Most shareholders hold no shares — official. But it doesn’t matter.

Relief all round in the Square Mile today, courtesy of Hildyard J in SL Claimants v Tesco Plc [2019] EWHC 2858 (Ch).

Something over two years ago Tesco was fined a whopping £129 million for publishing misleading profit figures which bent the market in its shares. A number of institutions, market makers and others who had relied on these figures sued Tesco under s.90A and Sch.10A of FSMA 2000, saying they had bought or retained its shares on the basis of the figures. At this point, however, Tesco raised a classic pettifogger’s point (to be fair, one previously raised by, among others, Profs Gullifer and Benjamin).

To qualify for compensation under FSMA you have by Sch.10A to have bought, disposed of or retained “any interest in securities”. Tesco said two things. First, they argued that where shares were dematerialised and the custody chain included more than one layer of custodianship, no ultimate beneficiary investor ever held an interest in any securities so as to trigger liability under FSMA. If shares were vested (legally) in A who held them on trust for B who held them for investor X, X had an interest in B’s interest in the shares, but no interest in the shares themselves. Secondly, Tesco contended that intermediated securities were fungible; that when they were dealt with the whole transaction was effectuated by a combination of electronic credit and debit book entries and netting arrangements between custodians; and therefore that one could simply not talk in the old-fashioned way about shares being acquired or disposed of by anyone. True, they admitted, their plea would leave the relevant parts of FSMA largely like Cinderella — all dressed up with nowhere to go — and largely emasculate the whole UK scheme of investor protection as regards dematerialised securities (meaning these days almost all securities); but, in effect, that was tough. Fiat justitia ruat coelum, as they might have put it.

Hildyard J was having none of it. He accepted that where there were two or more custodians in a securities daisy-chain the ultimate investor technically had an interest in his immediate custodian’s interest, and not in the actual shares in which the custodian had an interest. But he rejected the idea that juridico-metaphysical niceties of this sort affected FSMA. “Any interest”, he said, could and should be interpreted as including any proprietary interest in shares or interests in shares. True it was, too, that technically a transfer of shares these days involved no transfer of anything at all, but rather a stream of electrons signifying juridical suppression of one equitable claim in X and its co-ordinated supersession by another in Y. But this did not prevent concepts like disposal being given their popular, rather than their technical equity lawyers’, meaning.

So the big claim against Tesco goes ahead. Relief, one suspects, not only in the City but in government. Had the result gone the other way there would have been a need for urgent corrective legislation. And in these fraught times we know just how hard it can be to get that kind of thing through.

No absolute immunity for international organisations before US courts.

 

The International Finance Corporation (IFC) makes loans to private businesses to finance projects in developing countries. In 2008, it lent $450 million to finance a coal-fired power plant in India. Local residents complained of harm suffered as a result of pollution from the plant and sued the IFC before a federal court in Washington, D.C., where it is headquartered, claiming, inter alia, that the the IFC had violated provisions of the loan agreement that were included to protect the local community. The International Organizations Immunities Act 1945 gives international organizations “the same immunity from suit” as “as is enjoyed by foreign governments.”

At the time foreign governments enjoyed virtually absolute immunity and the IFC claimed immunity from suit. Since then s1605(2)(a) of the Foreign Sovereign Immunities Act 1976, s1605(2)(a) U.S.C., has lifted the immunity of foreign governments in respect of suits based on their commercial activities, but the Act made no reference to the immunity of international organisations. In Jam et al v International Finance Corporation 586 U.S _ (2019) the US Supreme Court held on 27 Feb, Justice Breyer dissenting, that the immunity of international organisations is co-equivalent with that of foreign governments and the IFC is not absolutely immune from suit. The case was remanded for further hearing consistent with this opinion.

