingly, it said the “dispute” was purely hypothetical.

The court was not persuaded that it would be appropriate to shut the Bank out from the possibility of declarations based on this ground. In particular, it noted the Bank’s intention to use the declarations sought by way of defence to the Italian claim. Although TRM had brought no claim under the ISDA Master Agreement in the Italian proceedings, the court considered that there was plainly scope for overlap. Moreover, the Bank had specifically pleaded the contractual rights under the ISDA Master Agreement as defences to the Italian claim.

In the court’s view, this was a case that was comfortably on the right side of the hypothetical/actual divide, noting as follows:

“The bottom line is that regardless of where the parts of the debate take place, there is a dispute between the parties as to whether the picture as to TRM’s rights is one which is framed within the [ISDA Master Agreement], or whether, despite the existence of the [ISDA Master Agreement], those rights are different. That is a dispute as to the existence of the rights which the Bank asserts, which is an actual existing dispute. That dispute is not divorced from the facts or based on hypothetical facts. It is plainly not one which has ceased to be of practical significance.”

Utility in obtaining the declarations sought

The court found that at least some of the declarations met the utility threshold requirement. In particular, the court noted that a judgment in England as to the meaning and legal effect as a matter of English law of specific clauses within the ISDA Master Agreement would be enforceable against TRM in Italy under the Brussels Regulation. Given that the ISDA Master Agreement was governed by English law, to the extent the Italian court had to grapple with what the agreement meant, the English court was best placed to decide and the Italian court was likely to be assisted by that determination.

Contractual construction of the ISDA entire agreement clause

Before considering the individual negative declarations sought by the Bank, the court ruled on a question of contractual interpretation of the standard entire agreement clause found in the ISDA Master Agreement.

TRM argued that the Entire Agreement clause was not effective and that it was able to rely on separately negotiated terms of the Financing Agreement prevailing over ISDA Master Agreement (relying on the comments of Lord Millett in The Starsin [2004] 1 AC 715).

The court rejected TRM’s approach, making the following observations, in particular:

  • On its face, the meaning of the ISDA entire agreement clause is “clear and unambiguous”. This was reflected by the decision in Deutsche Bank v Commune di Savona [2018] EWCA Civ 1740 (see our blog post), which said that the ISDA Master Agreement is a “self-contained” agreement, exclusive of prior dealings.
  • The court was not persuaded that TRM’s approach successfully undermined this simple reading of the clause, in particular because it did not identify the specific provisions in the ISDA Master Agreement which were allegedly offensive and which provisions of the Financing Agreement overrode them.
  • While TRM was a party to both the ISDA Master Agreement and to the Financing Agreement, the Bank was a party to the latter as Mandated Lead Arranger (and other roles), not in its capacity as the “Hedging Bank” (even though the Bank was separately defined in the Financing Agreement as fulfilling this role). The court said it would be something of an oddity if the terms of a separate agreement in which the Bank participated with a different hat on, could impact the ISDA Master Agreement.
  • The hedging transaction was entered into “in connection with” the Financing Agreement, highlighting the fact that there were two distinct, albeit connected, agreements.
  • TRM’s approach would sit uneasily with, while the Bank’s argument was harmonious with, the dicta in various authorities as to the importance of certainty and clarity in interpreting the ISDA Master Agreement (most famously in Lomas v Firth Rixson).

Analysis of the individual negative declarations sought

The court then turned to consider the individual negative declarations, granting the majority of them, particularly where those declarations simply tracked the wording of the ISDA Master Agreement, Schedule or Confirmation.

Of the declarations considered by the court, there is one category which has particular significance for financial services contracts. This is the court’s analysis of the effect of the ISDA versions of “no representation” clauses and “non-reliance on representation” clauses, and the application of contractual estoppel to those clauses.

