Court of Appeal finds ISDA jurisdiction clause trumps competing clause in related contract

The Court of Appeal’s judgment in BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA provides further assurance that jurisdiction clauses within standard form ISDA documentation will not readily be displaced by contrary jurisdiction clauses in related contracts. The Court of Appeal gave effect to an English jurisdiction clause in an ISDA Master Agreement over an apparently competing Italian jurisdiction clause in a related financing agreement, despite a provision in the Schedule to the ISDA Master Agreement stating that, in the event of conflict, the financing agreement would prevail. The first instance decision of the Commercial Court was upheld (see our banking litigation e-bulletin).

Key to the Court of Appeal’s decision was its conclusion that there was no conflict between the jurisdiction clauses, which were found to govern different legal relationships and were therefore complementary, rather than conflicting. The Court emphasised that factual overlap, between potential claims under the ISDA Master Agreement and a related financing agreement, did not alter the legal reality that claims under the two agreements related to separate legal relationships.

The Court of Appeal’s decision is not unexpected, as it is in line with the recent Court of Appeal decision in Deutsche Bank AG v Comune Di Savona [2018] EWCA Civ 1740 (see our banking litigation e-bulletin) – which expressly approved the first instance decision in the present case. However, it will be welcomed as further evidence of the English court’s emphasis on construing commercial contracts, and in particular standard form ISDA documentation, in order to achieve market certainty and predictability.

Following the recent publication of French and Irish ISDA Master Agreements in light of Brexit, the court’s emphasis on predictability may serve as a timely reminder of the advantages of selecting English jurisdiction for ISDA Master Agreements.

Background

In 2008, a syndicate of banks led by the claimant, BNP Paribas S.A. (the “Bank“), entered into a loan agreement (the “Financing Agreement“) with the defendant, Trattamento Rifiuti Metropolitani S.p.A (“TRM“), an Italian public-private partnership, to fund the building of an energy plant. 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 (the “Hedging Requirement“).

In 2010, pursuant to the obligation in the Financing Agreement, the parties executed a 1992 form ISDA Master Agreement (the “ISDA Agreement“) and an interest rate swap.

The Financing Agreement included an exclusive jurisdiction clause in favour of the Italian court. The ISDA Agreement contained an exclusive jurisdiction clause in favour of the English court. A clause in the Schedule to the ISDA Agreement stated that, in case of conflict between the terms of the ISDA Agreement and those of the Financing Agreement, the latter should “prevail as appropriate” (the “Conflicts Clause“).

In 2016, the Bank issued proceedings in the English Commercial Court against TRM seeking declarations of non-liability “in connection with a financial transaction pursuant to which [TRM] entered into interest rate hedging arrangements with the [Bank]“. In 2017, TRM sued the Bank before the Italian court and then issued an application in the Commercial Court to challenge its jurisdiction.

Commercial Court decision

The Commercial Court dismissed TRM’s application challenging jurisdiction. Applying Article 25(1) of the Recast Brussels Regulation, under which parties may agree to refer disputes to the court of a Member State, the Commercial Court found that the Bank had much the better of the argument that the dispute fell within the English jurisdiction clause of the ISDA Agreement. Of particular relevance are the Commercial Court’s findings that:

  1. There was no conflict between the two jurisdiction clauses. They could readily bear the interpretation that one concerned disputes relating to the Financing Agreement and the other concerned disputes relating to the ISDA Agreement. As there was no conflict, the Conflicts Clause in the Financing Agreement was not engaged.
  2. The parties’ decision to use ISDA documents was a “powerful point of context” which signalled that the parties wanted to achieve “consistency and certainty” in the interpretation of the contract. The use of ISDA documentation by commercial parties shows that they are “even less likely to intend that provisions in that documentation may have one meaning in one context and another meaning in another context“.

Grounds of appeal

The claimant appealed on the following principal grounds:

  1. The judge was wrong to conclude that there was no conflict between the jurisdiction clauses in the Financing Agreement and the ISDA Agreement. The Conflicts Clause therefore should have been engaged.
  2. In any event, the dispute arose in connection with the parties’ legal relationship set out in the Financing Agreement.

Court of Appeal decision

The Court of Appeal dismissed the appeal on all grounds. The key aspects of the judgment which are likely to be of broader interest (particularly in relation to whether apparently competing jurisdiction clauses are, in fact, in conflict with one another) are considered further below.

Guidance on competing jurisdiction clauses

The Court of Appeal set out useful guidance on how to interpret apparently competing jurisdiction clauses in related contracts:

  1. The starting point is that a jurisdiction clause in one contract was probably not intended to capture disputes more naturally seen as arising under a related contract. There is therefore a presumption that each clause deals exclusively with its own subject matter and that they do not overlap, provided the language and surrounding circumstances allow. The most obvious subject matter of a generally worded jurisdiction clause will be the legal relationship created by the contract.
  2. It is unlikely that sensible business people would intend that similar claims should be subject to inconsistent jurisdiction clauses. However, if the language or surrounding circumstances make clear that a dispute falls within both clauses, the presumption that the clauses deal with separate legal relationships can be displaced.
  3. A broad, purposive and commercially minded approach to construction should be taken which interprets jurisdiction clauses in the context of the overall scheme of the agreements.

Do the jurisdiction clauses conflict?

Applying this approach to the present case, the Court of Appeal held that the natural interpretation of the two jurisdiction clauses was that the clause in the Financing Agreement governed claims relating to the background lending relationship set out in that agreement, and the clause in the ISDA Agreement governed claims relating to the specific interest rate swap relationship set out in that agreement. The Court of Appeal noted that this conclusion was strongly supported by the decision in Savona.

TRM sought to distinguish Savona on a number of bases, including by relying on the Conflicts Clause. With respect to the Conflicts Clause, the Court of Appeal held that the two juridisction clauses governed different legal relationships and were therefore complementary, rather than conflicting. Accordingly, the first instance judge was correct to find that the Conflicts Clause was not engaged.

Overlapping legal relationships

TRM also sought to distinguish Savona on the basis that the inclusion of the Hedging Requirement in the Financing Agreement meant that there was overlap between the legal relationships under the Financing Agreement and ISDA Agreement. It claimed that, as a result, the dispute fell within the legal relationship under the Financing Agreement. However, the Court of Appeal firmly rejected this argument:

  • The Court of Appeal distinguished between factual and legal overlap. TRM alleged that there was overlap between the two agreements, as certain claims regarding the sale of the swap could be brought under both the Financing Agreement (for breach of the Hedging Requirement) and the ISDA Agreement. However, the Court of Appeal held that factual overlap between potential claims under the Financing Agreement and the ISDA Agreement did not alter the legal reality that claims under the two agreements related to separate legal relationships.
  • TRM’s approach would lead to fragmentation of jurisdiction, whereby different terms within the ISDA Agreement would be subject to different jurisdiction clauses in separate contracts. The Court of Appeal considered this to be undesirable and that it was generally unlikely to be the intention of sensible commercial parties.

Declarations sought

Having rejected TRM’s attempts to distinguish Savona, the Court of Appeal proceeded to consider the specific declarations of non-liability sought by the Bank. Subject to the amendment of one of the declarations, the Court found that all of the declarations sought fell within the jurisdiction clause of the ISDA Agreement.

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Court of Appeal emphasises the need to plead conspiracy claims in full

In a recent decision arising out of long-running litigation relating to alleged mis-selling of interest rate hedging products (“IRHPs“), the Court of Appeal has upheld the High Court’s refusal to allow the claimants to pursue claims in unlawful means conspiracy: Elite Property Holdings Ltd & Anor v Barclays Bank plc [2019] EWCA Civ 204. We considered the High Court decision in an earlier banking litigation e-bulletin.

While this decision did not involve new law, it serves as a reminder of the difficulties of bringing a claim based on conspiracy and, in particular, that it is not sufficient simply to plead a claim and hope something turns up in disclosure. The claimant must be able to plead full particulars of all elements of the claim at the outset. Further, as the case makes clear, release clauses in settlements may be construed widely and it is important to be clear as to precisely what claims (if any) are intended to survive the settlement. Both elements of the decision are likely to be welcomed by financial institutions.

The effect of the present judgment is finally to dispose of these proceedings (subject to any attempted appeal to the Supreme Court). The majority of the claimants’ claims relating to the sale of their IRHPs were previously struck out by the High Court (see our e-bulletin), in relation to which the Court of Appeal refused permission to appeal last year (see our e-bulletin). In its strike out judgment, the High Court had ordered the claimants to particularise properly their claims for conspiracy, giving the claim a potential lifeline, but the Court of Appeal has now refused permission to amend to include such claims, bringing this long-running dispute to an end.

Background

The detailed background is set out in our earlier e-bulletin, but in summary, following earlier decisions to strike-out parts of their claim, the claimants sought permission to amend their claim to add claims relating to unlawful interference and conspiracy with a predominant intention to injure, and conspiracy to use unlawful means. In particular, they sought to allege that the defendant bank (the “Bank“) combined with BDO to enable the Bank to foreclose the claimants’ loan facility (in connection with which the IRHPs were entered into) in breach of an undertaking given by the Bank.

The application to amend was dismissed by the High Court, whose judgment also dealt with other issues. The appeal in this case was concerned with the High Court’s decision to refuse permission to amend in relation to the claim for conspiracy to use unlawful means.

