BANKING & FINANCE LITIGATION UPDATE

Issue 52

We wish to establish a dialogue with our readers. Please CONTENTS contact us at B&FL Update and let us know which particular areas you are interested in and what you would Domestic Banking ...... 2 find helpful. Domestic General ...... 3 The Banking & Finance Litigation Update is published monthly and covers current developments affecting the European Banking ...... 4 Group's area of practice and its clients during the International Banking ...... 4 preceding month.

This publication is a general overview and discussion of International General ...... 4 the subjects dealt with. It should not be used as a Press Releases ...... 4 substitute for taking legal advice in any specific situation. DLA Piper UK LLP accepts no responsibility for any Case Law ...... 6 actions taken or not taken in reliance on it. Articles ...... 10 Where references or links (which may not be active links) are made to external publications or websites, the views expressed are those of the authors of those publications or websites which are not necessarily those of DLA Piper UK LLP, and DLA Piper UK LLP accepts no responsibility for the contents or accuracy of those publications or websites.

If you would like further advice, please contact Paula Johnson on 08700 111 111.

DOMESTIC BANKING 8. HSBC has awarded its chief executive, Stuart Gulliver, £5.9m in bonuses and longer-term incentives for 2011. BARCLAYS 1. Barclays has revealed that as a result of the Financial Times, 27 February 2012 investigation into the possible manipulation of Libor it could face regulatory action. The bank is 9. HSBC is to sell new shares in the bank to fund in talks with regulators about a solution. employee bonuses. A deal has been agreed with the Financial Services Authority (FSA) whereby Financial Times, 12 March 2012 an HSBC executive director earning £1m will receive 60 per cent of his bonus in the form of 2. Barclays has revealed that CEO Bob Diamond is shares deferred over three years while the non- to receive a bonus of up to £3.4m plus long-term deferred component will be paid for by HSBC incentives which will bring his total remuneration selling shares worth an equivalent amount, with package to around £10m. The bank is also the proceeds handed on to the employee. expected to give details of the remuneration of five more executives. Daily Telegraph, 22 February 2012

Daily Telegraph, 5 March 2012 10. HSBC has launched a £4bn fund to help small businesses with a turnover of up to £25m to boost 3. Sir Nigel Rudd, former deputy chairman of exports to emerging markets such as China and Barclays and chair of the remuneration India. committee, has stated that when John Varley stepped down as chief executive in 2010 his Independent, 21 February 2012 'goodbye package' of almost £4m was not enough given the difference he made to the bank during the credit crisis. LLOYDS BANKING GROUP 11. The Co-operative Group has held talks with Gary Daily Telegraph, 22 February 2012 Hoffman, the chief executive of NBNK, its main rival in the £1.5bn race to buy Lloyds Banking Group branches. The talks involved Whitehead HSBC Mann, the firm of executive head hunters that the 4. Stuart Gulliver, CEO of HSBC, has stated that Co-op is using to identify potential recruits. HSBC is undervalued by up to £17.7bn because of costs involved in the UK banking levy and the Sunday Telegraph, 18 March 2012 prospect of legislation splitting retail and investment arms of banks. 12. Lloyds has decided not to release shares under a long-term incentive plan to Eric Daniels, Tate Sunday Telegraph, 4 March 2012 Truett and Archie Kane, three former directors who were involved in the integration of HBOS. 5. Disclosures published by HSBC when they revealed their annual results show that executives Daily Telegraph, 16 March 2012 outside the UK are paid almost double the rate in the UK in 2011. 13. The Co-op is at risk of losing the right to buy 630 Lloyds' branches unless it overhauls its business Financial Times, 28 February 2012 structure. The FSA has insisted on changes which could mean a new regulated structure for the Co- 6. HSBC has decided to claw back bonuses from op's parent group. executives in the light of a fine from the FSA in December connected with the mis-selling of Sunday Telegraph, 4 March 2012 nearly £30m of long-term care bonds and an order to pay £29.3m in compensation. 14. Lloyds has confirmed that it is considering borrowing from the ECB to finance its remaining Daily Telegraph, 27 February 2012 eurozone assets – the first UK bank to do so. The ECB lent €489bn (£414bn) in three-year money to 7. HSBC is expected to become the first UK bank to eurozone banks in December and at the end of reveal pay deals for its eight top executives, even February lenders were offered a similar amount. though new Treasury rules have not yet been finalised. Daily Telegraph, 27 February 2012

