Contractual interpretation in recent capital markets cases


In this article, we survey recent litigation in capital markets featuring issues of contractual interpretation, drawing out some of the most interesting current issues and identifying key practice points.

The principles of construction of contracts in English law are now well established. The courts determine the intention of the parties objectively, asking not what their actual subjective intentions were, but rather what a reasonable person would have understood the common intention to be. The court uses the written terms of the contract as the primary source, reads the contract as a whole, takes into account the background facts and, in cases of ambiguity, is entitled to prefer the interpretation most consistent with business common sense.

However, what is of particular interest is how these general principles have been applied in recent capital markets cases.

Greenclose Ltd v National Westminster Bank plc [2014] EWHC 1156 (Ch)

In 2007, a family hotel business called Greenclose entered into an interest rate collar with the NatWest bank under a 1992 ISDA Master Agreement (the ‘1992 ISDA’). The bank had the right to extend the term of the collar. But, to do so, it had to give notice of the extension before 11 am on December 30, 2011.

The bank made various attempts to give notice on that date. An employee faxed the extension notice to Greenclose but this resulted in a failed transmission. The notice was sent by email but an out of office message was received in response. When the bank tried to telephone, there was no response from Greenclose’s office, it being closed for the Christmas period. Eventually, an employee resorted to leaving a message on the Managing Director’s mobile phone. A dispute ensued as to whether the bank had validly given notice to extend. This turned on the correct interpretation of the notice provisions found in Section 12 of the 1992 ISDA and the Schedule to the 1992 ISDA.

Section 12 of the 1992 ISDA states that:

‘12. Notices:

a.Effectiveness. Any notice … in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated:


iii.if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form …;


v.if sent by electronic messaging system, on the date that electronic message is received …’

The High Court found that the ways in which an effective notice could be given were limited to those permitted by Section 12 as supplemented by the Schedule. In other words, it was a mandatory, not a permissive provision. At first glance, this may seem surprising, given the use of the word ‘may’ in Section 12. But importantly, what drove the Court to this conclusion was reading the contract as a whole – one of the key general principles of contractual interpretation.

So, for example, the Court noted that the ISDA prohibits default and closeout notices being given by fax or electronic messaging system. It then reasoned that to apply a permissive construction to Section 12 would mean that such notices could be given verbally, which would make no sense because it would introduce uncertainty where certainty was paramount.

On the basis that Section 12 is a mandatory provision, the Court further concluded that

  • Neither fax nor email notices were permitted, because no fax or email notice details were contained in the parties’ ISDA Schedule.
  • The ‘Electronic Messaging System’ provision in Section 12 did not provide for email notices but for SWIFT notices and the like.
  • As Section 12 did not permit notices by telephone either, the bank’s notice was invalid and did not extend the collar.

This case thus provides a powerful example of the importance of following contractual notice provisions to the letter and a valuable demonstration of how English courts approach the interpretation of major standard form commercial contracts.

In particular, the Court noted that the ISDA Master Agreement is probably the most important standard market agreement in the financial world and that, as far as possible, it should be interpreted in a way that serves the objectives of clarity, certainty and predictability, so that the very large numbers of parties using it should know where they stand. In short, an English court should not be expected to creatively interpret major standard form contracts such as the ISDA Master Agreement.

The Court also noted that, because the ISDA Master Agreement is a standard form, it is permissible to take into account published explanatory notes such as the ISDA User’s Guide. Indeed, it drew support for its mandatory construction from phrases used in the ISDA User’s Guides. The Court also relied upon provisions of the 2002 ISDA Master Agreement (the ‘2002 ISDA’) in coming to the conclusion that the words ‘Electronic Messaging System’ in the 1992 ISDA are not intended to include email. For example, Section 12(a) of the 2002 ISDA provides separately for notices being sent by email and by electronic messaging system. Even though the 2002 ISDA was drafted long after the 1992 ISDA, the Court considered the 2002 ISDA and 2002 User’s Guide to be relevant, saying that it would be wrong to ignore any evidence that sheds light on how ISDA or the market interpreted the 1992 ISDA before the collar was entered into.

Napier Park v Harbourmaster Pro-Rata CLO 2 BV [2014] EWCA Civ 984

In this case, the High Court and Court of Appeal came to diametrically opposed conclusions, providing a powerful demonstration of the unpredictability of some interpretation cases.

The case concerned a collateralised loan obligation (CLO) in which some of the underlying loan obligations had matured early. The key issue in dispute was what should be done with the resulting cash proceeds. The transaction documents provided that they should be reinvested in further loan obligations, if the ratings of the Class A1 Notes (issued as part of the CLO) had not been downgraded below their Initial Ratings. Otherwise the proceeds were to be applied towards redemption of the Notes. The Class A1 Notes had initially been rated AAA; they were then downgraded to AA but were later upgraded back to AAA.

At first instance, the Chancellor of the High Court emphasised that, where contracts contemplate that rights and obligations may pass to persons other than the original contracting parties, such as with tradable financial instruments, certainty and clarity are key and that the Court should be particularly cautious about departing from the ordinary meaning of the words used. Against this background, the conclusion he reached was that the reinvestment criteria could no longer be satisfied, essentially because the ordinary meaning of the clause referred to a past event, not a continuing state of affairs. He drew further support for this conclusion by reference to other provisions in the transaction documents and expressed the view that there was simply insufficient admissible evidence to persuade him that his construction was contrary to the commercial purpose of the provision (which on one view could be argued to be the protection of senior noteholders at times when their notes were no longer rated AAA).

On appeal, the Court of Appeal disagreed that the reinvestment criteria unambiguously referred to a past event. It formed this view both on a grammatical basis and taking into account commercial considerations, which it emphasised were relevant to determining whether or not language is ambiguous. Instead, it considered that another potential interpretation was that the reinvestment criteria referred to something which is continuing (i.e. the language was ambiguous). Having reached this conclusion, the Court of Appeal was then able to determine which of the possible interpretations was most consistent with business common sense, which in its view favoured the continuing state of affairs interpretation. If, at the date on which the proceeds arose, the rating agencies had the highest level of confidence that the senior noteholders would be paid in full and on time (as conveyed by a AAA rating), the Court could not see why reinvestment would be absolutely prohibited due to an event which might have taken place years ago.

