Category: Uncategorized

Hearings in the Supreme Court are now shown live on the Court’s website.

 

On Tuesday 9th November, the Court will hear the case of Harpur Trust v Brazel. The case will consider whether a worker’s right to paid annual leave is accumulated according to the working pattern of the worker and/or is pro-rated. The judgment being appealed is [2019] EWCA Civ 1402, and will take place in Courtroom One at 10:30am.

 

On Wednesday 10th November, the Court will hear the case of FirstPort Property Services Ltd v Settlers Court RTM Company and others, on appeal from [2019] UKUT 243. This case will consider the provisions of the Commonhold and Leasehold Reform Act 2002 and the extent to which a company has acquired certain rights. This will be heard in Courtroom One at 10:30am.

The Court will also hand down the following two judgments on Wednesday:

Lloyd v Google LLC – here, the Court was asked to consider whether the respondent should have been refused permission to serve his representative claim against the appellant out of the jurisdiction (i) because members of the class had not suffered ‘damage’ within the meaning of section 13 of the Data Protection Act 1998 (‘DPA’); and/or (ii) the respondent was not entitled to bring a representative claim because other members of the class did not have the ‘same interest’ in the claim and were not identifiable; and/or (iii) because the court should exercise its discretion to direct that the respondent should not act as a representative. The judgment being appealed is [2019] EWCA Civ 1599 and the Supreme Court first heard the case on the 28th and 29th of April 2021.
Alize 1954 and another v Allianz Elementar Versicherungs AG and others – this judgment will decide whether seaworthiness for the purposes of Article III Rule 1 of the Hague-Visby Rules includes navigational decisions taken by the crew taken prior to commencement of a voyage. This case was heard on the 7th and 8th of July 2021 and the judgment being appealed can be found at [2020] EWCA Civ 293.

 

On Thursday 11th November, the Court will hear the cases of The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) No. 2 and No. 3. This is a joined appeal, wherein the Court is asked to consider:

In The Law Debenture Trust’s appeal: (i) whether there is any “domestic foothold” for the allegations of duress made by Ukraine or whether the foreign act of state doctrine is relevant to or engaged by the allegations such that they are non-justiciable before the English Court; and (ii) whether the claim (or any of its aspects) ought to be stayed.

In Ukraine’s Appeal: (i) whether Ukraine’s defence of lack of contractual capacity has a real prospect of success (including whether Ukraine as a sovereign has unlimited capacity to contract); (ii) whether Ukraine has an arguable case that Ukraine’s Minister of Finance did not have ostensible authority and/or usual authority to enter into the Notes and that it has not ratified the Notes;

(iii) whether Ukraine’s defence that it was entitled not to repay sums otherwise due as a countermeasure has a real prospect of success; and (iv) whether there is a “compelling reason” within the meaning of CPR r24.2(b) for any of Ukraine’s defences to be determined at a trial irrespective of whether any of those defences satisfy CPR r24.2(a).

The judgment appelaed is [2018] EWCA Civ 2026 and will be heard at 10:30am in Courtroom Two by Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Kitchin, and Lord Carnwath.

 

A full list of the cases scheduled for the Michaelmas Term can be found here.

The following Supreme Court judgments remain outstanding: (As of 01/11/2021)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
BTI 2014 LLC v Sequana SA and Ors, heard 4 May 2021.
Bott & Co Solicitors v Ryanair DAC, heard 20 May 2021
In the matter of an application by Margaret McQuillan for Judicial Review (Northern Ireland), In the matter of an application by Mary McKenna for Judicial Review (Northern Ireland), and In the matter of an application by Francis McGuigan for Judicial Review (Northern Ireland), heard 14-16 June 2021
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
R (on the application of O (a minor, by her litigation friend AO)) v Secretary of State for the Home Department and R (on the application of The Project for the Registration of Children as British Citizens) v Secretary of State for the Home Department) (Expedited), heard 23 and 24 June 2021
R (on the application of Elan-Cane)  v Secretary of State for the Home Department, heard 12 and 13 July 2021
A Local Authority v JB (by his Litigation Friend, the Official Solicitor) (AP), heard 15 July 2021
Maduro Board of the Central Bank of Venezuela v Guaidó Board of the Central Bank of Venezuela, heard 19 to 22 July 2021.
Basfar v Wong, heard 13th-14th October
Her Majesty’s Attorney General v Crosland, heard 18th October
Secretary of State for the Home Department v SC (Jamaica), heard 19th October
Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd, heard 26th October
Harpur Trust v Brazel, heard 9th November 2021
FirstPort Property Services Ltd v Settlers Court RTM Company and others heard 10th November 2021

On appeal from: [2019] EWCA Civ 588

The directors of Vantis Tax Ltd (“VTL”) exploited their position in breach of their fiduciary duty to make a secret profit of £4.55m. The amount of £4.55m was also the benefit obtained by the directors from their crime of cheating the public revenue by dishonestly facilitating and inducing others to submit false claims for tax relief. VTL went into administration. The respondent was assigned VTL’s proprietary rights.

