Banking and finance disputes review - Norton Rose … the editor In this edition of the Banking and...

Issue 06 / May 2015

In this issue:

Contractual estoppel in mis-selling claims

Strategic and procedural issues in resolving contractual interpretation disputes: a trustee perspective

Cross-border litigation risk in the capital markets

Knighthead Master Fund LP and others v The Bank of New York Mellon and The Bank of New York Depositary (Nominees) Limited [2014] EWHC 3662 (Ch)

Crédit Agricole Corporation and Investment Bank v Papadimitriou [2015] UKPC 13

MHB-Bank v Shanpark [2015] EWHC 408 (Comm)

Goldman Sachs International v Videocon Global Ltd [2014] EWHC 4267 (Comm)

The risks of de-risking: conflicting pressures on financial institutions

Competition concurrency: what does it mean for financial institutions and their senior management?

Financial crime and corporate criminal liability: what next?

The Insurance Act 2015: a banking case study

Banking and finance disputes review

Financial institutionsEnergyInfrastructure, mining and commoditiesTransportTechnology and innovationLife sciences and healthcare

From the editor

In this edition of the Banking and Finance disputes review, we focus on the identification and mitigation of certain risks arising from disputes and regulatory enforcement. A number of these risks arise from the increased compliance burden of new regulations and the uncertainty of applying novel legislative developments. But judicial decisions in England and Europe also expose new risks, sometimes from unexpected directions, such as the recent European decision to allow an investor to take proceedings against an issuer in the capital markets in its own jurisdiction rather than where the issuer was domiciled, which may have consequences generally for participants in the capital markets. Meanwhile, financial institutions increasingly take a proactive approach to reducing their risks, whether by minimising exposure to adverse regulatory environments or by adopting drafting that takes advantage of contractual estoppel and similar devices.

In Contractual estoppel in mis-selling claims, guest contributors from Fountain Court Chambers survey the ambit of this key risk mitigation tool for banks. Mitigation of risk for financial intermediaries is the focus of Strategic and procedural issues in resolving contractual interpretation disputes: a trustee perspective. Contractual interpretation of ISDA Master Agreements is dealt with in two casenotes: MHB-Bank v Shanpark [2015] EWHC 408 (Comm) and Goldman Sachs International v Videocon Global Ltd [2014] EWHC 4267 (Comm).

The risk of exposure to unwanted cross-border litigation has increased recently for capital markets participants. This is explored in Cross-border litigation risk in the capital markets. Further complexities of cross-border litigation are addressed in the casenote on Knighthead Master Fund LP v The Bank of New York Mellon [2014] EWHC 3662 (Ch).

In our regulation and investigations section, risk mitigation for banks is examined in The risks of de-risking: conflicting pressures on financial institutions. New developments in two different areas of regulation are looked at in Competition concurrency: what does it mean for financial institutions and their senior management? and in Financial crime and corporate criminal liability: what next?. A strict approach to a bank’s anti-money-laundering obligations is seen in the casenote on Crédit Agricole Corporation and Investment Bank v Papadimitriou [2015] UKPC 13.

Finally, in our insurance section, we look at the effect of a recent legislative change in The Insurance Act 2015: A banking case study.

Matthew WaudbyPartnerNorton Rose Fulbright LLPTel +44 20 7444 [email protected]

Contents

Banking and finance articles

Contractual estoppel in 03 mis-selling claims Strategic and procedural issues in 06 resolving contractual interpretation disputes: a trustee perspective Cross-border litigation risk in 09 the capital markets

Banking and finance case updates

Knighthead Master Fund LP 13 and others v The Bank of New York Mellon and The Bank of New York Depositary (Nominees) Limited [2014] EWHC 3662 (Ch) Crédit Agricole Corporation and 16 Investment Bank v Papadimitriou [2015] UKPC 13 MHB-Bank v Shanpark [2015] 17 EWHC 408 (Comm) Goldman Sachs International 19 v Videocon Global Ltd [2014] EWHC 4267 (Comm)

Regulation and investigations

The risks of de-risking: conflicting 20 pressures on financial institutions Competition concurrency: what 23 does it mean for financial institutions and their senior management? Financial crime and corporate 26 criminal liability: what next?

Insurance

The Insurance Act 2015: 29 a banking case study


02 Norton Rose Fulbright – May 2015


Contractual estoppel is unquestionably now one of the most significant defensive tools in the armoury of banks and other financial institutions, particularly when faced with what are commonly termed ‘mis-selling’ claims.

Although the doctrine is by no means limited to the financial/banking context, almost all the leading cases on contractual estoppel have arisen in this sector. This may in part be explained by the widespread use of industry standard documentation, including the ISDA Master Agreement, which incorporate clauses (such as the ‘non-reliance’, ‘assessment and understanding’ and ‘status of parties’ clauses commonly incorporated into the Schedule to, and confirmations under, the ISDA Master Agreement) which set out the basis upon which the parties are dealing and which the Courts have found are capable of giving rise to this type of estoppel. Similar provisions are also commonly found in banks’ terms of business.

The modern origin of contractual estoppel

Given its contemporary importance, it is perhaps surprising that the modern foundation of contractual estoppel – the decision in Peekay Intermark v Australia and New Zealand Banking Group [2006] EWCA Civ 386 – is less than 10 years old.

In Peekay the claimant was an investor which had purchased from the defendant bank a structured product linked to Russian Treasury bills. Prior to the purchase it had signed a ‘Risk Disclosure Statement’ which stated that the bank assumed that investors were aware of the risks involved and had determined for themselves that the product was suitable. Moore-Bick LJ summarised the essence of contractual estoppel, which he found arose from the contract, in the following terms:

‘There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, where it be the case or not … Where parties express an agreement … in a contractual document neither can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerned those aspects of their relationship to which the agreement was directed. The contract itself gives rise to an estoppel.’

Peekay was followed by Gloster J in JP Morgan Chase v Springwell Navigation [2008] EWHC 1186 (Comm). In that

case Springwell had made contractual representations and given warranties to the effect that it was sophisticated, was not relying upon advice from the bank and had made its own independent decision to acquire the financial instruments in question. Gloster J held that there was no reason why Springwell (a sophisticated investment vehicle for a Greek shipping family) and the bank were not free contractually to ‘determine the factual basis upon which they conduct business’, even if those statements were in fact inaccurate.

The Court of Appeal ([2010] EWCA Civ 1221) upheld Gloster J’s decision, with Aikens LJ’s analysis proceeding again from first principles: if A and B enter into a contract, they are prima facie entitled to agree what they like and this includes agreeing that a certain state of affairs exists at the time of the contract or in the past, even if it is not the case. As such, when Springwell agreed in its contracts with the bank that no representation had been made to it, it was – subject to statutory control by way of s.3 of the Misrepresentation Act 1967 and the Unfair Contracts Term Act 1977 (as to which see further below) – contractually estopped from asserting that it had bought the instruments in question on the basis of an actionable misrepresentation. The Court of Appeal also made clear that contractual estoppel was a separate doctrine from estoppel by convention,


Norton Rose Fulbright – May 2015 03

and that there was no requirement on the part of the bank to show that it would be unconscionable to resile from the representations made.

Control mechanisms: construction, fraud and rewriting history

The potential power of the doctrine, when combined with the terms commonly deployed by banks in their dealings, is self-evident, particularly in so-called ‘mis-selling’ cases; if a customer agrees that it is not being advised, that it is not relying upon anything said by the bank as a representation as to whether a product is suitable, and that it has made its own independent decision to enter into the financial transaction, having understood and appreciated its risks, the scope for claims for misrepresentation and to claim that the bank has breached alleged advisory duties is significantly curtailed. Indeed, this is reflected in a number of decisions where courts have held such

provisions to be effective to give rise to contractual estoppels: see e.g. Titan Steel Wheels v RBS [2010] EWHC 211 (Comm) and CRSM v Barclays [2011] EWHC 484 (Comm).

Although some commentators have railed against contractual estoppel, dismissing it as a form of ‘documentary fundamentalism’, the doctrine is now firmly entrenched in English law (at least short of the Supreme Court). However, the challenge for the courts has been to reconcile the primacy afforded to freedom of contract in cases concerning more sophisticated financial actors with concerns about the concept’s application to what Christopher Clarke J in Raiffeisen Zentralbank v RBS [2010] EWHC 1392 (Comm) called ‘everyday contracts’. As the judge pithily put it in that case, the rules must accommodate the ‘car dealer as well as the bond dealer’.

In this context, it is important to note that, powerful though contractual estoppel is, the doctrine is subject to a number of important limitations.

First, the specific clauses relied upon will be subject to the usual process of contractual construction, in order to determine their precise effect. For example, in CRSM Hamblen J found that the standard ISDA ‘non-reliance clause’ precluded a customer from claiming that it had relied upon communications from the bank as investment advice or as constituting a recommendation, but did not necessarily preclude a customer from claiming that it had been induced by a misdescription of the risks of the investment (as distinct from a claim that it had been advised or recommended a product).

Second, the application of contractual estoppel has been somewhat tentatively described by the Court of Appeal as ‘arguably misplaced’ (and at least unsuitable for summary determination) where it is claimed that the contracts containing the clauses had been induced by fraud: see Deutsche Bank v Unitech [2013] EWCA Civ 1372.



