High Court dismisses IRHP mis-selling and unlawful means conspiracy claims against bank

The High Court has dismissed claims brought by a business against a bank alleging the mis-selling of interest rate hedging products (IRHPs) and an unlawful means conspiracy regarding the transfer of the business to the bank’s internal restructuring unit: CJ And LK Perks Partnership & Ors v Natwest Markets plc [2022] EWHC 726 (Comm).

This decision continues the trend of past IRHP mis-selling decisions, in which the court has refused to impose additional obligations on banks that were providing general dealing services on an execution-only basis (see blog posts here). It highlights the difficulty for customers in bringing mis-selling claims in circumstances where the bank has provided accurate information and stated clearly that it is not providing advice on a transaction.

In the present case, the court was satisfied that the bank had not breached its duties towards the customer. The bank had provided full explanations of the costs and risks involved with each of the IRHPs. The bank had underlined in the contractual and non-contractual documentation that it was not assuming a duty to provide advice to the customer in relation to the IRHPs. The court also found that the defaults on loan repayments and the likelihood of the customer’s insolvency were genuine and compelling reasons for the bank’s decision for the transfer of the customer’s business to its restructuring group.

We consider the decision in more detail below.

Background

In 1999, the defendant bank (the Bank) provided finance to a Scottish legal partnership (the Partnership) and two companies (together, the Claimants) for (i) the expansion of a chain of chiropractic clinics across Scotland and North-East England,  and (ii) the acquisition of  commercial property. In 2007, the facilities were consolidated into a £2m variable interest rate loan. One of the conditions of the loan required that the Partnership enter into an IRHP (the 2007 swap). This would provide the Partnership with protection from any increase in interest rates. However, the Partnership would not be able to benefit from any decrease in interest rates, as there would be a corresponding increase in the payments due to the Bank under the swap.

Between 2008 and 2009 interest rates fell rapidly to reach a low of 0.5% in March 2009, placing the Partnership in a less advantageous position than it would have been if its only commitment had been to pay a floating rate under the loan. Following a cashflow crisis, in 2009 the existing loan was restructured into a new package, under which the Partnership entered into a new IRHP with costs for breaking the 2007 swap “blended in” (the 2009 swap). Following a default on loan repayments, in November 2009 the Bank transferred the management of the Claimants to its Global Restructuring Group (GRG). At the Bank’ request, the Claimants engaged the services of an independent business consultant who assisted with the negotiation of further restructuring, which concluded in mid-2011. The Claimants continued to suffer from financial difficulties and went into administration in 2013.

In due course, the Claimants commenced legal proceedings against the Bank regarding: (i) the alleged mis-selling of the 2007 and 2009 swaps (the Mis-selling Claim); and (ii) an alleged conspiracy concerning the conduct of GRG following the transfer of the management of the Claimants to GRG in 2009 (the Conspiracy Claim).

The Bank denied each of the claims and brought a counterclaim for the sums outstanding under the loan.

Decision

The court found in favour of the Bank and dismissed each of the claims. The court said that the Claimants had failed to establish liability in relation to their various causes of action. Since the claims failed, the Claimants were liable in principle for the sums owed to Bank.

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

1) Mis-selling Claims

The Claimants argued that the Bank: (i) failed to explain the risks involved and advise properly in respect of both the 2007 and 2009 swaps; and (ii) in relation to the 2007 swap only, made a negligent misrepresentation at a meeting in October 2007 that interest rates were going to rise, when the Bank was in fact aware that a fall in base rate was imminent.

Misrepresentation

The court found that there had been no misrepresentation by the Bank.

The court said that, on the balance of probabilities and in light of the documentary evidence: (i) it could not make a finding that the representation relied upon (i.e. the direction of interest rates) was made in 2007 or at any time; and (ii) the claim would have also failed on causation as the Claimants would have entered into the swap if the relevant misrepresentation had not been made.

Failure to explain

The court found that there had been no breach of duty by the Bank.

Duty not to misstate and to give advice fully, properly, and accurately

The court noted that, as per Hedley Bryne v Heller [1963] UKHL 4, there may be factual circumstances arising out of the position of the defendant in relation to the claimant, combined with the defendant’s conduct or omissions that give rise to an assumption of responsibility and the imposition of a tortious duty. This is a duty not to carelessly make a misstatement. What amounts to a misstatement will depend on the factual circumstances of the relationship and identification of the matter for which the defendant has assumed responsibility.

The court also highlighted that, as per Bankers Trust International plc v PT Dhamala Sakti Sejahtera [1996] CLC 518, that if a bank does give an explanation or tender advice then it owes a duty to give that explanation or tender that advice fully, accurately and properly. However, how far that duty goes will depend on the precise nature of the circumstances and of the explanation or advice which is tendered.

2007 swap

The court rejected the Claimants’ arguments that the Bank failed to explain the risks of the applicable break costs, the impact of a “Contingent Obligation” on future lending decisions, restrictions on property sales and fees charged by the Bank.

The court noted that the documentation provided to the Claimants clearly highlighted the risks of the 2007 swap. There had been a meeting in October 2007 to discuss the advantages and disadvantages of the different types of IRHPs, the potential for breakage costs, the mechanics of how a breakage cost would be calculated, and a recommendation that the Partnership seek independent advice before proceeding.

On the basis of the above, the court said it did not consider that there had been any misstatement in the information provided by the Bank in relation to break costs, nor any tortious duty which required more detail as to the size of possible break costs to be provided. Also, the key person acting on the Claimants’ behalf was capable of understanding financial matters including the consequences of the swap as explained to him.

2009 swap

The court said that, on the evidence, the Bank had sufficiently explained the substantial break costs for breaking the 2007 swap and the lengthening of the swap period. The court also highlighted that it did not consider that the Claimants would not have acted any differently if given any further details on the risks.

Failure to advise

The court found that there had been no breach of duty by the Bank.

Duty to provide advice

The court noted that, as per Fine Care Homes Ltd v National Westminster Bank PLC [2020] EWHC 3233 (Ch), the ultimate question was “whether the particular facts of the transactions, taken as a whole and viewed objectively, show that the bank assumed a responsibility to advise the customer as to the suitability of the transaction“.

The court also pointed out that, as per London Executive Aviation Ltd v RBS [2018] EWHC 74 (Ch), even if advice was given by the bank, whether such advice was of a kind to attract a duty of care on the bank would depend on a number of factors including: (i) the sophistication or otherwise of the claimant; (ii) the presence or absence of a written advisory agreement; (iii) the availability of advice from other sources; (iv) the indicia of an advisory relationship; and (v) the contractual documentation and agreed basis of dealing.

