BANKING & FINANCE LITIGATION UPDATE

Issue 60

We wish to establish a dialogue with our readers. Contents Please contact us at B&FL Update and let us know which particular areas you are interested in and what Domestic Banking ······································ 2 you would find helpful. Domestic General ······································· 4 The Banking & Finance Litigation Update is published monthly and covers current developments European Banking ······································ 5 affecting the Group's area of practice and its clients during the preceding month. European General ······································· 5

This publication is a general overview and discussion International Banking ·································· 5 of the subjects dealt with. It should not be used as a International General ··································· 6 substitute for taking legal advice in any specific situation. DLA Piper UK LLP accepts no Legislation ··············································· 6 responsibility for any actions taken or not taken in reliance on it. Press Releases ··········································· 6

Where references or links (which may not be active Case Law ················································ 8 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.

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DOMESTIC BANKING 7. Support staff working in investment divisions of banks including Barclays and RBS could have BANK OF ENGLAND their 2013 bonuses cut in a move to reduce costs. Executives believe that pay for backroom staff at 1. Mark Carney, the governor of the Bank of Canada, investment banks should be aligned with the pay will become the highest earning banker in the of their retail counterparts who are doing the same world when he becomes the Governor of the Bank job. of England ("BofE"). His total package will be worth £874,000, more than double the salary of Times, 19 November 2012 his nearest rival, Mario Draghi, the Governor of the European Central Bank. HSBC Guardian, 21 December 2012 8. The first sale of sub-prime loans since the height of the financial crash is being prepared by HSBC, 2. Martin Weale of the BofE Monetary Policy as the bank starts to off-load over $40 billion (£25 Committee has warned that further quantitative billion) of toxic US debt that it still has on its easing by the Bank would result in increased books. Four sub-prime loan portfolios worth a inflation and have no beneficial effect on growth. total of $2.7 billion will be sold in the next year, with interest already being expressed by hedge Daily Telegraph, 22 November 2012 funds. The sale will be the first time HSBC has BARCLAYS sold any of its holding of sub-prime debt since collapsed back in September 3. Barclays and Deutsche Bank have joined with 12 2008. other banks to become stakeholders in a "bad bank", called Sareb, created to absorb 60 billion The Daily Telegraph, 3 December 2012 Euros of Spain's bad debts. 9. HSBC is to launch a global 'know your customer' programme costing $700 million as part of a plan Times, 19 December 2012 agreed with US regulators to settle breaches of 4. An American plan that would force Barclays and Iran sanctions and money laundering issues. Deutsche Bank to put more cash into their Wall Financial Times, 14 December 2012 Street operations is threatening to bring about an international trade war. Daniel Tarullo, a governor 10. HSBC has agreed a record fine of $1.9 billion with of the and the man overseeing the international regulators to settle charges of money implementation of the Dodd-Frank banking laundering between 2002 and 2009. The bank was regulation reforms, wants tougher capital and found guilty of wholesale failings in its control liquidity rules for all foreign banks operating in and systems processes but was not found to have the US. According to senior financiers and facilitated money laundering. Senior staff at the analysts, foreign banks would be put at a bank will defer part of their bonus entitlement competitive disadvantage by the rules. A number until 2017 to safeguard against any future of foreign banks and financial institutions are wrongdoing. furious about the plans. Times, 12 December 2012 Sunday Times, 9 December 2012 11. HSBC chairman Douglas Flint wants bankers to 5. Barclays' CEO, Anthony Jenkins, has been in talks swear an oath similar to that sworn by doctors in with shareholders about axing its investment bank an attempt to rebuild confidence in the profession. as part of a radical restructuring. Financial Times, 26 November 2012 Daily Telegraph, 26 November 2012 12. HSBC has confirmed that it is in talks on the 6. Former Barclays chairman Martin Agius could be possible sale of its 15.57 per cent holdings in retained by the bank as a consultant. Agius Chinese insurance group Ping An. The deal could resigned in July but is still working on "legacy be worth $9 billion. issues" at the bank until 1 January 2013 when his Independent, 19 November 2012 notice period expires. Daily Telegraph, 19 November 2012

