Jurisdiction for claims in relation to bearer bonds
Kolassa v. Barclays Bank plc C375/13
This was a judgment of the European Court of Justice (ECJ). Mr Kolassa, who is domiciled in Austria, invested in certificates issued by Barclays in the form of bearer bonds. Barclays produced a prospectus in relation to the certificates, which was published in Austria. The certificates were then issued to institutional investors including DAB Bank, and sold to an Austrian subsidiary, which in turn sold an interest in the certificates on to Mr Kolassa. The certificates were, at all times, owned by the banks. The value of the certificates was directly referable to the performance of a portfolio, and as a result of its poor performance, the certificates lost the entirety of their value. Mr Kolassa sued Barclays in the Austrian courts. Barclays disputed both the underlying claim and the jurisdiction of the Austrian court, on which point the court made a reference to the ECJ.
Article 5 of the Regulation states that: "A person domiciled in a Member State may, in another Member State, be sued: 1. (a) in matters relating to a contract, in the courts for the place of performance of the obligation in question; … 3. in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur". However, under Articles 15 and 16, a consumer acting "for a purpose which can be regarded as being outside his trade or profession" can start proceedings either in the home court of the other party, or in his own home court (in this case the courts of Austria), if certain conditions are met. In most cases, such conditions include the consumer having entered into a contract with a professional counterparty.
The ECJ concluded that:
- the provisions of Article 15 did not apply in this case. Because the certificates were in bearer form, and Mr Kolassa was never the bearer, the ECJ held that he had not entered into a contract with Barclays, and that Article 15 could not, therefore, be invoked;
- in order for Article 5(1) to be used in order to found jurisdiction, there did not need to be a contract subsisting between the issuer of and the investor in the certificates, but the issuer did need to have freely consented to some legal obligation to that investor. This would be a matter for national courts to consider, but in the context of this case, the ECJ held that Barclays had not assumed obligations to Mr Kolassa as a purchaser in the secondary market; and
- as Austria was the place where Mr Kolassa had suffered loss, the Austrian court had jurisdiction to hear his claims in relation to Barclays's provision of misleading information in its prospectus under Article 5(3), provided such claims could not be characterised as arising out of a contract.
It is likely that the last of these three conclusions will provide some further scope for argument in specific cases, but, in general, the judgment should be reassuring for issuers. Had the decision been otherwise, they could have faced numerous (and potentially conflicting) judgments in the courts of different European states.
Exercise of contractual rights by purchaser of notes in the secondary market
Secure Capital SA v. Credit Suisse AG  EWHC 388 (Comm)
Credit Suisse's Nassau office issued various notes (governed by English law, and treated collectively for present purposes) which were linked to life insurance policies, such that the amount payable under them depended on the mortality of a set of "reference lives". Credit Suisse agreed in the terms applicable to the notes that it had taken reasonable care to ensure that information in the pricing supplements was accurate, and that there were no material facts the omission of which would make the statements misleading. Secure Capital alleged that Credit Suisse had breached those terms by failing to disclose an anticipated change to the calculation of life expectancy of the reference lives.
The notes were in bearer form, and held by BNY Mellon, which was the bearer of the notes, as common depositary for Clearstream. Subsequent transactions took place by way of book entries by members of Clearstream, who had recourse only against Clearstream in relation to non-payment. Secure Capital held the notes through such a member, RBS Global Banking (Luxembourg) SA (RBSL).
By the provisions of Luxembourg law, the owner of assets in a Clearstream account (here Secure Capital) has an intangible right in rem to securities of the same type (and the rights attaching to them) in the account of the account holder (here RBSL). Such right is only exercisable against the account holder. The same law provides that, if the account holder produces a certificate attesting to the owner's holding, the owner can exercise any corporate rights provided for in the securities, or rights attaching to the holding of the securities linked to the possession of the securities. In this case, RBSL had provided Secure Capital with such a certificate, and Secure Capital sought to rely on this provision of Luxembourg law to sue Credit Suisse directly in relation to the allegedly misleading content of the pricing supplements. Credit Suisse applied for summary judgment, alternatively to strike out the claim.