2007 and 2009 swaps

The court said that any single instance of advice given by the Bank in respect of swaps was not sufficient to attract a duty of care. The court highlighted: (i) the general absence of any advisory language in the Bank’s communications with the Claimants; (ii) the Bank’s recommendation to the Claimants that they seek independent advice prior to proceeding; (iii) both the contractual and non-contractual documentation made it clear that the Bank was providing an execution-only service and was not acting as an advisor to the Partnership; and (iv) the contractual documents contained the Partnership’s agreement that it had made its own decision to enter into the swaps and had not relied on any advice from the Bank when doing so.

The court said that, since the claim failed irrespective of the effect of the contractual documents, it was not necessary to consider in detail the parties’ arguments in relation to the validity of the terms relied upon. In any event, the court would have reached the same conclusion as Fine Care Homes, which confirmed that the bank was entitled to rely on its contractual terms as giving rise to a contractual estoppel (so that no duty of care to advise the customer as to the suitability of the IRHP arose) and that this clause was not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 when relied upon in the context of a breach of advisory duty claim.

2) Conspiracy Claim

The court found that the Bank had not engaged in an unlawful means conspiracy. In the court’s view, there were genuine and indeed compelling business reasons for the Claimants’ transfer to GRG.

Test for unlawful means conspiracy

The court recalled that the test for conspiracy, as per Lakatamia Shipping Co Ltd v Nobu Su and others [2021] EWHC 1907 (Comm), requires (i) a combination or understanding between two or more people; (ii) an intention to injure the claimant, for which intention to advance economic interests at the expense of the claimant is sufficient; (iii) unlawful acts carried out pursuant to the combination or understanding; and (iv) loss to the claimant suffered as a consequence of those unlawful acts.

Transfer to GRG

The court said that the Conspiracy Claim failed on the grounds that: (i) there was no relevant combination; (ii) individuals at the Bank including the consultant did not act unlawfully; and (iii) there was no intention on the part of the Bank to cause loss.

The court noted that the two core reasons for the transfer to the GRG were: (i) the inability of the Claimants to generate sufficient turnover and profit to repay its debt over an acceptable time frame; and (ii) a concern that the Bank had a security shortfall in respect of its lending to the Claimants.

The court said there was no evidence whatsoever that the transfer to GRG, and the 2011 restructuring, was driven by an ulterior motive on the part of the Bank, or was part of an internal conspiracy within the Bank, to profit from and at the expense of the Claimants. On the contrary, the court concluded that given the actual default on loan repayments and the likely insolvency of the Claimants, the Bank had a “commercially reasonable and rational basis” for the transfer to GRG and what became the 2011 restructure.

Moreover, the court found no evidence that the consultant furthered the Bank’ interests to the detriment of the business. The court pointed out that the consultant had worked positively in favour of the Claimants a number of times.

Accordingly, for all the reasons above, the court found in favour of the Bank and dismissed the Mis-selling and Conspiracy Claims.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529
Katie-Scarlett Wetherall
Katie-Scarlett Wetherall
Associate
+44 20 7466 3843

High Court considers termination and enforcement of security rights in context of default on loan agreement

The High Court has found in favour of a lender in its claim against a dissolved airline business for sums due under a loan facility agreement (which was secured by an aircraft mortgage): Lombard North Central plc v European Skyjets Ltd [2022] EWHC 728 (QB).

This decision will be of broader interest to financial institutions seeking to accelerate a loan and enforce security. It is a useful reminder that a creditor’s conduct, for example by accepting late payments or offering more time for outstanding payments to be made, may be held to waive an event of default.

In the present case, the lender was found to have waived its right to rely on the borrower’s payment default (because of conduct outlined above), despite the inclusion of a “no waiver” clause in the loan agreement, and the use of reservation of rights language in communications with the borrower. While the lender’s acceleration notice under the loan agreement referred to the payment default only (in respect of which the right to terminate had been waived), the court held that – on the construction of the loan agreement in question – the notice was valid because of an alternative event of default which had occurred (including a subjective material adverse change). Neither the loan agreement nor the mortgage (as drafted) required the relevant event of default to be specified in the notice, and such a requirement could not be implied in the circumstances of this case.

The court also confirmed that the lender’s right to accelerate the loan was not subject to the so-called Braganza duty, derived from the Supreme Court’s decision in Braganza v BP Shipping Ltd [2015] UKSC 17, i.e. the lender’s discretion was not required to be exercised in a way which was not arbitrary, capricious or irrational in the public law sense.

We consider the decision in more detail below.

Background

In 2008, Lombard North Central Plc (the Lender) lent approximately USD 8.8 million to European Skyjets Limited (the Borrower) for the purchase of an aircraft, pursuant to a loan agreement (the Loan Agreement). The loan was to be repaid in monthly instalments. By way of security, the Lender acquired a first priority legal charge over the aircraft.

In October 2009, the Borrower failed to make the first payment due under the Loan Agreement. Between October 2009 and October 2011, there were a series of further payment related defaults. However, during that time, the Borrower also periodically cleared the payment arrears, although it subsequently went into payment default again at various points. After lengthy restructuring related discussions, which included the Lender obtaining third party advice from an accounting firm, the Loan Agreement was terminated and the loan accelerated by the Lender serving a notice (the Notice) in November 2012. The Borrower subsequently went into administration.

In due course, the Lender brought a claim against the Borrower for the outstanding balance of some USD 5.8 million. The Lender’s case was that it had validly terminated the Loan Agreement, and thereafter validly enforced its security over the aircraft by selling it for USD 3.1 million.

The Borrower denied the claim. The Borrower’s case was that the Lender had no entitlement to terminate the Loan Agreement or to sell the aircraft, and that in any event the Lender had breached its duties as mortgagee when selling the aircraft. The Borrower brought a counterclaim for damages in the sum of GBP 26 million for breach of contract and/or conversion.

Decision

The court found in favour of the Lender, holding that the Lender had validly accelerated and terminated the Loan Agreement and thereby became entitled to enforce the security in respect of the outstanding balance of the loan. There also had been no breach by the Lender of its equitable duty to obtain the best price reasonably obtainable for the aircraft.

The key issues which may be of interest to financial institutions from the decision are set out below.

Termination

1) Did the Lender waive its right to rely on the Borrower’s default in the payment of principal or interest or any other sum payable as an event of default so as to terminate the Loan Agreement?

The court found that the Lender had waived its right to rely on this event of default through its conduct, notwithstanding the inclusion of common contractual “no waiver” language and the use of reservation of rights language in communications with the borrower.

The court noted that as a matter of construction, the relevant provisions in the Loan Agreement did not require the relevant event of default to be continuing; instead, an event of default simply had to have occurred in order for the loan to be accelerated (as per Mardorf Peach & Co Ltd v Attica Sea Carriers Corporation of Liberia (The Laconia) [1977] AC 850). However, the court acknowledged that its finding on the absence of a need for a continuing default could give rise to a relatively severe effect on parties in the position of the Borrower. Namely, a creditor might sit on the right of termination arising from an instalment which was paid late, only to exercise its right of termination much later.