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LLOYDS BANKING GROUP successive governments. The bank's first aim is to be ready to begin paying dividends again in late 13. In a deal worth £60 million, restaurants including 2014. Eighteen months of further repairs to the Le Pont de la Tour and Quaglino's are set to bank's balance sheet should, senior figures at the change hands. The private equity arm of Lloyds bank believe, leave it ready to be returned to the Bank, LDC, is frontrunner to purchase D&D private sector in four offerings spread over ten , owner of 30 leading restaurants. It would years. get the 51 per cent stake of founder Sir Terence Conran, and also the 18 per cent owned by Caird Times, 3 December 2012 Capital. The remaining 31 per cent would be 19. Despite having effectively agreed to pay its larger retained by management. A number of rivals are rival to take the unit off its hands, RBS has been still in the talks so LDC could be outbid, even forced to call off the sale of its Indian commercial though it is the current frontrunner. and retail operations to HSBC. RBS said that the Sunday Times, 9 December 2012 sale had 'lapsed' and it would now begin to 'wind- down' the 31-branch business. The collapse of the 14. An estimated 4.8 million Lloyds Banking Group deal is understood to have come after protracted account holders will begin receiving letters talks over the transfer of the ownership of the informing them that their branch has been business with the Indian regulator. transferred to new ownership as part of the Project Verde sale to Co-operative Bank in July. The Daily Telegraph, 3 December 2012 Times, 28 November 2012 20. After refusing to cave in to pressure to sell its American business, RBS is expected to further SANTANDER shrink its investment bank. RBS has been pressed 15. A deal is expected to be announced soon between by City regulators to consider a sale of its Santander UK and SAV Credit in relation to American retail banking business, Citizens, which Santander's store card portfolio. SAV currently could be worth as much as £10 billion. However serves retailers such as Debenhams and Arcadia. the bank has said it cannot find a buyer quick Santander is worried that its reputation will be enough to meet the timetable of new capital damaged by criticism of the high interest rates demands. RBS is believed to be looking at ways to charged on store cards. trim capital-intensive areas of its investment bank as an alternative. Times, 21 December 2012 Sunday Times, 2 December 2012 THE PLC 21. Private equity firm Corsair Capital has become a 16. The Royal Bank of Scotland ("RBS") is expected potential bidder for the 316 RBS branches to be to be the next bank to agree a settlement with sold. regulators over attempts to manipulate the rate, following the settlement agreed between UK Evening Standard, 26 November 2012 and US authorities in December with UBS, and 22. Whitehall is proposing that the 316 RBS branches the one made with Barclays in June 2012. which are for sale could be nationalised and set up Daily Telegraph, 20 December, 2012 as a standalone bank if a buyer is not found. The tax payer, as the majority shareholder in RBS, 17. RBS is to launch a £200 million Carbon would automatically acquire an 83 per cent share Reduction Fund aimed at helping businesses of the new bank. reduce energy costs. The fund will be run by the bank's corporate and institutional banking Sunday Times, 18 November 2012 division. RBS will finance a range of sustainable UK GREEN INVESTMENT BANK PLC energy projects and will be able to lend at lower rates as the fund is backed by Funding for 23. The UK Green Investment Bank Plc ("UK GIB") Lending, with funding available for businesses has officially opened for business and has invested with a turnover of over £25 million. £8 million in a project to construct an anaerobic digestion plant in Teesside, and £5 million to Independent, 10 December 2012 retrofit Kingspan's UK industrial facilities. UK 18. RBS has predicted that it will take it ten years to GIB has been funded with £3 billion of fully return to the private sector, underlining the Government money and will aim to mobilise scale of the challenge facing executives and

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additional private capital to develop a green scandal which has involved at least 20 of the economy. world’s largest banks and interdealer brokers. Department for Business, Innovation and Skills, Financial Times, 12 December 2012 28 November 2012 29. Thomson Reuters, the provider responsible for the administration of Libor, is set to join Bloomberg DOMESTIC GENERAL to bid to operate a new and toughened Libor system. 24. The Banking Standards Commission has said that it would like to see the ring-fence between high Financial Times, 12 December 2012 street and investment banking "electrified". The 30. In a move aimed at protecting consumers from Commission has recommended that if banks do bank collapses the FSA has issued new rules not implement the proposals in the Independent which will require subsidiaries of foreign banks Commission on Banking's report to ring-fence the taking deposits in the UK to own their own two areas of banking, the government should have liquidity. Since 2007 the FSA has permitted only the power to step in and force them to do so. four foreign banks to open branches which rely on Guardian 21 December 2012 the parent bank for capital. 25. A review into portable bank accounts is to be Financial Times, 10 December 2012 announced by the Treasury, in a move that will 31. The Parliamentary Commission on Banking is dismay the big banks. A cost-benefit analysis of expected to raise the possibility of an independent switching to a system where customers can move approval body to deal with directors and bank banks without having to change account numbers managers who are involved in the future in the is to be commissioned by Ministers. Such a move collapse of banks. would make it easier for customers to change bank, but is being strongly resisted by the banks Sunday Telegraph, 9 December 2012 on costs grounds. The Parliamentary Commission on Banking Standards is sympathetic to the idea. 32. Banks have been told by the BofE to increase the incentive periods for directors from three years to Times, 10 December 2012 between five and eight. New rules could also make it harder to qualify for a bonus. This latest 26. A report from the Commons Home Affairs crackdown comes after a warning from the FSA committee has suggested that bankers who allow that deferred bonuses should be clawed back this drugs barons to launder illegal profits through year in the wake of scandals involving rigging of their institutions should be punished with a new Libor rates and the mis-selling of interest rate criminal law, in place of the current system of derivatives. The BofE is working with European fines. The report also warned that enforcement by and global regulators to update remuneration the FSA had been "too weak". guidelines that were last published in 2009. London Evening Standard, 10 December 2012 The Daily Telegraph, 3 December 2012 27. New figures from the Bank of England have 33. The UK Chancellor of the Exchequer has urged shown that only 6 of 35 banks and building the Banking Standards Commission not to unpick societies signed up to the Funding for Lending Government plans to separate off parts of banks Scheme have drawn down the cheap loans on that carry the most risk. offer to fund mortgages. High street banks have been criticised for being slow to boost lending, Financial Times, 22 November 2012 with the worst affected being first-time buyers. 34. Lenders are refusing to invest in high-risk Sunday Times, 9 December 2012 developments unless greater support is provided by the UK government in the form of an injection 28. Ex-trader Tom Hayes and two interdealer brokers of cash or the underwriting of banks' refinancing who work for RP Martin, Terry Farr and Jim risk. Gilmour, have been arrested and questioned by the police in relation to the probe into the potential Financial Times, 20 November 2012 manipulation of Libor. These are the first arrests which have been made in connection with the 35. The BofE must become more accountable to the UK Parliament if it is to operate effectively

