High Court continues to demonstrate robust approach to statute-barred claims, summarily dismissing derivatives investment claim against bank

In the context of a claim by a sovereign wealth fund against a bank (and others) in relation to a derivatives investment, the High Court has allowed the defendant bank’s application for reverse summary judgment, finding that the fund’s claim was statute-barred and had no realistic prospect of extending the limitation period under section 32 of the Limitation Act 1980 (LA 1980): Libyan Investment Authority v Credit Suisse International & Ors [2021] EWHC 2684 (Comm).

This is the latest in a series of decisions in recent months, in which the court has adopted a robust approach and summarily dismissed a statute-barred claim where it fails to satisfy the requirements of section 32 LA 1980: see in particular European Real Estate Debt Fund v Treon [2021] EWHC 2866 (Ch) (read our blog post) and ECU Group plc v HSBC Bank plc & Ors [2021] EWHC 2875 (Comm) (read our blog post). As a reminder, under section 32 LA 1980, the statutory limitation period can be postponed/extended in the event that the action is based on the fraud of the defendant, where the claimant could not have discovered the fraud with “reasonable diligence” before the expiry of the limitation period.

In all three cases, the claims were brought out of time and the claimants sought to rely on section 32 LA 1980 to postpone the statutory limitation period. All of the claims were dismissed for failing to meet the requirements under this section, and in each case, the court’s analysis turned on the question as to what “reasonable diligence” requires. This question is assessed by the court in two distinct stages: (i) whether there is anything to put the claimant on notice of a need to investigate; and (ii) what a reasonably diligent investigation would then reveal. In each case, the court was strongly of the view that it expected the claimants to be proactive, especially where they have the resources to do so, in investigating any suspicion of fraud or concealment, whether that would be through routine due diligence, issuing proceedings, or making an application for pre-action disclosure.

In the present case, the court commented that had the fund acted with reasonable diligence to make enquiries of a third party intermediary, it could have discovered a key piece of information that was necessary for it to plead its claim against the bank and the other defendants. The court was satisfied that the bank (and other defendants) had shown to the requisite standard that by no later than the end of July 2012, a party in the position of the fund ought to have been on notice of the need to make enquiries as to the involvement of a third party intermediary in relation to the derivatives investment.

Accordingly, the court found in favour of the bank (and other defendants) and allowed the summary judgment application. The claim was therefore dismissed.

Ceri Morgan
Ceri Morgan
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Nihar Lovell
Nihar Lovell
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High Court dismisses claim against banks involving allegations of front running/trading ahead on stop-loss orders on limitation grounds

The High Court has dismissed a claim by a currency debt management firm against three banks in a banking group, which included allegations of front running and/or trading ahead in relation to the execution of certain stop-loss orders (SLOs) in 2006. In doing so, the court found that the claim was time-barred as the claimant failed to show that it had not discovered or could not with reasonable diligence have discovered the claim in the same year that the SLOs were triggered: ECU Group plc v HSBC Bank plc & Ors [2021] EWHC 2875 (Comm).

The decision highlights the difficult threshold for claimants to meet in proving that a bank has engaged in this type of market abuse (although this will always be fact-specific), and demonstrates how such claims may be effectively barred by the Limitation Act 1980 (LA 1980) in appropriate circumstances.

In the present case, the court was satisfied that in the year that the disputed SLOs were triggered, a senior officer of the claimant believed that the SLOs had been deliberately triggered by the banks and that this amounted to market abuse and front running. The court also considered that at the time, the claimant could with “reasonable diligence” have discovered the other claims now alleged (within the meaning of section 32 LA 1980), if it had pursued an application for pre-disclosure or the issue of a claim related to front running and/or trading ahead.

Even if the claim had not been time-barred, the court found (on an obiter basis) that the allegation of front running was not made out. In the court’s view, the claimant had not established that it was more likely than not that the banks had intended to trigger the SLOs. While the court’s finding on this aspect of the judgment does not have precedent value and is not binding, it may be persuasive in future cases with similar facts.

We consider the decision in more detail below.

Background

A currency debt management firm (the Firm) managed multi-currency loans for its customers. This involved placing large SLOs with a number of banks, including the second defendant, as a form of currency-damage limitation for the Firm and its clients to manage the risk of foreign exchange rates for a particular pair of currencies rising above an expected level. The second defendant would pass those orders on to entities within the same banking group. For simplicity, the defendant banks are referred to together as “the Banks” in this blog post.

If the relevant currencies rose above the expected level, then the stop-loss would be triggered and the Banks would buy/sell that currency pair to avoid further losses. If the relevant currencies did not rise above the predetermined ceiling, then no action would be taken on the order.

In January 2006, the Firm placed three SLOs. Each of these orders was triggered very shortly after they were placed. The Firm found this surprising, and expressed its concern to the Banks.  The Firm queried whether there had been front-running on those orders (i.e. whether the Banks had manipulated the markets by their own buying and selling activities in respect of the currencies so as to artificially push the relevant rates up causing the SLOs to trigger). The Banks conducted an internal investigation and responded that they had not found evidence of front-running or wrongdoing but rather that the currency movements were simply due to general market activity.

In February 2019, the Firm brought a claim against the Banks in connection with the loans and/or handling and execution of the SLOs. The Firm’s case was that:

  • the Banks had breached their contractual, tortious and equitable duties as they had engaged in the fraudulent front running of the SLOs, or some of them, to the detriment of both the Firm and the Firm’s customers; or
  • alternatively, the Banks had: (i) made misrepresentations to the Firm in connection with the SLOs; or (ii) failed to execute the SLOs in accordance with the duties that they owed to the Firm and in accordance with the Firm’s instructions.

