High Court considers scope of jurisdiction and meaning of records under Bankers’ Book Evidence Act 1879

The High Court has dismissed an application (under the Bankers’ Book Evidence Act 1879) by the CFO of a telecommunications company for access to bank documents for use in Canadian extradition proceedings (initiated by US prosecutors who were seeking to join the CFO as a co-defendant to criminal proceedings in the US because she was alleged to have misled the respondent banks into processing transactions linked to Iran which were in contravention of US sanctions law): Meng v HSBC Bank Plc & Ors [2021] EWHC 342 (QB)

This decision is a reassuring one for financial institutions faced with applications under the Bankers’ Book Evidence Act 1879 (the Act) for disclosure of bank documents for use in foreign or domestic legal proceedings. Such applications may be made by parties to legal proceedings in addition to disclosure applications under the CPR and other avenues for obtaining disclosure, which may increase the administrative burden and cost of business for a financial institution. Despite the longevity of the Act, there is relatively little reported authority interpreting the Act. This decision highlights the narrow scope of the court’s jurisdiction, and helpfully limits the type of documents which may be obtained, under the Act. Additionally, the decision underlines the fact that even if certain conditions in the Act are met for ordering disclosure, the court still ultimately retains the discretion as to whether to order disclosure.

In summary, the court found that it had no jurisdiction under the Act to make the disclosure order sought by the applicant. The Act was limited to UK legal proceedings and did not extend to making orders for the purposes of foreign legal proceedings. The court also said that if even it had found in favour of the applicant on the jurisdiction issue, it would have still refused the application on the basis that the documents/records sought by the applicant did not fall within the scope of the Act (which was limited to transactional records and did not include non-transactional records, such as attendance notes or correspondence between a bank and its customer). The court also noted that even if the applicant had been successful on both the jurisdiction and the records issues, the court would not have not exercised its discretionary power to grant the application. A number of factors which the court took into account in declining to exercise its discretion included the express US prohibition order on the use of the documents in the Canadian extradition proceedings, the likelihood of the applicant having a fair trial before the Canadian courts and the failure of the applicant to link the documents requested sufficiently clearly to specific regulatory duties to maintain records.

We consider the decision in more detail below.

Background

The applicant was the CFO in a telecommunications company (Company), which had a banking relationship with a global banking group. Between 2007 and 2017, the Company, two of its subsidiaries, and the applicant allegedly deceived the global banking group which included the respondents and the US government as to the Company’s business activities in Iran. The employees of the Company are alleged to have made misrepresentations about the relationship of the Company with an unofficial subsidiary in Iran and to the effect that the Company had not violated any US laws or regulations relating to Iran.

In reliance on the misrepresentations by the Company, the global banking group and its US subsidiary in particular cleared more than USD $100 million of transactions relating to the Company’s unofficial subsidiary in Iran between 2010 and 2014; this was in contravention of US sanctions law and exposed the global banking group to potential civil or criminal penalties.

In 2019, US prosecutors brought criminal charges against the Company, the two subsidiaries involved and the applicant for financial fraud. The applicant had in the meantime been detained in Canada. The US government sought the applicant’s extradition to the US so that she could be prosecuted as a co-defendant in the US criminal proceedings.

The applicant subsequently applied to the English High Court under section 7 of the Act seeking disclosure from three UK subsidiaries of the global banking group (the respondent banks) of 13 categories of documents to support her arguments in the Canadian extradition proceedings. The applicant’s case was that the documents were held by the US government, emanated from within the global banking group and were not ‘discoverable’ in the Canadian extradition proceedings or through the US criminal proceedings.

Decision

The court found in favour of the respondent banks and dismissed the application. In summary, the court held that it had no jurisdiction to make the disclosure order sought by the applicant. The court also said that even if it had found in favour of the applicant on the jurisdiction issue, it would have still refused the application on the basis that the documents/records sought by the applicant did not fall within the scope of the Act. The court also noted that even if the applicant had been successful on both the jurisdiction and the records issues, the court would not have not exercised its discretionary power to grant the application.

We consider below some of the key issues considered by the court in relation to the application.

Issue 1: Jurisdiction

The applicant argued that the court had the necessary jurisdiction under section 7 of the Act to make the disclosure order sought on the basis that the Act also applied to foreign legal proceedings anywhere in the world, not just legal proceedings in the UK.

The court held that it had no jurisdiction to make the disclosure order sought by the applicant. The court commented that Parliament had intended that the scope of the Act be restricted to legal proceedings in the UK and that there were statutory schemes in place for foreign courts, public authorities and international authorities – not a private party or criminal defendant – to make a formal request for assistance in obtaining evidence. Such statutory schemes would in effect be bypassed in the case of entries in bankers’ books if the court acceded to the applicant’s submissions; however, the court did not accept that this could have been Parliament’s intention with respect to how the Act was intended to operate.

