Interpreting ICC standardised rules in trade finance disputes: courts take an international perspective

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on interpreting International Chamber of Commerce (ICC) standardised rules in trade finance disputes.

Banking practice in areas of trade finance such as demand guarantees and letters of credit is standardised by a collection of contractual rules published by the ICC. The application of domestic contractual interpretation principles may risk inconsistency in the way such rules are construed between jurisdictions. However, in relation to the most commonly used rules (the UCP 600, which apply to letters of credit), several courts (including the English courts) have tried to ensure that the rules are interpreted consistently with reference to their international consequences, as opposed to strictly in accordance with the governing law of the contract.

In our article we examine a number of decisions demonstrating a trend towards construing other sets of ICC standardised rules in the same way as the UCP 600 and the broader implications for ICC standardised rules.

The article can be found here: Interpreting ICC standardised rules in trade finance disputes: courts take an international perspective. This article first appeared in the September 2022 edition of JIBFL.

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Administrative Court dismisses judicial review challenge of FOS “mortgage prisoner” decision

The Administrative Court has dismissed an application for judicial review of a decision by the Financial Ombudsman Service (FOS) in the context of a complaint against a lender by an individual borrower who claims she is trapped in her mortgage (a so-called “mortgage prisoner”): Mortgage Agency Service Number Five Ltd, R (On the Application Of) v Financial Ombudsman Service Ltd [2022] EWHC 1979 (Admin).

The judgment will be of general interest to financial institutions as an example of a decision of the FOS being subject to judicial review. In this case, the court rejected the lender’s argument that the FOS had accepted jurisdiction over complaints which were out of time. The court found that there was no other basis for challenging the final decision of the FOS and so dismissed the application.

The result demonstrates the court’s reluctance to interfere with the wide remit of the FOS to consider a complaint by reference to what is “fair and reasonable in all the circumstances of the case” (s.228 of the Financial Services and Markets Act 2000 (FSMA)). In particular, the court recognised that it is for the FOS to decide the parameters of the complaint when considering whether it will accept jurisdiction over it. The court also acknowledged the FOS’s wide discretion to consider the background and context to complaints found to be within its jurisdiction.

The decision is of particular interest given the introduction of the FCA’s new Consumer Duty, which aims to set higher standards of consumer protection across the financial services sector (see our FSR blog post), which may drive an increase in complaints made to the FOS. This, in turn, could spark a rise in challenges to FOS decisions relating to the Consumer Duty. Set against this landscape, the emphasis on the flexibility granted to the FOS highlights the potential difficulties in seeking to challenge future decisions.

The case is considered in more detail below.

Background

The claimant (MAS5) is a mortgage lender which is part of the Co-operative Bank, and which currently owns the mortgage of Mrs Gwendolyn Davies, the Interested Party to the claim.

In October 2018, Mrs Davies made a complaint to MAS5 about the fairness of the interest rates charged under her mortgage, and subsequently escalated her complaint to the FOS in December 2018.

The FOS decided that it would be able to investigate the complaint about the interest rate that MAS5 applied to Mrs Davies’ mortgage from October 2012 (i.e. for the six years prior to the initial complaint made by Mrs Davies, in accordance with Rule 2.8.2 in Chapter 2 of the “DISP Dispute Resolution: Complaints” section of the FCA Handbook (DISP)). As part of this investigation, the FOS confirmed that it would review the history of Mrs Davies’ mortgage from the time it reverted onto the standard variable mortgage rate in January 2009.

MAS5 applied for judicial review of the FOS’s decision to consider the rates applied to the mortgage prior to October 2012, on the ground that this decision was an error of law and goes back further than the jurisdiction of the FOS permits (i.e. more than six years before the complaint was made in October 2018).  MAS5 did not challenge the decision of the FOS to investigate the complaint about the interest rate applied to the mortgage from October 2012.