This outcome arguably appears to be more consistent with the likely commercial purpose of the provision. It also reflects a theme evident in some other contractual interpretation cases, namely that, at times, the appeal courts can appear more open to commercial purpose-type considerations. However, one of the consequences of this can be a sacrifice of predictability. Gone from the appeal judgment were the Chancellor’s words of caution about departing from the ordinary meaning of the words used.

US Bank Trustees Ltd v Titan Europe 2007-1 (NHP) Ltd [2014] EWHC 1189 (Ch)

US Bank v Titan concerned a securitisation transaction and raised the interesting question of what happens when provisions in the transaction documents conflict with the offering circular.

Under one of the transaction documents, what was defined as the ‘Controlling Party’ had the right to require the trustee to terminate the appointment of another party, the ‘Special Servicer’. The dispute arose when the junior noteholder sought to exercise this right, directing the trustee to terminate the appointment. This was opposed by other noteholders and so the trustee sought directions from the court via an expedited Part 8 claim. Like Napier Park, the dispute was effectively between different classes of noteholder.

One of the key questions the court had to determine was ‘who was the Controlling Party?’ The servicing agreement clearly provided that the Controlling Party was the issuer, whereas the offering circular indicated it was the junior noteholder. The court applied the definition contained in the servicing agreement, not the offering circular. It agreed that the offering circular was an important part of the factual matrix, against which the servicing agreement was to be construed, but it pointed out that the offering circular was not itself a contractual document. It also considered that the offering circular’s force as an aid to construction of the servicing agreement was minimised by a disclaimer in it that, in the event of a conflict, the terms of the contractual documents take precedence. The court was mindful of the importance of the offering circular to investors, but indicated that noteholders might have claims in respect of the offering circular instead (presumably under Section 90 of the Financial Services and Markets Act 2000).

As the junior noteholder was not therefore entitled to direct the termination of the Special Servicer’s appointment, in practice the remaining contractual interpretation issues fell away. However, the court nevertheless expressed its view on a further issue of interest. This related to a requirement in the servicing agreement to the effect that any termination of the Special Servicer’s appointment would only take effect if its successor had experience in servicing commercial property mortgages on similar terms and was approved by the issuer and the trustee.

The question for the court was whether, as the trustee submitted, the exercise of the trustee’s discretion here was limited to considering the experience of the proposed successor in servicing mortgages of commercial property or whether it ought also to take into account wider considerations. In view of the language of the provision in question, particularly the use of the word ‘and’, the court considered that it was clear that the clause involved two separate and distinct requirements. The role of the issuer and trustee was not limited to an assessment of the experience of the proposed successor. The court also considered this made good commercial sense, there being every reason why the parties should have intended that there should be a proper check on the suitability of the Special Servicer. Past experience was one factor that might be relevant, but there may be others such as whether it was subject to current financial or regulatory difficulties.

It is therefore clear for trustees and issuers faced with this type of provision that it is no rubber stamping exercise; a qualitative judgment has to be exercised. This may be a cause of disquiet to some trustees, not least because the court felt it inappropriate to provide a list of the issues to consider in all scenarios. The decision is currently the subject of an appeal.

Barclays Bank plc v Unicredit Bank AG [2014] EWCA Civ 302

Where a bank is granted a discretion which is required to be exercised ‘reasonably’, a debate sometimes arises as to the standard of reasonableness that applies: is the standard an objective one or, for example, is the bank required only to refrain from acting in a way that no reasonable bank would act (akin to a Wednesbury standard)? The Court of Appeal’s most recent pronouncements on the subject in Barclays v Unicredit suggest that, in practice, this debate may sometimes be somewhat academic.

Unicredit and Barclays entered into certain synthetic securitisation transactions. Unicredit had an optional termination right if a regulatory change occurred, provided that Barclays consented to the early termination. Such consent was to be determined in a commercially reasonable manner.

Two years later a regulatory change occurred and Unicredit sought Barclays’ consent to early termination. The court found that Barclays decided not to consent unless it was paid the balance of five years fees under the transactions, a substantial sum. So had Barclays exercised its discretion in a commercially reasonable manner?

At first instance, the Commercial Court essentially held ‘commercially reasonable’ meant reasonable in an objective sense and that Barclays had complied.

In contrast, the Court of Appeal found it unhelpful to debate whether the standard was objective, subjective or otherwise. Instead it preferred to look simply at the meaning of the particular clause in its particular context. Applying that approach, it considered the test to be whether Barclays demanded a price which was way above what it could reasonably have anticipated would have been a reasonable return from the contract. It also confirmed that Barclays was entitled to take into account its own interests in preference to Unicredit. If anything, the Court of Appeal thought its test accorded more with a Wednesbury standard. In any case, applying the test, it again found that Barclays had acted in a commercially reasonable manner.

The Court of Appeal’s conclusion on the meaning of ‘commercially reasonable’ was reached in a few brief paragraphs. While it noted that the words ‘commercially reasonable’ were used in many commercial contexts, it emphasised that the same interpretation would not necessarily apply elsewhere. Some may see this as a missed opportunity to have general Court of Appeal guidance on the meaning of this commercially significant phrase. However, it can also be seen as an indication that the debate as to whether an objective or Wednesbury standard of reasonableness applies may often be of less significance than might sometimes be assumed.

In any event, the judgment is likely to be welcome news to parties exercising these types of discretion, particularly given the Court of Appeal’s express indication that this is not intended to be a rigorous control and that the determining party can take into account its own commercial interests. Unicredit has lodged an application to appeal to the Supreme Court so the debate may yet continue.


Questions of contractual interpretation continue to provide the source of many disputes involving banks and financial institutions. The financial crisis and subsequent events have led to transaction documentation being tested in ways that may not have originally been envisaged. While the courts continue to apply the general principles outlined above and the creative interpretation of capital markets contracts is certainly not the norm, it is not always easy to predict how they will construe a particular provision.

