Top UK finance litigation and contract law developments in 2019
28 January 2020
This is a round-up of the most interesting finance litigation and contractual developments in 2019. The selection is necessarily subjective and draws from a wide range of cases and developments that are of direct relevance to finance parties.
Full coverage can be found in our monthly Litigation and Dispute Resolution Review.
Economic duress curtailed
In Times Travel (UK) Ltd v Pakistan Airlines Corporation  EWCA Civ 828, an extended concept of lawful-act duress, which had been given wings by the High Court, was ultimately grounded by the Court of Appeal. Economic duress recognises that a contract may be voidable where illegitimate pressure (which may include threats of lawful acts i.e. lawful-act duress) has been applied to induce a party to enter into that contract. The Court of Appeal held that an agreement will only be voidable for lawful-act duress where the defendant induces the claimant to concede a demand to which the defendant does not believe in good faith it is entitled. Reasonableness of the defendant’s belief is irrelevant.
In this case PAC gave notice of termination of its existing contract with Times Travel. It then offered a new contract on the condition that Times Travel waived its existing claims for commission. Times Travel successfully challenged the validity of the new contract on economic duress grounds in the High Court. The Court of Appeal allowed PAC’s appeal and declined to broaden the scope of lawful-act duress beyond cases of bad faith. This reining-in of lawful-act duress is reassuring given that economic pressure is ubiquitous in commercial situations and the introduction of a reasonableness standard would have given rise to considerable uncertainty.
Good faith in relational contracts
Alan Bates & ors v Post Office Ltd  EWHC 606 (QB) brought certainty in some respects and uncertainty in others to the implication of a contractual duty of good faith. In clarifying the scope of the duty of good faith, the High Court said that it went beyond mere honesty: the question is whether the conduct would be regarded as commercially unacceptable by reasonable and honest people and it relates to every power and discretion in the contract.
However, the question of when a duty of good faith will be implied into a contract remains unclear. The High Court appeared to indicate that once you have a relational contract (various relevant characteristics were listed), then a duty of good faith is automatically implied as a matter of law. However, there is a competing view that a duty of good faith will be implied in fact only if the context requires it. Subsequent High Court decisions such as UTB LLC v Sheffield United Ltd & Ors  EWHC 2322 (Ch) have approached implication as a matter of fact rather than law. Furthermore, in refusing the Post Office permission to appeal, the Court of Appeal’s view was that the High Court in Bates had not implied the duty automatically after finding that the contract was relational.
The practical effect of finding an implied duty of good faith in Bates was that 17 terms were implied into the contracts between the Post Office and sub-postmasters. The key takeaway is if you don’t want to risk this broad duty of good faith being implied into your contract, you should expressly provide otherwise.
Contracts are the only thing not frustrated by Brexit
Could Brexit result in frustration of a commercial agreement? In Canary Wharf (BP4) T1 Ltd v European Medicines Agency  EWHC 335 (Ch), an English court considered this question for the first time, and held that Brexit did not frustrate EMA’s 25 year lease of its headquarters in London. EMA argued that the lease had been frustrated because Brexit had (1) triggered legal changes which undermined EMA’s capacity to continue with the lease (i.e. EU legislation required EMA to relocate to Amsterdam) and (2) frustrated the common purpose of the lease. The court rejected both arguments finding, amongst other things, that EMA did have capacity and that the lease was a product of a negotiation between commercial parties with different purposes. That an EU institution failed to make out this argument shows that it will be very difficult for parties to argue that Brexit has frustrated their contracts. It is also clear that arguments based on frustration of a common purpose (which takes into account subjective factors such as the parties’ knowledge and expectations in determining that common purpose) will very rarely succeed. Another win for certainty although those left with a bad bargain as a result of Brexit might view the court’s approach as frustratingly narrow.
Fintech: decrypting crypto
Until recently, clarity over the legal treatment of cryptoassets appeared to be as elusive as the “Missing Cryptoqueen” herself, Dr Ruja Ignatova. Questions such as whether they constitute property will take on even more real-world significance as cases concerning stolen cryptocurrency and bust crypto-exchanges start to appear in the courts.