Decision

The Court of Appeal upheld the High Court’s decision. It agreed that, for the amendments to be allowed, the claimants needed to show that they had a real as opposed to fanciful prospect of success which was more than merely arguable and carried some degree of conviction: ED&F Man Liquid Products Ltd v Patel [2003] EWCA Civ 472.

The 2014 Release

The Bank argued it had made a redress offer concerned with the sale of the IRHPs (excluding consequential loss) which the claimants had accepted on 29 November 2014 (the “2014 Release“) and which settled any claims, including tortious claims for unlawful means conspiracy.

The claimants sought to argue that the 2014 Release did not, on its proper construction, include claims in unlawful means conspiracy. However, the Court of Appeal considered that, based on the drafting of the relevant agreement, the definition of “Claims” in the 2014 Release was extremely wide and was sufficient to include all claims of unlawful means conspiracy. As a result, it dismissed the appeal because the only claim in the amended pleading which was now pursued could have no real prospect of success.

Elements of unlawful means conspiracy

Although the appeal had been disposed of based on the 2014 Release, the Court of Appeal went on to consider the appeal against the High Court’s decision to refuse permission to amend on the grounds that the essential elements of the tort of conspiracy had not been pleaded.

The Court of Appeal confirmed the basic elements of the tort of conspiracy summarised by Morgan J in Digicel (St Lucia) Ltd v Cable & Wireless plc [2010] EWHC 774 (Ch):

“The necessary ingredients of the conspiracy alleged are: (1) there must be a combination; (2) the combination must be to use unlawful means; (3) there must be an intention to injure a claimant by the use of those unlawful means; and (4) the use of the unlawful means must cause a claimant to suffer loss or damage as a result.”

The claimants accepted that they needed to show that BDO and the Bank had combined to do something unlawful, and that they had simply pleaded an inference that there must have been a combination, rather than setting out a detailed pleading. However, the claimants submitted that pending disclosure it was not possible for them to plead more and that it was legitimate for an inference to be drawn.

The Court of Appeal held that this was not sufficient; it was necessary for each element of the conspiracy to be properly pleaded in full. Therefore the proposed amendments were defective and permission should be refused.

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Commercial Court rejects EURIBOR implied representations

The Commercial Court has dismissed claims that a bank made implied representations as to EURIBOR rate-setting in the context of selling an interest rate swap: Marme Inversiones 2007 SL v NatWest Markets plc & Ors [2019] EWHC 366 (Comm).

This is the second civil court trial judgment considering IBOR manipulation, the first being Property Alliance Group Ltd v Royal Bank of Scotland [2018] 1 WLR 3529 in which the claim relating to LIBOR manipulation was also dismissed (see our banking litigation e-bulletin). Together, these decisions are a reminder of the difficulties of proving allegations that IBOR-setting banks made implied representations when selling IBOR-linked products. The combined effect of these judgments suggests:

  • The requirement to identify specific conduct which led to the implied representation being made is important (and should not be underestimated). In the context of these transactions, a bank simply entering into an IBOR-linked swap is unlikely to justify the implication of any representation wider than the limited representation formulated by the Court of Appeal in PAG (see below).
  • Implied representations must be certain and obvious: if there is “elasticity of possible meaning“, this will indicate the absence of an implication.
  • The broader and more complex the alleged representations, the more active and specific the conduct must be to give rise to the implication.
  • Proving reliance on any representations which are implied will be fact-specific and onerous.
  • Falsity must be specifically proven: it is not sufficient to draw inferences on the basis of conduct relating to other benchmarks (such as an IBOR in a different currency) or indeed findings of the regulator.

In PAG, the Court of Appeal held that the bank made the narrow implied representation (at the time of entering into the swaps) that it was not itself seeking to manipulate GBP LIBOR and did not intend to do so in the future (however the claimants could not prove that the representation was false). In this case, the court’s view was that a similar narrow representation in relation to EURIBOR could theoretically have been implied, but this implied representation was not alleged, and was not shown to be false in any event.

Background

The proceedings arose out of interest rate swaps set by reference to EURIBOR, entered into between Marme Inversiones 2007 SL (“Marme“) and the defendant banks (the “Banks“). The Banks sought various declarations that they had lawfully terminated the swaps and that Marme owed them €710 million plus interest.

Marme sought rescission of the swaps ab initio and/or damages of up to €996 million on the basis that one of the Banks (RBS plc, “RBS“) negligently/fraudulently made representations regarding the integrity of the process of setting EURIBOR (on its own account and as agent for the other Banks) and that Marme relied upon those representations when entering into the swaps. Marme did not contend that the representations were made expressly, but that they should be implied from the circumstances and RBS’s conduct.

Decisions

The court found in favour of the Banks. It granted the declarations sought and held that the alleged representations did not fall to be implied.

The court distilled the following principles from existing authorities considering implied representations:

  1. It is possible for a representation to be made expressly or impliedly through words or conduct. For a representation to be implied, silence or mere assumption is not usually enough as there is no general duty of disclosure. It is necessary to view the words or conduct objectively to determine whether an implied representation has been made. The natural assumptions of the reasonable representee will be helpful in assessing whether an implied representation has been made through the conduct of the representor.
  2. Whether or not a representation is implied is ultimately a question of fact to be determined in the circumstances of the particular case: see also Deutsche Bank AG v Unitech Global Ltd [2013] EWCA Civ 1372.
  3. More may be required, in terms of words or conduct, to prove an implied representation which is wide in meaning or complex.
  4. It is less likely that a representation that is vague, uncertain or ambiguous would be objectively understood to have been made from words or conduct.

With these principles in mind, the court considered the representations alleged in the instant proceedings, identifying a number of (legal and factual) difficulties with the case alleged by Marme. The key points which are likely to be of broader interest are summarised below.

  • Marme alleged that in the light of PAG, at least some of the alleged representations in this case should be treated as having been “plainly” made by RBS. The court found that in truth PAG provided no support at all for Marme’s case. In PAG, the claimants similarly sought rescission of swap agreements and/or damages on the basis of (among other things) alleged implied fraudulent representations. The Court of Appeal in PAG found that the representations as pleaded could not be implied, but decided that a different implied representation would be justified:

In the present case there were lengthy discussions between PAG and RBS before the swaps were concluded as set out by the judge in the earlier part of her judgment. … RBS was undoubtedly proposing the swap transactions with their reference to LIBOR as transactions which PAG could and should consider as fulfilment of the obligations contained in the loan contracts. In these circumstances we are satisfied that RBS did make some representations to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR. Such a comparatively elementary representation would probably be inferred from a mere proposal of the swap transaction but we need not go as far as that on the facts of this case in the light of the lengthy previous discussions.

  • Marme submitted that, in the same way as PAG, the representations in this case should be inferred from a mere proposal of the swaps. However, the court observed that the representations in this case were not the same as the (narrow) implied representations reformulated by the Court of Appeal in PAG.
  • The court held that the implied representations were not supported by any other authority, in particular Deutsche Bank v Unitech offered no support. The court emphasised that although the Court of Appeal in Deutsche Bank v Unitech granted permission to amend to include pleas of implied representations about LIBOR, it would be wrong to regard what was decided as having too great a significance (given the appeal related to an interlocutory application to amend statements of claim and merely found that the points advanced were arguable).
  • Importantly, the court was concerned that if Marme’s case on implication was to succeed, it would inevitably involve a ‘watering down’ of the requirement that specific conduct be identified from which any alleged representation is said to arise. It said Marme could identify no conduct other than RBS entering into (and allegedly proposing) the swaps to justify the implication of any representation wider than the limited representation formulated by the Court of Appeal PAG. In the court’s view, this was an “intractable difficulty” for Marme.
  • The court also considered the decision in Geest v Fyffes [1991] 1 All ER (Comm) 672. The court in that case had set out a “helpful test” for evaluating the representor’s conduct in cases of implied representations, which is: to consider whether a reasonable representee would naturally assume that the true state of facts did not exist and that, if it did, he would necessarily have been informed of it. The Court of Appeal in PAG agreed this test was helpful, but it warned that this should not water down the requirement that there must be clear words or clear conduct of the representor from which the relevant representation can be implied. Here, the court said that invocation of the “helpful test” in Geest was not enough by itself – Marme could not merely rely on an internal assumption on its part that RBS failed to correct.
  • The court was concerned about the distinct lack of certainty (and associated lack of obviousness) as to what was entailed in the alleged representations. It said there was the same “elasticity of possible meaning” which had operated against the implication in Raiffeisen Zentralbank Osterreich AG v RBS [2010] EWHC 1392 (Comm).
  • The court accepted that passive conduct may sometimes be sufficient for the implication of a representation. However, it said the broader and more complex the alleged representations, the more active and specific the conduct must be to give rise to the implication.
  • In the court’s view, RBS’s conduct in going along with the swaps was sufficient for the implication of a much narrower representation: namely that RBS was not itself manipulating, and did not intend to manipulate or attempt to manipulate, EURIBOR. However, that implied representation was not put forward by Marme in the action. The court said that this was probably because Marme recognised that it would be “in no position to establish falsity“.

The court therefore rejected the implication of the representations alleged by Marme, the action failed and the court held that the banks were entitled to the declaratory relief sought. In case it was wrong in these conclusions, the court went on to consider questions of falsity and reliance, but this was on an obiter basis given its primary conclusions.

