This is a round-up of the most interesting banking litigation and contractual developments in 2017. The selection is necessarily subjective and draws from a wide range of cases and developments that are of direct relevance to finance parties. Full coverage can be found in our monthly Litigation and Dispute Resolution Review.
Not out of the woods yet on jurisdictional/governing law challenges although some promising developments
Tactics around jurisdiction and governing law have been a common feature of cross border litigation for many years for parties attempting to avoid, or at least delay, meeting their obligations under financial contracts. ‘Italian torpedoes’ (starting pre-emptive proceedings in a jurisdiction perceived to be slow), alleging lack of capacity to enter into the contract in the first place, and reliance on mandatory provisions of local law, are some of the weapons in the recalcitrant borrower’s armoury. While recent European legal developments, such as the Brussels Regulation (Recast), have sought to limit the opportunity for such jurisdictional chicanery, the cases in 2017 demonstrate that they are likely be with us for some time to come, even before one factors in the possible impact of Brexit on this area.
The dangers of agreeing contracts with the same party that have differing jurisdiction and governing law clauses: Deutsche Bank AG v Comune di Savona  EWHC 1013 (Comm) In light of threatened legal action in Italy, Deutsche sought 12 declarations from the English High Court concerning the entry into, validity, enforceability, interpretation and performance of certain swaps it had with Savona. The swaps were under the ISDA Master Agreement, governed by English law and had exclusive jurisdiction clauses in favour of the English courts. Nevertheless, Savona was successfully able to argue that half of the declarations should instead be heard in Italy, owing to the existence of an exclusive jurisdiction clause in favour of the Milan Courts in a contract governed by Italian law, under which Deutsche had agreed to give Savona some unpaid advice in connection with managing its debts. This was despite the fact that, with one exception, the declarations being sought tracked closely contractual representations in the ISDA Master Agreement. It will be interesting to see if it is upheld when it comes before the Court Appeal in July 2018.
‘International element’ prevents mandatory local laws derailing swap: In Dexia Crediop S.p.A. v Comune di Prato  EWCA Civ 428, one of the main questions facing the Court of Appeal was whether a swap under a 1992 ISDA Master Agreement governed by English law was invalid or unenforceable under mandatory provisions of Italian financial services law. Prato argued that the mandatory rules applied, by virtue of Article 3(3) of the Rome Convention on the basis that, apart from the choice of English governing law, “all other elements relevant to the situation at the time of the choice” of law were connected to Italy. The Court of Appeal disagreed, finding that Art 3(3) did not apply as there was an “international and relevant element in the situation”, which made it impossible to say that “all elements” were located in a country other than England. These elements included: (i) the choice of an international standard form agreement; (ii) the fact the contract envisaged the use of more than one currency and the involvement of more than one country; and (iii) Dexia’s “back to back” swaps with banks outside of Italy. This decision, and the Court’s willingness to recognise international elements in interest rate swap transactions, will provide greater certainty to financial institutions looking to enforce their agreements. The Supreme Court has refused Prato’s application to appeal.
Promising ruling on asymmetric (or hybrid) jurisdiction clause although some risk remains: In Commerzbank Aktiengesellschaft v Liquimar Tankers Management Inc  EWHC 161 (Comm), an asymmetric (or hybrid) jurisdiction clause in favour of the English Courts was found to be exclusive for the purposes of the Brussels Recast’s “anti-torpedo” provisions. This meant that the English Court was able to determine the dispute without having to defer to the Greek Courts which had been first seised of the case. A note of caution here however, as it is far from clear (despite certain obiter comments from the judge in this case) that such clauses would be exclusive for the purpose of the equivalent provisions in the Hague Convention – which is likely to be the applicable regime following Brexit. There have also been certain French cases that have questioned the validity of such clauses at all. As such, parties to financial contracts should be aware that a degree of risk remains in the use of such clauses. This case will not be heard on appeal as the parties reached a settlement agreement in December 2017.
More guidance on contractual interpretation: The Supreme Court revisited contractual interpretation in 2017. Since its decision in Arnold v Britton  UKSC 36, 10 June 2015, there had been considerable debate as to whether textualism (the natural meaning of the words used) should be given greater weight than the wider context of the contract, such as business common sense (so-called “contextualism”). In Wood vs Capita Insurance Services Ltd  UKSC 24, the Supreme Court emphasized that textualism and contextualism were not “conflicting paradigms”; rather they are complementary tools for ascertaining the objective meaning of the language chosen by the parties to express their agreement. Where there is dispute as to the meaning of a provision the court will adopt an iterative process weighing up the indications given by the language against the implications of the rival meanings. The court also indicated that for certain contracts – for instance where parties are more sophisticated and professionally advised – greater emphasis on a textual approach may be appropriate, albeit this would not be a hard and fast rule. On balance, this is a welcome development as it lessens the likelihood that a drafting ambiguity will be able to threaten the wider commercial structure of a deal. The overall message however remains the same: when drafting, say what you mean and mean what you say, because if you end up in court there is always going to be a degree of uncertainty as to the outcome.
