High Court considers interpretation of English exclusive jurisdiction clause in trade finance documentation

In the context of the claimant Afghan bank’s entitlement to enforce certain counter-guarantees provided by the defendant Indian bank, the High Court has granted limited declaratory relief confirming the exclusive jurisdiction of the English court: Afghanistan International Bank v Yes Bank Ltd [2023] EWHC 3294 (Comm).

The decision is an interesting one for financial institutions facing disputes relating to cross-border trade finance documents (such as letters of credits and demand guarantees), which are governed by English law and which confer jurisdiction on the English courts. The decision continues the trend that the English court will take steps to respect and protect parties’ choice of English law and exclusive jurisdiction in trade finance documentation (please see our previous blog post).

The decision was made against the backdrop of proceedings initiated by a third party in India, in which the Bombay High Court had granted interim injunctions prohibiting payment under the counter-guarantees (and related agreements). The English court was persuaded that the declaration would have some utility in assisting the Indian court to determine that it did not have jurisdiction over the counter-guarantees, and that granting such a declaration in respect of an English law contract between parties who were before the court would not interfere with the principle of judicial comity.

The present decision illustrates that the English court may be willing to grant a declaration as to its own jurisdiction over an English law governed contract, where it considers that such a declaration may have some effect on the relevant foreign court and can be granted consistently with the principle of comity. The more usual route by which the English court will police its own jurisdiction is by issuing an anti-suit injunction against a party that brings or threatens foreign proceedings in breach of an English jurisdiction clause (typically where the party that has brought the foreign proceedings is a party to the relevant contract containing the English jurisdiction clause, which was not the case here).

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

High Court refuses Swiss bank’s jurisdiction challenge over declarations of enforceability of standby letters of credit

In the context of a claim seeking declarations as to the claimant’s entitlement to enforce two standby letters of credit (SBLCs) issued by the defendant Swiss bank and governed by English law, the High Court has dismissed the defendant’s application contesting the jurisdiction of the English court: Macquarie Bank Limited v Banque Cantonale Vaudoise [2024] EWHC 114 (Comm).

In the present case, the defendant bank challenged jurisdiction on the basis of the doctrine of forum non conveniens, as laid down by the House of Lords in the well-known case of Spiliada Maritime Corp v Cansulex [1987] AC 460. Under this doctrine, the English court may decline jurisdiction on the ground that there is a court in another jurisdiction which is clearly a more suitable forum for the trial of the action, in the interests of all the parties and the justice of the case. The defendant relied on close links with Switzerland and ongoing parallel Swiss civil and criminal proceedings. The High Court dismissed the defendant’s application, finding that England and Wales was the most appropriate forum for the dispute and that the current and future course of the Swiss proceedings would prevent attempts to enforce the SBLCs, which conflicted with the claimant’s substantive rights under the SBLCs as a matter of their (English) governing law.

The court’s decision provides valuable insights into the application of the principles of documentary credits in cross-border disputes and determining the most appropriate forum for a dispute. The judgment confirms that where the parties have chosen English law as the governing law of a SBLC, the transaction will benefit from the protection of certain substantive characteristics (such as an absolute obligation on the banker to pay, irrespective of any wider dispute between the parties, save for exceptional circumstances). These substantive characteristics have important procedural consequences, which are intended to prevent the payee’s substantive rights being circumvented by procedural means. The outcome in this case demonstrates that the English court is well-placed and willing to protect these legal characteristics and implications, to avoid the risk of undermining the certainty and reliability of such instruments in international trade.

It is worth noting that the analysis above will not be impacted by the Berne Financial Services Agreement between the UK and Switzerland, which was signed in December 2023. The trade deal aims to ensure that the financial regulations and supervisory practices of each country are recognised and accepted by the other, but does not seek to override the determination of governing jurisdiction under standard form trade agreements.

We consider the decision in more detail below.