Secure Capital's position was that it was entitled in its own name, by operation of the Luxembourg law, to assert the same rights as the bearer of the notes. In making this assertion, it had to convince the court that the law of Luxembourg was the appropriate governing law, notwithstanding that the notes were governed by English law. The judge said that: "It is artificial to seek to treat the issue as being who is entitled to be the holder of the Notes. This is not a case where there is a dispute between two parties as to who is entitled to be the holder. It is accepted that BNYM is the holder. The argument is that Secure Capital is entitled to be treated as an additional holder. It is also artificial to seek to divorce that question from the rights which Secure Capital is seeking to enforce which are clearly (and admittedly) contractual rights."
On that basis, he held that the Luxembourg law had no application in this case, and that it could not, in any case, create new rights in an English law contract. In deciding the application in Credit Suisse's favour, the judge noted in some detail its argument (and the authorities supporting it) that: "any other conclusion would fly in the face of market practice and the unanimous views of the commentators relating to intermediated securities, which, for good reason, is to the effect that all rights to sue the issuer under a bearer note are held and exercisable only by the bearer, not an intermediary and certainly not the ultimate investor".
This judgment makes it clear that purchasers of notes in the secondary market will face genuine obstacles in enforcing their terms if the notes are issued in the same way as those in this case. This should not be any great surprise, given the contractual terms applicable in this (and other) cases, but it may be that this is not an issue which has previously received much attention.
Claim for misrepresentation against issuer by purchaser of notes in the secondary market
Taberna Europe CDO II plc v. Selskabet AF1. (in bankruptcy) EWHC 871 (Comm)
Another day, another judge, different facts and a completely different conclusion. The judgment of Eder J, handed down a month after that of Hamblen J in the Credit Suisse case, also related to a case where a purchaser of notes in the secondary market alleged that relevant matters had been misrepresented to it by the issuer, the failed Danish bank Roskilde. The operative misrepresentations had been made, not in the documents pursuant to which the notes were issued, but in other published documents of Roskilde, in relation to its business.
However, in summary, Taberna asserted its claim against Roskilde under section 2(1) of the Misrepresentation Act 1967, which provides that: "Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true" (emphasis added).
Roskilde argued that section 2(1) of the Act had no application in this case, because of the words underlined above. Taberna had bought the notes from Deutsche Bank, with which it had conducted some pre-sale negotiations. Any representations allegedly made by Roskilde had induced that contract, not a contract between Roskilde and Taberna, and it was the Deutsche Bank/Taberna contract that was the cause of Taberna's loss.
The judge found that section 2(1) applied notwithstanding that Taberna had bought the notes from Deutsche Bank, not Roskilde. Crucially (and curiously) the judge noted Roskilde's admission in this regard that Taberna's purchase of the notes had created some form of contractual relationship between Roskilde and Taberna. The judgment does not indicate the form of the notes issued by Roskilde, but were they issued in bearer form, this admission would seem at odds with the views of the courts in both the cases referred to above. We understand that permission to appeal is currently being sought.
Role of trustee in Argentine bond litigation
Knighthead Master Fund LP and others v. Bank of New York Mellon and another  EWHC 270 (Ch)
In 2005 and 2010, Argentina exchanged existing defaulted bonds for new ones, at a substantial discount. Its litigation with those "Holdout Creditors" who did not participate in the exchange has been long running and well publicised. However, the applicants in this case were the holders of euro-denominated bonds issued pursuant to the exchange, and governed by English law. The defendant, Bank of New York Mellon, is the trustee of the securities which comprise the exchange. The role of BNY Mellon as trustee of these bonds is also governed by English law.