However under s.1605(2)(a) there are three alternative conditions for the lifting of immunity: (i) the action arises out of commercial activity in the US, or (ii) the action arises out of an act in the US in connection with commercial activity elsewhere, or (iii) the action arises out of an act outside the US in connection with commercial activity elsewhere  and the act causes a direct effect in the US. In many cases against international organisations based in the US these criteria will not be satisfied and this may prove to be the case with the further hearings in the instant case.

Money in the bank is not a trust fund — OK?

It is hornbook banking law, and has been ever since 1848 (see Foley v Hill (1848) 2 HLC 28), that those lucky enough to have a credit balance with their bank have the benefit of a debt owed by the latter: nothing more, nothing less, and certainly no trust or other equitable interest in any funds in the institution. Any lingering doubts on the matter were dispelled by Space Investments v CIBC (Bahamas) Ltd [1986] 3 All E.R. 75.

Or so we thought, until Barling J put the cat among the pigeons in late 2017. The Court of Appeal has now, much to everyone’s relief, reversed his decision and restored orthodoxy in First City Monument Bank plc v Zumax Nigeria Ltd [2019] EWCA Civ 294.

Cut away the intricacies of murky Nigerian financial transactions, and the background was this. Zumax, a Nigerian company servicing the oil industry in the shape of Shell and Chevron, banked in Nigeria with IMB. Like many Nigerian organisations, when it received dollar payments it ensured they were made offshore: here, into an account with Chase in the name of an Isle of Man nominee, Redsear. If and when monies were needed in Nigeria, Redsear would then transfer them into IMB’s account with Commerzbank; IMB in turn would credit Zumax in naira.

Between 2000 and 2002 several million dollars were transferred from the Redsear account to IMB, but allegedly never reached Zumax. Allegations of fraud were made against the person who organised these transfers, who had connections with both Redsear and IMB. Zumax alleged that in so far as these sums had reached IMB (whose obligations First City Monument had taken over), they had been held on trust for Zumax. We are not told in terms why Zumax did not simply sue to have its account credited, but this may have been due to the fact that Zumax was alleged to owe large sums of money to IMB under a previous facility, or some other reason connected with dubious dealings by IMB.

Barling J held that because the monies had been transferred to IMB via its Commerzbank account specifically for the benefit of Zumax, IMB had not been free to deal with them as its own, and there was in the circumstances no reason why a trust should not be inferred. The Court of Appeal saw this off in short order. It was of course possible for a bank to receive money as a trustee for its customer: but it was unlikely. The fact that monies were transferred to a bank for the benefit of the account of X was entirely consistent with a duty to credit the account and not to hold the monies on trust, and this applied as much to a transfer through a correspondent bank (i.e. Commerzbank) as to a direct transfer. The normal inference, indeed, was that a bank in such a case held the monies at its free disposal. For good measure there had been no mention of any need to segregate the monies — normally an important feature of a trust. (The court might have added that in so far as a “Quistclose trust” was alleged, it would still not get Zumax home, since the normal inference in such trusts is that unless and until put to its intended use the money is held not for the payee but for the payer — here Redsear).

Relief all round, one suspects, for the banking community. Banking law is complex enough without being regularly made more difficult by the use of trusts; this decision will make it that much more difficult for lawyers further to muddy turbid waters by lengthy pleadings alleging fiduciary duties, trust relationships and the like. In the view of this blog, this is quite right too.

International insolvency — English law rights confirmed protected

Shortly after New Year 2018, Hildyard J decided that when an Azeri bank went bust and was put into reconstruction in Baku, the Azeri administrator could not use the Cross-Border Insolvency Regulation to freeze out a couple of creditors in England and Russia whose bond debts were governed by English law. They had refused to have anything to do with the reconstruction, smugly sat back and waited for the reconstruction to finish, knowing that the bank still had English assets that could potentially be seized. (See our blogpost here).