Issue 2: Documents/Records

The applicant argued that the references in the Act to “entries in” and “other records used in the ordinary business of the bank” included both transactional records and non-transactional records maintained for regulatory compliance.

The court said that even if it had found in favour of the applicant on the jurisdiction issue, it would have still refused the application on the basis that the documents/records sought by the applicant did not fall within the scope of the Act as they were not transactional records. The court underlined that “entries in” and “other records used in the ordinary business of the bank” meant transactional records and did not include non-transactional records maintained for regulatory compliance. The court noted that the Act was never intended to cover everything that a bank has, or does, or writes down, in the course of its ordinary business as a bank; for example, an attendance note of a conversation with a customer or prospective customer or correspondence between the bank and a customer or prospective customer will not fall within the scope of the Act.

Issue 3: Exercise of the court’s discretion

The applicant argued that the court should exercise its discretion to order the respondent banks to provide access to the 13 categories of documents sought in order to promote and ensure fairness in the Canadian extradition proceedings. The applicant said that: (i) the US prosecuting authorities’ case against her was clearly based to a significant extent on information provided to the US authorities by entities and individuals within the global banking group; (ii) the documents sought were plainly material to the Canadian extradition proceedings; and (iii) nothing would be forced on the Canadian courts who would still have to decide admissibility and relevance.

The court noted that even if the applicant had been successful on both the jurisdiction and the records issues, the court would not have not exercised its discretionary power to grant the application. The court said that the documents sought were subject to an express prohibition order, made in the US criminal proceedings, that they could not be used in the Canadian extradition proceedings; the court must therefore proceed on the basis that the express prohibition was lawful under US law. Also, in the court’s view, there was nothing to suggest that without those documents the applicant would be denied a fair hearing before the Canadian court. Finally, the court highlighted that the applicant had failed to provide a clear link between the particular documents sought and specific regulatory duties to maintain records; if it was correct that records for regulatory compliance did fall within the scope of the Act, the applicant was required to specify the records sought and reference them to a specific regulatory duty to maintain those records.

Simon Clarke
Simon Clarke
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Nihar Lovell
Nihar Lovell
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Supreme Court judgment in KBR v SFO appeal: detailed briefing published

As reported in our previous blog post, the Supreme Court has handed down judgment in a keenly anticipated case concerning the scope of extraterritorial application of the SFO’s document compulsion powers under section 2(3) of the Criminal Justice Act 1987 (CJA): R (on the application of KBR, Inc) v Director of the Serious Fraud Office [2021] UKSC 2.

The Supreme Court unanimously allowed the appeal, confirming that the SFO did not possess the power to compel a foreign company to produce documents held outside the UK.

Our FSR and Corporate Crime team have now published a briefing with further analysis of the decision and its practical implications for multinational corporations.

The briefing refers to the Supreme Court’s interesting observations on the potential read across value for other regulatory bodies. There was some anticipation that the KBR judgments might, depending on the outcome of the Supreme Court case, be used by other law enforcement or regulatory authorities (including the FCA) in arguing that their own powers should be considered to have extraterritorial scope. This potentially included any agencies who may be involved in cross-border investigations and who have statutory document compulsion powers which are not expressly limited in their territorial scope.

The Supreme Court warned, however, against “reading across” between the document production powers vested in different UK agencies, noting that each operates under its own legislative history and context. The court distinguished the tax case of Jimenez, R. (On the Application of) v The First Tier Tribunal (Tax Chamber) [2019] EWCA Civ 51, which had followed the High Court decision in KBR v SFO, on the basis that (among other things) the powers pursuant to the Finance Act 2008 were expressly limited for the purpose of checking the taxpayer’s tax position. The powers were necessarily and only exercisable in relation to someone who is or may be liable for tax in the United Kingdom and who, to that extent, had an identifiable relationship with the United Kingdom. This, it indicated, was different to the broad ambit of section 2(3) CJA 1987 which, on the High Court’s analysis, had required limitation through the creation of the “sufficient connection” test. A further distinguishing factor was that non-compliance in Jimenez did not amount to a criminal offence, as under section 2(3).

Notwithstanding these comments, the parallel between the SFO’s document compulsion powers and those of the FCA under the Financial Services and Markets Act 2000 is noteworthy (and arguably more aligned than the tax example). The Supreme Court’s ruling may therefore provide a helpful indication that the FCA’s similar statutory powers do not extend to compel foreign group companies to produce overseas held documents, within the context of an FCA investigation into a group company based in the UK.