No representation / non-reliance on representation / contractual estoppel

The Bank sought a number of declarations which simply tracked the ISDA documentation:

  • That TRM had “made its own independent decision” to enter into the hedging transaction and was not relying on communications from the Bank as investment advice or as a recommendation to enter into the hedging transaction (the Non-Reliance provisions at Part 5(d)(i) of the Schedule).
  • That TRM was capable of evaluating and understanding the terms, risks etc. of the hedging transaction (Evaluations and Understanding at Part 5(d)(ii) of the Schedule).
  • That TRM was acting as principal and not as agent or in any other capacity, fiduciary or otherwise (Acting as Principal at Part 5(d)(iv) of the Schedule).
  • That TRM had specific competence and expertise to enter into the hedging transaction and in connection with financial instruments (Competence and Expertise at Part 5(e)(i) of the Schedule).
  • That TRM entered into the hedging transaction for hedging purposes and not for speculative purposes (Hedging Purposes at Part 5(e)(ii) of the Schedule).
  • That TRM had full capacity to undertake the obligations under the hedging transaction, the execution of which fell within its institutional functions (Capacity at Part 5(e)(iii) of the Schedule).

In addition, the Bank sought a further declaration that these clauses gave rise to a contractual estoppel, which prevented TRM from contending, for example, that it had relied on any representations given by the Bank as investment advice or a recommendation to enter into the hedging transaction).

The Bank argued that applying accepted principles of contractual interpretation, it was clear that TRM agreed that the Bank did not make any actionable representations to TRM, and that TRM did not rely on any representations in connection with the hedging transaction.

The court swiftly agreed to grant the declarations tracking the parts of the Schedule listed above, but the question of contractual estoppel gave rise to more detailed analysis.

Existence of a contractual estoppel

The court noted that Springwell broadly supported the finding of contractual estoppels arising from such clauses, citing the following comments from Aikens LJ in that case:

“…there is no legal principle that states that parties cannot agree to assume that a certain state of affairs is the case at the time the contract is concluded or has been so in the past, even if that is not the case, so that the contract is made upon the basis that the present or past facts are as stated and agreed by the parties.”

TRM argued that there was a distinction between warranties and undertakings on the one hand (which it accepted could give rise to a contractual estoppel), and an acknowledgement or a representation on the other. In relation to the latter, it said that there was no “agreement”, and therefore an acknowledgement/representation could not create a contractual estoppel. TRM pointed to the judgment of Leggatt LJ in First Tower, in which he questioned whether a clause which simply said that a party “acknowledges” that it has not entered into the contract in reliance on any representation could give rise to a contractual estoppel.

However, the court noted that Springwell itself disagreed with this proposition, with the Court of Appeal finding in that case that Springwell was bound contractually to its statement, or acknowledgement, that no representation or warranty had been made by Chase Manhattan. The court emphasised that Leggatt LJ’s commentary in First Tower was obiter, and did not think he was intending to overrule or qualify Springwell. The court noted that the factual situation in First Tower was very different (since the case concerned the effect of an exclusion clause in a commercial lease and its effect vis à vis pre-contractual enquiries which misrepresented the position as regards asbestos on site). Leggatt LJ was not purporting to consider the effect of representations typically made in a financial services context.

The court also considered obiter comments in Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (Comm), a case concerning the ISDA Master agreement, which TRM suggested drew a distinction generally between warranties and mere representations. Again the court was not persuaded that this authority took matters any further forward, as it was bound by Springwell.

Even if not bound by Springwell, the court considered that the question was whether it could “objectively conclude that by the relevant contractual materials the parties did intend to agree” to the contractual estoppel. It said the question was not dependent on the precise wording (representation vs warranty), but was a question of substance (per Hamblen J in Cassa Di Risparmio Della Repubblica Di San Marino Spa v Barclays Bank Ltd [2011] EWHC 484 (Comm)). This would require the court to discern the intention of the parties, taking into consideration the relevant factual background, including the nature and status of the ISDA Master Agreement. On that basis, even if it had not been bound by Springwell, the court said it would have reached the same conclusion, namely that a contractual estoppel existed.

Effect of the Misrepresentation Act 1967

The court also considered TRM’s argument that the Non-Reliance provisions sought to exclude liability for misrepresentation under the Misrepresentation Act 1967, and so were subject to the requirement of reasonableness under section 11(5) of the Unfair Contract Terms Act 1977 (UCTA).

The court was “entirely unpersuaded” of the merits of this argument. In particular, the court specifically endorsed the decision in Barclays Bank plc v Svizera Holdings BV [2014] EWHC 1020 (Comm), which held that a clause in a mandate letter gave rise to a contractual estoppel against reliance on alleged representations. In that case, the court referred to the consistent judicial recognition of the effectiveness of such clauses giving rise to a contractual estoppel, and said the suggestion that the clause should be struck down as unreasonable under UCTA was “hopeless”. In the present case, the court commented that this conclusion might very well apply here.