Two recent English cases, Robertson v Persons Unknown, unreported, CL-2019-000444 and Elena Vorotyntseva v Money-4 Limited t/a Nebeus.Com, Sergey Romanovskiy, Konstantin Zaripov  EWHC 2596 (Ch) made headlines for their treatment of cryptocurrencies as property for the purposes of an asset preservation order and freezing order respectively. A promising start but both are interlocutory decisions and neither elaborated on the specific proprietary category these cryptocurrencies fell into (choses in possession or choses in action). Enter the UK Jurisdiction Taskforce with its legal statement on cryptoassets and smart contracts (released in November) suggesting that cryptoassets should be treated as a third category of property. The legal statement is not binding but its analysis on the proprietary status of cryptoassets received High Court endorsement in AA v Persons Unknown  EWHC 3556 (Comm). The legal statement has therefore brought some welcome clarification to this area although some significant uncertainties remain (e.g. governing law concerns).
Smart contracts are often mentioned in the same breath as cryptoassets and the Singapore International Commercial Court dealt with both in B2C2 Ltd v Quoine Pte Ltd  SGHC(I) 03. Traders on Quoine’s platform bit-coined off more than they could chew when, as a result of a bug in Quoine’s software, they purchased cryptocurrency for values that were 250 times off-market. The court had to consider (1) whether Bitcoin was property (it held that it was) and (2) whether contracts entered into by software on both sides and without human intervention were void for unilateral mistake. For unilateral mistake to apply (under both Singaporean and English law), the counterparty must be aware of the innocent party’s mistake. As the contracts had been concluded by software, the court held that the knowledge/intention of the programmer at the time of programming (by including values that were 250 times off-market) was relevant. The relevant values had been inserted in B2C2’s trading algorithm to protect B2C2’s position rather than to take advantage of the traders’ mistake, so unilateral mistake was not made out and the contracts were valid. This is a good example of some of the perverse outcomes that may occur when the common law collides with automated smart contracts that involve little or no direct human involvement.
UK class action regime
Merricks v Mastercard Inc  EWCA Civ 674 concerned a GBP 14 billion class action claim brought against Mastercard on behalf of 46 million UK consumers. They relied on the European Commission’s finding that interchange fees had been set at an unlawfully high level and therefore artificially raised prices for British consumers. Under the UK consumer rights class action regime, a collective proceedings order (CPO) must be obtained from the Competition Appeals Tribunal (CAT). The CAT had dismissed the application on the basis of its finding that there was no credible methodology for determining the loss suffered by each individual consumer. The Court of Appeal overturned the CAT’s decision holding that it should not have conducted a mini-trial (the question is simply whether the claims are suitable to proceed on a collective basis, not whether they are certain to succeed) and that the method of distribution could be addressed after the actual trial. Mastercard was subsequently granted permission to appeal to the Supreme Court. All similar CPO applications at the CAT have been paused pending the Supreme Court’s decision which is expected in late 2020 / early 2021.
Representative class action: damages for loss of control of data
2018 saw the success of the 5500-strong class action in WM Morrison Supermarkets PLC v Various Claimants  EWCA Civ 2339 (judgment is currently awaited from the Supreme Court in this case). Arguably even more concerning for institutions is the 2019 four-million-strong class action in Lloyd v Google LLC  EWCA Civ 1599 (this also relates to a pre-GDPR cause of action under the Data Protection Act 1998) in which the Court of Appeal held that damages could be claimed for loss of control of data without having to prove any financial loss or distress: mere breach was sufficient. The claim alleged that Google had installed cookies on iPhones without the users’ knowledge and consent and which enabled it to track their internet activity. Lloyd sought permission to serve the claim out of jurisdiction on Google and he was required to show that damage was sustained in the jurisdiction. In granting him permission, the Court of Appeal held that the damage was the users’ loss of control of data; that he had a good arguable case that the damage was sustained within the jurisdiction; and that there was no requirement for the class to authorise the claim. The size of this claim shows that managing data risks should be at the forefront of firms’ minds (especially with GDPR now in the picture).
