DEUTSCHE BANK UNITECH BANK : OF FREEDOM DEUTSCHE ALONGSIDE SET EQUITY KEY POINTS ––A recent Court of Appeal judgment holds that “principal debtor” and “primary obligor” Feature language clearly point to an obligation of indemnity rather than guarantee. ––The judgment confirms that the courts will give priority to parties’ freedom of contract in defining their relationship. ––Protections attaching to guarantees therefore do not apply.

Authors David Joseph QC and Edward Brown Equity set alongside freedom of contract: Deutsche Bank Unitech, round two

In this article, the authors consider whether LIBOR manipulation engages the the express wording of the guarantee and “unusual features” principle, such that any unusual feature of the contract between indemnity proved fatal to the assertion creditor and debtor can discharge the guarantor from liability (provided the contract of protection on the part of the parent with the guarantor is characterised as a guarantee and not as an indemnity). company obligor against the creditor bank.

THE ISSUES IN DEUTSCHE BANK A tension has for some time been is a great deal to be said in favour of solutions The underlying complaint in theDeutsche nevident between, on the one hand, underscoring the primacy of freedom of Bank actions will be familiar from the the imposition of particular legal and contract in financial transactions. The case ongoing LIBOR litigation. It relates to a equitable duties on parties to certain types was heard by Longmore and Christopher facility agreement under which US$150m of contract or in certain situations, and, on Clarke LJJ and Sales J, with Longmore LJ was advanced, and to a US$11m interest rate the other hand, the autonomy or freedom of delivering the single judgment of the court. swap, where the interest rates under both commercial parties to agree to circumscribe In China and South Sea Bank Ltd v Tan the loan and the swap were tied to LIBOR. the same. In the wider sphere of financial [1990] 1 AC 536 at 544, Lord Templeman Here, as in most LIBOR cases, the borrower litigation, this tension has played out in a long expressed the maxim: “equity intervenes (Unitech Global) under with a rate- TWO ROUND , running debate arising from the contractual to protect a surety”. In that case, however, submitting bank (Deutsche Bank) complains estoppel line of cases – see Lowe v Lombank equity provided no assistance to the that the bank’s manipulation of LIBOR [1960] 1 WLR 196; Peekay Intermark Ltd guarantor’s complaint that a creditor had has some consequence for the credit facility v Australia & New Zealand Banking Group failed to have regard to its interests when agreement. Deutsche Bank’s manipulation of Ltd [2006] 2 Lloyd’s Rep 511; Springwell exercising a power of sale over mortgaged LIBOR is a matter of public record, as it has Navigation Corp v JP Morgan Chase Bank securities. As Lord Templeman made clear, accepted it in regulatory decisions in the UK [2010] EWCA Civ 1221, [2010] 2 CLC 705; a creditor/mortgagee can make up its own and the US. and Prime Sight Ltd v Lavarello [2013] UKPC mind and consider its own interests when A previous Court of Appeal hearing 22, [2014] AC 436. For the present ( determining if and when to sell mortgaged ([2013] EWCA Civ 1372) allowed Unitech excepted), the party autonomy wing might be securities. The guarantor in that case was not Global to proceed with an allegation that it said to be in ascendancy. However, the last able to seek the discharge of the guarantee had been induced to enter the agreements chapter in that debate has quite clearly not simply by reason of the grant of time by the by implied representations from the bank to been written. creditor to the debtor (under well-established the effect that LIBOR was genuine. Unitech This might also be seen as background rules of equity) because the guarantee Global further claims that the manipulation context for a similar debate evident in provided expressly that the grant of further of LIBOR breached implied terms to the the Court of Appeal’s recent decision in time by the creditor to the debtor would not same effect. Deutsche Bank AG v Unitech Global Ltd result in the discharge of the guarantee – the In cases like Deutsche Bank, the [2016] EWCA Civ 119 (3 March 2016). agreed terms meant that the parties wished manipulation may also trigger a number of The issues inDeutsche Bank arose in the to exclude the equitable rule in question. equitable principles intended to protect the sphere of banking surety law and a similar The debate was similar inDeutsche Bank. guarantor (in this case Unitech Limited, debate: namely whether equitable principles The Court of Appeal (albeit in the context the parent company of Unitech Global, trumped the freedom of parties to express of an application for permission to amend) the debtor) by discharging it from liability. their relationship in particular terms and declined to intervene in principle to allow As noted in the introduction, however, so the operation of equitable principles or for protection (ie release) of an obligor in these principles are dependent not only on the consequences of breach. The where the underlying credit facility the wording of the contract between the Appeal’s approach shows that freedom of – which was the subject of a guarantee bank and Unitech Limited but also on its contract still holds the advantage. There is a and indemnity by the parent company of characterisation as guarantee or as indemnity. lot at stake in this argument particularly in the principal debtor – contained interest The Court of Appeal had to decide the terms of the future role of English law in provisions that had been impacted by whether to allow an amendment which the sphere of financial litigation. Equally there LIBOR manipulation. Once more, however, (among other things) sought to add a defence