Following the directors’ criminal convictions, the appellant sought confiscation orders under the Proceeds of Crime Act 2002 (“POCA”) against them, and they were ordered to pay ordered to pay £809,692 and £648,000 to the appellant. The respondent argued that the directors should be treated as having acquired the benefit of the secret profit on behalf of VTL. The respondent argued that, as a result, the £4.55m was beneficially owned by VTL under a constructive trust, and now the beneficial interest in that trust had been assigned to the respondent.

Thus, the respondent argued that because it had a proprietary claim to the secret profit of £4.55m, its claim takes priority over the confiscation orders, which do not give the appellant any form of proprietary interest. If this is correct, the respondent would be entitled to all of the directors’ assets, leaving nothing to satisfy the confiscation orders. At first instance, the trial judge granted a declaration that an amount of £4.55m was held on constructive trust in favour of VTL, whose rights had since been assigned to the respondent. Further, and in accordance with an agreement between the parties, the trial judge declared that the appellant was obliged to give instructions for the transfer of the net proceeds realised from all the assets listed in the confiscation orders to Aquila.

On appeal to the Court of Appeal the appellant argued that the directors’ actions should have been attributed to VTL, and thus VTL should have been barred from recovering any proceeds of crime because of the principle of illegality. The Court of Appeal dismissed the appeal.

 

Held – appeal dismissed

Lord Stephens considered the appellants three grounds of appeal in turn.

Ground 1:

The appellant argued that the Court of Appeal was wrong to conclude that in the case of a proprietary claim by a company against its directors to recover proceeds of crime received in breach of fiduciary duty, the illegality of the directors is not attributed to the company, notwithstanding that the company itself suffered no loss and stood to profit from the illegal acts.

The Court dismissed this argument and found that the reasoning in Bilta (UK) Ltd v Nazir [2015] UKSC 23 applies to this case, in that the unlawful acts or dishonest state of mind of a director cannot be attributed to the company to establish an illegality defence defeating the company’s claim under a constructive trust.

Ground 2:

The appellant argued that the decision of the Court of Appeal is inconsistent with the regime established by POCA. It argued that POCA was intended to permit innocent third-party purchasers who have paid market value for criminal property to keep it, and for innocent third-party victims who have suffered loss as a result of criminal behaviour to be compensated, in each case in priority to the State, but not to permit third parties to otherwise benefit from criminal activity.

The Court found that the overall scheme of POCA is not to interfere with property rights. Furthermore, although there are specific provisions of POCA which allow the State to override property rights, these provisions were not engaged by the CPS in this case. As a result, the Court found the decision of the Court of Appeal was not inconsistent with POCA.

Ground 3:

The appellant argued that even if the unlawful conduct of the former directors cannot be attributed to VTL then the trial judge in the proper exercise of his discretion, ought not to have granted Aquila any declaratory relief.

The Court found that in this context, the constructive trust (and thus VTL’s beneficial ownership of the secret profits) arose automatically when the directors breached their fiduciary duties. At no stage did the directors own the secret profits in equity. The Court found that the trial judge’s order recognised this reality, and was a proper exercise of his discretion.

 

Watch hearing: 

27 April 2021   Morning session          Afternoon session

For a PDF version of the judgment, see:  Judgment (PDF)

For the Press Summary, see:  Press summary (HTML version)

For a non-PDF version of the Judgment, see:  Judgment on BAILII (HTML version)

The normal rate on which corporate lending and leasing (and some other facilities’) interest is currently based is LIBOR, which provides forward-looking rates that are applied to calculate the rate of interest, for various borrowing periods, in advance. LIBOR is used internationally, and is quoted in a wide number of currencies.

However, LIBOR will no longer be available from the end of 2021, and there is not yet an agreed replacement rate. Latest developments mean that different countries will most probably use their own local reference rates (and these possibly will apply to UK loans drawn in other currencies): SONIA in UK, SOFRA in USA, ESTER/€STR in Eurozone.

What does this mean in practical terms?

Each of these screen rates currently are available, but only provide backward looking rates – so you know what the interest rate is only once it has been applied, which makes projections and budgeting more difficult. In addition, these rates were designed as overnight rates and so will change daily rather than setting a rate that you know will not change for three months, six months or whatever. And they don’t take into account lenders’ credit risk, so an additional element will need to be added to the replacement screen rate to calculate the actual rate that will be charged.

As a result, the rate that applies under existing loan agreements will change once the applicable replacement rate has been adopted. Where your loan agreement already provides for changing the basis for interest to apply, and most will, it might be worthwhile checking before LIBOR ceases, to see what that will mean to those loans, what costs are likely to be incurred, and who has the right to decide on the applicable replacement rate.

Where you have hedging arrangements, then you may already see reference to SONIA (Sterling Overnight Index Average) or other replacement reference rates in the documentation. For traditional lending transactions however, SONIA does not yet provide an answer – although there is a lot of work going on to make it work before LIBOR disappears. At the moment, it is tricky to include SONIA or any other alternative rate for debt finance, since the definitions cannot be pinned down, the actual replacement rates are not agreed yet and we don’t know yet exactly how they will be calculated.