The court was critical of TRM’s approach to the argument on the Misrepresentation Act, in particular because it had failed to put its argument formally in issue in the proceedings, cautioning as follows:

“It cannot be acceptable for a party to (as TRM did here) stay absolutely quiet on the subject until the door of the court, and then play their joker in the form of the [Misrepresentation Act], asserting that the burden of proving reasonableness has not been discharged by its opponent.”

The court was also critical of the fact that TRM failed to identify clearly which clauses were said to be exclusion clauses, and the absence of any factual evidence to suggest that the provision should be struck down as unreasonable.

In fact, the court pointed to a number of factors suggesting that the clause was in any event reasonable, including that: this was not a case of a consumer transaction or where there was an inequality of bargaining power; the terms were contained within an ISDA Master Agreement which contains effectively market standard terms; and the bespoke Schedule was agreed between two commercial parties.

The court was therefore prepared to grant the declarations sought relating to representations and contractual estoppel.

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Court of Appeal upholds High Court’s decision on the preferred contractual construction of a term in an exclusion clause

The Court of Appeal has upheld the High Court’s decision on a claim involving the legal meaning of ‘goodwill’ and the contractual construction of an exclusion clause excluding liability for lost goodwill: Primus International Holding Co & Ors v Triumph Controls – UK Ltd & Anor [2020] EWCA Civ 1228.

In doing so, the Court of Appeal has confirmed that (unless there are clear words to the contrary in a contract) the ordinary legal meaning of a particular term will be preferred to an unusual, technical or non-legal meaning. The Court of Appeal agreed, in this case, that the ordinary legal meaning of ‘goodwill’ applied to the exclusion clause under consideration as opposed to the technical accounting definition advanced by the defendants; there were no indications otherwise to suggest that the technical definition should be preferred.

This decision will be of broader interest to financial institutions as it underlines the importance of careful drafting, particularly if a contract is to refer to a financial term of art or ‘jargon’. If the parties wish for an unusual, technical or non-legal meaning to be attributed to a particular term rather than the ordinary legal meaning, the approach taken by the Court of Appeal makes it clear that it would be wise to define that particular term clearly.

Background

The Triumph companies (the claimants) entered into discussions with the Primus companies (the defendants) in relation to the potential acquisition of two aerospace manufacturing companies in 2012. As part of the discussions, the defendants provided the claimants with a set of financial forecasts for the target companies extending to 2017. These were known as the “Long Range Plan” (LRP) and predicted that the target companies would be profitable in the future. In 2013, the claimants completed their USD 76.5 million acquisition of the target companies through a SPA. Following completion, the claimants discovered significant operational and business issues at the target companies, which led to a failure to meet their forecasted earnings and their performance did not match that predicted by the LRP.

The claimants subsequently brought a USD 63.5 million damages claim against the defendants alleging that there had been a breach of the warranties given in the SPA, in particular that the LRP had not been “honestly and carefully prepared”.

The defendants sought to rely on certain exclusions of liability in the SPA to defeat that claim. The provision which was relied on and subject to the appeal was an exclusion clause which excluded liability “to the extent that…the matter to which the claim relates…is in respect of lost goodwill”. The defendants argued that the reference to ‘goodwill’ here was a reference to the accounting concept of goodwill, namely an “intangible asset recorded when a company acquires another company and the purchase price is greater than the sum of the fair value of the identifiable tangible and intangible assets acquired and the liabilities that were assumed”.

High Court decision

The High Court found that the defendants were in breach of warranty for failing to prepare the LRP with care. The High Court commented that the LRP failed to take into account key operational and financial assumptions relating to planned transfers of productions lines relating to the target companies. As a result, the LRP overestimated the rate at which production could be transferred and overstated the future profitability of the target companies. The High Court concluded that the purchase price paid by the claimants for the target companies would have been lower if they had been provided with a proper LRP and awarded the claimants damages on that basis.

The High Court rejected the suggestion that the exclusion of claims “in respect of lost goodwill” could be relied upon by the defendant to defeat the claims for breach of warranty as the claims were not for lost goodwill, but rather lost revenues and increased costs. In reaching its decision, the High Court determined that the plain and natural meaning of ‘goodwill’ in a commercial contract is business reputation.