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Court of Appeal finds ISDA jurisdiction clause trumps ‘theoretically competing’ clause in separate agreement governing wider relationship

Consistent with recent authority, the Court of Appeal has given primacy to an English jurisdiction clause in an ISDA Master Agreement (overturning the first instance decision that had declined to do so), in circumstances where there was a “theoretically competing” jurisdiction clause in a separate agreement governing the wider relationship: Deutsche Bank AG v Comune di Savona[2018] EWCA Civ 1740.

The appellate decision contributes to market certainty in respect of contracting parties’ choice of jurisdiction and therefore represents good news for derivative market participants. The Court of Appeal commented that it would have been “startling” if the bank’s claims for declaratory relief falling squarely under the relevant swap contracts could not be brought in the forum selected by the parties in the ISDA Master Agreement.

The approach taken by the Court of Appeal focused on determining the “particular legal relationship” to which the dispute related for the purpose of Article 25 of the Recast Brussels Regulation, which deals with jurisdiction agreements. In circumstances where there were two contracts (with theoretically competing jurisdiction clauses), it held that there was a distinction to be drawn between a generic wider relationship on the one hand, and a specific interest rate swap relationship governed by the ISDA Master Agreement on the other. It concluded in general terms that disputes relating to the swap transactions were therefore governed by the jurisdiction clause in the ISDA Master Agreement.

While it may be expected that disputes relating to a specific transaction should be governed by the contract for that transaction, the position had been undermined by the High Court decision in the instant case (which considered a number of points of Italian law and the effect of the declarations sought by the bank on any potential claims in Italy). The Court of Appeal noted that while each case should be considered on its own terms, it agreed in principle with the approach in the recent case of BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2018] EWHC 1670 (Comm): which focused on the question of whether the English Court had jurisdiction under the relevant agreements, rather than to trying to predict whether the declarations sought, if made, would act as defences in another jurisdiction (read our banking litigation e-bulletin). Given that there had been conflicting first instance decisions on this issue, it is helpful to have this clarification from the Court of Appeal.

Background

In this case, the court considered “two theoretically competing jurisdiction clauses“. The clauses, in favour of the Italian and English courts respectively, were included in: (i) a written agreement dated 22 March 2007 between Deutsche Bank AG (the “Bank“) and Comune di Savona (“Savona“) (referred to as the “Convention“); and (ii) a 1992 multicurrency ISDA Master Agreement dated 6 June 2007 agreed between the same parties. In June 2007 the Bank and Savona executed swap confirmations, subject to the terms of the Master Agreement, by which the Bank and Savona entered into two interest rate swap transactions.

Years after the conclusion of the swaps, the validity of the transactions came under some scrutiny in Italy. In June 2016 this prompted the Bank to apply to the English Commercial Court seeking twelve declarations (in most cases) carefully tracking the wording of the Master Agreement. Savona challenged the jurisdiction of the English court in relation to five of the declarations sought, arguing that they fell to be determined in the Court of Milan and under Italian law, in accordance with the Convention.

High Court Decision

At first instance, the High Court allowed Savona’s challenge to the jurisdiction of the English court in respect of the five declarations and dismissed the Bank’s claims.

The High Court referred to Article 25 of the Recast Brussels Regulation, which provides that parties may agree to refer disputes in connection with a “particular legal relationship” to the court of a Member State. The High Court proceeded to consider the proper interpretation of the jurisdiction clauses, distinguishing the Bank’s role as an adviser under the Convention, from the Bank’s position “simply as a counterparty” under the swaps. The High Court concluded that the dispute was essentially concerned with the Bank’s role as an adviser, and more naturally fell within the Italian jurisdiction clause than the English jurisdiction clause.

Court of Appeal Decision

The Court of Appeal overturned this decision, finding that all twelve declarations sought fell within the English jurisdiction clause in the ISDA Master Agreement.

In reaching its conclusion, the Court of Appeal drew a distinction between the generic relationship between the Bank and Savona, which was governed by the Convention, and the specific derivative transactions entered into between the Bank and Savona, which were governed by the ISDA Master Agreement. It commented that this was a more natural and reasonable demarcation than the High Court’s distinction between “advice” on the one hand and being a “counterparty” on the other.

The Court of Appeal noted that:

  • While the Convention required the Bank to provide Savona with its expertise as to how to manage its debt, any transaction or agreement proposed by the Bank for this purpose and accepted by Savona would be the subject matter of a separate contract.
  • If a separate contract was proposed and approved, the relationship agreed in that contract would be the “particular legal relationship” envisaged by Article 25. Any proceedings “relating” to that contract would then be a dispute in connection with the particular relationship for the purposes of Article 25.
  • Consistent with this, the interest rate swap relationship was set out in the swap contracts incorporating the ISDA Master Agreement.
  • The existence of the entire agreement clause in the ISDA Master Agreement was a strong confirmation that the swap contracts were indeed separate contracts and any dispute relating to them was to come within the jurisdiction clause of those contracts.

In the Court of Appeal’s view, it would have been “startling” if the Bank’s claims falling squarely under the swap contracts could not be brought in the forum selected by the parties through the jurisdiction clause under those agreements, namely that contained in the ISDA Master Agreement. It said that a conclusion to that effect would have been highly damaging to market certainty.

Having found that disputes relating to the swaps were therefore to be determined by the English courts, the only question for the Court of Appeal was whether the particular declarations sought arose from disputes relating to the swaps. The Court of Appeal found, on reviewing the text of the declarations sought, that they did.

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Court of Appeal holds no real prospect of success for claim alleging contractual obligations owed by a bank to its customers in the conduct of FCA review

The Court of Appeal has refused the claimants permission to appeal in the most recent interest rate hedging product (“IRHP“) mis-selling claim to come before the appellate courts: Elite Property Holdings & Anor v Barclays Bank plc [2018] EWCA Civ 1688.

The Court of Appeal considered the High Court’s decision to refuse the claimants permission to make two key (but contentious) amendments to the particulars of claim. Agreeing with the High Court, it held that neither claim had a reasonable prospect of success and refused to grant the claimants permission to appeal. The proposed amendments concerned the following claims:

  1. A claim that the bank owed a contractual obligation to its customers in relation to the conduct of the bank’s past business review into the sale of IRHPs agreed with the FCA (then FSA). The Court of Appeal noted that the bank was obliged to carry out the review pursuant to its obligation to the FCA, and the agreement between the bank and the FCA expressly excluded any rights of third parties under the Contract Rights of Third Parties Act 1999 (“CRTPA“). Further, there was no consideration provided by the customers in relation to any alleged contract.
  2. A claim brought in circumstances where one IRHP was restructured into another IRHP (and a settlement agreement was entered into in relation to the first IRHP). The proposed amended particulars of claim alleged that losses under the first product were “repackaged and continued” or “carried over and continued” under the second. The Court of Appeal found that there was no causative link between the mis-selling of the second IRHP and the losses pleaded.

The decision is a welcome one for institutions, confirming that claimants will face significant legal obstacles if they seek to bring claims of the type outlined above. In particular, the decision is consistent with the prior decisions of the Court of Appeal in CGL Group Limited & Ors v The Royal Bank of Scotland plc[2017] EWCA Civ 1073 and of the High Court in Marsden v Barclays Bank plc[2016] EWHC 1601 (QB) (which considered and rejected the notion of tortious duties owed by financial institutions to customers in carrying out their FCA reviews).

The result of this decision is that the instant proceedings will be brought to an end; save for a final appeal in relation to the High Court’s separate refusal permit an amendment of the particulars of claim to include conspiracy allegations. Permission to appeal in that regard has been allowed by the Court of Appeal, but the appeal itself has not yet been listed.

Background

For a detailed background to this decision, read our banking litigation e-bulletin on the High Court decision.

In summary, Barclays Bank plc (the “Bank“) provided loan facilities to the two appellant companies and the appellants entered into three structured collars with the Bank. Subsequently, the appellants raised concerns about the structured collars. This led to a settlement agreement concerning the structured collars being concluded by all parties in 2010 (the “2010 Agreement“) and the structured collars were terminated, with the break costs being financed by further loans from the Bank. The refinanced loans were hedged by the appellants entering into three interest rate swaps.

In June 2012, in common with several other banks, the Bank agreed with the FCA to undertake a past business review in relation to its sales of IRHPs to small and medium-sized enterprises (the “FCA review“). That undertaking expressly excluded third parties’ ability to rely on the terms of the undertaking.

The outcome of the FCA review was that the two appellant companies were offered redress by the Bank. Following negotiations in September 2014, in November 2014, the appellants agreed to receive basic redress payments in full and final settlement of all claims connected to the IRHPs, but excluding any claims for consequential loss (the “2014 Agreement“).

Following a review of the evidence submitted by the appellants, the Bank rejected their claims for consequential loss. The appellants then issued proceedings to recover the consequential losses in November 2015. The Bank applied to strike out the majority of the appellants’ claims, which the appellants sought to meet by a cross application to amend the particulars of claim.