The Firm also sought to rely on the postponement of the primary limitation period under section 32 of the LA 1980 on the basis that the Banks’ breaches of duty had been committed in circumstances where they were unlikely to be discovered for some time. Alternatively, the facts relevant to the Firm’s right of action had deliberately been concealed from it by the Banks.

The Banks denied the claim. The Banks’ case was that the claim was time-barred given that the material events had taken place between 13 to 15 years prior to the issue of the claim. The Banks also contended that there had been no front running or misuse of confidential information: any trading ahead of the SLOs that may have taken place was simply pre-hedging; this did not constitute a breach of confidence and was a legitimate order management technique that the Banks were entitled to adopt when executing the SLOs.

Decision

The court found in the Banks’ favour and dismissed the claim.

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

1. Limitation

Limitation legal principles

In its consideration as to whether the claim was statute barred, the court reviewed the authorities and highlighted the following key principles:

  • Under section 32 LA 1980, the limitation period on fraud or concealment does not begin until the claimant has discovered the fraud or concealment or could, with reasonable diligence, have discovered it.
  • One of the main reasons for the statute of limitation is to require claims to be put before the court at a time when the evidence necessary for their fair adjudication is likely to remain available (as per AB v Ministry of Defence [2013] 1 AC 78).
  • The test for discovery of the fraud or the concealment is the “statement of claim” test (as per OT Computers v Infineon Technologies [2021] EWCA Civ 501). This is met if the claimant has sufficient knowledge to plead the claim.
  • For the fraud to be known or discoverable by a claimant under section 32 LA 1980 (such that time will start running against them), it is not necessary that the claimant knows or could have discovered each and every piece of evidence which it later decides to plead (as per Libyan Investment Authority v JP Morgan [2019] EWHC 1452).
  • What reasonable diligence requires in any situation must depend on the circumstances. The question is not whether the claimants should have discovered the fraud sooner, but whether they could with reasonable diligence have done so. The question may have to be asked at two distinct stages: (1) whether there is anything to put a claimant on notice of a need to investigate; and (2) what a reasonably diligent investigation would then reveal. However, it is a single statutory issue, i.e. whether the claimant could with reasonable diligence have discovered the concealment (as per OT Computers).

Application of the limitation principles to the present case

The court held that the claim was time barred as the Firm had failed to show that it had not discovered or could not with reasonable diligence have discovered the claim in 2006.

In respect of the allegations of front running and trading ahead, the court commented that for the purposes of section 32 LA 1980, the Firm had sufficient knowledge in 2006 to plead the claim in relation to the SLOs. The court noted that it was satisfied that in 2006 a senior officer of the Firm believed that the SLOs had deliberately been triggered by the Banks and that this amounted to market abuse and front running. The court also said that, as far as knowledge was concerned, the knowledge of the senior officer could be attributed to the Firm and it was not necessary for the board of directors to have shared his belief for the Firm to have knowledge for the purpose of limitation. The evidence also showed that it was unlikely that the Banks’ response in 2006 would have been a barrier to concluding that there was credible evidence enabling a claim to be pleaded.

As to the remainder of the allegations, the court noted that the Firm had not shown in the circumstances that the exercise of reasonable diligence did not extend either to issuing proceedings for the claim in front running and/or trading ahead, or to making an application for pre-action disclosure. Had the Firm taken either of those routes, the Firm could with reasonable diligence have discovered the other claims now alleged within the meaning of section 32 LA 1980. In the court’s view, if the Firm had wanted to know what had happened and exercised reasonable diligence, it would have sought legal advice and taken steps to pursue the claims for trading ahead and front running, yet the Firm decided not to take any further steps in response to the Banks’ response in 2006 that there was no evidence of front running or wrongdoing. The court also noted that the Firm was a sophisticated commercial player with access to lawyers and there was no evidence that it would not have had the resources or the staff to pursue the claims.

2. Front running/misuse of confidential information

Front running/misuse of confidential information principles

In the event that the front running claim had not been time barred, the court in its consideration as to whether there had been front running noted the following key principles:

  • Front running involves a claimant establishing on a balance of probabilities that: (i) for the relevant trade there was trading ahead of the order which was not legitimate; and (ii) the trader(s) involved intended by trading ahead to trigger the SLO.
  • The court had to consider whether it was satisfied on the balance of the probabilities in relation to the individual trades in issue that: (i) trading ahead of the SLO occurred; (ii) such trading was not for legitimate purposes; (iii) such trading had a material effect on the triggering of the order; and (iv) the trader intended to trigger the order by trading ahead.
  • There was a distinction between a trader taking a position ahead of an order (pre-hedging) and front running. The latter would be trading behaviour that was deliberately intended to trigger the stop-loss to the detriment of the client.
  • The experts were agreed that even if there had been a valid instruction to a bank not to trade ahead, trading to fill customers’ orders or to adjust the trader’s own position was legitimate.
  • It was common ground that if the trading ahead had been deliberately intended to trigger the SLOs that would amount to a misuse of confidential information.

Application of front running/misuse of confidential information principles to the present case

The court said that the Firm had not established that it was more likely than not that the Banks had intended to trigger the SLOs and thus the allegation of front running was not made out.

The court noted that there was no trading data and no evidence that the Banks traded ahead. Even if the Banks had traded ahead, there was no evidence as to why such trading ahead occurred, its impact on the market or the motive of the trader. Any such trading ahead could have been to reduce slippage or for other legitimate purposes.

The court commented that the guidance in the regulatory code at the time (relied upon by the Firm in support of its case that there had been illegal front running), the Non-Investment Products Code on FX trading, was aspirational and did not represent actual best practice at the time.

The court also rejected the submission that an adverse inference as to widespread misconduct and systemic failures in the Banks’ FX business should be drawn from subsequent regulatory findings/foreign proceedings in relation to the misconduct of a particular rogue trader.