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according to the FSA's head of prudential 41. UBS has been fined £940 million by the US and regulation. UK authorities in relation to its part in the LIBOR rigging scandal, the largest penalty ever made, Financial Times, 20 November 2012 after the bank pleaded guilty to the charges of 36. Leading investors and pension funds have written fraud. Two former traders at UBS, one British, a letter to business secretary Vince Cable saying have also been charged by the US Department of that current accounting rules are leading to a Justice with conspiracy to manipulate the distortion in bank profits and subsequently borrowing rate. harming shareholders. Daily Telegraph, 20 December 2012 Daily Telegraph, 20 November 2012 42. Kweku Adoboli has been sentenced to seven years 37. 300,000 customers sold credit card insurance by in jail after he was found guilty of two counts of Credit Card Protection (CPP) will receive £14.5m fraud by abuse of position, following a two-month in compensation from the company, which has trial at Southwark Crown Court. The former UBS been fined £10.5m by the FSA. The move makes trader gambled away £1.4 billion in Britain's it likely that banks which sold the same product to biggest fraud, which nearly destroyed the Swiss customers may have to compensate them as well. bank. Adoboli was acquitted of four lesser charges UK banks, including RBS, Barclays and HSBC, of false accounting, indicating that the jury did not are currently in talks with the FSA about the believe that personal gain was the motive for his matter. actions. Daily Telegraph, 16 November 2012 Times, 21 November 2012

EUROPEAN BANKING EUROPEAN GENERAL CREDIT SUISSE 43. Germany has given ground on some of its objections, including UK demands, paving the 38. Credit Suisse has announced that it is planning to way for a deal on creating a common eurozone carve out its investment banking arm from its bank supervisor. newly merged private banking and wealth management business, citing "the new regulatory Times, 14 December 2012 reality". 44. The European Parliament has indicated that new Guardian, 21 November 2012 laws to cap bankers' bonuses will not take effect until March 2013, due to difficulties in agreeing the bank capital rules and finding a compromise SOCIÉTÉ GÉNÉRALE on the cap proposal on bonuses. 39. The Supreme Court has found in favour of a Times, 29 November 2012 former Société Générale banker who had claimed unfair dismissal. Raphael Geys, who was the head of European fixed income sales, argued that INTERNATIONAL BANKING he was sacked for "being too successful" as the bank did not want to pay him the large bonuses he was owed. He could receive a termination LYNCH payment of £11 million. 45. Plans to bring in fees that could have hit more than ten million current account customers have been Daily Telegraph, 20 December 2012 dropped by Bank of America. About $200 a year UBS per customer is lost by the bank on around a fifth of its customers who typically only have modest 40. The Hong Kong Monetary Authority has balances and do not buy any other services from announced that it is to investigate UBS in relation the bank. A number of Bank of America's rivals to the rigging of the local inter-bank rate, HIBOR, are also looking to raise fee revenue from such following the Swiss banks record fine by the UK customers. and US regulators for manipulation of LIBOR, the London inter-bank lending rate. The Times, 3 December 2012 Daily Telegraph, 21 December 2012

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CITIGROUP websites and locked customers out of their 46. Ofgem and the FSA are investigating gas trades accounts temporarily in September. made by traders in the London office of . The Times, 3 December 2012 The investigation follows allegations by Seth Freedman, an employee for the energy industry 51. The US is being urged to rethink new rules on data provider ICIS Heren, who said that he was international money transfers before their concerned there had been an attempt on 28 introduction in February 2013 as it is thought they September 2012 to manipulate the wholesale gas will be unworkable. Under the rules, banks market. sending more than 100 international wire transfers a year will be required to disclose extra Daily Telegraph, 7 December 2012 information on fees and costs. Financial Times, 22 November 2012 52. The Securities and Exchange Commission has 47. The US Commodity Trading Commission has fined JPMorgan Chase and Credit Suisse a fined Goldman Sachs $1.5m (£900,000) for failing combined total of $416.9 million for negligently to supervise a former trader. The trader, Matthew selling sub-prime loans prior to the financial crisis. Marshall, is alleged to have hidden an $8.3bn Both banks agreed to settle the claim with position that cost $118m to unwind. payments of $296.9 million by JP Morgan and Daily Telegraph, 8 December 2012 $120 million being paid by Credit Suisse. Neither bank admits any wrongdoing. MORGAN STANLEY Times, 19 November 2012 48. Morgan Stanley has been fined $5 million by the Massachusetts securities regulator after it ruled LEGISLATION bankers exerted an "improper influence" on researchers covering Facebook during its IPO. 53. The Controlled Foreign Companies (Excluded Banking Business Profits) Regulations 2012 Financial Times, 18 December 2012 SI Number: 2012/3041 Commencement date: 1 January 2013 INTERNATIONAL GENERAL These regulations provide an exclusion from the controlled foreign company (CFC) charge for 49. US banks want to relax new Basel III rules on banking CFCs within banking groups, provided liquidity requirements, arguing that they would certain conditions are met, with effect from the need to come up with $800 billion in assets under introduction of the new CFC rules on 1 January the proposed standards. 2013. As an alternative to the normal Financial Times, 18 December 2012 capitalisation rules, the regulations offer a 'safe harbour' from the charge, based on a comparison 50. The president of the Federal Reserve Bank of between the capital held by the CFC and the Atlanta has said that cyber-attacks on banks capital held by the banking group of which the should not be viewed as isolated actions carried CFC is a member. A draft of the regulations was out by maladjusted teenagers any longer, but published in October 2012. instead seen as Lehman-style threats with the capability of severely damaging the financial For further information: Click here system. His warning comes as an investigation began in the United States into a sustained attack on several banks two months ago. Attacks have become more sophisticated over recent years and it has become apparent that state-backed cyber- terrorism and organised crime syndicate attacks are increasing. Five banks, including JPMorgan Chase and Bank of America, were victims of a denial of service attack that swamped their