Guardian, 27 February 2012

02 | THE ROYAL BANK OF SCOTLAND Government may order a loosening of lending 15. The Royal Bank of Scotland ("RBS") and criteria. seventeen former directors including ex-chief Financial Times, 19 March 2012 executive Fred Goodwin and ex-chairman Sir Tom McKillop are being sued by RBS Shareholders 22. Hector Sants is to step down from his post as chief Action Group for £2.4bn. The Group claims that executive of the FSA in June this year. RBS misled investors in the lead-in to its takeover of ABN Amro, specifically in the prospectus for Financial Times, 19 March 2012 the £12bn rights issue used to fund the takeover. 23. The FSA has begun a new inquiry into claims that Daily Telegraph, 12 March 2012 banks mis-sold derivatives to small businesses: the inquiry will look at whether banks have breached 16. The Business Secretary, Vince Cable has called conduct of business rules. for RBS to be broken up to create a vehicle for lending to small companies. Sunday Telegraph, 18 March 2012

Financial Times, 7 March 2012 24. Venture capital firms are to back a group of cases worth up to ₤1 billion against major banks over 17. RBS investment bankers earning more than £500k the alleged mis-selling of interest rate hedging p.a. are to receive 40 per cent of their bonuses contracts. The cases, identified by Norton Accord within four months in the form of a bond award and worth £2-4 million each, would represent the and the balance in three equal instalments over largest set of funded claims faced by UK banks to three years. Lower earners will be treated date. proportionately Law Society Gazette, 15 March 2012 Daily Telegraph, 1 March 2012 25. The chair of the Treasury Select Committee, has 18. UK authorities are still hoping that RBS will leave asked the chair of UK Financial Investments the Asset Protection Scheme this year according to ("UKFI"), which manages stakes in RBS and an interim report published by the Asset Protection Lloyd's Banking Group among others, whether Agency. future bonuses at RBS, which is 82 per cent state owned, should be "linked to taxpayers getting their Independent, 29 February 2012 money back". UKFI has agreed to consider the 19. Professor Charles Goodhart, formerly of the Bank plan. of England, has suggested that RBS would have to Times, 16 March 2012 move its headquarters to England if Scotland achieved independence, as a separate Scottish 26. The new UK Loan Guarantee Scheme is to be government would not be able to support such a launched before the Budget on 21 March. The massive lender. scheme will make the Government responsible for guaranteeing £20bn of loans for banks to pass on Independent, 27 February 2012 to SMEs at low interest rates.

Independent, 7 March 2012 STANDARD CHARTERED 20. Standard Chartered has applied for a full 27. Problems in agreeing terms between banks, the commercial banking licence to operate in Saudi Government and house-builders is likely to delay Arabia. It has a large regional presence but is the scheduled launch of the NewBuy guarantee unable to offer personal banking services in the scheme. The scheme is intended to stimulate the Kingdom. housing market by underwriting 95 per cent mortgages. Times, 12 March 2012 Financial Times, 6 March 2012 DOMESTIC GENERAL 28. The Bank of England, the FSA, the British Bankers' Association and global banks are in 21. Andrew Stunell, the minister in charge of discussions about the calculation and regulation of reviewing banks' lending to minorities, is calling interbank lending rates in the wake of the year- on banks to make greater efforts to lend to black long probe into the manipulation of Libor. enterprises. If such calls do not work the Financial Times, 6 March 2012