Background

Between 2019 and 2020, the claimant entered into agreements with a UAE company called Phoenix Global DMCC (Phoenix) to purchase coal. These agreements required the claimants to make advance payments secured by SBLCs. The defendant bank issued two SBLCs, which were stated to be subject to: (i) the ICC Uniform Customs and Practice for Documentary Credits 600 (UCP 600); and (ii) English law.

Phoenix failed to deliver the coal. The claimant considered this to be an event of default under the agreements and issued default notices to Phoenix calling for the repayment of the advance payments within 5 business days. No payments were made. A week later, the claimant demanded payment under the SBLCs. Under Article 14(b) of UCP 600, the defendant was entitled to 5 business days to consider whether, on their face, the payment requests constituted compliant presentations, and under Article 16(d) of UCP 600, if rejecting the requests, the defendant was required to give notice to the claimant no later than the fifth banking day following the day of presentation. A few days later, the defendant requested additional information on the shipment of the goods under the sales contract between the claimant and Phoenix, which the claimant provided. However, the defendant did not identify any discrepancies in the payment requests within the 5 business days or at all, nor did it give notice that was refusing to honour the SBLCs.

The claimant subsequently commenced proceedings against the defendant in the Swiss civil court. The defendant filed a criminal complaint with the Swiss Public Prosecutor’s Office against an unknown person for fraud and forgery, alleging that Phoenix presented fictious/falsified contracts to the defendant in order to obtain the SBLCs. The defendant also sought a stay of the Swiss civil proceedings pending the outcome of the Swiss criminal proceedings; this was granted and any attempts by the claimant to appeal this were unsuccessful.

The claimant consequently issued proceedings against the defendant in England seeking declarations as to its entitlement to enforce the two SBLCs issued by the defendant. In response, the defendant filed an application contesting the jurisdiction of the English court (in light of the ongoing parallel Swiss civil and criminal proceedings).

High Court Decision

The court dismissed the defendant’s application contesting jurisdiction, finding that it was satisfied that England and Wales was the most appropriate forum for the determination of the dispute. In reaching this conclusion, the court focused its analysis on two key areas, each of which is considered below.

Governing law of the SBLCs

First, the court considered the consequences of the parties’ choice of English law as the governing law of the SBLCs and underlined that the legal effects of a letter of credit governed by English law are clear. In particular, the court highlighted the following legal principles:

  • Absolute obligation on bank to pay. The opening of a confirmed letter of credit constitutes a bargain between the bank and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods meet the contract’s terms or not. An elaborate commercial system has been built up on the footing that bankers’ confirmed credits are of that character and it would be wrong to interfere with the established practice (as per Edward Owen Engineering Ltd v Barclays Bank International Ltd [1979] QB 159).
  • No set off or counterclaim available. By opening the letter of credit in favour of the seller, the buyer implicitly agrees that they will not raise any set off or counterclaim such as to delay or resist payment. The buyer has contracted under the terms of the Uniform Customs and Practice by which they promise that the bank will pay without regard to any set off or counterclaim; and implicitly that they will not seek an attachment order (as per Power Curber International Ltd v National Bank of Kuwait Sak [1981] 1 WLR 1233). Even where the courts of the bank’s domicile have granted an injunction seeking to prevent a bank from paying out under a letter of credit, that will not provide it with a basis for refusing to do so.

The court also emphasised that the substantive characteristics of a letter of credit have important procedural implications, which are intended to prevent the payee’s substantive rights being circumvented by procedural means. For example:

  • Enhanced Merits Test. When a party seeks to prevent the bank paying on the grounds of fraud of the beneficiary, or the bank itself seeks to resist payment on that basis, a heightened evidential requirement applies: the fraud must be “established or obvious fraud” (as per Edward Owen) or fraud that was “very clearly established” (as per Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31).
  • No stay of judgment. The court will not stay the enforcement of a judgment under a letter of credit. To do otherwise would defeat the whole commercial purpose of the transaction, be out of touch with business realities and keep the bank waiting for a payment (as per Continental Illinois v National Bank Trust Company of Chicago [1986] 2 Lloyd’s Rep 441).