Decision

MAS5’s application for judicial review was dismissed. The key elements of the decision were as follows:

  1. FOS entitled to identify the parameters of the complaint. The court stated that it is for the FOS to decide what the complaint is and whether it will accept jurisdiction over it. In the court’s view, the FOS had clearly both: (a) identified the complaint as it was understood; and (b) stated which parts the FOS would, and would not, accept jurisdiction over.
  2. FOS did not accept jurisdiction for time-barred complaints in this case. The court found that the jurisdiction the FOS accepted was, exclusively, to consider complaints about interest charged after October 2012, and the proposed consideration of interest variations before October 2012 was firmly set as background or context only. Accordingly, there was no basis for challenging the FOS’s final decision on the basis that it accepted jurisdiction over complaints which were out of time.
  3. FOS has broad discretion to consider the background to complaints. The court emphasised the broad discretion of the FOS under s.228 FSMA and DISP 3.6.1R to decide what it will take into account when deciding what is “fair and reasonable in all the circumstances of the case”. In the court’s view, the FOS was entitled to consider the background to the complaints within its jurisdiction, including the setting of the prevailing rate. The FOS’s decision as to what it would take into account was not irrational or unlawful.
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Navigating UK sanctions against Russian persons in English court proceedings

The UK is one of many countries which have introduced extensive sanctions against Russia, its individuals and entities in light of the military action in Ukraine which began on 24 February 2022. The application of the sanctions is generally limited to the territory of the UK and the conduct of UK persons (as defined) inside or outside the UK, but their practical effect is nevertheless wide-ranging.

An area where the UK sanctions regime may have significant impact, but which is not often discussed, is the effect on proceedings in the English court involving sanctioned Russian parties. Whilst UK sanctions generally do not restrict court proceedings against Russian individuals or entities subject to sanctions, the effect of the overall sanctions regime means that pursuing such claims may involve practical difficulties, such as delays to the proceedings or issues with enforcement. Those who wish to pursue claims against sanctioned Russian persons in the English courts therefore need to understand how to navigate the relevant sanctions in order not to be caught off-guard by such difficulties.

For a background to the sanctions regime and potential difficulties arising from asset freeze restrictions, please see our Litigation Notes blog post.

High Court orders stay of English proceedings brought by bank on grounds of forum non conveniens

The High Court has ordered a stay of English proceedings brought by a bank against several shareholders of a company for deceit and unlawful means conspiracy on the grounds of forum non conveniens: Abu Dhabi Commercial Bank Pjsc v Shetty & Ors [2022] EWHC 529 (Comm).

This decision will be of interest to financial institutions seeking to bring a fraud claim in the English courts in relation to financial services provided to a UK customer and its foreign subsidiaries. It highlights that, where a non-contractual claim is brought against those standing behind the customer, the governing law of that claim may not be English law, even if the contractual documentation with the customer contains a choice of English law. If that is the case, and particularly if the claim raises disputed issues of foreign law, the courts may be more inclined to conclude that the relevant foreign jurisdiction is the appropriate forum for the trial of a claim – though this factor may of course be outweighed if there are other substantial connections with England.

In the present case, the court found that the governing law of the dispute was United Arab Emirates (UAE) law rather than English law. This was due to the fact that the loss which the bank sought to recover from the shareholders was suffered in the UAE where the credit facilities were drawn down by UAE domiciled entities. In other words, the direct loss occurred where the facility was drawn down, not where the contract to make the facility available was entered into – and only direct damage is sufficient for these purposes. The damage could not, therefore, be said to have occurred in England.

In contrast, for the purposes of the tort gateway for service of proceedings out of the jurisdiction, the Supreme Court held in FS Cairo (Nile Plaza) LLC v Brownlie [2021] UKSC 45 (considered here) that it is sufficient if the claimant has suffered any actionable damage within the jurisdiction, whether direct or indirect. However, the court will decline to exercise jurisdiction if another forum is clearly and distinctly the more appropriate forum for the claim (unless justice requires that the claim be tried in England). On the facts of this case, the court was satisfied that Abu Dhabi was the more appropriate forum, including (among other factors) because of the court’s conclusion that UAE law applied.