Third, and perhaps most importantly, there is scope for statutory control by way of the Unfair Contract Terms Act 1977 (UCTA) and section 3 of the Misrepresentation Act 1967 (which subjects clauses which exclude or restrict liability for misrepresentation to the UCTA reasonableness requirement). However, before the reasonableness requirement in UCTA can come into play, the a priori question of whether UCTA applies at all to the clause in question must be addressed. In Springwell Gloster J found that clauses (so-called ‘basis clauses’) which merely defined the basis upon which the parties were dealing were not exclusion clauses subject to control by UCTA. The line between ‘basis clauses’ and ‘exclusion clauses’ is not straightforward, but it undoubtedly exists. At present the test – as laid down in Raiffeisen – appears to turn on whether the clause in question seeks to ‘re-write history’. As Christopher Clarke J put it:

‘If sophisticated commercial parties agree, in terms of which they are both aware, to regulate their future relationship by prescribing the basis on which they will be dealing with each other and what representations they are or are not making, a suitably drafted clause may properly be regarded as establishing that no representations (or none other than honest belief) are being made or are intended to be relied on … Per contra, to tell the man in the street that the car you are selling him is perfect and then agree that the basis of your contract is that no representations have been made or relied on, may be nothing more than an attempt retrospectively to alter the character and effect of what has gone before, and in substance an attempt to exclude or restrict liability.’

But, of course, as Peekay explained, the law has no objection in principle to parties who agree to re-write history, or

treat history as having been re-written, and thereby take the risk that they might be precluded from relying on that history to found a claim.

Crestsign

Contractual estoppel has featured particularly prominently in the current wave of litigation concerning interest rate hedging products and a recent important decision – Crestsign Limited v NatWest and RBS [2014] EWHC 3043 (Ch) – arises in that context.

Crestsign was a property development company which had entered into an interest rate swap with the bank. The judge found as a matter of fact that the bank had given advice to Crestsign during a meeting, following which various documents, including a Risk Management Paper, two sets of terms of business and a swap confirmation (all of which contained clauses which clearly defined the relationship between Crestsign and the bank as non-advisory) were provided to Crestsign and, except for the Risk Management Paper, were signed on its behalf. The judge found that, although negligent advice had been given, the terms of the contracts were clear and unambiguous and were effective to preclude Crestsign from claiming that it was being advised. The bank had gone out of its way to bring these to the customer’s attention during the negotiations. The judge rejected the suggestion that, applying the ‘re-writing history’ test from Raiffeisen, the clauses operated as exclusion clauses, although he also stated that (if it had been necessary to decide the point) he would have found the clauses to be unreasonable. An appeal by Crestsign – which will include consideration by the Court of Appeal of the effect of the clauses and whether they can properly be regarded as ‘basis clauses’ not exclusion clauses – is due to be heard later this year.

Conclusion

Crestsign illustrates the power of contractual estoppel. In particular, where a disclaimer is construed as a ‘basis clause’, it may be effective notwithstanding its unreasonableness under UCTA. It remains to be seen whether the courts will continue to apply this doctrine so widely in future mis-selling cases.

Authors

Andrew Mitchell QC Adam Sher Fountain Court Chambers



Strategic and procedural issues in resolving contractual interpretation disputes: a trustee perspective

Disagreements over contractual interpretation are a significant source of litigation in relation to highly structured transactions. And since the global financial crisis, the drafting of complex financial documents has been tested to an unprecedented degree.

Recent and ongoing examples of such disputes include:

• US Bank Trustees Limited v Titan Europe 2007-1 (NHP) Limited and others [2014] EWHC 1189 (Ch) (‘US Bank v Titan’) (a noteholder dispute over power to remove the special servicer under a securitisation)

• Napier Park v Harbourmaster Pro-Rata CLO 2 BV [2014] EWCA Civ 984 (‘Napier Park’) (a noteholder dispute over interpretation of reinvestment criteria under a collateralised loan obligation (CLO))

• CBRE Loan Servicing Limited v Gemini (Eclipse 2006-3) PLC, BNY Mellon Corporate Trustee Services Limited and others (an ongoing dispute concerning the correct classification of certain funds received by the special servicer under a securitisation)

• Canary Wharf Finance II PLC v Deutsche Trustee Company Limited and others (an ongoing dispute concerning the applicability of a Spens clause under a bond issuance).

In many of these cases, as far as trustees are concerned, the real dispute is between other parties – such as different classes of noteholders – with the trustee having no real economic interest as to which interpretation is adopted. Nevertheless, trustees cannot always steer clear of the dispute and may find themselves ‘stuck in the middle’.

Thus, in US Bank v Titan, one class of noteholders purported to direct the trustee to act in a certain way (to terminate the appointment of a special servicer), but another class of noteholders disputed their entitlement to do so, leading the trustee to seek the guidance of the court.

This article briefly sets out the general principles of contractual interpretation which English courts apply to determine disputes of this nature and then focuses on certain key strategic and practical issues peculiar to trustees who find themselves ‘stuck in the middle’.

General principles of contractual interpretation

The English law approach to contractual interpretation is to establish the intention of the parties

objectively, asking not what their actual subjective intentions were, but rather what a reasonable person would have understood the common intention to be. For this purpose the courts use the written terms of the contract as the primary source, they read the contract as a whole (not individual clauses in isolation) and they take into account the background facts. In cases of ambiguity (and in order to determine whether there is ambiguity), the court will also take into account business common sense.

For this purpose, ‘background facts’ means all the background knowledge which would reasonably have been available to the parties at the time of the contract, such as the market in which the parties are operating. However, importantly, for policy reasons prior negotiations and declarations of subjective intent are inadmissible for the purposes of contractual interpretation. The Supreme Court also made it clear in Re Sigma Finance Corporation [2009] UKSC 2 that in structured finance transactions, where certain facts may not be known to many of the relevant parties, the role of background facts may be more limited. Therefore in practice, this objective approach and its exclusory rules of evidence make some interpretation issues reasonably straightforward, going little beyond the clear words of the contract, read in the context of that contract as a whole.

However, some cases are more difficult – particularly, for example, where the



correct interpretation turns on disputed background facts or business common sense. A further layer of uncertainty can also be added by the fact that appeal courts can sometimes appear to be more willing to take into account commercial considerations than courts at first instance.

A good recent example of all this in action is the Napier Park case. There, the interpretation issue arose under a CLO structure and the dispute was essentially, where some of the underlying loan obligations had matured early, what should be done with the resulting cash proceeds. The answer turned on the correct interpretation of certain reinvestment criteria. At first instance the Chancellor of the High Court essentially set out the principles summarised above and reached his decision based primarily on what he considered to be the clear ordinary meaning of the words of the clause. In contrast, however, the Court of Appeal ruled that the clause was in fact ambiguous and commercial considerations ultimately led it to a diametrically opposed interpretation.

Strategy – procedural options in litigation

For a trustee involved in this type of dispute, one of the most immediate and important strategic questions is: how can the issue be determined quickly and efficiently? Clearly, this depends on the type of dispute. Nevertheless, in part because of the objective approach to interpretation taken by English courts, a number of procedural options may be available to a trustee to assist it to achieve a fairly swift and efficient conclusion.

Pre-actionIdeally, the parties would reach agreement without having to resort to the Courts. If that is proving difficult, sharing a robust opinion on the matter from leading counsel

or circulating a draft claim form can sometimes encourage a sensible resolution, provided that the trustee is in possession of any necessary background facts and is able to obtain a clean opinion.

If that is not possible, what are the options in terms of resolving the dispute via the courts?

Section 48 of the Administration of Justice Act 1985 (‘Section 48’)By virtue of Section 48, a trustee has the option of seeking an order from the High Court authorising it rely on an opinion of senior counsel. The procedure is simple and efficient: a straightforward claim is made, supported by a witness statement which sets out the dispute and exhibits counsel’s opinion. The judge will then consider the matter on the papers alone.

This can be a useful option for trustees where the correct interpretation seems clear. However, the court will not make the order if it considers it inappropriate to do so without hearing argument. Therefore, where there is a tenable difference of views, the procedure is unlikely to help.

Also, the better view is that the court is not deciding the question of construction itself; it is merely authorising the trustee to act in reliance on the opinion. This may protect the trustee against a claim for breach of trust, but it is unlikely to bind the beneficiaries, potentially leaving them free to argue for a different interpretation at a later point.

Part 8 of the Civil Procedure RulesInstead, arguably the most common approach is for a party to seek a declaration from the court as to the correct interpretation of the contract under Part 8 of the Civil Procedure Rules. Indeed, all of the cases listed in the Introduction are Part 8 claims.

The standard full trial procedure under the English Civil Procedure Rules takes place under Part 7, but for simple questions of contractual interpretation that can be overly cumbersome. Therefore, Part 8 makes available an alternative, simpler procedure for claims which are unlikely to involve a substantial dispute of fact. This will often be the case in interpretation disputes because of the court’s objective approach.

Where it applies, generally there is no disclosure or oral evidence and trial may involve little more than oral submissions by Counsel. It can be a relatively quick and efficient process, certainly compared to a full-blown Part 7 trial.

Summary judgmentWhere the correct interpretation is clear, a further option may be to apply for summary judgment. This is essentially a means of seeking an early determination from the court without a trial – on the basis of the statements of case and of evidence served for the purpose of the summary judgment hearing. Oral evidence may be heard where appropriate. It is available to both claimants and defendants and there is Court of Appeal authority supporting the use of this process for appropriate contractual interpretation questions (ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725).

To succeed, however, the applicant has to persuade the court that the other party has no real prospect of success and that there is no other compelling reason why the issue should be dealt with at trial. This is a high hurdle to overcome – and making a failed application can simply increase costs and delay. Indeed, if the case already falls under the streamlined Part 8 procedure, the potential benefits of a summary judgment application are likely to be less pronounced in any event.