Against this background, the court said it was immediately apparent that the course and state of the Swiss civil proceedings had failed to give effect to the substantive characteristics of the SBLCs under their applicable law as the defendant had been able to:

  • Prevent the claimant from enforcing the SBLCs whilst third party investigations into a potential fraud was taking place, when the defendant was not even in a position to present an arguable case of fraud against the claimant, or evidence of the claimant’s knowledge of the fraud.
  • Use Swiss procedural law as a basis for not performing its substantive obligations under the SBLCs.

Forum conveniens

Second, the court said it was necessary to consider whether the English or foreign courts were the most appropriate forum for the dispute to be suitably tried in the interests of all the parties and for the ends of justice, referring to the established test in Spiliada Maritime Corp v Cansulex Ltd [1987] 1 AC 560.

The court noted that the current and future course of the Swiss civil proceedings would prevent attempts to enforce the SBLCs while investigations were undertaken which might, or might not, provide a defence. This conflicted with the claimant’s substantive rights under the SBLCs as a matter of their (English) governing law.

In the court’s view, this provided a strong basis for concluding that England and Wales (where the court’s procedure will be applied in a manner compatible with those substantive rights) is the forum in which the case can most suitably be tried for all the interests of all the parties and for the ends of justice. In particular:

  • While there will be many cases in which the applicable law will be of only limited weight in determining the most appropriate forum, the court commented that “the law applicable to letters of credit and equivalent financial instruments has a number of important and technical consequences”.
  • The extent to which English law gives effect to the autonomous nature of a documentary credit and the status of such instruments as “akin to cash” is one of the principal reasons why it is often chosen as the governing law of such instruments.

The court underlined that such matters outweighed the links with Switzerland identified by the defendant – ie the defendant’s domicile, and the (related) fact that Switzerland was identified in the SBLCs as the place of expiry, payment and where presentation would take place.

Finally, the court rejected the other key submissions advanced by the defendant:

  • Initiator: The claimant itself had commenced the Swiss civil proceedings. The court pointed out that at the time it did so, the Lugano Convention 2007 was in force and it could not have brought proceedings against the defendant elsewhere.
  • Comity: Allowing the English proceedings would cut across considerations of comity so as far as the Swiss courts were concerned. The court said there had been no substantive progress in the Swiss civil proceedings and that this was not a case in which the party had permitted the foreign proceedings to advance to any considerable extent before seeking to bring them to an end.
  • Conflict: There was a risk of irreconcilable judgments arising from the inherently vexatious nature of a party bringing two sets of proceedings in two different jurisdictions at the same time and for the same claim. The court noted that if the defendant’s jurisdiction challenge was dismissed, the claimant was willing to undertake to use its best endeavours to discontinue the Swiss proceedings.

Accordingly, the court dismissed the defendant’s application contesting jurisdiction.

Rupert Lewis
Rupert Lewis
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Ceri Morgan
Ceri Morgan
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Privy Council considers Norwich Pharmacal and Bankers Trust disclosure orders against banks

The Board of the Privy Council has held that the Supreme Court of Mauritius was wrong to refuse to grant a “Norwich Pharmacal” order requiring a Mauritian bank to disclose information about a customer’s account to the victims of an alleged fraud, to assist them in tracing misappropriated funds: Stanford Asset Holdings Ltd and another v AfrAsia Bank Ltd [2023] UKPC 35.

While this decision considered an application to the Mauritian courts for a third-party disclosure order against a bank located in Mauritius (which was subsequently appealed up to the Privy Council) it will be of more general interest to banks faced with Norwich Pharmacal and Bankers Trust disclosure applications.

In the present case, the Privy Council held that the disclosure order would not conflict with the bank’s common law confidentiality duties, because Norwich Pharmacal orders are a recognised exception to those duties. Commenting on the nature of the Norwich Pharmacal jurisdiction (and the similar Bankers Trust jurisdiction), the Privy Council stated that while the jurisdiction is in itself “exceptional” in the sense that it requires an innocent third party to supply information to a party to whom they would otherwise owe no duty, that does not mean that it will only exceptionally be appropriate to grant such relief where the necessary conditions are satisfied.

