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BANKING & FINANCE: An Introduction

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Contributed by Tom De Vecchi and Victor Steinmetz of 3 Verulam Buildings.

Throughout 2019, many of the themes that have characterised banking and finance litigation over the last ten years continued. There were important decisions arising from the Lehman Brothers bankruptcy. Swaps continued to be a fertile source of disputes. And there were some notable decisions relating to proceeds of crime. Adding to those important appellate decisions relating to rectification and SAAMCO, it is clear that the Courts have been as busy with banking and finance cases as they have ever been.

Recent case law 

1. In Robertson v Persons Unknown, Moulder J granted what is believed to be the first asset preservation order ('APO') over cryptocurrency (100 Bitcoin) of a value of about £1.2 million, which had been stolen in a “spear phishing” attack from Mr Liam Robertson, CEO of Alphabit Fund and one of the largest cryptocurrency traders in Europe and the Middle East. Blockchain investigators at Chainalysis discovered that 80 of the stolen Bitcoin had been transferred to a wallet held at Coinbase, an exchange platform for cryptocurrencies. As a result of the decision, Coinbase had to temporarily freeze the Bitcoin. The judge also granted a Bankers Trust Order to ascertain the identity of the wallet-holder to which the Bitcoin had been transferred. On the return hearing, Jacobs J continued the APO. The Court had to consider the legal nature of Bitcoin, in particular whether it constitutes property rather than information or data. That question appears to remain unresolved since the decisions of Moulder and Jacobs JJ are not final, and news reports indicate that Mr Robertson and Coinbase have settled the dispute.

2. The Courts dealt again with the tension between the bank-customer relationship and the Proceeds of Crime Act 2000 in N v Royal Bank of Scotland [2019] EWHC 1770 (Comm). In that case, the bank’s customer ‘N’ was an authorised payment institution whose accounts were frozen by the bank as a result of money laundering concerns. The banking relationship was terminated and N brought claims in breach of contract and negligence against the bank for losses incurred. The NCA was an interested party, this decision having followed on from the NCA’s successful appeal of interim orders made by the High Court requiring the bank to carry out past payment instructions given by N despite the NCA not having given consent to such payments ([2017] EWCA Civ 253).

Knowles J held that the bank was entitled to terminate without notice its relationship (pursuant to an express provision in its terms and conditions that it could do so “where the Bank considers there are exceptional circumstances”). The bank had considered that the customer’s client accounts were being used for fraud and money laundering, and that there was commingling of funds between the suspect client accounts and the customer’s main account.

3. In Marme Inversiones 2007 SL v Natwest Markets plc and others [2019] EWHC 366 (Comm), Picken J dismissed the claimant company’s claim for damages against the defendant banks for alleged implied misrepresentations, and rescission of interest rate swaps which it had entered into on the basis of those alleged misrepresentations, which concerned the EURIBOR benchmark. Picken J found that the alleged misrepresentations had not been made, and that (reflecting the decision of the Court of Appeal in Property Alliance Group Limited v Royal Bank of Scotland plc [2018] EWCA Civ 355) the only representation made was that the first defendant was not itself manipulating, and did not intend to manipulate or attempt to manipulate, EURIBOR.

4. Two High Court decisions continued the saga that has been the litigation fall-out from the failure of Lehman Brothers around 11 years ago:

a. Lehman Brothers International (Europe) (in administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch) concerned a sale of Peruvian Government global depository notes ('GDNs'). In a trade of some GDNs sold by the claimant to the defendant, the trade summary had mistakenly recorded the price as USD7,707. It transpired that the true value was over £7 million, and so the claimant brought a claim in unjust enrichment against the defendant relating to the price eventually achieved by the defendant when the GDNs were sold on. Giving judgment for the claimant, Hildyard J ordered the defendant to pay to the claimant so much of the price it obtained from the on-sale as was attributable to the number by which the claimant had over-delivered.

b. In Lehman Bros Finance AG (in liquidation) v Klaus Tschira Stiftung GmbH and another [2019] EWHC 379 (Ch), the claimant successfully challenged the defendant’s valuation of the amount due for automatic early termination under four collateralised equity derivative transactions under the the ISDA Master Agreement (Multicurrency-Cross Border) (1992 ed), which provided that on automatic early termination an amount would be payable equal to the non-defaulting party’s “loss” in respect of the agreement. On 15 September 2008, the claimant’s ultimate parent company filed for bankruptcy protection, giving rise to an automatic early termination. Two valuations for replacement transactions on a collateralised basis were obtained by the defendants, but then discarded in favour of a further valuation on an uncollateralised basis when the defendant appreciated that its collateral was tied up in the administration of an entity related to the claimant. Snowden J held that the loss was to be fixed on the basis of the valuations obtained on a collateralised basis, as among other things it had not been within the reasonable contemplation of the parties that the defendants would be able to recover the additional sum associated with having to enter into an uncollateralised replacement trade.