High Court Decision

For a detailed explanation of the High Court decision, please read our banking litigation e-bulletin. By way of summary, the key parts of that judgment insofar as relevant to the appeal:

  • Advisory claims – structured collars: The High Court struck out all mis-selling claims in relation to the structured collars, which it held were barred by the 2010 Agreement. The appellants did not seek to appeal this finding.
  • Advisory claims – swaps: The High Court also struck out the mis-selling claims in respect of the swaps, on the basis that the loss pleaded was said to be attributable to or caused by breaches of duty owed in respect of the structured collars alone. It refused leave to amend the particulars of claim to include a pleading that the losses incurred under the structured collars were “repackaged” by virtue of the appellants’ entry into the swaps and accordingly continued after the swaps were sold. The appellants described these as “legacy losses“, and argued that they were attributable to the Bank’s alleged breach of duty when selling the swaps.
  • Claims in relation to the FCA review: The High Court struck out the claim that the Bank owed and breached a tortious duty of care to the appellants in carrying out the FCA review, resulting in losses to the appellants. This was on the basis that any such claim was compromised by both the 2010 Agreement (in relation to the structured collars) and the 2014 Agreement (in relation to the structured collars and swaps).

The High Court refused permission to amend the particulars of claim, to include a contractual claim mirroring the tortious claims in relation to the FCA review above – on the basis that the Bank assumed such contractual obligations when the appellants accepted basic redress under the 2014 Agreement.

Grounds of Appeal

The appellants appealed the High Court’s decision on two grounds:

  • Advisory claims – swaps: The appellants appealed the finding that there was no reasonable prospect of success in relation to the swaps claim, asserting that the High Court had wrongly concluded that the appellants’ pleaded case in relation to the “legacy losses” arising from the swaps did not link breach of duty and loss.
  • Claims in relation to the FCA review: The appellants appealed the High Court’s refusal to permit them to amend the particulars of claim to plead that the acceptance of basic redress under the 2014 Agreement gave rise to a contractual relationship in relation to the Bank’s conduct of the FCA review.

The appellants had also initially sought to appeal the finding that there was no reasonable prospect of arguing that the Bank owed the appellants a tortious duty of care in relation to the conduct of the FCA review akin to the contractual duty. However, before the permission hearing, following CGL Group Ltd v Royal Bank of Scotland Plc[2017] EWCA Civ 1073, the appellants abandoned that ground of appeal.

Court of Appeal Decision

The Court of Appeal refused permission to appeal on both grounds.

(1) Advisory claims – swaps

The Court of Appeal assessed the original particulars of claim and was satisfied that the High Court was correct when it concluded that the losses claimed were only pleaded as having been caused by the appellants’ entry into the structured collars rather than the subsequent swaps.

The Court considered that the proposed amendments did not improve the appellants’ position. The proposed new paragraph in the particulars of claim suggested that the losses caused by the structured collars were “repackaged and continued” or “carried over…and continued” following the appellants’ entry into the swaps. The Court of Appeal was satisfied that while the losses may have occurred after the appellants’ entry into the swaps, “the cause of the relevant loss was the entering of the mis-sold structured collars“.

Accordingly, the Court of Appeal refused permission to appeal on this ground, finding that the High Court was right to refuse permission to amend the particulars of claim in relation to the swaps mis-selling claim. Given that the High Court struck out the swaps mis-selling claim as it was originally pleaded, the result is that these claims cannot now be pursued by the appellants.

(2) Claims in relation to the FCA review

The Court of Appeal held that the appellants’ claim that the Bank came under a contractual obligation to them in relation to the conduct of the FCA review (when they accepted basic redress under the 2014 Agreement) was unsustainable. Having heard argument from the Bank in Suremime Limited v Barclays Bank [2015] EWHC 2277 (QB), as well as Marshall v Barclays Bank [2015] EWHC 2000 (QB) and Marsden, the Court of Appeal concluded that there was “…plainly no such contract in June 2014 for all the reasons given by judges who decided the earlier cases” which the Court of Appeal described as having been “correctly decided on this issue“.

In support of this finding, the Court of Appeal relied on the following key factors in particular:

  • The Bank was obliged to carry out the review pursuant to its obligation to the FCA under the FCA undertaking that it had previously given.
  • The agreement between the Bank and the FCA expressly excluded any rights of third parties.
  • There was no consideration provided by the appellants in relation to any alleged contract at that time (as had been noted in Suremime).
  • The position had not changed in September or November 2014 (i.e. when the appellants entered into the 2014 Agreement); the suggestion that the Bank came under an additional contractual obligation to the appellants, mid-way through the FCA review, was nonsensical.
  • The only relevant contract was the 2014 Agreement, which was, in substance, a compromise agreement in relation to which the Bank had not assumed any additional obligations (such as obligations to carry out the FCA review with reasonable skill and care) in relation to the conduct of the FCA review.

Moreover, the Court of Appeal expressly endorsed the reasoning of Beatson LJ in CGL. This focused on the nature of the FCA review and the limitations of the remedies available to non-private persons under the relevant regulatory regime whose claims are time barred. Although CGL considered the imposition of a tortious duty of care, the Court of Appeal in the instant case commented that Beatson LJ’s reasoning was “…inconsistent with there being any basis for a claim in contract either, absent some clear expression of intention by the bank to assume a contractual obligation“. The fact that the imposition of a contractual obligation would cut across the regulatory regime seemed to the Court of Appeal to “strongly militate against there being a contract of the kind alleged by the appellants“; the only contract the Bank had entered into in relation to the FCA review was with the FCA.

Accordingly, the Court of Appeal refused permission to appeal on this ground also. The effect is that the appellants will not be able to pursue any claims relating to the Bank’s conduct of the FCA review, given that the High Court struck out the claim based on the existence of a tortious duty and refused permission to amend the particulars of claim to plead the existence of a contractual obligation.

Conclusion

This is another welcome decision for financial institutions given the clarity that the Court of Appeal has now given on two occasions in relation to claims relating to alleged contractual obligations or duties of care owed by financial institutions in relation to their conduct of FCA past business reviews.

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High Court holds ISDA jurisdiction clause trumps competing jurisdiction clause in separate but related agreement

The decision of the High Court in BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2018] EWHC 1670 (Comm) confirms that an express agreement to the jurisdiction of the English court within standard form ISDA documentation will not easily be displaced or restricted. The court found that the jurisdiction clause in a 1992 ISDA Master Agreement was effective over a ‘competing’ jurisdiction clause in a separate but related agreement between the same parties. This was despite a provision in the Schedule to the Master Agreement that in the event of conflict, the related agreement would prevail.

The decision is likely to be of interest to financial institutions trading in derivatives based on ISDA documentation, and of particular interest to those involved in cross-border funding transactions which require the implementation of associated hedging through separate but related agreements. Significantly, the court found no conflict between ‘competing’ jurisdiction clauses in an ISDA Master Agreement and a separate financing agreement. The court noted that in complex financial transactions it was possible for the same parties to have multiple relationships, each governed by a separate agreement, and there was no inconsistency in each agreement having a different jurisdiction provision.

The court gave two further points of guidance in response to arguments raised by the bank’s counterparty relating to the background context within which to interpret the jurisdiction clause:

  1. In considering the declarations sought in these English proceedings, the court did not engage with the question of whether those declarations may act as defences to a claim in another jurisdiction (preferring the approach taken in Dexia Crediop SPA v Provincia di Brescia [2016] EWHC 3261 (Comm), over that in the more recent case of Deutsche Bank AG v Comune di Savona [2017] EWHC 1013 (Comm)).
  2. More generally, the court suggested that the use of ISDA standard documentation was evidence of the parties’ intention to limit the use of the specific factual background to their transaction in interpreting the agreement between them. It emphasised that the purpose of using such standard documentation is to achieve greater consistency and certainty in the parties’ dealings with each other. This reflects the approach of the court more generally in limiting the extraneous factors which will be considered where standard documentation, including ISDA documentation, is used by sophisticated commercial parties.

Background

In 2008, a syndicate of banks led by the claimant, BNP Paribas SA (the “Bank“), entered into a loan agreement (the “Financing Agreement“) with the defendant, Trattamento Rifiuti Metropolitani SpA (“TRM“), an Italian public-private partnership, to fund the building of an energy plant. The Financing Agreement included an obligation for TRM to hedge with the Bank against the interest rate fluctuation risks associated with the loan.

In 2010, pursuant to the obligation in the Financing Agreement, the parties executed a 1992 ISDA Master Agreement (the “Master Agreement“), and an interest rate swap.

The Financing Agreement included an exclusive jurisdiction clause in favour of the Italian court. The Master Agreement contained an exclusive jurisdiction clause in favour of the English court. A clause in the Schedule to the Master Agreement stated that in case of conflict between the terms of the Master Agreement and those of the Financing Agreement, the latter should “prevail as appropriate“.

In 2016 the Bank issued proceedings in the English Commercial Court against TRM seeking declarations of non-liability “in connection with a financial transaction pursuant to which [TRM] entered into interest rate hedging arrangements with the [Bank]“. In 2017, TRM sued the Bank before the Italian court and challenged the jurisdiction of the English High Court.

Decision

The court considered TRM’s arguments that the Bank should not be permitted to pursue the English proceedings because: (1) there was no serious issue to be tried; and (2) the English court had no jurisdiction.

(1) Serious issue to be tried

TRM argued that there was no relevant dispute regarding the Master Agreement (containing the English jurisdiction clause) and the swap transaction. However, the court held that while there was no argument as to the validity of the swap transaction or Master Agreement, there was a dispute as to the Bank’s rights under them, and therefore a serious issue to be tried.