Strategic and procedural issues in resolving contractual interpretation disputes


Hearing of a preliminary issueAnother option is to take advantage of the court’s power to give judgment on preliminary issues. For example, in a complex dispute including numerous issues, if there is a decisive interpretation issue that can be isolated from the rest of the case, it is open to a party to apply to have a preliminary trial of that point, potentially resolving matters relatively quickly. Further, the high summary judgment standard is not applicable; this is essentially a mini-trial on the discrete interpretation question.

This can be a powerful weapon to deploy. However, it will be necessary to persuade the court that hearing the issue would dispose of all or part of the case and significantly cut time and costs.

ExpeditionIf the previous options still do not achieve a swift and efficient resolution, in cases of real urgency (under either Part 7 or Part 8), the court may order an expedited hearing with a far quicker timeline to trial. Indeed this approach was adopted in US Bank v Titan. However, as this involves ‘jumping the queue’ in front of other litigants, an application for expedition must be supported by clear evidence of the need for a speedy trial and the court will also consider potential prejudice to the other parties.

This procedure could be appropriate, for example, where there is a dispute concerning cash flows and an interest payment date or maturity date is imminent.

Costs protection – Beddoe applicationFinally, a procedural tool available specifically to trustees is a Beddoe application under Part 64 of the Civil Procedure Rules. In essence, this is an application for directions as to whether to bring or defend proceedings. The key purpose of bringing a Beddoe

application is for the trustee to obtain court approval for steps taken or to be taken in litigation and thereby obtain costs protection.

Although a trustee may be entitled to an indemnity out of the trust fund against all charges and expenses it incurs, it will be deprived of that protection in respect of any charges and expenses that are held to have been not properly incurred. In the absence of the consent of the beneficiaries, protection against this scenario may be sought via a Beddoe application. Importantly, however, a Beddoe application is not available for a trustee defending a hostile claim by a beneficiary for breach of trust.

At the application, the trustee must give full and frank disclosure of all relevant information; otherwise, any Beddoe protection obtained is liable to be set aside if and when the true position is discovered.

Conclusion

Interpretation disputes arising out of structured finance transactions show no signs of abating. It is not unusual for trustees to find themselves ‘stuck in the middle’, sometimes in situations of real urgency. There are, however, a number of procedural options available that can assist trustees finding themselves in this position in resolving these disputes more quickly and efficiently and in protecting themselves against liability for costs.

For more information contact:

Matthew WaudbyPartnerNorton Rose Fulbright LLPTel +44 20 7444 [email protected]

John LeeAssociateNorton Rose Fulbright LLPTel +44 20 7444 [email protected]




Recent European case law has increased the litigation risks for participants in the international capital markets. In this article, we set out these risks and examine how European courts have allowed borrowers and arrangers to be sued in different jurisdictions.

Jurisdiction in Europe is determined by the Brussels Regulation Recast (Regulation (EU) 1215/2012) (the ‘Regulation’). The overall scheme of the Regulation is to require parties to be sued in the jurisdiction of their domicile. Typically, this will suit the arranger or issuer of a capital markets transaction where there is a risk of action by international investors. For instance, the prospectus may be published and distributed in a number of jurisdictions, taking advantage of the European passporting regime, whereby a prospectus approved in one European country may be used for offers in other European countries. Assuming that the transaction is not a retail issuance, the bonds may be sold to institutional investors in different jurisdictions. And the bonds themselves will be held in the clearing systems in Belgium and Luxembourg, with a chain of intermediary accounts in different jurisdictions connecting them to their ultimate investors. If disputes later arise over issues such as the accuracy of the prospectus, it would be a significant extra cost and source of uncertainty if the participants could be sued in those different jurisdictions and not only in their home jurisdiction.

However, there are a number of exceptions to the principle that parties are sued in the jurisdiction of their domicile. Investors may try to use these exceptions to start action against an issuer or arranger in their own jurisdiction. This is demonstrated in the recent case of Kolassa v Barclays (Case C-375/15) and in a number of other similar recent cases. The relevant exceptions for the purposes of this article are:

• choice of court agreements (Art. 25): parties to a contract may agree that the courts of a particular country will have exclusive jurisdiction in respect of disputes under that contract

• consumer contracts (Arts. 17-19): consumers are permitted to bring proceedings against the other party to a consumer contract in the courts of their own domicile

• special jurisdiction over contracts (Art. 7(1)): parties to a contract may start proceedings in the jurisdiction where the contract is to be performed

• special jurisdiction over torts (Art. 7(2)): the courts for the place where the harmful event occurred have jurisdiction over torts.

In each case, there are clear countervailing policy reasons to override the default domicile rule – in particular, to help with the administration of justice, prevent parallel proceedings and provide effective consumer protection. However, Kolassa shows that applying these exceptions in the capital markets can cause difficulties.

Kolassa: decision

An Austrian investor acquired an interest in an index-linked certificate issued by Barclays, a bank registered in the United Kingdom, in the form of a bearer bond. Barclays had published a base prospectus which was also distributed in Austria. The bonds were purchased by institutional investors and sold on to consumers. The Austrian investor had purchased the certificates through an Austrian bank, which held the certificates in its own name on behalf of its clients. The investor claimed against Barclays on the basis of allegations concerning breach of the bond terms and conditions, breach of information and control obligations and prospectus liability and started proceedings in Austria. Barclays argued that proceedings could be brought against it only in the United Kingdom.



The Court of Justice of the European Union (CJEU) held that the Austrian courts did have jurisdiction through the rules for special jurisdiction over torts, but not from the consumer contracts rules or the rules for special jurisdiction over contracts.

The connection between the investor and Barclays was via a chain of contracts whereby rights and obligations were transferred by back-to-back arrangements between the bank and the investor. However, there was no single contract between the bank and the investor. Accordingly, the CJEU held that the consumer contracts provisions were not engaged.

The CJEU held that the special contract and special tort provisions were mutually exclusive and exhaustive. That is, the contract rules covered matters ‘relating to a contract’ and the tort rules applied otherwise.

The contract rules did not only apply where there was a contract between

the bank and the investor, but there did have to be an obligation freely consented to by the bank to the investor. The relevant breaches did not concern such an obligation, so the contract rules were inapplicable. Accordingly, as the contract and tort rules were exhaustive, the tort special jurisdiction rules were engaged.

The tort special jurisdiction rules conferred jurisdiction on ‘the place where the harmful event occurred or may occur’. This is interpreted as meaning both the place where the damage occurred and the place where the event giving rise to it occurred. The events giving rise to the loss were the alleged breach by the bank of obligations relating to the prospectus and investor information – there was no evidence that these occurred other than where the bank was domiciled in the United Kingdom.

This left the place where the damage occurred. The CJEU stated, following an earlier case (Kronhofer v Maier (Case

C-168/02)), that this did not simply mean the domicile of an investor who suffered financial damage. However, the CJEU held that in the particular circumstances of this case, the loss occurred where the investor suffered it – in the account of the investor with its bank in Austria. Accordingly, the investor was able to start proceedings against the bank in Austria.

Kolassa: discussion

The crux of the CJEU’s argument is to determine where financial damage is suffered as a result of a tort. Simply to allow that a claimant suffers financial damage where it is domiciled would turn the jurisdiction rules upside down. Instead of jurisdiction being based on the domicile of the defendant it would be based on the domicile of the claimant. Participants in the international capital markets – and others who transacted with people in different jurisdictions – would be exposed to court proceedings in many



different countries, creating a high degree of uncertainty.

The CJEU expressly disavowed the principle that financial damage was always suffered in the domicile of the investor. Yet it was suffered in the domicile of the investor in Kolassa. What was special about that case? The CJEU expressly refers to the account of the investor being held at an Austrian bank, thereby locating the damage in Austria. But this is an extremely thin justification. Jurisdiction should not follow from such accidental matters as whether the investor holds an interest in the bond directly through participation in the clearing system or indirectly through an account with a clearing system participant or, even more indirectly, through an account with a bank which itself has an account with a clearing system participant and, in all those cases, where the last in the chain of intermediary accounts happens to be located.

Although the CJEU said that they were not simply applying the domicile of the investor when financial loss was suffered, the effect on capital markets participants may be similar. If jurisdiction follows from facts unknowable at the time of distribution, such as the mode by which the investor comes to have an interest in the bonds and the location of the intermediaries through which he holds that interest, borrowers and arrangers will still face the uncertainty of jurisdiction in any country where an investor is domiciled.

Other recent cases

Unless and until the CJEU gives further judicial guidance on the scope of tortious special jurisdiction for bond investors, it is helpful to look at some other recent cases involving special jurisdiction.

Pez Hejduk v EnergieAgentur.NRW GmbH (Case C-441/13) is a copyright

infringement case that sheds some important light on the approach of the CJEU to tortious special jurisdiction. A German company uploaded a number of photographs onto its website without obtaining permission from the claimant, who was the copyright holder and who lived in Austria. The claimant sued for breach of copyright in the Austrian courts. The CJEU held that the Austrian court did have jurisdiction as the photographs could be accessed from Austria, notwithstanding that the website at the .de top level domain was not directed at Austria. However, the Austrian court only had jurisdiction to rule on the damage caused within Austria.

This decision will be significant to website owners. As with Kolassa, it effectively reverses the domicile principle, so that the claimant will be able to start proceedings in the country where it is domiciled. Any website owner will be exposed to the risk of proceedings in many different jurisdictions. The CJEU considered that the sound administration of justice required the Austrian courts to have jurisdiction over copyright claims, which were protected on a territorial basis. The territorial protection of copyright coupled with damage incurred in that territory provided the close connection that justified an exception to the normal domicile rule.

In Kolassa, the CJEU also adverted to the sound administration of justice, but it is harder to see how the location of an account in a jurisdiction creates the necessary close connection. On the contrary, the possibility of multiple investor claims in different jurisdiction appears to increase the likelihood of parallel proceedings and impede the sound administration of justice.