As noted above, this case concerned an application to the Mauritian courts for a third-party disclosure order against the foreign bank. More commonly on this blog, we consider applications of this nature made to the English court. As discussed in our recent blog post considering Scenna v Persons Unknown and Others [2023] EWHC 799 (Ch), special considerations will apply to applications for a Bankers Trust order made to the English court in respect of a foreign bank. Given the strong likelihood that compliance with the order would put the foreign bank at risk of breaching local laws (including because such an order by a non-local court may not satisfy a “compulsion of law” exception to the bank’s confidentiality duties), the English court has stressed that disclosure orders of this kind should only be made against a foreign bank in exceptional circumstances.

The case law seems to suggest that applications for third-party disclosure against foreign financial institutions may face a lower threshold before the domestic court of the relevant bank (where the foreign court is based on the English common law system at least), in comparison to a similar application before the English court. The reasoning behind this approach appears to be the assumption of a lower risk of making an order which would place the bank in breach of foreign law and expose it to financial and/or reputational damage, where the order is made by the bank’s domestic court, with greater knowledge of the legal/regulatory environment in that jurisdiction.

For a more detailed discussion of this case, see our Civil Fraud and Asset Tracing Notes blog post.

Trilogy of decisions shows English courts’ approach to granting anti-suit injunctions in support of foreign-seated arbitrations

The Court of Appeal and High Court have, in two separate cases, granted anti-suit injunctions (ASIs) restraining a Russian party from bringing proceedings in Russia in breach of an arbitration clause in an English law governed contract, despite the seat of arbitration being in Paris. In a third similar case, where the arbitration agreement was found to be governed by French law, the English High Court has refused to grant an ASI.

In general, the English courts will ordinarily grant an ASI where a contracting party brings proceedings in a foreign jurisdiction in breach of an exclusive English jurisdiction clause or an arbitration agreement. Most cases in which ASIs have been granted in support of arbitration have, however, involved an English seated arbitration.

The present cases are of particular interest to financial institutions in demonstrating that an ASI can be granted even where there is a foreign seat, though the court will need to be satisfied that England is the proper forum for granting relief.

ASIs have become all the more important in respect of transactions involving Russian parties, given the Russian law which allows the Russian courts to take exclusive jurisdiction over cases which involve sanctions. The present decisions may lead to more applications for ASIs from the English courts where Russian proceedings have been commenced, particularly where there is an English governing law.

For more information see this post on our Arbitration Notes blog.

High Court rules on common law enforceability of foreign judgment in E&W

The High Court has held that there is no common law rule preventing enforcement of a foreign judgment in England and Wales simply because it is not presently or fully enforceable in the relevant foreign jurisdiction: Invest Bank PSC v El-Husseini [2023] EWHC 2302 (Comm).

A foreign money judgment is enforceable at common law by suing on the judgment as a debt. The key requirement is that the foreign judgment must be final and conclusive in its jurisdiction of origin. In the present case, an Abu Dhabi judgment for amounts due under two guarantees was not enforceable locally, due to a subsequent change in the law of the United Arab Emirates (UAE). However, in the court’s view, a mere impediment to local enforcement did not mean the judgment failed to be final and conclusive. It therefore remained enforceable at common law in this jurisdiction. The judge noted, however, that if his conclusion on this issue were essential to the outcome of the case (which it was not, because of an alternative basis for the claim) he might have been persuaded to grant permission to appeal on it. This issue may therefore be ripe for consideration by a higher court.

Interestingly, the outcome in this case contrasts with the position under the Foreign Judgments (Reciprocal Enforcement) Act 1933, which enables judgments from certain countries (including for example Australia, Canada and India) to be enforced by registering the judgment in England. Under the express terms of the 1933 Act, a foreign judgment cannot be registered if it could not be enforced by execution in the country of origin.