(2) Jurisdiction

The court started its analysis by reference to Article 25(1) of the Recast Brussels Regulation, which provides that parties may agree to refer disputes to the court of a Member State. The court went on to consider the ‘competing’ jurisdiction clauses in the Finance Agreement and Master Agreement. The court said that this was a question of construction or interpretation, and that its approach should be broad and purposive (Sebastian Holdings Inc v Deutsche Bank AG [2010] EWCA Civ 998).

It was held that the Bank had much the better of the argument that the dispute fell within the English jurisdiction clause of the Master Agreement. The following points made by the court in reaching its conclusion are likely to be of wider interest and application:

  • The two jurisdiction clauses could “readily bear” the interpretation that one was concerned with the Master Agreement and the other was concerned with the Financing Agreement. That fitted well in the context of the parties’ dealings and recognised that the parties had more than one relationship.
  • Similarly, the wide contractual language of the jurisdiction clauses in the two agreements did not prevent “an interpretation that allows those contracts to fit together“.
  • The provision in the Schedule to the Master Agreement providing that the Financing Agreement would prevail in cases of conflict was not engaged, simply because there was no conflict.
  • Addressing TRM’s argument that the interpretation of the jurisdiction clauses should have taken into account the specific factual context:

Comment

This decision is in line with recent judgments in relation to jurisdiction clauses in associated agreements and reinforces the view that non-identical clauses can co-exist in related agreements. The decision is also another example of judicial recognition of the need for certainty and consistency associated with the use and interpretation of the ISDA standard documentation.

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Emma Deas
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High Court rejects the first IRHP mis-selling claim brought by private persons under Section 138D FSMA

The High Court has rejected the first interest rate hedging product (“IRHP“) mis-selling claim brought by private persons under section 138D of the Financial Services and Markets Act 2000 (“FSMA“) in the recent case of Ramesh Parmar & Anor v Barclays Bank plc [2018] EWHC 1027 (Ch).

The decision will be of particular interest to financial institutions defending claims relating to the mis-selling of financial products generally, and in particular to statutory claims brought by private persons. The court considered a number of factors which may make for useful comparisons with other cases, in particular in relation to its assessments that there was no advisory relationship and that there was no breach of the Conduct of Business Sourcebook (“COBS“) Rule 10 (which applied on the basis that it was a non-advised sale). The factors of potential wider application are discussed in the decision section below. Insofar as two of the claimants’ complaints were found to amount to technical breaches of other COBS Rules, the court’s decision that no loss flowed from those breaches and therefore the claims still failed, is instructive.

Significantly, the court took a more narrow approach to the use of basis clauses to define the bank/customer relationship as “non-advisory“, than has previously been adopted by the courts in the mis-selling context (and in financial markets transactions generally). The courts have consistently found that basis clauses are outside the scope of the Unfair Contract Terms Act 1977 (“UCTA“) (and s.3 Misrepresentation Act 1967), as they do not attempt to exclude or limit liability, but rather give rise to a contractual estoppel, which prevents the parties contending that the true state of affairs was different to that agreed in the contract: Crestsign Ltd v National Westminster Bank plc & Anor [2014] EWHC 3043 (Ch). However, in the instant case, the court held that UCTA was irrelevant, because COBS 2.1.2 applied and went further than UCTA to “prevent a party creating an artificial basis for the relationship, if the reality is different“. The court therefore held that the bank would not have been able to rely upon the basis clause if it had in fact given advice.

Given the court’s ruling that the defendant bank did not give advice, its conclusions on this issue were obiter dicta and therefore do not have precedent value, but may be persuasive in future cases. However, the court’s suggestion that COBS 2.1.2 goes further than UCTA is ripe for challenge. It is widely accepted that an attempt to alter the character of a relationship retrospectively through the use of basis clauses is unlikely to avoid the scrutiny of UCTA. Indeed, in Crestsign itself, the claimant submitted that it would be “rewriting history or parting company with reality” to define the relationship as one in which advice was not given. However, the court in that case (properly in our view) highlighted that the line that separates provision of information from giving advice may be a fine one, and this may lead parties to legitimately define their relationship to avoid disputes afterwards, with “no violence” being done to history or reality. With this in mind, there is an argument to be made that COBS 2.1.2 does not go any further than UCTA, and as such the bank should have been able to rely on the basis clause if it had crossed the line into giving ‘advice’.

Additionally, and in keeping with other recent authorities, the court held that there was no specific requirement for the bank to disclose its internal credit limits at the point of sale under the COBS Rules for the purpose of demonstrating the breakage costs (see our banking litigation e-bulletin). However, there was a second aspect of the complaint relating to non-disclosure of the internal credit limit considered in this case: the impact of the internal credit limit on the claimants’ future borrowing ability. This aspect caused the court more concern. The court commented that there could be factual situations where disclosure would be required under the COBS Rules if the limit would have a significant impact on future borrowing, although this was not the case on the present facts. However, the court does not seem to have been referred to the Privy Council decision in Deslauriers & Anor v Guardian Asset Management Limited [2017] UKPC 34, in which the contrary conclusion was reached (see our banking litigation e-bulletin).

Background

The claimants were longstanding clients of Barclays Bank plc (the “Bank“) and ran a small disposable gloves business and a small residential property investment business.

The claimants had no prior experience of IRHPs. However, in May 2006, prior to taking out a third loan with the Bank, the claimants indicated to the Bank that they were interested in taking out a fixed rate loan. The Bank no longer offered fixed rate loans. Instead, the Bank suggested that the claimants could enter into an IRHP to manage their interest rate risk.

The Bank provided a number of different presentations over three years which gave information on a variety of IRHPs (including swaps, caps, collars, enhanced collars and structured collars). Following discussions between the Bank and the claimants, in April 2009, the claimants entered into two ten-year interest rate swaps at a fixed rate of 3.48% (the “Swaps“). Relevant details of the presentations and discussions are considered further in the decision section below.

In October 2012, after the past business review into the sale of IRHPs had been announced by the FCA, the claimants made a complaint about the Swaps. The claimants met the criteria of non-sophisticated retail classified customers and were assessed as eligible for the review. However, the review ultimately concluded that the Bank had met the necessary standards at the point of sale and therefore no redress was due. The claimants subsequently commenced proceedings.

Claim

The claimants initially advanced various causes of action, including allegations of breach of various common law duties of care and fiduciary duties in connection with the underlying sale of the Swaps and/or the conduct of the past business review by the Bank (among others). However, the claimants abandoned these claims and instead focused on a sole cause of action: a statutory claim under s.138D FSMA for several alleged breaches by the Bank of the COBS Rules. The claimants claimed that – but for the alleged breaches of COBS – they would have entered into two interest rate cap products, each for a term of five years at a rate of 4.5%.

Decision

The principal issues which arose for consideration were:

  1. Was the sale advised or non-advised?
  2. Did the Bank fail to comply with either COBS Rule 9 (if it was an advised sale) or COBS Rule 10 (if it was a non-advised sale)?
  3. Could the Bank rely on ‘basis clauses’ in its contracts with the claimants?
  4. Did the Bank comply with various other COBS Rules?

The court cautioned that each case will turn on its own facts and so the findings made may provide limited assistance in any subsequent case. However, there are a number of points of potentially wider application which arise from the court’s discussion of these issues, which are explored in further detail below.

  1. Was the sale advised or non-advised?

    The court stated that, in order for the sale to be advised, there must be “a value judgement“, “an element of opinion” or “advice on the merits” on the part of the Bank, in keeping with the principles established in Rubenstein v HSBC [2011] EWHC 2304 (QB) and Zaki & Ors v Credit Suisse (UK) Ltd [2011] EWHC 2422 (Comm). The court noted that the test was an objective one, namely, having regard of all evidence in the factual circumstances of the case: “has there been advice or simply the giving of information?” (as per Thornbridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB)).

    The court concluded that the sale was non-advised and that COBS Rule 9 was not engaged in the circumstances. In reaching that conclusion, the court relied on the following factors:

    • The fact that the claimants had a relationship of trust with their relationship managers at the Bank did not mean that the relationship managers were dealing with the claimants as advisers.
    • The absence of an external independent adviser did not necessarily mean that the Bank’s representative was giving advice to the claimants.
    • References in the presentations provided to the claimants to “Barclays Capital’s unrivalled depth of expertise and providing strategic FC to Corporate Risk to the UK Market Place” and the words “Corporate Risk Advisory” beneath the Bank representative’s name, by themselves did not mean that the Bank was giving advice to the claimants in relation to the IRHPs.
    • Generally, to constitute a recommendation, the recommendation must have been made in respect of a particular product (and not interest rate management generally). The fact that the claimants were given information as to the pros and cons of various IRHPs by a specialist in the field authorised by the FCA to do so, in itself did not make the Bank’s representative an adviser, particularly as he did not promote one IRHP over the other.
    • The use of phrases such as “bespoke“, “our more popular solutions“, and “tailoring the protection” in literature or communications did not mean that advice had been given.
    • It was clear from the evidence that the claimants’ decision to enter into the Swaps (rather than the cap product) was not based on a recommendation from the Bank’s representative, but was because the claimants did not wish to pay a premium, having considered all the information available.
  2. Did the Bank fail to comply with either COBS Rule 9 (if it was an advised sale) or COBS Rule 10 (if it was a non-advised sale)?

    As the court found that there was no advisory relationship, it was not strictly necessary to consider the effect of COBS Rule 9 and whether the Swaps were suitable. However, the court went on to do so, and found that even if COBS Rule 9 had been engaged, the Swaps would have been suitable for the claimants in the circumstances.