Corporate criminal liability and financial crime
Bank breaches Quincecare duty
The Quincecare duty is implied into bank/customer relationships and requires a bank to refrain from executing an order to transfer funds where there are reasonable grounds for believing that the order is part of a scheme to defraud a customer. Despite the duty having been established over 30 years ago, Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd  UKSC 50 marks the first time a bank has been held to have breached it.
Singularis’ liquidators claimed that Daiwa had made payments from Singularis’ account in breach of its Quincecare duty. The payments had been made on the instructions of a fraudulent Singularis director. On appeal to the Supreme Court, Daiwa argued that the director’s fraudulent conduct should be attributed to Singularis which would engage, amongst other things, the illegality defence in favour of the bank. The Supreme Court dismissed the appeal, holding that the question of attribution required consideration of the context and that the fraud was not to be attributed because the very purpose of the duty was to protect customers where trusted agents, such as the director, misappropriated funds. To allow for attribution would “denude the duty of any value”.
Breach will be rare (e.g. in Singularis, the judge had found at first instance that there were “many obvious, even glaring, signs” of fraud) but this case confirms that the duty is not inert. The duty can in principle be excluded however the courts have suggested that clear express words are required and standard entire agreement or exclusion clauses are unlikely to be sufficient.
Terminating customer relationship on suspicion of financial crime / money laundering
Banks concerned about their obligations in respect of preventing financial crime and mitigating money laundering risk will welcome the decision in N v The Royal Bank of Scotland  EWHC 1770 Comm (although permission to appeal this decision has been granted). RBS had a contractual right to terminate a customer relationship without notice if it considered there to be exceptional circumstances. The court held that RBS was entitled to exercise this right where RBS suspected that the customer accounts were vulnerable to fraud and money laundering. While each case will need to be decided on its facts, banks should ensure that they take appropriate advice before making decisions to terminate and should document their decision-making processes. Measures which are less extreme than termination should be taken into account in a bank’s decision-making process.
Breaching confidentiality to report suspected criminality?
Saab & Anor v Dangate Consulting Ltd & Ors  EWHC 1558 (Comm) provided clarity on when, and how, it is appropriate to breach confidence to report suspected criminality. Private investigators were engaged to conduct an independent internal investigation into alleged money laundering at FBME. The retainer contained strict confidentiality provisions including a duty to notify FBME’s lawyers before disclosing confidential information to third parties and to deliver up confidential documents if requested by FBME’s lawyers/owners. Having fallen out with FBME, the investigators gave all the documents and information obtained from FBME to a US regulator and other law enforcement agencies. When they were sued by the owners of FBME for breach of confidence, the investigators relied on the public interest defence. The court held that the investigators were in breach and made the following findings: the public interest defence is available in respect of regulators but not law enforcement agencies; the defence was not available in respect of the notification and deliver up confidentiality provisions; and a wholesale document dump of all the information they had gathered (as opposed to focussed disclosure) was not justified on public interest grounds.
Key takeaways are that targeted disclosure is more readily justifiable on public interest grounds and that, for parties seeking to protect confidential information when disclosing to third parties, express confidentiality agreements which include notification and deliver up provisions are advisable.
English law disclosure obligation clashes with foreign criminal law
Bank Mellat found itself between a rock and a hard place in Bank Mellat v HM Treasury  EWCA Civ 449 where compliance with a disclosure order of the English court would have placed it in breach of Iranian criminal law. In holding that disclosure should be given, the Court of Appeal undertook a balancing act between, on the one hand the risk of prosecution in Iran (it concluded that there was an actual risk but that it was less serious than Bank Mellat suggested because no relevant examples of past prosecutions had been given), and on the other, fair disposal of the trial. The court observed that where a court order might entail a breach of foreign law, it would not make such an order lightly but also emphasised that “foreign law cannot be permitted to override this Court’s ability to conduct proceedings here in accordance with English procedures and law”. This is consistent with previous cases which, for instance, have ruled that the French Blocking Statute does not trump orders for disclosure in the English courts.