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PRESS RELEASES as well as the BBA's timescale for the phased discontinuation of certain Libor rates. 54. Treasury appoints new Director General Financial Services British Bankers Association, 18 December 2012 Further information can be found on the BBA Charles Roxburgh has been appointed Director website: General, Financial Services at HM Treasury. He will have responsibility in the Treasury for all Click here issues relating to financial services, the financial 58. Implementation of the Basel III Framework system and financial stability. The Basel Committee on Banking Supervision has HM Treasury 21 December 2012 discussed the progress of its members in Further information can be found on the HM implementing the capital adequacy reforms within Treasury website: Basel III. Eleven of its member jurisdictions have published the final set of Basel III regulations Click here effective from January 1, 2013, including 55. BBA response to PCBS report Australia, India, Japan, Mexico and Chile. Brazil, the European Union and the United States have The BBA has welcomed the Parliamentary issued draft regulations which will be published Commission on Banking Standards' First report, early in 2013. which it said broadly endorsed the Government’s approach to banking reform. The BBA said the Bank for International Settlements, 18 December industry is strongly committed to taking the 2012 necessary steps to ensure that taxpayers are never Further information can be found on the BIS again asked to bail out failing banks. website: British Bankers Association, 21 December 2012 Click here Further information can be found on the BBA 59. Investibility of UK banks website: The Association of British Insurers has issued a Click here report on the investibility of UK banks which 56. Financial Services Bill receives Royal Assent reflects UK investors' views in the continuing debate on UK banks' capital structure, funding, The Financial Services Bill, which will deliver liquidity and balance sheet risk weighting. fundamental reform of financial regulation in the UK, has received Royal Assent. The Bill, which Association of British Insurers, 11 December 2012 has now become an Act of Parliament, will be Further information can be found on the ABI known as the Financial Services Act. It sets out a website: clear and coherent regulatory framework, replacing the uncertainty and inadequacy of the Click here failed Tripartite system. 60. The regulation and supervision of benchmarks HM Treasury, 19 December 2012 The FSA has issued a consultation seeking views Further information can be found on the HM on proposed new rules and regulations for Treasury website: financial benchmarks following the recommendations of the Wheatley Review of the Click here London Interbank Offered Rate (LIBOR). The 57. BBA reports findings of LIBOR reform FSA also seeks comments on ensuring the consultation continuity of LIBOR and broadening participation in the rate. Comments by 13 February 2013. The British Bankers' Association (BBA) has published its feedback statement concerning the Financial Services Authority, 5 December 2012 consultation on Libor reform. The statement summarises the key findings of the consultation,

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Further information can be found on the FSA member of the Group of Thirty and of the website: Foundation Board of the World Economic Forum. Click here HM Treasury, 26 November 2012 61. Implementing the Wheatley Review Further information can be found on the Treasury website: The government has launched a public consultation on the regulation of the Libor Click here benchmark. The consultation requests views from 64. Re-appointment of Deputy Governor of Bank industry and the public on legislation intended to implement the key recommendations of the of England for Monetary Stability Wheatley Review of Libor, which the government The Queen has approved the re-appointment of has accepted in full. The regulation of Libor is Charles Richard Bean as Deputy Governor of the part of an attempt to restore public confidence in Bank of England for Monetary Stability from 1 the benchmark. The consultation will close on 24 July 2013. Mr Bean has agreed to stay on for a December 2012. year to help oversee the extension of the Bank of England’s responsibilities and the transition to the HM Treasury, 29 November 2012 new Governor. He has asked to stand down on 30 Further information can be found on the Treasury June 2014. website: HM Treasury, 26 November 2012 Click here Further information can be found on the Treasury 62. Opinion of the European Central Bank of 27 website: November 2012 on a proposal for a Council regulation conferring specific tasks on the Click here European Central Bank 65. Strengthening Oversight and Regulation of In its opinion on a proposal for a regulation Shadow Banking: An Integrated Overview of conferring specific tasks on the European Central Policy Recommendations Bank (ECB) concerning policies relating to the The Financial Stability Board has published a prudential supervision of credit institutions and a consultation paper seeking views on policy proposal for a regulation amending Regulation recommendations to strengthen oversight and 1093/2010 establishing a European Supervisory regulation of the through Authority (European Banking Authority), the measures including the mitigation of the spill-over ECB broadly welcomes the proposals and states effect between the regular banking system and the that it supports the establishment of the single shadow banking system and the reduction of the supervisory mechanism. susceptibility of money market funds to "runs". Comments by January 14, 2013. European Central Bank, 29 November 2012 Further information can be found on the ECB Financial Stability Board, 19 November 2012 website: Further information can be found on the FSB website: Click here Click here 63. Governor of the Bank of England 66. The creation and sale of plc: The Queen has approved the appointment of Mark Carney as Governor of the Bank of England from Eighteenth Report of Session 2012-13: Report, 1 July 2013. He will succeed Sir Mervyn King. together with formal minutes, oral and written Mr Carney is currently Governor of the Bank of evidence Canada, having taken up his office on 1 February This Committee of Public Accounts report on the 2008. He also currently serves as Chairman of the creation and sale of Northern Rock Plc concludes Financial Stability Board (FSB) and as a member that: the rescue of Northern Rock is expected to of the Board of Directors of the Bank for cost the taxpayer some £2 billion; the Treasury International Settlements (BIS). He is also a was unable to respond promptly because it lacked the right skills and understanding; it is unlikely