For more information, please read our FSR and Corporate Crime team briefing on this decision.

Supreme Court rules SFO cannot compel foreign company to produce documents held overseas

On 5 February 2021, the Supreme Court handed down judgment in the case of R (on the application of KBR, Inc) v Director of the Serious Fraud Office [2021] UKSC 2 concerning whether the Serious Fraud Office (SFO) can require a foreign company to produce documents held overseas, pursuant to its investigation powers under section 2(3) of the Criminal Justice Act 1987 (CJA).

The decision followed a “leapfrog” appeal from the High Court (see our blog post), the issue being a “point of law of general public importance”. The Supreme Court found unanimously against the broad extraterritorial impact read into the s2(3) CJA power by the High Court: the SFO could not compel the production of documents held overseas on the basis of “a sufficient connection” between the foreign company and the UK.

The practical effect of the decision for financial institutions is that foreign group entities that hold documents overseas, will not find themselves on the receiving end of a section 2(3) notice, should a UK-based group entity be under SFO investigation. Given the parallel between the SFO’s document compulsion powers and those of the FCA under the Financial Services and Markets Act 2000, the Supreme Court’s ruling is also a helpful indication that the FCA’s similar statutory powers do not extend to compel foreign group companies to produce overseas held documents, within the context of an FCA investigation into a group company based in the UK.

For more information on the decision please see this post on our FSR and Corporate Crime Notes blog. Further analysis of the case and its potential implications for financial institutions will be published in due course.

High Court confirms no abuse of process or exceptional grounds for partially striking out/staying parallel English proceedings brought by a Bank in relation to a swap claim

The High Court has dismissed an Italian municipal authority’s application to strike out certain parts of the claimant banks’ particulars of claims and/or for a stay (in relation to a declaratory relief claim in connection with two interest rate swap transactions): Banca Intesa Sanpaolo SPA and Dexia Credip SPA v Commune Di Venezia [2020] EWHC 3150 (Comm).

This decision is a noteworthy and reassuring one for financial institutions which may be considering whether to pursue English proceedings, especially where there are existing parallel foreign proceedings in relation to a particular subject matter, or which may be at risk of an application for a stay if parallel foreign proceedings are filed after English proceedings have commenced. The decision highlights the grounds on which the court will decline to strike out part of a claim (insofar as they refer to foreign proceedings or finance documentation which is not directly related to the transaction at the centre of the dispute) or stay proceedings where there are related proceedings in another jurisdiction.

The court found that the definition of a new claim (which would be liable to be struck out) is a new cause of action which changes the essential features of the factual basis of the claim. Interestingly, the court found that references to documentation not directly related to the interest rate swaps at the centre of the dispute in the English proceedings (and which were central to the dispute in Italian proceedings) did not constitute a new claim for the purpose of the English proceedings. Further, the court did not consider that the existence of the Italian proceedings changed the essential features of the factual basis of the English claim. The fact that the relief sought in the English claim form and particulars of claim was the same was significant.

The court also found that exceptionally strong grounds are needed for a stay on case management grounds where the English courts have been granted exclusive jurisdiction. The court confirmed that the risk of parallel proceedings and inconsistent judgments is not sufficient to warrant a stay.

Background

In mid-2007, the defendant Italian municipality authority of Venice engaged the claimant banks (Banks) to restructure €156 million worth of bonds and associated interest rate swaps it had entered into five years earlier with another bank. The parties entered into a Mandate Agreement and Investment Services Agreement (ISA), which were both governed by Italian law and conferred exclusive jurisdiction on the Italian courts. In December 2007, the defendant entered into interest rate swaps (Swaps) with the Banks and signed a suite of associated Swap documentation, including ISDA Master Agreements and schedules which contained an English choice of law and conferred exclusive jurisdiction on the English courts.

In June 2019, the defendant commenced proceedings against the Banks in Italy. The defendant claimed the Banks had failed to comply with the advisory obligations it owed to the defendant under the Mandate, the ISA and certain Italian legislation. Alternatively, the defendant claimed that the Banks’ breaches of duty caused it to enter into the Swap documentation. Two months later, the Banks commenced proceedings in England seeking various declarations in relation to the Swaps. The declarations sought included that the Banks had complied with and/or discharged their obligations arising out of or in connection with the Swaps and were not liable for any claims arising in relation to them (and that such claims were time-barred under the Limitation Act 1980). The Banks also filed applications in Italy challenging the jurisdiction of the Italian courts.