The Bank of England Working Group on Sterling Risk Free Reference Rates issued a discussion paper on possible conventions for referencing SONIA in loan documentation and has now issued a statement on progress towards adoption of a Term SONIA Reference Rate (TSRR) in Sterling markets. There is a general assumption that the market will move towards use of a TSRR, with work focussing on development of a forward-looking TSRR that would give the borrower some advance notice of the interest payment which would apply. It is also generally expected that transition from LIBOR, to the greatest extent possible, will progress independently of the development of a TSRR.

We will continue to update you as the position evolves, and in the meantime discuss with your legal team if your existing loan agreement refers to LIBOR. Although we have until the end of 2021 before LIBOR will stop being widely used, we expect that new agreements will start to refer to the replacement rate in readiness as soon as that rate is agreed.

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The Supreme Court has handed down its eagerly awaited judgment in the case of Singularis Ltd v Daiwa Capital Markets Europe Ltd. The decision, made on October 31, is the first reported case of a bank having been found to have breached a so-called Quincecare duty, but is also significant because of the appellant bank’s unsuccessful attempt to attribute the fraudulent conduct of its customer’s director to his company.

Our expert view

Singularis merits reflection from a risk perspective, because the case is about banks’ potential civil liability for processing fraudulent instructions, but the question of potential criminal and regulatory penalties should not be overlooked.

David Farnell, partner in the firm’s litigation services team (specialising in banking and finance disputes), said the Supreme Court had made a “common sense decision”.

“This will provideclarity for banks and their advisers about the extent to which they might defend Quincecare claims.  Really the message is that if a bank has been negligent, then it would appear that in the absence of very exceptional circumstances, the court is unlikely to deny its customer a remedy on the ground of illegality,” he added

“All banks must of course be wary of fraud and put robust procedures in place to protect their customers from fraudulent instructions.  From the detailed judgment, I can see that in this particular case, the court seems to have drawn a distinction between Daiwa, which is a relatively small investment bank, and large retail banks who receive many thousands of customers’ payment instructions daily.  That distinction might be significant in determining whether a particular bank is, in specific circumstances, ‘on inquiry’, but that is all. It would be foolhardy for larger banks to assume that their duty of care is somehow less exacting in light of this decision.

“The preferred practice of many banks is to place distressed corporate connections under specialised relationship management, which might well have avoided the kind of mistakes that Daiwa made in this particular case.”

Dan Stowers, partner in our regulation, business crime and compliance team, said

“This is a welcome decision on the duties owed by financial institutions to their corporate customers in circumstances of fraud and an area where we expect to see further development in coming years, but two points arise:

“First, the Supreme Court’s decision against the attribution of fraudulent conduct to the company, appears sensible, but, in a criminal law context, difficult to rationalise when you bear in mind that Al Sanea was the only director who exercised any influence over the company and the only mandated signatory for the company’s bank accounts. The other seven must have had fiduciary duties, after all.  It looks a pragmatic decision, in the sense that the Supreme Court appears to have stood back and looked in broad terms at whether it would be fair to attribute blame to the company where only an eighth of the directorship had been behaving fraudulently. From a criminal law perspective, the Serious Fraud Office or other law enforcement body, were they investigating this matter, might not be so sympathetic. Nor does the identification principle require them to be – the actions of a controlling mind would be sufficient.

“Second, the civil courts have recognised that it would be a rare situation, for a bank in its day to day business, to be put on inquiry [of fraudulent conduct] given the high threshold. It is, however, clear that once there are ‘reasonable grounds to believe’ that such conduct is taking place, the bank is under a positive duty to investigate the fraud. It is only after taking those steps that a ‘reasonable banker’ would be expected to do in these circumstances that the bank should go on to progress the transaction. However, once this stage of inquiry is reached, the bank should have already considered, or be in the process of considering, all of its duties. This includes not only contractual duties, but also those under anti-money laundering and tax evasion legislation, in order to identify potential criminal and regulatory liabilities that flow from its actions, or its failure to take action, in circumstances where it could be said that the bank is facilitating or involved in the transacting of criminal property.”

Background

The Quincecare duty derives from the case of Barclays Bank v Quincecare (1988), which held that it is an implied term of a contract between a bank and its customer that the bank must not execute instructions if it is put on notice, or has reasonable grounds to believe, that the instructions are an attempt to misappropriate funds.

The court recognised the need to ensure that the law did not impose too burdensome an obligation on banks, hampering the effective transacting of bank business. On the other side of the coin, the court was keen to ensure that the law should guard against the facilitation of fraud and impose a reasonable standard of care, so as to protect customers and third parties.

To balance these competing interests, the court settled a “sensible compromise”. The bank’s duty is therefore as follows:

“a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that an order is an attempt to misappropriate the fund of the [customer]”.

In Singularis, the claimant was a Cayman Islands-registered company set up to manage its sole shareholder Mr Maan Al Sanea’s assets.  He was head of the Saad Group and one of Singularis’s seven directors, but the others exercised no real influence over the company and Mr Al Sanea was the only mandated signatory for the company’s bank accounts.

