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Forced sale of security: court considers duties owed by bank

27 May 2015

The courts will be very cautious before accepting that one commercial party owes implicit contractual duties to another commercial party, unless the contract gives good grounds for doing so, or there is a special form of relationship between them. In Rosserlane Consultants Ltd & anr v Credit Suisse International [2015] EWHC 384 (Ch), 20 February 2015, the claimant borrower failed to show that duties should be implied relating to the bank’s forced sale of the claimant’s share in an oil field. The claimant was unable to show that the share could have been sold at a higher price than that achieved by the bank.

Rosserlane and Swinbrook were companies owned by Dr Zaur Leshkasheli. Both companies were investors in CEG, a Scottish limited partnership. Credit Suisse International was a subsidiary of Credit Suisse Group AG.

CEG’s only asset was its 51% interest in Shirvan, the operator of the Kurovdag oilfield. By December 2006, CEG needed finance in order to repay existing indebtedness. Accordingly, it borrowed USD 127 million from CS. The loan was intended to be short-term refinancing: “a 12-month breathing space to enable CEG’s interest to be sold”, and CS to be repaid. The loan was secured on the claimants’ interests in CEG. Under a Security Agreement and a Participation Agreement, CS was given the power to force a sale of the claimants’ interests if the claimants had failed to sell them by 14 August 2007.

The claimants’ efforts to find a buyer were led by Dr Leshkasheli. He concentrated on potential Indian or Chinese buyers, and excluded Russian ones, as he did not feel they could be trusted or had as much money as Indian or Chinese bidders. This initial process attracted only four bidders, with bids ranging from USD 100 million to USD 1.2 billion.

In the end, Dr Leshkasheli’s efforts failed and CS exercised its rights under the Participation Agreement. Ultimately, CS forced the sale of CEG on 15 February 2008 to Berghoff for USD 245 million. Since CEG did not consent to the sale, it was achieved by CS using a Power of Attorney that CEG had granted in exchange for the loan from CS.

The claimants argued that, but for CS’s actions, the interests could have been sold to a Russian company, GazpromNeft, for USD 650 million.

The claimants’ main arguments were:
(i) CS owed them a duty to achieve the best sale price possible, and failed to do so. This duty was said to arise because CS was their agent or because of some implied term, or by analogy with mortgagees.
(ii) CS failed “properly to target potential bidders”.
(iii) A properly conducted bidding process would have resulted in a sale to GazpromNeft for USD 650 million. The claimants had lost the chance of such a sale. There had been a 65% likelihood that this sale would have taken place but for CS’s failings, and CS therefore owed damages based on the difference between the actual sale price and 65% of USD 650 million.


Peter Smith J found against the claimants.

He rejected the claim that CS was agent for, or owed a duty to, CEG in relation to price. He noted the Participation Agreement had been freely negotiated by the parties “with the benefit of experienced lawyers” and could see no basis on which CEG could have negotiated to impose such a duty, given its feeble bargaining position.

Peter Smith J applied the recognised tests for when a term, such as the alleged duty, might be implied. Thus, he noted that, where a term was not mentioned, “The most usual inference… is that nothing is to happen” (per Lord Hoffmann in Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988). If, nonetheless, a term was to be implied, it must (a) be reasonable and equitable; (b) necessary to give business efficacy to a contract; (c) so obvious that it goes without saying; (d) be capable of clear expression; and (e) not contradict any express term of the contract.

As Peter Smith J accepted, in certain cases a term may be implied which does not satisfy such requirements, for example, where it is a legal incident of a particular type of relationship. Here there was no such relationship. It was merely an arm’s-length commercial deal.

The claimants argued that CS was, by analogy, in the position of a mortgagee. Again, Peter Smith J saw no basis for such an argument: “The Participation Agreement merely regulated the inevitable sales process that was contemplated by the short term nature of the monies advanced by the Bank.”

In relation to agency: “The Bank is not appointed agent… it was given the right to do certain things in the name of the Claimants for the purposes of protecting the Bank’s own interests.” Peter Smith J also did not accept that the law imposes an automatic obligation to take the owner’s interests into account “on anyone with a power… to sell property that does not belong to him”.

A particular difficulty with the claimants’ case was their claim that a sale for USD 650 million could have been achieved with GazpromNeft, despite the fact that it had been Dr Leshkasheli himself who had refused to deal with Russian companies when he led the initial efforts to sell.

Peter Smith J did find that, if CS had have contacted GazpromNeft, “there was a very good prospect that it might have purchased” CEG’s interest. Thus, “the failures of the Defendant to approach GazpromNeft at all [were] are the cause of the Claimants’ loss of the opportunity of selling Kurovdag to GazpromNeft.” This was, however, not enough to make CS liable.

The claim was essentially for the “loss of a chance” and Peter Smith J noted that there is a “difficulty of proof in all” such cases. In particular, he examined the modern approach taken to the rule established in Armory v Delamiries (1722) 1 Stra 505. According to this rule, “where the defendant has wrongfully deprived the claimant of property of value… the court will, save to the extent that it is persuaded otherwise by the defendant, assess the value of the missing property on a basis which is generous to the claimant” (Browning v Messrs Brachers [2005] EWCA Civ 753). However, he found that, despite this tendency to give claimants a “fair wind” in such cases, it remained the case that it was for claimants to prove both the fact, and amount, of damage suffered.

Peter Smith J held that, if GazpromNeft had been contacted by CS, it would have been willing to acquire CEG’s interest for up to USD 400 million. However, the actions of CS did not lead to the claimant’s loss. This was because Dr Leshkasheli refused to allow bidders access to the Kurovdag site and there was no evidence that GazpromNeft would have been an exception. The judge accepted expert evidence to the effect that, without site access, GazpromNeft would have “said goodbye”.


This was a lengthy, complex and curious case.

The judgment gives a clear and extensive account of the hurdles that must be crossed by anyone attempting to argue that a contract should be read as containing an implied term. Such arguments remain very difficult to sustain (with the possible exception of recent developments concerning where a duty of good faith arises). The starting point for any contractual dispute is always the contract itself. By definition, an implied term does not appear on the face of the relevant contract.

In this case, the duties the parties owed were solely the creation of the contractual terms, and Peter Smith J was robust in refusing to extend these beyond the ones which had been explicitly negotiated, with help from legal advisers, by commercial parties.

Ultimately, the claimants themselves were responsible for their failure to secure damages. It was they who imposed conditions on the sale which had essentially guaranteed that GazpromNeft would not have bought, even if it had been invited to bid, by refusing to let bidders make site visits. The claimants were authors of their own downfall, and CS was not liable for this.

Peter Smith did not find Armory v Delamiries valuable as a guide to how he should approach questions of the burden of proof. Though he did not say so explicitly, the facts in Armory were very far removed, since in that case, there was a very strong implication that the defendant had actually stolen the claimant’s property, thus making it impossible for the claimant to demonstrate the value of what he had lost.

The clear general point emerging from the judgment is the continuing difficulty faced by parties arguing that terms should be implied. The courts assume contracts mean what they say. In particular, courts have shown themselves in recent years to be very reluctant to impose duties on commercial entities of the type the claimants have argued for unless there has been a contractual basis for doing so. If, therefore, party A enters an arrangement which can allow party B to dispose of A’s property, A should take great care to make explicit what obligations B has when disposing of the property.