Banks and customers

Lender under no duty to advise borrower about onerous terms in loan agreement

In Finch & anr v Lloyds TSB Bank plc & ors [2016] EWHC 1236 (QB), the Court found that a lender did not owe a contractual or tortious duty to advise a borrower about a potentially onerous clause in a loan agreement which made the borrower liable for the lender’s hedging break costs if the borrower chose to repay the fixed rate loan early.  This is a welcome judgment for lenders, emphasising the difficulty for a borrower to establish that a lender had a duty to advise on potentially onerous terms, even if a lender emphasises in its marketing strategy a willingness to co-operate with a borrower to find the best solution for their borrowing requirements. It is even more challenging for a borrower to prove that a lender has such a duty when they are represented by solicitors and financial advisors, as was the case here.

Basis clause in investor presentation slides protects issuer against secondary market investor claim

In Taberna Europe CDO II Plc v Selskabet (Formerly Roskilde Bank A/S) (In Bankruptcy) [2016] EWCA Civ 1262, the Court of Appeal overturned a ruling against the issuer of subordinated notes who, at first instance, was found to be liable to a secondary market professional investor for damages for misrepresentations made in investor presentation/roadshow slides and a quarterly results announcement.  At first instance Eder J held that market standard disclaimer wording in the investor presentation slides did not protect the issuer.  The Court of Appeal however disagreed. The Court of Appeal ruling makes clear the importance of setting out the basis upon which information is shared prior to entering into a transaction, and emphasises the distinction made by the courts between “duty-negating” (or “basis”) clauses and more traditional exclusion clauses (“liability-negating” clauses).

A new standard for advising on investment risk

There has been a change in how the Court will assess whether a financial advisor has used reasonable care and skill when giving investment advice.  In O'Hare & ors v Coutts & Co [2016] EWHC 2224 (QB), Kerr J, following Montgomery v Lanarkshire Health Board [2015] AC 1430 (a Supreme Court medical negligence case), declined to rely on the traditional test (ie the standard of a reasonably competent practitioner in the same field).  Instead, the judge extended the application of the test in Montgomery (to take reasonable care to ensure that the patient is aware of any material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments) to define the standard of care to be applied in the explanation of risk in investment advice.  The regulatory regime was "strong evidence" of what the common law required on the part of an investment advisor, as a duty to explain (analogous to Montgomery) was already found in the relevant Conduct of Business rules.  This new test in the financial services sector reflects a move over time in professional negligence cases away from essentially a self-certified standard set by the relevant professionals to an objective standard, set principally on regulatory rules.   In cases where investors are exercising discretion, compliance with both the Montgomery standard and regulatory rules will prove key in defending future negligence actions.

Refinancing loans and negligent valuations

Liability for a negligent valuation relied upon by a lender in refinancing a pre-existing loan facility would not be limited to any new funds advanced but extends to the entire refinanced facility. Had there not been a negligent valuation, the lender would not have made the refinancing loan. The fact that the purpose of the loan was in part to discharge an earlier (potentially loss making) loan on the part of the same lender was irrelevant in fact and law to the valuer, who was fully liable in respect of the full amount of the loan (Tiuta International Ltd v De Villiers Surveyors Ltd [2016] EWCA Civ 661). Lenders should consider, when advancing new funds in reliance on an updated valuation, clearly structuring any fresh advance as a refinancing such that the second transaction does result in the redemption of the first loan in the lender’s books and ensures the clear transfer of full liability to the later valuation. 

Contract law developments relevant to banks

Rectification used to correct drafting error in interest rate swap

A mistaken reference in an interest rate swap confirmation to the 1992 ISDA Master Agreement instead of the 2002 ISDA Master Agreement could not be corrected by interpretation. However, on the facts, the mistaken reference could be corrected by rectification. LSREF III Wight Ltd v Millvalley Ltd [2016] EWHC 466 (Comm) highlights that interpretation is unlikely to cure a drafting error unless there is some ambiguity or linguistic mistake which makes the drafting commercially absurd.  However, rectification may work where interpretation does not, and has the added benefit of allowing evidence of the subjective intentions of the parties and their negotiations to be admitted.

No variation clauses weakened by Court of Appeal

In Globe Motors Inc v TRW Lucasvarity Electric Steering Ltd [2016] EWCA Civ 396, the Court of Appeal considered a potential issue that arises frequently in practice but has only infrequently been considered by the courts: the effect of so called "no variation" clauses (ie a clause which states that no variation can be made to a contract except in writing). The court ruled that, whilst “no variation” clauses may make it harder to show that the parties intended their oral negotiations to result in a change to a contract, the clause cannot preclude that outcome.

The Court of Appeal in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 also confirmed the limited value of “no variation” clauses.  It ruled that an oral agreement to defer payments under an existing contract, which also contained a “no variation” clause, was legally binding. In addition, the court made it easier for a party to establish the critical elements of consideration or estoppel when seeking to show a contractual variation – the consideration for the agreement in this case was simply the benefit to the landlord of not having empty premises. The Court of Appeal also confirmed that part payment of a debt may now discharge the whole debt, especially where there will be an on-going relationship between the parties. The rule in Foakes v Beer is arguably not such an absolute bar as it once was. 