EVERYTHING MATTERS | 03 29. Lehman's failure to segregate client money before funds) in bidding for budget hotel chain its collapse in 2008 led to a three-year battle to Travelodge. determine the distribution of funds by the bank's administrators. On 29 February the UK Supreme Daily Telegraph, 19 March 2012 Court ruled, dismissing an appeal by hedge fund GLG, that clients whose money had not been 35. HM Revenue & Customs' internal governance segregated could share in a pool of money department has said that Dave Hartnett, amounting to $2bn alongside clients whose money permanent secretary for tax, and Anthony Inglese, had been segregated, meaning a smaller payout solicitor and general counsel, have no case to for all concerned. answer after they were accused of wrongdoing in a deal that let Goldman Sachs off £10m in tax Financial Times, 1 March 2012 penalties.

30. Figures from the FSA show that a record £441m Guardian, 14 March 2012 was paid in compensation for the mis-selling of Payment Protection Insurance in December 2011 following a steady rise since April last year. INTERNATIONAL GENERAL 36. The UK and Japan have warned the US that the Times, 23 February 2012 'Volcker rule', which restricts the ability of US banks to trade with their own capital, could hit the international sovereign debt market by making it EUROPEAN BANKING costlier and more difficult for countries to issue and distribute debt. DEUTSCHE BANK 31. BaFin, the German financial regulator, has Financial Times, 23 February 2012 blocked the appointment of Bill Broeksmit as 37. Lord Davies of Abersoch, the author of a study head of risk management at the bank, saying he into boardroom diversity, has said that the FSA's lacks management experience. The board has decision to intervene in the appointment of senior appointed Stuart Lewis, currently deputy head in bank executives was a 'fatal mistake' and threatens the department, in his place. to homogenise boards.

Financial Times, 19 March 2012 Financial Times, 23 February 2012 32. Anshu Jain, the new head of Deutsche Bank, plans to set up a new business unit called asset and wealth management to be headed by investment PRESS RELEASES banker Michele Faissola. He will also put other 38. Shadow banking and financial instability investment bankers in top management positions. In a speech at the CASS Business School, the Financial Times, 8 March 2012 chair of the FSA set out how the "shadow banking" sector contributed to the financial crisis, the risks it still poses to financial stability and the INTERNATIONAL BANKING importance of a sufficiently comprehensive and radical policy response. CITIGROUP Financial Services Authority, 16 March 2012 33. The US Second Circuit Court of Appeals has said it may support an appeal by the SEC against a Further information can be found on the FSA district court's rejection of the agency's $285m website: settlement with Citigroup, finding its argument had a "strong likelihood of success". http://www.fsa.gov.uk/static/pubs/speeches/0314- at.pdf Financial Times, 16 March 2012 39. Towards a new deal for consumers of British banking GOLDMAN SACHS The FSA Consumer Panel believes that the 34. Goldman Sachs has joined Avenue Capital and creation of the new Financial Conduct Authority GoldenTree Asset Management (both US hedge is a once in a generation opportunity to ensure

04 | better banking services for British consumers by 41. FATF releases new standards using its new powers to do the following things: Revised standards on combating money ■ remove opaque charging by requiring laundering, terrorist financing and the transparency on the true costs of the proliferation of weapons of mass destruction has different parts of banking services; been issued by the Financial Action Taskforce (FATF). Key changes include: more guidance on ■ empower consumers to shop around much the types of clients, countries and transactions more by switching their current account which may be higher or lower risk; options for provider without any hurdles or delays; simplified due diligence; a requirement that a money laundering reporting officer should be ■ tackle cross-subsidisation within retail appointed at management level. banking at the expense of financially vulnerable consumers; Law Society, 23 February 2012

■ insist banks act honestly, fairly and http://www.lawsociety.org.uk/newsandevents/ professionally by bringing an end to the news/view=newsarticle.law?NEWSID=445583 inappropriate incentive structures that reward one-off sales rather than developing 42. Payments Council project will enable mobile long term customer relationships; payments from any account

■ make it easier for new competitors to enter The Payments Council has announced that its the retail banking market in order to latest mobile payments project should enable increase consumer choice. customers to link their mobile phone number to their bank accounts and use their mobile phones FSA Consumer Panel, 16 March 2012 to make payments.