The defendant then applied, in the English proceedings, to strike out parts of the particulars of claim as an abuse of process and/or for a stay until the Italian proceedings had determined the jurisdiction challenge. The disputed paragraphs pleaded details of the Italian proceedings, including the defendant’s allegations that the Banks had failed to comply with their obligations under the Mandate Agreement by advising the defendant to enter into the Swaps.

Decision

The court rejected the defendant’s application to strike out parts of the particulars of claim and for a stay.

Application to strike out

The defendant argued that the disputed paragraphs of the particulars of claim were an abuse of process as they introduced a claim which had not been included in the claim form. The defendant also argued that the claim form was framed solely by reference to the Swap documentation, not the Mandate Agreement or ISA, which were already subject to separate Italian proceedings. In the defendant’s view, the particulars of claim expanded the claim to include matters which were already the subject of the Italian proceedings.

The court accepted that pleadings may be struck out if they raise a new cause of action which is not within the ambit of the claim form. However, in the present case, the court held that the disputed paragraphs did not plead a cause of action distinct from the causes of action in the claim form. In reaching this finding, the court noted it was significant that the relief sought in the particulars of claim was the same as in the claim form. The court also said the disputed paragraphs did not introduce a change to the “essential features of the factual basis of the claim made” (as per the definition of a new cause of action set out in Jalla v Royal Dutch Shell PLC [2020] EWHC 459 (TCC)). The claim in the claim form was based on the terms and effect of the Swap documentation, and those documents referred to the consulting services provided by the Banks prior to entry into the Swaps. Therefore, reference to the Mandate Agreement and ISA in the particulars of claim did not change the essential features or factual basis of the claim, which was based on the terms of the Swaps. The court also considered that reference to the Italian proceedings did not change the essential features of the factual basis of the claim. The existence of the Italian proceedings may have indicated why the declarations were being sought, but did not amount to a factual situation giving rise to an entitlement to a different relief to that being sought in the claim form.

Application for a stay

In seeking a stay on case management grounds until the jurisdictional challenge in the Italian proceedings had been determined, the defendant argued that if the strike out application was not granted, there was a real risk of parallel proceedings and of inconsistent decisions if the Italian proceedings went ahead. If, on the other hand, the Banks’ jurisdictional challenge succeeded in Italy, then England would be the only forum for the defendant to pursue its claims under the Mandate Agreement and ISA. In the view of the defendant, it was in the interests of justice to stay the English proceedings.

The court held in line with previous authority that exceptionally strong grounds are required to grant a stay on case management grounds, especially where the English courts have exclusive jurisdiction, and that there were no such grounds in this case. It noted that in a case where the English court has jurisdiction, especially exclusive jurisdiction, the danger of inconsistent judgments is not a legitimate consideration amounting to exceptional circumstances (as per MAD Atelier International BV v Manes [2020] EWHC 1014 (Comm)).

In this case, the presence of the exclusive jurisdiction clause in the Swap documentation weighed against a stay. Further, a stay would not be consistent with Articles 29 and 30 of the Recast Brussels Regulation (1215/2012), as the English and Italian claims were separate and distinct, and the Banks’ claim could not be heard in Italy due to the exclusive jurisdiction clauses in the Swap documentation. Lastly, the jurisdiction of the English courts was established, whilst the jurisdiction of the Italian courts was being challenged. A stay in such circumstances would rarely be justified on case management grounds. A stay would only delay the English proceedings and would not be conducive to dealing with them expeditiously.

Simon Clarke
Simon Clarke
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Georgia Nickson
Associate
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Latest guidance from the Court of Appeal on asymmetric jurisdiction clauses

The Court of Appeal has held that an asymmetric or unilateral jurisdiction clause is an exclusive jurisdiction clause for the purposes of the recast Brussels Regulation. The English court was therefore entitled to continue with its proceedings where it was the chosen court but proceedings had been commenced earlier in Germany: Etihad Airways PJSC v Lucas Flother [2020] EWCA Civ 1707.

Asymmetric jurisdiction clauses are common in the financial sector, and typically require one party to bring proceedings in one jurisdiction only, while the other (usually the financial institution) may choose to bring proceedings in other jurisdictions. The effect of this decision is (for proceedings commenced in England & Wales before 1 January 2021 at least – see further below) that an asymmetric jurisdiction clause will have the benefit Article 31(2) of the recast Regulation, a provision designed to defuse the so-called Italian Torpedo (whereby a counterparty could delay a resolution in the chosen court by racing to commence proceedings first in some other EU state, and the chosen court would then have to stay any proceedings under the “first seised” rule). Accordingly, the Court of Appeal’s decision will be welcomed by banks for providing certainty in respect of how asymmetric jurisdiction clauses will be treated under the recast Regulation.

