Parties' positions

In AP-Fonden v Bank of New York Mellon SA/NV(1) the High Court considered the nature and extent of the duty of care owed by a securities lending agent when managing a client's portfolio. The judgment, which is likely to have implications for the securities lending industry, underscores the need for securities lending agents to act fairly when communicating with their clients.


The claimant, Swedish pension fund AP-Fonden, entered into a securities lending authorisation agreement with the defendant, Bank of New York Mellon (BNYM), in 2004. The agreement provided that BNYM would manage AP's cash collateral investment portfolio and would perform its duties with "care, skill, prudence and diligence" (Clause 10(b)(i)).

In March and April 2007 BNYM acquired two tranches of medium-term notes issued by Sigma Finance, a structured investment vehicle, for AP's account as collateral.

In August 2007 Sigma began to experience financial difficulties. By April 2008 it had been downgraded by the rating agencies and the price of the Sigma medium-term notes declined sharply. The downgrading triggered BNYM to inform AP of Sigma's difficulties in May 2008. BNYM maintained that it was confident that the Sigma medium-term notes would continue to perform and pay out on maturity. However, at the same time BNYM was warning other clients of the potential risk to their portfolios and recommending alternative solutions in relation to their Sigma medium-term note investments. In particular, BNYM wrote letters to other clients stating that "there is a significant likelihood that Sigma will not be able to continue to meet its commitments in respect of the Sigma notes in the medium term".

On the basis of the position as outlined by BNYM, AP continued to hold the Sigma medium-term notes. In October 2008 Sigma went into administrative receivership. As a result, AP incurred losses in excess of $33 million and began proceedings against BNYM to recover those losses.

Parties' positions

AP advanced three claims:

  • An acquisition claim – BNYM should never have acquired the Sigma medium-term notes on the basis that it was a conservative securities lending client and the securities were illiquid.
  • A retention claim – BNYM's retention of the Sigma medium-term notes was a breach of contract and/or negligent.
  • A communications claim – once Sigma started to show signs of financial difficulty, BNYM was negligent and/or misrepresented the position and/or acted in breach of fiduciary duty in its communications with AP.

Broadly, BNYM contended that it had acted correctly in acquiring the securities on behalf of AP, and that it was only with hindsight that AP criticised the investment. BNYM also argued that its discussions with AP were simply opinions in its role as manager and were not to be construed as advisory opinions. It maintained that the securities lending authorisation agreement required it to carry out its obligations under the contract with the requisite level of care and skill, but imposed no additional obligations not otherwise found under the contract.


The judge dismissed the acquisition claim and the retention claim, finding that the Sigma medium-term notes had met the necessary investment guidelines at the time and that BNYM was not in breach of duty for failing to communicate with AP regarding Sigma before it actually did so.

However, the judge found that BNYM was at fault in how the position regarding Sigma was explained to AP in May 2008. BNYM did not owe AP a fiduciary duty to make full disclosure of all information in respect of Sigma. However, BNYM was required to provide a full and fair assessment of the position once it became aware that there was a material risk that the Sigma medium-term notes could suffer a default. The judge found that BNYM did not take reasonable care in making the representations that it did in that regard, and that what was said was misleading, as relevant facts were omitted which were required to provide a proper picture. A key component of this analysis was how BNYM had treated other clients in a similar situation, which had been informed that there was a serious risk to their investments and to whom BNYM had recommended alternative action.

On this basis, the judge found that although there was no deliberate attempt to mislead, BNYM's communications had given rise to misrepresentations and negligent misstatements. BNYM had breached the contractual duty imposed by Clause 10(b)(i) of the securities lending authorisation agreement, and also the equivalent duty which arose in tort.


The judgment underscores the need for securities lending agents to act fairly when communicating with their clients. Although it confirmed that a securities lending agent generally does not owe its clients a fiduciary duty, an agent is required to provide its clients with a fair assessment of the situation once it becomes aware that an investment is at serious risk of default that would result in significant losses to the client. In this case, that BNYM did not do so was brought into sharp relief by the fact that it provided quite different information and guidance to other clients in the same position.

The judgement is also notable for the application of Rubenstein v HSBC Bank plc(2) in the rejection of BNYM's argument that the risk that materialised was not within the contemplation of the parties. The judge found that AP's loss – which resulted from the default of Sigma – was foreseeable (and was foreseen) and the issue did not depend on the foreseeability or otherwise of the financial 'tsunami' following the collapse of Lehman.

The case also stands out as one of the rarer examples in which a bank has been found liable for losses resulting from false representations in the wake of the financial crisis.

For further information on this topic please contact Leonora Howard or Jonathan Cary at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (leonora.howard@rpc.co.uk or jonathan.cary@rpc.co.uk). The RPC website can be accessed at www.rpc.co.uk.


(1) [2013] EWHC 3127 (Comm).

(2) [2012] EWCA Civ 1184.