The Court of Appeal considered tortious special jurisdiction recently in AMT Futures v Marzillier, Meier & Gunter [2015] EWCA Civ 143. The somewhat creative claim was brought by a

derivatives dealer against the lawyers advising a number of investors in Germany. The investors had brought proceedings in Germany in breach of an English exclusive jurisdiction clause (the claim was settled). The claim against the lawyers was for inducing breach of contract – namely, the breach of the exclusive jurisdiction clause by the investors – and was brought by the dealer in England. The Court of Appeal held that the relevant event was the bringing of the claim in Germany, not the non-bringing of the claim in England. Therefore, the English courts did not have jurisdiction.

The Court of Appeal’s reasoning was that it was only the direct or original damage that founded jurisdiction. This was considered and applied in Actial Farmaceutica v Professor Claudio de Simone [2015] EWHC 836 (Ch), a claim involving an unlawful means conspiracy. The Court distinguished the place where direct harmful consequences are suffered from the place where indirect or remote damage occurs or consequential financial loss is felt which has arisen out of the event which already caused the initial and actual damage elsewhere. In that case, the result was that a refusal to supply goods in the Netherlands for onward distribution to the UK founded jurisdiction for the Dutch courts but not the English courts.

The reasoning in these cases appears to be at odds with that in Kolassa. The English courts stress the distinction between the direct harm and consequent financial loss. Applying this to Kolassa appears to favour the place where the loss in value of the bonds occurred as opposed to the place where the investor’s account is located.

Choice of court agreements

One important point that is not directly addressed in Kolassa is the relevance of a choice of court agreement in the



underlying bond documentation. A choice of court agreement may be contained or referenced in the terms and conditions of the bonds and also set out in the bond trust deed or other document constituting the bonds. This agreement will clearly apply to the original transaction parties, but it is unclear the extent to which it will apply to investors who acquire bonds in the secondary markets or via intermediaries. Suppose, for instance, that the certificates issued by the bank in Kolassa had contained an English exclusive jurisdiction clause: would this have bound the investor?

The reasoning in Kolassa suggests that an exclusive jurisdiction clause in the bond terms and conditions would not have bound the investor. The rejection of contractual special jurisdiction was on the grounds that there was no breach of an obligation freely consented to by the bank to the investor. This is similar but not identical to the test for agreement of a jurisdiction clause (contained in Article 25 of the Regulation). A jurisdiction clause will be enforced if it has been ‘agreed’ between the parties – there is no explicit mention of a contract. This Article must be construed independently of any national law interpretation and is generally given a wide interpretation. Therefore, the rejection of contractual special jurisdiction in Kolassa does not automatically rule out the applicability of a choice of court agreement. In fact, this question is currently at issue in a case being considered by the CJEU (Profit Investment Sim SpA v Stefano Ossi (Case C-366/13)) and so there may be more clarity soon.

Conclusion

The CJEU has sought to justify the exceptions to the domicile principle on the basis of the sound administration of justice. In particular, tortious special jurisdiction is founded on the particular close connection between the tort and the local jurisdiction, that justifies reversing the normal rule.

However, the wide interpretation given to this by the CJEU in Kolassa may cause problems to banks trying to gauge their legal risks and limit their exposure to litigation in different jurisdictions. The uncertainty of the Kolassa approach and the increased risk of overlapping parallel proceedings do not seem to be consistent with the stated aim of the sound administration of justice.

By contrast, the English courts have taken a narrower view of tortious special jurisdiction, strictly distinguishing the direct damage from the indirect financial consequences. It remains to be seen whether the English courts can maintain this approach in the face of the CJEU’s jurisprudence.

There is a chance that the CJEU will apply choice of court agreements in bond terms and conditions widely. This could limit the effect of Kolassa. In the meantime, participants in the capital markets will have to take a cautious view of their exposure to legal risk in different EU jurisdictions.


Adam SanittHead of disputes knowledgeNorton Rose Fulbright LLPTel +44 20 7444 [email protected]



Payments by an issuer to a bond trustee were held on trust for bondholders in accordance with the terms of an English law governed trust indenture, notwithstanding an injunction granted by a New York court restraining the trustee from paying the bondholders.

Facts

The partiesThe claimant investment funds had an interest in euro-denominated debt securities issued by the Republic of Argentina (the Exchange Bonds). The first defendant bank was the bond trustee of the Exchange Bonds (the Trustee) and was incorporated under New York law, with its registered office in New York. The second defendant was the registered holder of the global securities issued in respect of the Exchange Bonds and was incorporated under English law.

The Exchange BondsThe Exchange Bonds were subject to the terms of a trust indenture and both the Exchange Bonds and the trust indenture contained English governing law clauses. The trust indenture provided that any principal and interest paid by Argentina to the Trustee under the trust

indenture and securities ‘shall be held in trust by the Trustee for the exclusive benefit of the Trustee and the Holders entitled thereto and in accordance with their respective interests and [Argentina] shall have no interest whatsoever in such amounts’ pending the application by the Trustee of the amounts received. The Exchange Bonds were among securities that had been issued in exchange for a previous series of bonds on which Argentina had defaulted back in 2001 (the Legacy Bonds). A small percentage of the holders of the Legacy Bonds refused to accept the exchange (the Holdout Creditors).

The New York proceedingsThe origin of the English dispute lies in proceedings commenced by the Holdout Creditors in the New York courts. The history of the New York proceedings is quite convoluted, but the key events were as follows:

• Several sets of Holdout Creditors commenced proceedings against Argentina for the full amount of their Legacy Bonds. The New York courts accepted that Argentina’s failure to pay interest on the Legacy Bonds amounted to an event of default and ordered that the full amount of the principal had become due.

• The New York courts also accepted the Holdout Creditors’ argument that a pari passu clause in the Legacy Bonds prevented Argentina from making any interest payments under the Exchange Bonds without making an equivalent payment of the amount due under the Legacy Bonds (a construction which Richards J described in the English proceedings as ‘controversial’). The New York courts granted an injunction preventing Argentina from making payments on the Exchange Bonds without making equivalent payments on the Legacy Bonds (the Injunction).

• In June 2014, Argentina nevertheless transferred funds for the payment of interest due on the Exchange Bonds into an account of the Trustee in Argentina, without making any payment in respect of the Legacy Bonds.

Knighthead Master Fund LP and others v The Bank of New York Mellon and The Bank of New York Depositary (Nominees) Limited [2014] EWHC 3662 (Ch)

Banking and finance case studies


• The Holdout Creditors obtained a further injunction from the New York courts declaring that the payment of funds by Argentina was a violation of the Injunction. The Trustee was ordered to retain the funds pending further order of the court and the court declared that non-payment would not violate the terms of the Exchange Bonds.

• Two groups of Holdout Creditors then applied to the New York courts for an order for payment of the sums held by the Trustee to them (the Turnover Motions) on the basis that they, as judgment creditors, had a better claim to the funds than the Trustee or those for whom it held the funds because the funds had been transferred to the Trustee in breach of the Injunction. The Turnover Motions were denied on the grounds that the euro funds were located outside the United States, but the Holdout Creditors appealed.

The application to the English courtThe holders of the Exchange Bonds in turn applied to the English court for:

• a declaration that the funds transferred to the Trustee’s account were held on the trust declared by the trust indenture for the holders of the Exchange Bonds and that the trust was governed by English law (the English Trust Declaration)

• a declaration that, subject to the terms of the trust indenture and any other defences available under English law, the Trustee’s obligations under the trust indenture and Exchange Bonds were unaffected by the Injunction (the Obligations Declaration)

• a direction to the trustee to bring the terms of the Declarations to the attention of the US courts (the Direction).

Decision

The court made the English Trust Declaration. Richards J held that, on the plain construction of the trust indenture and terms and conditions of the Exchange Bonds, the payments made to the Trustee were held on trust for the holders of the Exchange Bonds. The Trustee did not oppose the application and the court considered it appropriate and useful to make it in circumstances where there was so much dispute surrounding the attempt by Argentina to pay sums due on the Exchange Bonds.

The court emphasised that it was ‘very concerned not to intrude improperly into matters which are before the US courts’ but concluded that the English Trust Declaration did not do so because it related to the status of the funds as a matter of English law and issues of English law had not been raised before the US courts. The court held that the



trust arrangement had no connection with New York law at all, except for the fact that the Trustee was incorporated under New York law and had its registered office there, meaning that it was subject to the personal jurisdiction of the New York courts in respect of the injunctions. Richards J was careful to avoid making any comment on the effect of the injunctions and other orders of the New York courts as a matter of US law but commented that, as a matter of English law, there was no basis on which any such order could of itself give Argentina or the Holdout Creditors any proprietary interest in the funds held by the Trustee.

The court declined to make the Obligations Declaration. The main purpose of that declaration was to establish that the Injunction provided no defence to a claim to enforce the terms of the trust indenture, including the obligation to transfer the funds. However, the court held that the qualification of the wording of the draft declaration as subject to the terms of the trust indenture and any defences under general principles of English law meant that the declaration sought would serve no useful purpose.

The court also declined to give the Direction. Richards J was sympathetic to the delicate position of the Trustee, owing obligations as trustee whilst itself subject to the personal jurisdiction of the US courts, and concluded that it was for the Trustee itself, with the benefit of advice from its lawyers, to decide when to bring the English Trust Declaration to the attention of the US courts.

Discussion

The case is an example of the English court asserting its power to rule on issues of English law in circumstances

where a foreign court has taken what on one view may appear to be a generous view of its jurisdiction. However, the immediate result appears to be of limited practical value to the holders of the Exchange Bonds because the Injunction continues and, as Richards J observed, this effectively paralyses the operation of the trust. Richards J made passing reference to there being potential consequences to this in English law but did not elaborate on what those might be.