However, the recast Regulation ceased to apply in the UK when the Brexit transition period came to an end on 31 December 2020. This means that the Court of Appeal’s decision will only be of direct relevance in respect of proceedings commenced in England & Wales before 1 January 2021. This is the case even if the UK accedes to the Lugano Convention 2007, as there are no similar provisions within Lugano giving priority to an exclusive jurisdiction clause where the proceedings in the chosen court are second in time. In this context, it is worth noting that judicial cooperation in civil and commercial matters was outside the mandate of the negotiations leading to the Trade and Cooperation Agreement (TCA) agreed between the UK and the EU, which therefore contains no relevant provisions (for our initial commentary on the TCA, see our Beyond Brexit blog post).

Of more interest and ongoing relevance are the Court of Appeal’s comments concerning whether an asymmetric clause is an exclusive jurisdiction clause for the purposes of the 2005 Hague Convention on Choice of Court Agreements, as this Convention will apply post-Brexit to proceedings between the UK and the EU (assuming no Lugano). The Court of Appeal’s view, was that there were strong indications that the intention was to exclude asymmetric clauses from Hague.

While this aspect of the decision is less helpful from the perspective of financial institutions, it is important to note that Court of Appeal did not reach a final decision on the point and there have been two previous Commercial Court decisions observing that there are good arguments for asymmetric clauses being within the Hague Convention (see our posts here and here).

It is also worth noting that whatever view the English court takes concerning such clauses, the most important question from a UK perspective will be what stance an EU court takes on this question, i.e. whether it will stay proceedings and enforce judgments under the Hague Convention where there is an asymmetric clause which restricts one of the parties to bringing proceedings in England. While under Article 23 of Hague, courts must have regard to the Convention’s international nature and the need to promote uniformity in its application, English judgments will not be binding on foreign courts.

For a more detailed analysis of the decision, see our Litigation Notes blog post.

New Webinar Available: Dispute Resolution Choices for Banks and Financial Institutions – Maximising the Chances of Successful Enforcement

Choice of dispute resolution forum can have a fundamental impact on the ability of banks and financial institutions to enforce contractual obligations.

In our client webinar on 23 September, Dispute Resolution Choices for Banks and Financial Institutions: Maximising the Chances of Successful Enforcement, Julian Copeman, Nick Peacock and Hannah Ambrose discussed recent trends in dispute resolution choices in the banking and finance sector in the context of Brexit, before addressing:

  • the use of the English courts, providing guidance as to enforcement of English court judgments in the EU in the context of Brexit;
  • the risks and rewards associated with unilateral clauses which enable a choice of forum to be made once a dispute has arisen; and
  • the key points which banks and financial institutions need to be aware of if choosing arbitration, such as the powers of arbitral tribunal with respect to remedies and the award of interest, and the increasing use of summary judgment procedures to resolve unmeritorious claims.

The speakers also touched on practical points to bear in mind for successful enforcement in Russia, Africa, India and China, and addressed questions from clients on the restatement of English court jurisdiction clauses after the end of the Brexit transition period to minimise enforcement risk, and the availability of interim relief from the court to support arbitral proceedings.

The webinar recording is now available for clients and contacts. To access the recording, please contact Hannah Ambrose or your usual Herbert Smith Freehills contact.

Julian Copeman
Julian Copeman
Partner
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Nicholas Peacock
Nicholas Peacock
Partner
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Hannah Ambrose
Hannah Ambrose
Senior Associate
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Commercial Court gives guidance on definition of ‘consumer’ under Recast Brussels Regulation in cryptocurrency futures trading case

An individual investor, with substantial means and more knowledge and experience than the average person, may still be considered a ‘consumer’ for the purposes of Article 17 of Regulation (EU) No 1215/2012 on jurisdiction and enforcement of judgments in civil and commercial matters (“Recast Brussels Regulation“), even when contracting to trade a specialised product such as cryptocurrency futures.