The court commented that this could be addressed by the doctrine of waiver (or estoppel). In cases of waiver, the conduct of the creditor in the period after receipt of the late payment may be held to have waived any right to terminate on account of that late payment. In the present case, the court found that the Lender’s conduct and statements, in accepting late payment of various instalments, offering further time for the balance of the outstanding payment to be paid by a specific date and adding late payment charges to the amounts said to be due from the Borrower, was consistent with the Lender having waived its right to terminate the Loan Agreement based on the event of default by that date.

The court also considered the effect of a “no waiver” clause in the Loan Agreement, and also a statement in an e-mail sent by a representative of the Lender to the Borrower purporting to reserve its rights in relation to the event of default. The “no waiver” clause provided that a failure or delay in exercising a right on the part of the Lender would not operate as a waiver, and the reservation of rights wording indicated that the Lender’s rights were generally reserved in relation to identified breaches of the Loan Agreement.

Here, it was not the failure or delay to exercise a right which resulted in a waiver, but the positive assertions said to arise from the late payments in which the Lender had indicated that it would not enforce the event of default if payments were subsequently brought up to date. As to the reservation of rights, as per SK Shipping Europe Plc v Capital VLCC 3 Corp [2020] EWHC 3448 (Comm), the court noted that a statement in an email reserving rights could not prevent an affirmatory act, which would amount to a waiver and thereby effectively trump the reservation of rights. That was the case here.

2) Could the Lender rely on another event of default not specified in the Notice?

The court found that although the Notice did not specify the correct events of default, this did not impugn the notice, and it had been validly given.

The court noted that the Loan Agreement required that the Notice must (i) be sent after the occurrence of an event of default and (ii) cancel the facility and require the Borrower to immediately repay the loan together with the accrued interest and all other sums payable under the Loan Agreement. The related mortgage had a similar provision which required notice to be given after the occurrence of an event of default.

As per Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19, a party exercising its contractual right of termination by notice must strictly comply with any conditions relating to the exercise of that right. Neither the Loan Agreement nor the mortgage required the relevant event of default to be specified in the Notice, and such a requirement ought not to be implied. This was not a case where there was a cure period, such that it could be said the borrower needed to know what the default was to address it. Furthermore, as per Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 352, 364, it was possible to terminate an agreement without identifying (or correctly identifying) the breaches justifying termination. Similarly, the court said there was ample authority, as per Byblos Bank SAL v Al-Khudhairy [1986] 2 BCC 99,548 and Brampton Manor (Leisure) Ltd v McLean [2007] BCC 640, that a bank was able to accelerate a debt and appoint a receiver where it relied on a default which had not been invoked prior to the appointment.

3) Was there a material adverse effect on the Borrower’s position giving rise to an event of default?

The court found there had been a subjective material adverse change which gave rise to an event of default.

The court noted that the Loan Agreement provided that there would be an event of default if “in the opinion of the Lender, a material adverse change occurs in the business, assets, condition, operations or prospects of any Group Company or any Credit Support Provider.

The court accepted that for the purposes of that clause it was necessary for the court to be satisfied that the Lender formed the requisite opinion at the time (and that the opinion was honest and rational) but unnecessary objectively for the event of circumstance relied upon to have had an adverse effect (as per Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013] UKPC 2). This would need to be the case at the time it served the Notice (as per Plantation Holdings (FZ) LLC v Dubai Islamic Bank PJSC [2017] EWHC 520 (Comm)).

The court highlighted that the Lender had previously been told by the principal of the Borrower’s group, that it required a certain level of net revenue to break even and meet the loan repayments over 10 years, it had recently achieved net profits and was forecasting to do the same and that the principal had substantial net assets.

However, the court said the evidence (from the relevant account manager at the Lender) showed that the Lender honestly believed at the time the Notice was served that there had been a material adverse change in the Borrower’s position, and this was objectively an entirely reasonable position. The account manager had raised the need for an investigation into the position of the Borrower. The investigation by a third-party accounting firm revealed that the Borrower’s management accounts showed trading losses for four months, the performance of the Borrower’s group was far below budget performance and that the business was insolvent on a cash flow basis. Following receipt of that report, the account manager had also made clear in an internal communication that he endorsed that assessment and that the short- and long-term forecasts had shown that the Borrower’s group was not viable at that time and would in the future be unable to service its facilities.

4) Was the Lender precluded from terminating by a contractual duty of good faith?

The court highlighted that the occurrence of an event of default giving the Lender a right of termination was not a contractual discretion to which the Braganza duties applied.

The court noted that, as per TAQA Bratani Limited v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm), that the Lender’s right of termination was an absolute one, which could be exercised by the Lender for its own purposes as it saw fit (and therefore was not subject to a Braganza style fetter).

Sale of aircraft

The court found that there had been no breach by the Lender of its equitable duty to obtain the best price reasonably obtainable for the aircraft.

The court acknowledged that, as per Silven Properties v Royal Bank of Scotland [2003] EWCA Civ 1409 and Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] EWCA Civ 9, the Lender owed the Borrower an equitable duty to obtain the best price reasonably obtainable for the aircraft, that this involved the exercise of an informed judgment and that provided that the Lender as mortgagee went about the exercise of its judgment in a reasonable way it would not be held to be in breach of duty.

The court said that it was not persuaded that the Lender had breached its duty as mortgagee by: (i) keeping the aircraft in situ (rather than flying it to a cheaper location to store or where there would have been less risk of corrosion): and (ii) acting as it did in the sales process of the aircraft, e.g. by appointing a certain sales broker to conduct the process, not advertising the aircraft in trade journals, and refusing to deal with intermediaries seeking commission.

Further, the court said that even if there had been a breach of duty to take reasonable steps to realise the best value of the aircraft it was persuaded that, when it had regard to the fact that aircraft was being sold by a mortgagee in possession after a lengthy period on the market, the sale price fell within the range of reasonable market values.

Accordingly, for all the reasons above, the court found in favour of the lender.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Emily Barry
Emily Barry
Professional Support Consultant
+44 20 7466 2546
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529
Nic Patmore
Nic Patmore
Senior Associate
+44 20 7466 2298

Cryptocurrency, proprietary injunctions, freezing orders, and trusts: the law is not cryptic

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on a recent cryptocurrency case, Wang v Darby [2021] EWHC 3054 (Comm), which applies established principles relating to trusts, proprietary injunctions and worldwide freezing orders to this new asset class.

Despite the meteoric rise of cryptocurrency as an asset class, there has to date been little case law concerning it. Wang v Darby confirms that familiar legal principles apply equally to cryptocurrencies, although digital assets can shine a light on established areas of law.

In our article we discuss the key issues arising from the application of established principles to novel circumstances and the way in which Wang v Darby represents a missed opportunity to address the more interesting points arising in existing case law concerning cryptocurrency.