    The court therefore considered compliance with COBS Rule 10 (the obligation to assess the appropriateness of the product), which applied because the court held that the sale was non-advised. The claimants alleged that the Bank was in breach of this rule by failing to carry out an adequate fact finding exercise, so as to ensure the claimants had the necessary understanding of the risks involved in relation to the IRHPs. The court rejected this claim and found that the fact-finding exercise carried out by the Bank had been sufficient, despite the Bank conducting the exercise incrementally.

  3. Could the Bank rely on basis clauses in its contracts with the claimants?

    The Bank took the position that even if it had been found to have given advice, it could rely on certain ‘basis clauses’ in the contractual documentation. The Bank submitted that similar or near identical clauses to those in the present case had been considered by the court in mis-selling cases, and repeatedly found to be ‘basis clauses’ rather than exclusion clauses, and therefore beyond the remit of UCTA (for example, in Crestsign). The Bank submitted that there was no distinction to be drawn between the words used in s.3 UCTA and those used in COBS 2.1.2. The latter prevents any attempt by a firm “in any communication relating to designated investment business seeking to (1) exclude or restrict; or (2) rely on any exclusion or restriction of; any duty or liability it may have to a client under the regulatory system“.

    The court rejected the Bank’s submission on this issue and instead found that UCTA was irrelevant. The court held that COBS 2.1.2 went further than s.3 UCTA, in that it “prevent[ed] a party creating an artificial basis for the relationship, if the reality is different“. Accordingly, had the Bank in fact given advice, the Bank would not have been able to rely on the disclaimers in the contractual documentation in question or any similar statements in the presentations provided to the claimants to negate this. Such clauses would be void under COBS 2.1.2.

  4. Did the Bank comply with various other COBS Rules?

    The other aspects of the claimants’ claim centred on allegations that the Bank had failed to provide sufficient information to the claimants in relation to three principal matters, and thereby failed to comply with various other COBS Rules.

    Potential magnitude of break costs

    The claimants argued that the presentations provided by the Bank failed to give a sufficient explanation of the potential magnitude of break costs. The court rejected this argument, instead finding that the Bank provided the claimants with both qualitative and quantitative illustrations of potential break costs and the documentation made it clear that break costs would depend upon market conditions at the time of termination. Further, on the evidence before the court, the claimants clearly understood the nature, effect and possible magnitude of break costs.

    The court did, however, find that the following wording in the presentations was misleading: “cancelling the contract may result in either a breakage cost or a breakage gain. The principles of the calculation are the same as for traditional fixed rate loans“. The court accepted the claimants’ submission that the principles were in fact wholly different. The court held that this amounted to a breach of COBS Rules 2.2.1, 4.2.1, 4.5.2 and 14.3.2. However, the claimants had not in fact been misled and therefore no loss flowed from those breaches.

    True value of the cap product in comparison to the Swaps 

    The claimants argued that in the presentations provided to them, and in their discussions with the Bank’s representative, the Bank failed properly to identify the true value (in terms of potential future gains and offset of the initial premium) of the cap product in comparison to the Swaps.

    The court found that the Bank failed to state in the written presentations that there could never be a break cost in relation to the cancellation of a cap. It held that this flaw amounted to a breach of COBS Rules 4.5.6 and 14.3.2. However, as the claimants were well aware of the fact that a cap would not involve break costs (from discussions with the Bank) by the time they decided to enter into the Swaps, no loss flowed from the breach.

    Disclosure of the existence of the Bank’s internal credit limit 

    The claimants argued that the Bank should have disclosed the existence of its credit equivalent exposure (“CEE“) limit in relation to the Swaps, and its potential impact on the claimants’ ability to obtain further borrowing in the future. There were two distinct aspects of this complaint: (a) disclosure of the CEE limit would have effectively demonstrated the potential breakage costs; and (b) the CEE limit imposed a hidden fetter on the claimants’ credit and therefore their ability to borrower further sums.

    In keeping with the Court of Appeal’s recent decision in Property Alliance Group Limited v The Royal Bank of Scotland plc [2018] EWCA Civ 355 (see our banking litigation e-briefing), in which the Court of Appeal found that there was no obligation on the defendant bank to disclose its internal credit limit at the point of sale, the court held that it was not necessary for the Bank to disclose the existence of its CEE limit to meet its obligations under the COBS Rules in this case. The Bank could discharge its COBS obligations to explain potential breakage costs by giving adequate examples, and discussing them with the client (as in the instant case).

    The court said that the decisions in PAG (and five other first instance authorities) as to why there was no obligation to make such disclosure, were instructive. This was notwithstanding the fact that those cases were not specifically concerned with whether or not there had been compliance with the COBS Rules. In PAG, it was found that the CEE equivalent could not have been expected to have been revealed, as it was the product of the subjective view of the lending bank about possible movements in interest rates in the future and the length of the outstanding term of the swaps at the time of the break.

    However, the impact of the CEE limit on the claimants’ future borrowing ability caused the court more concern. The court understood that the CEE was not a credit line capable of being utilised by a customer, but was a factor taken into account when the Bank determined whether to grant the customer further lending. On the evidence, the CEE in the instant case had no impact whatsoever on the claimants’ ability to borrow further funds from the Bank. However, the court commented that there may be other factual situations where the CEE limit could have a significant impact on future borrowing and should be disclosed in order for the financial institutions in question to comply with the COBS Rules.

Conclusion

This is largely another welcome decision for financial institutions involved in IRHP (and other mis-selling) claims. In particular, it highlights the relative similarity in the approach of the court in considering claims brought by private persons and other persons that do not qualify under s.138D FSMA. There is still no single reported case involving allegations of the mis-sale of IRHPs in which a claimant has succeeded at full trial. Although obiter, it remains to be seen whether the court’s comment on the need to disclose the CEE will be followed in future decisions.

John Corrie
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Ceri Morgan
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Nic Patmore
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Action for declaration that bank failed to conduct past business review properly is not arguable

In the context of interest rate hedging product (“IHRP”) mis-selling litigation, the High Court has rejected an application for permission to amend particulars of claim to include a claim for a declaration that the defendant bank failed properly to conduct its past business review of IRHPs (the “Review”): Teresa Day & Anor (t/a Appledore Clinical Services) v Barclays Bank plc [2018] EWHC 394 (QB).

This judgment is consistent with the related decision in CGL Group Limited & Ors v The Royal Bank of Scotland plc & Ors [2017] EWCA Civ 1073, in which the Court of Appeal held that it was not arguable that the defendant banks owed a duty of care in tort directly to their customers in connection with conduct of the FCA Review (read our banking litigation e-bulletin). The instant application was viewed by the bank as an attempt by the claimants to introduce “through the back door” a claim based on the bank’s alleged failures to conduct the FCA Review properly, now that such a claim could not be made through the “front door”, following the CGL decision.

The High Court held that the declaration sought would inappropriately and disproportionately extend the scope of the proceedings, because it would have required the court (and the parties) to address issues outside of the substantive claims. In this context, it was particularly relevant that the claimants accepted that they were unable to bring a claim against the bank for breach of duty to conduct the FCA Review properly, as a result of the decision in CGL. The court viewed the application as an attempt by the claimants to act as “informal enforcers” of the FCA regulatory regime when this was a matter for the FCA itself. It held that it was not a legitimate use of the court’s powers to make findings in an attempt to force the FCA to act; the more appropriate route would be for the claimants to seek judicial review if the FCA refused to take enforcement action against the bank.

The combined effect of the decision in this case and CGLis that private claims by customers based on conduct of the FCA Review by defendant banks are very unlikely to succeed, whether they are pleaded by way of an alleged tortious duty or by seeking a declaration of wrongdoing.

Background

In October 2007, the claimants purchased an interest rate collar from Barclays Bank plc (the “Bank”). In June 2012, the Bank agreed with the now-FCA to carry out the Review of its sales of IRHPs since 1 December 2001 to customers who did not meet the ‘Sophisticated Customer Criteria’, and to offer redress as appropriate. In January 2013, following a pilot exercise, the Bank agreed amendments to the specifications of the FCA Review. The two agreements between the Bank and the FCA are referred to in this e-bulletin as the “FCA Agreement”.

As part of the FCA Review, the Bank reviewed the IRHP sold to the claimants, and in early 2014 offered basic redress to the claimants together with compensation for consequential losses (provided that they could be proved). However, the claimants did not submit a claim for consequential loss and instead commenced proceedings in the High Court in October 2014.

The claimants alleged misrepresentation relating to the sale of the IHRP and/or that the Bank breached various Conduct of Business Rules giving rise to a claim for breach of statutory duty under s.138D of the Financial Services and Markets Act 2000 (“FSMA”). The claimants subsequently applied for permission to amend their particulars of claim on a number of bases. The instant judgment considered their application to introduce a claim for declaratory relief.

Decision

The court refused to grant permission to amend the particulars of claim to include the claim for declaratory relief, for the reasons explained below.

(1) Scope of the declaration

In oral submissions, the claimants confirmed that the declaration sought might cover “…any breach of any regulatory requirement on the part of the [Bank] including any element which constituted a breach of the [FCA Agreement]”. As to breach of the FCA Agreement, the complaint articulated by the claimants was that the Bank had not conducted the FCA Review properly, in particular by not allowing the claimants enough time to submit their consequential loss claim.