The recent Commercial Court decision in Ramona Ang v Reliantco Investments Limited [2019] EWHC 879 (Comm) has confirmed the purposive test to be applied when considering whether an individual investor is a consumer under the Recast Brussels Regulation. While this decision arguably gives a generous interpretation as to who is a consumer under Article 17, it does provide some helpful clarification for financial institutions contracting with retail clients. In particular:

  1. The court held that the key question when assessing if an individual investor is a consumer is the purpose for which the investment was entered into. Specifically, whether the individual entered into the contract for a purpose which can be regarded as being outside his or her trade or profession. While the circumstances of the individual and the nature of the investment activity (including the use of intermediaries/advisers) will be considered, the court emphasised that these factors will not be determinative of the issue.
  2. This decision is a good example of how each case will be fact-specific and will turn on whether the individual is considered to be contracting for a non-business purpose. In this instance, the court held that despite the specialised nature of the products themselves, a wealthy individual committing substantial capital to speculative transactions in the hope of making investment gains was a consumer for the purposes of Article 17 of the Recast Brussels Regulation. It disagreed with the suggestion from other EU Member State courts that such activity must necessarily be a business activity, i.e. cannot ever be a consumer activity.
  3. In cases where a person does meet the ‘consumer’ test, if they have nonetheless given the other party the impression that they are contracting for business purposes, they will not be able to rely upon Article 17. (However, that was not the case here).
  4. This case is a reminder that if an individual investor meets the criteria under Article 17 of the Recast Brussels Regulation and brings a claim in the courts of their choice as a consumer under Article 18, this may trump an exclusive jurisdiction clause under Article 25 (unless certain exceptions apply, such as agreeing the exclusive jurisdiction clause after the dispute has arisen).

It is worth noting that the Court of Justice of the European Union (“CJEU“) has recently published an Advocate General (“AG“) opinion in a similar case, concerning a preliminary ruling on whether a natural person who engages in trade on the currency exchange market is to be regarded as a consumer within the meaning of Article 17: Jana Petruchová v FIBO Group Holdings Limited Case C 208/18. The AG opinion is largely consistent with the decision of the High Court in this case, save that it goes further by stating that no account should be taken of the circumstances of the individual and the nature/pattern of their investment (whereas in the instant case, the High Court said such factors would be considered, but would not be determinative – see the first point above).

Background

The claimant (an individual of substantial means) invested in Bitcoin futures, on a leveraged basis, through an online trading platform (UFX), owned by the defendant. The claimant had no education or training in cryptocurrency investment or trading and was not employed at the time, but she played a part in looking after the family’s wealth and assisting her husband, a computer scientist with cybersecurity and blockchain expertise, who has identified himself publicly as being “Satoshi Nakamoto”, the online pseudonym associated with the investor of Bitcoin.

During the account opening process on the UFX platform, the claimant provided certain information about herself, including that she was self-employed, familiar with investment products including currencies and was a frequent trader (75+ trades). She was provided with and accepted the defendant’s terms and conditions.

The defendant terminated the claimant’s UFX account, the claimant alleged that the defendant did so wrongfully and brought a claim in the English High Court for compensation for the loss of her open Bitcoin positions. In response, the defendant challenged the jurisdiction of the English High Court, by reference to an exclusive jurisdiction clause in favour of the courts of Cyprus in the terms and conditions (and relying upon Article 25 of the Recast Brussels Regulation).

Decision

The claimant argued that the exclusive jurisdiction clause in the defendant’s terms and conditions was ineffective, either because she was a consumer within Section 4 of the Recast Brussels Regulation or because the clause was not incorporated into her UFX customer agreement in such a way to satisfy the requirements of Article 25 of the Recast Brussels Regulation.

The High Court held that the claimant was a consumer within Article 17 of the Recast Brussels Regulation, on the basis that she was contracting with the defendant for a purpose outside her trade or profession. As a result, she was permitted under Article 18 of the same regulation to continue her claim in the High Court and the defendant’s challenge to the jurisdiction was dismissed. The court’s decision in relation to Article 17 is discussed further below.

Test to be applied to an individual under Article 17 of the Recast Brussels Regulation

Article 17 of the Recast Brussels Regulation applies to contracts “concluded by a person, the consumer, for a purpose which can be regarded as being outside his trade or profession“. The court noted that the concept of ‘consumer’ had been considered a number of times by the ECJ/CJEU and had an autonomous meaning under EU law, which was independent of national law.

The defendant contended that the ECJ/CJEU had ‘glossed’ the definition of consumer, relying in particular upon the ECJ’s statement in Benincasa [1997] ETMR 447 that “only contracts concluded for the purpose of satisfying an individual’s own needs in terms of private consumption” were protected by the consumer rule under Article 17. The High Court rejected this contention, however, following the approach taken by Longmore J in Standard Bank London Ltd v Apostolakis [2002] CLC 933 and holding that this reference to “private consumption” was not a new or different test to the one under the Recast Brussels Regulation. The court reaffirmed that there were “end user” and “private individual” elements inherent in the notion of a consumer, but that an individual acting for gain could nonetheless meet the test.