The defendants appealed on a number of matters, but were only granted permission to appeal on the true meaning and effect of the exclusion clause that they had relied upon.

Court of Appeal decision

The Court of Appeal held that the High Court was right to prefer the claimants’ definition of ‘goodwill’ and their construction of the exclusion clause.

The Court of Appeal agreed that the ordinary legal meaning of ‘goodwill’ in a commercial context meant the good name, business reputation and connection of a business, and that the authorities overwhelmingly pointed to this conclusion. The Court of Appeal also examined other parts of the SPA to see how ‘goodwill’ was construed and found that it was used in way that was consistent with its ordinary legal meaning. In the Court of Appeal’s view, there was no reason to depart from the ordinary legal meaning of the word when construing the exclusion clause or to utilise the accounting definition of the term (as suggested by the defendants).

Furthermore, the defendant’s meaning of goodwill was also not a commercially sensible one as it would mean that any claim for breach of warranty not relating to existing assets would be covered by the all-encompassing accounting definition of ‘goodwill’ and therefore be excluded by the exclusion clause; thereby depriving the claimants of most of the force and protection of the warranties in the SPA without any clear words to that effect. In support of its reasoning on this point, the Court of Appeal relied on the view of Briggs LJ in Nobahar Cookson and Another v Hut Group Ltd [2016] EWCA Civ 128: “the parties are not likely to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligation without using clear words having that effect”.                                                                       

The Court of Appeal therefore dismissed the appeal. On the facts, this was plainly the correct decision. However, parties to financial contracts in particular will want to take note of the observation made in the Court of Appeal’s reasoning that if a contract wishes to include a term which has an unusual, technical or non-legal meaning, that must be spelt out.

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Nihar Lovell

Nihar Lovell
Senior Associate
+44 20 7466 2529

High Court refuses to strike out Quincecare duty claim against a PSP where its customer was hijacked by fraudsters

The High Court’s judgment in Gareth Hamblin and Marilyn Hamblin v World First Limited and Moorwand NL Limited [2020] EWHC 2383 (Comm) is the first decision to follow the Supreme Court’s ruling in Singularis Holdings Ltd v Daiwa Capital Markets [2019] UKSC 50, considering the so-called Quincecare duty of care (see our banking litigation blog post).

As a reminder, the Quincecare duty arises where a bank or deposit holding financial institution must refrain from processing a payment mandate made by an authorised signatory of its customer for as long as the bank is “put on enquiry” i.e. it has reasonable grounds for believing that the instruction is an attempt to misappropriate funds from the customer. This is an objective test to be judged by the standard of an ordinary prudent banker.

The present decision considered a novel factual scenario not previously analysed by the court in the context of the Quincecare duty, namely whether such a claim can be brought against a financial institution (here, a payment services provider) where the customer was an insolvent shell company, without any directors, which had been hijacked by fraudulent individuals and used for the purpose of a fraud. Even in these extreme circumstances, the court found that a Quincecare claim was realistically arguable. Following Singularis, the court emphasised that the Quincecare duty is owed to the company not to those in control of it, and as such it was possible for the shell company itself to be a “victim” of the fraud.

The court refused to attribute the knowledge of the fraudsters to the shell company, arguably taking a conservative approach to the test for attribution in Singularis. In that case, the Supreme Court confirmed that there is no principle of law that the fraudulent conduct of a director is to be attributed to the company if it is a one-man company. The court applied this principle here, even though on the facts the company was not even a “one-man company” because it had no directors at all, it was in the control of those who were at best de facto directors, all of whom had been intimately involved in the prosecution of the fraudulent scheme. As per Singularis, the court said that the question of attribution in such circumstances is always to be found in consideration of the context and the purpose for which the attribution is relevant.

The decision highlights the creep in the scope of the Quincecare duty first established in Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 343. Quincecare itself considered the duty in the context of a current account, but it has since been extended to depository accounts (JP Morgan Chase Bank, N.A. v The Federal Republic of Nigeria [2019] EWCA Civ 1641, see our banking litigation blog post), investment banks (Singularis) and it is now being considered in the context of a payment service provider in the present case. It is presenting an increasing risk for financial institutions that process client payments, as the spate of recent judgments indicates (see also our recent banking litigation blog post on Stanford International Bank Ltd v HSBC Bank plc [2020] EWHC 2232 (Ch)).