Further information can be found on the FS-CP Payments Council, 22 February 2012 website: http://www.paymentscouncil.org.uk/ http://www.fs-cp.org.uk/publications/pdf/md-bba media_centre/press_releases/-/page/2041/ -complaints-speech20120315.pdf 43. Santander fined £1.5 million for failing to 40. FSA publishes guidance consultation to help clarify FSCS cover on structured products firms provide redress to victims of PPI mis- selling The FSA has fined Santander £1.5m for failing to confirm under what circumstances its structured The FSA has published proposed guidance for products would be covered by the Financial firms that sold payment protection insurance Services Compensation Scheme (FSCS). (PPI) and are beginning to contact customers who Customers began to query to extent of FSCS may have been mis-sold a policy but have yet to cover towards the end of 2008, but it was January complain. The guidance outlines steps firms 2010 before Santander clarified the position. should take when writing to these customers. It During this time Santander sold approximately stresses the importance of these communications £2.7bn of structured products including £1.2bn explaining clearly why the customer may have after June 2009 when it concluded that the been mis-sold and could be entitled to redress, circumstances in which its two products, what the customer should do to respond to the Guaranteed Capital Plus and the Guaranteed firm, the time limits involved and the need to act Growth Plan, would be covered by the FSCS promptly. were limited. However, new customers were not informed of the limitations in FSCS cover until Financial Services Authority, 7 March 2012 January 2010.

Further information can be found on the FSA Financial Services Authority, 20 February 2012 website: Further information can be found on the FSA http://www.fsa.gov.uk/library/communication/ website: pr/2012/021.shtml http://www.fsa.gov.uk/library/communication/ pr/2012/017.shtml

EVERYTHING MATTERS | 05 CASE LAW trading or the risks faced by the portfolio in volatile markets and that the close out was slow, 44. Broker's duties when conducting forced close- disorganized and often mis-directed. out The period in question was a time of great Euroption Strategic Fund Limited ("Euroption") turbulence in the financial markets. The crisis is an investment fund which traded options on caused a massive increase in volatility in the European exchanges. Option Strategist Limited markets in which Euroption had positions. It also ("OSL") acted as its investment manager though caused markets to fall heavily. It was common in practice this role was performed by Stefano ground that, at the start of the week of 6 October Scattolon ("S") a trading advisor employed by 2008, Euroption had enormous open positions Alternative Strategies Trading SA ("AST") which which, taken as a whole, were weighted heavily acted as trading advisor to OSL. Effectively S towards what amounted to a bet that the markets was Euroption's principal trader. would rise. It was also common ground that Euroption's margin commitments on its open Skandinaviska Enskilda Banken AB ("SEB"), a positions had dramatically increased over a short Swedish investment bank, acted as Euroption's period of time and that it could not meet those clearing broker between May and October 2008 commitments. After the close of the European pursuant to an Exchange Traded Futures & markets on 9 October 2008, markets around the Options Mandate ("Mandate"). Settlement of world plummeted. exchange-traded derivatives takes place through a clearing house associated with a particular Euroption did not meet or respond to calls from exchange. Only clearing members of such an SEB from 7 October 2008 to pay margin to cover exchange (like SEB) can enter into contracts with this exposure. SEB however was meeting margin the clearing house. So, non-members, such as calls made on SEB by the clearing house. SEB Euroption, had to contract with a clearing gave Euroption the opportunity to meet its margin member, such as SEB, which in turn held an obligations and/or reduce its positions but equivalent contract with the clearing house. Euroption did not take that opportunity.