Daiwa, an investment bank (and not a deposit taker), lent Singularis funds with which to acquire a portfolio of shares, over which the bank took security. In 2009 the Saad Group collapsed, and Daiwa learned that creditors had moved to freeze Mr Al Sanea’s assets. Daiwa enforced its security and discharged the loan, leaving a surplus in Singularis’s account of USD$204 million.

On receipt of instructions from Mr Al Sanea, Daiwa effected various payments to third parties, who subsequently passed the money to Mr Al Sanea. The surplus was dissipated, Singularis was unable to pay its creditors and subsequently became the subject of a winding-up order. Its liquidators commenced proceedings against Daiwa, claiming (among other things) that it should restore the surplus to the account, because it had breached its Quincecare duty.

The High Court found that Daiwa had been negligent, because it should have been obvious to its officers that Mr Sanea’s instructions were to effect payments for his personal benefit, rather than the company’s. Daiwa’s head of compliance had warned staff only a few days before the relevant transactions that “any payment requests [from Singularis] must be properly authorised and be appropriate”, emphasising the “need for care and caution”, but to no avail. Daiwa’s employees processed the instructions without conducting enquiries to confirm that they were legitimate.  These failings were symptomatic of “a dysfunctional structure” according to Rose J.

Daiwa had breached its Quincecare duty and was ordered to restore the surplus (subject to a 25% reduction to allow for Singularis’s contributory negligence). Daiwa’s appeal was subsequently dismissed by the Court of Appeal.

Issues in the Supreme Court

Daiwa appealed again to the Supreme Court. The main issue was whether Mr Al Sanea’s fraudulent conduct was attributable to the company, so that Singularis should be denied a remedy because of the ex turpi causa principle.

The principle is that it would be contrary to the public interest for the civil courts to enforce a claim which had arisen from illegality. Daiwa cited the House of Lords case of Stone & Rolls Ltd v Moore Stephens (2009), where the Supreme Court’s predecessor had held that the principle applied to companies and that the fraud of a company’s dominant director and shareholder could be attributed to the company itself. The Supreme Court had reviewed that decision in Bilta (UK) Ltd v Nazir (No 2) (2015) and stated that a defence of illegality could be run in certain circumstances, where there were no innocent directors or shareholders.

In Singularis, Daiwa argued that its customer had been a “one-man company” and Mr Al Sanea’s fraudulent conduct should therefore be attributed to his company.

Decision

The Supreme Court decided unanimously that the facts of Singularis differed from those of Bilta and that there was no evidence to show that Mr Al Sanea’s fellow directors had been aware of his fraudulent conduct, nor any reason why they should have been complicit in his misappropriation of the company’s funds.  Consequently, the fraud could not be attributed to the company.

Helpfully, the court determined the apparent conflict between the Quincecare and Bilta decisions. It said that to answer the question of whether to attribute a fraudulent director’s knowledge to his company, it was necessary to consider the context and the purpose for which attribution is relevant.  The court also reiterated the purpose of the Quincecare duty: it is meant to protect a company against the misappropriation of its funds, but if the fraud of its trusted agent is attributed to the company itself, that attribution will effectively remove the practical value of the duty.

Throughout this case, the courts saw no reason to treat Daiwa as anything other than a bank and therefore subject to the Quincecare duty, even though Daiwa was not a deposit taker.Daiwa satisfied the broad common law definition of a bank, even though it would not have fallen within the more exacting FCA and PRA definitions, which require a bank’s activities to include deposit taking. 

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“This consultation doesn’t come as any surprise to the industry – we have been expecting action from the FCA since we sat down with them in recent weeks. Clearly the principal impact will be for both brokers and motor finance providers creating something of a level commission playing field, with the ultimate aim of benefitting consumers.

“I am delighted that firstly that there are no proposed changes on the rules for creditworthiness assessments. In the context of commission however, and a ban on discretionary commission models, the challenge in this market is not necessarily commission itself, but more so the discretion afforded to brokers in setting the rates that directly affect the cost of motor finance for consumers. The discretion element, creating an obvious conflict of interests, is where we see the real impact of this consultation. And I certainly welcome anything that builds trust, maintains competition and allows innovation in the market. The one risk being that flat fee models and reduced commissions in one part of the customer transaction could push up costs in other parts (the vehicle cost itself for example) or encourage more pushy sales of additional products, making the transaction more complex.

“The other principal aim is to enhance the disclosure requirements around the existence and nature of commission models, as part of the brokering process. In my view, this may result in more information for consumers (which can be very helpful) but we do also risk overload if the explanations are complex and involve additional paperwork. This would be an own goal.

“If we do have rules in place for the end of Q2 2020 then the industry will need to respond quickly to the consultation and continue with the evolution that is already under way.”

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The government recognises that to meet the 2050 target it will require ‘unprecedented levels of investment in green and low carbon technologies, services and infrastructure’. It is therefore focussing attention on green financing as it believes the financial service sector has a significant role to play in shaping the UK’s greener future.

The Green Finance Strategy has two key objectives:

to align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by government action; and
to strengthen the competitiveness of the UK financial sector.