that the taxpayer will make a profit on the sale of RBS and Lloyds which remain in public

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ownership; and that there is a risk that the £66 proceedings in the county court for their additional billion invested in RBS and Lloyds may never be losses. Their claim was struck out. The judge recovered. regarded himself bound by the decision in Andrews v SBJ Benefit Consultants Ltd [2010] House of Commons Committee of Public EWHC 2875 ("Andrews"), a case which had been Accounts, 16 November 2012 determined some 9 months after the Clarks had Further information can be found on the decided to accept the Ombudsman's final decision. Parliament website: Andrews decided that the doctrine of merger applies in complaints made to FOS and that once a Click here complainant accepts an Ombudsman's decision this extinguishes his right to make a further claim CASE LAW through the courts. This doctrine of merger 67. Doctrine of merger does not apply to operates so that a person who obtains a final determinations made by Financial Services judgment from a tribunal of competent jurisdiction Ombudsman cannot later obtain a second judgment from a court for the same relief in respect of the same subject The issue in this case was whether a claimant can matter. The cause of action initially advanced accept a determination made by the Financial merges with the judgment and there is therefore no Services Ombudsman ("FOS") which gives them existing cause of action to pursue on the second some compensation for their loss but then go on to occasion. Applying that logic, by accepting the also claim damages in court to cover their "full Ombudsman's decision the Clarks' cause of action loss". had merged with that decision and they were barred from further litigation. Here, Mr and Mrs Clark made a complaint to the FOS claiming that Focus Asset Management and The Clarks appealed. Tax Solutions Ltd ("FAMTS Ltd") had wrongly advised them about their investments and that they On appeal, the judge decided that the doctrine of had lost in excess of £500,000. FOS found in their merger does not apply to Ombudsman's favour and determined that FAMTS Ltd should determinations and he declined to follow pay them compensation in accordance with a Andrews. In his view the Ombudsman deals with formula designed to put them back in the position "complaints" not "causes of action". The doctrine they would have been in had the advice not been of merger turns on a "cause of action" being given. The maximum amount FOS could award extinguished - if the Ombudsman consider under the Ombudsman Scheme at the time was "complaints" not "causes of action" then the £100,000 but FOS recommended that FAMTS Ltd doctrine of merger is not relevant. also pay the balance due under the formula over Also the judge was not persuaded that the and above this amount to the Clarks as well. Ombudsman is a "tribunal" for the purposes of The Clarks were told that if they accepted the applying the doctrine of merger. The issue as to Ombudsman's final decision they "would be bound whether the doctrine of merger applies to the by the decision" which would be "final". Their Ombudsman should be determined by a detailed solicitor queried the meaning of "final" and analysis of the Ombudsman's functions. "binding" and whether their rights to pursue their For a number of reasons the functions of the additional losses would in any way be prejudiced Ombudsman differ from those of a typical by accepting the final decision. FOS responded by tribunal. The correct approach was to consider the stating that if FAMTS Ltd did not pay the Ombudsman scheme as a whole. The statutory recommended balance and the Clarks decided to aims of the scheme were to provide a scheme for sue for the balance in court, then the court would the summary and informal resolution of disputes. make its own decision as to whether to award The Ombudsman does not have to apply the law in anything. reaching a fair and reasonable disposal of any The Clarks accepted the Ombudsman's decision complaint and the procedure is designed to be but indicated in writing that they reserved the right expeditious. Complainants can accept or reject the to pursue the matter further through the courts. Ombudsman's determination but if they do accept a determination then it is binding on the parties FAMTS Ltd paid only £100,000 to the Clarks in and final. compensation so the Clarks subsequently issued