The Court of Appeal has now agreed, in Bakhshiyeva (Foreign Representative of the Ojsc International Bank of Azerbaijan) v Sberbank of Russia & Ors [2018] EWCA Civ 2802 (18 December 2018) . It might or might not be a good idea for England to adopt modified universalism in insolvency and accept, in essence, that the law of a corporation’s home jurisdiction should be controlling in all questions of the enforceability of obligations against it, wherever situated and whatever the law governing them. Indeed, it does just this in EU insolvencies, courtesy of the EUInsolvency Regulation 2015. But established common law authority said that an English court would ignore laws cancelling debts that did not emanate from the state whose law governed them. Further, the CBIR was best read as legislation with procedural, not substantive, aims. It would suspend enforcement of obligations while the reconstruction was going ahead, but would not actually destroy them. Any attempt to use a foreign reconstruction for anything more than that would not be countenanced.

Whether this is the last word we will see. There may be an appeal to the Supremes: the two creditors clearly have the money, and quite a lot rides on the result. However, the view of this blog, for what it is worth, is that this is a delicate matter best left to careful legislative reform, if indeed reform is needed at all. And that’s a bigger if than it looks. Money-men aren’t popular these days, but there is something to be said for the position of the two creditors. No-one has to issue English-law bonds, nor to leave assets in England that can be seized to support the obligations contained in them. And, one strongly suspects, the interest rate on the English-law debt was lower than on Azeri-law debt precisely because of the perceived lower solvency risk. The ability to take the benefit of this and then tell foreign creditors to go fish isn’t, perhaps, something we should be promoting.

Ship arrest: no undertaking in damages exigible from arresting party

The Court of Appeal declined yesterday to upset the ship arrest apple-cart. In The Alkyon [2018] EWCA Civ 2760 it upheld the decision of the Admiralty Judge, Teare J, noted here on this blog, that a bank could hold an arrest over a mortgaged ship without having to give any undertaking to pay damages for loss of use should it turn out that its claim was ill-founded. The owners of the MV Alkyon, a 36,000 dwt bulker, had argued that there was no default justifying her arrest in Newcastle; that they could not afford to bail her; that her immobilisation by arrest would cause them big losses; and that it was only fair that if the bank was indeed wrong, it should carry the can for those losses.

Despite the fact that there is theoretically no restriction on the court’s discretion to release an arrested vessel (see CPR 61.8(4)(b)), Teare J disagreed; and the Court of Appeal agreed with him. Although there was much in common between ship arrest and freezing orders, where an undertaking in damages was emphatically the rule, for the court to demand such an undertaking in arrest cases would  cut across the idea that arrest was available as of right, and also the established principle that liability for wrongful arrest could not be imposed unless the claimant proved bad faith or possibly gross negligence. This was not something for the judiciary — barring possibly the Supreme Court — to do.

In the view of this blog, the Court of Appeal was quite right not to draw the analogy with freezing orders. For one thing not all arresters are plutocratic banks: think crewmen seeking wages or damages for injury on board, or for that matter suppliers of canned food and water for those crewmen to eat and drink. For another, the right to arrest is there for a purpose, namely to assure people that they will be paid by the owners of peripatetic pieces of maritime machinery: to allow a threat to arrest to be met with a threat to claim damages would not further this end. For a third, damages for arrest may well bear no proportion to the amount of the claim: the losses caused by the arrest of a large bulker or reefer would be likely to dwarf a straightforward $100,000 bunkers debt. And lastly, it’s all very well saying a single arrester ought to carry the can for immobilisation losses: but what if cautions against release then pile on? Which of the undeserving claimants should have to pay how much? Nice work for lawyers, maybe: less good news for shipping claimants who want to get on with their commercial lives.

Atlantik (misplaced) Confidence — the saga continues.