Clause 11 of the Mandate obliged Euroption to It was common ground that, in those pay margin when asked to do so by SEB to circumstances, SEB was contractually entitled to support the exposure on Euroption's portfolio. If conduct a close out of Euroption's account and to at any time Euroption failed to provide sufficient choose the moment when it exercised that right margin or other payment due in respect of any (subject to its overriding regulatory obligations). transaction as required, SEB was entitled, The date on which SEB exercised this right and pursuant to clause 11 of the Mandate, "to close began the close out was one of the principal out [Euroption's] open contracts at any time issues of dispute, Euroption claiming that it without reference to [Euroption]". SEB was also started on 9 October, SEB claiming it started on entitled, at its discretion, to close out Euroption's 10 October. By 14 October all the positions had positions having made reasonable efforts to been closed out. In the end SEB was able to contact Euroption "at any time SEB deem[ed] it return to Euroption a final positive ledger balance necessary for its own protection". of €2,049,437.29.

Euroption employed an execution broker called Euroption claimed that SEB had negligently Tavira Securities Limited ("TSL"). When delayed completing the close-out and had Euroption had identified a trade that it wished to conducted it incompetently. SEB argued that it enter into, such trades were executed by TSL and had a wide and unfettered discretion in relation to given up to SEB for clearing. The result was a the conduct of the close out and that it had not contract between Euroption and SEB as breached its duty. principals and a back-to back contract between SEB and the relevant clearing house. The court had to decide whether SEB had a contractual and/or tortious duty of care to conduct Euroption brought a claim against SEB alleging the close out exercise competently and with that SEB was negligent in the way that it reasonable care or whether its only duty was to conducted a forced liquidation or close out of act honestly, in good faith and not arbitrarily, Euroption's portfolio of equity index options in capriciously, perversely or irrationally. October 2008, following several missed margin calls by Euroption. It complained that the person Having reviewed the evidence, the court SEB appointed to conduct the close out ("M") concluded that SEB began to close out appeared to have no real understanding of options Euroption's positions on 10 October, not 9

06 | October as contended for by Euroption. Before to support its claim that SEB was negligent or that SEB had attempted to limit the trading on irrational in executing the combination of trades Euroption's account without itself taking over that it did as part of the close out. conduct of the trading. Until 10 October S retained control of directing Euroption's trades. A clearing member conducting a close out in its own interests in circumstances such as those The next issue to determine was whether SEB prevailing on 10 October was under no obligation owed any contractual or tortious duty to to consider every possible alternative trade at Euroption to conduct the close out of Euroption's every moment on that day. For practical reasons, positions with reasonable skill and care. a clearing member in the position of SEB must have a good deal of flexibility in carrying out the The court rejected Euroption's argument that the close out process, choosing the sequence of trades Mandate contained an implied term pursuant to in order to achieve it and deciding on the timing section 13 of the Supply of Goods and Services of those trades. Also a clearing member must Act ("the Act") that SEB had a duty to provide its have the unquestioned right to carry out its own services with reasonable skill and care and that assessment of the risks of the client's positions this covered a situation where SEB was providing and choose that order and timing of trades which the service of conducting a forced liquidation of it deems most effective in reducing those risks, in Euroption's portfolio. The rights SEB had under light of market conditions and liquidity. the Mandate to impose limits on Euroption's activities and to close out Euroption's positions Even if the judge were wrong on the point that no could not be characterised as "services" within duty of care existed, then she still would not have the meaning of the Act. The section 13 implied found that Euroption had demonstrated any term only applies to services agreed to be breach of a duty to take reasonable care let alone provided under a contract for services and not to any breach of its duty to act rationally. all rights and obligations under such a contract. Euroption's claim was dismissed. The court saw no justification for implying any such term into the contract here on any other Euroption Strategic Fund Limited v ground either. The right to close out after a Skandinaviska Enskilda Banken AB, Commercial customer default as contained in the Mandate Court, 15 March 2012 must afford the broker considerable discretion and be subject to the limitations of good faith and 45. Letter of credit : jurisdiction rationality only. Petrologic Capital SA ("Petrologic") is a Swiss The court also rejected any argument that SEB company which buys and sells petroleum owed a tortious duty to take reasonable care in products. It had an account at Banque Cantonale the conduct of the close out. The only way in de Genève ("Bank"). The basic contract which which such a duty might arise would be if SEB governed the account provided for legal relations had acted in the conduct of the close out in a between the Bank and Petrologic to be subject to manner that was not contractually authorised. Swiss law and Swiss jurisdiction.