Finally, the court said that in any case any alleged front running or trading ahead did not affect the rate at which the SLOs were executed since the rate was specified by the Firm when it gave the orders to the Banks and remained a constant; it only affected the time when the SLOs were triggered. In addition, the Firm could not prove that any wrongdoing would have changed the subsequent trajectory of the market for the relevant currency pair.

The court also noted that there was no fiduciary relationship between the Firm and the Banks or between the loan customers and the Banks, so any comparison that the Firm sought to draw with cases concerning the misuse of trust property was inapposite.

Accordingly, for the reasons given above, the court dismissed the claim.

Rupert Lewis
Rupert Lewis
Partner
+44 20 7466 2517
Karen Anderson
Karen Anderson
Partner
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Jon Ford
Jon Ford
Senior Associate
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High Court dismisses fraudulent misrepresentation claim relating to loan notes investment on limitation grounds

The High Court has dismissed a claim by the assignee of an investment fund against a financial advisory firm (and associated parties) for losses arising out of alleged fraudulent misrepresentations made in relation to the financial position and prospects of a business which had induced the investment fund to subscribe for £11 million in loan notes in 2011 and to later make a follow-on investment of £4.25 million: European Real Estate Debt Fund v Treon [2021] EWHC 2866 (Ch).

The decision will be of interest to financial institutions faced with fraudulent misrepresentation claims in relation to certain investments which: (i) have been brought more than 6 years after the date of the disputed investment; and (ii) seek to postpone the start of the statutory limitation period. It highlights the difficulties for claimants in pursuing fraudulent misrepresentation claims where they do not satisfy the requirements of section 32(1) Limitation Act 1980 (LA 1980), especially where it is clear that the claimant discovered the fraud or could with reasonable diligence have discovered it before the expiry of the statutory limitation period.

In the present case, the court found that the claim was statute-barred. The court highlighted that although it is well known that fraudsters cannot avoid liability for fraud by pleading that their victim failed to take reasonable care to detect the fraud, this did not necessarily mean that claims based on fraud brought outside the primary limitation period were entitled to invoke the special statutory postponement of the limitation period. If a claimant could reasonably have discovered the fraud by virtue of events and circumstances occurring before it actually suffered a loss, there was no principled rationale for allowing it the indulgence of more than the normal six years’ period to bring its claim. The court said that a reasonably diligent investor, such as one in the position of the investment fund’s adviser, in reviewing the financial information provided to it before the investment was made, would have been put sufficiently on inquiry to ask some basic questions and demand further information. The court also noted that if the investment fund’s advisers had asked the further questions it would have discovered sufficient facts to enable the investment fund to plead a statement of claim within the primary limitation period of six years.

We consider the court’s decision in more detail below.

Background

In 2011, an investment fund (the Fund) made a principal investment of £11 million in a care homes business. The Fund’s advisers then discovered in early March 2012 that the financial information about the business and its prospects that had been provided as part of the discussions leading up to the investment was false and misleading. In July 2012, in order to mitigate its losses, the Fund made a follow-on investment of £4.25 million in the business. The business went into administration in 2014 and the Fund lost the entire value of its investment.

Subsequently, the assignee of the Fund (the claimant) brought a damages claim against the founder of the business, a financial advisory firm, and a director of the financial advisory firm (together, the defendants). The claimant alleged that the defendants had fraudulently misrepresented the financial position of business and had induced the Fund to subscribe for £11 million in loan notes in June 2011. The claimant’s case was that the Fund and its advisers had relied on certain trading numbers and projections as accurate and current, and that defendants conspired to mislead the Fund. In addition, the claimant also alleged that the business’ founder was responsible for various representations made by the issuer of the notes in a loan note agreement of June 2011. The claimant also relied on section 32(1) LA 1980 in seeking to postpone the start of the limitation period for its claim.

The defendants denied all liability and in addition said that the action was statute-barred given that it had been commenced more than six years after the date of the principal investment.

Decision

The High Court found in favour of the defendant and dismissed the claim for the reasons explained below.

Limitation legal principles

In its consideration as to whether the claim was statute barred the court noted that section 32(1) LA 1980 had been considered in a number of cases which were reviewed in OT Computers Limited v Infineon Technologies AF [2021] EWCA Civ 501 and highlighted the following key principles:

  • The state of knowledge which a claimant must have in order for it to have discovered the concealment has for the most part been regarded as the knowledge sufficient to enable it to plead a claim. This is known as the statement of claim test. Test Claimants in FII Group Litigation v Revenue and Customs Commissioners [2020] UKSC 47 suggested a more liberal test in that time should begin to run from the (possibly earlier) point when the claimant knows, or could with reasonable diligence know, about the mistake with sufficient confidence to justify embarking on the preliminaries to the issue of proceedings.
  • As per Paragon Finance Plc v DB Thakerar [1999] 1 ALL ER 400 the question is not whether the claimant should have discovered the fraud sooner but whether they could have done so with reasonable diligence. The claimant must therefore establish that they could not have discovered the fraud without undertaking exceptional measures, which they could not reasonably have been expected to take. In considering what would constitute exceptional measures, the court will consider how a person carrying on a business of the relevant kind would act if they had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency.
  • As per OT Computers, the question of what reasonable diligence requires may have to be asked at two distinct stages: (i) whether there is anything to put the claimant on notice of a need to investigate; and (ii) what a reasonably diligent investigation would then reveal. However, there is a single statutory issue, which is whether the claimant could with reasonable diligence have discovered the concealment.
  • Section 32(1) LA 1980 is only relevant once there is a complete cause of action because that is when the primary limitation period would commence, and the purpose of that section is to postpone that period. However, it does not follow that the court investigating the claimant’s state of mind must ignore events, communications or things known to the claimant before then. There may be cases where the claimant is aware (or could with reasonable diligence have been aware) of facts before it suffered any loss which would have enabled it to write a letter before action. Consequently, the court must examine all of the facts and should not artificially restrict itself to events or circumstances arising only after the cause of action had completely accrued. As per OT Computers, the ultimate question under the section is whether the claimant has or could have “discovered” the fraud and that may turn on events before as well as after loss was suffered.
  • It is well known that a fraudster is not entitled to plead that his victim failed to take reasonable care to detect the fraud (as per Redgrave v Hurd (1881) 20 Ch.D.1.). However, the question under section 32(1) LA 1980 is not whether the claim is defeated by the careless failure of the claimant to spot the fraud. It is quite the distinct issue of whether the claimant who brings his claim outside the primary limitation period for a fraud claim (6 years) is entitled to invoke the special statutory postponement of the limitation period. Such postponement is available to a defrauded claimant who could not normally have discovered the facts, but it is not available to all victims of fraud, however careless they may be in attending to and asserting their rights. If a claimant could reasonably have discovered the fraud by virtue of events and circumstances occurring before it actually suffered a loss, there is no principled rationale for allowing it the indulgence of more than the normal six years’ period to bring its claim.