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

Commercial Court takes rare decision to refuse enforcement of arbitration award on public policy grounds in crypto case

The Commercial Court has refused to enforce a foreign-seated arbitration award on the grounds that to do so would be contrary to public policy, including because it was contrary to certain protections provided under the Consumer Rights Act 2015 (CRA) and the Financial Services and Markets Act 2000 (FSMA), which the court held were an expression of UK public policy and required the issues to be governed by English law and not to be decided overseas: Payward Inc and others v Chechetkin [2023] EWHC 1780 (Comm).

The case concerned a dispute between Mr Chechetkin and the Payward group, which operates the Kraken cryptoasset trading platform. Mr Chechetkin, a UK-based consumer, undertook various trading activities on the platform in 2020 and lost more than £600,000. Payward’s terms of service were governed by California law and contained a Judicial Arbitration and Mediation Service Rules (JAMS) arbitration clause with disputes to be determined by a sole arbitrator seated in San Francisco. In response to Payward commencing a JAMS arbitration in 2022, Mr Chechetkin brought a jurisdictional objection in the English court and challenged the arbitrability of the dispute, on the basis that Payward had breached FSMA because it was conducting activities for which it did not have the necessary authorisation. Payward received a favourable arbitration award in California which it sought to enforce in England.

Section 74 of the CRA specifies that where (as in this case) a consumer contract has a close connection with the UK, the CRA applies regardless of whether the parties have chosen a non-UK governing law. The arbitration award applied only California law, without taking account of the CRA. The court held that this alone was sufficient to make the award unenforceable as a matter of public policy.

In addition, the court found that the arbitration clause was “unfair” pursuant to s.62 of the CRA, which provides that an unfair term of a consumer contract is not binding on the consumer. The court was clear that the mere fact that a consumer contract provides for disputes to be resolved in arbitration does not make it unfair. However, this clause was unfair, as it contained a number of significant disadvantages for Mr Chechetkin – including that he had to use US attorneys, which was expensive and inconvenient, and that a US arbitrator was not an appropriate tribunal for the issues in the case.

The court also held that stifling Mr Chechetkin’s claim under FSMA would be contrary to the public policy considerations under FSMA itself – including because claims advanced overseas are less likely to come to the attention of the FCA.

The case suggests that businesses may have difficulties enforcing foreign judgments or arbitral awards against consumers in the UK, where the underlying contract had a close connection to the UK and the decision applied a (contractually agreed) foreign governing law without reference to the CRA. The decision will also be of particular interest to financial institutions as a key consideration for the court was the desire not to stifle the FSMA claim, which would have been stopped in its tracks had the arbitration award been enforced.

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

High Court reaffirms primacy of ISDA Master Agreement jurisdiction clause post-Brexit

The High Court’s judgment in Dexia Crediop SpA v Provincia di Brescia [2023] EWHC 959 (Comm) confirms that an English jurisdiction clause within standard form ISDA documentation will not readily be displaced.

The High Court gave effect to an English jurisdiction clause in an ISDA Master Agreement, finding that the claims related to the validity and enforceability of either the ISDA Master Agreement or the underlying swaps. The court rejected the suggestion that the relevant claims for declaratory relief arose out of a connected settlement agreement between the parties (which did not contain a jurisdiction clause and was governed by Italian law).

This decision is consistent with the trend of the English courts to give effect to ISDA standard form jurisdiction clauses, as set out in the previous decisions of BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2019] EWCA Civ 1740 (read our blog post) and Deutsche Bank AG v Comune di Savona [2018] EWCA Civ 1740 (read our blog post). These judgments were made pursuant to Article 25 of the Recast Brussels Regulation, which governs the question of jurisdiction where there has been an agreement between the parties under EU law. The present case (together with the recent decision in Deutsche Bank v Brescia [2022] EWHC 2859 (Comm)) is one of the first to look at the question of competing jurisdiction clauses in an ISDA context since the UK left the EU, deciding the issue under the UK’s domestic rules on jurisdiction agreements.

Helpfully for financial institutions, the English courts are continuing to demonstrate under the post-Brexit regime that they will give effect to the broad and market standard jurisdiction clauses contained in standard form ISDA documentation. This provides some degree of certainty to parties incorporating such clauses into their transactional documentation, should they need to rely on them at a later stage.

