This case concerned the inability of the claimants to recover sums pursuant to a promissory note (the Promissory Note) which formed part of the transaction documents for a sukuk financing transaction (the Sukuk) for the Saudi Arabian Saad group, referred to by the judge in the case as "equivalent in economic effect to a Eurobond issue". The claimants were the issuer and trustee of the rights of holders of certain certificates issued as part of the Sukuk (Golden Belt) and funds which had invested in the secondary market, and were specialist investors in distressed debt (the Funds).
BNP Paribas (BNPP) was described as the Arranger and as one of the Lead Managers for the Sukuk. There was some discussion in the judgment as to what this role entailed, but the judge found as a matter of fact that it included the preparation and execution of the transaction documents. The judge declined, however, to find that disclaimers contained in the transaction document relating to BNPP's role as Lead Manager did not apply also to its role as Arranger, in view of the fluidity of use of these descriptions.
The claimants alleged (and the judge agreed) that it was a requirement under Saudi Arabian law (which governed the Promissory Note) that the Promissory Note be signed with a "wet ink" signature. In fact, microscopic investigation showed that the relevant signature had been added by a laser printer. The judge held that, had the Promissory Note been signed with a "wet ink" signature, Golden Belt would have obtained judgment on it in Saudi Arabia, although he also held that such judgment would not have been paid.
Golden Belt alleged that BNPP owed it (and certificate holders) a duty of care to exercise reasonable care and skill to ensure that the Promissory Note was properly executed – BNPP denied this. The judge considered some of the authorities dealing with the existence of a duty of care in this context. He drew from them the following two points: (1) that BNPP's client was Saad, and that the existence of contractual duties to one party generally meant that a bank would not undertake a duty of care to other parties in relation to the transaction; and (2) that the existence of carefully structured contractual relationships meant that the court should be slow to superimpose a tortious duty on those relationships. Nonetheless, the judge held that this was a case in which it was right to hold that BNPP owed a duty of care, although to certificate holders only, not Golden Belt, which had no economic interest of its own in the transaction. The reasons were, in summary, that:
- unlike the earlier authorities, this case related not to investment advice or information provided to investors (which were covered by disclaimers) but to BNPP's performance of its own responsibilities as Arranger;
- the relevant service performed by BNPP was specific, namely arranging for execution of the Promissory Note. It is interesting to note in this context that the judge stated obiter that he would be minded to find such duty included checking capacity or necessary board/shareholder resolutions, had such issues been relevant in this case;
- it was particularly important that the Promissory Note was properly executed and "there was no room for any slip";
- this service was carried out entirely for the benefit of certificate holders;
- there was no hint that certificate holders were to bear the risk of invalid execution, and they had no independent means of checking this as a risk; and
- BNPP was effectively telling investors that it would arrange the execution of the Promissory Note.
It is interesting to note that the judge rejected an argument that the imposition of such a duty risked putting banks such as BNPP in a position of potential conflict with their clients. He held that, in reality, there was no way that Saad could have given (or BNPP could have accepted) an instruction to execute the Promissory Note invalidly.
Similarly, he rejected an argument that a duty of care should not be found to exist to subsequent investors in the Sukuk, such as the Funds. The judge said that the existence of such a duty was neither for an indeterminate amount, for an indeterminate time, or to an indeterminate class, although he accepted that investors in the secondary market might struggle to prove reliance on BNPP to carry out the relevant service with reasonable care. In practice, however, the judge had no difficulty in finding such reliance on the part of the Funds.
As a matter of fact, the judge determined that BNPP had breached its duty of care. He found that it had not relied on its own legal advisers, but had left execution arrangements entirely to Saad. He agreed with BNPP, however, that the appropriate measure of damages was the difference between the Funds' recovery as matters stand and their recovery had the Promissory Note been validly executed. While quantum was left to a separate trial, it seems plausible that the Funds will recover little if anything by way of damages.
While the judge's reasoning was clear, his conclusions may come as something of a surprise to banks. BNPP is appealing the judgment. As matters stand, however, it is a reminder to banks acting as arrangers to take particular care with execution of documents. There is no reason, however, why the ratio of the judgment should not apply to services other than arranging execution (or, for that matter, outside the Islamic finance context), and it will be interesting to see whether this judgment results in broader drafting of the type of disclaimer that has previously focused on alleged investment advice.