FINANCIAL SERVICES LITIGATION BRIEFING

Financial services litigation: the key trends of 2017

A number of key decisions from the English courts in 2017 illustrate the litigation trends Cases to watch in 2018 that are likely to have ramifi cations for fi nancial institutions in 2018 and beyond The most anticipated hearing of 2018 is SFO v ENRC on the question of privilege in (see box “Cases to watch in 2018”). the context of criminal investigations, which is scheduled to be heard by the Court of Appeal in July 2018. Banking duties In Thomas and another v Triodos Bank NV, the Other expected developments include the appeal by PAG against the dismissal of its High Court considered whether a mezzanine LIBOR claims against RBS in Property Alliance Group Ltd v The Royal Bank of Scotland duty existed and the circumstances in which plc, which is due to commence on 29 January 2018. The outcome of UBS’s application that duty would arise ([2017] EWHC 314 for permission to appeal to the Supreme Court in UBS AG v Kommunale Wasserwerke (QB); www.practicallaw.com/4-641-0329). Leipzig GmbH is also keenly awaited. A mezzanine duty is higher than the Hedley Byrne duty to take reasonable care not to misstate any facts on which a customer might of Appeal reversed a High Court decision CIMB sought a stay of the English proceedings. be expected to rely, but is not as high as the that had worrying implications for banks The High Court refused, fi nding that the risk advisory duty (Hedley Byrne & Co Ltd v Heller concluding international transactions of inconsistent decisions did not point to & Partners Ltd [1964] AC 465). using standard form documents ([2017] either court being more appropriate and it EWCA Civ 428). Dexia and the Comune was CIMB’s decision to issue proceedings The court in Thomas held that no advisory had entered into interest rate swaps under in Singapore that created the risk. Either relationship existed between Triodos and an International Swaps and Derivatives court could determine the compliance of the retail customers who had received commercial Association (ISDA) Master Agreement, documents equally well. The crucial enquiry lending, and that no advice had in fact been which contained English governing law regarding the fraud was whether DB had given. However, Triodos owed the customers and jurisdiction clauses. Dexia brought suffi cient knowledge that the documents a duty under Hedley Byrne to take reasonable proceedings in England seeking payment were forged and that evidence was in London. care not to mislead them or misstate any facts. under the swaps. The court also noted that both proceedings were in their early stages and, although The court also considered whether, in the The High Court held that, despite the English all relevant parties were involved in the circumstances, Triodos’s duty of care went governing law clause, all elements of the Singapore proceedings, this was not decisive. further than the Hedley Byrne duty. As Triodos swap pointed to Italy and so, under Article It held that it was inappropriate to stay DB’s subscribed to the Business Banking Code, the 3(3) of the Rome Convention (Article 3(3)), action so that it could be decided along with court found that it also owed the customers a Dexia had to comply with mandatory rules CIMB’s claims against other parties, which duty to explain in plain English, when asked of Italian law and the swaps were void. The were of no concern to DB. by the customers, the fi nancial implications Court of Appeal disagreed, fi nding that there of entering into the arrangements. Triodos was no need to establish a link to a specifi c In Deutsche Bank AG v Comune di Savona, had breached that duty. jurisdiction other than Italy in order to fall DB entered into an agreement to provide outside of Article 3(3), provided that there advice to the Comune regarding its derivative Thomas means that the distinction between were elements that lent an international commitments, with an Italian exclusive the duty that a fi nancial institution owes fl avour and pointed away from Italy. jurisdiction clause (the advice agreement) when advising a customer to buy a product ([2017] EWHC 1013 (Comm)). DB also entered and when only providing information about In Deutsche Bank AG v CIMB Bank Berhad, into an ISDA Master Agreement, with an a product remains blurred. Although the Deutsche Bank (DB) confi rmed letters of credit English exclusive jurisdiction clause. DB decision has not been appealed, it is likely for a customer of CIMB on presentation of the issued proceedings in England seeking to be subject to further judicial scrutiny, relevant documents ([2017] EWHC 81 (Comm); declaratory relief under the ISDA Master including by the Court of Appeal in Property www.practicallaw.com/w-008-7520). DB Agreement, which included a clause that Alliance Group Ltd v The Royal Bank of then issued proceedings in England against the Comune had not relied on any advice Scotland plc in January 2018 ([2016] EWHC CIMB for reimbursement. CIMB issued or recommendation from DB. The Comune 3342; www.practicallaw.com/4-638-0407). various proceedings in Singapore against then issued proceedings against DB in DB, and its customer and associates, Italy alleging breaches under the advice Governing law and jurisdiction alleging a conspiracy to defraud and seeking agreement, and challenged the English As usual, cross-border financial transactions declarations that the customer was liable to court’s jurisdiction on the basis that some continue to generate litigation. In Dexia indemnify CIMB and that CIMB was not liable of the declarations sought by DB fell within Crediop SPA v Comune di Prato, the Court to pay DB under the letters of credit. the scope of the advice agreement.