From a procedural perspective, it is of note that Newey J adjourned the original application for declaratory relief to give the Holdout Creditors an opportunity to intervene. However, instead of intervening, they sent various letters to the court opposing the application. The court emphasised that this caused difficulties because it did not have the benefit of submissions from different parties responding to each other or the opportunity to probe submissions with the counsel advancing them and because at least one of the letters contained important errors.

Finally, it is interesting to compare this with the recent judgment in Akers v Samba [2014] EWCA Civ 1516, which held that an English law trust was only sustainable if the initial transfer to the trustee was valid under the law applicable to the assets. This suggests that, if the transfer of funds to the Trustee in this case had been illegal under Argentinian law rather than New York law, the trust would not have been properly constituted as a matter of English law.


Harriet Jones-FenleighSenior associateNorton Rose Fulbright LLPTel +44 20 7444 [email protected]




The Privy Council held that a bank had constructive notice of a third party’s proprietary rights where it had failed to make inquiries as to the commercial purpose of a transaction.

Facts

The matter concerned a proprietary claim relating to the proceeds of sale of an antiques collection worth approximately US$15 million. The collection had been sold by a Mr Symes who had been held not to be the true owner. The issue was whether the appellant, Mr Papadimitriou, could trace into the hands of the respondent bank, where a substantial portion of the proceeds ended up via a complex scheme.

It was accepted that the appellant would succeed unless the bank could establish that it was a bona fide purchaser for value without notice. The bank argued that there was nothing suspicious about the transaction that would have put it on notice.

Decision

The Privy Council held that the bank did have constructive notice and upheld the finding of the court below (the Court of Appeal of Gibraltar) that, had the bank given adequate consideration to the purpose of the transaction, it would have concluded that the purpose of the transaction was improper. In particular, the use of a web of companies routing payments via Liechtenstein and Panama

and the extra costs thereby incurred could not have had a proper commercial purpose and would have alerted the bank to the improper motive, namely to launder the proceeds of sale.

The Privy Council essentially applied the test stated by Lord Neuberger in Sinclair v Versailles [2011] EWCA Civ 347 – i.e. whether on the facts known to the bank at the time at which they received the payments in question, the bank had notice of the appellant’s proprietary right to the money.

In addition to cases of actual notice, constructive notice can arise in two types of circumstances: (i) where a reasonable person with the attributes of the bank should have appreciated, based on the facts already available to it, that a proprietary right probably existed, and (ii) where the bank should have made inquiries or sought advice which would have revealed the probable existence of such a right. As to the latter, Lord Clarke stated that a bank will be required to make inquiries if there is ‘a serious possibility of a third party having such a right or, to put it another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction.’

Discussion

This decision provides an important reminder that banks need to consider the propriety of transactions in which they become involved.

The question of whether a bank will need to make further inquiries in a particular case will depend on the facts and circumstances. According to Lord Sumption ‘if there are features of the transaction such that if left unexplained they are indicative of wrongdoing, then an explanation must be sought before it can be assumed that there is none.’ Here, on the facts known to the bank, there was no explanation for the interposition of Panamanian and Liechtenstein entities in the transaction unless it was to conceal the origin of funds derived from third parties – and the bank ought to have made inquiries before proceeding as if there was an innocent explanation.


Andrew SheftelSenior knowledge lawyerNorton Rose Fulbright LLPTel +44 20 7444 [email protected]

Crédit Agricole Corporation and Investment Bank v Papadimitriou [2015] UKPC 13



A mis-selling claim could not be netted against early termination amounts under an ISDA Master Agreement.

Facts

A right to payment of early termination amounts under a 1992 ISDA Master Agreement (the ‘IMA’) by the defendant was assigned by the original counterparty to the claimant. The defendant alleged that the interest rate swaps governed by the ISDA were mis-sold and that mis-selling claims could be set off under sections 2(c) and 6(f) of the IMA (section 6(f) was incorporated into the IMA pursuant to the Schedule in broadly the same terms as section 6(f) of the 2002 ISDA Master Agreement).

Decision

Cooke J held that neither equitable nor liquidation set off were available. Under a separate contract, the defendant had waived equitable set-off rights and it was agreed that liquidation set-off was not available (although the original counterparty was insolvent and subject to a special bank resolution procedure). Therefore, only the ISDA netting arrangements under section 2(c) or contractual set-off under 6(f) could apply.

Cooke J adopted the analysis of the ISDA Master Agreement found in Lomas v JFB Firth Rixson [2011] 2 BCLC 120: there were two separate regimes – one applied during the life of the agreement and the other on termination. Section 2(c) applied during the life of the agreement. However, it was very narrow. It applied only to ‘netting’ of sums due under the ISDA confirmations due on the same date, in the same currency and in respect of the same transaction (the process set out in section 2(c) is known to practitioners as ‘payment netting’). It did not apply to the determination of early termination amounts (‘close-out netting’) or any possible set-offs against those amounts. Cooke distinguished the different regimes and the sometimes overlapping nomenclature as follows:

‘both s.2(c) and s.6(e) provide for some ‘netting’ of payments due in either direction under the Agreement, whilst s.6(f) provides for a “set-off”. It is clear, from reading the terms of s.2(c) and s.6(e), as compared with s.6(f), that netting and “set-off” are different concepts for the purposes of the IMA. Netting relates to sums due under the IMA, whether during the life of the Agreement or after termination.

Set-off, as used in s.6(f) allows amounts payable under any other agreement to reduce the Early Termination Amount, which is in itself the result of close-out netting.’ (para. 33)

Cooke J then held that a later contract between the parties meant that the defendant could not rely on section 6(f). But he did still consider the construction of section 6(f). Section 6(f) applied in two cases: firstly, where termination takes place as the result of an Event of Default, it allows the Non-Defaulting Party to exercise an option of set-off; secondly, where termination takes place after a specific class of Termination Event, it allows the Non-Affected Party to exercise this option.

Where termination is due to an Event of Default, there can be only one Defaulting Party, and that is determined by who serves the notice under section 6(a) specifying the relevant Event of Default and designating an Early Termination Date, irrespective of whether other defaults exist.

Where termination is due to a Termination Event, there is no Defaulting Party – even if there was one before the Agreement was ended by the Termination Event – and so the references to Defaulting Party in section 6(f) are not relevant.

MHB-Bank v Shanpark [2015] EWHC 408 (Comm)



Cooke J also considered, strictly obiter, that if section 6(f) had been triggered by an Event of Default and the Non-Defaulting Party had a mis-selling claim, then it could have been used to set off the claim for unliquidated damages.

The assignor had originally stated that it was intending to set off the mis-selling claim against the early termination amount itself. But it withdrew this statement when it assigned the early termination amount. Cooke J held that the set-off had not been effected and the bank could change its mind.

Discussion

Where, as here, both parties are potentially in default, Cooke J’s judgment reiterates the importance of being the party that serves the notice of default, thereby effectively designating itself the Non-Defaulting Party. While there may be an advantage in delaying service of a notice, thereby engaging the suspensory effect of the ISDA Master Agreement in favour of the party not in default, this can also be a risk if later events then allow the other party to serve a notice of default.

Cooke J’s obiter statement that a mis-selling claim could be the subject of set-off under section 6(f) may also be of importance in future cases.

The injustice in this case essentially arose from the fact that the Irish bank effectively became insolvent but did not enter into an insolvency process that triggered mandatory insolvency set-off. It was then able to assign the benefit of the ISDA Master Agreement while keeping the mis-selling liability.





A calculation statement under the ISDA Master Agreement that was served late was not a nullity.

Facts

There was no dispute that in principle the defendant owed the claimant bank sums following the termination of ISDA Master Agreement based currency swaps. The bank served a notice of calculation of the sums owing under clause 6(d)(i), but this notice was held to be insufficiently detailed. The bank then served another notice rectifying the defect – this notice was given over two years after termination.

The defendant claimed that the notice did not comply with section 6(d) as it was not served ‘on or as soon as reasonably practicable’ following the Early Termination Date and that the consequence of this was that the claimant was not entitled to payment.

Decision

Teare J held, on a summary judgment application, that there was a real prospect that the notice was not given ‘on or as soon as reasonably practicable’ following the Early Termination Date.

However, he then held that, as a matter of construction, this did not render the notice a nullity and so the termination amount was payable to the bank. The non-compliance ‘does not render the notice ineffective. It merely renders it “late”’ (para. 16).

The effect of the lateness was that the bank was in breach of contract and might be liable in damages, if the defendant could show that they suffered any damage due to the lateness of the notice. For lateness to invalidate the notice would be to depart from commercial sense and would be inconsistent with the policy of the court to give effect to, rather than invalidate, commercial agreements.

Discussion

This is a clear, commercial interpretation which draws an important distinction between a notice being late and it being a nullity.



Goldman Sachs International v Videocon Global Ltd [2014] EWHC 4267 (Comm)



The verb to ‘de-risk’ was one of a flurry of new words entering the lexicon of the financial sector in the aftermath of the credit crisis, referring to the process of removing or minimising risk in financial operations.

In 2015, global financial institutions attempting to de-risk face conflicting guidance from regulators in choosing where and with whom to conduct business. Effective de-risking may reduce the likelihood and scope of future disputes and regulatory action, but the process itself may also trigger disputes and investigation by regulators.