Valuers’ negligence and limitation


Unsurprisingly, negligence claims by financial institutions against valuers arising from secured lending transactions tend to follow recessions. Property values slumped in 2008 following the onset of the global financial crisis and this has led to more cases reaching the courts recently. However, in the light of low interest rates and the longer term view adopted by lending institutions, we have not seen quite the number of such cases that we did following the collapse of the property market in the early 1990s and it may well be that there are a large number of such potential claims which have not yet been recognised.

This article looks at some recent decisions in this field and at some litigation currently in progress, including claims by special purpose vehicles involved in structured finance transactions. Since there is a real risk that further crisisrelated claims will become time barred unless they are pursued promptly, thereby closing off this potential route for recovery of losses, we also consider limitation issues.

The basic principles

In order to bring a successful claim against a valuer for overvaluing property securing a loan it is necessary to establish negligence, causation and loss. Fundamentally, this means establishing each of the following

  • That the valuer owed the claimant a duty of care (which may be more complicated in respect of structured investment arrangements such as commercial mortgage backed security transactions, where the issuer may not have a direct contractual relationship with the valuer).
  • That in preparing the valuation the valuer fell below the standards to be expected of a reasonably competent valuer and that his valuation fell outside an acceptable ‘margin for error’.
  • That the lender (or issuer) relied on the valuation and would have acted differently if the valuation had been accurate.
  • That as a consequence the lender has suffered a loss which falls within the scope of the valuer’s duty of care (in the sense established by SAAMCO v York Montague Ltd [1997] AC 191 (SAAMCO).

There is then scope for the quantum of the claim to be reduced if the lender was itself negligent in its lending practices (contributory negligence).

Correct claimant, duty of care, reliance and loss

In a straightforward property loan it will be the lender who will bring the claim against the valuer for negligent overvaluation of the security, having suffered loss following the borrower’s default and the realisation of the security for less than the outstanding loan. It is far more complicated to identify the correct claimant in respect of structured investment arrangements such as commercial mortgage backed security transactions – ‘CMBS’, where the party who ultimately suffers the loss may not have a direct contractual relationship with the valuer. In addition, these cases raise interesting questions about the interaction between limited recourse and nonpetition clauses and the recoverability of loss: in particular, whether the fact that any reduction in cashflows payable to the special purpose vehicle (SPV) arising from an undervaluation leads to a matching reduction in amounts payable by the SPV to bondholders prevents the SPV from suffering any loss due to an undervaluation.

These issues have arisen in two recent cases where the claimant was the special purpose vehicle (SPV) itself, rather than the ultimate lenders: the syndicate of financial institutions or the bondholders. A further two cases are currently being litigated: Gemini (Eclipse 2006-3) v CBRE & Warwick Street and Windermere X CMBS v Warwick Street.

The case of Capita Alternative Funds Services (Guernsey) Limited and Matrix Securities Limited v Drivers Jonas [2012] EWCA Civ 1417 provides a fairly recent and stark example of a negligent valuation resulting in a £12 million judgment for the purchasers of a factory outlet centre in an Enterprise Zone, arising from the valuer’s lack of expertise in valuing such a specialist asset and the associated tax implications.

Capita was the trustee of a trust set up as an investment vehicle for multiple individual investors and Matrix sponsored the creation of the trust and was responsible for establishing and promoting the investment. However Matrix suffered no loss itself. Accordingly Drivers Jonas sought to argue that, in the absence of an engagement letter recording the scope of its duties, it was only retained by Matrix and owed no duty to advise Capita or the investors. The judge at first instance was not attracted by this technical argument and had no difficulty in finding, in the light of the contents of Drivers Jonas’ own report, that it was retained by Capita to provide valuation and investment advice in relation to the leasehold purchase. This aspect of the decision was not challenged on appeal.

Similar issues as to the identity of the correct claimant arose in the very recent Commercial Court case of Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) [2014] EWHC 3106 (Comm). Titan was an SPV formed by the lender, Credit Suisse, to act as the issuer of securities in a complex CMBS transaction. Credit Suisse lent approximately €1billion in respect of eighteen separate loans secured on commercial property and that portfolio of loans was subsequently purchased by Titan using subscriptions from the investors who purchased the securities in the debt (the ‘Noteholders’). One of the loans was secured on a large commercial building in Nuremberg in Germany, which had been valued by Colliers. When the tenant of that building became insolvent the borrower was unable to service the loan and the security was sold for very considerably less than the outstanding loan. Titan sued Colliers for the loss it claimed arose from Colliers’ negligent overvaluation of the property.

However Colliers sought to argue that Titan was not the correct party to bring the claim because it had suffered no loss. It had purchased the loan with funds raised by the issue of the securities to the Noteholders on a non-recourse basis. Accordingly Titan essentially acted as an economically neutral conduit between the Noteholders and the debt in which they were investing and it was the Noteholders, not Titan, who would ultimately suffer any loss.

The judge held that, whilst the loss might ultimately rest with the Noteholders, for various technical legal reasons they were not likely to be in a position to bring a claim themselves. Titan could be treated as suffering a loss immediately on purchase of the loan for more than its true value and the fact that it had subsequently securitised that debt on a non-recourse basis was irrelevant as a matter of law as being an arrangement with third parties which should not benefit the valuer (the principle of res inter alios acta). Critically, he further held that Titan was contractually required to apply any damages awarded according to the structure to which the Noteholders subscribed when they made their investments.

Colliers also suggested that, although Credit Suisse may have relied on its valuation when making the loan, Titan had not done so. However the judge concluded that even if Titan had not actually seen the valuation before it purchased the loan it could still be said to have relied upon it if it was aware of its existence and contents.

Negligence and the ‘margin for error’

In both of the cases referred to above the claimant was able to establish by expert evidence that, in preparing the valuation, the valuer had fallen below the standards to be expected of a reasonably competent valuer. For instance, in Titan, the judge concluded that the valuer had failed to give sufficient consideration to the possibility that the tenant of the property might not renew its lease and that the property might be difficult to relet or sell because it had been purpose built for the needs of the current tenant and it was very large and ageing.