5. The Court of Appeal also considered the proper interpretation of standard form ISDA documentation in Netherlands v Deutsche Bank AG [2019] EWCA Civ 771. Dismissing an appeal by the Netherlands against a decision of Knowles J ([2018] EWHC 1935 (Comm)], it held that, on a true interpretation of the Credit Support Annex to the ISDA Master Agreement, it did not provide for the payment of negative interest.

6. The Federal Republic of Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347 (Comm) concerned JP Morgan’s summary judgment and strike out applications against Nigeria, which had brought a claim for over USD1 billion alleging that JP Morgan had made three transfers from one of Nigeria’s accounts in breach of its Quincecare duty of care. Nigeria alleged that the sums were used and/or intended to be used to pay off corrupt former and current Nigerian government officials and executives at the Royal Dutch Shell and Eni Corporation. Banks owe a Quincecare duty of care where they have been ‘put on inquiry’, i.e. have reasonable grounds for believing that the payment order is part of a scheme to defraud the customer. Andrew Burrows QC, sitting as a judge of the High Court stated that although he did not have to decide the point, he “strongly” inclined to the view that a bank which had such reasonable grounds had a duty to investigate whether they had any substance. The judge did find that there was no reason why a Quincecare duty should be restricted to current accounts and would not also apply to depositary accounts.

7. In Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40, the Court of Appeal clarified the approach to be taken when determining whether adviser had been negligent under the principle set out in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191. According to the Court of Appeal, a distinction has to be made between a duty to provide information (“information cases”) and a duty to advise the client (“advice cases”). This distinction, which depends on the “purpose and effect” of the advice/information given, is of importance as the scope of liability varies greatly between the two cases. An advice case is one where the advisor is “responsible for guiding the whole decision-making process.” If it is not an advice case, it is an information case. Whereas in the former, an advisor is responsible for all the foreseeable consequences of entering into the transaction in question, it can only be held liable for the foreseeable consequences of the information being wrong in an information case. As a result, it falls on a claimant to prove that it would not have suffered the losses claimed had the information been correct. An appeal to the Supreme Court is currently outstanding.

8. In FSHC Group Holdings Ltd v GLAS Trust Corp Ltd [2019] EWCA Civ 1361, the Court of Appeal held that rectification was available to a party which showed that the relevant term of the contract did not reflect the parties’ subjective intentions. The Court resolved the uncertainty and conflicting case law on this issue, finding that the obiter comments in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, according to which such intentions had to be determined objectively, did not represent the law. The objective approach does therefore not apply where there was an agreed common intention between the parties as to the meaning of a particular provision, but such term, objectively interpreted did not reflect that common understanding. It was held that it would be contrary to good faith for a party to take advantage of the mistake in seeking to enforce the contract in a manner that was inconsistent with what both parties had in fact intended such term to be when the contract was executed. As a result, to be successful in a claim for rectification for common mistake where there is no prior concluded contract, it is necessary to show that both parties knowingly shared the same subjective understanding.

9. On 12 July 2019, the National Crime Agency secured the first unexplained wealth order on the sole basis that it suspected the respondent to be involved in serious organised crime (s.362B(4)(b) of the Proceeds of Crime Act 2002). The respondent was thus forced to reveal the source of the funds used to build up his £10 million property empire, which the NCA believes originated from drug and firearms trafficking and armed robberies.

Other developments in banking and finance 

1. In addition to the recent case law, notable developments include the EU Prospectus Regulation (EU/2017/1129) which fully applies since 21 July 2019, replacing the Prospectus Directive. The Regulation imported the materiality standard into the disclosure requirement. A prospectus must contain all “the necessary information which is material to an investor for making an informed assessment” of the matters set out in Article 6(3) of the Regulation, which include the assets and liabilities, profits and losses, the rights attaching to the securities, the reasons for issuing and its impact on the issuer. This materiality standard also applies to any claims brought under section 90 of FSMA 2000. Article 16 of the Regulation requires that only the risk factors that are specific to the issuer and the securities, and which are material for taking an informed investment decision must be set out in a prospectus. Risk factors are to be categorised in accordance with their nature, with the most material risk factors to be mentioned first. Risk factors will undoubtedly play a significant role in any prospectus-related litigation and it is likely that the specificity and materiality requirements will form the subject of debate.

2. The Fifth Anti-Money Laundering Directive will have to be transposed by 10 January 2020. The Directive extends anti-money laundering regulations to include virtual currency exchanges and custodian wallet providers. It will also introduce a new national bank account register allowing financial intelligence units, tax and law enforcement authorities to quickly identify bank account holders and require the government to create a list of politically exposed persons ('PEPs').

3. Ongoing matters to look out for include the widely publicised HBOS case connected with its Reading branch, which saw the FCA impose a £45.5 million fine on the Bank of Scotland in June this year for having failed to disclose information relating to the branch’s conduct. The next year will also see the progression of the much anticipated SKAT ‘dividend arbitrage’ litigation in which Denmark alleges that it has been defrauded of £1.5 billion.