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The fact that an award, even though accepted, Davisons had not previously dealt with the might not lead to the end of proceedings in any solicitors purporting to act for the vendor, one case would not undermine the statutory aims. Rothschild, so they checked their existence and The scheme would still yield a final outcome in the existence of their branch office in Small Heath cases where there was no prospect of recovering as recommended in paragraph A3.2 of the CML more than £100,000 in compensation. Handbook and the Law Society's Green Card. They did this by checking websites maintained by In cases involving amounts above £100,000, the the Law Society and the Solicitors Regulation Ombudsman's non-binding recommendation to the Authority. Everything seemed to be in order. respondent under s. 229(5) of the Financial Services and Markets Act 2000 Part XVI might Rothschild confirmed that they would have well encourage parties to compromise without sufficient funds on completion to discharge the recourse to the courts. existing mortgage. Davisons asked for replies to the standard protocol requisitions on Form TA13 If a complainant uses an award of £100,000 from but were sent completed requisitions on title on the Ombudsman to finance the legal costs of the OYEZ form not TA13. These confirmed that bringing court proceedings for a greater amount the charge in favour of G.E. would be discharged. then this is not inconsistent with the statutory Rothschild also confirmed in the replies to the aims. The term "final" simply means the end of requisitions that they would comply with the Law the Ombudsman's process. Society's Code for completion by post (1998 In the judge's view the judge in Andrews was Edition) which provides that when completing the wrong to regard the doctrine of merger as vendor's solicitor undertakes to redeem or obtain applying to the determinations of the discharges for existing charges. Ombudsman. The Clarks' claim was therefore Nationwide released the loan money to Davisons. reinstated. Contracts were signed and exchanged and the (1) Barry Clark (2) Julie Clark v In Focus Asset charge in favour of Nationwide was executed by Management & Tax Solutions Ltd, Queen's Bench Mr Patel. The purchase price was sent to Division, 19 December 2012. Rothschild by CHAPS. Mr Patel was registered as proprietor but the charge in favour of G.E. was not 68. Solicitor in breach of trust relieved of liability discharged and Nationwide's charge was not under s. 61 of the Trustee Act as he had acted registered. honestly and reasonably It turned out that whilst there was a legitimate firm If a solicitor is found to be liable for breach of called Rothschild it had never had premises in trust he may be relieved of liability under s.61 of Small Heath. An impostor had notified that the Trustee Act 1925 if he has acted honestly and business address to the Law Society and the reasonably. In this case the issues were whether Solicitors Regulation Authority. the solicitor had acted in breach of trust, and, if so, whether he should be relieved of liability and Nationwide issued proceedings against Davisons whether he was liable otherwise for breach of seeking damages for breach of retainer and retainer. repayment of the money transferred by Nationwide to Davisons or equitable Davisons Solicitors ("Davisons") were instructed compensation for breach of trust. Davisons denied by Nationwide Building Society and its borrower, liability and in the alternative sought relief under Mr Patel, in connection with the purchase and s.61 of the Trustee Act 1925 on the ground that it mortgage of a property. The property was had acted honestly and reasonably and ought fairly registered in the name of the vendor, Shamsun to be excused for any breach of trust for which it Naher Begum, and was subject to a registered might be liable. charge in favour of G.E. Money Home Lending Ltd ("G.E."). Davisons were instructed on the At first instance Davisons were found to be in basis of the Council of Mortgage Lenders breach of contract and in breach of trust. Davison's Handbook current at that time ("CML were refused relief under s.61 on the basis that Handbook") which amongst other things at they had not acted reasonably. They did not have paragraph 10.3.4 required them to hold any loan anything capable of being construed as a solicitor's money released to them on trust for Nationwide undertaking to discharge the G.E. charge and the until completion. replies to the requisitions did not contain anything capable of being construed as a solicitor's