Further, it will be interesting to see the court’s decision on the merits of the claimants’ alternative breach of mandate claim against the bank (for purporting to act on the instructions of an individual whose identity had been stolen by the fraudsters, where in fact there were no registered directors of the company). The court held that the claimants had an arguable case to narrow the established principle that a customer is estopped from claiming damages resulting from its own instruction where the bank has acted in good faith and in the ordinary course of business (see Bank of England v Vagliano Brothers [1891] AC 107). In the court’s view, this principle may need to be refined in the context of a corporate entity controlled by fraudsters, particularly in light of the distinction between where the customer is an individual vs a company, as highlighted in Singularis.

Background

The claim arose out of a sophisticated investment fraud using the second defendant, Moorwand NL Limited (Moorwand NL) as the corporate vehicle by which the fraud was carried into effect by individuals unknown. Those individuals set up an account in the name of Moorwand NL on the application of a Mr Carter, whose identity had been stolen by the fraudsters. At no material time was Mr Carter a director of Moorwand NL, nor did Moorwand NL have any registered directors. Moorwand NL’s account was set up and maintained by the first defendant (against which no allegations of fraud were made), a payment service provider known as World First Limited (WF).

The claimants were persuaded by the fraudsters to open an investment account and transferred £140,000 to Moorwand NL’s account with WF. Subsequently, WF paid out the £140,000 credited to Moorwand NL’s account on instructions apparently received on behalf of Moorwand NL. The sums paid out were misappropriated and the individuals behind the investment fraud were never found.

The claimants commenced proceedings against both WF and Moorwand NL (now in insolvent liquidation) to recover the £140,000 they lost. The claim against WF was brought on the grounds that Moorwand NL was a trustee of the claimants’ funds and that the claimants (as beneficiaries of the trust) had standing to bring representative proceedings (i.e. claims belonging to Moorwand NL) directly against WF.

WF applied for strike out or reverse summary judgment on the grounds that the claims were bound to fail as a matter of law. This blog post focuses on the following issues in the application:

  1. Breach of the Quincecare duty i.e. that WF owed Moorwand NL a duty of care to use reasonable care and skill to not execute a payment instruction in circumstances where a reasonable service provider would be placed on notice that the payments had not been duly authorised.
  2. Breach of mandate because: (i) no authority to pay out from Moorwand NL’s account could have been obtained since Moorwand NL had no directors at any material time and/or (ii) payment out of the account was not authorised by Mr Carter since his identity was stolen and he was not asked nor gave authority for payment out of the account.
  3. The claimants’ right to bring representative proceedings.

For the purpose of the application, WF did not dispute that there was a proper factual basis for alleging that a reasonable service provider ought to have been on notice that the payments out were not duly authorised.

Decision

The High Court (Pelling J) ruled that the claimants had a realistically arguable case against WF for breach of the Quincecare duty and/or breach of mandate, and realistically arguable standing to bring the claim.

Breach of the Quincecare duty

WF submitted that no claim for breach of the Quincecare duty could succeed because:

  1. No loss could be caused by a breach of the Quincecare duty that was within the knowledge of those in control of the customer.
  2. As a matter of policy, the only claim available to a person in the position of the claimants was a claim for dishonest assistance (which was not available on the facts of this case).

Taking each of these arguments in turn, WF argued that the Quincecare duty requires the bank’s customer to have been the victim of the fraud, but here the customer (Moorwand NL) was controlled by fraudsters. Accordingly, any claim for breach of duty brought by Moorwand NL would be bound to be met with an assertion that no loss could be caused by a breach within the knowledge of those in control of Moorwand NL. Any such claim brought by Moorwand NL against WF would give rise to a complete circuity of action, since WF would then be entitled to sue Moorwand NL for fraudulent misrepresentation.

The court highlighted the emphasis given by Lady Hale in Singularis to the fact that the Quincecare duty is owed to the company not to those in control of it. This is because the purpose of the duty is to protect the legally distinct company against the misappropriation of the company’s assets. Taking Moorwand NL as a distinct legal entity, the court held that it was realistically arguable on the facts as they were assumed that Moorwand NL was itself a victim of the fraud.