Application of the limitation principles to the present case

The court held that the claim was statute-barred as the claimant had failed to satisfy the requirements of section 32(1) LA 1980 to postpone the start of the limitation period.

In its analysis, the court commented that in approaching the exercise under section 32(1) LA 1980, it had to be careful to avoid the dangers of hindsight and to examine events as they would have appeared at the time and in their proper context and sequence. The court also noted that a reasonable investor in the Fund’s adviser’s position could reasonably be expected to approach potential investments with a careful eye and appropriate degree of professional care, i.e. it could be expected to undertake professional due diligence.

The court then examined the financial information that had been provided to the Fund’s adviser (whose knowledge was considered to be the same as the Fund) by the business, keeping in mind the two stage test in OT Computers.

With respect to whether there was anything to put the Fund’s advisers on notice of a need to investigate, the court’s view was that a reasonably diligent investor, when it reviewed the financial information provided to it before the investment, would have been put sufficiently on inquiry to ask some basic questions and demand further information. The court disagreed that there was nothing in the financial information provided to the Fund’s advisers to trigger these questions or requests for further information on the basis that these basic questions would have been prompted by the information provided to the Fund’s advisers and by the passage of time. Seeking this further information would not have been an exceptional measure which a reasonably diligent investor could not be expected to take. It would have been a routine part of due diligence.

The court then considered what would have happened if the Fund’s advisers had raised further questions with the defendants. It concluded that if the Fund’s adviser had asked the further questions it would have discovered sufficient facts to enable the Fund to plead a statement of claim within the primary limitation period of six years.

Accordingly, the court dismissed the claim.

Natasha Johnson
Natasha Johnson
Partner
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Mannat Sabhikhi
Mannat Sabhikhi
Associate
+44 20 7466 2859

Know your limits: the increasingly high bar for claims to extend the limitation period

Herbert Smith Freehills LLP have published an article in the New Law Journal on recent authorities clarifying the application of the Limitation Act 1980 and the high threshold for claimants to postpone the limitation period under s.32 or s.14A of that Act.

The litigation market is well known to be counter-cyclical – an uptick in disputes usually follows market turmoil. The 2008 global financial crisis was no exception, and disputes with their factual roots in this period are still heard by the English courts today. As an inexorable consequence, the court must grapple with complicated limitation arguments, and recent decisions fleshing out the law demonstrate the judiciary’s willingness to consider time-barred claims on a summary basis, in circumstances where, traditionally, such cases have been less amenable to a strike out or summary determination.

In our article, we examine recent authorities focusing on the operation of the deliberate concealment extension under section 32(1)(b) of the Act and the alternative 3-year extension mechanism for negligence actions under section 14A(4)(b).

The article can be found here: Know your limits. This article first appeared in the 9 July 2021 edition of the New Law Journal.

Chris Bushell
Chris Bushell
Partner
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Ceri Morgan
Ceri Morgan
Professional Support Consultant
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High Court strikes out time-barred claims holding that banks did not deliberately conceal facts so as to extend the limitation period

The High Court has granted applications by two banks to strike out claims brought against them after the primary limitation period for the claims had expired. This decision provides a helpful summary of the case law surrounding the operation of section 32(1)(b) Limitation Act 1980 (LA 1980), a provision that we are increasingly seeing claimants seek to rely on in order extend the life of financial services disputes that have their factual roots in the global financial crisis of 2008: Dixon v Santander Asset Finance plc & Anor [2021] EWHC 1044 (Ch).

Section 32(1)(b) LA 1980 provides that, where a fact relevant to the claimant’s claim has been deliberately concealed, the limitation period will not begin to run until the claimant has discovered, or could with reasonable diligence have discovered, the concealment.

In this decision the court highlighted certain challenges claimants will face when seeking to rely upon section 32(1)(b) LA 1980. In particular, the facts that are alleged to have been concealed from the claimant must be those that are essential for the claimant to prove in order to establish its prima facie case.

In reaching its decision, the court was careful to distinguish between concealed evidence on the one hand (which will not be sufficient to trigger section 32(1)(b) LA 1980) and concealed facts without which the claim is incomplete on the other (which will be).

Background

The claims were brought by Mr Richard Dixon, the sole director and shareholder of a vehicle purchase/hire company, Just Vans Self Drive Ltd (Just Vans). Just Vans’ activities were financed by Santander Asset Finance plc (Santander) and Handelsbanken plc (Handelsbanken).

In 2008 both banks demanded repayment of all outstanding liabilities. Neither Just Vans nor Mr Dixon discharged the liabilities. Just Vans was subsequently placed into administration by Handelsbanken on 25 September 2008, and was ultimately liquidated on 22 September 2009.