The Holdout Creditors succeeded, in 2012, in persuading the District Court in the Southern District of New York to grant an injunction. The injunction was premised on the court's decision that a pari passuclause in Argentina's Fiscal Agency Agreement (pursuant to which the notes held by the Holdout Creditors were issued) meant that Argentina could not pay its exchange creditors without paying the Holdout Creditors rateably.
In 2014, in accordance with the terms of the exchange, Argentina made a payment to the account of BNY Mellon with the Argentine Central Bank in Buenos Aires for onward payment to the exchange noteholders (including the applicants) through Clearstream and Euroclear. The court in New York agreed that this payment was made in breach of the injunction referred to above, and BNY Mellon was ordered to retain the funds and not deal with them pending further order of the court. The court declared that BNY Mellon would incur no liability in doing so.
As set out above, the euro-denominated exchange bonds and BNY Mellon's role in relation to them were governed by English law. On that basis, neither the contractual obligations nor the payment mechanisms through which they were to be satisfied had any connection with the US, save that BNY Mellon was itself subject to the jurisdiction of the New York court, and obliged to abide by its orders. Some holders of these bonds, who found that the New York court had a longer reach than might usually be expected to be the case, applied to the English court for declarations that: (1) the money paid to BNY Mellon in Argentina for onward transmission to the euro-denominated exchange noteholders was held by it on trust for such noteholders, and did not belong to Argentina; and (2) the obligations of BNY Mellon as trustee under English law were unaffected by the orders of the court in New York.
The judge hearing the application made the first declaration sought. He took the view that to do so did not intrude on matters being considered by the court in New York, but it was appropriate to say that, as a matter of English law, the orders made in New York did not grant either Argentina or the Holdout Creditors any proprietary interest in the funds held on trust by BNY Mellon. He declined, however, to make the second declaration, holding that as (necessarily) worded, it would have the effect of saying that BNY Mellon would continue to be liable to the noteholders for its failure to pay, unless the New York injunction provided it with a defence. He did not consider that it served any useful purpose for the court to make a declaration to that effect.
Right of set-off under the ISDA Master Agreement
MHB-Bank AG v. Shanpark Ltd; MHB-Bank AG v. Vendart Ltd and another  EWHC 408 (Comm)
In this case, Irish Bank Resolution Corporation (previously Anglo-Irish Bank) (the Bank) assigned to MHB-Bank (MHB) the right to payment of early termination amounts payable pursuant to two interest rate swaps concluded pursuant to ISDA Master Agreements between the Bank and the Defendants (referred to collectively below as "Shanpark"). While the judgment does not say so specifically, it appears that the 2002 Master Agreement was used. Shanpark said that:
- the swaps had been mis-sold by the Bank, and that its claim in respect of such mis-selling was capable of founding a set-off for the purposes of clauses 2(c) and 6(f) of the ISDA Master Agreements; and
- the Bank had already exercised a contractual right of set-off available to it by the terms of a facility agreement, and that MHB could be in no better a position than its assignor.
MHB applied for summary judgment.
The judge agreed that clause 2(c) of the ISDA Master Agreement did not apply to payments due on early termination. The clause referred to amounts which would be payable on any date in the same currency and in respect of the same transaction, whereas payments due on early termination represented (or could represent) a number of transactions. In addition, damages in respect of the mis-selling claim could only become payable once a court ordered that they be paid.
In relation to clause 6(f), the judge held that Shanpark was unable to rely on it in any event, because of a provision in the facility agreement restricting its right to claim set-off. However, the judge considered clause 6(f) and concluded that references in it to a "defaulting party" only applied where the Master Agreement had been terminated for an event of default. The Master Agreement relied on this having happened in order for the Defaulting Party to be identified: the judge noted that there could only ever be one such party, despite the fact that both parties might be responsible for events of default.
In this case, while the Bank had been in default for some time, Shanpark had not served notice terminating for the Bank's event of default. The Master Agreement had, instead, terminated on Shanpark's repayment of the facility agreement, which was an early termination event. The Bank's default was therefore irrelevant for the purposes of clause 6(f). However, the judge went on to find that, where set-off was available under clause 6(f), it would include unascertained claims for breach of contract, as well as sums payable under a contract.