In doing so, the court made the following key observations:

  • The court confirmed that the issue as to whether an individual investor is a consumer will be fact-specific in any given case. It emphasised that the question of purpose is the question to be asked, and must be considered upon all of the evidence available to the court and not to any one part of that evidence in isolation.
  • It agreed with the decision in AMT Futures Limited v Marzillier [2015] 2 WLR 187that any assessment of whether an individual investor is a consumer is “likely to be heavily dependent on the circumstances of each individual and the nature and pattern of investment“. However, it emphasised that these factors cannot determine the issue, as to do so would be to effectively replace the non-business purpose test set by the Recast Brussels Regulation.
  • It disagreed with the conclusion reached by the Greek courts in both Standard Bank of London v Apostolakis [2003] I L Pr 29 and R Ghandour v Arab Bank (Switzerland) [2008] I L Pr 35 that “the purchase of moveable property for the purpose of resale for profit and its subsequent actual resale…” was intrinsically commercial, so that engaging in such trading was necessarily a business activity and not a consumer activity.

Application of the test

Applying the purposive test as set out in the Recast Brussels Regulation, the court’s view was that the claimant had contracted with the defendant for a non-business purpose. It is worth noting that the court reached this conclusion despite finding that the claimant had over-stated the extent of her prior trading experience. Given that such over-statement did not go as far as creating the impression that the claimant was opening an account for a business purpose, it did not affect the court’s overall conclusion.

Donny Surtani
Donny Surtani
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Ceri Morgan
Ceri Morgan
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Phoebe Jervis
Phoebe Jervis
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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.

Harry Edwards
Harry Edwards
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Dan Eziefula
Dan Eziefula
Senior Associate
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Ceri Morgan
Ceri Morgan
Professional Support Lawyer
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High Court refuses declarations sought by trustee of unsecured notes as to amounts due and payable by issuer

In Part 8 proceedings brought by the trustee of certain unsecured notes, the High Court has refused to exercise its discretion to grant declarations as to the amounts due and payable by the issuer of the notes: The Bank of New York Mellon, London Branch v Essar Steel India Ltd [2018] EWHC 3177 (Ch). The court reached this conclusion notwithstanding the fact that the issuer was clearly in default under the notes, did not take any steps in the proceedings and was not represented before the court.

The decision offers some cautionary guidance as to the steps that those exercising corporate trustee functions might consider taking when applying for declaratory relief in relation to non-payment by the issuer of notes or other debt instruments. In particular, the court in this case found that:

  • In the absence of any evidence to confirm that other proceedings involving the issuer (an insolvency process in India) would not be affected by declarations made by the English court, the potential for those foreign proceedings to be affected was a factor that pointed clearly against the making of the declarations.
  • In circumstances where a third party who might be affected by the declarations (the insolvency professional in India) was not before the court and had been unable to make submissions, granting the declarations would amount to an “improper interference” in a foreign process being conducted by another party if the declarations were to affect the foreign process.

To the extent that the court appears to have taken a strict approach to the exercise of its discretion in this case, this may be explained by the court’s decision to adopt a “conservative mindset” against granting the declaration, because of the issuer’s non-participation in the proceedings. It is noteworthy that the court adopted this approach even though the issuer’s non-participation was not the fault of the claimant, and the claim was made under Part 8 and therefore did not turn on a factual dispute.

Background

The defendant (the “Issuer”) issued certain US Dollar 0.25% unsecured notes (the “Notes”), which were constituted under the terms of a trust deed dated 5 December 2003 (the “Trust Deed”). The claimant was the trustee (the “Trustee”) of the Notes.

The Trustee issued a Part 8 Claim in July 2018 seeking declarations against the Issuer as to the amounts due and payable in respect of the Notes. The Issuer took no step in the proceedings and was not represented at the hearing.

To determine whether the declarations sought should be made, the court said there were three questions to resolve:

  1. Did the Trustee have standing to bring the claim?
  2. Was the Defendant properly before the court, so that it could properly determine the substance of the Part 8 Claim?
  3. Was it appropriate to make the declarations sought by the Trustee?

Decision

Having found that the Trustee had standing to bring the claim and the Issuer was properly before the court (by service of the claim form on a service agent appointed under the Trust Deed), the court held that it would be inappropriate to make the declarations sought by the Trustee.

The court noted that the power to grant declaratory relief is discretionary (Rolls Royce plc v Unite the Union [2009] EWCA Civ 387). In exercising that discretion, the court said it was required to take into account justice to the claimant, justice to the defendant, whether the declaration would serve a useful purpose and whether there were other special reasons why or why not the court should grant the declaration (Finance Services Authority v Rourke  [2002] CP Rep 14).

The key reasons given by the court for finding that the declarations sought by the Trustee should not be made were as follows:

Both sides of the argument will not be put

The court said it was required to ensure that all those affected were either before the court or would have their arguments put before the court (Rolls Royce at [120](6)).

