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Top ten finance litigation and regulatory decisions of 2014


16 February 2015

A summary of the most interesting banking litigation and regulatory decisions from 2014. The selection is necessarily subjective and draws from a wide range of cases and developments that are of direct relevance to finance parties.

Effectiveness of contractual terms to protect banks

Contractual terms successfully exclude liability for negligent advice:  Crestsign Ltd v National Westminster Bank plc and Royal Bank of Scotland plc (October/November 2014 Litigation Review)

Liability for negligent advice provided by banks in respect of interest rate swaps sold to a retail customer was successfully disclaimed by the contractual terms of business which stated that the banks had a non-advisory role. This was despite the advice pre-dating the parties entering the swap. Obiter the court ruled that whilst the banks did not have a "duty to educate", they did have a duty to give full and accurate information on products which the banks chose to present. The ruling is interesting for its confirmation that, when acting in a non‑advisory role, banks do not have a duty to (a) explain other products that a client might want to purchase or (b) explain the obvious. A bank must, however, correct any obvious misunderstandings and answer any reasonable question. Any information that a bank provides must be accurate and not misleading. This decision is subject to an appeal.

Warranty as to capacity protects bank where swap counterparty asserts incapacity: Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103

A warranty as to capacity in an English law-governed ISDA Master Agreement was construed so as to give rise to a claim in damages when a Dutch housing association later asserted that it lacked capacity, as a matter of Dutch law, to enter into certain swap transactions. The association had capacity to enter into an English law ISDA Master Agreement, but had lacked capacity, as a matter of Dutch law, to enter into certain subsequent swap transactions (ostensibly under the Master Agreement) on the basis that they were speculative rather than true hedging transactions. Andrew Smith J ruled that the effect of the capacity provision was that the association had either (i) agreed in the Master Agreement that it would only enter into valid (intra-vires) transactions, which gave rise to a contractual estoppel preventing it from relying on or asserting the invalidity of transactions or (ii) made a contractual warranty to that effect and so was liable for damages for breach of warranty. The case demonstrates an innovative approach from the English court using the contractual master agreement structure of the ISDA to overcome the so‑called "boot-straps" problem in relation to capacity which applies in standard contracts, where if a party does not have capacity to enter into an agreement it cannot have capacity to represent that it does have capacity in that same agreement. This decision is subject to an appeal.

Representation and warranty provisions insufficient to protect bank where bribes have been paid: UBS AG (London Branch) & Anor v Kommunale Wasserwerke Leipzig GMBH [2014] EWHC 3615

In contrast, oral and written representations and warranties were insufficient to help the bank in a successful claim by a German municipal water company to rescind a single tranche collateralised debt obligation (STCDO) as the underlying transaction was voidable by reason of bribery and/or conflict of interest by the water company's intermediary financial advisers, which were found by the court to have an agency relationship with the bank. This despite the bank being unaware of the bribes having been paid. The representations and warranties had no "independent life" so were unable to help the bank. The case shows how an agency relationship can arise without any formal contract or arrangement, and is a cautionary tale for banks. This decision is subject to an appeal.

Contractual interpretation

Court of Appeal interprets "commercially reasonable" in complex finance transaction: Barclays Bank plc v UniCredit Bank AG & anr (May 2014 Litigation Review)

The Court of Appeal has held "commercially reasonable" to require Wednesbury reasonableness (ie not to be irrational) and no more. The bank had not unreasonably refused to give its consent where required to act in a "commercially reasonable manner" by demanding five years' fees in return for consenting to early termination of some guarantees. The court has set the threshold for acting commercially reasonably at a low level. The court was at pains to stress that this was a finding on these particular facts; nonetheless, it is hard to imagine debating what is commercially reasonable without reference to this case. If parties want the term "commercially reasonable" to elicit a particular behaviour from a drafting perspective they are best spelling this out.

Opposing judicial views on meaning of clause in collateralised loan obligation: Napier Park v Harbourmaster Pro-Rata CLO 2 BV & ors [2014] EWCA Civ 984

The High Court and Court of Appeal came to diametrically opposed conclusions on the interpretation of the words "have not been downgraded below their Initial Ratings" in the reinvestment criteria for cash proceeds of Class A1 Notes issued as part of a collateralised loan obligation (CLO). The Class A1 Notes had initially been rated AAA; they were then downgraded to AA but were later upgraded back to AAA. The Chancellor of the High Court concluded that the reinvestment criteria could no longer be satisfied, essentially because the ordinary meaning of the clause referred to a past event, not a continuing state of affairs. The Court of Appeal stressed that interpretation of a tradable financial instrument requires an "iterative process" to place the "rival interpretations of a phrase within their commercial setting and investigate their commercial consequences" and favoured a continuing state of affairs interpretation. To find otherwise, Lewison LJ held, would have raised the effect of a historic downgrade of the Class A1 Notes "to a level of pre‑dominance which it was not designed to have in a context where, if given that level of pre-dominance, it conflicts with the basic scheme" of the CLO. Allen & Overy LLP acted for one of the defendants.

Jurisdiction and standing

Jurisdiction issues in mis-selling claim: McGraw Hill International (UK) Ltd v Deutsche Apotheker Und Arztebank EG [2014] EWHC 2436, 18 July 2014 (October/November 2014 Litigation Review)

This was a mis-selling claim by investors who bought Constant Proportion Debt Obligations (CPDOs) arranged by the then ABN Amro Bank NV, and rated by Standard & Poor's (S&P). The English court accepted jurisdiction over S&P's claim for a negative declaration against both the investors and the Bank. The ruling considered issues which arise in claims for negative declaratory relief (which are often used as a way of forum shopping) against multiple defendants. It highlights the importance of there being a genuine lis (ie a serious issue to be tried) between the claimant and each of the defendants, and that a particular defendant should not just be added in order to establish a basis for jurisdiction in a forum favourable to the claimant. Further, if written marketing materials contain misleading information, in a tortious claim, the harmful event will, for the purposes of Article 5.5 Brussels Regulation, be held to be where the materials were delivered and received, not where they were created. This fact is perhaps not likely to affect how marketing is carried out, but it is perhaps a point to remember when deciding where potential investor claimants are likely to mount legal action in the event of a mis-selling claim.