Jurisdiction in cross-border disputes
A summary of litigation developments would be incomplete without discussing the tactics around jurisdiction that are a common feature of cross-border disputes. Note that certain decisions below relate to the application of the Brussels Recast Regulation in the English courts and are likely therefore to be of limited applicability once the transition period has come to an end and the UK ceases to be an EU Member State.
Different jurisdiction clauses in two contracts between the same parties
In BNP Paribas SA v Trattamento Rifiuti Metropolitani SpA (Rev 1)  EWCA Civ 768, the parties’ financing agreement contained a jurisdiction clause in favour of the Court of Turin whereas their swap agreement contained a jurisdiction clause in favour of the English courts. Proceedings were issued in both courts under Article 25 of the Brussels Recast Regulation. TRM challenged the jurisdiction of the English courts over BNPP’s claims under the swap agreement. The Court of Appeal held that there were two legal relationships for the purposes of Article 25: the financing agreement relationship and the swap relationship. Disputes relating to the swap therefore fell within the English jurisdiction clause.
This case brings welcome certainty as it appears to accord with the intention of the parties in choosing different jurisdictions for different agreements. Importantly however, the Court of Appeal recognised that the starting presumption that competing jurisdiction clauses are to be interpreted on the basis that each clause deals exclusively with its own subject matter may be displaced by the language and surrounding circumstances.
Bringing foreign-domiciled defendants within the jurisdiction of an anchor defendant
Will jurisdiction be refused where a claimant commences an action in an ‘anchor defendant’s’ jurisdiction with the sole object of joining a foreign defendant to the same proceedings? The Court of Appeal in JSC Commercial Bank Privatbank v Kolomoisky and Bogolyubov and others  EWCA Civ 1708 held that jurisdiction will not be refused on this basis provided that the claimant has a sustainable claim against the anchor defendant which it intends to pursue to judgment. The Court of Appeal was considering the Lugano Convention but confirmed that the same reasoning would apply for Brussels 1 and the Brussels Recast Regulation. Also notable was the court’s willingness to apply the Lugano Convention rules concerning parallel proceedings in another Convention state by analogy to circumstances which fell outside the Lugano Convention’s scope (i.e. where parallel proceedings were in a non-Convention state).
Liability for actions of foreign subsidiaries
Finally, the Supreme Court’s decision in Vedanta Resources Plc and another v Lungowe and others  UKSC 20 has important consequences for British multinationals whose subsidiaries and suppliers operate abroad. The claimants alleged that toxic water pollution had been caused by the subsidiary’s mine and brought a claim against the parent and subsidiary in the English courts. In holding that the English courts had jurisdiction over both parent and subsidiary, the Supreme Court stated that: (1) the duty of care owed by parent companies in relation to the activities of their foreign subsidiaries depends on the extent and type of the parent’s involvement in the operations of the subsidiary and (2) where a parent company has submitted to the jurisdiction of the relevant foreign court then the risk of irreconcilable judgments will not be a “trump card” to allow the English courts to assume jurisdiction but the court may then go on to consider any barriers to substantial justice in that foreign court.
Further guidance on the weight to be given to the risk of irreconcilable judgments in the forum non conveniens analysis was provided by the High Court in E, D & F Man Capital Markets Ltd v Come Harvest Holdings Ltd & ors  EWHC 1661 (Comm) where it distinguished Vedanta. In holding that England was the proper place to bring the relevant claims, the High Court placed considerable weight on the risk of irreconcilable judgments. The question therefore appears to be whether the risk of irreconcilable judgments is of the claimant’s own making (it was not of the claimant’s making in E, D & F).
Vedanta indicates an increased willingness by the English courts to hear claims against parent companies in respect of actions of their subsidiaries. Initial worries that the decision would discourage parent companies from implementing environmental and social policies in respect of their subsidiaries (for fear of being held to have assumed a duty of care) appear to be misplaced as the risks of not implementing such policies far outweigh the risks of having assumed a duty of care. That said, it fits with a trend that business and human rights disputes are likely to form an ever more important part of the litigation landscape in the years to come.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. If you wish to receive this publication, please contact Amy Edwards.