We consider the decision in more detail below.

Background

Prior to 2019, the claimant bank (the Bank) extended credit facilities to a UK company (the Company), its main UAE subsidiary, and its other subsidiaries (together, the Group). In April 2020, the Company was placed into administration, and the existence and scale of a fraud within the Group become apparent. This fraud allegedly led to undisclosed debt within the Group totalling almost USD 5 billion.

The Bank brought a claim in the English court against the Company’s controlling shareholders for deceit and unlawful means conspiracy in relation to certain credit facilities made available by the Bank to the Company and its subsidiaries. The Bank’s case was that the shareholders had conceived or carried into effect a scheme by which false financial statements were created for the Company, which gave a false impression of the Company’s financial strength by concealing the losses it had accumulated within its subsidiaries as a result of massive dishonest misappropriation. It was alleged that these statements were deployed by or with the encouragement and consent of the shareholders for the purposes of inducing the Bank to extend or renew credit facilities to entities within the Group.

The Bank served proceedings on the first defendant within the jurisdiction, relying on section 1140 of the Companies Act 2006 which allows service on a director of an overseas company at an address in England and Wales which the director has registered under section 1046 of that Act. It then obtained permission to serve the remaining defendants out of the jurisdiction on the basis that they were “necessary or proper parties” to the claim against the first defendant (relying on the jurisdictional gateway at paragraph 3.1(3) of CPR PD6B) or alternatively the jurisdictional gateway for tort claims at paragraph 3.1(9) of CPR PD6B.

The shareholders applied for an order setting aside permission to serve the proceedings on them out of the jurisdiction. The shareholders challenged the English court’s jurisdiction on the basis that there was no real issue to be tried and no PD6B gateway through which the Bank could pass. The shareholders also argued that England was not the most suitable forum for the resolution of this dispute, which in their view should be resolved by the UAE courts, including on the basis that UAE law was the governing law of the dispute.

Decision

The court found in favour of the shareholders and ordered a stay of the proceedings.

The court was satisfied that there was a real issue to be tried between the Bank and the shareholders, the latter had either been properly served in accordance with section 1140 of the Companies Act 2006 or passed through the necessary or proper party gateway, and that the claims also passed through the tort gateway. However, in its view, there was another forum which clearly and distinctly was more appropriate for the trial of the claim than England, namely Abu Dhabi, and there were no circumstances by reason of justice requiring that the claim be tried in England rather than Abu Dhabi.

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

Test for grant of permission to serve proceedings out of the jurisdiction

The court referred to the well-established principles in Altimo Holdings and Investments Limited v Kyrgyz Mobile Telephones Limited [2011] UK PC 7 for the grant of permission to serve proceedings out of the jurisdiction. The court highlighted that a claimant must establish:

  • As against each foreign defendant concerned, that there is a serious issue to be tried on the merits, applying the summary judgment test – that is, whether there is a real as opposed to a fanciful prospect of success;
  • A good arguable case that the claim against each foreign defendant passes through at least one of the gateways identified in paragraph 3.1 of PD6B; and
  • In all the circumstances the forum conveniens for the determination of the litigation is clearly and distinctly England, and that therefore the court ought to exercise its discretion so as to permit service out of the jurisdiction. At this stage of the enquiry, the task of the court is to identify the forum in which the case can be suitably tried for the interests of all the parties and for the ends of justice.

Serious issue to be tried

The court found that the Bank had demonstrated against each of the shareholders that there was a serious (that is more than fanciful) issue to be tried between them.

The court said, amongst other things, that it considered it realistically arguable that a court could readily conclude that the shareholders, in procuring the financial statements representations, were deliberately causing harm to the Bank given that it was alleged that the shareholders all knew and intended that the Bank’s entry into certain credit facilities would be predicated on its reliance on the Company’s financial statements and that they knew the representations were false.