© 2018 Thomson Reuters (Professional) UK Limited. This article fi rst appeared in the January/February 2018 issue of PLC Magazine, 1 published by Practical Law, part of Thomson Reuters (Professional) UK Limited, and is reproduced by agreement with the publishers. The High Court found that there is no rigid Parliament’s statutory scheme on money take into account the whole relevant factual rule that declaratory relief based on the laundering could not be displaced merely on background available to the parties at the terms of a contract is within the scope of consideration of the balance of convenience time of the contract. Where there are rival the jurisdiction clause in the same contract. as between the interests of private parties. meanings, the court can give weight to the There is no presumption that the later clause The order sought by N could only be justifi ed implications of competing constructions by had been intended to cut down the earlier in exceptional circumstances. reaching a view as to which is more consistent clause, and so each agreement must be with business common sense. interpreted according to its own governing In UBS AG (London Branch) and another v law. As a matter of Italian law, the Italian Kommunale Wasserwerke Leipzig GmbH, Privilege proceedings, which concerned complaints the Court of Appeal considered the effect of Following The RBS Rights Issue Litigation, about advice given by DB, were within the dishonest assistance on a party’s liability for privilege has continued to be a hot topic scope of the Italian jurisdiction clause. As a bribe and its effect on the enforceability of ([2016] EWHC 3161 (Ch); see News brief “Legal the advice agreement concerned DB as an the contract subsequently concluded ([2017] advice privilege: who is the client?”, www. adviser, and the ISDA Master Agreement EWCA Civ 1567; see News brief “Enforceability practicallaw.com/3-638-0479). concerned DB as a counterparty, a dispute of derivatives: whose bribe is it anyway?”, www. which was essentially concerned with DB’s practicallaw.com/w-011-0507). Director of the Serious Fraud Office v role as an adviser fell more naturally within Eurasian Natural Resource Corporation Ltd the Italian jurisdiction clause. This decision A customer had been advised by its fi nancial was particularly signifi cant for companies is subject to an appeal. advisers to acquire certain complex derivative responding to enquiries from criminal products from UBS and two intermediaries. prosecutors, but also has broader implications Financial crime KWL defaulted and UBS sought payment. for companies seeking to withhold documents A few cases in 2017 highlighted the risk It transpired that the fi nancial advisers had on the basis of litigation privilege ([2017] of fi nancial crime to fi nancial institutions. bribed KWL’s managing director to enter EWHC 1017 QB; see News brief “Investigations In Singularis Holdings Ltd v Daiwa Capital into the transactions. Although UBS was and privilege: a restrictive scope”, www. Markets Europe Ltd, Daiwa, a stock broker, unaware of the bribes, UBS had reached an practicallaw.com/w-008-3720). paid monies out of Singularis’s client account undisclosed arrangement with the fi nancial on the instruction of one of Singularis’s advisers whereby they would advise clients The Serious Fraud Offi ce (SFO) challenged directors and its only shareholder ([2017] to enter into the derivative transactions ENRC’s claim that certain documents the SFO EWHC 257 (Ch)). The instructions were not regardless of the clients’ interests. had requested could be withheld because of bona fi de and the High Court found that privilege. The High Court rejected almost all Daiwa had information available to it that The Court of Appeal held that the transactions of ENRC’s claims to privilege. It held that a should have put it on notice that a fraud was, could be rescinded. Although the general criminal investigation should not be treated or might have been, perpetrated against rule is that the contracting party must know as adversarial litigation for the purpose Singularis. The court found that Daiwa was about the bribe or the breach of fi duciary of litigation privilege. Although litigation liable to Singularis for allowing payments duty by its counterparty’s agent, there was privilege applies to documents prepared for to be made in circumstances where it had an exception here because UBS’s conscience the sole or dominant purpose of conducting reasonable grounds to believe that funds was affected both by the agreement with the litigation, it does not apply to documents were being misappropriated. fi nancial advisers (of which it knew) and by prepared to avoid litigation. any other form of abuse (here, the bribe), In NCA v N and Royal Bank of Scotland which the fi nancial advisers (as agents of the Here, the materials in question included plc, RBS suspected that monies held in an customer) might choose to deploy to conclude interview notes produced by external individual’s (N) accounts constituted criminal the transaction. lawyers and materials produced by forensic property, so RBS froze the accounts and experts during an internal investigation into sought the consent of the NCA to return the Contractual interpretation whistleblower allegations of corruption and funds to N ([2017] EWCA Civ 253). N sought In Wood v Capita Insurance Services Ltd, the throughout the course of ENRC’s subsequent an interim injunction requiring RBS to carry Supreme Court gave further guidance on the engagement with the SFO in a self-reporting out specifi ed past payment instructions. proper approach to contractual interpretation, process. ENRC has been granted leave to The High Court ordered that the payments emphasising that interpretation is not a literal appeal. be made and declared that, in making the exercise focused solely on the wording of payments, RBS would not be committing the particular clause ([2017] UKSC 24; see Sarah Parkes is a partner, and Emma Probyn a criminal offence under the Proceeds of News brief “Contract interpretation: the is an associate, in the Financial Institutions Crime Act 2002 or otherwise. The Court of Supreme Court’s last word (for now)?”, www. Disputes Group at Freshfi elds Bruckhaus Appeal overturned this decision, holding that practicallaw.com/1-641-0887). The court must Deringer LLP.

© 2018 Thomson Reuters (Professional) UK Limited. This article fi rst appeared in the January/February 2018 issue of PLC Magazine, 2 published by Practical Law, part of Thomson Reuters (Professional) UK Limited, and is reproduced by agreement with the publishers.