The article can be found here: Cryptocurrency, proprietary injunctions, freezing orders, and trusts: the law is not cryptic. This article first appeared in the April 2022 edition of JIBFL.

Ajay Malhotra
Ajay Malhotra
Partner
+44 20 7466 7605
Tom Wyer
Tom Wyer
Associate
+44 20 7466 7579

High Court finds developers did not owe duty to cryptoasset owners to enable access to lost cryptoassets

The High Court has held that cryptoasset systems and software developers did not owe a duty to cryptoasset owners to permit or enable access to the assets where the owners had lost control over the assets following a hack: Tulip Trading Limited v Bitcoin Association for BSV [2022] EWHC 667 (Ch).

This is an important judgment for financial institutions who offer cryptoasset custody services, or otherwise deal with cryptoassets, and is the latest in a series of significant rulings from the English courts in relation to this asset class.

The decision suggests that an owner of cryptoassets has no recourse against the developers of the relevant cryptoasset systems if they lose control of their cryptoassets, either accidentally or due to an event such as a hacking incident. It does not, however, altogether close off arguments that the developers or controllers of cryptoasset systems might owe fiduciary duties or a tortious duty of care in other circumstances, for example where they have introduced a bug by means of a software update or otherwise created a risk to users.

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

High Court considers unlawful means conspiracy claim in the context of a repo fraud

The High Court has found in favour of a global financial brokerage business in its claim for unlawful means conspiracy against several businesses and individuals in the context of a repo fraud: ED & F Man Capital Markets Limited v Come Harvest Holdings Limited & ors [2022] EWHC 229 (Comm).

The decision will be of broader interest to financial institutions who may have been victims of a fraud perpetrated by a counterparty, or when defending mis-selling litigation, where allegations of unlawful means conspiracy are commonly included as part of a suite of claims.

While the decision did not involve new law, it serves as a reminder of the principles underpinning the tort of unlawful means conspiracy, and provides a useful application of the test set out in Kuwait Oil Tanker v Al Bader & ors [2000] EWCA Civ 160. Of note is the court’s view is that in pursuing a claim for unlawful means conspiracy: (a) there can be different levels of intentionality involved when assessing whether there has been an intention by the fraudster(s) to cause harm; (b) it is not necessary that a party prove that the perpetrator(s) must have directed their actions towards a specific claimant, as opposed to a third party or class of persons more generally; and (c) blind-eye or Nelsonian knowledge (i.e. where a party abstains from inquiry because they do not wish to confirm a particular state of affairs which they believe likely to exist) may be sufficient to establish intention to cause harm.

In the present case, the court was satisfied that the defendants knew that the global financial brokerage was an intended victim of the unlawful means conspiracy, and if this had not been the case, the court noted that it would have found that the defendants had blind-eye knowledge. They also knew it was the global financial brokerage who would suffer loss.

We consider the decision in more detail below.

Background

Between May and October 2016, the claimant global financial brokerage business (MCM) entered into 28 sale and repurchase transactions. The counterparties to the transactions were 2 Hong Kong companies (together, the HK Companies). As part of the transactions, MCM received 92 purportedly genuine original warehouse receipts (Purported Receipts) purporting to give a right to title to parcels of nickel issued by the warehouse storing such metals. MCM consequentially provided finance to the HK Companies via its own sub-sale of 83 of the Purported Receipts to an Australian financial services company (ANZ).

When it later transpired that the Purported Receipts were forgeries which did not confer title to any nickel, MCM brought an unlawful means conspiracy claim against the HK Companies on the basis that it had been left seriously out of pocket for the monies it had advanced. MCM also added the following parties as defendants to the claim: (a) the sole director and shareholder of the HK Companies (Mr Wong); (b) the agent and adviser of the HK Companies (Genesis); (c) the sole director and shareholder of Genesis (Mr Kao); and (d) a Singaporean brokerage (Straits).

MCM’s case was that Straits either knew or consciously decided not to enquire as to how the HK Companies, Mr Kao and Genesis were obtaining finance from MCM, ANZ and other financiers using the Purported Receipts. If they chose not to enquire, MCM submitted that this was a situation where the test for “blind-eye” or Nelsonian knowledge (i.e. refraining from making enquiries when suspicious) was satisfied.

However, Straits contended that there was no (documentary or otherwise) evidence that it had any knowledge of the fraud perpetrated on MCM; nor did it have blind-eye knowledge. Rather, it claimed that it was itself misled by Mr Kao and at most “with the benefit of hindsight as perfect vision“, it could be said that Straits missed a number of “red flags” in regard to Mr Kao and his associated companies.

Decision

The court found in favour of MCM, holding that the defendants had conspired to injure MCM by unlawful means.

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

Test for unlawful means conspiracy

In reaching its conclusion, the court noted that the tort of conspiracy to injure by unlawful means is actionable where the claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the defendant to do so (as per Kuwait Oil Tanker).

A combination or understanding between two or more people

The court found that there was a combination, understanding or agreement between the CEO and Vice President of Straits, Mr Wong and Mr Kao that Straits should carry out certain steps as part of the wider fraud. The basis upon which this conclusion was reached was fact specific and related to the state of certain defendants’ knowledge. However, it is notable that the court found that the “overt acts” of Straits were themselves strongly suggestive of a conspiracy, and what is more, the implausible explanation offered by Straits’ witnesses and “untruthful attempts” in evidence to explain away the part Straits played only provided further “compelling evidence” in support of Straits’ involvement.

Intention to injure

In regard to this element of the tort, Straits sought to contend that the defendant must have directed their actions towards a specific claimant, as opposed to a third party or class of persons more generally, and mere recklessness as to injury to the claimant was not sufficient. However, MCM maintained that this was not supported, and in fact contradicted, by the authorities cited.

The court referred in its analysis on this point to OBG v Allan [2007] UKHL 21, where the House of Lords considered the level of intentionality required to establish liability, and highlighted the distinction between ends, means, and consequences. In summary: (i) ends, where harm to the claimant is the end sought by the defendant, then the requisite intention is made out; (ii) means, where the harm to the claimant is the means by which the defendant seeks to secure his/her end, then the requisite intention is made out; and (iii) consequences, where the harm is neither the end nor the means but merely a foreseeable consequence, the requisite intention is not made out. The court then went on to note that there was another category, known as “the other side of the coin”, to consider if harm to the claimant was the necessary consequence of the defendant’s actions. This was differentiated from category (iii) on the basis that the defendant’s gain and the claimant’s loss are inseparably linked and the defendant cannot obtain the one without bringing about the other, and the defendant knew this to be the case. In such circumstances, then although the purpose of the defendant’s action was not to harm the claimant, they will be considered as having intended to harm the claimant. The court also noted that there was no additional requirement that the precise identity of the victim be required at law to establish the requisite intention.