Last year we dealt here with Teare J’s meticulous decision in Aspen Underwriting Ltd & Ors v Kairos Shipping Ltd [2017] EWHC 1904 (Comm), in which following the Atlantik Confidence debacle, hull underwriters, having previously paid out on the orders of her owners’ (Dutch) bank under an insurance assignment provision, now sued the bank to recover their money on the basis that the ship had been deliberately scuttled. The issue was whether the bank could insist on being sued in the Netherlands on the basis of Art.4 of Brussels I Recast. The decision was that most claims, including those based on unjust enrichment, had to be brought in the Netherlands. Howver, claims based on tortious misrepresentation and under the Misrepresentation Act 1967 could be brought here. The fact that such claims related to insurance under Art.14 was no bar, since there was no question of a large Dutch bank being a weaker party who, according to Recital 18 to the Regulation, needed to be protected from the machinations of big bad insurers.

The Court of Appeal has dismissed an appeal (seeAspen Underwriting Ltd & Ors v Credit Europe Bank NV [2018] EWCA Civ 2590). On most points it simply said that the Judge had got it absolutely right. The only exception was that it was not open to a judge, consitently with Euro-law, to take the sensible view and decline to apply Art.14 to anyone he thouht was not in fact a weaker party. But this did not matter, since in Kabeg v Mutuelles Du Mans Assurances (Case C-340/16) [2017] I.L. Pr. 31 the ECJ Advocate-General had since Teare J’s judgment accepted that Art.14 could be disapplied to a subrogee “regularly involved in the commercial or otherwise professional settlement of insurance-related claims who voluntarily assumed the realisation of the claim as party of its commercial or otherwise professional activity”. This was near enough to the position of the bank here to justify ignoring Art.14.

Some good news, in other words, for marine underwriters trying to get their money back from those acting for crooks.  On the other had, the moral we advanced in our previous article still stands: all policies in future ought to contain a term, rigorously enforced, stating that no monies will be paid out save against a signed receipt specifically submitting to the exclusive jurisdiction of the English courts in respect of any subsequent dispute respecting the payment or the policy generally.

 

Bank references — undisclosed principals needn’t apply

Banks will, if you will forgive the pun, be laughing all the way to themselves today courtesy of the UK Supreme Court. In Banca Nazionale del Lavoro SpA v Playboy Club London Ltd [2018] UKSC 43  the question was whether a Hedley Byrne duty of care could be invoked by an undisclosed principal. The Playboy Club in London was approached by a Lebanese gentleman, a Mr Barakat, who wanted a cheque-cashing facility of £800,000 to gamble with. The Club, with its usual caution, required a banker’s reference for twice that amount. With Mr Barakat’s permission, and quite properly not wishing to divulge to the bank the reason for Mr Barakat’s desire, it got an associated company, Burlington Street Services, to make the necessary inquiries as its undisclosed agent. The bank gave a positive answer despite the fact that Mr Barakat had no substantial funds deposited with it. Over four days Mr Barakat  gratefully bought £1.25 million of chips with two cheques, won and drew a cool half-million, and then departed. He never came back. His cheques did. Playboy, relying on its position as Burlington’s undisclosed principal, sued the bank for its losses.

Upholding the Court of Appeal, the Supreme Court in short order held that an undisclosed principal, being someone whom ex hypothesi the person giving the advice knew nothing of, could not take advantage of a Hedley Byrne duty of care. Even though we might talk about a relationship akin to contract in connection with Hedley Byrne, said the majority, thise was no reason to extend the anomalous doctrine of the undisclosed principal beyond contract so as to allow the creation of a duty of care in favour of a given claimant when none would otherwise exist.

The Playboy Club will now no doubt either bite the bullet and write its own reference requests, or possibly investigate some more sophisticated device (an assignment by Burlington of its rights in favour of the Club might come to mind). But the decision may have further implications. Many professional negligence claims — for example, against insurance sub-brokers, specialists employed by professional advisers, consulting engineers employed by construction companies, or sub-agents generally — lie exclusively in tort under Hedley Byrne. It now seems that, while a direct client of a professional person may contract as undisclosed agent and give his principal the right to sue the professional in contract in the event of any blunder, the principal will have to be content with this. He will not be able to sue anyone further down the chain. Whether this can be got round by allowing the ostensible client to sue for some notional loss suffered by it is a question that will have to be left to another day: but that day, as a result of Playboy, may well come round sooner than you think.

