Banking and financial services: key litigation trends of 2020
By Sarah Parkes and Emma Probyn. This article first appeared in the January/February 2021 issue of PLC Magazine.
A number of key decisions from the English courts in 2020 illustrate the litigation trends that are likely to have implications for the financial services industry in 2021 and beyond (please also see the “Cases to watch in 2021” section below).
There has yet to be any significant volume of litigation arising solely as a result of the COVID-19 pandemic; however, two cases warrant a mention.
In June 2020, the Financial Conduct Authority (FCA) sought legal clarity about the meaning and effect of certain business interruption insurance policy wordings: an issue affecting a large number of SMEs in the UK due to the pandemic (FCA v Arch Insurance (UK) Ltd and others  EWHC 2448). The High Court found that coverage was available under some, but not all, of the policy wordings it considered. Following a leapfrog appeal, the Supreme Court dismissed an appeal by certain insurers and substantially allowed the FCA’s appeal, potentially broadening the scope of the cover available under certain affected policies ( UKSC 1).
In Travelport Ltd and others v WEX Inc, WEX had invoked a material adverse effect (MAE) clause in a share purchase agreement to pull out of a $1.7 billion acquisition ( EWHC 2670). The court found in favour of WEX on the main issues, holding that there are no special rules of construction that apply when interpreting MAE clauses.
The court focused on the ordinary rules of contractual interpretation, relying heavily on the exact choice of language selected by the parties. Noting the dearth of English precedent on this issue, the court considered that US case law could provide useful guidance, although was not binding or formally persuasive, and therefore considered arguments made by the parties relating to the commercial purpose of the transaction and allocation of risk between the parties. This is a rare example of an English court considering the scope and effect of an MAE clause. Although both parties appealed the decision, the proceedings have since settled.
Two cases considered the effect of US sanctions on parties’ payment obligations.
In Lamesa Investments Limited v Cynergy Bank Limited, Cynergy withheld payment of interest to Lamesa under a loan facility ( EWCA Civ 821). Cynergy relied on a clause in the facility agreement which provided that it would not be in default if sums owing to Lamesa were not paid in order to comply with a mandatory provision of law. Lamesa’s ultimate beneficial owner had become a blocked person under US sanctions law. The Court of Appeal held that US secondary sanctions constitute a mandatory provision of law and Cynergy’s compliance with these sanctions excused its withholding of payment.
However, in Banco San Juan Internacional, Inc v Petroleos De Venezuela SA, the High Court found that Petroleos De Venezuela’s payment obligations under two credit agreements were not suspended as a result of the imposition of US sanctions on Venezuela ( EWHC 2937 (Comm)). The court rejected the argument that Lamesa demonstrated that it is perfectly normal and sensible in commercial agreements to suspend payment obligations where payment would otherwise be in breach of US sanctions. Instead, the court found that this authority, and others, were simply decisions on their facts. In the present case, the relevant clause provided no basis for a suspension of the repayment obligations. These decisions serve as an important reminder of the need to allocate potential sanctions risks when drafting English law contracts.
Since its re-emergence in Singularis Holdings Ltd (in official liquidation) v Daiwa Capital Markets Europe, the Quincecare duty of care has been a continued feature of financial services litigation ( UKSC 50).
In Stanford International Bank Ltd (in liquidation) v HSBC Bank plc, the liquidators of Stanford International Bank Limited (SIB) brought a claim against HSBC, which operated various accounts for SIB ( EWHC 2232 (Ch)).
SIB argued that the Quincecare duty required HSBC to freeze payments to investors from SIB’s accounts sooner than it had done so. HSBC applied to strike out the claim on the basis that SIB had suffered no loss and, therefore, had no claim in damages. Refusing to strike out the claim, the High Court accepted that the net asset position of a solvent company may remain the same in these circumstances but found that the position may be different for an insolvent company. If HSBC had frozen the accounts sooner, while SIB would still have had a large number of creditors, it would have had money in its accounts available for the liquidators to pursue claims. HSBC has been granted permission to appeal the decision not to strike out SIB’s claim, so this case may not proceed to trial.