The court acknowledged the overlap between intention and knowledge and in particular, the fact that blind-eye or Nelsonian knowledge may be sufficient, which strengthened the view that there can be no requirement to intend to harm a specific claimant (because, in a case of blind-eye knowledge, no inquiry would have been undertaken to confirm the state of affairs, such as the identity of the claimant).

In any event, the court found on the facts that Straits knew that MCM was an intended victim of the unlawful means conspiracy at least from or shortly prior to April 2016, and if this had not been the case, the court noted that it would have found that the CEO and Vice President of Straits had blind-eye knowledge.

Similarly, the court found that the HK Companies, Mr Kao, and Genesis entered into a combination with intent to injure MCM by deceit. In the court’s view, they knew it was MCM who would suffer loss.

Unlawful means

The court agreed with the parties that there were two constituent parts to this element of the tort, namely (i) the unlawfulness of the act; and (ii) whether the unlawful act is in fact the “means” by which injury is inflicted. Straits contended that the “indeed the means” component of the tort was made up of two aspects, causation and intention, and that this requirement of “intention” was in addition to the separate requirement that the defendant had intent to injure the claimant (considered above). By contrast, MCM maintained that in fact the “indeed the means” concept went to the unlawful means and causation elements of the tort, but not intention.

The court held that MCM’s analysis was correct and confirmed that there was no intention requirement to this component of the tort. It found that MCM had sufficiently met the required threshold, given that Straits knew about the forgeries (although it was noted that the defendant is not required to know the specifics of the “unlawful means” deployed).

Loss

On the question of loss, the court considered there to be no doubt that MCM had suffered loss as a result of the unlawful means.

Accordingly, for all the reasons above, the court found in favour of MCM in relation to its claim for unlawful means conspiracy.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529
Phoebe Fox
Phoebe Fox
Associate
+44 20 7466 2805

Court of Appeal finds Quincecare duty is not limited to corporate customers and can (in principle) extend to protecting individuals

This week, the Court of Appeal handed down an important judgment considering the scope of the so-called Quincecare duty: Philipp v Barclays Bank UK plc [2022] EWCA Civ 318.

Historically, the Quincecare duty has arisen where a bank receives a payment instruction from an authorised signatory of its customer, and executes 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 factual circumstances of the major cases in which the duty has been considered have all involved instructions made by an authorised signatory (acting fraudulently) on behalf of a company or firm. In particular, this was the factual scenario in Barclays Bank v Quincecare [1992] 4 All ER 363 itself, and it was also the factual basis for the only case to date in which the duty has been found to have been owed and breached, Singularis Holdings v Daiwa Capital Markets [2019] UKSC 50 (see our blog post).

However, in the present case the Court of Appeal found, as a point of law, that the Quincecare duty is not limited to the situation where instructions have been given by an agent/authorised signatory on behalf of the customer of the bank. This means the duty is not limited to protecting corporate customers and can, in principle, extend to protecting individuals.

While recognising previous statements in the authorities as to the purpose of the Quincecare duty, the Court of Appeal focused instead on the reasoning behind the duty given in those cases. Crucially, the Court of Appeal found that the line of reasoning in the authorities: (a) did not depend on whether the instruction was being given by an agent of the customer; (b) was not limited to the factual circumstances of those cases; and (c) could properly be applied on a wider basis.

Turning to the facts of the present claim, the proceedings were brought by the victim of an authorised push payment (APP) fraud, who was deceived by a fraudster to instruct the bank to transfer money from her account and pay into an account controlled by the fraudster. The Court of Appeal held that, whether or not the Quincecare duty arose in these circumstances was a question to be determined at trial, but confirmed that this was at least possible in principle. Accordingly, the Court of Appeal held that summary judgment granted by the High Court in favour of the bank was wrongly entered and should be set aside.

Notwithstanding the Court of Appeal’s analysis in this case, its conclusions on the parameters of the Quincecare duty appear to extend the application of the duty beyond the strict boundaries established in previous authorities. Without the need for the agency relationship described above, there is a risk that the Quincecare duty could now (in principle) apply to a wider range of payment processing scenarios, with repercussions outside of the APP fraud context at the centre of this dispute.

We consider the decision in further detail below.

Background

The background to this decision is more fully set out in our blog post on the High Court’s decision, here.

In summary, 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 (the 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 and the National Crime Agency.

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 Quincecare duty of care to protect her from the consequences of the payments.

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.

High Court decision

The High Court’s reasoning is discussed in our previous blog post, here.

In summary, the High Court struck out the claim, finding that the Bank did not owe the Quincecare duty in respect of the APP fraud perpetrated upon the claimant.

In the view of the High Court, the existing authorities limited the Quincecare duty to protecting 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 High Court confirmed that the Quincecare duty did not extend to individual customers, and it 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.

Grounds of appeal and intervener application

The High Court granted the claimant permission to appeal to the Court of Appeal. The claimant/appellant submitted that:

  1. It was at least properly arguable that a duty of care did arise in this case and that the matter ought to have gone to trial.
  2. The duty was a species of the duty arising under section 13 of the Supply of Goods and Services Act 1982 or at common law, and its existence ought to be seen as a proper application of reasoning which supports the existence of the Quincecare duty.
  3. Alternatively, the duty of care arising in this case should be recognised as a legitimate incremental development of that line of authority.

Following the High Court’s judgment, the Consumers’ Association (also known as “Which?”) applied to intervene in this appeal and permission was granted. The intervener supported the appeal, contending that the courts should recognise a duty of care in these circumstances, that the Quincecare duty was unremarkable and that it would be illogical to confine it to companies or agents. The intervener also contended that the Bank was wrong to say that the duty would impose onerous and unworkable obligations on banks.

Court of Appeal decision

The Court of Appeal allowed the appeal. The key elements of the Court of Appeal’s analysis are discussed further below.

Scope of the Quincecare duty

The Bank argued that no Quincecare duty existed in the circumstances of this case as a matter of law, because the duty was limited to cases where the instructions were given by an agent, usually an agent of a company. Accordingly, the Bank said that the Quincecare duty could not extend to the present case where the customer herself authorised the transfer.

In support of this argument, the Bank placed emphasis on two particular passages in Singularis in which Lady Hale explained the purpose of the Quincecare duty as being:

  • “…to protect a bank’s customers from the harm caused by people for whom the customer is, one way or another, responsible” (paragraph 23 of Singularis); and
  • “…to protect the company against…misappropriation of its funds…by definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account” (paragraph 35 of Singularis).

The Court of Appeal accepted that the factual circumstances of the major cases in which the Quincecare duty has been considered to date have involved instructions from a fraudulent agent acting for a company or firm: see in particular, Quincecare, Lipkin Gorman v Karpnale [1989] 1 WLR 1340 and Singularis.