This judgment provides useful clarification of the set-off provisions in the ISDA Master Agreement. It also underscores the importance of thinking very carefully about whether or not a party should declare an event of default when it is in a position to do so.
Calculation of "Loss" under the ISDA Master Agreement
Fondazione Ensarco v. Lehman Brothers Finance SA and another  EWHC 1307 (Ch)
Ensarco was an Italian pension fund, which entered into an arrangement marketed by Lehman in order to gain exposure to hedge funds, while protecting the principal sum invested. It purchased €780,470,000 of secured notes from ARIC, a special purpose vehicle incorporated in the Cayman Islands. ARIC used the money to buy shares in Balco, which in turn invested the money chiefly in funds of funds. In order to protect the capital, ARIC bought a put option from Lehman Brothers Finance SA (LBF), governed by the terms of a 1992 ISDA Master Agreement (the Option). The Option gave ARIC the right to put its shares in Balco on LBF in 2023, for a price which would be equal to the shortfall between €780,470,000 and the amount which would be received by ARIC on redemption of the shares.
Lehman's insolvency in September 2008 led to the automatic early termination of the Option. Ensarco moved to put in place replacement capital protection, which it did through Credit Suisse in May 2009 (the CS Option). The CS Option had a maturity of 2039 (rather than 2023), and premium payments were structured differently.
The dispute related to the amount payable to ARIC on early termination of the Option, which was to be determined using the Loss method in the ISDA Master Agreement. The definition says (inter alia) that: (a) Loss is to be reasonably determined by the calculating party in good faith; (b) a party will determine Loss as of the earliest reasonably practicable date after the early termination date; and (c) a party may (but need not) determine Loss by reference to quotations.
ARIC (which assigned its claim to Ensarco) served notice in September 2009 seeking US$61.5 million, being (in summary) the difference between the premiums it was obliged to pay under the CS Option as compared with the Option.
LBF accepted that Ensarco was entitled to base its calculation of Loss on the cost of a replacement transaction, but alleged that: (a) it could have obtained a quotation for a replacement transaction shortly after 15 September 2008, and in any event much sooner than May 2009; (b) the CS Option was on such different terms that it was not properly comparable; and (c) Loss had not been determined as at the earliest reasonably practicable date, in that notice of the amount claimed had not been provided until September 2009.
The judge did not agree that the market was such that Ensarco could have secured a replacement for the Option materially earlier than it did. He also found that the transaction (in which Lehman entities were involved in a number of capacities) required restructuring before the Option could be replaced, and that (in effect) the process inevitably took some time. The judge noted that "as soon as practicable" did not mean the same thing as "as soon as possible" and required a consideration of all the circumstances.
He also disagreed that the CS Option was too different from the Option to be termed a "replacement transaction". He held that the longer term had not been shown to have made any difference to the cost of the premium, and might in fact have driven it down. He also rejected an argument to the effect that a put option from Credit Suisse was qualitatively better than one from Lehman, because of Credit Suisse's higher credit rating. He held that the point for focus was securing the economic equivalent of the payment which would have been made under the terminated transaction, not the prospects of performance by the other party.
The judge accepted that the notice setting out the early termination amount (delivered in September 2009) could have been delivered much sooner, but found that this did not affect the validity of the calculation of Loss itself.
Entitlement to payment premium after transfer − LMA standard terms
Tael One Partners v. Morgan Stanley  UKSC 12
Tael assigned its rights in respect of part of its lending under a loan agreement incorporating LMA terms for par trade transactions (now superseded) to Morgan Stanley. Morgan Stanley then transferred its participation to Spinnaker. The loan was subsequently repaid in full together with a payment premium. Tael and Spinnaker received a share of the payment premium, in respect of the participations they held at the time of repayment. Morgan Stanley, having no outstanding participation, received nothing. Tael then claimed from Morgan Stanley a proportion of the payment premium referable to the period before the transfer.