Mr Dixon claimed that Santander had: (a) breached its contract with Just Vans, on the basis that Santander had terminated its contract with Just Vans during an agreed moratorium; and (b) provided Handelsbanken with a spreadsheet containing negligently inaccurate information about Just Vans (the Spreadsheet) shortly before Handelsbanken demanded repayment of outstanding liabilities by Just Vans, which amounted to a negligent misstatement.

Mr Dixon also brought a claim in contract against Handelsbanken, claiming that it was not open to Handelsbanken to call in its loans and appoint an administrator when it did so. In particular, Mr Dixon alleged that Handelsbanken had represented to Just Vans that it would not take steps to put the company into administration until it had received a report from an accountant on the company’s viability (the Report), but that Just Vans was placed into administration prior to receipt of the Report.

Santander and Handelsbanken denied the claims brought against them, and sought to strike out the claims on the basis that they were time-barred and had no real prospects of success.

Decision

There was no dispute that the primary limitation period had expired prior to the date on which the proceedings were brought. However, Mr Dixon argued that the limitation period had been extended by virtue of the operation of section 32(1)(b) LA 1980.

As set out above, section 32(1)(b) LA 1980 holds that, where a fact relevant to the claimant’s claim has been deliberately concealed, the limitation period will not begin to run until the claimant has discovered, or could with reasonable diligence have discovered, the concealment. Mr Dixon claimed that three relevant facts had been deliberately concealed, and that he had brought his action within six years of his discovery of those facts (which he could not, with reasonable diligence, have discovered any earlier).

The three relevant facts alleged by Mr Dixon were, in summary:

  1. Mr Dixon gained possession of a letter which allegedly documented the moratorium agreed with Santander (the Moratorium Letter).
  2. Mr Dixon gained possession of the Spreadsheet.
  3. Mr Dixon was notified that Handelsbanken had placed Just Vans into administration prior to receipt of the Report, and was provided with the true reasons why Handelsbanken had placed Just Vans into administration (at least one of which, Mr Dixon alleged, was the provision to Handelsbanken by Santander of negligently inaccurate information).

In order to successfully defend the banks’ strike out application, Mr Dixon had to demonstrate that his claims regarding the concealed facts, and the operation of section 32(1)(b) LA 1980, were more than merely arguable.

The banks contended both that: (a) there was no real prospect of Mr Dixon establishing that any of the allegedly concealed facts were relevant to his cause of action; and (b) even if the facts were relevant, there was no real prospect of Mr Dixon successfully establishing they were not discovered or reasonably discoverable until the date on which Mr Dixon alleges the six-year limitation period began to run.

Relevance

In answering the first question, as to the relevance of the allegedly concealed facts, the court reiterated the well-established position that, in order to fall within section 32(1)(b) LA 1980, the facts that have been concealed must be “those which are essential for a claimant to prove in order to establish a prima facie case”. The test will not be met if the facts only make the claimant’s case stronger. The court emphasised the need to distinguish between concealed evidence on the one hand and concealed facts without which the claim is incomplete, on the other (as per Kimathi v FCO [2018] EWHC 1169 (QB)).

Discovery

In relation to the second question, regarding what is meant by “discovery” of the facts, the court relied upon the recent judgment in In Granville Technology Group Ltd v Infineon Technologies AG [2020] EWHC 415, which held that “a claimant can be said to have discovered a fact when the claimant is aware of sufficient material to be able to properly plead that fact”.

Application to the facts

In relation to the breach of contract and negligent misstatement claims brought against Santander, the court held that Mr Dixon had the facts that were essential for the claims to be brought more than six years before the claims were in fact brought, even if he lacked the evidence itself:

  • Even though Mr Dixon did not have the moratorium letter, the moratorium had been referred to by Mr Dixon in a witness statement in earlier proceedings and the fact of it was something he had always “asserted vigorously”.
  • Mr Dixon’s own evidence established that he was aware of the Spreadsheet since 2009, and both (a) the existence of the Spreadsheet; and (b) the effect the Spreadsheet had on the thinking of Handelsbanken, have been consistently asserted by Mr Dixon. It was immaterial therefore that Mr Dixon received the evidence in support of the allegation (i.e. the Spreadsheet itself) subsequently.

In relation to the claim against Handelsbanken, the court found that Mr Dixon’s claim for breach of contract was pleadable absent knowledge of the allegedly concealed fact. Indeed, Mr Dixon had in fact pleaded his claim against Handelsbanken in these proceedings without reference to that fact.

Ultimately, the court therefore held that there was no real prospect that Mr Dixon could establish that the allegedly concealed facts were essential to his claim (and therefore “relevant” for the purposes of section 32(1)(b) LA 1980). Accordingly, the claims were time-barred.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Sarah Penfold
Sarah Penfold
Senior Associate
+44 20 7466 2619

Court of Appeal clarifies requirements for establishing deliberate concealment to postpone limitation period

The Court of Appeal has found that a defendant creditor could not rely on a limitation defence to a borrower’s claim that its non-disclosure of a very high rate of commission rendered the relationship “unfair” within the meaning of s.140A of the Consumer Credit Act 1974, as the borrower could establish deliberate concealment to postpone limitation under s.32 of the Limitation Act 1980: Canada Square Operations Ltd v Potter [2021] EWCA Civ 339.

Section 32(1)(b) of the Act provides that, where any fact relevant to a claimant’s right of action has been deliberately concealed by the defendant, limitation does not begin to run until the claimant has discovered the concealment (or could with reasonable diligence have discovered it). Section 32(2) provides that, for these purposes, deliberate commission of a breach of duty in circumstances where it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.