However, in the Court of Appeal’s view, statements about the purpose of the duty should be seen in the context of the case in which they were made, and what mattered was the reasoning in those cases. The judgment highlighted three steps to the reasoning underpinning the Quincecare duty in these cases, as follows:

  1. What is the relationship between the customer and the bank? The Court of Appeal said the starting point was the correct identification of the relationship between the customer and the bank in the context of an instruction to pay. The answer was that the bank was the agent for the customer as principal.
  2. Is the bank’s duty to execute the customer’s instruction absolute? Notwithstanding the bank’s primary obligation to execute a payment instruction, the Court of Appeal noted acceptance in the authorities that the bank would be liable for breach of a duty to use reasonable skill and care in executing the customer’s orders, if it knew that the relevant instruction was an attempt to misappropriate funds and executed the instruction notwithstanding that knowledge.
  3. What level of knowledge on behalf of the bank would give rise to liability for breach of the duty to use reasonable skill and care in executing the customer’s orders? Once the second step was accepted, the Court of Appeal said the final question was, what lesser state of knowledge would put the bank under a legal obligation? It said this has been expressed in the case law (and confirmed by the Supreme Court in Singularis) as being the level at which an ordinary prudent banker would be “on inquiry”. The Court of Appeal noted that the duty was not to execute the order while on inquiry, and to make inquiries.

In the judgment of the Court of Appeal, the reasoning set out above led to the conclusion that, despite the importance of the bank’s duty to execute orders promptly, the bank had another duty which operated in tension with that primary duty. This opposing duty meant that the bank may be required to refrain from executing an order if and for so long as the circumstances would put an ordinary prudent banker on inquiry. To reinforce this point, the Court of Appeal proceeded to consider a number of authorities confirming that a banker’s duty when presented with a payment instruction was not unqualified. The important point was that the bank’s obligation was not simply and always to execute every payment instruction of whatever kind unthinkingly. It noted that the purpose of the duty identified by this logic was to protect the customer and not the bank.

Crucially, the Court of Appeal found that the line of reasoning identified in the authorities: (a) did not depend on whether the instruction was being given by an agent of the customer; (b) was not limited to the factual circumstances of those cases; and (c) could properly be applied on a wider basis. Accordingly, as a matter of law, the Court of Appeal held that the Quincecare duty of care did not depend on the fact that the bank was instructed by an agent of the customer. It said this was the only legal conclusion necessary to resolve the appeal.

In reaching its decision, the Court of Appeal also rejected the following arguments made by the Bank.

  • The Bank submitted that the Quincecare duty (as articulated by the Bank) did not cut across the absolute duty to execute the customer’s order. This was because – if the agent’s instruction was an attempt by the agent to misappropriate its principal’s funds – the bank did not in fact have an instruction from the true customer at all, and therefore was not in breach of a genuine instruction by delaying and making inquiries or refusing it altogether. However, the Court of Appeal found that the Bank’s case about the scope of the Quincecare duty was wrong, and so this point did not go anywhere.
  • The Bank argued that to recognise a Quincecare duty in this case would impose onerous and unworkable obligations on banks. In its judgment, the Court of Appeal said this issue clearly involved disputed facts and was not capable of being resolved in a summary way. It said that this point alone was enough to indicate that the court below erred in accepting the absence of the duty of care without a trial.
  • The Court of Appeal rejected the argument that allowing the appeal would involve either identifying a novel duty of care or an unwarranted extension of the existing duty, given its finding that the Quincecare duty was not limited in the manner contended for by the Bank.

Application of the Quincecare duty in the context of an APP fraud

Given its findings on the scope of the Quincecare duty, the Court of Appeal held that it was at least possible (in principle) that a relevant duty of care could arise in the case of a customer instructing their bank to make a payment when that customer is the victim of APP fraud. In the view of the Court of Appeal the right occasion on which to decide whether such a duty in fact arose in this case was at trial. Whether this case succeeds at trial or not will depend on the evidence and findings of fact at trial about ordinary banking practice both in terms of what would put an ordinary prudent banker on inquiry and what such a banker would then have done about it if they were.

Accordingly, the Court of Appeal held that summary judgment in favour of the Bank was wrongly entered and should be set aside.

Correct approach to summary judgment applications

It is worth highlighting some commentary by the Court of Appeal as to the correct approach in law to applications for summary judgment, as established in EasyAir Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch). In EasyAir, the court warned against carrying out a mini trial but also recognised that if a short point of law arose which could be decided (because all the evidence necessary to decide it was before the court), then the court could do so. The Court of Appeal said it was regrettable that the trial judge had been drawn into conducting a mini trial on whether recognising a Quincecare duty in this case would impose onerous and unworkable obligations on banks, contrary to the warnings against doing so.

The Court of Appeal also referred to AK Investment CJSC v Kyrgyz Mobil Tel Ltd [2012] 1 WLR 1804, in which the Privy Council held that: (i) it is not normally appropriate to use a summary procedure for the determination of controversial questions of law; and (ii) that it is generally desirable that such issues of law are decided on the basis of actual rather than hypothetical facts and with the benefit of detailed argument and mature consideration. In the view of the Court of Appeal, this case bore out the warning in Kyrgyz Mobil that questions of law of this sort are best decided on the basis of actual facts rather than by a summary procedure. Although the incidence of a duty of care is a matter of law, the Court of Appeal commented that when duty and standard of care were so closely related as they were in this case (and particularly when the court was being asked to decide whether to develop the law or not), these ought to be indicators that the best course was to bring the matter to trial rather than decide aspects of these points on a summary basis.

Chris Bushell
Chris Bushell
Partner
+44 20 7466 2187
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529

High Court finds no duty owed to investors by barrister advising scheme promoter

In a decision handed down this morning, the High Court has found that a tax QC who had prepared opinions for the promoter of film finance tax schemes did not owe a duty of care to the investors in those schemes – and that even if he had owed a duty, the views he expressed in the opinions were not unreasonable: McClean & Others v Thornhill [2022] EWHC 457 (Ch).

The court accepted that the claimants had a credible starting point for an assumption of responsibility, because Mr Thornhill QC consented, unequivocally and in writing, to his opinions being shared with prospective investors. However, on proper analysis there was no assumption of responsibility: the prospective investors had been recommended to take (and all warranted that they had taken) their own advice; and in addition, they could only have gained access to the schemes through an IFA, and it was reasonable to expect that the IFAs would either have given or procured the necessary advice.

Herbert Smith Freehills Partner Will Glassey (whilst a partner at his previous firm Mayer Brown) acted for the successful defendant Andrew Thornhill QC. His full case note can be accessed here.

Overview of anticipated focus areas for BBLS litigation

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the government’s Bounce Back Loan Scheme (BBLS) and the anticipated focus areas for litigation against BBLS lenders now that collection and recovery activities have begun.