On the question of whether to attribute the knowledge of the fraudsters to Moorwand NL, the court again cited Singularis, which confirmed that where a company (e.g. Moorwand NL, represented by the claimants) is suing a third party (e.g. WF) for breach of duty, there is no principle of law that the fraudulent conduct of a director is to be attributed to the company if it is a one-man company. In the court’s view, it was at least realistically arguable that this principle would apply here, even though on the facts Moorwand NL was not even a “one-man company” (because it had no directors at all, it was in the control of those who were at best de facto directors, all of whom had been intimately involved in the prosecution of the fraudulent scheme). As per Singularis, the court said that the question of attribution in such circumstances is always to be found in consideration of the context and the purpose for which the attribution is relevant. The court echoed the reasoning in Singularis that to attribute the knowledge of the fraudsters to Moorwand NL so as to defeat the claim would be to denude the Quincecare duty of much of its practical utility.

The court also disagreed with WF’s policy argument, that allowing the claimants to pursue a claim for breach of the Quincecare duty, would be contrary to the deliberate public policy of limiting the claims available to a person in the position of the claimants to a claim for dishonest assistance.

For the above reasons, the court ruled that the claimants had a realistically arguable case for breach of the Quincecare duty by WF.

Breach of mandate

The claim under this head was that WF breached its mandate with Moorwand NL because it purported to act on the instruction of Mr Carter, where Mr Carter could not and did not give any instructions  (because his identity had been stolen by the fraudsters and in fact there were no registered directors).

WF relied on the principle set out in Vagliano Brothers, which held that if a bank acts upon a representation by a customer in good faith and in the ordinary course of business, the customer is estopped from suing the bank for any loss which occurred based on the representation, where that loss would not have occurred if the representation had been true. Accordingly, because the fraudsters (presumably on behalf of Moorwand NL) had impersonated Mr Carter, WF argued that this principle estopped the claimants from bringing the breach of mandate claim.

The claimants argued that the time may have come to review, refine or confine this proposition of law, so as not to apply to a situation where the “customer” was a corporate entity controlled by fraudsters. They said a distinction needed to be drawn between when an individual/partnership of individuals was the customer (as was the case in Vagliano Brothers) and when a company was the customer. In particular, the claimants relied on the following passage from Singularis (emphasis added):

“In Luscombe v Roberts (1962) 106 SJ 373, a solicitor’s claim against his negligent accountants failed because he knew that what he was doing – transferring money from his clients’ account into his firm’s account and using it for his own purposes – was wrong. But companies are different from individuals. They have their own legal existence and personality separate from that of any of the individuals who own or run them. The shareholders own the company. They do not own its assets, and a sole shareholder can steal from his own company.”

The court recognised that Singularis dealt with different facts and a different cause of action, but said that the principle of law was generally stated and well established. On the present application (and in a case where the defence had not been filed nor meaningful disclosure taken place), the court found that the distinction between an individual and a company observed in Singularis was maintainable. Further, the court was not prepared to conclude that Vagliano Brothers provided a certain answer to the claimants’ claim that WF was in breach of mandate, in circumstances where Moorwand NL had no directors and had come under the control of fraudsters who were at best de facto directors of the company.

The court suggested that this would amount to a “modest but incremental” development of the law, but that any development to that effect should be on the basis of facts properly established at trial and not assumed facts as was the case at the interim stage.

Representative proceedings

The final issue considered was whether the claimants had standing to bring the claim at all, which the court found was realistically arguable.

For the purpose of the application, the court found that Moorwand NL was a trustee. In such circumstances, Hayim v Citibank NA [1987] AC 730 (PC) enabled the claimants to bring representative proceedings as a beneficiary where Moorwand NL had committed a breach of trust or “in other exceptional circumstances”. The court found that this requirement was satisfied (at least to the level of realistic argument) where Moorwand NL as the trustee was in insolvent liquidation and there was no dispute that it had been hijacked by fraudulent individuals and used as the means by which a fraud was carried into effect.

The court therefore dismissed the application for strike out or summary judgment.

Chris Bushell

Chris Bushell
Partner
+44 20 7466 2187

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Mannat Sabhikhi

Mannat Sabhikhi
Associate
+44 20 7466 2859