Necessary or proper party gateway / s.1140 Companies Act 2006

The court found that the Bank had satisfied the requirements of the necessary or proper party gateway on which it had relied.

The court said that the first defendant shareholder had been properly served in England under section 1140 and so was capable of being an anchor defendant for the purposes of the necessary or proper party gateway. It rejected the defendants’ argument that this method of service was not available unless a defendant was resident in the jurisdiction at the time of service. The court found that such a restriction would be potentially arbitrary and, even if the test was one of domicile rather than residency, it would significantly reduce the practical utility of providing for this method of service. The court’s conclusion was also consistent with previous decisions, eg in Key Homes Bradford Limited v Patel [2015] 1 BCLC 402 (considered here).

Tort gateway

The tort gateway at paragraph 3.1(9) of PD6B applies if either (a) damage was sustained within the jurisdiction or (b) damage resulted from an act committed within the jurisdiction.

In relation to paragraph 3.1(9)(b), as per Metall und Rohstoff A.G. v Donaldson [1990] 1 QB 391, the claimant must show that the damage has resulted from “substantial and efficacious acts” committed within the jurisdiction, whether or not substantial and efficacious acts have also been committed elsewhere. With regard to certain of the pleaded implied representations, the court said that “with very great hesitation” it was prepared to accept that the Bank had shown at least a plausible evidential basis for saying that the financial statements or a summary of them were published by the London Stock Exchange on its website and were accessed from that site by the Bank. This was sufficient to satisfy the requirements of the gateway.

In relation to paragraph 3.1(9)(a), as per Brownlie, the question was whether the Bank had shown a plausible evidential basis that direct or indirect actionable harm had been caused to it within the jurisdiction by the wrongful acts alleged. The court was satisfied that this was the case in relation to two of the core facilities, as the syndicated loan agreements had become effective only when the solicitors to the facility agent had received all the signed and executed counterparts at their London office and then dated them bringing the agreements into effect. The fact that the Bank had never transferred funds to or from England, or become liable to do so, did not prevent there having been indirect actionable harm in England. That was consistent with the approach endorsed by the Supreme Court in Brownlie that the issue of forum non conveniens should be used as the mechanism for excluding claims that otherwise pass through the gateway adopting this wide test.

Governing law

The court found that the governing law of the dispute was UAE law.

The court noted that the dispute was non-contractual and therefore the governing law of the dispute was to be determined by applying UK Rome II – the EU Regulation on the law applicable to non-contractual obligations, as it continues to apply in UK domestic law following the end of the Brexit transition period.

Article 4 of UK Rome II provides that: (i) the law applicable to a non-contractual obligation arising out of a tort shall be the law of the country in which the damage occurs; (ii) however, where the person claimed to be liable and the person sustaining damage both have their habitual residence in the same country at the time when the damage occurs, the law of that country shall apply; and (iii) where it is clear from all the circumstances of the case that the tort is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.

The starting point was therefore the law of the country in which the (direct) damage occurred, not that of the country in which the event giving rise to the damage occurred. Here the damage occurred when a UAE-based company drew down against or otherwise benefitted from the credit facilities offered by a UAE-based bank. In other words, for these purposes the loss occurred where the facility was drawn down, not where the contract to make the facility available was entered into. The direct damage could not, therefore, be said to have occurred in England.

The court also underlined that, even if the damage had occurred in England, all the shareholders and the bank were habitually resident/had their central place of administration in the UAE at the time the damage occurred. There was no basis for saying the tort was manifestly more closely connected with England. The law of the UAE should therefore apply.

Finally, the court noted that contract was immaterial on the facts of this case because the contracts on which the Bank relied were between it and the Company and not any of the entities or individuals involved in the conspiracy and so did not evidence a pre-existing relationship between the parties to the dispute.

Forum Conveniens

The court said it was satisfied that: (a) there was another forum which was clearly and distinctly more appropriate than the English forum, namely Abu Dhabi; and (b) there were no circumstances by reason of which justice required that this claim be tried here rather than Abu Dhabi.