There are three strategic pillars to the strategy to support these objectives:

Greening finance – which centres on ensuring climate and environmental factors are integrated into mainstream financial decision making;
Financing green – where the focus is on accelerating finance for clean and resilient growth and improving access to finance for green investment; and
Capturing the opportunity – which aims to cement the UK’s position as a global leader for green finance and ensure the UK is at the forefront of green financial innovation, data and analytics.

Of particular interest to publicly listed companies is the strategy’s expectation that they will disclose climate risk and impact data by 2022, and that such reporting may become mandatory.

Shoosmiths’ sector experts offer up their thoughts on the main themes outlined in the strategy:

Stephen Dawson, financial services sector head:

“This strategy truly shows that everyone has their part to play to address climate change and that while funding green projects is an important building block, the financial services sector has a much bigger role in helping the private and public sectors deliver on the 2050 targets.

“We’re already seeing financial institutions recognise climate change as a key financial risk factor in their decision-making processes, perhaps as more of a reaction to significant increases in insured losses resulting from weather disasters over the past decade rather than pre-empting the issue, but there are the beginnings of a more proactive approach by lenders and the regulators alike.

“We’ve seen HSBC make a longer-term commitment to sustainable funding through the launch of its green finance range for businesses and now we’re seeing the regulators speak up about their desire to embed climate change initiatives within the regulatory frameworks through concepts such as mandated climate related disclosures. No doubt this is just the beginning, with more rules and guidance to come from the Prudential Regulation Authority and Financial Conduct Authority to drive better behaviours to support the strategy, which is all very encouraging. However, businesses and financial institutions need to be ready and willing to adapt quickly as the scale of the issue can only mean that any changes will need to be implemented very quickly if 2050 is to be achievable.”

James Wood-Robertson and Nick Iliff, joint sector heads, infrastructure and energy:

“This strategy shows that the UK government recognises the importance of putting climate and environmental considerations at the heart of financial decision-making, and the need to encourage and accelerate private investment in clean energy.

“The government has introduced some positive initiatives such as the £5m Green Home Finance Fund established to help scale green finance mechanisms, including home energy efficiency grants, green mortgages, the Green Finance Education Charter, and the expectation for publicly-listed companies and asset owners to disclose climate risk and impact data by 2022. These initiatives deserve support and some praise. There is an overriding concern in the market, echoed by the shadow chancellor in his response to the strategy, that may be “too little, too late” and it is not going to bring the scale of investment required to deliver the UK’s commitment to net zero emissions by 2050.

“The government needs to follow up this strategy with the right policy framework, including binding targets to push through change, and support mechanisms and reliefs to encourage and underpin investment. In turn, the financial services and energy sectors need to embrace and implement the strategy if the UK and the City of London are to meet their potential to be the global hub for green investment.”

Bhavesh Amlani, living sector head:

“In its report issued at the start of the year, ‘UK Housing: fit for the future?’ the Climate Change Committee warned that the UK would fail to meet its binding climate change targets if it does not almost completely eliminate greenhouse gas emissions from UK buildings.

“We know that the technology and know-how exists to create sustainable and high quality low-carbon homes but these targets will not be achieved without policy and building standards driving change. In recent years, retrofitting initiatives such as the Green Deal suffered from low up-take and concerns about standards and consumer protection with the government subsequently pulling funding for the scheme, and key policies for new-build residential such as the Zero Carbon Homes scheme have also been withdrawn.

“This strategy supports one of the recommendations of the Green Finance Taskforce in its Accelerating Green Finance report issued last year by committing a £5m Green Home Finance Innovation Fund to help the financial sector develop green home finance products such as “green mortgages” to finance the home retrofit measures.

“The Green Deal is likely to cast a long shadow, however, and more ambitious policy is required to drive change at the pace and scale required to meet our climate change commitments.”

James Klein, technology sector head:

“It is great to see the government setting out its ambition to position the UK at the forefront of green financial innovation and data and analytics. While the number of investors looking for sustainable investment opportunities is increasing, it is often acknowledged that such investments carry assessment and pricing risks, generally down to a lack of analytical capability and information asymmetry. Maturity misalignment is another barrier for sustainable investments with long term rewards.

“The advancement of digital technologies such as, big data, AI, mobile platforms, blockchain and the internet of things, means we now have the ability to address these barriers and thereby mobilise both public and private financing to accelerate green finance investment and support sustainable development. Those involved in the FinTech industry and likely to welcome the government’s recognition of this and I have no doubt we will see significant FinTech innovations reshaping the financial system to ensure it has the ability to meet sustainable development goals.”

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At the same time, LIBOR (or using its full title, the London Interbank Offered Rate) will also see last orders called by supporting Banks in 2021. Beyond that, the future of LIBOR is entirely uncertain.

Why?

Largely as a result of the financial crisis in 2007, and the subsequent market abuse identified with LIBOR rates, the world of reference rate calculation is set to change.  Broadly, the three key concerns identified with LIBOR in particular were:

the potential for rate manipulation – further investigation of which has resulted in criminal convictions for various individuals as a result of misconduct in this area
the accuracy of the rates – the reference rates are calculated based on submissions of estimated borrowing costs and not actual transactions, which may differ from those estimates; and
the decline of unsecured interbank lending – as banks have started to use a more diverse range of funding options, unsecured interbank lending has seen a fall in popularity and consequently inter-bank offer rates may not reflect the true costs of funding, making it difficult to determine a benchmark on that basis.