Background

The court considered the standard form ISDA Master Agreement jurisdiction clauses relating to two swap transactions entered into by Dexia and Brescia in 2006 (the Swaps).

The parties were previously involved in litigation in England and Italy concerning the Swaps, which was brought to an end by a settlement agreement. One of the provisions of the settlement agreement purported to confirm the validity of the Swaps. The settlement agreement did not contain a jurisdiction clause, but was governed by Italian law and expressly referred to the fact that the Swaps and the related ISDA Master Agreement were subject to English law and the jurisdiction of the English courts.

Subsequently, the Provincia di Brescia (Brescia) sought to challenge the validity and enforceability of the Swaps and the settlement agreement in a new claim in Italy. In turn, Dexia Crediop SpA (Dexia) brought proceedings in the English court seeking various declarations to the effect that the Swaps were valid and enforceable.

Brescia accepted that the English court had jurisdiction to hear and determine some of the declarations, but applied for an order that it had no jurisdiction in respect of declarations referring to the settlement agreement. Brescia contended that these declarations fell outside the ISDA Master Agreement jurisdiction clause and should be litigated in Italy. Dexia argued that the declarations to which Brescia objected, all related to the Swaps and to the ISDA Master Agreement, and therefore fell within the scope of the jurisdiction clause in the ISDA Master Agreement.

Brescia was not represented at the hearing although the court went on to consider the application anyway, as it had not been withdrawn.

Decision

The court confirmed that no permission to serve out of the jurisdiction was required since the contract contained an English jurisdiction clause (as provided for by CPR 6.33(2B)(b)).

The key question for the court was whether the declarations sought by Dexia related to: (i) the ISDA Master Agreement/Swaps; or (ii) the settlement agreement.

In coming to its decision, the court relied heavily on another recent decision (Deutsche Bank v Brescia [2022] EWHC 2859 (Comm)), where proceedings were brought by Deutsche Bank in relation to two swap transactions entered into by Brescia at the same time as the Swaps. Deutsche Bank sought many of the same declarations as Dexia in the present case, and Brescia took the same position in relation to the ISDA Master Agreement (and related settlement agreement), which were on substantially the same terms. In the Deutsche Bank v Bresica case, the court had held that the ISDA Master Agreement jurisdiction clause:

  • was drawn in “very wide terms” and applied to future disputes; and
  • took precedence over the settlement agreement which expressly preserved the rights of the parties under the ISDA Master jurisdiction clause.

In the present case, the court considered the terms of the relevant declarations sought by Dexia, finding that they each related to the validity and enforceability of either the ISDA Master Agreement or the Swaps.

The court also rejected Brescia’s alternative arguments that: (1) England was not the proper forum, given the irrevocable waiver of any objection on the ground of forum non conveniens set out in the ISDA Master Agreement jurisdiction clause; and (2) service of the claim form had not been properly effected, on the basis that service had been effected in accordance with the notice provisions in the ISDA Master Agreement (which was in accordance with CPR rule 6.11, which requires service to be effected by an agreed contractual method where the claim relates to the contract in question).

As a result, the court dismissed Brescia’s application.

Damien Byrne Hill
Damien Byrne Hill
Partner
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Ceri Morgan
Ceri Morgan
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Nic Patmore
Nic Patmore
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Asymmetric jurisdiction clauses: French court refers questions of validity to CJEU

In recent decades the courts of some countries, including some EU member states, have questioned the validity of asymmetric jurisdiction clauses or have refused to give effect to them. These clauses (also known as unilateral or one-way clauses) give one party greater flexibility as to the forum in which they can bring proceedings. They are often used in finance transactions, to give the lender flexibility to sue the borrower in any jurisdiction where it has assets, while restricting the borrower to a named jurisdiction. For example, a clause could allow the lender to bring an action before the English courts or any court which will accept jurisdiction under its own conflict of laws rules, while requiring the borrower to bring any action before the English courts.