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undertaking to discharge the G.E. charge. the CML Handbook imposed an absolute Davisons had not got an undertaking in the Law obligation on Davisons to obtain a fully Society's recommended form and had not got enforceable first legal charge by way of legal replies to requisitions in the form they had mortgage over the property and to ensure that all themselves requested. It was insufficient for them existing charges were redeemed on or before to proceed without clearly worded undertakings completion. that the prior charge would be redeemed on The Court of Appeal considered that obtaining a completion and that evidence of its discharge "fully enforceable first charge by way of legal would be provided after completion. They could mortgage" was not comparable to obtaining a pre- not assume that because the Code for completion packed commodity to be supplied to a customer's by post provided that undertakings had to be given order. It would involve issues of title and the that they had them already. exercise of professional skill. Likewise, the Davisons appealed. requirement that all existing charges "must be redeemed", necessarily involved reliance on the The Court of Appeal held that Davisons had acted acts and omissions of the vendor's solicitors. Each in breach of trust. It could not be implied from the of those ingredients was inconsistent with an terms of paragraph A3.2 of the CML Handbook absolute obligation. that by carrying out the verification steps required that a solicitor had the requisite authority to part The effect of an absolute undertaking would be to with the lender's funds. The trust imposed by impose on Davisons the equivalent of a guarantee paragraph 10.3.4 of the CML Handbook could that all existing charges would be redeemed and only be discharged by completion of the purchase that Nationwide would obtain a fully enforceable or return of the money to Nationwide. No such first charge by way of legal mortgage. If that was completion ever took place and the money was the intention of the parties then almost all of the not returned. rest of the CML Handbook would be redundant. The obligation in paragraph 5.8 went no further On the s.61 point, there was no dispute that the than an obligation to exercise reasonable skill and solicitor at Davisons had acted honestly care in seeking to procure the outcome it referred throughout. The agreement to adopt the Law to. Society Code for completion by post constituted the giving of an undertaking as provided for by Davisons Solicitors (A Firm) v Nationwide paragraph 9 (ii) of the Code. The solicitor had Building Society, Court of Appeal, 12 December acted reasonably in believing that he had an 2012. undertaking to redeem the G.E. charge from a 69. Lender not entitled to normal Part 36 costs person whom he believed was a solicitor. Whilst in reality he did not have an undertaking because order due to failure to comply with pre-action the person who had given it was not a solicitor, he protocol could not know that having made the required In this case the court had to decide what costs checks. Whilst he had not obtained an undertaking order to make after a professional negligence to submit evidence of the discharge of the claim brought by a lender against a firm of mortgage which he would have done had solicitors settled following acceptance of a Part 36 Rothschild used Form TA 13, no such document offer. could have been provided in advance of completion and by that time Davisons would have In July 2010 Webb Resolutions Limited parted with the purchase money anyway. ("Lender") sent a Letter of Claim, purportedly in accordance with the Professional Negligence Pre- S.61 only requires a solicitor to have acted Action Protocol ("Protocol"), to Waller Needham reasonably, he is not required to have complied & Green ("Solicitors"). The Letter of Claim with best practice in all respects. In the alleged that the Solicitors had been negligent in circumstances Davisons had acted reasonably and their handling of a mortgage transaction and that the court was prepared to exercise its discretion had they not been negligent the Lender would not under s.61 to grant relief from liability. have lent. The claim was valued at £165,000. That left Nationwide's claim that Davisons had On the same day the Lender made a Part 36 offer been in breach of their retainer. In this regard offering to settle for £140,000 plus costs. Nationwide sought to argue that paragraph 5.8 of

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On 12 January 2011 the Solicitors asked for Solicitors should have their costs thereafter or, that disclosure of 12 classes of documents which they there should be no order for costs thereafter. said they needed in order to prepare their Letter of The court regarded it as settled law that CPR Part Response. 36 establishes what might be called the "normal The Lender provided some of the documents but order" for costs but that the court has a discretion argued that the Solicitors did not need the other to depart from that order. The court should make documents in order to assess their liability. the "normal order" unless it would be unjust to do so. In deciding whether it would be unjust the The Solicitors wrote again on 17 and 22 February court must take into account all the circumstances 2011 explaining in some detail why they needed of the case including those expressly set out in the underwriting file and repossession and sale CPR Rule 36.14(4). In deciding whether it would files which, they argued, were essential for them be unjust to depart from the normal order it was to be able to assess the extent of their possible relevant to consider whether there had been liability. substantial compliance with the Protocol or The relevant documents were not disclosed. On 8 whether sanctions might be appropriate. April 2011 the Solicitors wrote stating that they The aim of the Protocol is to establish a could not make a Protocol Letter of Response framework in which there is an early exchange of because of the failure to provide the documents. information so that the claim can be fully On 12 April 2011 the Lender replied arguing that investigated and, if possible, resolved without the it had complied with the Protocol and that the need for litigation. Parties are expected to act Solicitors were not entitled to any further reasonably and sanctions will only be imposed if disclosure until they formally admitted liability. there is substantial non-compliance. On 17 May 2011 the Lender made a Part 36 offer Although the Solicitors early requests for offering to settle for £30,000. The offer was disclosure might have been ambitious, it was calculated on the basis that the Lender would apparent from the correspondence that they were recover on a lesser loan basis rather than a no placing emphasis on two important files and were transaction basis. explaining why disclosure of those files was necessary for them to be able to properly assess On 17 June 2011 the Lender gave 14 days' notice the claim. that proceedings would be commenced. A claimant acting reasonably would, in the On 5 July 2011 the Solicitors reminded the Lender circumstances of this case, have supplied copies of that no Protocol Letter of Response had in fact those files at an early stage and not merely extracts been served as they had been unable to respond to from them. Instead, the Lender either refused to the issue of causation pending disclosure of the supply the documents requested without giving documents which had been requested on 17 any good reason or failed to respond to the letters February 2011. of request at all. Such conduct was not in accordance with the Protocol. It was neither The Lender served proceedings on 12 September helpful nor conducive to an early disposal of the 2011. In March 2012 the Lender provided case. When the Lender refused to give further standard disclosure. On 23 May 2012 the disclosure unless liability was admitted it was Solicitors accepted the Lender's Part 36 offer of clearly acting well outside the letter and spirit of 17 May 2011. the Protocol. Its conduct was not designed to The Lender argued that the normal order for costs achieve early resolution of the dispute with a when a claimant's Part 36 claim is accepted out of proportionate expenditure on costs. time is that the claimant should have an order for The Lender's non-compliance with the Protocol costs on the standard basis and that it was entitled made it unjust for the "normal order" under CPR to an order on this basis. The Solicitors on the 36.(10)(4). other hand argued that the Lender should only be entitled to its costs up to 12 January 2011 (when The judge concluded that the Lender was not the Solicitors had requested disclosure) and that proceeding properly in accordance with the the Solicitors should be entitled to their costs Protocol by not properly responding to the letters thereafter. Alternatively they argued that the of 17 and 22 February 2011 and by rejecting any Lender should have its costs up to 21 days after obligation to provide further disclosure until the Part 36 offer made on 17 May 2011 and the liability was admitted. It would therefore be unjust