However, it is not sufficient simply to be able to demonstrate that a valuer has gone wrong in respect of some (or even all) of its inputs. It is still necessary to show that the valuation figure derived fell outside the reasonable range of values that a competent valuer could have reached, known as the ‘margin for error’. As highlighted by Coulson J in cases such as K/S Lincoln v CBRE Hotels [2010] EWHC 1156 (TCC) and the two related cases he decided subsequently, Blemain Finance Ltd v E.Surv Ltd [2012] EWHC 3654 (TCC) and Webb Solutions Ltd v E. Surv Ltd [2012] EWHC 3653 (TCC), the acceptable margin for error can vary depending on the state of the market and the type of property. For instance, if the market is particularly volatile, or very flat, so that there are not many comparables, the margin will be wider and, whilst standard residential properties should be fairly straight forward to value, commercial development projects are likely to be more challenging. Generally, the margin for error for residential property valuations is +/-5 per cent, whilst for commercial properties it is likely to be between +/-10-15 per cent. Indeed in the Titan case the valuer argued that the margin should be 20 per cent or more given the unique aspects of the property in question, although the judge decided that the acceptable margin should be 15 per cent.

SAAMCO, Causation and the scope of the duty of care

As is well known, in the SAAMCO case, the House of Lords (as it then was) effectively held that losses arising out of the subsequent fall in the property market fell outside the scope of duty of care owed by a valuer to a lender. Accordingly a lender’s loss is capped at the amount of the overvaluation (i.e. the difference between the negligent valuation and the true value of the property as at the date of valuation). Subsequently this analysis of what losses fall within the scope of a professional’s duty of care has been applied in a number of fields.

A recent example is Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184, a successful claim brought by a retail client against a financial adviser in respect of investment advice. Mr Rubenstein wanted an investment that carried no risk of loss to his capital, as in due course he wanted to use the capital to fund the purchase of a new house. HSBC recommended that he invest in the AIG Premier Access Bond (which included the Enhanced Variable Rate Fund). Ultimately, following the unforeseeable collapse of Lehman Brothers and the subsequent run on AIG in September 2008, Mr Rubenstein did suffer the loss of some of his capital and he pursued a claim against HSBC. Although at first instance the judge held that HSBC had advised negligently, he then decided, applying the SAAMCO principles, that Mr Rubenstein’s loss had been unforeseeable and too remote, and had not been caused by HSBC’s negligent recommendation but by the ‘extraordinary and unprecedented financial turmoil which surrounded the collapse of Lehman Brothers’ and that therefore the loss fell outside the scope of HSBC’s duty of care.

However, on appeal, the Court of Appeal rejected this approach. In his leading judgment, Rix LJ held that the loss was not caused by the run on the AIG fund but by the impact of adverse market forces on the underlying assets of the fund, which was foreseeable. Indeed it was precisely this ‘market’ risk (as opposed to the risk of ‘issuer default’) against which the bank was supposed to protect Mr Rubenstein and therefore the loss did not fall outside the scope of the bank’s duty of care.

Accordingly, whilst the SAAMCO cap remains likely to be applicable to the majority of claims against valuers, where the loss flows from a cause from which the lender has expressly sought protection (for instance in the unusual event that the lender has asked the valuer to advise about likely future movements in the property market), then it might be possible to seek to recover losses flowing from a fall in the market.

Contributory negligence

It is common for valuers to seek to reduce the quantum of claims against them by raising allegations of contributory negligence on the lender’s behalf in approving the loan. The court is likely to reduce any damages awarded by an appropriate percentage if it is satisfied that the lender’s approach fell below that of a reasonably competent lender (such as applying an excessive LTV) and that such negligence contributed to the loss. However in a number of recent cases, such as the cases determined by Coulson J in 2012 referred to above, the courts have emphasised that allegations of contributory negligence must be judged in the light of the facts and against the background of the lending market at that particular time, such as during the over-heated market in 2007 when lending policies were less stringent. This led the judge to find in those cases that, for instance,a relatively high LTV of 85 per cent, errors on the borrower’s application form and self-certification of income did not amount to contributory negligence.


As explained at the start of this article, claims against valuers often arise in the wake of recessions. This is partly because valuers are perhaps more prone to overvalue property in an overheated market or fail to appreciate the impact of a deteriorating economy on property prices and partly because of the increased likelihood of borrower default in difficult financial times. However, as it can take some time for lenders to enforce their security and realise any losses, claims may arise years after the date of the relevant valuation. Accordingly it is necessary to consider at an early stage whether any such claims may be time barred.

Claims against valuers are normally brought in both contract and tort and these causes of action have different limitation periods, which can be crucial. Whilst a claim in contract becomes statute barred within six years from the date of breach (which will normally be the date of the valuation), the claim in tort does not become statute barred until at least six years after the lender has first suffered a loss. In the context of valuers’ negligence claims this has been held to occur when the value of the property, together with the value of the borrower’s covenant, first falls below the amount of the loan (see Nykredit v Edward Erdman Group [1997] UKH 53). Accordingly, whilst on the face of it a claim arising from a valuation carried out in 2007 might appear to be potentially time barred, it is quite possible that, on analysis of when the loss occurred, a claim may still be available.

Indeed, a lender may have an even longer period in which to bring a claim. As discussed in our article on Mis-Selling elsewhere in this edition of Banking and finance disputes review, s14A of the Limitation Act 1980 sets out an extended limitation period of 3 years after that date on which the claimant discovered (or ought reasonably to have become aware) that the property had been over-valued (subject to a fifteen year long stop date). Indeed it was on this basis that the claim against Drivers Jonas referred to above succeeded in respect of a valuation given in 2001.


Banks and financial institutions may well have potential claims against valuers arising out of losses sustained during the global financial crisis. Many of these claims are in danger of becoming time barred. Others raise challenging questions of causation and the scope of the duty of care. Nonetheless, if lenders are sitting on losses arising from secured lending transactions entered into during or shortly before the global financial crisis of 2008/9 it is critical that these are reviewed now to ensure such claims are not lost.