The court noted that, as per Cairo (Nile Plaza) LLC v Brownlie [2021] UKSC 45, the principle of forum non conveniens provides a robust and effective mechanism for ensuring that claims which do not have their closest connection with England will not be heard in the English court.

The court also highlighted that, as per Spiliada Maritime Corp v Cansulex Ltd [1986] UKHL 10, in relation to applications for permission to serve proceedings out of the jurisdiction, the onus usually rests on the claimant to show that England and Wales is clearly the most appropriate jurisdiction in which to resolve the claims. However, where the defendant has been served in the jurisdiction, the onus rests on the defendant to show that there is another available forum having competent jurisdiction which is clearly or distinctly the more appropriate forum for the trial.

The court also commented that, as per Lungowe v Vedanta Resources plc [2019] UKSC 20, the risk of irreconcilable judgments is not a trump card on a forum assessment. The fact that one of the defendants had accepted the English court’s jurisdiction would not justify the conclusion that England was the most suitable jurisdiction for this case to be tried if an evaluation of all other factors pointed towards Abu Dhabi as being the most suitable jurisdiction.

The court then pointed out the lack of connection between the shareholders and England when compared with Abu Dhabi. Most of the shareholders were either UAE citizens or Indian nationals and long-time residents in Abu Dhabi with substantial business interests and assets in the UAE. The Bank itself was UAE incorporated and had no connections to England other than its engagement of London solicitors to prepare some of the documentation against which it was prepared to lend in the UAE. The alleged wrong doing took place in the UAE in that the alleged implied representations were received and acted on in the UAE, if they were received and acted on at all. The loss which the Bank sought to recover from the shareholders was suffered in the UAE where the credit facilities were drawn down against by UAE domiciled entities. The governing law of the dispute was the law of the UAE – issues of UAE law that arose were better resolved by the UAE courts than by a court in England, particularly where there would be a right of appeal on those legal issues in the UAE. The evidence also suggested that there would be significant costs savings if the case was litigated in the UAE compared to England.

Accordingly, for all the reasons above, the court found in favour of the shareholders and ordered a stay of the proceedings.

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High Court orders banks to disclose documents under the Evidence (Proceedings in other Jurisdictions) Act 1975

The High Court has ordered a number of banks to provide disclosure to various foreign companies, following an application seeking disclosure in accordance with a letter of request (LOR) issued by a Canadian court. The application was issued in the context of certain Canadian civil proceedings alleging that a former foreign government minister and others orchestrated an international scheme to defraud the companies of USD 3.47 billion: Sakab Saudi Holding Co v Al Jabri & Ors, Re: HSBC & Ors [2021] EWHC 3390 (QB).

This decision will be of interest to financial institutions faced with applications under the Evidence (Proceedings in other Jurisdictions) Act 1975 (the 1975 Act) and CPR 34.17 for the disclosure of bank documents for use in foreign legal proceedings. The decision highlights that the English courts will, if they can properly do so, accede to LORs issued by foreign courts seeking evidence for use in foreign litigation. However, in deciding what response to make to a LOR, the English courts can have regard to the balance to be struck, under section 2(4) of the 1975 Act, between the legitimate requirements of foreign courts and the burden those requirements may place on the intended witness. If the LOR is irrelevant, or fishing, or speculative, or oppressive, the English court can refuse it.

In the present case, the High Court was satisfied that there were no grounds on which to refuse the disclosure requested from the banks. It could not conclude in respect of the evidence sought from the banks either that: (a) the requesting court had plainly not considered the question of relevance; or (b) it is clear to the English court, even on a broad examination, that the evidence is not relevant. It was also clear that the documents sought from the banks were not part of a fishing expedition; they had not merely been requested solely for investigative purposes, and they were clearly relevant to the Canadian civil proceedings. The High Court also did not consider that there was any basis to refuse disclosure on the grounds that the documents were too broadly drafted or were oppressive. The documents identified to be produced by the banks did meet the requirements of section 2(4) of the 1975 Act. No oppression was caused to the non-respondent party and none of the banks had suggested that it would be onerous to produce the documents.