The Court of Appeal’s decision is of interest in confirming that s.32 does not require “active concealment”. It may apply to cases of non-disclosure and, in such cases, there is no need for the court to consider whether there was a pre-existing contractual, tortious or fiduciary duty to disclose. Precisely when the court will find there was a sufficient duty is not altogether clear, however. The decision suggests that the obligation may arise from “a combination of utility and morality”, which is not the most straightforward of benchmarks. The upshot is that claimants may be able to postpone the limitation period due to (deliberate) non-disclosure, even where the non-disclosure is not actionable in itself.

The decision also clarifies what is meant by “deliberate”, for both deliberate concealment under s.32(1)(b) and deliberate commission of a breach of duty under s.32(2). It shows there is no need for the claimant to establish actual knowledge or wilful blindness on the part of the defendant. Recklessness is sufficient, in the sense that: (a) the defendant realised there was a risk (that they ought to disclose the information, or that their conduct amounted to a breach of duty); and (b) it was objectively unreasonable to take that risk. Again, this may make it easier for claimants to postpone time running, as there is no need to show a defendant was aware of its wrongdoing so long as it took an unreasonable risk that what it was doing was wrong.

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

High Court provides further insights on the risks of Quincecare claims against banks

The High Court has recently handed down another interesting decision on the so-called Quincecare duty: Roberts v The Royal Bank of Scotland plc [2020] EWHC 3141 (Comm).

Quincecare duty claims typically arise where a bank received a payment mandate from an authorised signatory of its customer, and executed the order, in circumstances where (allegedly) there were red flags to suggest that the order was an attempt to misappropriate the funds of the customer. The recent uptick in Quincecare duty claims against financial institutions is striking, perhaps a culmination of years of increased regulation which has raised the expectation of firms to identify potentially fraudulent activity. Accordingly, insights from the court on the risks associated with processing client payments will be welcomed by the sector. You can find our blog posts on previous Quincecare decisions here.

Roberts involved a classic breach of Quincecare duty (and breach of mandate) claim, in respect of which the court granted the defendant bank’s application for reverse summary judgment on the basis that the claims were time-barred under the Limitation Act 1980. It highlights the court’s approach to a limitation defence to resist claims alleging breach of Quincecare duty and breach of mandate claims. The decision confirms that the court will (in appropriate cases) take a robust approach in dismissing such claims which on the facts are clearly time-barred; this will especially be the case where the necessary facts required to plead a prima facie case of breach were within the claimant’s knowledge at an earlier date than contended.

However, in doing so the court concluded that a prima facie case for breach of the Quincecare duty could be pleaded by the claimants from inference, i.e. simply being inferred from the fact of payment. While this was helpful in the context of the bank’s limitation defence, it is potentially less helpful to the extent that it suggests a low threshold applies to the pleading requirements in Quincecare cases.

We examine the decision in more detail below.

Background

In early 2006, an advertising company set up a business account with the defendant bank (Bank). The Bank was authorised to accept instructions from any two signatories as set out on the authorised signatories sheet attached to an original mandate.

In mid-2006, the company hired a temporary accounts clerk. Shortly thereafter, a form was sent to the Bank apparently authorising that clerk as a full and additional signatory of the company’s business accounts. Between 2006 and 2007 the Bank paid cheques presented to it (totalling £265,000), which had the clerk’s signature and which were in favour of the company’s majority shareholder. In 2008, the company went into administration and was subsequently placed into compulsory liquidation.

In late 2015, the liquidators assigned the company’s claims to the claimant individual who issued a claim in 2019 (more than 12 years after the last cheque had been paid), alleging that the company’s administration and compulsory liquidation was a consequence of the Bank honouring the cheques presented to it. The claimant’s case was that the Bank had breached its Quincecare duty and the mandate in place between the Bank and the company.

The bank applied for reverse summary judgment and/or strike out of the claims made against it on the basis that the claims were time-barred and that the claimant had no real prospect of establishing that the limitation period had been extended under section 32 of the Limitation Act 1980.

Decision

The court rejected the claimant’s arguments and granted the Bank’s application for reverse summary judgment.

The claimant argued that the limitation period did not start running until late 2017 as it was only then that certain facts were discovered, having been deliberately concealed by the Bank until then. The facts relied on by claimant included, in respect of the breach of the: (a) Quincecare duty claim, “the knowledge whether the defendant conducted an inquiry on any of the cheque payments and if it did not why”; and (b) mandate claim, certain paperwork such as that relating to the mandate and the authorised signatory form.

The court noted that section 32(1)(b) of the Act does allow for the postponement of the commencement of the relevant period of limitation where “any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant”. That postponement will be until the time when “the plaintiff has discovered the fraud, concealment or mistake or could with reasonable diligence have discovered it”. However, the court said that (as per Arcadia Group Brands Limited and others v Visa Inc and others [2014] EWHC 3561) not every broadly relevant fact would qualify; the only facts that would count for this purpose would be those facts which the claimant would need to plead in a statement of case to plead a prima facie case.

In the present case, the court said that what really mattered was whether there was knowledge sufficient to plead that the Bank had reasonable grounds for believing that the payment was part of a scheme to defraud the company such that the Bank came under a duty to refrain from making the payment. The court concluded “without hesitation” that a prima facie case of breach could be pleaded by inference from the fact of payment, if the prior steps could be pleaded (i.e. that the company was a customer of the Bank, that the authorised signatory instructed the Bank to make payment etc.). The court noted that this was, in fact, the way the claimant had pleaded the case.

The court held that the facts giving rise to the claims were plainly within the company’s knowledge at a very early stage – far earlier than six years ago, therefore there could be no deliberate concealment which has a real as opposed to a fanciful prospect of success. The claims were therefore time-barred and the court granted reverse summary judgment in favour of the Bank.