Mis-selling and limitation periods

State of Play

In the previous edition of Banking and finance disputes review, we considered Graiseley Properties Ltd & Ors v Barclays Bank plc [2013] EWHC 67 (Comm), in which the Court of Appeal gave permission for claims based on the fixing of LIBOR to proceed to trial in the context of wider claims relating to the mis-selling of interest rate swaps. Graiseley promised a detailed consideration of issues that would be widely relevant for misselling claims, including fraudulent misrepresentation, attribution of knowledge and rescission. However, in April 2014, Graiseley, together with the much less publicised case of Domingos Da Silva Teixeira v Barclays Bank Plc, also involving allegations relating to LIBOR manipulation, were both settled. This leaves one other mis-selling case, Deutsche Bank AG v Unitech Global Ltd, which is on-going.

Meanwhile, the constant presence of mis-selling and index manipulation in the news suggests that these will continue to be a source of litigation. For instance, in July 2014, the Financial Times reported that investors in the Brandeaux Student Accommodation Fund were planning to sue advisers for mis-selling after plans to float the Fund on the stock exchange collapsed (Lawyers prepare case against advisers over Brandeaux,1/7/14). Similar funds have also seen a collapse in asset values. This follows a ban by the Financial Conduct Authority on the promotion of unregulated collective investment schemes to individual nonsophisticated investors imposed from the beginning of 2014.

With regard to index and benchmark manipulation, regulators have also turned their focus from LIBOR to commodity and foreign currency markets. At present, this has led to a number of regulatory investigations. It is possible that mis-selling cases may follow: although these may face significant hurdles in establishing causation.

Limitation Periods

Another important driver of mis-selling litigation may be the expiry of the six year limitation period that applies to contractual claims. This may lead to a glut of litigation where claims arise out of events during the financial crisis of 2008.

However, mis-selling claimants might also try to take advantage of the extended limitation period for negligence claims set out in s14A of the Limitation Act 1980, which allows claims within three years of the earliest date when the claimant had ‘the knowledge required for bringing an action for damages in respect of the relevant damage’.

This was the argument successfully employed by the claimants in Kays Hotels Ltd v Barclays Bank Plc [2014] EWHC 1927 (Comm). In 2005, the claimant entered into a loan and an interest rate collar with the bank. The collar lasted ten years and provided that if interest rates remained between 4 and 5.5 per cent, as they did from 2005 to 2007, neither side paid. If interest rates rose above 5.5 per cent, as they did in 2007, the bank would make payments to Kays, whereas if rates fell below 4 per cent, as they did in 2008, Kays would pay the bank. Kays issued a claim in November 2012 alleging that the collar had been mis-sold.

The bank applied to strike out the claim on the basis that the product had been sold more than six years before the claim was issued and was therefore time-barred. Kays accepted that its claims for breach of contract and breach of statutory duty were time barred but in respect of its claim in tort Kays sought to rely on Section 14A Limitation Act 1980.

The trigger for the s14A starting date is not knowledge of the precise details of the alleged negligence or sufficient knowledge to identify conclusively that the defendant’s acts or omissions were the cause of the loss. It is sufficient to have enough knowledge to justify setting about investigating the possibility that the defendant has done something wrong (Haward v Fawcetts [2006] UKHL 9).

With the claim against the bank having been brought in November 2012, Kays argued that it had not had the requisite knowledge to bring an action before November 2009 (thereby bringing it within the extended three year limitation period). Meanwhile, the bank argued that Kays knew or should have known that it had a claim before proceedings were issued since, by that date, it had made payments totalling £36,000 and that the essence of Kays’ case was that it was told that interest rates would rise throughout the life of the product and was given no warning about the risk of payment liabilities.

The court dismissed the bank’s application and held that the test was whether Kays had been alerted to the factual rudiments of its claim, sufficient for it to take advice and put proceedings in train. The determinative moment was when it had reason to begin to investigate. Furthermore, the court viewed the bank’s categorisation of the complaint as being too narrow and considered the claim was not based simply on advice or on interest rates, but was more complex because it dealt with questions of suitability of the collar.

In the circumstances, the mere fact that Kays knew that some interest payments were being made for a period of about a year did not give rise to an unanswerable case that Kays knew or ought to have known sufficient facts to make the requisite investigation for the purposes of Section 14A. Consequently, Kays did have a real prospect of establishing that it could rely on Section 14A and its claim would not be summarily dismissed as bound to fail on limitation grounds.

Kays’ actual or constructive knowledge was fact dependent and required a full consideration of all the circumstances. In particular, this would involve the claimant’s sophistication, what it had been told or not told, what its general state of knowledge was in 2008/2009 and what the more general state of knowledge was at the time, such as the anticipated future trend of interest rates, all of which matters were not appropriate for summary determination.

While this was only an application to strike out rather than a trial, it provides valuable guidance as to the approach the court might take to limitation periods in cases of mis-selling. It appears that, in cases of suitability, as opposed to breach of a particular representation, a greater degree of knowledge will be required to trigger the start of time running under Section 14A.

Summary judgment and conclusion

Kays has one other aspect in common with previous cases such as Graiseley: it was an unsuccessful attempt by the defendant to dispose of the case at a preliminary stage. The hurdle for the claimant in these applications is very low, so it should not be surprising when a case is not struck out or summary judgment is not granted. However, these applications are also trailers for the likely judicial interpretation of key issues in the case, and are therefore much analysed. When cases settle before the main trial, as with Graiseley, they become the only relevant judicial statement. It is a tactical consideration in each particular case whether to apply for summary judgment or to strike out the claim but, where the claim is factually complex, it is unlikely to be susceptible to determination at that stage.

Kays v Barclays illustrates that complex mis-selling cases fall into this category. Questions of suitability, in particular, may be regarded as complex and multi-faceted which may also enable claimants to take advantage of s14A to circumvent the limitation period.

Recovering misappropriated money


It is an increasingly common feature of litigation that a party seeks to recover misappropriated or lost money or assets.