Post-credit crunch de-risking

In the aftermath of the global financial crisis, against a backdrop of political and regulatory pressure combined with press and populist outrage, the need for financial institutions to de-risk was paramount. In this context, the de-risking process was relatively straightforward. In short, banks quickly had to reduce the level of risk to which they were exposed, such as their involvement in overly complex asset-backed securities, and to enhance their capital and liquidity provisions. There seemed little backlash against the need for a realignment of banks’ attitude to these types of risk, although some commentators warned of a detrimental impact on global growth given the

resulting restraints on the availability of financing.

De-risking and financial crime

More recently, the issue of de-risking has arisen in a new context; banks are de-risking by exiting certain relationships, products, markets, and jurisdictions to reduce their exposure to financial crime. This has generated some difficult headlines questioning the rationale for the banks’ de-risking decisions. Debate is ongoing as to the potential impact of this form of de-risking. Some question whether it is a signal that the point of over-regulation has been reached.

Fines imposed by regulators on financial institutions found to have engaged in financial crime, or deemed to have had in place inadequate systems and controls to prevent financial crime, continue to soar. In the UK, fines imposed by the Financial Conduct Authority (FCA) on regulated firms and individuals in 2014 exceeded the £1 billion mark (compared to the £474 million of fines levied in 2013,

and far beyond the £35 million of fines imposed in 2009 in the aftermath of the credit crisis). In the 12 months to the end of September 2014, the US Securities and Exchange Commission imposed fines totalling US$4.16 billion. The SEC noted that ‘Aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets’. While recent figures have been buoyed by fines imposed for conduct relating to market manipulation of foreign exchange and benchmarks such as LIBOR, failures relating to anti-money laundering and alleged breaches of economic sanctions remain on the radar. The level of expectation on financial institutions to know their customers, to know their customers’ customers, and to prevent (as well as detect) financial crime, is at an all-time high.

In an effort to bolster the fight against financial crime, to meet regulatory expectations and to avoid further enforcement, global financial institutions are continuing to invest millions of dollars in their compliance functions. However, financial institutions are also grappling with the question of whether, in the context of managing certain risks, it is simply more cost effective (and less troublesome) to pull out of doing business in relevant sectors or markets. For example, in




the context of anti-money laundering regulation, global financial institutions have been seen to step back from financing arrangements with high-risk customers in sectors including money transfer, casinos, virtual currency exchanges and correspondent banking in high-risk jurisdictions.

Criticism

Commentary has suggested that a broad-based approach to de-risking by global financial institutions has left individuals and organisations (including charities and embassies) in some jurisdictions being unable to access finance and banking services. The media have also reported that the ensuing lack of competition in

the market may expose businesses to greatly increased costs.

For instance, a recent report of the UK’s Overseas Development Institute, UK humanitarian aid in the age of counterterrorism: perceptions and reality, reports that charities and non-governmental organisations face ‘increasing restrictions on their access to financial services relating to the global regulatory framework in place to prevent the financing of illicit activities, including terrorism’ with particular impact on organisations providing aid across the Middle East.

Financial institutions have had to manage PR fallout from their approach to reducing risks associated with certain markets or customers.

Decisions to close the bank accounts of institutions with links to alleged terrorist financing, for example, have led to accusations in the press and from retail customers that de-risking decisions are no longer simply risk-based but, rather, deliberate attempts to marginalise the access of certain groups to the financial institution.

Another potential outcome of comprehensive de-risking is the creation of something of a void in certain high-risk jurisdictions into which, in the absence of legitimate alternative finance providers, groups with limited experience might step, thereby adversely affecting overall level of regulatory compliance.



Regulators

Regulators on both sides of the Atlantic have given mixed messages, signalling both concern about the impact of regulatory reform and de-risking on access to the financial system but also recognising the importance of risk management and the banks’ rights to choose the business they conduct.

At a conference of the Association of Certified Anti-Money Laundering Specialists in the United States in March 2014, Thomas J Curry, the Comptroller of the Currency, promoted a risk-based approach, rather than risk avoidance: ‘You shouldn’t feel that you can’t bank a customer just because they fall into a category that on its face appears to carry an elevated level of risk. Higher-risk categories of customers call for stronger risk management and controls, not a strategy of total avoidance’. However, it was reported that at the same conference Daniel Stipano, Deputy Chief Counsel in the Office of the Comptroller of the Currency, stated that his agency ‘the OCC as a regulator doesn’t tell banks whose business they should take on. Those are business decisions that the banks have to make themselves. But we also don’t think … that the answer, when it comes to providing banking services for higher risk clients, is to just dump them wholesale’.

Similarly, the President of the Financial Action Task Force (FATF), Roger Wilkins, told the Financial Times in late 2014 that de-risking is ‘not so much a function of our standards as a fig leaf for the banks doing what they need to do and are going to do anyway by taking people off their balance sheets … There is nothing in our standards that requires this ‘blunderbuss’ approach to de-risking’.

The potentially adverse impact of de-risking is recognised by the UK’s financial regulator. The FCA’s Risk Outlook 2014 states that ‘the reform agenda seeks to improve outcomes for consumers, market integrity and competition across retail and wholesale financial markets, and there are already signs of success in many areas. However, it is also affecting prospects for growth and expansion in certain markets and, at times, altering what firms are able or willing to offer their consumers. Firms need to assess the social costs of withdrawing from products and areas as part of a de-risking process against the wider policy objective to ensure financial inclusion. These impacts have the potential to drive risks to our objectives if not properly understood and managed.’

On April 27, 2015, the FCA issued a formal Policy Statement on the issue, reiterating its view that the management of risk should not extend to ‘no longer offering financial services to entire categories of customers that they associate with higher money-laundering risk.’ While the FCA recognised that the decision to engage in or continue with a business relationship is ultimately a commercial one for the bank, the UK regulator emphasised that ‘there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements. As a result, we now consider during our AML work whether firms’ de-risking strategies give rise to consumer protection and/or competition issues’.

Conclusion

It is little wonder that global financial institutions seem stuck between a rock and a hard place. On the one hand,

they are encouraged to reduce exposure to risk and are reminded that they have freedom to choose their customers. On the other, and at the same time, they are expected to engage with clients in certain high-risk sectors or jurisdictions in order to facilitate policy on access to the financial sector and to provide information to regulators.

Financial institutions and their advisers should monitor the debate closely, engaging with regulators, legislators and trade groups to ensure their concerns about the impact of regulation are heard.


Sam EastwoodHead of business ethics and anti-corruptionNorton Rose Fulbright LLPTel +44 20 7444 [email protected]

Ian Michael PegramSenior associateNorton Rose Fulbright LLPTel +44 20 7444 [email protected]



In the wake of the new concurrent competition powers of the Financial Conduct Authority (FCA) becoming effective on April 1, 2015, financial institutions and their senior management now face a more empowered FCA joining the Competition and Markets Authority (CMA) as a regulator charged with enforcing competition law breaches.

The FCA Director of Competition, Deborah Jones, has said that competition will not sit as a discrete function within the FCA but that it will be brought into ‘every decision, rule and action we take’ and has recruited a significant number of competition experts, including former CMA employees and high profile competition practitioners. In the same way, the FCA will expect financial institutions and their management to consider competition in every aspect of their decision making and to include it on their compliance agendas.

Primacy of competition

Under its new powers, the FCA can investigate breaches of the Competition Act 1998 (CA98), as well as breaches of Articles 101 and 102 of the Treaty on the Functioning of the European Union. (The FCA will not have criminal competition enforcement powers – the cartel offence will continue to be

enforced by the CMA.) As part of this regime, the FCA now has ‘primacy’ obligations under which it has a duty to consider whether it would be more appropriate to use its CA98 powers first, before exercising certain powers set out in the Financial Services and Markets Act 2000 (FSMA). These include the power:

• to vary or cancel a Part 4A permission (to carry out regulated activities) and/or impose or vary a requirement on an authorised person with a Part 4A permission

• to take action against a sponsor firm (to advance its operational objectives)

• to impose a requirement (intervention in respect of incoming firms).

This means that if the FCA regarded a firm to be engaging in an anti-competitive information exchange, it

would consider first, before using its regulatory powers, whether it would be more appropriate to investigate under CA98. If necessary, the FCA could issue interim and final directions ordering the behaviour to stop.

The FCA may also take enforcement action under its other powers as well as CA98, in parallel or sequentially. Indeed, it is possible for the FCA to begin an investigation under CA98 and subsequently decide that another of its powers is more appropriate (and vice versa). Where more than one of its enforcement powers is considered to be potentially appropriate, the FCA is able to make separate information requests under different information gathering powers.

Market studies

In addition to enforcement action, the FCA will also be able to conduct market studies under the Enterprise Act 2002 (EA02), with a view to considering whether aspects of the supply of financial services may have an adverse effect on competition. Whilst the FCA has previously been able to use its FSMA powers to require information only from firms that it regulates and certain persons connected with them, under EA02 it may use its new concurrent powers against any person, whether or not they carry out regulated activities.




The FCA has already been very active in initiating and carrying out competition–focused market studies under FSMA in areas including general insurance add-ons, cash savings, retirement income products and credit cards. It is also working closely with the CMA to publish a joint market study on banking services for small and medium-sized businesses. Following the conclusion of its wholesale sector competition review, the FCA has now launched a market study into the investment and corporate banking sector focusing on the impact of transparency and bundling of services.

The FCA’s business plan for 2015/2016 indicates that it will continue to be active in prioritising its competition objective. In his introduction to the business plan, Martin Wheatley emphasised that competition would be considered generally, for instance, in relation to the effects that complex systems with intermediaries and/or gatekeepers have on competition and whether such systems make it more difficult for new players to enter the market and for the market to work well. In terms of specific reviews, the FCA will launch an assessment of barriers to competition in the mortgage market, considering factors such as consumers’ ability to access credit and ability to switch providers and barriers to entry and/or expansion, with a view to launching a market study in early 2016. Further, the FCA has announced its intention to strengthen its rules on high-cost short-term credit to promote greater competition in light of the remedies proposed by the CMA payday lending market investigation.