The imposition of a duty of care in this case Petrologic concluded a contract with an Austrian would involve expanding the law into a new company, MIC Petrochemische Vertriebs GmbH context, namely that of a clearing broker ("MIC") for the purchase of oil products with conducting a close out. This was not an payment by a standby letter of credit payable at appropriate relationship for a duty of care to be sight, to be opened by a first class Swiss bank. imposed. Further, Euroption was seeking to Petrologic asked the Bank to open a credit and recover what would be, in the law of negligence, sent the purchase contract to the Bank for this a new type of loss: the loss of hypothetical purpose. A draft of the letter of credit was sent to investment opportunities. This would involve an the Bank which identified Petrologic as the expansion of the law of negligence beyond the applicant for the credit and MIC as the normal heads of damage. beneficiary. The credit was to be for €2,425,000 plus or minus 10%. The draft included an English Having considered the evidence, the court law and English jurisdiction clause. concluded that it was not open to Euroption to complain that certain trades were executed The Bank issued the credit in this form including without authority or in excess of the powers the law and jurisdiction clause. which it had to close out under the Mandate. In due course, MIC, as beneficiary, presented the Euroption had failed to demonstrate any grounds necessary documentation to the Bank and claimed

EVERYTHING MATTERS | 07 payment of €2,385,506.3. However Petrologic be entered into. There was nothing in those claimed that the goods had been disposed of to a general contractual terms which committed the third party and that Petrologic was the victim of a Bank to open letters of credit, but the terms made fraud perpetrated by, or with the involvement of, clear that if the future business relations between one of its own signatories. It applied to the Swiss them did include the opening of letters of credit court for an order prohibiting the Bank from then their relations in respect of such transactions paying out under the letter of credit. An order would be subject to the same general conditions was made but later set aside and an appeal including Swiss law and jurisdiction. That was ultimately made to the Swiss Federal Court of confirmed by a Power of Attorney limited to Appeal. An injunction was obtained in criminal documentary credits signed by Petrologic which proceedings preventing the Bank from paying emphasized that Swiss law and jurisdiction MIC but Petrologic was worried that this applied. injunction might be discharged without warning. The English law and jurisdiction clause in the Petrologic issued English proceedings against the draft letter of credit was not intended to govern Bank and MIC, seeking an injunction to restrain the relationship between Petrologic and the Bank. the Bank from paying MIC and an injunction The parties' exchanges amounted to no more than requiring MIC to withdraw and/or refrain from a statement of the terms in which Petrologic pursuing the call on the letter of credit. wanted the Bank to open the credit. The English law and jurisdiction clause was no more than one The Bank applied for an order declaring that the of the terms which the claimant wanted the Bank English court did not have jurisdiction to hear to include in the letter of credit to be issued to Petrologic's claim. Petrologic argued that the MIC. It was clear from the contractual English court did have jurisdiction pursuant to documents signed by Petrologic that as between Article 23 of the Lugano II Convention. the Bank and Petrologic any future letter of credit transactions were to be subject to Swiss law and First, it argued that the instruction which it gave jurisdiction. There was nothing in the particular the Bank to open the credit, which governed the circumstances surrounding the opening of the relationship between Petrologic as the applicant letter of credit in this case to suggest that the for the credit and the Bank as issuing bank, parties intended to vary their existing contractual contained an agreement for exclusive jurisdiction. arrangements in this respect. Second, it argued that the letter of credit itself contained an agreement for exclusive English Petrologic could not enforce the jurisdiction jurisdiction and that that jurisdiction clause clause in the letter of credit under the 1999 Act. should be taken to apply to the related contract The effect of the 1999 Act is to enable a third between the applicant and the issuing bank. party to enforce a term of a contract to which it is Third, it argued that it was entitled to enforce the not a party but that was not what Petrologic was jurisdiction agreement in the credit pursuant to seeking to do here. Petrologic was not seeking to the Contracts (Rights of Third Parties) Act 1999 enforce the jurisdiction clause in the contract ("1999 Act") on the ground that the jurisdiction between MIC and the Bank in order to ensure that agreement purported to confer a benefit on a dispute between those parties was litigated in Petrologic. the proper agreed forum. Rather it was attempting to take the benefit of that clause for The Bank maintained that it had agreed with itself, in an action to prevent the Bank from Petrologic that their relationship would be subject performing what the Bank considered to be its to Swiss law and jurisdiction and that there was obligation under the letter of credit. Moreover no agreement between them for English Petrologic was attempting to do so in order to jurisdiction. Further, Petrologic was not entitled avoid the terms of the Swiss law jurisdiction to take the benefit of the jurisdiction clause in the clause in its own contract with the Bank. Further letter of credit as this only governed the the letter of credit did not purport to confer the relationship between the Bank and MIC. benefit of the jurisdiction clause on Petrologic.