The provisions of the facility agreement were complex, and provided that the total return to each participating lender depended on a number of factors. Clause 11.9 of the LMA terms provided that:
“Unless these Conditions otherwise provide . . .
(a) any interest or fees (other than PIK Interest) which are payable under the Credit Agreement in respect of the Purchased Assets and which are expressed to accrue by reference to the lapse of time shall, to the extent they accrue in respect of the period before (and not including) the Settlement Date, be for the account of the Seller and, to the extent they accrue in respect of the period after (and including) the Settlement Date, be for the account of the Buyer; and
(b) all other fees shall, to the extent attributable to the Purchased Assets and payable after the Trade Date, be for the account of the Buyer.”
The Supreme Court rejected Tael's argument that the payment premium under the facility agreement was "expressed to accrue by reference to the lapse of time". It held that the fact that the payment premium was calculated by reference to the lapse of time did not mean that it accrued in that way. The payment premium in fact accrued on the occurrence of a number of defined events, including repayment and prepayment. On that basis, Morgan Stanley was not obliged to account for the payment premium to Tael.
The Supreme Court also rejected the Court of Appeal's conclusion that clause 11.9 was effectively redundant, on the basis that it did little that was not already done by clause 11.2 or 11.3. The Supreme Court found that the earlier parts of clause 11 related to fees and interest not falling within clause 11.9, and that all parts of the clause had to operate together.
When a bank is on constructive notice of wrongdoing
Papadimitriou v. Crédit Agricole Corporation and Investment Bank  UKPC 13
In this case, the Privy Council considered whether the defendant bank had successfully shown that it did not have constructive notice of the claimant's proprietary right to money transferred to it. The judgment considers, in particular, the circumstances in which a bank is obliged to investigate a transaction in order to avoid being fixed with such notice.
The funds which were the subject of the litigation were the proceeds of sale of a collection of furniture belonging to the deceased parents of the claimant. The collection was sold without the family's knowledge by the partner of the claimant's brother, who had also died, and the proceeds of sale were laundered through a number of entities incorporated in different jurisdictions before being transferred to the bank. The bank, based in Gibraltar, received the funds as guarantee for a loan extended by its London branch to refinance borrowings of a company owned by the seller of the collection.
The Privy Council set out three situations in which a bank would have notice of another's proprietary right to funds it received, and in which it would therefore not be able to establish that it was a bona fide purchaser for value of the funds. Those situations are where the bank:
- has actual notice, in that it in fact appreciates the probability that another person has a proprietary right;
- ought to have understood, on the basis of the facts already available to it, that such a right existed (constructive notice); and
- should have made inquiries or sought advice which would have revealed the probable existence of such a right (a further species of constructive notice).
The Privy Council was primarily concerned with the third category of cases. Delivering the lead judgment, Lord Clarke said that "The bank must make inquiries if there is a serious possibility of a third party having such a right, or put another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction". Lord Sumption added that "There must be something which the defendant actually knows (or would actually know if he had a reasonable appreciation of the meaning of the information in his hands) which calls for inquiry". In this case, the unnecessary complexity of the structure of the transaction, and interposition of different layers of corporate entities, was sufficient to mean that the bank should have made further inquiries.
Satisfaction of delivery obligations under repo agreement
(1) Mercuria Energy Trading Pte; and (2) Mercuria Energy Group Ltd. v. (1) Citibank NA; and (2) Citigroup Global Markets Ltd EWHC 1481 (Comm)
In May 2013, the Citi entities which were the defendants to these proceedings entered into Master Agreements relating to repo transactions they were to conclude with Mercuria. The nature of the transactions to be concluded (each pursuant to the terms of a Sale Confirmation and a Forward Sale Confirmation) was that Mercuria would sell Citi a quantity of metal stored in three warehouses in China, and Citi would sell back equivalent metal (in reality the same metal, which would never leave the warehouse) at a future date and at a higher price (the Forward Sale). While the purpose of these transactions was for Citi to provide finance to Mercuria, ownership of the metal was stated to pass to Citi.