Employees – privilege and bonuses

Scope of legal advice privileged confirmed

The High Court confirmed in The RBS Rights Issue Litigation, Re [2016] EWHC 3161 that records of interviews conducted variously, by in-house lawyers, external lawyers and non-lawyers who, RBS maintained, were acting as agents of its external lawyers, with RBS employees pursuant to internal investigations were not covered: (i) by legal advice privilege; or (ii) as lawyers' privileged working papers under English law. The court followed the reasoning in Three Rivers DC v Bank of England (Disclosure) (No.3) [2003] EWCA Civ 474 because the notes did not contain any indication of the legal advice which had been given.  The Court reaffirmed that “client” for these purposes was narrowly defined. It held that: (i) the client consists only of those employees authorised to seek and receive legal advice from the lawyer; and (ii) legal advice privilege does not extend to information provided by employees and ex-employees to or for the purpose of being placed before a lawyer. 

Further, the Court held that whilst the notes would probably by privileged under U.S. law the proper law to determine privilege in this case was English law. Lastly, the Court determined that it was not appropriate in this case for the Court to exercise its discretion to refuse to permit disclosure as there was no exceptional concern that disclosure could lead to violence, intimidation, interference with witnesses etc.

This case confirms the strict application of “client” for the purposes of legal advice privilege. It also demonstrates the challenges of responding to internal investigations where what may be privileged in one jurisdiction may well not be in another.

Challenging bonus discretion post-Braganza: two recent decisions

The case of Braganza v BP Shipping Ltd [2015] UKSC 17 established that courts may look into the process that is undertaken by employers when reaching decisions that involve the exercise of a discretion.  Prior to Braganza, when determining the reasonableness of an exercise of bonus discretion, the courts tended to focus on the outcome. Two recent cases, Patural v DG Services (UK) Ltd [2015] EWHC 3659 (QB) and Hills v Niksun Inc [2016] EWCA Civ 115, were the first to consider Braganza-based arguments in a bonus/commission context where employees were challenging the process behind their awards as well as the awards themselves. In the Hills ruling, the Court of Appeal found in favour of the employee, thus potentially leaving the door open for courts to take a more interventionist approach to an employer's decision-making process.

Costs and settlement

Third part funders held liable for costs on an indemnity basis

Third party funding is becoming a more frequent feature in commercial litigation. In Excalibur Ventures LLC v Texas Keystone Inc & Ors [2016] EWCA Civ 1144, the Court of Appeal provided important guidance on the extent to which third party litigation funders may be liable to pay the costs of a defendant who has successfully defended a funded claim.  In particular, it found that a commercial funder should ordinarily be required to contribute to a successful defendant's costs on the same basis as a funded claimant; that it was appropriate to include funds provided in order to furnish security for costs in calculating a funder's liability under the Arkin cap; and that an order could be made against a party who in reality had funded the litigation, irrespective of whether they were a party to any funding agreement. 

Although users of commercial litigation funding may now find their cases subject to more thorough and on-going scrutiny, given that professional commercial funders do not typically fund cases as unmeritorious as Excalibur's, the case is unlikely to have a seismic impact on the funding industry.  In this regard it is worth noting that the Funders were not members of the Association of Litigation Funders (the ALF) (who had intervened in the appeal) and that only one of the Funders had any litigation funding experience.  Indeed, the decision has been welcomed by the professional funding community, including the ALF, as a welcome reaffirmation that funding is not only part of the modern legal landscape but also, in Tomlinson LJ's words, "an accepted and judicially sanctioned activity perceived to be in the public interest".

Claimant ordered to disclose identity of third party funder

In Stuart Barrie Wall v The Royal Bank of Scotland plc [2016] EWHC 2460 (Comm), the Commercial Court ordered a claimant to disclose the identity of a third party funding the litigation he had commenced against RBS where, armed with that information, RBS had a serious prospect of succeeding in an application for security for costs from the funder.  It therefore serves as a reminder to defendants to English court proceedings to consider whether the claimant may be in receipt of funding and, if so, to consider seeking security for costs from the funder.

Effect of currency fluctuations on settlement offer

Novus Aviation Ltd v Alubaf Arab International Bank BSC(c) [2016] EWHC 1937 (Comm) is relevant when unforeseen fluctuations in the currency exchange rate between the time of a Part 36 offer and the time of judgment affect whether the Part 36 offer has been ‘beaten or not’. The Court confirmed that the value comparison between a judgment and a Part 36 offer should be done on the date of the Court’s order. The only reason that the claimant obtained a judgment (in U.S. dollars) which was more advantageous than its Part 36 offer (in pound sterling) was as a result of the post-Brexit vote fall in pound sterling. However, in these circumstances, the Court found it unjust to order the normal Part 36 costs consequences which apply where an offer has been beaten at trial.

Disclosure

Potential cost and time saving from predictive coding in large disclosure exercise

In Pyrrho Investments Ltd & ors v MWB Property Ltd & ors [2016] EWHC 256 (Ch), a Chancery Master approved the use of “predictive coding” in a large disclosure process. Although not completely replacing manual review (for example, to train the software and check relevance or privilege), the use of such technology can vastly cut down the cost of (and time taken for) large disclosure exercises.

Although this may be the first published judgment on the subject, it is not the first time that the Court has approved its use. In 2009, when acting for a major financial institution, Allen & Overy used predictive technology successfully (with the blessing of the Court and the opposing party) in a Commercial Court case. It is likely that it has also been used in other cases that have not resulted in formal public judgments.