The judge rejected Petrologic's arguments. The English court accordingly had no jurisdiction over Petrologic's claims against the Bank. The basic contract and the Bank's general terms and conditions were of general application to the Petrologic Capital SA v Banque Cantonale De Bank and Petrologic's relationship and were in Geneve & Anor, Commercial Court, 8 March sufficiently wide terms to include future letter of 2012 credit transactions and specifically contemplated that such future letter of credit transactions might

08 | 46. Informal dealings with customer : no improper transparency in respect of the flotation, it owed conduct or misrepresentations him a duty to disclose the involvement of BBS in monitoring his business and that if this had been Jeffrey Morris ("M"), a businessman, and a disclosed he would not have entered into the number of companies over which he had financial personal loan. control ("Portfolio") were customers of Barclays Bank PLC ("Bank"). In June 2004, the Bank had The court ruled on the evidence that it had not concerns about the Portfolio and unbeknownst to been a term of the loan agreement that the Bank Morris brought in its Business Support Division would in addition to the loan provide sufficient ("BBS") to monitor some of the accounts. working capital for the flotation of MB. At the However the companies seemed to recover and lunch all that B had done was to express, in there was no need for the BBS to call in the general terms, his own intention to try and Bank's Debt Recovery Unit ("DRU"). support M's business plans and his hope that the Bank would provide finance. The generality of In January 2006 the Bank's area corporate the discussion was in itself a good indication that director, Mr Brown ("B") met M and Michael what B had said was not in the nature of or Abrahams ("A") (the Chairman of one of the susceptible of becoming a contractual promise. In companies and a very experienced businessman) any event B had no authority to commit the Bank for lunch. It was M's case that they had met for to provide finance to M or his companies and lunch to discuss a personal loan to M and both M and A knew that B had no such authority, continuing financial support that he would so nothing said by B would have been capable of require for two of his companies, Amteus Secure committing the Bank to provide finance. Communications Ltd ("ASC") and The Media Buzz Ltd ("MB"), pending a flotation. He Even if there had been a contractual promise by claimed that B had given personal assurances that the Bank to support the companies, the judge the Bank would be happy to continue to support would have rejected the contention that the Bank the businesses if M transferred all of ASC and had failed to provide the promised support MB's debts into M's name. because the Bank did in fact provide additional funding for the group by way of the personal loan It was the Bank's case that the lunch was not a to M and also the overdraft facilities for MB. business meeting but rather an informal social meeting and that B had not had the authority to The judge unhesitatingly rejected the suggestion sanction any new banking facilities and did not that the Bank's employees had acted in bad faith. do so. Having seen the witnesses give evidence and having considered the evidence, there was no Later that year M negotiated a secured personal basis for imputing bad faith or dishonesty to the loan with the Bank for in excess of £1 million. Bank or its employees. It was plain that the Bank This loan was on the basis that all the business was acting with normal commercial self-interest debts were to be transferred to M personally. and was concerned to improve its position by minimizing its risk and that it did so by requiring 47. The planned flotation never went ahead. The the assumption of personal liability by M as the Bank granted a short-term overdraft facility to price for its further support. But there was MB which it extended a number of times. nothing underhand or improper in that.

