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Caroline Edwards, partner and David Thomas, solicitor at Travers Smith, discuss the key cases and developments in relation to financial contracts.
A large number of cases concerning complex financial contracts have come before the courts in the last 12 months. The following decisions are of particular interest:
In this case the defendant sought to disclaim various transactions that it had entered into under an International Swaps and Derivatives Association (ISDA) Master Agreement in order to avoid liabilities to the claimant. It claimed that it did not have authority to conclude the transactions, despite the ISDA Master Agreement including representations and warranties that stated that it did. The court held that, while the transactions were made without authority, and therefore void:
The case is the latest attempt made by a public body to disclaim an interest rate swap, which can be traced to the early '90s cases of Hazell v Hammersmith and Fulham London Borough Council  2 QB 697,  3 All ER 33 and Westdeutsche Landesbank Girozentrale v Islington London Borough Council,  AC 669,  2 All ER 961. This decision is currently under appeal (that appeal will be heard in July 2015). Dexia Crediop SpA v Provincia Di Crotone and Banco Santander Totta v Companhia Carris de Ferro de Lisboa, which are currently before the courts, involve similar arguments.
This case related to an interest rate swap product sold by NatWest to Crestsign in 2008 to hedge Crestsign’s interest rate risk. Crestsign alleged that the product had been mis-sold, and that NatWest had provided negligent advice. The court held that, as a result of contractual disclaimers contained in the documents reflecting the relationship, Crestsign was estopped from bringing claims against NatWest in negligence, even though the bank had provided negligent advice. The court also held that, notwithstanding the contractual disclaimers, NatWest had a duty to provide information about the product to Crestsign, albeit that this duty had not been breached. The case is the latest in a long line of cases—including the well-known cases of IFE Fund SA v Goldman Sachs International  EWCA Civ 811,  All ER (D) 476 (Jul) and JP Morgan Chase Bank and others v Springwell Navigation Corp  EWCA Civ 1221,  All ER (D) 08 (Nov)—in which the courts have permitted financial institutions to rely on contractual disclaimers on the basis of estoppel. The recent decision inBarclays Bank plc v Grant Thornton UK LLP  EWHC 320 (Comm),  All ER (D) 210 (Feb) also reinforces the strict approach currently adopted by the courts when construing contractual disclaimers. Crestsign is currently under appeal, with the appeal due to be heard next April 2016.
This case concerned the extent to which, for the purposes of the calculation of loss recoverable by one party under an ISDA Master Agreement following an early termination date (ETD), the defendant could rely upon quotations which predated the ETD. The court held that this approach was contrary to the clear meaning of the relevant provisions of the ISDA Master Agreement, and was therefore not permitted. The case provides a good illustration of the court’s approach to construction of market-standard contracts, namely to construe the relevant provision strictly, in accordance with the plain meaning of the words used. The recent case of Greenclose Ltd v National Westminster Bank Plc  EWHC 1156 (Ch),  All ER (D) 127 (Apr), where the court held that a notice delivered by email was not a valid form of service for the purposes of the ISDA Master Agreement (because email is not an ‘electronic messaging system’), is another example of the court construing an ISDA Master Agreement strictly in accordance with the meaning of the words used.
A number of common themes can be identified from the cases discussed above.
First, SAL Oppenheim and Greenclose both demonstrate that, when construing a market standard financial contract, the court is more likely to take a strict approach. This is because, as Burton J noted in SAL Oppenheim, market-standard contracts are ‘intended to be normative, and to apply in many different situations and with as much straightforward application as possible…so that the very large number of parties using [them] should know where they stand’. It follows that there is likely to be little scope to adduce extraneous material by way of factual matrix evidence to be taken into account in construing the provisions of a market-standard contract. This is most recently illustrated in the case of SwissMarine Corporation Ltd v O W Supply & Trading A/S (in bankruptcy) EWHC 1571 (Comm),  All ER (D) 103 (Jun), in which Andrew Smith J stated that:
‘…when parties choose to use for a contract a standard wording such as the ISDA Master Agreement form, generally their own circumstances at the time of the contract will not affect the interpretation of the wording. By choosing standard wording, parties usually evince an intention that the wording as incorporated into their contract should be given its usual meaning’ (para ).