We consider the decision in more detail below.

Background

In 2008, a former Saudi Arabian government minister (Dr Al Jabri) and others allegedly carried out an international scheme to defraud several Saudi Arabian companies (the Applicants) of the equivalent of $3.47 billion. Dr Al Jabri subsequently fled to Canada.

In 2021, the Applicants issued proceedings in Canada against Dr Al Jabri in relation to the fraudulent scheme. The Canadian court then made a Norwich Pharmacal order (the Norwich Order) against various third parties including three banks in England and Wales (the Banks), requiring the disclosure of certain categories of documents. The Norwich Order also requested the judicial assistance of the appropriate courts of the United Kingdom to give effect to the Norwich Order in their jurisdiction. Since the Norwich Order was not directly enforceable outside of Canada, and the Banks refused to provide voluntary disclosure, the Applicants issued a Notice of Motion asking that the Canadian court issue a LOR to the English court for the production of documents from the Banks. The Canadian court subsequently issued the LOR attaching the Norwich Order.

The Applicants then made an application to the English High Court for an order for the disclosure of the documents specified in the LOR from the Banks. The application was not opposed by the Banks; they indicated that they either remained neutral or had no comments.

Although not a party to the application, Dr Al Jabri contested it on a number of grounds.

Decision

The High Court found in favour of the Applicants and ordered that the documents requested from the Banks be disclosed.

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

General principles relating to LORs

The High Court, in its analysis, highlighted the following key principles relating to LORs:

  • The court’s power to make an order pursuant to a LOR from a foreign court derives from sections 1 and 2 of the 1975 Act and CPR 34.17. It may make such an order only if satisfied that: (i) the application is made in pursuance of a request issued by and on behalf of the requesting court; and (ii) the evidence to which the application relates is to be obtained for the purposes of civil proceedings instituted before the requesting court.
  • While it is ordinarily a respondent witness who will be concerned to object to a LOR, a non-respondent party to the underlying civil proceedings before the requesting court has locus standi to apply to set aside an order obtained ex parte under the 1975 Act (as per Boeing Company v PPG Industries Inc [1988] 3 All E.R. 839).
  • English courts should, if they can properly do so, accede to LORs issued by foreign courts seeking evidence for use in foreign litigation. This is particularly important in the context of litigation arising out of fraud practised on an international scale (as per First American Corp v Zayed [1999] 1 WLR 1154).
  • The authorities show that the burden is on the applicant to establish that a document sought by way of evidence does in fact exist, and the jurisdiction of the English courts under the 1975 Act is to obtain documents by way of evidence for trial rather than for investigatory purposes; section 2(3) of the 1975 Act is aimed at preventing general pre-trial discovery or ‘train of enquiry’ disclosure. However, the authorities made it clear that a dual-purpose request does not necessarily mean that the request will be refused (as per In Re State of Norway’s Application [1987] 1 QB 433).
  • The question of relevance of evidence is generally one for the requesting court, as the court seised of the proceedings (as per Rio Tinto Zinc Corporation v Westinghouse Electric Corp. [1978] AC 547, Re Asbestos Insurance Coverage Cases [1985] 1 W.L.R. 331 and First American). If the requesting court has itself considered questions of relevance, then the English court should not embark upon a close examination of questions of relevance. However, English courts may conclude that the intended witness should not be required to give evidence on a particular topic if two conditions are satisfied: (a) the requesting court has plainly not considered the issue of relevance; (b) it is clear to the English court on a broad examination that the evidence is not relevant (as per Galas v Alere Inc [2018] EWHC 2366 (QB)).
  • In deciding what response to make to a LOR, the court should bear in mind the need to protect intended witnesses from an oppressive request. There is a balance to be struck, under section 2(4) of the 1975 Act, between the legitimate requirements of foreign courts and the burden those requirements may place on the intended witness (as per First American). If the court considers that the request is irrelevant, or fishing, or speculative, or oppressive, the court should refuse it (as per Senior v Holdsworth, ex-parte Independent Television News Ltd [1976] QB 23).