The loan fell due for repayment and M defaulted. The lunch meeting was entirely typical of an The Bank made formal demand on both the loan informal lunch between a bank manager and his account and M's overdrawn current account. The major customers, at which conversation will balance due remained unpaid and the Bank range widely and will certainly include discussion started proceedings. of the customer's plans and requirements. The conversation might lead to further meetings, M claimed that the Bank had agreed to provide formal requests for facilities, negotiations over sufficient working capital (in addition to the terms and eventual contractual agreements but it personal loan) to ensure that MB would be will not itself usually be the occasion for making successfully floated and that this was a term of agreements or for committing either party to the loan agreement and that he had been induced obligations. There was clearly no such by false misrepresentations made by B at the commitment here and A's evidence showed that lunch to transfer the business debts into his own he well understood the position that nothing said name in return for the personal loan. He also at the lunch meeting was intended to commit claimed that because the Bank was aware that he either party contractually. The judge was was relying on its expertise, guidance and satisfied that M understood that position too.

EVERYTHING MATTERS | 09 The judge also rejected an argument by M that it This bulletin is intended as a general overview and was a term of the loan agreement that repayment discussion of the subjects dealt with. It is not intended, would not be due until the flotation. The terms of and should not be used, as a substitute for taking legal the loan agreement were clear and there could be advice in any specific situation. DLA Piper UK LLP will no justification for using a conversation over accept no responsibility for any actions taken or not lunch some five months earlier as a basis for taken on the basis of this publication. If you would like ignoring or rewriting the clear terms for further advice, please contact: repayment.

There was no duty on the Bank to disclose the LEEDS: HUGH EVANS involvement of BBS and, in any event, the facts T 0113 369 2200 were sufficiently known by M or his agents. [email protected] Contracts of suretyship are one of the classes of cases where a duty of disclosure might arise. But LONDON: IOANNIS ALEXOPOULOS M was a principal debtor, not surety, and no question of suretyship arose. T 020 7796 6897 [email protected] The Bank's claim succeeded and M's counterclaim was dismissed. MANCHESTER: STEWART PLANT T 0161 235 4544 Barclays Bank PLC v Jeffrey Clive Morris, [email protected] Queen's Bench Division, Leeds District Registry, Mercantile Court, 14 February 2012.

ARTICLES 48. Indemnities; exclusion clauses

Looks at the Supreme Court decision in "The Far Service" in which the court considered the effect of an undertaking by one party to 'defend, indemnify and hold harmless' another party in the case and the need for careful consideration where such a clause covered claims by or liabilities to the indemnifying party.

Indemnities as exclusion clauses in guaranteed transactions", Journal of International Banking and Financial Law, Vol 27 No 3, pp 146-148

NB For copyright and/or technological reasons, any internet addresses in the electronic version of this publication may not be active links. This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper UK LLP and DLA Piper SCOTLAND LLP will accept no responsibility for any actions taken or not taken on the basis of this publication. If you would like further advice, please contact Hugh Evans (Leeds) T: 0113 369 2200, E: [email protected] or Ioannis Alexopoulos (London) T: 020 7796 6897 E: [email protected] or Stewart Plant (Manchester) T: 0161 235 4544, E: [email protected] on 08700 111 111. www.dlapiper.com

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