The court accepted that it would be “invidious and wrong” to allow a defendant’s non-participation in proceedings to prevent the making of declarations (particularly where this was not the fault of the claimant, and where the claim was made under Part 8 and did not turn on substantial disputes of fact – as here). However, where the defendant was absent, the court considered that it was required to approach the exercise of its discretion with “something of a conservative mindset against the granting of a declaration“.

Potential effect on a third party not before the court

The court noted that the Issuer was the subject of an insolvency process in India, but the effect of the instant proceedings on that insolvency process (and on the insolvency professional appointed in India) was unclear. There was no Indian law before the court to confirm the position.

The court found that the possibility of the insolvency professional being affected by declarations made in English court proceedings to which he/she was not a party was a factor that pointed clearly against the making of declarations.

The existence of a real and present dispute and the potential for interference in a foreign process

The court emphasised the need for a real and present dispute between the parties, which would be resolved by the making of the declaration.

The court found that it was “difficult to identify such a dispute as between the Trustee and the [d]efendant“, because although the Issuer was in default under the Notes, there was not a discernible dispute as to terms of the Notes or the Issuer’s obligations and it was not a case where the Issuer would pay if the declarations sought were made. It appeared to be a case where the Issuer simply could not pay and the granting of a declaration would not resolve the position in respect of the Issuer.

Further, the court understood that there were some points of dispute between the insolvency professional in India and the Trustee. As noted above, the court did not have evidence as to whether the declarations sought would affect the Indian insolvency process. However, if they did, then in the court’s view such declarations would amount to an “improper interference” in a foreign process being conducted by a party (the insolvency professional in India) who was not before the court and had been unable to make submissions. The court said this was not cured by the fact that the Indian insolvency process did not preclude claims for declaratory relief; and/or that the insolvency proceedings had not been recognised in this jurisdiction.

In light of the above, the court considered that it would be inappropriate to make the declarations sought by the Trustee and declined to do so.

 

Simon Clarke
Simon Clarke
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Ceri Morgan
Ceri Morgan
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High Court finds SFO can compel production of documents held by foreign company outside the jurisdiction

In a recent decision in the context of a judicial review, the High Court held that the SFO was able to compel a foreign company to produce documents located outside the jurisdiction, pursuant to s.2(3) of the Criminal Justice Act 1987 (CJA), where there was “a sufficient connection between the company and the jurisdiction”: R (On The Application Of KBR Inc) v The Director of the Serious Fraud Office [2018] EWHC 2368 (Admin).

This is the first time that an English court has reasoned that compulsory disclosure powers exercisable by a UK criminal enforcement agency have extraterritorial application. The judgment is notable for its finding of the extraterritorial operation of a statute where no explicit wording in favour of extraterritoriality applied. In the civil context, the courts have also seemed increasingly willing, in recent years, to find that provisions enabling the enforcement of judgments and orders have extraterritorial effect, such as the court’s powers of committal (see here).

From a civil litigation perspective, the increased reach of the SFO to obtain documents outside of this jurisdiction, in light of the KBR decision, may increase the scope of documents that are ultimately disclosable in civil proceedings. This may be because the SFO is itself a party to the proceedings – the CJA does not act as a bar against the SFO giving disclosure of documents obtained under its compulsory powers (see Tchenguiz v Rawlinson and Hunter Trustees SA [2013] EWHC 2128 (QB), considered here) – although the circumstances in which this is likely to be the case will be rare. Or, if it was known that the SFO had obtained the documents, a litigant could make an application against the SFO for third party disclosure under CPR 31.17 – such an application was granted against the police in Frankson v Home Office [2003] EWCA Civ 655, for example, the court having balanced the competing public interests. It is relevant to note that, where there is an ongoing criminal investigation or prosecution, those public interest factors would include not only the general public interest considerations pertaining to the investigation of crime but also considerations pertaining to possible prejudice to that investigation, and, if ordered, disclosure might be made subject to strict conditions, as it was in Frankson. Further, unless the material became public via a trial process in due course, or a party confirmed that they had disclosed documents to the SFO, a litigant would not be expected to have visibility of this fact.

Nonetheless, those who provide documents to the SFO in response to s.2 notices should be aware that such documents may be disclosable by the SFO in civil proceedings, if the SFO becomes a party or is required to provide third party disclosure.

For more information on the KBR decision, see our Global Corporate Crime and Investigations e-bulletin.

Rupert Lewis
Rupert Lewis
Partner
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Susannah Cogman
Susannah Cogman
Partner
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Ceri Morgan
Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948