In late May 2014, reports emerged of a fraud at two of the warehouses, whereby the same warehouse receipts had been tendered in transactions with a number of banks, such that (in effect) the same metal had been sold or charged more than once. The scale of the fraud is under investigation in China and has yet to be made known.
The Master Agreements provided that, if any storage facility ceased to be satisfactory, Citi could serve a Bring Forward Event Notice (called a "BFE Notice" in the judgment) which would have the effect of accelerating the Forward Sale. Citi was then entitled to receive payment from Mercuria, prior to delivering the metal back to it. Citi served BFE Notices in June 2014. In July 2014, Mercuria served notices stating that there had been a Termination Event as defined in the Master Agreements, in that the discovery of fraud at the warehouses had a material adverse effect on Citi's ability to perform its obligations. On that basis, the Master Agreements stated that Mercuria was not obliged to make any payment until the metal was delivered to it. This Citi purported to do by delivering its warehouse receipts to Mercuria, endorsed in blank. The warehouse operators did not attorn to Mercuria (and were not asked by Citi to do so), and Citi did not issue release instructions to them.
The issues between the parties were (in summary): (a) as to whether this amounted to valid delivery (and, if not, whether Citi could instead deliver the metal pursuant to the terms of the Master Agreements by assigning rights to Mercuria); and (b) whether the BFE Notices were valid, and survived service of Mercuria's termination notices.
The judge held that Citi had not delivered the metal. Citi accepted that the Sale of Goods Act 1979 (the Act) applied to the transactions, and that, under the provisions of section 29(4) of the Act, delivery could not be effected unless a title document was passed to Mercuria (the warehouse receipts were not title documents) or the warehouse operators attorned to Mercuria that they held the metal for it. However, Citi argued that the provision in the Forward Sale Confirmation that delivery could be effected "without the need for any confirmation from the owner/operator of the Storage Facility" meant that it could be deemed to have made delivery even where there was no actual delivery under the Act. Further, it said that this was the case even if the metal no longer existed. The judge agreed that this was the effect of the relevant wording, but held that it was inconsistent with words earlier in the same sentence which appeared to require actual delivery to take place within the terms of the Act. He also held that the relevant words were inconsistent with the Master Agreements and the commercial scheme of the transaction. On that basis, the judge struck down the relevant wording.
He was then required to consider whether, instead of delivering the metal, Citi could assign its right to the metal, or to the benefit of insurance policies. A clause in the Master Agreements permitted it to do so where, inter alia, Citi wished but was unable to deliver the metal, and this was not the result of a Termination Event. The judge held that Citi could not take advantage of this provision. First, it had not asked the warehouse operators to attorn to Mercuria, so was not in a position to say that it was unable to deliver the metal. Second, even if it was unable, this was the result of a Termination Event.
The judge was not, however, willing to order that Citi pay damages to Mercuria for its failure to deliver the metal. He held that the suspension of Mercuria's payment obligations pending delivery did not impose on Citi an obligation to deliver, or to deliver by a particular date.
In relation to the validity of Citi's BFE Notices, the questions the judge was required to decide were whether Citi held the opinion stated in the BFE Notices (as to the satisfactory nature, or otherwise, of the storage facilities) and whether its view was reasonable. The judge decided in favour of Citi on both issues. In doing so, he held that the requirement that Citi's opinion be reasonable meant reasonable in the Wednesbury sense of not being an opinion which no reasonable person in Citi's position could hold.
The judge also held that, as the BFE Notices were valid, Mercuria had been obliged to pay for the metal. Its future payment obligations were suspended by the service of its notices of a Termination Event, but such notices did not affect payment obligations which had already accrued.