During the pandemic, the coronavirus loan schemes provided more than £75bn of government funding, overseen by the British Business Bank. The BBLS was the largest of these schemes by both number of applications and total amounts lent, with lending in excess of £47bn across more than 1.5 million applications. BBLS applications closed at the end of March 2021.

The influx of complaints and claims is expected to follow the customer journey. To date, these have mostly related to declined or delayed applications; however, numbers are starting to increase as repayments begin and lenders begin collection and recovery activities. In our article we examine the litigation risks which lenders will need to take into account when engaging with such customer complaints and claims.

The article can be found here: Overview of anticipated focus areas for BBLS litigation. This article first appeared in the February 2022 edition of JIBFL.

Rupert Lewis
Rupert Lewis
Partner
+44 20 7466 2517
Eleanor Dole Sheaf
Eleanor Dole Sheaf
Associate
+44 20 7466 7612

Regulation in Focus Podcast – Operational Resilience

Our FSR colleagues’ latest Regulation in Focus podcast features two former regulators in conversation about operational resilience – Andrew Procter from Herbert Smith Freehills and Michael Sicsic from Sicsic Advisory.

The discussion focuses on the implementation of operational resilience requirements for the upcoming UK regulatory deadline of 31 March 2022, including a discussion of the regulatory and litigation risks for financial institutions.

To listen to the podcast and for more details, please see our FSR Notes blog post.

Supreme Court confirms UK government’s recognition of President of Venezuela, leaving Commercial Court to determine who is authorised to give instructions on behalf of Venezuelan Central Bank

Following an ongoing dispute between two competing Boards of the Central Bank of Venezuela (BCV), both claiming to be appointed by the recognised President of Venezuela, the Supreme Court determined unanimously that: (a) Mr Guaidó is recognised by Her Majesty’s Government (HMG) as the constitutional interim President of Venezuela; and (b) Mr Maduro is not recognised by HMG as President of Venezuela for any purpose.

Central to the Supreme Court’s decision was its recognition of the “one voice” principle, namely that it is for the executive (i.e. HMG) to decide with which entities or persons it will have relations on the international stage, and statements made by the executive to this effect must be accepted by UK courts as conclusive. This approach was perhaps not surprising, in light of intervention in the appeal by the Foreign, Commonwealth & Development Office (FCDO), confirming that HMG recognised Mr Guaidó. However, in holding that UK courts should make their own findings of fact and look at extrinsic evidence only in the absence of such an express statement of recognition by HMG, the Supreme Court may have limited the scope for future judicial interpretation in relation to matters of this nature and the “one voice” principle.

The relevant question for the purposes of UK financial institutions arising out of this dispute, is the identity of the persons entitled to give instructions on behalf of the BCV. This question remains outstanding, and the matter will now be remitted to the Commercial Court to determine whether certain of Mr Guaidó’s acts, including his appointments to the Board of the BCV, are lawful.

In this context, although HMG has recognised Mr Guaidó’s government, the Supreme Tribunal of Venezuela (STJ) has nullified, or at least purported to nullify, Mr Guaidó’s appointments to the BCV. Accordingly, the authority of either Board to give instructions to UK financial institutions with custody of BCV assets now rests on whether the STJ decisions should be recognised in the UK. If those decisions are recognised in the UK, the Maduro Board will prevail and will have authority to give instructions on behalf of the BCV; if the STJ decisions are not recognised in the UK, the Guaidó Board will prevail and have such authority. However, as the Supreme Court explained, judicial rulings by a foreign state, while manifestations of state sovereignty, do not fall within the scope of any rule of act of state under English law. They are therefore not entitled to the same level of deference which may be shown to the legislative and executive acts of a foreign state. Accordingly, the Commercial Court may be more willing to challenge the legitimacy of the STJ rulings than to challenge Mr Guaidó’s executive acts. Further, the Supreme Court noted that if the STJ’s reasoning for its rulings was because Mr Guaidó is not the President of Venezuela, such STJ decisions cannot be recognised or given effect by the UK courts, because to do so would conflict with the view of the UK executive.

The key issues and findings of the Supreme Court which are likely to be of broader interest to financial institutions, are summarised below.

Background

The background is summarised in our previous blog post.

In short, two boards of the BCV, one appointed by Mr Maduro (the Maduro Board) and another appointed by Mr Guaidó (the Guaidó Board), disputed which Board was entitled to give instructions to UK financial institutions on behalf of the BCV. They had given conflicting instructions regarding the following assets:

  • USD 2 billion gold reserves, currently held by the Bank of England (BoE); and
  • USD 120 million proceeds from a gold swap transaction concluded between Deutsche Bank and the BCV, currently held by court-appointed receivers.

In response to a claim from the Maduro Board in April 2020 to compel the BoE to act on its instructions, the BoE applied in May 2020: (a) for court guidance (under CPR Part 86) as to whether it could act on the instructions of the Maduro Board; and (b) for a stay while the wider political and legal battle between the two Boards was determined. That claim against the BoE is currently stayed pending resolution of these proceedings between the two Boards and pending the Commercial Court determination as to whether to give effect to acts of the Venezuelan executive or rulings of the Venezuelan judiciary.

First Instance Commercial Court decision

The Commercial Court held in July 2020 that HMG had recognised Mr Guaidó as the current Venezuelan head of state and held that any associated legislative and executive acts by Mr Guaidó as the recognised Venezuelan head of state would be non-justiciable before the UK courts. The Commercial Court’s reasoning is summarised in our previous blog post.

The Maduro Board appealed.

Court of Appeal decision

In October 2020, the Court of Appeal allowed the appeal and set aside the first instance ruling. The Court of Appeal held that it was not possible to give a definitive answer and remitted the case back to the Commercial Court for further consideration.

In particular, the Court of Appeal disagreed with the Commercial Court that HMG had clearly and unequivocally recognised Mr Guaidó as the Venezuelan head of state in a statement dated 4 February 2019 (the HMG Statement), and accordingly disagreed that any associated legislative or executive act by Mr Guaidó would be non-justiciable. The Court of Appeal held that the HMG Statement left open the possibility that HMG had simultaneously recognised Mr Maduro as de facto head of state. The Court of Appeal made no ruling regarding whether it could consider questions as to the validity of certain Venezuelan legislative and executive acts, but underlined that if HMG confirmed “de facto” recognition of Mr Maduro, the appointments made to the Guaidó Board by Mr Guaidó would be considered null and void and the Guaidó Board’s claim to the disputed assets would effectively be extinguished.

Appeal to the Supreme Court

Following the Court of Appeal’s decision, there were a number of political developments. In early December 2020, the Venezuelan National Assembly held a new set of elections and a day after the election results were announced proclaiming Mr Maduro as the winner and therefore as the President of Venezuela, HMG (via the FCDO) issued a statement that it did not recognise the result of the election on the basis that it was neither free nor fair.