As a result of the above, something known as the Benchmarks Regulation was published in order to tighten up the controls concerning reference rates, and create requirements around how and who will set reference rates.

What’s the impact?

What this means in practice is that with effect from 31 December 2019, FHBR will cease to exist and will no longer be published by the Finance & Leasing Association (FLA).  Similarly, the future of LIBOR is not certain and whilst it will continue to be published for a period, it is by no means certain for how long it will continue to exist. 

For those used to relying on FHBR, all is not lost.  With effect from 1 January 2020, the FLA proposes to calculate an adjustment to 3-month Sterling LIBOR and publish this on a monthly basis for those who want to reference LIBOR with this adjustment in their contracts but do not wish to calculate the adjustment themselves.  The FLA can do this without falling into the territory of creating a reference rate for the purposes of the Benchmarks Regulation, but if LIBOR’s future is uncertain, this may not prove to be the magic wand that many may be hoping for.

So, what’s the deal with LIBOR?  Well, to date, the Financial Conduct Authority (FCA) has confirmed that the LIBOR panel banks have agreed to continue submitting data to support the calculation of LIBOR until the end of 2021.  The FCA was keen to do this in order to avoid a sudden withdrawal of the rate which could have a detrimental impact on the financial sector, which is reassuring save that after the end of 2021 there will be no ability for the FCA to compel banks to submit data to support the calculation of LIBOR and so it is not guaranteed that LIBOR will exist post 31 December 2021.  In fact, the FCA has gone as far as to say that firms should assume that LIBOR will be discontinued and prepare for this accordingly. 

What to do next?

1. Back book:

Contracts:

Firms need to review their contracts and identify if any of them reference FHBR and/or LIBOR;
Determine whether those contracts provide for the right to use a substitute rate or calculation, or a fall-back rate in the absence of FHBR or LIBOR;
If not, consider amending those contracts to replace the definition of the interest rate with a wider definition, bearing in mind any limitations on the right to vary such as the circumstances in which variation is permitted, notice periods etc;

Tariffs of charges:

Identify if these refer to FHBR and/or LIBOR;
Consider whether updates to these documents can be made on notice to the other party or if any change has to be handled as a variation of the related document;

Security:

Review existing security documents to determine whether they refer to FHBR and/or LIBOR;
If they do, consider whether to seek amendments to that security to deal with updating those references, noting that this could result in updated filings with various registries, and amendments to any related intercreditor deeds;

2. Forward looking:

Update template contracts, tariff of charges and any security templates;
Review funding agreements to determine whether a firm’s own cost of funds may be impacted by a withdrawal of FHBR and / or LIBOR;
Review and update pricing models to ensure that they reflect the firm’s position on reference rates;
Review and update collections and arrears policies, identify any references to FHBR and/or LIBOR and update these to align with the above.

Ultimately, given the potential need for amendments to existing contracts, firms need to start looking at this now if they are to avoid any nasty surprises six months from now.  If they don’t, and they face a challenge on the interest charges under their agreement, they may find themselves in unchartered territory as regards what interest can be recovered under their contracts.

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On appeal from: [2020] EWCA Civ 6

The Appellant, a Lebanese company, entered into a Franchise Development Agreement with a Kuwaiti company, granting a licence to operate its restaurant franchise in Kuwait for ten years. In 2005, the company became a subsidiary of the Respondent. A dispute arose under the FDA and linked Franchise Agreements, which was referred to arbitration.

The Respondent argued that it was not a party to the FDA, the arbitration agreements contained in the FDA, or the Franchise Agreements, and that they took part in the arbitration under protest. The majority arbitrators found that, applying French law, the Respondent was a party to the arbitration agreements. They also found that, applying English law, the Respondent was an additional party to the FDA by “novation by addition” and was in breach of the FDA and linked agreements. They made an award against the Respondent for unpaid licence fees and damages in the principal sum of US$6.7 million. The Respondent applied to the Paris Court of Appeal to set aside the award. Soon afterwards, the Appellant issued proceedings in the Commercial Court in London to enforce the award.

On a trial of preliminary issues relating to the FDA the Commercial Court held that the validity of the arbitration agreement in the FDA was governed by English law and that, subject to a point left open, as a matter of English law the Respondent was not a party to the FDA or the arbitration agreement. The court postponed making a final decision on enforcement pending the decision of the Paris Court of Appeal. Both parties appealed to the Court of Appeal which upheld the judge’s decision, save that it held that the judge should have made a final determination. It held that that there was no real prospect of it being shown that the Respondent became a party to the arbitration agreement and that summary judgment should be given refusing recognition and enforcement of the award.

The Appellant appealed to the Supreme Court.

 

HELD – appeal dismissed.

The Court held that: (i) that the arbitration agreement is governed by English law; (ii) that in English law there is no real prospect of a court finding that the Respondent became a party to the arbitration agreement; and (iii) that, procedurally, the Court of Appeal was right to give summary judgment refusing recognition and enforcement of the award.