Capacity of state to contract: The Law Debenture Trust Corporation vs Ukraine  EWHC 655, 29 March 2017, was not only a case in which recent struggles between Russia and Ukraine moved to the English Courts, it was also the first time the English courts had considered the question of a state’s capacity to contract. Ukraine argued that it did not have the capacity to enter into the USD3 billion English law governed Eurobond for which Russia had been the only subscriber. The judge found that the question of a state’s capacity to contract, which was a question of English law and not the law of the state in question, derived from the state’s sovereignty. Once the state was recognised as sovereign in international law, it would have the ability to contract under English law, regardless of any local law restrictions. Having established that Ukraine had the capacity to contract (and hence to borrow), the judge also held that the Ukrainian finance minister had “usual” authority to sign the various transaction documents (on the basis that he had previously signed 31 similar transactions), and also “ostensible” authority having been held out by the Ukrainian Cabinet as someone with the authority to contract. Legal battle lines are currently being contested in the case’s appeal before the Court of Appeal.
No principle of futility: In Astor Management AG & anr v Atalaya Mining PLC & ors  EWHC 425 (Comm), the Court denied that there was a “principle of futility” which could be relied on to require payment of some deferred consideration when one of the conditions to payment – the raising of money via a Senior Debt Facility – was never going to be formally met. The court held that even though, in economic substance, Atalaya had obtained the funding required to trigger the payment obligation, because this had not strictly been achieved through a Senior Debt Facility, the condition had not been met and no payment was due.
Subsequent communications relevant to question of whether a contract has been made: Global Asset Capital & anr v Aabar Block S.A.R.L & othrs  EWCA Civ 37 serves as a reminder that when it comes to assessing the existence of a contract (as opposed to its meaning) subsequent events could be taken into account. Here, subsequent communications such as a reference to the “proposed transaction”, and the phrase “upon your agreement that you are willing to proceed” were persuasive in a finding that a contract had not been formed. This case also reiterated the power and importance of the phrase “subject to contract” to refute contractual intentions.
Increasing corporate criminal liability/reducing privilege
The Criminal Finances Act 2017 contains two new strict liability corporate offences of failing to prevent the facilitation of UK or non-UK tax evasion. The new tax offences put corporates, particularly financial and professional services firms, under increased pressure in relation to the behaviour of their employees, agents or anyone providing a service for or on behalf of the company. The new offences catch both UK and foreign companies (who do business in the UK) and apply to UK and non-UK tax evasion. The new offences came into force on 30 September 2017. The Act also introduced Unexplained Wealth Orders and made changes to the Suspicious Activity Reporting Regime. Specific guidance on the implications of the new Act for financial services firms can be found here.
The changes made by the Criminal Finances Act 2017, together with the Supreme Court’s change to the test for criminal dishonesty (Ivey v Genting Casinos  UKSC 67) increases the risk of financial services firms, and their staff, falling foul of the criminal law.
Whilst corporate criminal liability expands, the scope for parties claiming privilege in investigations gets ever narrower: In 2016, the High Court in the RBS Rights Issue Litigation  EWHC 3161 (Ch), confirmed that legal advice privilege could not be claimed over a lawyer’s notes of interviews with a party’s employees (save to the limited extent it betrayed the trend of the lawyer’s advice). Only communications with the ‘client’ (ie those individuals in an organisation authorised to receive legal advice such as the Board or in-house counsel) would be protected. In Serious Fraud Office (SFO) v Eurasian Natural Resources Corporation Ltd  EWHC 1017 (QB), this approach to legal advice privilege was confirmed in the context of a criminal investigation. Further, the court also ruled that litigation privilege did not apply in the context of a criminal investigation by the SFO, as this is not considered to be adversarial litigation for privilege purposes. SFO v ENRC goes before the Court of Appeal in July, but before then parties looking into potential criminal wrongdoing or regulatory breaches in their organisations, should work on the assumption that it will be difficult to resist requests from the authorities for material created during the course of those investigations, save for communications made within the narrow confines of the lawyer-client relationship.
Enforcement – increased availability of third party debt orders against letters of credit
Supreme Court has increased the availability of third party debt orders: English Court third party debt orders are a useful arrow in the quiver of successful claimants seeking to enforce court judgments or arbitral awards made in their favour. Armed with one of these orders a party can recover the money owed to it by intercepting payments – for instance to a bank account – or, in this case, under a letter of credit. In Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq  UKSC 64, the issue was whether the legal ‘location’ (situs) of a debt due under a letter of credit is: (i) the place of the residence of the debtor, or (ii) where the debt is due to be paid. By deciding that it was the former, the Supreme Court increased the availability of third party debt orders, since they can now be sought against payments made under letters of credit issued by a London-based bank even if the debt is to be paid outside the jurisdiction.