Second, until the financial crisis relatively few cases relating to the construction of market-standard financial contracts had come before the courts. The recent spate of cases has provided clarification as to the proper construction of some provisions contained in certain market-standard contracts. The issues that have arisen in these cases have also led, in certain cases, to revisions to market-standard documents to address those points—see, for example, the 2011 Global Master Repurchase Agreement, where the distinction between administration and liquidation for the purposes of the designation of an event of default has been removed (unless the parties elect to maintain it). This distinction was in issue in the case of Heis v MF Global Inc  EWHC 3068 (Ch), EWHC 3068 (Ch).
The cases arising under market-standard financial contracts all demonstrate the importance of complying to the letter with the provisions set out in market-standard financial contracts when seeking to exercise rights under those contracts. In light of the strict manner in which these contracts are construed, a failure to comply precisely with contractual requirements can have very severe consequences, and we would expect lawyers’ practices now to reflect that.
Similarly, the recent cases arising from market-standard contracts also show that, when assessing whether parties have complied with contractual requirements under market-standard contracts, the court will look very closely at the steps taken by the parties concerned at the relevant time in order to determine whether the requirements under the contract were met. The more evidence a party has of the steps it has taken, the stronger its position will be when this exercise is undertaken. Again, this is likely to be taken into account by lawyers advising counterparties around the time of a default.
We can also expect parties to continue to seek new ways to extricate themselves from unfavourable contracts, and the various investigations into market manipulation, which seem set to continue, will doubtless provide a rich source of such arguments. The cases of Deutsche Bank AG and others v Unitech Global Ltd and others and Property Alliance Group v The Royal Bank of Scotland, which are still ongoing, both involve parties seeking to set aside interest-rate hedging agreements on the basis that the counterparty bank participated in the manipulation of the LIBOR benchmark.
Benchmark manipulation and other market misconduct of this nature may also prove to be a source of so-called ‘follow-on damages’ claims—these are civil claims for damages brought against parties who have been found by competition authorities to have infringed competition law and are a burgeoning source of litigation in the English courts. It remains to be seen whether claims of this nature will be brought following the findings by the European Commission that certain financial institutions had participated in illegal cartels in markets for euro- and yen-denominated financial derivatives in within the EEA. However, while the assessment of damages in claims of this nature will be extremely complex, it seems inevitable that we will see claims in this area. It is also notable that the Financial Conduct Authority has recently established a new competition division and declared itself ‘open for business’ following the new powers conferred on it, with effect from April 2015, to investigate anti-competitive behaviour in the financial services sector. The potential for any findings of competition law infringements in the financial services sector to lead to civil claims is undoubtedly an area to watch with interest.
The pending appeals in Crestsign and Stitchting Vestia could give rise to further judicial consideration of the scope of the principles of estoppel by the senior courts. The following upcoming cases are also likely to be of interest.
This is an appeal of an earlier decision of the High Court (see Re MF Global UK Ltd (in special administration)  EWHC 883 (Ch),  All ER (D) 10 (Apr)). It addresses the question of whether an administrator of a company is analogous to a liquidator. The question is relevant because, under various market-standard contracts, including the ISDA Master Agreement, the appointment of a liquidator or analogous officer triggers an automatic event of default (which leads to the immediate close out the parties’ respective positions), but the appointment of an administrator does not. David Richards J held in the High Court that an administrator was not an analogous officer to a liquidator, and thus that the appointment of an administrator is not sufficient to trigger an event of default on its own. This point is now under appeal, and if David Richards J’s decision is reversed that reversal could have wide-ranging consequences for parties to many market-standard financial contracts facing counterparties who have entered administration.
This is an application by the Joint Administrators of Lehman Brothers International (Europe) (LBIE) for directions in relation to the management of its estate. LBIE has now paid all of its (agreed) principal debtors in full, and is holding a surplus of funds. The purpose of the Waterfall II application is to determine various issues in relation to the question of how the Joint Administrators should deal with the surplus. The application includes (among other things) questions relating to:
As set out above, these two cases both involve attempts by parties to disclaim interest hedging products on the basis that the banks that provided the products were participating in the manipulation of LIBOR. No such case has yet been finally decided. If a court rules against the banks, there will undoubtedly be scope for other claims to be launched against banks on a similar basis.
Interviewed by Duncan Wood.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
First published on LexisPSL Banking & Finance. Click here for a free trial.
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