The claimants accepted that they had no direct claim against the Bank for failure to conduct the FCA Review properly following the decision in CGL. The court noted that part of the reasoning given by the Court of Appeal in CGL for rejecting the notion of the existence of any such duty of care owed by banks to customers, was because the appropriate enforcement mechanism in respect of the FCA Review was the FCA. The claimants asserted that the declaration was nonetheless appropriate because the FCA was “strapped for cash” and would not take enforcement action in individual cases unless findings have already been made for the FCA by a judge. However, the court noted that the trial judge would not have to deal with what happened in the FCA Review because there was no claim against the Bank for breach of the FCA Agreement (nor could there be because of the decision in CGL). Accordingly, the declaration sought would involve the court and the parties having to address issues other than those arising under the existing substantive claims. The court stated that this was a wholly unsatisfactory basis on which to proceed.

In the court’s view, the application amounted to an attempt by the claimants to act as “informal enforcers” of the FCA regulatory regime, when this was a matter for the FCA itself. The Bank’s conduct of the FCA Review was subject to the supervision and approval of the independent reviewer, in the form of the Skilled Person. This important role was described in CGL and was found to militate against the imposition of a duty of care in that case. The court held that it also militated against using a declaration as a device to force the FCA into action. The court characterised it as “absurd and inappropriate” to consider regulatory questions that extended beyond the issues in the underlying claim in the hope that the FCA may later provide compensation to unsuccessful litigants.

The court also found that the scope of the claim for a declaration remained unclear and had every prospect of adding significantly to the length of trial. Finally, even if the claim for declaratory relief was allowed, it was not accepted by the court that the claimants had any real prospect of success in establishing any breach of the FCA Agreement by the Bank. The time allowed by the Bank for submitting a consequential loss claim (four months) was not considered an impossibly short period of time, particularly considering the fact that the claimants had been involved in the FCA Review since early 2013 and were assisted by counsel for most of that time. The claimants had not sought any further extension of time. Further, the court noted that even after four years of litigation the consequential losses had still not been articulated.

(2) Discretionary power to grant declaratory relief

The court considered a number of cases on the discretionary power of the court to grant declaratory relief (presumably on the basis that the test for permission to amend under CPR 17 requires the amending party to demonstrate that the claim has a real prospect of success, although this was not expressly stated in the judgment). The court highlighted the following relevant principles from the case law in particular:

  • Cause of action: The court accepted that there is no need for an underlying cause of action in order to grant a declaration (following Guaranty Trust Co of New York v Hannay & Co [1915] 2 KB 536).
  • General principles: The court also considered the principles articulated in Financial Services Authority v Rourke [2001] EWHC 704 (Ch) that in granting a declaration the court should take into account: justice to both claimant and defendant; whether the declaration would serve a useful purpose; and whether there are any other special reasons for or against a declaration. The court considered that the claim for a declaration would extend the scope of the trial and be unjust to the Bank. Whereas refusing to allow the amendment would not be unjust to the claimants, due to the speculative nature of the claim. Further, the lack of clarity and difficulty in determining the scope of the declaration was a special reason against granting it.
  • Non-parties: The court noted that the claimants were not a party to the FCA Agreement between the Bank and the FCA, but this did not itself preclude the granting of a declaration provided that the non-party was directly affected by the issue: Rolls Royce Plc v United the Union [2009] EWCA Civ 387. However, it would still be exceptional for a non-party to obtain declaratory relief where the contracting parties themselves were not in dispute as to their rights/obligations: The Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Limited & Ors [2014] LR 671. In the current case, there was no dispute between the Bank and the FCA in relation to the FCA Agreement, and in any event, there was no legal right on the question of the time extension. The court held that this case clearly fell into the category where it would still be exceptional to allow a non-party to a contract to seek declaratory relief.
  • Judicial review as an alternative to declaratory relief: The court also highlighted that the claimants could seek judicial review of the FCA’s refusal/failure to take enforcement action against the Bank. The court noted that while there have been other cases in which the obligations of a public body were considered by the court when judicial review was also available, they were highly fact-sensitive. On the present application, the court doubted the claimants’ legitimate interests in seeking a declaration and determined that it was not a legitimate use of the court’s powers to make findings in an attempt to force the FCA to act. The court commented that this would cut across the regulatory regime which had been established for the FCA generally and the FCA Review in particular.

Comment

The possibility of claimants finding new routes to attack the FCA Review seems even more remote. This robust decision represents a further marker by the High Court upholding the integrity of the process.

John Corrie
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Ceri Morgan
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Nihar Lovell
Nihar Lovell
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High Court clarifies calculation of Close-out amount under 2002 ISDA Master Agreement

Lehman Brothers Special Financing Inc. v National Power Corporation & Anor [2018] EWHC 487 (Comm) is a significant case on the calculation of Close-out Amount under the 2002 ISDA Master Agreement.

Two important points of principle arise from this judgment, which will have general application to transactions governed by the 2002 ISDA Master Agreement:

  1. In calculating Close-out Amount, a manifest mathematical or numerical error should more appropriately be corrected by agreement or by court or tribunal (and only in relation to the error itself); it will not ordinarily enable a Determining Party to make a fresh determination.
  2. The standard to be applied to a Determining Party in calculating a Close-out Amount is higher under the 2002 ISDA Master Agreement compared to the 1992 ISDA Master Agreement. The 2002 ISDA Master Agreement replaced the requirement for a rational decision (the applicable standard under the 1992 ISDA Master Agreement) with the requirement for objectively reasonable procedures in order to produce an objectively reasonable result.

This result is consistent with what market participants anticipated was the impact of the wording contained in the 2002 ISDA Master Agreement, which was to introduce a higher standard through greater objectivity, although it arguably gives rise to greater scope for disputes to arise in relation to parties’ determinations pursuant to that higher standard.

Background

In 2007, the claimant (“LBSF”) entered into a US$100 million principal only US$/Philippine peso forward currency swap (the “Swap”) with the first defendant, which was later transferred to the second defendant (“NPC”, meaning the first or second defendant, or both). Both defendants were owned and controlled by the Republic of the Philippines. The parties elected to apply the 2002 ISDA Master Agreement to the Swap (terms defined in that agreement are capitalised in this e-bulletin).

Following LBSF filing for Chapter 11 bankruptcy in the United States, the terms of the 2002 ISDA Master Agreement triggered an Event of Default. NPC subsequently served a notice on LBSF for early termination of the Swap and designated 3 November 2008 as the Early Termination Date. NPC, as the non-defaulting party, had the right under the 2002 ISDA Master Agreement to determine the Close-out Amount using “commercially reasonable procedures in order to produce a commercially reasonable result”.

On 3 November 2008 (i.e. the designated Early Termination Date), NPC requested and received indicative quotations for a replacement swap from various banks and on 7 November 2008, NPC requested and received firm quotations from those banks. NPC subsequently entered into a swap with UBS based on the firm quotation received on 7 November 2008 (the “UBS Swap”). In January 2009, NPC served its determination of the Close-out Amount for the Swap on LBSF (the “2009 Determination”). NPC demanded circa US$3.5 million, which represented the cost it had incurred in entering the UBS Swap as a replacement transaction.

LBSF disputed the 2009 Determination on the basis that commercially reasonable procedures were not used to arrive at this figure and that it was not a commercially reasonable result. In 2015, LBSF commenced court proceedings asserting that LBSF itself was in the money on the Swap. LBSF claimed that NPC owed a Close-out Amount of circa US$13 million to LBSF (the “LBSF Determination”).

NPC subsequently served a revised calculation statement in 2016 which contained two alternative determinations payable by LBSF to NPC: (a) a Close-out Amount of circa US$11 million based on the indicative (not firm) quotation received from UBS on the Early Termination Date (the “Primary Determination”); or (b) a Close-out Amount of circa US$2 million based on the original 2009 Determination of circa US$3.5 million but with the deduction of an Accrued Amount which had not been taken into account in 2009 (the “Alternative Determination”).

Decision

The principal questions examined by the court were:

  • Is it open to a Determining Party to remake a determination of a Close-out Amount?
  • Was the requirement to “use commercially reasonable procedures in order to produce a commercially reasonable result” complied with?

Can a Determining Party remake a Close-out determination?

In the present case, the 2009 Determination fell for scrutiny on two counts: (a) whether the Accrued Amount should have been taken into account; and (b) whether the requirement for “commercially reasonable procedures in order to produce a commercially reasonable result” was complied with.

As to (a), it was common ground that the Accrued Amount should have been taken into account. The question for the court was whether the failure to include the Accrued Amount was a manifest error entitling NPC to make a fresh determination, or whether it was the type of error that should simply be corrected by agreement or by the court/tribunal. This question is considered below. The following section considers whether the requirement at (b) was complied with, and the consequences if this requirement was not complied with.