Application of the LOR principles to the present case

(1) Relevance of evidence

The High Court said it would not refuse the order sought against the Banks on the grounds of relevance. It could not conclude in respect of the evidence sought from the Banks either that: (a) the requesting court had plainly not considered the question of relevance; or (b) it is clear to the English court, even on a broad examination, that the evidence is not relevant.

The High Court commented that the Canadian court did consider the issue of relevance in the Norwich Order, albeit in the context of an investigatory order rather than considering evidence for trial. The Canadian court also concluded in the Norwich Order that the documents ordered to be produced by the Banks were relevant for establishing the existence, nature, and extent of the alleged fraudulent scheme, and to trace assets. In the High Court’s view, both of those topics would also be relevant to the trial in Canada.

(2) Investigatory purposes/Fishing expedition

The High Court noted that the documents ordered to be produced under the Norwich Order were primarily ordered for an investigative purpose, but that the range of documents was cut down substantially in the LOR to comply with the requirements of the 1975 Act.

The High Court then said that it did not conclude that the documents sought from the Banks were requested solely for an investigative purpose. The LOR stated that the documents ordered ‘will be admissible and relevant at trial’. Given this, and the conclusion made in respect of the relevance of the documents for trial above, in the High Court’s view the documents requested could not be regarded as part of a ‘fishing expedition’ in the way the term is commonly understood.

(3) Request for documents drafted too broadly

The High Court said that it did not consider that there was any basis to refuse disclosure on the grounds that the documents were too broadly drafted or were oppressive.

The High Court commented that the documents identified to be produced by the Banks did meet the requirements of section 2(4) of the 1975 Act. No oppression to Dr Al Jabri was caused as he was not being asked to produce the documents and none of the Banks had suggested that it would be onerous to produce the documents.

The High Court also noted that the documents ordered from financial institutions in the Norwich Order would not have met the requirements of the 1975 Act. However, the documents requested in the LOR were far more narrowly drafted, and the LOR listed specific documents or categories of documents.

(4) Section 2(3) of the 1975 Act

The High Court said that it was apparent from its consideration of the other heads of challenge to the order sought that it considered that section 2(3) of the 1975 Act was satisfied in respect of the documents sought from the Banks.

Accordingly, for all the reasons above, the High Court found in favour of the Applicants and ordered that the documents requested from the Banks be disclosed.

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Ceri Morgan
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Court of Appeal decision highlights dangers of choosing non-exclusive jurisdiction clause in favour of an EU court

The Court of Appeal has held that the English court had no power under Article 33 of the recast Brussels Regulation to stay in favour of prior proceedings commenced in New Jersey, where the English court had jurisdiction under a non-exclusive jurisdiction clause. It made no difference that, absent the clause, the court would have had jurisdiction based on the defendant’s domicile: Perform Content Services Ltd v Ness Global Services Ltd [2021] EWCA Civ 981.

This decision will be of interest to financial institutions because of its implications for non-exclusive jurisdiction clauses in favour of EU member state courts.

For proceedings commenced since 1 January 2021, the recast Brussels Regulation will not apply in the UK. However, the Regulation will be applied by any EU member state court asked to exercise its discretion under Article 33 to stay its proceedings in favour of prior proceedings in England as a “third State” (ie a non-EU country).

If the English court’s approach in this case is followed in the EU, it means an EU court would have no power to stay its proceedings in favour of (prior) English proceedings where there is a non-exclusive jurisdiction clause in favour of an EU court. This is so regardless of whether England is a more appropriate jurisdiction in which to decide the dispute, and regardless of the fact that commencing proceedings in the English court was not a breach of the jurisdiction clause.

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

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
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000

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
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000
Georgia Nickson
Georgia Nickson
Associate
+44 20 7466 2290