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to require the Solicitors to pay any costs after 17 claiming that there was no proof that the steel had June 2011. been cut, that no representative of the Buyer had given its approval (as provided for in the Payment It was possible that a substantial amount of costs Guarantee) and that the Seller had not provided a were incurred after 17 June 2011. It was Refund Guarantee in respect of the second significantly more likely than not that those costs instalment in a form finally approved by the banks would not have been incurred had the Lender of both Buyer and Seller. These issues and others acted reasonably and responded properly to the were to be determined at arbitration. requests for disclosure. The fair order to make was that the Lender should have its costs until 17 June The Contract came to an end with both parties 2011 but should pay the Solicitors costs thereafter. arguing that the other was in repudiatory breach. Webb Resolutions Limited v Waller Needham & The Seller issued proceedings against the Bank Green (a firm), Chancery Division, 11 December and claimed summary judgment for the principal 2012 and interest it said was due under the Payment Guarantee. It argued that the Payment Guarantee 70. Payment guarantee was an on demand bond was in the nature of a demand or performance not a traditional guarantee bond and that payment was due upon written The central issue in this case was whether a demand whether or not the payment was actually payment guarantee was actually a traditional due. guarantee or an on demand bond. The Bank disputed this. It argued that the Payment Wuhan Guoyu Logistics Group Co Ltd and Guarantee was a traditional guarantee. If the Yangzhou Guoyu Shipbuilding Co Ltd ("Seller") second instalment was not due, there could be no jointly operated a shipyard in China. They entered liability under the guarantee. As there was a into a shipbuilding contract ("Contract") with a dispute as to whether the Buyer was liable to pay buyer ("Buyer"). Emporiki Bank of Greece S.A. the second instalment which could not be ("Bank") provided finance to the Buyer. determined summarily the Seller must await the determination of that question in arbitration. If The Contract price was payable in five successful then it could then recover under the instalments. The first instalment due was paid Payment Guarantee. after receipt by the Buyer of a Refund Guarantee issued by the Seller's bank, Bank of China, At first instance the court held that the payment securing the first instalment for the Buyer. The guarantee was a traditional guarantee and that the second instalment was payable within "5 New Bank could argue that it was not liable under the York banking days of receipt by the Buyer of a guarantee as no payment had become due under Refund Guarantee" in a specified form issued by the contract containing the obligation guaranteed. the Seller's bank together with "a certificate of the On appeal, the Court of Appeal noted that whilst cutting of the first steel plate of the Vessel in the every bond has to be construed in accordance with Seller's workshop." its terms there is a presumption that where the The Buyer assigned to the Bank all the moneys instrument: and claims for moneys due to the Buyer under the ■ relates to an underlying transaction between Contract at any time and also the Refund the parties in different jurisdictions; Guarantee and any other guarantee given to the Buyer as security for the money due to it under ■ is issued by a bank; the Contract. Notice of Assignment was given to ■ contains an undertaking to pay "on the Seller which was duly acknowledged. demand" (with or without the words "first" The Bank then issued what was described as a and/or "written"); and guarantee ("Payment Guarantee") in respect of the ■ does not contain clauses excluding or limiting second instalment. That instalment was not paid. the defences available to a guarantor; There was a dispute as to whether the cutting of it will almost always be construed as a demand the first steel plate had taken place. The Seller made a demand under the Payment Guarantee guarantee and not a traditional guarantee. stating that the steel had been cut. The Buyer This presumption, which is set out in Paget's Law disputed that the second instalment was due, of Banking (11th Edition), was approved by the

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Court of Appeal in Gold Coast Ltd v Caja de This bulletin is intended as a general overview and Ahorros [2002] 1 Lloyd's Rep. In that case the discussion of the subjects dealt with. It is not document in question was held to be an on intended, and should not be used, as a substitute for demand guarantee even though the fourth element taking legal advice in any specific situation. DLA of the presumption was absent (as in this case) but Piper UK LLP will accept no responsibility for any the others were present. actions taken or not taken on the basis of this The first instance judge had thought that there publication. If you would like further advice, please were pointers in both directions but that there contact: were more pointers in favour of the instrument being a traditional guarantee. These could have Leeds: Hugh Evans been serious points if the court had been T 0113 369 2200 approaching the document on a wholly fresh basis without regard to previous authority. However, E [email protected] there were also factors pointing to the document London: Jean-Pierre Douglas-Henry being an on demand guarantee and given the presumption set out in Paget (now contained in T 020 7153 7373 almost identical words in the 13th edition) and E [email protected] supported by previous authority, the first instance Manchester: Stewart Plant judge should have paid more regard to the presumption than he did. He should have been T 0161 235 4544 guided by the general tenor of previous authority E [email protected] enunciated by past judges of great distinction.

The document sued on was an on demand guarantee. (1) Wuhan Guoyu Logistics Group Co Ltd (2) Yangzhou Guoyu Shipbuilding Co Ltd v Emporiki Bank of Greece SA, Court of Appeal, 7 December 2012

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]

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