It is possible that such market studies may lead to certain behaviours or practices being uncovered which then prompt enforcement action under CA98 or FSMA. It is also open

to the CMA (or any other regulator with concurrent jurisdiction over the agreement or conduct in question) to take action under CA98, following consultation with the FCA.

FCA consultation

In January 2015, the FCA published a consultation paper Competition Concurrency Guidance and Handbook amendments setting out how it proposes to use its powers. The consultation paper raised three key areas of concern:

• the proposed obligation to report all potential competition law infringements as soon as the firm becomes aware that an infringement may have occurred (to be included in new SUP provisions in the FCA Handbook)

• the proposed obligation to require a firm that intends to settle to waive its right to appeal

• the ability for the FCA to choose between two market study regimes to take advantage of their different processes.

The first of these has been particularly contentious since it risks cutting across the pre-existing leniency regime. Whilst there has previously been an option to self-report competition infringements, and in so doing, earn immunity from penalties (provided no previous report to a regulator has been made), the draft reporting obligation would impose an obligation on the financial institution to report to the FCA any suspected breach of competition law, with no materiality threshold. Whilst we await the outcome of the consultation on the draft amendments, institutions and senior management should be

prepared that the threshold for any future notifications of competition law breaches is likely to be notably lower than would otherwise prompt an application for leniency.

Approved persons and senior managers regimes

These changes and concurrent powers come into effect at a time when changes are also being made to the approved persons regime. The new Senior Managers regime for banks is due to commence in March 2016 and a Senior Insurance Managers regime is also under consideration. It remains to be seen how the FCA’s new powers will interact with the approved persons regime and the new parallel frameworks. However, individuals at a firm found to be in breach of CA98 could risk also facing disciplinary action under the Statements of Principle and Code of Practice for Approved Persons or the new Conduct Rules.

The new ‘presumption of responsibility’ in relation to senior managers where reasonable steps are not taken to prevent or stop breaches of regulatory requirements in their areas of responsibility, means that individuals must ensure that they have sufficient understanding of their competition responsibilities. In determining whether an individual should be held responsible, the regulator will take into account the level of expertise the manager should have possessed.

Practical actions

Over the coming months we expect to see a confident FCA with the means and motivation to use its new competition powers actively.



Concurrent FCA regulatory and competition investigations are likely to operate according to different procedural rules and timetables. This is a clear challenge for financial institutions exposed to the risk of concurrent investigations. Institutions must be alert to the tensions that exist between both regimes and may wish to consider taking the following practical steps:

• Ensure the reporting obligation and its interaction with competition issues is well understood.

• Plan to escalate all potential breaches of competition law quickly for strategic input.

• Consider how to manage engagement with different regulators effectively and use supervisory contact.

• Ensure a joined-up approach to market investigations, studies and reviews to ensure consistency and avoid duplication.

• Refresh and update competition law compliance training, including in relation to any possible dawn raid, recognising the new focus on the role of technology in dawn raids today.


Peter ScottPartnerNorton Rose Fulbright LLPTel +44 20 7444 [email protected]

Katie StephenPartnerNorton Rose Fulbright LLPTel +44 20 7444 [email protected]

Sarah ToddAssociateNorton Rose Fulbright LLPTel +44 207 444 [email protected]



In this article, we analyse the expanding landscape of corporate criminal liability and ask the simple question: what next?

Corporate criminal liability is one of the tools used to ensure corporate compliance with regulations and laws. In an increasingly onerous regulatory environment, the scope of criminal liability may widen. An examination of the English law relating to the attribution of criminal intent to companies in the light of recent government announcements shows, in particular, how criminal liability may develop and whether it may converge with the approach taken in other legal systems.

New offences

On March 19, 2015, Danny Alexander, then Chief Secretary to the Treasury, announced a number of measures aimed at cracking down on tax evasion. These measures included the introduction of two new criminal offences: a strict liability offence to address offshore tax evasion and a corporate offence covering failures to prevent tax evasion, or the facilitation of tax evasion. When combined with the proposed introduction of higher penalties for those who evade tax and civil penalties for those who enable tax evasion, it appeared that the government were taking another leap forward in their attempts to recast corporate criminal liability. Turn the clock back just a few years and the

legal landscape that corporates had to navigate arguably looked very different.

Corporate criminal liability in the UK: the identification principle

In the UK, corporate criminal liability for offences requiring proof of criminal intent has tended to be based on what is known as the ‘identification principle’, under which corporates can be held liable for the criminal acts of those who are the ‘directing mind and will’ of the company: Tesco Supermarkets Ltd v Nattrass [1972] AC 153. This has been widely regarded as limiting a corporate’s criminal liability to the acts of those who are ‘board level senior management’. However, in Meridien Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, the Privy Council adopted a more innovative, flexible approach to the application of the identification principle which allows the court to look beyond the relevant articles of association and examine how, and by whom, the relevant powers of the company were in fact exercised.

This approach has not however been widely adopted by the courts and the current legal position is far less nuanced, with the identification principle (in the narrow Nattrass

sense) being applied unless the Court considers that insistence on the primary rules of attribution would defeat a parliamentary intention that the relevant statute or regulation law apply to corporate entities: R v St Regis Paper Co Ltd [2012] 1 Cr. App. 14. This case also limited the decision in Meridien to stressing the importance of determining the true scope of corporate criminal liability by careful analysis of the construction of the provision establishing the offence in question.

The net result is that, absent strict liability, corporate criminal liability is notoriously difficult to prove, especially in respect of large corporate entities where those at board level will inevitably be several layers removed from those who actually conduct the company’s business and interact with its customers on a day to day basis. Consider, for example, recent investigations relating to the LIBOR benchmark. In the majority of financial institutions, the individuals with day to day conduct and control of benchmark setting and trading were probably so far down the bank’s chain of command that, taking into account this issue alone, there may only be a small chance of successfully bringing corporate criminal proceedings in the UK. Indeed it has been argued that the narrow application of the identification principle provides a perverse incentive for companies to decentralise control and responsibilities through diffuse structures so as to make it impossible to identify a senior individual or group in charge of any particular operation.




Corporate criminal liability in the United States

The position in the UK is of course entirely at odds with that adopted in the United States where the net is cast much more widely and criminal prosecutions of corporate entities have been commonplace since the turn of the 21st century. Corporate criminal liability has been a feature of US law since the 19th century and, by the early 20th century, the US Courts were already starting to apply the civil doctrine of respondeat superior to hold corporates liable for intent based crimes committed by their agents and their employees. It is this doctrine which is applied today and under which US companies can be held criminally liable for the illegal acts of their agents (including employees and contract personnel) where those acts were carried out within the scope of their duties and were intended, even if only in part, to benefit the corporation.

Moving away from the identification principle

As of July 1, 2011, the Bribery Act 2010 made it a criminal offence for a commercial organisation to fail to prevent bribery (s.7). Often seen as the start of a new era in corporate criminal liability, the construction of the section enables prosecuting authorities to sidestep the identification principle when investigating matters of bribery by providing them with an alternative basis for criminal liability. The introduction of s.7 also forced corporates to closely examine their local and overseas operations and introduce measures aimed at tightening up or taking control of the means they (and their agents) use to conduct business.

On December 18, 2014, the UK government published the UK Anti-Corruption Plan in which they set out the actions that they propose to take

to improve how corruption is tackled on a domestic basis. Under Action 36, The Ministry of Justice (MoJ) is to examine the case for a new offence of a corporate failure to prevent economic crime and the rules on establishing corporate criminal liability more widely. The timescale for completion of this review is June 2015. David Green QC, the Director of the SFO, has long since been calling for s.7 to be extended to cover corporate failures to prevent financial crime and fraud, and both the initiative set out in Action 36 and the March proposals seem to take him a few steps closer towards achieving that goal.

What next?

All of this rather begs the question: what next? The March announcement was foreshadowed by similar calls for professionals and organisations who facilitate or encourage tax evasion



to face the same sanctions as the evaders themselves. However, in and of themselves, such measures would have added little to existing provisions of the criminal law which are adequately drawn to capture such behaviour, for example, by bringing a charge alleging the aiding and abetting of tax evasion or a simple conspiracy charge under which the prosecution would have to prove the fact of a criminal agreement. What these existing provisions do not do however is get around the narrow application of the identification principle to enable the UK authorities to hold a corporate criminally liable for the relevant ‘facilitating’ acts of their customer-facing employees. This is exactly what the proposed offence of corporate failure to prevent tax evasion or the facilitation of tax evasion seeks to achieve.

In this way, the March proposals can be seen both as part and parcel of an attempt to move away from strict reliance on the identification principle and a much wider move towards using the criminal law to force corporate entities to examine their own operations to ensure that those they employ act within the letter and spirit of the criminal law. This approach is familiar to those operating in the regulated sector where the Financial Conduct Authority’s Principles for Business already require companies which operate under its auspices to maintain adequate financial crime systems and controls. It is also an approach which arguably fits well with related measures, such as reporting obligations under the Proceeds of Crime Act 2002 and the introduction of Deferred Prosecution Agreements, through which the UK government has attempted to use the criminal law to force corporate entities to both report crime and to join them in the fight against crime.

Conclusion

It seems most unlikely that the MoJ review will result in a proposal that corporate criminal liability in the UK be entirely revisited and placed on a wider footing more akin to that found in the US. However, we should perhaps be less surprised if we are faced with further examples of the criminal law being used to force corporate entities to tackle their own and their employees’ behaviour in other relevant areas (such as cybercrime and the unlawful sale of personal data) as well as ever increasing scrutiny of corporate compliance.