 

The choice of law issue

The effect of the relevant clauses in the FDA is plain. The FDA’s governing law clause provides that “this Agreement” shall be governed by English law and this clearly extends to the arbitration agreement.

The party issue

The Appellant contended that the Respondent became a party to the arbitration agreements by becoming a party to the FDA by novation because of the parties’ conduct and the performance of various contractual obligations over a sustained period of time. It could not, however, point to any agreement in writing to this effect between itself. The FDA contained a number of provisions which prescribe that it may not be amended save in writing signed on behalf of both parties – “No Oral Modification Clauses”. The No Oral Modification clauses are therefore an insuperable obstacle to the Appellant’s case of novation by addition as the Appellant could not adduce evidence to prove that it was done so in writing.

Watch hearing

30 June 2021
Morning session
Afternoon session

1 July 2021
Morning session
Afternoon session

 

For a PDF version of the judgment, see: Judgment (PDF)

For the Press Summary, see: Press summary (HTML version)

For a non-PDF version of the Judgment, see: Judgment on BAILII (HTML version)

On appeal from: [2019] EWCA Civ 1009

The Appellant and 56 others are all members of the trade union “Unite” and are employed by the Respondent. They began formal annual pay negotiations and the Respondent made a pay offer. Union members were balloted and rejected the offer. The Respondent then made the same offer to its employees directly, bypassing Unite, also saying that if no agreement was reached “this may lead to the company serving notice on your contract of employment”.

In May 2016, the claimants complained to an employment tribunal that the direct offers made to them by the Respondent contravened section 145B of the Trade Union and Labour Relations (Consolidation) Act 1992. The tribunal upheld the complaints and made the statutory award of £3,800 to each claimant for each offer made to him. The Respondent appealed to the Employment Appeal Tribunal which, by a majority, dismissed the appeal. They then appealed to the Court of Appeal, which allowed the appeal and set aside the decisions of the tribunal and the EAT. The claimants were given permission to appeal to the Supreme Court.

 

HELD – appeal allowed and the awards made by the tribunal are restored. It held that the direct offers to workers who were Unite members breached section 145B(2) of the 1992 Act.

 

The key provisions of the 1992 Act provide: section 145B (1) A worker who is a member of an independent trade union … has the right not to have an offer made to him by his employer if – (a) acceptance of the offer, together with other workers’ acceptance of offers which the employer also makes to them, would have the prohibited result. (2) The prohibited result is that the workers’ terms of employment, or any of those terms, will not (or will no longer) be determined by collective agreement negotiated by or on behalf of the union.

The Court held that what section 145B prohibits is not an offer with a particular content (as argued by the parties) but an offer which, if accepted by all the workers to whom the offer is made, would have a particular result. What is required is a causal connection between the presumed acceptance of the offers and the prohibited result specified in section 145B(2). That requirement will not be satisfied unless there is at least a real possibility that, had the offer not been made and accepted, the workers’ relevant terms of employment for the period would have been determined by a new collective agreement. On this interpretation there is nothing to prevent an employer from making an offer directly to its workers in relation to a matter which falls within the scope of a collective bargaining agreement provided that the employer has first followed, and exhausted, the agreed collective bargaining procedure. What an employer cannot do with impunity is what the Respondent did here: make a direct offer to its workers, including union members, before the collective bargaining process which the employer has agreed to follow has been exhausted.

 

For a PDF version of the judgment, please see: Judgment (PDF)

For the Press Summary, please see: Press summary (HTML version)

For a non-PDF version of the judgment, please see: Judgment on BAILII (HTML version)

 

Watch hearing

18 May 2021
Morning session
Afternoon session

 

In this post, Stephanie Cheung, Mitchell Abbott and Jana Blahova of CMS Cameron McKenna Nabarro Olswang LLP, comment on the decision handed down by the UK Supreme Court in Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] UKSC 40 and consider how the decision impacts on the doctrine of lawful economic duress.

A claimant needs to establish the following in order to succeed with a claim of economic duress (1) that there was an illegitimate threat or pressure, (2) that illegitimate threat or pressure caused the claimant to enter into the agreement (which the claimant is now trying to rescind) and (3) the claimant had no reasonable alternative but to give in to the threat or pressure. This case concerns the scenarios in which lawful actions (e.g. the lawful termination of a contract) will amount to an illegitimate threat or pressure.

The facts of the case are as follows: Times Travel is a travel agency whose business primarily relied upon its ability to sell tickets for Pakistan International Airlines Corporation’s (“PIAC”) flights to Pakistan. Disputes arose between PIAC and a number of its affiliated travel agents concerning the commission payable by PIAC to its agents (following the events discussed below, some agents were successful in legal proceedings).

In response to the disputes, PIAC reduced Times Travel’s fortnightly ticket allocation from 300 to 60 tickets and it gave notice that it intended to exercise its right of termination (which existed in all its contracts with its agents). PIAC subsequently offered Times Travel new terms of appointment as an affiliated travel agent, and those the new terms included a provision that waived Times Travel’s right to claim for unpaid commission. PIAC also advised Times Travel that its ticket allocation would be restored to 300 tickets if it agreed to the new terms. Times Travel agreed to the new terms.