Corporate has no right of action under s150 FSMA: Bailey v Barclays Bank plc [2014] EWHC 2882 (QB), 27 August 2014 (October/November 2015 Litigation Review)

The High Court struck out and summarily dismissed a claim by a company in relation to the alleged mis‑selling of an interest rate swap by the bank. The decision confirms that a body corporate (such as the second claimant in this case) does not constitute a "private person" and as a result does not have rights of action under s150 Financial Services and Markets Act 2000 (FSMA).

Dispute over who can sue for loss caused by negligent underlying property valuation in non-recourse securitised loan: Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) [2014] EWHC 3106 (Comm), 30 September 2014 (October/November 2014 Litigation Review)

The transferee of a non-recourse securitised loan, rather than the noteholders, was the proper claimant in a claim against a valuer for losses caused by the negligent valuation of the underlying commercial property (which had been carried out for the original lender). The presence of a contractual obligation for the transferee to pass on proceeds of a successful claim to the noteholders, coupled with the loss suffered when the transferee purchased the loan for more than it was worth, were persuasive factors supporting the transferee's right to bring a claim. In finding that Titan was a proper claimant, Blair J noted that the complexity of securitisations meant that "the distribution of loss can be difficult to pin down". For those involved in securitisations, disputes like this can perhaps be most easily avoided by ensuring that there are agreed and clear provisions in the documents which identify parties with a right to claim. As regards noteholders – who actually bear any economic loss – the case highlights the practical problems they may have in recovering damages unless the documents make clear who is entitled to claim. The decision is subject to an appeal.


Assignment of FSMA claims by private persons: Connaught Income Fund, Series 1 v Capita Financial Managers Ltd & anr [2014] EWHC 3619 (Comm) (December 2014 Litigation Review)

The High Court has allowed the assignment of claims by private persons under s138D Financial Services and Markets Act 2000 (FSMA). The confirmation by the court of the ability to assign claims brought under s138D FSMA raises important considerations for financial institutions. It suggests that private persons who would otherwise have been prohibited by difficulty and cost are allowed to assign their claims and therefore gain redress indirectly. Assignment was not expressly limited to liquidators so a "private person" could, in theory at least, assign his or her claim to anyone willing to bring litigation against the relevant authorised person in question. This decision therefore highlights the possibility of retail customers who do not wish to incur the considerable time and expense of litigation, selling their investment and the claims arising from that investment to third parties. Those third parties, whether hedge funds or litigation funders for example, might use this as a mechanism to collect a number of claims and seek to bring proceedings against a financial institution for breach of their statutory obligations.

Parties may not claim additional damages in court following acceptance of an FOS determination: Clark & anr v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA 118 (May 2014 Litigation Review)

The Court of Appeal overturned a decision of the High Court that had held that Mr and Mrs Clark (the Respondents) could claim additional damages by way of a civil claim despite the fact they had already accepted a favourable determination by the Financial Ombudsman Service (FOS). The Court of Appeal held that the Respondents could not pursue civil claims in court for damages over and above those received as a result of an FOS decision. The Court of Appeal's decision in this case has provided some much needed clarity in relation to the issue of whether persons who complain to the FOS can pursue separate legal proceedings to recover additional sums after accepting a favourable FOS determination. Although the Court of Appeal held that persons who complain to the FOS cannot pursue separate legal proceedings to recover additional sums after accepting a favourable FOS decision, Arden LJ expressly acknowledged that this would depend on whether the substance of the proceedings before the courts are the same as those which were considered by the FOS. As a result, it is possible that persons who have accepted a favourable FOS determination may still attempt to pursue separate civil claims to recover additional sums and argue that their civil claims are based on separate causes of action to the ones that were originally argued before the FOS. However, it is likely to prove difficult for most claimants to successfully take this approach in practice.

And finally, not a decision, but an important new European Regulation that came into force in July 2014 that will affect all banks operating in the EU:

Freezing bank accounts across Europe: The new Regulation establishing a European Account Preservation Order (EAPO)

The Regulation came into force on 17 July 2014 and will be applied by participating Member State courts from 18 January 2017. This instrument represents a new tool in a claimant's armoury, allowing it to freeze monies in a defendant's bank accounts across Europe. The UK and Denmark have not opted into this Regulation and, accordingly, are not bound by it. However, UK and Danish account holders in participating Member States will be impacted, as will banks operating in participating Member States. The legislation imposes extensive obligations on banks, which will have to "freeze" accounts subject to an EAPO "without delay". Banks may also have to carry out certain searches in respect of a defendant's bank accounts. The Regulation involves a complicated interplay between national and European law, with the practical effect that banks will not be able to adopt a uniform pan-European response to this legislation and instead may require specific local law advice as to its implementation and impact in different Member States. On Thursday 15 January 2015, Mona Vaswani, Partner, Litigation and Sarah Garvey, Counsel, Litigation, spoke to clients about this new legislation providing for a pan-European Freezing Order. Mona and Sarah explained the key provisions and assessed the risks posed by this instrument for commercial parties and banks. The UK Government has not opted in to this Regulation but for commercial parties (especially banks) operating across Europe, with bank accounts in Member States, this new legislation (effective from 2017) may introduce new litigation risks and (for banks) significant administrative burdens.


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