Neil O’MayPartnerNorton Rose Fulbright LLPTel +44 20 7444 3499neil.o’[email protected]

Joanna TorodeSenior associateNorton Rose Fulbright LLPTel +44 20 7444 [email protected]



The Insurance Act 2015 (the ‘Act’) will come into force in August 2016, marking the most significant reform of UK insurance law in over a century.

The driving force behind the Act has been a perception that existing business insurance law principles, enshrined in the Marine Insurance Act 1906 to protect a fledgling modern insurance industry, have become outdated and no longer provide a fair balance between insurer and policyholder. The Act therefore re-calibrates certain aspects of this relationship by replacing the duty of disclosure with a duty of fair presentation, implementing a system of proportionate remedies for breach of the new duty, outlawing basis clauses (which convert statements made in a proposal form into warranties) and mitigating the consequences of a breach of warranty. A number of other matters are also clarified, such as the law on fraudulent claims.

Despite the array of briefings that have been produced on this subject, the brave new world of fairly presented risks, proportionate remedies and suspensory warranties may still come as a shock to the system. So, in this article, we present a scenario from a bank perspective and work through the practical application of the Act to the issues that it raises.

Case study

In late 2016, a bank discovers that a number of its employees have been defrauding it on a grand scale over five years, involving the production of counterfeit promissory notes. Fortunately, the bank has a comprehensive crime programme providing cover for such fidelity losses.

It has emerged that a number of general concerns raised by an investigation into compliance standards at the bank were not disclosed prior to the October 2016 renewal of the bank’s crime insurance. The individual who arranges that insurance was not aware of these issues, which were therefore not passed on to the crime insurance team at the bank’s broker. However, the investigation and its findings were brought to the attention of the broker’s Directors and Officers liability (D&O) team by a senior executive (D&O cover is arranged elsewhere in the bank). This information was passed on to the bank’s D&O insurers as part of a ‘data dump’ amounting to hundreds of pages of documents.

Due to an historic issue, the crime policy contains a warranty that, since 2010, twice-yearly compliance audits of a number of departments have been undertaken, one of which is the department in which the fraud was carried out. However, over the five year period of the fraud, during which audits were meant to be undertaken twice a year, audits have been undertaken on only three occasions.

It is now late 2017 and the bank’s insurance claim remains unpaid. However the very significant losses have contributed to the undermining of the bank’s capital base, necessitating the sale of its highly profitable but ‘non-core’ commodities arm. If the insurance had paid out promptly, this outcome might have been avoided.

None of the bank’s insurance policies contract out of the Insurance Act 2015.

A fair presentation of the risk?

The first question arising from the case study is whether the risk was fairly presented to the bank’s crime insurers – the general issue being whether the concerns raised by the investigation into compliance standards should have been disclosed.




The starting point is that, from August 2016 when the Act is implemented, insureds must make a fair presentation of the risk before entering into a contract of insurance. This duty of fair presentation requires the insured to disclose all material circumstances which the insured knows or ought to know, unless any of the exceptions listed in section 3(5) of the Act applies (i.e. the circumstance diminishes the risk, the insurer knows, ought to know or is presumed to know it, or its disclosure has been waived). While the new duty is broadly similar to the duty of disclosure as currently understood, the Act seeks to clarify and confirm a number of features of the current law which have been uncertain to date.

In this instance, the dispute is likely to turn on two points. The first point is whether the compliance concerns are ‘material circumstances’ within the meaning of the Act, in the sense that they would influence the judgment of a prudent insurer in determining whether to accept the risk and, if so, on what terms (section 7 of the Act). While it would ultimately be a matter for expert evidence, and the substance of the concerns would be important, it is plausible that compliance issues could be relevant to the judgment of a prudent crime insurer. The second and perhaps more contentious point is whether the compliance issues were known or ought to have been known to the insured. On this point, sections 4 and 6 of the Act contain detailed provisions as to when an insured is treated as knowing circumstances which are material to the risk. Applying these provisions:

• Where, as in this case, the insured is a company, the insured knows only what is known to those individuals who are part of its senior management or responsible

for its insurance. Helpfully for the insured, the compliance issues were not known to the bank’s risk manager. However, we know that a senior executive was aware of them and he could be part of the bank’s senior management (defined in the Act as ‘those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised’). If so, the knowledge requirement will be met.

• Although the findings of the investigation were known to the broker’s D&O team, the broker’s crime team was not aware of them. On this point, section 4 of the Act provides that an insured (in this case the bank) is not taken to know confidential information which is known to its agent (i.e. the broker), in circumstances where that information was acquired by the agent in a way that was ‘not connected with the contract of insurance’. In this case, the insured would no doubt argue that the relevant ‘contract of insurance’ for these purposes is the crime policy and, given that the broker only acquired the information in connection with the D&O policy, the broker’s knowledge cannot be imputed to the bank.

• In any case, the bank may well face an uphill struggle because an insured must also disclose material circumstances which it ought to know. In the Act, these are described as ‘what should reasonably have been revealed by a reasonable search of information available to the insured’. Would a reasonable search have identified the investigation and its findings? Quite possibly, although this would of course be entirely fact dependent.

Finally, although not relevant to the claim in this particular case study, the bank and its broker may wish to reconsider the current practice of ‘data dumping’ used in connection with the bank’s D&O cover, which is one of the issues that the duty of fair presentation seeks to address. Although the Act recognises that a fair presentation need not be contained in only one document or oral presentation (section 7), by the same token, the disclosure of material circumstances must be made in a manner which would be reasonably clear and accessible to a prudent insurer (section 3).

What remedy, if any?

If the duty of fair presentation has been breached, the next question is whether the insurer has a remedy (and, if so, what it is).

Whereas currently the only remedy for a breach of the duty of disclosure is avoidance of the policy, the Act aims to put the insurer in the position that it would have been in if the risk had been fairly disclosed. Therefore, if the risk would have been underwritten on precisely the same terms and for the same premium, the insurer has no remedy. However, if the risk would have been underwritten on different terms or for a higher premium, or even declined altogether, then the remedy will reflect this.

In order to escape liability altogether in this scenario, the bank’s crime insurers would need to argue that they would have walked away from the risk, or that they would have pared back the cover that is available for fidelity losses (by inserting a wide exclusion, for example). If this point is put in issue, it will be a mixed question of factual and expert evidence as to what exactly the



bank’s crime insurers would have done if the risk had been fairly presented.

What follows from the breach of warranty?

Section 10 of the Act abolishes the existing law on breach of warranties. The current rule is that a breach of warranty immediately discharges the insurer from all further liability under the policy whether or not the breach is subsequently remedied, whereas the new rule is that warranties are suspensory – in the sense that an insurer is only discharged from liability while the warranty is breached.

In a further change, section 11 of the Act provides that the breach of warranty must relate to the loss. This is framed as a requirement that if a loss occurs, an insurer may only rely on a breach of warranty if it could have increased the risk of the loss which occurred.

On this occasion, the warranty has been breached and cannot be remedied, so the suspensory effect of the warranty does not arise. The position might be different if, for example, there was a warranty as to the specification of the bank’s vault which was only met two months into the policy period (although in that case the breach would not relate to losses involving promissory notes). The difficulty faced by the insured, however, is that the compliance audit warranty may tend to reduce the risk of fidelity losses occurring in the relevant department in the period of the fraud. As a result, the insurer would have a legitimate defence to some or all of the bank’s claim if the non-compliance with the warranty increased the risk of this type of fraud loss – a factual question which would probably turn

on the detail of the fraud and the likely scope of the additional audits.

Still no damages for late payment

And what of the bank’s losses resulting from non-payment of the insurance proceeds? Leaving aside questions of causation and remoteness, which may be significant, the Act does not alter the existing position that damages are not available for late payment of a claim by the insurer. This is despite the Law Commission’s proposals to the contrary and the inclusion of a provision in the draft Insurance Bill, which was subsequently removed after it was deemed too controversial. For the time being, the only remedy available for insureds such as the bank will continue to be interest from the date of loss.

Conclusion

The Act shifts the balance of risk between insurer and insured and banks should review their insurance coverage and their procedures for monitoring compliance and integrating it with insurance requirements accordingly. While it is difficult to predict the practical effects of the Act, the case study in this article illustrates the complex factual issues that may arise in determining insurance liability under the new regime.


Ffion FlockhartPartnerNorton Rose Fulbright LLPTel +44 20 7444 [email protected]

Charles Weston-SimonsSenior associateNorton Rose Fulbright LLPTel +44 20 7444 [email protected]



References to ‘Norton Rose Fulbright’, ‘the law fi rm’, and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective affi liates (together ‘Norton Rose Fulbright entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifi cations of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specifi c legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.

Norton Rose FulbrightNorton Rose Fulbright is a global legal practice. We provide the world’s preeminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

Norton Rose Fulbright US LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP and Norton Rose Fulbright South Africa Inc are separate legal entities and all of them are members of Norton Rose Fulbright Verein, a Swiss verein. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients.

nortonrosefulbright.com

© Norton Rose Fulbright LLP NRF21705 06/15 (UK) Extracts may be copied provided their source is acknowledged.

Contact

If you would like further information please contact:

Adam SanittHead of disputes knowledge, LondonNorton Rose Fulbright LLPTel +44 20 7444 [email protected]

Date post:	28-May-2018
Category:	Documents
Upload:	dinhhuong
View:	215 times
Download:	0 times

Banking and finance disputes review - Norton Rose … the editor In this edition of the Banking and...

Documents