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that the guarantee was discharged by such from North Shore, where the court held (at unusual feature’. This appears to reflect principles. The key issues before the Court of [14]) that the principle of disclosure was that: a degree of flexibility in theNorth Shore Appeal in this regard were: ––the creditor is obliged to disclose to the principle which has yet to be worked out fully ––whether the LIBOR manipulation was an surety any contract or other dealing in the cases. “unusual feature” which could, if proven, between creditor and debtor so as to The guarantor may have the benefit of cause the contract between the bank and change the position of the debtor from other, well-established defences, such as Unitech Limited to be discharged under what the surety might naturally expect; but that a creditor cannot plead his own fraud principles of equity; and ––the creditor is not obliged to disclose to in making a claim against the surety. It is ––whether that principle in fact applied to the surety other matters relating to the an open question, in light of the tentative the clause in question. debtor which might be material for the comments of the Court of Appeal, whether surety to know. the North Shore principle will provide a It is worth noting that the discharge broader basis for extending the rationale defence was no doubt advanced at least partly Accordingly, North Shore itself would of those defences in LIBOR cases such as because Unitech Global wished to avoid appear to extend the principle to the terms Deutsche Bank. repaying the bank the US$120m in restitution of the contract or “other dealings” which it will owe if it succeeds on its rescission changed the position of the debtor from COULD THE PRINCIPLE APPLY TO defence (see the judgment at [52–55]). what the surety might naturally expect, but THE OBLIGATION IN QUESTION not to “other matters” even if they might be ANYWAY? DOES LIBOR MANIPULATION material. The rationale for theNorth Shore In fact, the Court of Appeal in Deutsche ENGAGE THE “UNUSUAL FEATURES” principle, although not expressed as such Bank did not need to determine the scope PRINCIPLE? in the decision, appears to be akin to the of the principle on the facts of the case. This The “unusual features” doctrine is a classic rationale for the equitable principle in Holme is because of the well-trodden further issue instance of the courts’ piecemeal development v Brunskill (1878) 3 QBD 495 (by which a before it, namely whether the facility wording of the protection of guarantors through guarantor is discharged from liability by a in question constituted a guarantee or an principles of equity. The principle was material binding variation to the underlying indemnity. Where the obligation is properly considered by the Court of Appeal in North contract): that equity prevents two parties described as a “true indemnity” (described as Shore Ventures Ltd v Anstead Holdings Inc to a triangular relationship altering their such at [18]), on the current state of the law EQUITY SET ALONGSIDE DEUTSCHE FREEDOM OF CONTRACT: BANK UNITECH [2012] Ch 31. Giving the judgment of the arrangements behind the back of the third. equity will not step in. Court in North Shore, Sir Andrew Morritt As Longmore LJ said in Deutsche Bank It is well recognised that modern facility C cited the following passage from Lord at [19], this ambit is ‘perhaps not entirely agreements are usually drafted on standard Nicholls’s speech in Royal Bank of Scotland plc clear from the authorities’. That said, on forms of wording with the objective of v Etridge (No 2) [2002] 2 AC 773: the authority of North Shore and Deutsche protecting banks. They are intended as Bank it now appears likely in any future a riposte to the principle that “equity ‘It is a well-established principle that, case that protection will be afforded both to intervenes to protect a surety”, the means stated shortly, a creditor is obliged to contractual arrangements between debtor deployed being the drafting of contractual disclose to a guarantor any unusual feature and creditor and to other dealings. The terms which modify or exclude equitable of the contract between the creditor and unresolved issue is the scope of the “other principles that might otherwise act to the the debtor which makes it materially dealings” that might qualify, particularly detriment of the lender. different in a potentially disadvantageous where “other matters” are expressly outwith In Deutsche Bank there were effectively respect from what the guarantor might the doctrine. On the facts of North Shore, two arguments raised by the bank which were naturally expect. The precise ambit of this the circumstances of a criminal investigation raised in answer to the North Shore argument. disclosure obligation remains unclear.’ into the debtor were (perhaps unsurprisingly) The first was that the facility contained characterised as “other matters” and not indemnity obligations. The second was that The principle, on its face, therefore applies to contracts or dealings. This characterisation is the rule was ousted in any event. The Court unusual features “of the contract”. The question entirely understandable in that it concerned of Appeal construed the facility obligation in Deutsche Bank was whether the doctrine matters which did not relate to anything that as constituting a primary indemnity (at extended beyond the contractual terms, to the passed between the creditor and debtor. [19–21]) and so held that the North Shore “contractual relationship”. Ultimately, the Court The issue of LIBOR manipulation by argument had no application. It is therefore of Appeal, for reasons set out below, did not the bank is more difficult. Longmore LJ worth considering the facility wording which decide the issue. But it is ripe for consideration. considered it arguable that ‘manipulation resulted in this successful outcome for the Some support for a wider interpretation by the Bank of a rate by reference to which bank. The facility agreement in question (beyond the terms of the contract) comes interest was calculated would be a most provided as follows:

394 July/August 2016 Butterworths Journal of International Banking and Financial Law DEUTSCHE BANK UNITECH BANK CONTRACT: OF FREEDOM DEUTSCHE ALONGSIDE SET EQUITY Biog box David Joseph QC and Edward Brown are at Essex Court Chambers specialising Feature in commercial litigation. Email: [email protected] and [email protected]

‘15.1 Guarantee and indemnity rules about guarantees did not apply”. The ultimately, one that did not require an Court of Appeal agreed at [20] that the answer as it was a rule applicable only to The Guarantor irrevocably and sub-clause had the effect of constituting an guarantees and not to primary obligations unconditionally: indemnity if any amount was not recoverable of indemnity. Accordingly, in respect of on the basis of a guarantee “for any reason”. this aspect of the equitable principles in (a) guarantees to each Finance Party Those words, the Court of Appeal held, play, absent further development, the safest punctual performance by the Company would encompass irrecoverability by reason course for lenders is to include primary of all its obligations under the Finance of non-disclosure of features which ought contractual language of indemnity. Documents; to have been disclosed. The wording was (b) undertakes with each Finance Party effective therefore to render reliance onNorth CONCLUSION that, whenever the Company does Shore irrelevant. The incremental approach of equitable rules not pay any amount when due under has historically focussed upon the position or in connection with any Finance DISCHARGE BY BREACH of secondary guarantee liability and not Document, the Guarantor must A further feature of the Court of Appeal’s primary indemnity obligations. The modern immediately on demand by the Facility conclusion that sub-cl 15(c) was an indemnity trend is to give primacy to the parties’ Agent (acting on the instructions of is that a (further) equitable rule, again freedom to restrict or disapply those rules. the Majority Lenders) pay that amount applicable only to guarantees, was not The Court of Appeal’s judgment inDeutsche as if it were the principal obligor in available to the debtor. There is no doubt Bank provides robust protection to the respect of that amount; and that under ordinary contractual principles a primacy of the parties’ bargain, as expressed (c) agrees with each Finance Party repudiatory breach of a guarantee agreement in the financial documents which they that if, for any reason, any amount must be accepted for the guarantee to be execute. Nevertheless, it is clearly in lenders’ claimed by a Finance Party under this discharged. If it is not accepted, or the interests to ensure that they enter contracts TWO ROUND , Clause is not recoverable from the contract is affirmed, the guarantor remains in terms similar to those in Deutsche Bank, Guarantor on the basis of a guarantee, liable. In Deutsche Bank there was never making it clear that the liability of the then the Guarantor will be liable as a any such acceptance of any repudiatory “guarantor” is primary as well as secondary. principal debtor and primary obligor breach regarding LIBOR. However, it was Correspondingly, if a “guarantor” wants to to indemnify that Finance Party in argued that a non-repudiatory breach of the be sure of receiving any of the protections respect of any loss it incurs as a result underlying contract with the principal would traditionally attaching to contracts of of the Company failing to pay any nevertheless discharge the guarantee, whether guarantee, then it should expressly provide amount expressed to be payable by or not accepted. for them in the mechanisms of the contract it under a Finance Document on the There is some support for this equitable in terms which operate independently of its date when it ought to have been paid. principle on the current authorities (see overall characterisation. n The amount payable by the Guarantor eg National Westminster Bank Plc v Riley under this indemnity will not exceed [1986] BCLC 268 and The Wardens and the amount it would have had to pay Commonality of the Mystery of Mercers Further Reading: under this Clause had the amount of the City of v New Hampshire ––Guarantees: What needs to be claimed been recoverable on the basis Insurance Co [1992] 2 Lloyd’s Reports 365). disclosed? [2010] 9 JIBFL 534. of a guarantee.’ However, the breach in question must be ––Satisfaction guaranteed? [2014] 5 “not insubstantial”). The Court of Appeal JIBFL 293. The bank relied upon sub-cl (c) as in Deutsche Bank considered this principle ––LexisPSL: Practice note: Guarantees – containing an indemnity “to which the legal to be an “interesting question” ([25]) but, varying the underlying transaction.

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