Of course, mistakes can occur innocently where, in the age of electronic banking, money is simply paid to the wrong account. However, all too often money is diverted as a result of fraudulent activity. In many instances the fraudster cannot be found or no longer has any assets and, in such circumstances, a claimant will have to look elsewhere for a remedy, usually to the ultimate recipient. Banks and financial institutions can often find themselves caught in the middle as claimants seek to identify the recipient and freeze the relevant accounts.

Money and other assets may also be misappropriated as a result of corruption. In that case, or where there is a complex fraud, money may be transferred multiple times and across international boundaries in order to obfuscate its source. This adds another layer of complication to the remedies available.

Although intuitively, it would seem that the innocent party should automatically be entitled to the return of his money from the recipient, the legal mechanisms for such recovery are not always straightforward and can often throw up significant obstacles in practice.

There are two common legal avenues for recovery against the recipient of misappropriated funds: (i) knowing receipt or a similar ground based on a constructive trust analysis; or (ii) unjust enrichment, generally falling within the ambit of a claim for money had and received.

From a claimant’s perspective, the benefit of a constructive trust claim is that it gives rise to proprietary rights, provided that the claimant is able to trace the asset or its proceeds. However, neither cause of action provides certainty of recovery. An unjust enrichment claim is susceptible to defences such as change of position. Similarly, a defendant to a knowing receipt claim who can show he is a bona fide purchaser for value without notice will not be liable.

Relfo v Varsani

The recent Court of Appeal decision in Relfo v Varsani [2014] EWCA Civ 360 concerned both tracing and unjust enrichment. Each is considered in more detail below but, more generally, the Court of Appeal’s approach arguably demonstrates a willingness on the part of the Court to assist an innocent party in recovering misappropriated funds.

The Relfo case concerned a claim by a liquidator seeking to recover approximately £500,000 which he claimed had been transferred from the insolvent company to the defendant, albeit indirectly. The allegation was that this had been instigated by a dishonest associate of the defendant who had owned the insolvent company and also separately managed the business affairs of the defendant’s family.

The money was transferred from the insolvent company and this was followed by a series of international transfers to various entities at various times of varying amounts in different currencies culminating in a transfer to the defendant. The liquidator argued that the money in the hands of the defendant could be claimed by it through tracing or unjust unrichment.


Tracing is neither a cause of action nor a remedy. It is merely a process by which a claimant will follow his assets, pursuant to an underlying cause of action, such as knowing receipt.

Tracing has been described as being ‘not a matter of court discretion but of property rights’ (Re Montagu’s Settlement Trust [1987] Ch 287). More recently, Lord Millet in Foskett v McKeown [2001] 1 AC 102, stated:

‘We … speak of tracing one asset into another but that … is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it … Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property.’

Complications arose in Relfo v Varsani because of the following potential obstacles to tracing the money

  • There was no clear line of payments from the company to the defendant, so that it was not possible to identify a coherent chain of payments.
  • The payments were not all in chronological order.
  • The sum transferred from the claimant company and the sum ultimately paid to the defendant did not match – Floyd LJ accounted for the difference in the end figure as being a ‘1.3 per cent money laundering charge and a $10 bank charge’.

However, the Court of Appeal held that evidential gaps and possible chronological anomalies did not prevent the liquidator from being able to trace the money in equity, or prevent the court from concluding that the money paid to the defendant was substituted proceeds.

There are a number of important points which can be drawn from the Court of Appeal’s decision

  • Notwithstanding that there might be evidential gaps, the court was entitled to draw an inference not only that the claimant’s monies had passed to the intermediaries’ accounts but that they were the source of the monies paid on to the defendant. It should be cautioned, however, that whether a court is able to draw such an inference in a particular case will always depend on the circumstances.
  • It does not matter how many accounts the money passes through or that the transactions are not in chronological order. However, these factors may make it harder to substitute one asset for another. The fact that payments need not be in chronological order recognises that instances where the intermediary pays out money in the expectation that it will be reimbursed should not preclude a claimant’s ability to trace and therefore must be seen as a welcome development in actions against money launderers.
  • Intention of itself is not enough to make the payment to the defendant substitute property for the claimant’s property. However, intention can be a relevant factor in the ‘basket of factors’ the court will take into account.

Ultimately, it seems that the court will look at the transaction as a whole to determine whether the monies paid to the defendant amount to substitute proceeds. However, the fact that the Court of Appeal has permitted courts to draw inferences in cases of money laundering and financial crime where there are evidential gaps suggests an approach keen to provide relief in appropriate cases.

Unjust enrichment

To succeed in an unjust enrichment claim, a court will need to be satisfied as to

  • The enrichment of the defendant.
  • That such enrichment was at the expense of the claimant.
  • That the enrichment was unjust (i.e. that it falls within one of the recognised causes of action such as money had and received).
  • That no defence is available to the defendant.

The Relfo decision concerned the second of these questions and specifically whether a claim can be brought against an indirect recipient. The general position is that a claim can only be brought against the direct recipient of a benefit, albeit various exceptions to this had previously been recognised. The Court of Appeal considered that the exceptions should be regarded as being a matter of general principle, rather than a set of separate and discrete exceptions.

However, no further clarification of the nature or extent of this general principle was provided.

It seems that, in essence, there must be a sufficient link between the transaction whereby the claimant conferred a benefit on the direct recipient and the transaction under which the defendant received the benefit so as to make the defendant’s enrichment unjust. Certainly in Relfo, the Court of Appeal was ultimately unanimous in the overall conclusion that the liquidator was entitled to a restitutionary remedy.

However, given that no general principle was articulated, it is fair to say that, in many instances, it may be difficult to determine whether an indirect beneficiary will be afforded a restitutionary remedy. The best that can be said is that it is likely that the court will look at the economic reality of the matter as a whole to determine whether the defendant has been unjustly enriched at the expense of the claimant.


The Court of Appeal’s decision in Relfo is of general interest as providing a practical illustration of tracing and unjust enrichment claims.