Foreign banks breathe easier in the US after Supreme Court’s decision on scope of the Alien Tort Statute.

 

 

The US Judiciary Act of 1789, 28 U. S. C. §1350. which is now known as the Alien Tort Statute, provides: “The district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of of the law of nations or a treaty of the United States.” For nearly forty years it has been used as the gateway to bring suits in the US District Courts against individuals and corporations based on alleged violations of norms of international law. The Supreme Court has twice considered the scope of the ATS, in Sosa in 2004, and in Kiobel in 2013, each time limiting its scope. It has now spoken for a third time in Jesner v Arab Bank when it gave judgment last Tuesday, in a majority decision that foreign corporations could not be subject to liability under the ATS.

In Jesner v Arab Bank  foreign plaintiffs sued a Jordanian bank, Arab Bank, alleging that it had helped facilitate financial transactions to terrorist organisations which had then committed attacks in Israel, West Bank and Gaza Strip between 1995 and 2005 during which plaintiffs or their family members were injured. It was alleged that Arab Bank had used its New York branch to clear US dollar transactions which had led to money being sent to the terrorist organisations.

The question framed before the Supreme Court was whether corporations could be held liable under the Alien Tort Statute. The Second Circuit in 2010 in Kiobel had found that corporations could not be held liable under the ATS, and the question was referred to the Supreme Court. However, in 2013 the Supreme Court left the question unanswered and affirmed the Second Circuit’s dismissal by reference to a new question it had raised during argument before it in 2012 concerning the extra-territorial scope of the ATS. The Supreme Court concluded that the presumption that US statutes should not have extra-territorial effect applied to the ATS and would only be rebutted if the claim were to ‘touch and concern the territory of the United States…with sufficient force’.

In Jesner, the Supreme Court gave a partial answer to the question initially framed in Kiobel. The Supreme Court referred to its 2004 decision on the scope of the ATS in Sosa  which set out a two part test. First, was the alleged violation of the law of nations a violation of a norm that  is ‘specific, universal and obligatory’?  Second, would allowing the case to proceed be an appropriate exercise of judicial discretion?

On the first question of whether there is a specific, universal and obligatory norm that corporations are liable for violations of international law, Justice Kennedy expressed the view that there was not such norm, citing the fact that international criminal tribunals had never been given jurisdiction over corporations, but only over natural persons. Justice Roberts and Thomas concurred but this view did not obtain majority support.

The case was decided on the basis of the application of the second Sosa test. By a 5-4 majority the Supreme Court concluded that extending liability under the ATS to foreign corporations should be a matter for Congress to decide, rather than the judiciary. Congress’s intent could be deduced from the fact that a similar statute, the 1991 Torture Victims Protection Act, had been specifically limited to suits against ‘individuals’.  Accordingly, the Supreme Court affirmed the Second Circuit’s dismissal of the suit under the ATS against Arab Bank, a foreign corporation.

The upshot of the decision is that the scope of the Alien Tort Statute has been further restricted in that it no longer permits claims against foreign corporations. The decision may put the final nail in the ATS coffin. However, claims against US corporations, and foreign and US natural persons, could still be made, although the ‘touch and concern’ requirement set out in Kiobel means that there must be a strong link to the US for the claim to proceed. Some Circuits have interpreted the ‘touch and concern’ requirement to mean that the primary violation of international law must have taken place within the US, so excluding claims based on secondary violations for aiding and abetting by US corporations. The Supreme Court has twice denied certiorari to clarify this issue.

Good news for English judgment creditors — oh, and the beneficiary of a credit is who the credit says it is.

In Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64 Shell bought two parcels of Iraqi oil in 2013 from the state Iraqi oil company SOMO. Its bank, Credit Agricole in London, issued letters of credit governed by English law naming SOMO as beneficiary, but containing a clause as follows (essentially to comply with the Iraqi sanctions regime):

“[A] Provided all terms and conditions of this letter of credit are complied with, proceeds of this letter of credit will be irrevocably paid in to your account with Federal Reserve Bank New York, with reference to ‘Iraq Oil Proceeds Account’.These instructions will be followed irrespective of any conflicting instructions contained in the seller’s commercial invoice or any transmitted letter.
[B] We hereby engage with the beneficiary and Central Bank of Iraq that documents drawn under and in compliance with the terms of this credit will be duly honoured upon
presentation as specified to credit CBI A/c with Federal Reserve Bank New York.”
Taurus subsequently got an arbitration award against SOMO of something like $9 million, which it wanted to enforce against the benefit of the letter of credit under a TPDO (garnishee in old-fashioned English). Three questions: (1) who was the creditor under the LCs,  SOMO or the Central Bank? (2) where was the debt situated? (3) should a receiver be appointed?
On the situation of the debt, the whole court agreed, reversing the CA, that it was London, where the debtor, the London branch of Credit Agricole, was situated. It followed that the English court had jurisdiction to make a TPDO. There was no reason to treat a LC debt as any different from any other debt: Power Curber International Ltd v National Bank of Kuwait S.A.K. [1981] 1 W.L.R. 1233, regarding such debts as situated in the place of payment, was wrong.
All their Lordships felt that a receivership order was appropriate.
On the identity of the creditor, the decision was by a majority. The majority said, reversing the CA, that it was SOMO. They were named as beneficiaries. The agreement to pay the Oil Proceeds Account in New York made no difference in this respect: it was merely a collateral agreement. (Presumably Taurus had some arrangement with the Central Bank to collect from them: we are not told).
On balance, a good decision for creditors chasing funds through TPDOs. Its effect is essentially that any LC issued by a London bank, even a branch of a foreign institution, now seems fair game, even if payable in Mannhein, Manila or Madagascar. Forget Brexit: London is likely to remain the place to be.

Asymmetric jurisdiction clauses and the Brussels Recast Judgments Regulation 2012

 

 

Asymmetric jurisdiction agreements are a long established and practical feature of international financial documentation. Under a typical asymmetric jurisdiction clause X (say a bank) and Y (say a borrower) agree that Y may sue X in the courts of jurisdiction A only but that X may bring proceedings against Y elsewhere. In Commerzbank Akt v Pauline Shipping and Liquimar Tankers [2017] EWHC 161 (Comm) the bank made various loans for ship purchase which were subject to guarantees on similar terms, including the provision of a clause for the benefit of the bank, conferring jurisdiction on the English courts. The borrowers defaulted and the bank exercised its rights to sell one of the vessels, the Adriadni. The guarantors brought proceedings against the bank in Greece, the first seeking orders that the guarantee of the loan was discharged and it was not liable to the bank, the second seeking damages from the bank in tort and under the Greek Civil Code for loss of the use of the Adriadni consequent on the arrest. The bank then brought proceedings in the English Court which the guarantors sought to stay under either art 29 or art 30 of the Recast Judgments Regulation.

 

Cranston J s held that the asymettric jurisdiction clause in the sale and guarantee contracts did confer exclusive jurisdiction on the English courts pursuant to art 31(2) of the Regulation.  Article 25 did not invalidate such clauses. Article 25 required the parties to have designated the courts of a Member State to enable the law applicable to the substantive validity of a jurisdiction clause to be identified and to provide certainty as to the forum in which a putative defendant can expect to be sued.  Article 25 did not require that a valid jurisdiction agreement had to exclude any courts, in particular non EU Courts. Accordingly, the Court refused to stay proceedings under Art. 29.

 

The Court also rejected an application to stay the English proceedings under Art. 30 concerning related proceedings. The agreement to an exclusive jurisdiction clause in favour of the English court was a powerful factor against a stay. In addition, the degree of relatedness between the English and Greek actions was very small and the English court was placed to determine the issue of interpreting and applying the jurisdiction clause.