Harry Edwards
Harry Edwards
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Chris Bushell
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Ceri Morgan
Ceri Morgan
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Nihar Lovell
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Qadir v Barclays: High Court gives helpful guidance on limitation periods in IRHP mis-selling litigation

Following a series of decisions considering similar issues, the High Court has again granted a bank’s application to strike out an interest rate hedging product (“IRHP“) mis-selling claim on the grounds that it was out of time under the Limitation Act 1980 (the “Act“): Qadir & Hussain v Barclays Bank plc [2016] EWHC 1092 (Comm).

Finding in favour of the bank, the Court held that:

  1. There was no real prospect of the Claimants relying at trial on the three-year extension for negligence actions at section 14A(4)(b) of the Act, because the Claimants must have known the “essence of the claim” more than three years before they brought it: namely, that the IRHPs they acquired were lossmaking and that alternatives were available.
  2. There was no real prospect of the Claimants establishing at trial that the bank made a “clear and unequivocal” representation during its review of IRHPs that it would not rely on its right to assert a limitation defence. Even if the bank’s statements did amount to an unambiguous representation, the Court did not accept that the Claimants had relied on it to their detriment.

Damien Byrne Hill, Ben Worrall and Ceri Morgan consider the decision below. Continue reading

Worthing v Lloyds: High Court finds no continuing contractual duty to correct investment advice

The recent decision of the High Court in Worthing and Another v Lloyds Bank plc [2015] EWHC 2836 (QB) provides helpful clarification for financial institutions as to their duties when providing regulated investment advice under the Financial Services and Markets Act 2000 (“FSMA“) and conducting subsequent reviews of that advice.

In this case, the Court held that the original investment advice given by Lloyds Bank plc (the “Bank“) was reasonable. However, even if the advice had been wrong, there was no continuing contractual duty for the Bank to correct it. Accordingly, the Claimants were not able to avoid the limitation bar to a claim based on the original advice (given in 2007) by casting the alleged omission of a later correction as a continuing breach of duty. On the facts, the Bank was required to conduct periodic reviews in accordance with its terms and conditions. In performing this obligation the Bank duly discharged its duties.

The following further key points in this case will be of interest to financial institutions:

  1. There is a “clear advantage” in financial institutions using standardised documentation when explaining to customers the nature of products and the associated risks.
  2. The Court rejected a complaint that risk-assessment used in this case ought to have involved more specific and concrete questions involving potential percentage falls in an investment portfolio.
  3. There is no requirement under the COBS Rules for financial institutions to carry out a fresh risk/objectives analysis at every periodic review (and it would seem there is no such duty at common law, given that discharge of the duty to exercise reasonable care and skill when providing regulated investment advice requires compliance with the applicable COBS Rules, and no additional common law duty was found by the Court in this case).
  4. The Court’s strong reliance on the contemporaneous file notes of the Bank when giving the investment advice highlights the importance of keeping thorough and accurate notes when giving such advice to customers.

Factual Background

The Claimants, being a husband and wife of high net worth, sought to recover compensation for investment losses. They claimed that the Bank, in advising them to invest in a medium-risk investment portfolio, acted negligently, in breach of contract and in breach of its statutory duties under FSMA and the Conduct of Business Rules, subsequently replaced by the Conduct of Business Sourcebook Rules (“COB” and “COBS” respectively). In essence, they claimed they only ever wanted a low-risk investment and were not properly advised as to the medium-risk nature of the portfolio.

The investment advice followed several meetings during which the Claimants discussed their expectations and objectives and filled out a number of standardised documents designed to assess their appetite, and capacity, for risk. The Claimants also signed various documents which explained the risk nature of the investment portfolio.

The Bank conducted a review meeting with the Claimants approximately one year later. At around this time the Claimants were experiencing financial pressure from an unpaid overdraft account. At the review meeting the Bank set out a number of options to assist the Claimants with the overdraft, but ultimately recommended retaining the portfolio. Later that year, the Claimants decided to sell the portfolio suffering losses of around £43,000.

At a pre-trial hearing, the Claimants had conceded that their causes of action relating to the original advice were statute-barred (the original investment being made in 2007), with the result that they relied upon claims in respect of the Bank (i) failing to correct the original advice; and (ii) providing further incorrect advice at a review meeting.

Decision

The Court dismissed the claim.

Original advice

Although the claims arising from the original advice were statute-barred, the Court considered the reasonableness of that advice in deciding whether there was any duty to correct it. At all relevant times until the making of the initial investment, the giving of investment advice was subject to the COB Rules. The Court found that the Bank had complied with its duties under contract and the COB Rules, as well as its common law duty to exercise reasonable care and skill. The Court accepted the use of the standardised documentation for the purpose of explaining to its customers the nature of its products and the risks attendant on them. That entitlement is now expressly recognised by COBS 2.2.1 R. Interestingly, the Court rejected the claimants’ submission that risk-assessment ought to have involved more specific and concrete questions, such as: “Are you comfortable if the value of the investment falls by 10%? What about 20%? Or 30%?

Continuing duty

The Claimants’ primary submission was that, having given incorrect investment advice in January 2007, the Bank was at all times thereafter under an absolute contractual obligation to correct that advice by recommending that the Claimants either reinvest in a portfolio with low-risk profile or disinvest. This had the same effect as saying that each moment after the giving of the incorrect investment advice was a new breach by way of a failure to rectify the earlier breach. At trial, the Claimants relied upon the terms and conditions to create those continuing contractual obligations, which are set out at paragraphs 32-34 of the judgment. For example:

3. The Service

        ii. We are responsible on a continuing basis for managing the securities in your portfolio, in accordance with the              investment objective and risk category that you have chosen for your portfolio.

       iii. We will contact you from time to time to check whether there have been any changes in your circumstances and         requirements that could affect the way in which we act on your behalf. You should inform us then or at any time if           there are or have been any material changes that may affect your investment objective or attitude to risk for your             portfolio, so that we can discuss with you how best to meet your future needs and objectives.