The English courts have repeatedly held that asymmetric clauses are valid – and, indeed, that they may be considered exclusive jurisdiction clauses for the purposes of the recast Brussels Regulation (in cases commenced before the end of 2020, in which that Regulation continues to apply to the UK). See for example our blog posts here and here.

Decisions refusing to enforce these clauses have emerged, however, from various EU member state courts, including the courts in Bulgaria, Poland and (as particularly relevant for our purposes) France, as well as courts outside the EU. So it is significant that the French court has now referred to the CJEU three questions relating to the validity of such clauses:

  1. What law should govern the validity of unilateral clauses: EU law or EU member states’ national laws?
  2. If EU law governs this question, does EU law prohibit unilateral clauses?
  3. Alternatively, if the question is governed by national laws, how should a court decide which member state’s law should be applied?

In our latest Litigation Notes blog post, we consider the relevant French case law, the questions to be addressed by the CJEU, and why this is still relevant to the UK despite Brexit.

English High Court sets aside Bankers Trust disclosure orders against Australian banks

The English High Court has set aside Bankers Trust disclosure orders made against two Australian banks at a without notice hearing, which required the banks to disclose certain information regarding two of their Australian customers to the claimants. In doing so, the judge reiterated that the English court should only make disclosure orders against foreign banks in exceptional circumstances, because of the strong likelihood that compliance with such an order would put the foreign bank at risk of being in breach of local laws or regulations: Scenna v Persons Unknown and Others [2023] EWHC 799 (Ch).

In order for the English court to make a disclosure order against a foreign bank, the claimant will need to show, amongst other things, that the application falls within one of the “jurisdictional gateways” in Practice Direction 6B of the Civil Procedure Rules (CPR). There was previously some uncertainty as to whether any of the “jurisdictional gateways” applied to applications for disclosure orders, but this was resolved by the amendment of the CPR, with effect from 1 October 2022, to introduce a new “jurisdictional gateway” in respect of such applications. This amendment has been relied upon in a number of recent cases in which the English court has made disclosure orders against foreign cryptocurrency exchanges (see, for example, LMN v Bitflyer Holdings Inc [2022] EWHC 2954 (Comm), considered here).

Following the amendment to the CPR, it is now clear that the English court could, in an appropriate case, make a Bankers Trust disclosure order against a foreign bank. However, the present decision is a helpful indication that it will not routinely do so and that such orders will still only be made in exceptional circumstances. The English court will be particularly reluctant to make a disclosure order against a foreign bank where there is a real risk that providing the disclosure would result in a breach of local law, and where there is an alternative method for obtaining the disclosure through the local courts.

We consider the decision in further detail below.

Background

The claimants, a Canadian individual and his company, were victims of an alleged fraud pursuant to which they transferred money to two bank accounts in Australia and a bank account in Hong Kong. At a without notice hearing on 6 October 2022, the claimants obtained Bankers Trust disclosure orders requiring the Australian and Hong Kong banks to disclose certain information in relation to the accounts to which the money was transferred. The information ordered to be disclosed included the deposit and withdrawal history, the final balance of the account, KYC information, and copies of access logs and details of approved devices.

The Australian banks applied to set aside the disclosure orders on the basis that, amongst other things, providing the disclosure pursuant to an order of the English court, rather than an Australian court, would put them in breach of their obligations under Australian law.

The claimants also asserted substantive claims against the banks in relation to the receipt of the money. The Australian banks successfully challenged the jurisdiction of the English court in relation to those claims but we do not consider that aspect of the decision in this blog post.

Decision

The court considered the five criteria for making a Bankers Trust order as set out in Kyriakou v Christie Manson and Woods Ltd [2017] EWHC 487 (QB).

  1. There must be good grounds for concluding that the property in respect of which disclosure is sought belongs to the applicant.
  2. There must be a real prospect that the information sought will lead to the location or preservation of the relevant property.
  3. The order should not be wider than necessary.
  4. The interests of the applicant in getting the disclosure must be balanced against the detriment to the respondent.
  5. Appropriate undertakings must be given in respect of the use of the disclosed information and/or documents.