As regards tracing, the case is significant in highlighting that, even though there may be evidential gaps, a court may draw an inference that a claimant’s monies are the source of monies paid to the defendant. However, the greater the gaps or anomalies and the more accounts the money passes through, the harder it will be to trace.

As regards unjust enrichment, the decision provides an important example of a claimant succeeding against an indirect recipient notwithstanding that the Court of Appeal has left open the question of the full extent of any general principle underpinning indirect unjust enrichment claims. It remains to be seen whether and how any such principle is developed in future cases.

From a wider perspective, Relfo is one example of the increasing body of jurisprudence dealing with proprietary remedies in the recovery of assets linked to fraud and corruption. In United States v Abacha [2014], Field J granted a freezing injunction in respect of assets that were linked to corruption. He stated that ‘corruption, like other types of fraud, is a global problem and it and its consequences are only going to be dealt with effectively if there is co-operation and assistance not only between the governments of states but also between the courts of different national jurisdictions.’ In FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, the Supreme Court held that a proprietary claim was available in respect of bribes or secret commissions. All of these cases, but Relfo in particular, demonstrate a vigorous approach from the courts in dealing with assets connected with fraud and corruption.

Civil liability of credit rating agencies in Australia


In the last edition of the Banking and finance disputes review, we described the new civil liability regime for credit rating agencies (CRAs) in the EU. This was introduced by Regulation (EC) No 462/2013, implemented in the UK by the Credit Rating Agencies (Civil Liability) Regulations 2013 (the ‘Regulations’). The Regulations allowed market participants to claim compensation from CRAs even where there was no contractual relationship or other relationship giving rise to a duty of care, although it was limited to intentional or grossly negligent actions by the CRA.

Before this new regime was agreed, in 2012, a first instance decision in Australia imposed on CRAs liability to investors under Australian investor protection legislation. This decision has now been upheld on appeal and, in this article, we analyse the appeal decision and its implications for CRAs, financial institutions and investors in the EU and governed by the Regulations.

ABN Amro v Bathurst

The Full Federal Court of Australia, delivering its judgment in the matter of ABN Amro & Ors v Bathurst Regional Council & Ors, dismissed all appeals (save for one cross-appeal in respect of the apportionment of claims) and upheld the judgment of Jagot J (delivered on November 5, 2012).

The court’s judgment confirms the findings of Jagot J that a CRA may be liable to investors for its rating of a financial product, a financial institution may be liable to investors in structuring and marketing a financial product to be sold to those investors, and the reseller of a financial product may also be liable to the investors to whom it on-sells such products.

The decision confirms that entities involved with selling, arranging or rating complex financial products may be liable to investors in circumstances where there has been misleading or deceptive conduct or where negligent misrepresentations are made to investors, even if there is no direct relationship between the entity and the investor.

Judgment at first instance

In 2009, 13 local councils in New South Wales commenced proceedings in the Federal Court of Australia against Local Government Financial Services Pty Limited (LGFS) for losses incurred after the councils purchased a complex structured synthetic investment product (a constant proportion debt obligation known as ‘Rembrandt’) from LGFS, which in turn had purchased Rembrandt from ABN Amro. Prior to LGFS’s purchase of Rembrandt from ABN Amro, the product had been assigned a ‘AAA’ rating by Standard and Poor’s (S&P), which LGFS alleged was essential to its purchase (and subsequent marketing) of Rembrandt. LGFS and the councils consequently brought claims against S&P and ABN Amro.

The judgment of Jagot J resulted in orders for damages to be paid to the councils by LGFS, S&P and ABN Amro in the amount of approximately A$15.8M and by S&P and ABN Amro to LGFS in the amount of approximately A$16M. The insurer of LGFS, American Home Assurance Company (AHAC), was ordered to indemnify LGFS in full in respect of its liability to the councils.

LGFS, S&P ABN Amro and AHAC each appealed the judgment.

CRA liability

The finding by Jagot J that the AAA rating assigned by S&P to the notes issued by Rembrandt (the ‘Notes’) was misleading and deceptive in contravention of ss1041H and 1041E of the Corporations Act 2001 and s12DA of the Australian Securities and Investments Commission Act 2001 was upheld by the court. This was because the rating conveyed a representation that, in S&P’s opinion, the capacity of the Notes to meet all financial obligations was ‘extremely strong’, as well as a representation that S&P had reached this opinion based on reasonable grounds and as the result of an exercise of reasonable care and skill, when neither representation was true and S&P knew that the representations were not true when they were made.

Liability of financial institution

The court also upheld the findings that ABN Amro was ‘knowingly concerned’ in S&P’s misleading and deceptive conduct and that ABN Amro itself engaged in misleading and deceptive conduct towards LGFS and the potential investors, with whom it knew LGFS intended to deal, by reason of its use of the AAA rating and the representations it made itself as to the meaning and reliability of the AAA rating, which it knew to be untrue.

In addition, the court upheld the finding that ABN Amro breached its contract with LGFS under which it was to model and structure the transaction by which LGFS would purchase Notes with a degree of security commensurate with an S&P rating of AAA.

Liability of reseller

The finding that LGFS engaged in misleading and deceptive conduct towards the councils by reselling the Notes was upheld, as were the findings that the Notes were each a derivative under the Corporations Act (as they were not a debenture) and that LGFS had thus acted in breach of its Australian Financial Services Licence in dealing with the Notes.

The court further upheld Jagot J’s finding that LGFS owed a fiduciary duty to each of the councils and that, in its dealings with them, LGFS breached its fiduciary duty to avoid a conflict of interest in relation to the Notes, or to disclose and obtain informed consent to such conflicts.

Characterisation of the notes

In finding that the Notes were not a debenture (and therefore fell within the definition of ‘derivative’ in s761D(1) of the Corporations Act), the court commented that an instrument which provides for the return of the amount deposited at a particular time and in a particular amount not linked to the conduct of the business of the company which issued it, but instead linked to and measured by the performance of a separate index, does not constitute a debt falling within the meaning of ‘debenture’ under the Corporations Act. Further, it is fundamental to the nature of a debenture that it be issued by the company which borrowed the funds and this condition was not satisfied in respect of the Notes.