In Gareth Hamblin and another v World First Limited and another, the High Court considered, in the context of a strike out application, whether a payment service provider owed a Quincecare duty to a customer where that customer was an insolvent shell company, without any directors, which had been hijacked by fraudulent individuals and used for the purpose of a fraud ( EWHC 2383). Following Singularis, the court held that the Quincecare duty is owed to the company rather than to those in control of it and, therefore, it was possible for the shell company to be a victim of the fraud. In addition, it was at least reasonably arguable that the knowledge of the fraudsters should not be attributed to the customer because to do so would denude the Quincecare duty of much of its practical utility.
Financial institutions may face an increased litigation risk from competition misconduct following the Supreme Court’s decision in Mastercard Incorporated and others v Walter Hugh Merricks CBE to remit Mr Merricks’ collective proceedings order (CPO) application to the Competition Appeal Tribunal (CAT) for reconsideration ( UKSC 51). A CPO remittal hearing is scheduled to take place in late March 2021.
The decision in Merricks also means that a number of other collective proceedings in the CAT that were stayed pending that decision will now proceed to certification hearings, including two competing applications made to the CAT for a CPO in the foreign exchange litigation: Mr Philip Evans v Barclays Bank plc and others and Michael O’Higgins FX Class Representative Limited v MOL (Europe Africa) Ltd and others. The CPO hearing before the CAT in those cases will take place in July 2021.
The boundaries of privilege continued to be tested in the courts. In The Civil Aviation Authority v Jet2.com, the Court of Appeal clarified that, when assessing if a communication or document is protected by legal advice privilege, a dominant purpose test must be applied ( EWCA Civ 35).
In Sports Direct International Plc v The Financial Reporting Council, the Court of Appeal held that, in the absence of statute overriding the usual rules of privilege, an auditor’s client was not required to hand over its privileged documents in response to a notice from the Financial Reporting Council (FRC) requiring the production of documents in connection with an investigation into the auditor’s conduct ( EWCA Civ 177).
However, in A v B and another, the High Court held that an auditor that was required to produce documents to the FRC could not rely on the assertion of privilege by its client to withhold the disclosure of those documents ( EWHC 1491 (Ch)). Rather, the auditor had to form its own view as to whether documents were privileged even though the privilege in those documents was that of the client, not the auditor.
In PCP Capital Partners LLP and another v Barclays Bank Plc, PCP sought the disclosure of legal advice relating to certain agreements referred to in Barclays’ witness statements and argued that, as a result of these references, Barclays had waived privilege in all legal advice relating to those agreements ( EWHC 1393 (Comm)). The High Court found that references in the witness statements to reliance on the legal advice amounted to more than mere references to the fact of legal advice existing and therefore privilege had been waived in that legal advice.
Access to information
In Burford Capital Ltd v London Stock Exchange, Burford applied for Norwich Pharmacal relief to identify those involved in alleged unlawful market manipulation with a view to bringing claims against those parties for breach of the Market Abuse Regulation (596/2014/ EU) (MAR) and to support a complaint to the FCA ( EWHC 1183 (Comm)). The High Court refused Burford’s application, finding that there was no good reason to suppose that any market manipulation had occurred. Even if there had been market manipulation, the court concluded that a breach of MAR by the alleged market manipulators would not give rise to an actionable tort by Burford.
In Lees v Lloyds Bank plc, the High Court dismissed Mr Lees’ claim that Lloyds had failed to provide an adequate response to his data subject access requests (DSARs) ( EWHC 2249 (Ch)). In doing so, the court gave some helpful obiter commentary that, even if the responses were inadequate, there would have been good reasons for the court to decline to exercise its discretion in favour of Mr Lees because his DSARs were abusive, being numerous and repetitive. Their real purpose was to obtain documents rather than personal data, and they had been made for a collateral purpose; that is, for use in separate litigation with Lloyds.
Cases to watch in 2021
Financial services practitioners should watch out for the High Court’s decision in PCP Capital Partners LLP and another v Barclays Bank Plc. The Competition Appeal Tribunal looks set to have an active year, with at least five cases expected to be heard at the certification stage following the Supreme Court’s decision in Mastercard Incorporated and others v Walter Hugh Merricks CBE, with the proposed foreign exchange collective proceedings likely to be of particular interest to those in the financial services industry ( UKSC 51).
Quincecare duties will continue to be in focus, with the Court of Appeal hearing the appeal of Stanford International Bank Ltd (in liquidation) v HSBC Bank plc in March 2021 ( EWHC 2232 (Ch)). There are also likely to be more disputes arising as a result of the COVID-19 pandemic, such as disputes concerning the close out of derivative contracts and lending or forbearance decisions.