The Claimants’ amended Particulars of Claim also relied upon an implied obligation under section 13 of the Supply of Goods and Services Act 1982 to exercise reasonable care and skill in and about giving investment advice. However, the argument based on continuing breach of contract required the Claimants to identify the particular contractual obligation that remained unperformed, i.e. the underlying contractual obligation to which the duty of care in section 13 applied. The Claimants failed to do so, and it appears from the judgment that this argument was not relied upon at trial.

The Court held that:

  • The Bank was not under a continuing contractual duty with regard to the original advice; the Claimants were not able to avoid the limitation bar to a claim based on the original advice by casting the omission of a later correction as a continuing breach of duty.
  • The relevant duty (to provide advice in accordance with contractual, statutory and common law duties) arose only at the point of the original advice. It was not the Claimants’ case that the Bank failed to give investment advice at all (which could theoretically give rise to a continuing duty if not satisfied), but that the advice given was incorrect.
  • Once the advice was given, correct or otherwise, the duty to provide advice was satisfied. The Court did not think that the case of Midland Bank Trust Co. Ltd v Hett, Stubbs & Kemp [1979] 1 Ch. 384 provided any support to the Claimants’ argument and nothing in Maharaj and another v Johnson and others [2015] UKPC 28 cast any doubt upon the Court’s analysis (see our blog post on Maharaj here).

The review

The Bank satisfied its duty to conduct the review with reasonable care and skill and in accordance with the COBS Rules (which had replaced the COB Rules by the time of the review). It was not in breach of a strict obligation to correct an error in its original investment advice, because of the conclusions reached above. There was no contractual obligation to carry out a fresh risk assessment at the review, nor was there a statutory duty under the COBS Rules. The contention that the Bank nevertheless failed to advise the Claimants that the portfolio was no longer suitable failed because the claimants’ attitude to risk had not changed. The recommendation provided was suitable in the circumstances (given the Claimants’ main concern was the overdraft not the portfolio), and the future investment objectives of the claimants at that time could not properly be assessed.

Comment

This case provides welcome comfort to financial institutions that, where there is an advisory relationship with a customer, the Court will be slow to find that a bank is under a legal duty to update the original advice on a continual basis.

It is worth just briefly considering whether the position might be different after the recast Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) come into application.

Although regulatory expectations of suitability assessments under MiFID II are arguably more granular, requiring valid and reliable assessment of the client’s knowledge and experience and risk, and recommendations to be suitable in the context of the client’s risk tolerance and ability to bear loss, it seems unlikely that the court would have come to a different conclusion regarding the suitability of the investment in this case.

Under MiFID II, firms providing portfolio management (such as the Bank in this case) will be required to provide periodic suitability assessments, and firms giving investment advice to disclose whether or not they will provide such assessments. Where these assessments are provided, firms will be required to issue a periodic report containing an updated statement of how the investment meets the client’s preferences, objectives and other characteristics of the retail client. However, ESMA’s Technical Advice to the European Commission on MiFID II and MiFIR suggests that periodic suitability reports would only need to cover any changes in the instruments and/or the circumstances of the client. ESMA accepts (p.106 of its final report) that this falls some way short of an obligation to provide on-going monitoring of suitability. Assuming that the Commission acts on ESMA’s advice, it therefore seems unlikely that the outcome of this case would be substantially different under MiFID II.

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Angus Tummel
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Ceri Morgan
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High Court refuses to strike out claim for negligent sale of interest rate hedging product on basis of limitation defence

The High Court has refused to grant an application to strike out a claim relating to the alleged negligent sale of an interest rate hedging product. The application had been made on the basis that the claim was time-barred.

The decision shows that the High Court will be reluctant to prevent such claims from proceeding to trial where the respondent is seeking to rely on s.14A Limitation Act 1980 to extend the limitation period and there are factual issues about when the respondent should be deemed to have constructive knowledge of the elements giving rise to the claim.

Kays Hotels Ltd v Barclays Bank Plc (2014) QBD (Merc) (Hamblen J) 16/05/14

In 2005, the Respondent (K) entered into a loan agreement with the Applicant bank (B) to borrow £1.34 million. Before the end of 2005, K entered into a collar to hedge its interest rate exposure. Under the terms of the product, no payment was made by either side between 2005 and 2007. In 2007, as rates rose above a certain level, B made payments to K. In 2008, interest rates fell sharply and K began making payments to B. K issued a claim in 2012, alleging that the collar had been mis-sold.

B applied for summary judgment or to strike out the claim brought by K against it on the ground that the claim was time-barred, as the product was sold more than 6 years before the claim was issued. K sought to rely on s.14A of the Limitation Act 1980, which provides for an extended limitation period in negligence actions where there are facts relevant to the cause of action which are not known to the Claimant at the time when the cause of action accrued, in this case the point of sale. K’s main argument was that it did not have the requisite knowledge to bring an action until November 2009. B argued that K knew or should have known that it had a claim prior to that date, since it had made payments under the collar.

The High Court stated that the test for whether the Claimant could rely on s.14A of the Limitation Act 1980 was whether it had been alerted to the facts giving rise to the substance of the claim so as to enable him to take advice and issue proceedings. The determinative moment was when he had reason to begin to investigate. B’s approach to K’s knowledge was therefore too narrow: K had a real prospect of establishing that it could rely on s.14A and thus its claim could not be summarily dismissed on limitation grounds. Furthermore, determining when K could be deemed to have had constructive knowledge was a factual question and required consideration of the facts at trial.

The effect of this decision is to make it more difficult for banks to dispose of such claims summarily on the basis that they are time-barred where the claimant relies on s.14A of the Limitation Act 1980 to try to extend the limitation period.  However, this does not meant that all such applications will fail, or that the bank in this case will not ultimately be successful with its limitation defence at trial.

Rupert Lewis
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John Corrie
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