Damages, contributory negligence and apportionment

The court rejected the submissions of the appellants that the councils and LGFS had been contributorily negligent in purchasing the Notes and that their damages should be reduced to reflect this contributory negligence.

The court overruled the finding of Jagot J that the councils’ entitlements to damages against ABN Amro, LGFS and S&P (pursuant to s1041E of the Corporations Act) were apportionable claims, holding instead that damages suffered as a result of a contravention of s1041E are not apportionable and that ABN Amro, LGFS and S&P are consequently jointly and severally liable for the councils’ losses.


The court’s judgment confirms the liability of each of S&P, ABN Amro and LGFS to the councils (and the liability of S&P and ABN AMRO to LGFS) for misleading and deceptive conduct in their respective roles in relation to the investment in this complex structured financial product and for the resulting losses suffered by the investors.

The Australian statutory liability is analogous to the European liability regime. In both cases, although the class of possible claimants is wide, only certain behaviour will found liability: in Australia, ‘misleading or deceptive conduct’; in the EU, actions committed ‘intentionally or with gross negligence’.

Interestingly, the court found that the AAA rating constituted an implied representation that the CRA had reasonable grounds for its opinion and that it had exercised reasonable care and skill in forming it. The court also considered that there would be a tortious duty of care owed by the CRA to investors and that the disclaimers in the pre-sale report and other materials available to investors were not sufficient to negate this. These findings could be relevant to similar claims in other common law jurisdictions.

The increased regulatory scrutiny of financial markets following the global financial crisis has extended to CRAs in Europe, the US and elsewhere. In the EU, it has led to increased regulation of CRAs and the imposition of civil liability on them. This lengthy and complex Australian judgment shows that courts may be prepared to find CRAs liable to wide classes of investors.

Briggs v Gleeds casenote [2014] EWHC 1178 (Ch)


Estoppel cannot be used to circumvent the statutory requirements for execution of deeds, where the defect in execution is apparent on the face of the deed.

Briggs v Gleeds is a pensions dispute, but it is relevant to banks and financial institutions because it concerns the formalities for executing deeds, which are, of course, frequently used in finance and capital markets transactions.

There has been an increased focus on the statutory requirements for execution of deeds since the Mercury case (R (on application of Mercury Tax Group Ltd) v HMRC [2008] EWHC 2721 (Admin)), which has increasingly led to a formalistic approach to execution. Briggs v Gleeds reiterates the key practice point: follow the statutory requirements for the execution of deeds to the letter. The court applied the statutory requirements strictly even though the result was to unravel nearly 20 years’ worth of documentation. It held that only certain requirements may be circumvented by estoppel arguments: those where the defect is not one that is ‘apparent’ on the face of the deed. It is difficult to predict how the courts will apply the dividing line between apparent and non-apparent defects in practice.


The case concerned a retirement benefits scheme which had been established in 1974 as a final salary scheme (the ‘Scheme’). It was discovered that 30 deeds of amendment and deeds for the appointment and retirement of trustees had been improperly executed between 1991 and 2008. The partners’ signatures had not been witnessed, contrary to s.1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 (the ‘Act’), which provides:

‘An instrument is validly executed as a deed by an individual if, and only if, (a) it is signed (i) by him in the presence of a witness who attests the signature …’.

The trustees issued a Part 8 claim to determine whether the deeds were effective. If not, the Scheme’s deficit could be increased by £45 million. The claimants argued that, although the deeds were improperly executed, they were effective on one or more of the following grounds.

Estoppel by representation: the scheme administrators had represented that the law was such that the deeds could properly be executed in the manner in which they were executed; that such representations should be attributed to the trustees, since the administrators were acting on the trustees’ instructions; and that, by relying on those representations, an estoppel had arisen precluding the trustees (and members) from challenging the execution of the deeds.

Estoppel by convention: there was an estoppel by convention precluding the members from denying that they had accrued benefits on the basis of the defective deeds.

Extrinsic contracts: the members had contractually bound themselves to accept benefits in accordance with the defective deeds by signing forms agreeing to the terms of the documents.


Newey J. held that estoppel could not be used to circumvent the statutory requirements for execution of a deed on the particular facts of the case. The following points are of note.

An estoppel by representation can be founded on a statement of law and the rule to the contrary did not survive the House of Lords decision in Kleinwort Benson v Lincoln City Council [1992] 2 AC 349. However, it is still necessary to show that the representation is not simply one of opinion (i.e. a statement of opinion as to the law may found an estoppel that prevents the person from denying that was his opinion, but not that it was the law) and to show reasonable reliance.

Estoppel by representation cannot be invoked where the relevant document does not even appear to comply with the Act. There was scope for estoppel where the deed was ‘apparently valid’ (e.g. if the attestation were somehow defective), but not here where the defect was apparent on the face of the document. Moreover, the scheme administrators could not be said to have made representations on behalf of the trustees or members of the Scheme in relation to the execution of the defective deeds.

Estoppel by convention had not arisen because the members merely passively accepted the existence of the defective deeds, rather than actively agreeing to them.

In signing various forms, members were exercising rights they thought they had under the Scheme, not accepting or making any contractual offer to vary the terms of the Scheme (except in respect of one amendment agreed by certain members).


The limitation on estoppel by representation, namely that the defect must not be apparent on the face of the document, appears difficult to delineate in practice and harsh in effect. It is artificial, in the sense that, although the absence of a witness may be apparent, it may not be apparent to a non-lawyer that this invalidates the deed. Reliance may therefore be placed on a document which a court may later find contains an apparent defect.

The practical effect of this judgment is that some statutory requirements of deeds will be applied strictly and some may be circumvented by estoppel arguments, depending on whether the requirement is one that is ‘apparent’ on the face of the deed. However, the application of this principle may be difficult to predict in practice.

Banks and financial institutions should be aware that estoppel is a possible argument where there is later discovered to be a defect in the execution of a deed, but that the boundary of this argument is unclear. Accordingly, they should continue to take a strict approach to compliance with the formal requirements and execution of deeds generally.

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