The Supreme Court granted the Guaidó Board permission to appeal the Court of Appeal’s decision and the issues which had been remitted by the Court of Appeal back to the Commercial Court were stayed pending the outcome of the Guaidó Board appeal.

Issues for the Supreme Court to determine

The key issues were, following the decisions of the lower courts, in summary:

  • Who does HMG recognise as the President of Venezuela and in what capacity, on what basis and from when? (the Recognition Issue)
  • If Mr Guaidó is the President of Venezuela, can the Supreme Court consider the validity and/or constitutionality under Venezuelan law of various acts taken by him, including his appointment of the Guaidó Board, or must it regard those acts as being valid and effective without further enquiry? (the Act of State Issue)

Supreme Court decision

Issue 1: the Recognition Issue

The Supreme Court disagreed with the Court of Appeal’s finding that it was not possible to give a definitive answer to all aspects of the Recognition issue.

In the leading judgment of Lord Lloyd Jones (with whom Lord Reed, Lord Hodge, Lord Hamblen and Lord Leggatt all agreed), the Supreme Court stated that the “one voice” principle is today not open to question; it is for the executive (i.e. HMG) to decide with which entities or persons it will have relations on the international plane and UK courts must “accept as conclusive statements made by the executive relating to certain questions of fact in the field of international affairs. These questions include the sovereign status of a state or government and whether an individual is to be regarded as a head of state“.

In this particular instance, the Supreme Court said that HMG had made an express statement via Jeremy Hunt on 4 February 2019 and via the Hugo Shorter letter on 19 March 2020 (together, the Certificate) in relation to “the status of a person claiming to be head of state of Venezuela“. The Supreme Court said that the Court of Appeal erred in construing the Certificate as ambiguous – it held that it was an unequivocal and clear recognition of Mr Guaidó as President. It said the Court of Appeal should not have interpreted the Certificate by reference to extrinsic evidence when there was no ambiguity, and it was not appropriate for the Court of Appeal to look beyond the terms of the Certificate in this way. The Supreme Court stated that although the Certificate must be interpreted and applied by the courts, “[if] the FCDO has departed from its usual practice by issuing an express statement of recognition, any ambiguity in the statement should be resolved by a further request to the FCDO for clarification“.

Finally, the Supreme Court criticised the Court of Appeal for “introducing the concept of implied de facto recognition and in addressing the possibility that HMG might recognise Mr Guaidó as President de jure, while also impliedly recognising Mr Maduro as President de facto“. It held that the de jure versus de facto distinction when determining the President of Venezuela complicated the present proceedings and held that no question of implied recognition arose. The Supreme Court urged great caution in employing these concepts, stating that they are not precise terms of art and their meaning may vary according to context. The Supreme Court then proceeded to doubt whether the distinction between de facto and de jure recognition, in any of its forms, has a useful role to play any longer before the English courts.

Issue 2: The “Act of State Issue”

This aspect of the Supreme Court’s judgment is perhaps a little more complex. In summary, the Supreme Court considered that President Guaidó’s appointments of public officials are “sovereign acts” of the Venezuelan state to which the “Act of State doctrine” applies.

The Supreme Court opined that the effect of the “Act of State doctrine” is that English courts will not question the effect of a foreign state’s: (1) legislation or other laws; or (2) executive, in relation to any acts which take place or take effect within the territory of that state (referred to as Rules 1 and 2 respectively).

The Supreme Court noted that existence of Rule 2 should now be acknowledged because “there is now a substantial body of authority, not all of which is obiter, which lends powerful support for the existence of a rule that English courts will not adjudicate or sit in judgment on the lawfulness or validity under its own law of an executive act of a foreign state, performed within the territory of that state“. It proceeded to make the following interesting observations on Rule 2:

  • The concept of Rule 2 has a sound basis in principle as a matter of international comity, but is different to state immunity.
  • To allow a UK court to interfere in the internal affairs of another state (for example, by questioning or adjudicating upon the lawfulness or the validity of certain executive acts of a foreign state) would constitute an objectionable interference with the internal affairs of that state, and would imperil amicable relations between governments and vex the peace of nations.
  • Although UK courts must not interfere with the internal affairs of another state, within most modern states sovereign power is shared among the legislative, executive and judicial branches of government. As such, UK courts cannot assume that the acts or conduct of the overseas executive is the sole manifestation of sovereign power and cannot assume that such acts or conduct should necessarily prevail over the position taken by the overseas legislature or judiciary.
  • In seeking to respect the sovereignty of a foreign state, it will not always be appropriate for UK courts to focus exclusively on acts of the overseas executive; UK courts are not always required to accept the lawfulness and validity of the executive act in preference to recognising a foreign court judgment where the two conflict (save in cases where to do so would conflict with UK public policy).

In the present case, this raises the question of whether the UK court should favour acts of the overseas executive (i.e. President Guaidó’s appointments of public officials) or the overseas judiciary (i.e. the STJ’s decisions that the acts of Mr Guaidó are unlawful and nullities).

The Supreme Court stated that UK courts “are more willing to investigate whether a foreign court is acting in a way that meets the standards expected of a court and whether there has occurred or is likely to a occur a failure of substantial justice“.

Foreign judgments therefore fall to be assessed under different rules from those applicable to legislative and executive acts and are less impervious to review. The Supreme Court endorsed the following view expressed by Rix LJ in Yukos [2014] QB 458, para 87: “… whereas in a proper case comity would seem to require… that the validity or lawfulness of the legislative or executive acts of a foreign friendly state acting within its territory should not be the subject of adjudication in our courts, comity only cautions that the judicial acts of a foreign state acting within its territory should not be challenged without cogent evidence.”

Further, the Supreme Court noted that “[if] and to the extent that the reasoning of the STJ leading to its decisions that acts of Mr Guaidó are unlawful and nullities depends on the view that he is not the President of Venezuela, those judicial decisions cannot be recognised or given effect by courts in this jurisdiction because to do so would conflict with the view of the UK executive.”

The Supreme Court commented that the Guaidó Board’s pleaded case is that the STJ’s judgments were issued in violation of principles of due process and that the members of the STJ are not impartial and independent but were acting corruptly to support Mr Maduro.

However, the Supreme Court pointed out that these issues were not addressed in argument and it was not taken to the STJ judgments in question. Given this, it held that whether, and if so, to what extent, the STJ decisions should be recognised or given effect by the English court was a matter which fell outside the preliminary issues and held that it was therefore appropriate for this aspect to be remitted to the Commercial Court.

Herbert Smith Freehills LLP acts for the BoE in the proceedings brought against it by the Maduro Board of the BCV.

Damien Byrne Hill
Damien Byrne Hill
Managing Partner, Disputes
+44 20 7466 2114
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948