On the true interpretation of the 2002 ISDA Master Agreement, the court stated that the position was as follows:

  1. With its notice of early termination of the Swap, NPC caused a debt obligation to arise and with delivery of NPC’s 2009 Determination an obligation to pay arose (Videocon Global Ltd v Goldman Sachs International [2016] EWCA Civ 130).
  2. These are significant contractual events and that once they have arisen the relationship between the parties is thereafter affected and not reversible (save by agreement, or in some cases an order of a court or tribunal).
  3. The 2009 Determination completed NPC’s obligation and right to make a determination.
  4. If there is an error in the determination then (absent agreement) the court or tribunal chosen by the parties will be left to declare that and to state what the Close-out Amount would have been absent that error.
  5. However, the Determining Party is also a party to the contract and it can make and accept proposals in its capacity as a party to the contract, including correcting an error in the determination.
  6. The Primary and Alternative Determinations might serve as evidence to inform the question of whether there was an error and the question as to what the Close-out Amount would have been on a determination without error (Socimer International Bank Ltd v Standard Bank London Ltd (No.2) [2008] EWCA Civ 116).

The court went on to consider comments on the question of remaking a determination in the practitioner text: Derivatives Law and Practice (by Simon Firth), which states as follows:

“Once a determination has been validly made of the…Close-out Amount, it will be final and binding on both parties. The determining party cannot subsequently change its mind (for example, on the basis that a mistake has been made). On the other hand, if the original determination was invalid (for example, because it was based on a misinterpretation of the Agreement), or (probably) it was founded on or infected by a manifest numerical or mathematical error [], the determining party should be able to make a fresh determination that complies with the requirements of the Agreement.”

In the court’s view (and in contrast to the suggestion in Derivatives Law and Practice), the case of manifest mathematical or numerical error would still be a case for correction of the determination (by agreement or by court or tribunal, and in the respect where there was error) rather than a fresh determination. Accordingly, the failure by NPC to take into account the Accrued Amounts in making the 2009 Determination was the type of error that simply admits a case for correction of the determination as above and NPC was not entitled to make a fresh determination.

Was the requirement to “use commercially reasonable procedures in order to produce a commercially reasonable result” complied with?

The court observed that the definition of Close-out Amount in the 2002 ISDA Master Agreement included the provision:

Any Close-Out Amount will be determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result”.

The court considered (and rejected) NPC’s arguments that the references in the definition of Close-out Amount to “commercially reasonable procedures” and a “commercially reasonable result” required only that the Determining Party use rational procedures in order to produce a rational result. In the court’s view, the 2002 ISDA Master Agreement required the Determining Party to use procedures that are (objectively) commercially reasonable in order to produce (objectively) a commercially reasonable result. It considered that the 2002 ISDA Master Agreement had wording that showed a higher standard is intended when that standard form is chosen by the parties.

There were two principal elements to the court’s decision:

  1. The court highlighted that the change in the wording used in the 1992 ISDA Master Agreement to the form used in the 2002 ISDA Master Agreement was material. The 1992 ISDA Master Agreement states that the non-defaulting party has to “reasonably determine in good faith” the Close-out Amount payable. This was summarised in Fondazione Enasarco v Lehman Brothers Finance SA [2015] EWHC 1307 (Ch) as “essentially a test of rationality”. By contrast, under the 2002 ISDA Master Agreement: “[f]or the first time the calculation of the liabilities on closing out had to be carried out ‘in order to produce a commercially reasonable result’“: Lehman Brothers International (Europe) v Lehman Brothers Finance SA [2013] EWCA Civ 188. Further, the court said it was clear from the 2002 User’s Guide supporting the 2002 ISDA Master Agreement that the change was specifically designed to include greater objectivity.
  2. The court emphasised the difference between the tests of rationality and reasonableness (citing Lord Sumption in Hayes v Willoughby [2013] UKSC 17):

“Rationality is not the same as reasonableness. Reasonableness is an external objective standard applied to the outcome of a person’s thoughts or intentions. The question is whether a notional hypothetically reasonable person in his position would have engaged…A test of rationality, by comparison, applies a minimum objective standard to the relevant person’s mental processes”.

The court concluded that it was commercially reasonable to make the 2009 Determination as NPC did, relying on the UBS Swap. The court was not persuaded that, especially in the market circumstances at the time, it would have been commercially reasonable to determine the Close-out Amount as of 3 November 2008 (the Early Termination Date, i.e. as per the Primary Determination); at that stage only indicative quotations were available.

The court remarked that the UBS Swap replaced more than what was provided for under the original Swap because it included an option which NPC did not have at the Early Termination Date. NPC, therefore, was not entitled to pass onto LBSF the option exercise price or pre-payment premium of US$1 million attached to that option. The Close-out Amount was therefore the 2009 Determination, less the Accrued Amount, less the option premium.

The court did not proceed to consider what the position would have been if the 2009 Determination had not complied with the requirement for “commercially reasonable procedures in order to produce a commercially reasonable result”, i.e. whether NPC would have been entitled to make a fresh determination or whether the error could be corrected by agreement or by the court/tribunal.

Comment

The instant case confirms that in calculating Close-out Amount, a manifest mathematical or numerical error should more appropriately be corrected by agreement or by court or tribunal (and only in relation to the error itself); it will not ordinarily enable a Determining Party to make a fresh determination. Further, the standards imposed on a Determining Party calculating Close-out Amount are higher under the 2002 ISDA Master Agreement than the 1992 ISDA Master Agreement. The change in the relevant wording under those agreements had the effect of replacing a requirement for a rational decision with a requirement for an objectively reasonable one.

 

Harry Edwards
Harry Edwards
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Ceri Morgan
Ceri Morgan
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Nihar Lovell
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PAG v RBS: Court of Appeal dismisses IRHP mis-selling and LIBOR manipulation claim

The Court of Appeal has dismissed the entirety of the long-awaited appeal in Property Alliance Group v The Royal Bank of Scotland [2018] EWCA Civ 355. The result is that all claims against the defendant bank have failed. This is the first substantive decision involving allegations of LIBOR manipulation and interest rate hedging product (“IRHP”) mis-selling to reach the Court of Appeal, and it offers a number of points of binding authority, which are helpful from the perspective of financial institutions.

In this executive summary, we highlight the key legal and factual points decided by the Court of Appeal which are likely to have wider application to claims involving alleged mis-selling of financial products, together with potential commercial implications.

We have prepared a more detailed case analysis in our banking litigation e-briefing, which can be accessed via the hyperlink.

  1. The Court of Appeal has confirmed that the expression ‘mezzanine’ or intermediate duty of care is best avoided. There is no “continuous spectrum of duty, stretching from not misleading, at one end, to full advice, at the other end”. Absent an advisory relationship or special circumstances in which a specific broader duty is established, a financial institution owes no duty to explain the nature or effect of a proposed arrangement to a prospective customer. This restates the orthodox position, from which earlier cases had seemed to depart.
  2. The extent of the duty owed in a non-advised sale of financial products will therefore typically be a duty not to misstate (Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465). In order to establish a specific broader duty of care, claimants will need to satisfy one of the traditional tests for establishing a duty of care (as set out in Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28). Further, claimants will need to distinguish the instant case, in which no such broader duty of care was found on the facts.
  3. Of particular interest was the decision of the lower court (flowing from the point above) that, absent special circumstances, there was no positive duty on the defendant bank when selling the IRHPs to disclose to the claimant the bank’s internal contingent liability figure for the IRHP. The Court of Appeal noted that several first instance judgments had reached the same conclusion and could find no basis for interfering with the High Court’s decision on this point. Absent special circumstances, this decision – along with the previous decision of the Privy Council in Deslauriers and Anor v Guardian Asset Management Limited (Trinidad and Tobago) [2017] UKPC 34 (see our e-bulletin) – means that it will be extremely difficult for claimants to argue that these figures ought to have been provided (indeed, the Court of Appeal noted that it remains the defendant bank’s practice not to do so).
  4. This case should therefore help focus the issues in ‘mezzanine’ duty claims. It may be appropriate for defendant banks to review the scope of any more onerous information-related duties which have been alleged, and make clear in correspondence that the burden is on the claimant to prove the existence of a specific duty of care (and this burden is likely to be reasonably onerous). Such claims may be amenable to strike out and/or summary judgment. Addressing such issues early in proceedings may help reduce the scope of disclosure and the evidence to be served, ultimately reducing time and cost.
  5. Departing from the judgment of the High Court, the Court of Appeal did find that in selling GBP LIBOR linked products, the bank made the narrow implied representation (at the time of entering into the IRHPs) that it was not itself seeking to manipulate GBP LIBOR and did not intend to do so in the future. However, on the current facts, the claimant could not prove that the representation (concerning GBP LIBOR) was false. The Court of Appeal held that falsity will need to be specifically proven; it would not be sufficient to invite the court to draw inferences on the basis of conduct relating to other benchmarks (such as LIBOR in a different currency) or indeed findings of the regulator. It is thus likely that claimants will continue to face significant hurdles to succeed in such claims. In particular, proving reliance on any representations (which is likely to be fact specific) and that the representations were in fact false, will be onerous.
  6. Although the Court of Appeal did not overturn the High Court’s decision, it emphasised a point likely to arise in other cases involving an exercise of a contractual discretion – namely that such a contractual power needs to be exercised for legitimate commercial aims and not used maliciously. In the current case, the bank exercised a power in the relevant loan agreement to instruct a valuer to prepare a valuation of the claimant’s assets which were charged to it. The claimant argued that the bank had no reason to do so and thus the exercise of the power was wrongful. On the facts, the Court of Appeal disagreed. However, the rule may be of wider application.

For a more detailed analysis of the decision, read our banking litigation e-briefing.

John Corrie
John Corrie
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Ceri Morgan
Ceri Morgan
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Ajay Malhotra
Ajay Malhotra
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Nic Patmore
Nic Patmore
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