In this case, there was no dispute that the first to third criteria and the fifth criteria were met (or could be met by an appropriately worded order). The real issue was in relation to the fourth criteria (seeking to achieve a balance between the interests of the applicant and respondent).

The court noted that where the respondent to the disclosure order is a foreign bank, additional and special considerations apply when conducting the balancing exercise. While regard should still be taken of the Kyriakou criteria, because of the strong likelihood that compliance with such an order would put the foreign bank at risk of being in breach of local laws or regulations, an order should only be granted in exceptional circumstances (applying the decision of Hoffman J in Mackinnon v Donaldson, Lufkin & Jenrette Corp [1986] Ch 482). One example of where such exceptional circumstances might exist is in cases of urgent necessity or “hot pursuit”.

In conducting the balancing exercise required by the fourth Kyriakou criteria, the court took account of two main factors:

  • First, there was a real risk that compliance with the disclosure order would place the banks in breach of Australian law and thereby expose them to financial and/or reputational damage. There was a real risk that the banks would suffer significant prejudice and detriment and this was a significant factor to be taken into account in the balancing exercise.
  • Second, there was an alternative and broadly equivalent remedy available in Australia. The banks had confirmed that they would not oppose an application to the Australian courts and that they would comply with any order made. While discharging the disclosure order might cause the claimants some inconvenience and increased cost, it would not cause them to suffer any irremediable damage in their pursuit of the alleged underlying fraudsters, because they could apply for and would probably be granted the same relief in Australia.

In respect of whether there were exceptional circumstances, the court found that this was not a case of “hot pursuit” and that, at best, the pursuit could be described as “lukewarm”. The alleged fraud had taken place in March/April 2022, it had been discovered in June 2022 and the proceedings were issued in October 2022.

The court also considered the recent case of LMN, which concerned an application for Bankers Trust disclosure orders against various foreign cryptocurrency exchanges. In LMN, Butcher J found that the approach in Mackinnon was inapplicable and granted the disclosure orders. The court distinguished the reasoning in LMN from the present case on the basis that, in LMN, it was not known where the relevant documents were located, such that the applicants did not know in which jurisdiction to make an application. In the court’s view, it would have been impractical and contrary to the interests of justice to require victims of an alleged fraud to make speculative applications in different jurisdictions. That was different from the present case where it was known that the information was in Australia, there was a very significant risk that compliance with the order would breach Australian law, and the Australian courts offer a similar remedy which would probably be granted.

The court held that there were no exceptional circumstances to justify a departure from the general rule that a disclosure order should not be made against a foreign bank. On the contrary, the balancing exercise came down clearly in favour of discharging the disclosure orders.

Julian Copeman
Julian Copeman
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Ceri Morgan
Ceri Morgan
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Gary Horlock
Gary Horlock
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Court of Appeal finds real issue to be tried as to whether developers owe fiduciary duties to Bitcoin owners

The Court of Appeal has held that there is a realistic argument that Bitcoin developers, while acting as developers, owe fiduciary duties to the true owners of that property, which could include taking active steps to introduce code so that an individual owner’s Bitcoin can be transferred to safety: Tulip Trading Limited v Wladimir van der Laan and ors [2023] EWCA Civ 83.

While the effect of the judgment is not to decide whether such a duty exists, in general or in this specific instance, it means that the question will need to be determined at trial, once the relevant facts have been established.

Although the central debate in the present case relates to the true nature of decentralisation in the context of the blockchain, the trial will present the court with a novel scenario in which to examine the existence of fiduciary duties. If a duty is found to exist, it would in the words of Lord Justice Birss “involve a significant development of the common law on fiduciary duties”.

The outcome of this case may, therefore, have general implications for when a fiduciary duty will be found to be owed, beyond the specific repercussions for software developers and controllers. We will be following the proceedings with a focus on the potential impact for financial institutions.

For more information on the decision, please see out Litigation Notes blog.