Times Travel subsequently issued proceedings against PIAC arguing (1) it felt it had no alternative but to agree the new terms and (2) the new terms should be rescinded on grounds of economic duress.

Times Travel was successful at first instance, however, as set out in our Case Preview, the Court of Appeal overturned the decision and rejected Times Travel’s claim of economic duress. The Court of Appeal’s decision hinged upon the fact that PIAC did not make its demands in bad faith – PIAC mistakenly believed that its position in the disputes was correct. The Court of Appeal was unwilling to find that PIAC’s termination of Times Travel’s contract (which was legal) and its demand that new terms were entered into amounted to economic duress without bad faith.

Leading Judgment: Lord Hodge

The leading judgment which was given by Lord Hodge who dismissed Times Travel’s appeal. Lord Hodge identified two categories of cases where, historically, the courts have accepted lawful actions have amounted to economic duress:

The first category of cases concerns where one party has exploited knowledge of criminal activity by an individual or a member of their family to procure an agreement.

For example, in Williams v Bayley 1 HL 200 a son forged his father’s signature to obtain promissory notes from a bank. The bank threatened to prosecute the son unless the father agreed to undertake to repay the sums, which he did. Upon the father’s application, the House of Lords rescinded the contract.

The second category of cases concerns where illegitimate means have been used to manoeuvre the claimant into a position of weakness to force him or her to waive their claim.

For example, in The Cenk K [2012] EWHC 273 (Comm) Party A chartered a vessel from Party B. The contact specified a date of return of the vessel to permit it to be sent on to its next charter. However, Party A did not return the vessel, instead, it chartered it out to a third party. Party A promised Party B that it would provide another vessel to allow Party B to meet its next charter and promised to pay damages arising from the failure to provide the contracted vessel. When it was too late for Party B to do anything but accept, and in breach of their prior agreement, Party A advised it would not pay the  damages – and it refused to provide the vessel unless Party B waived its claim for damages. Left with no alternative, Party B agreed to waive its claim. The court later upheld an arbitrator’s award finding that the settlement was rescinded on grounds of economic duress.

The majority agreed PIAC’s actions did not fall within the categories of cases identified above, and more was needed for Times Travel to succeed, in particular – “morally reprehensible behaviour” which rendered the contract “unconscionable” was required in order to establish an illegitimate threat or pressure.

In reaching its decision, the majority noted that there are no general principles of “inequality of bargaining power” or “good faith” in English law. The courts have generally taken the view that unequal bargaining power is a matter that should be regulated by the legislature and whilst good faith might be relevant in limited circumstances, generally, English law has never adopted a general requirement of good faith in contractual dealing. As a result, the doctrine of lawful act economic duress, particularly in commercial contexts, must be “extremely limited”. Leverage and/or pressure applied in negotiations will rarely meet the required standard of “illegitimate pressure or unconscionable conduct”.

The majority did not accept that PIAC used illegitimate means to expert pressure on Times Travel and in the absence of the principles referred to above there was no lawful act economic duress. The majority were satisfied that the approach adopted by other common law jurisdictions with similar contract law foundations (and no general principles of good faith) supported the restrictive approach they had chosen to adopt. Whilst Lord Hodge did not rule out scope for development of the doctrine of economic duress, he identified 3 difficulties in doing so, namely:

In the absence of a general principle of inequality bargaining power and/or good faith, there was no recognised principle on which to base another interpretation/approach;
A broader interpretation may give rise to uncertainty; and
A broader interpretation may be of limited use because it will be difficult to establish subjective bad faith.

Dissenting Judgment: Lord Burrows

Lord Burrows’ dissenting judgment reached the same conclusion as those of the majority, he accepted that it was necessary to dismiss Times Travel’s appeal. However, Lord Burrows had a different view on what constitutes an “illegitimate threat or pressure”. The main focus of Lord Burrows’ dissent, similar to the Court of Appeal, concerned the requirement of a “bad faith demand”.

In Lord Burrows’ view, if a party deploys a bad faith demand whilst, at the same time, creating or worsening the other party’s vulnerability, then that could constitute an illegitimate threat and it should be relevant for the purposes of a claim of lawful act economic duress.

Lord Burrows stated the illegitimacy of the threat would have been determined with reference to the justification for the demand. A demand motivated by commercial self-interest is, in general, justified. For the demand to be unjustified, PIAC would have had to deliberately create or increase Times Travel’s vulnerability to the demand.

Conclusion

Whilst this judgment clearly confirms that the concept of lawful act economic duress does exist in English law (the majority rejected academic commentary suggesting the contrary), this doctrine is, as stated by Lord Burrows, “in its infancy”.

Beyond the two categories of case law already identified by Lord Hodge it is not clear what other actions (if any) might amount to “morally reprehensible conduct” and/or what behaviour might render a contract “unconscionable”. Claimants who feel that they have been subjected to illegitimate threats or pressure may choose to pursue alternative causes of action (for example, undue influence) following this judgment because of the cautious approach adopted by the Supreme Court.