In the wake of the Graiseley Properties v Barclays Bank case, Joshua Freedman finds there is compelling evidence that indicates that the big banks are not untouchable giants when it comes to suing for mis-sold products.
The stand-out case of 2014 in the financial services sector was certainly Graiseley, which saw theGuardian Care Homes’ parent settle its dispute with the banking giant Barclays on the steps of the court in the so-called “LIBOR test case” that never was.
Alongside Graiseley have been a trickle of cases, some well-publicised and some less-so. The former might be rare, but as one QC points out, now is the time for claims from the financial crash to come to court: “Mis-selling would have come to light in 2007 to 2008. Lehman Brothers collapsed on 15 September 2008 – so we are coming to the end of proceedings. The reality is, simply, they are out there.”
Indeed, while such cases are generally considered hard to bring due to the difficulty of demonstrating the size of a loss and estimating counterfactuals, the indication is that some of the recent proceedings have made life marginally easier for those trying to bring a mis-selling claim.
“The landscape was one where you were facing a bit of adverse case law if you wanted to claim for mis-selling,” says Signature Litigation partner Abdulali Jiwaji. “[But] one or two of the recent cases related to mis-selling have opened some new avenues and breathed new life into the way you can construct an argument.”
To be precise, these are UBS v DEPFA and Crestsign v National Westminster Bank and the Royal Bank of Scotland. Both derivatives cases included, at times as something of a footnote, statements made by the judges, which pointed to the fact that exclusion clauses may not get banks out of a misrepresentation claim.
Commenting on UBS, Jiwaji adds: “The judge [Mr Justice Males] made some comments which potentially widen the scope for claiming misrepresentation and calling to question the extent to which banks can rely on the non-reliance clauses. If you have got a situation where it is a mis-selling claim, this situation may allow someone claiming against a bank to have more scope for saying there was some failing by the bank which they are less likely to be able to escape liability from.”
The case, in brief, dealt with a complex arrangement whereby German utility group Kommunale Wasserwerke Leipzig (KWL) had agreed to a credit default swap with UBS in return for selling UBS credit protection. It turned out that KWL had only agreed to this because of bribes paid to managing director Klaus Heininger by advisers Value Partners. The German-Irish bank DEPFA had been one of the intermediaries and was named as a defendant.
Describing the case as “a case study in how not to conduct investment banking in an honest and fair way”, Males J made findings of serious misconduct by key UBS personnel, including bribery, which led to KWL investing in the swaps.
In concluding that UBS drove the deal through regardless of KWL’s interests, Males J remarked: “[T]his went well beyond the understandable wish which a bank and a financial adviser might properly have to do further business together.”
“It is to be hoped that the events described belong to a bygone era,” Males J added, in a 400-page ruling.
Michael Barnett, a partner at Addleshaw Goddard said, in a statement acknowledging the judge’s hopes, “the outcome highlights the importance for banks of maintaining rigorous, effective and independent control functions”.
In a statement, UBS said it was “extremely disappointed with the court’s ruling and will take steps to appeal this judgment”.
It added: “The court has found that KWL’s managing director took a bribe from KWL’s financial advisers, Value Partners, as part of a corrupt scheme which the other managing director of KWL helped to cover up, that KWL’s supervisory board failed to do its job, and that UBS knew nothing of that corrupt arrangement.”
UBS, advised by Mayer Brown partner Ian McDonald, had also claimed that DEPFA, guided by Dentons partner Richard Caird, could not argue misrepresentation on UBS’ part because of a clause in the International Swaps and Derivatives Association (ISDA) master agreement and a non-reliance clause in the parties’ agreement. While the judgment was damning for UBS, DEPFA – represented by David Railton QC of Fountain Court Chambers, with Edward Levey andRichard Power, persuaded the judge the scope of any implied representation to counterparty should be interpreted in their favour – which it was.
The judge, critically, held that the relevant clause of the master agreement does not exclude misrepresentation, as it is there to deal with what they have agreed rather than with inaccurate statements.
Furthermore, Males J stated that “UBS accepts that the entire agreement and non-reliance clauses on which it relies cannot assist it to defeat a claim in fraud, and would only be relevant if any misrepresentation was negligent or innocent”.
In Crestsign, by contrast, Tim Kerr QC of 11KBW, sitting as a deputy judge of the High Court, found for NatWest and RBS, concluding that the banks did not owe a common law duty of care to Crestsign, a small property investment company, not to provide negligent advice, alongside selling the product in question, and that any negligent advice that had been given, was therefore not actionable.
Nonetheless, Crestsign saw the treatment of a topic that could open up some doors for those trying to defeat a bank. The case has been seen by some as a controversial authority, on the issue of contractual estoppel in a retail and regulatory context.
The judge was alerted by Andrew Mitchell QC of Fountain Court Chambers, counsel to the defendants to a discussion of ‘basis clauses’ by Mr Justice Clarke in the 2011 judgment ofRaffeisen Zentralbank v Royal Bank of Scotland. These clauses are usually stated in such a way as to say: “X agrees with Y that Y is not acting as an adviser or assuming any responsibility.”
In that case, Clarke J opined that while parties of equal bargaining power should be able to agree what responsibility they have towards each other without needing to satisfy a reasonableness test, there is also a danger that the “ingenuity of the draftsman” could lead to a hidden clause that no representations have been made, as a means of evading liability.
Clarke J gave the example of a car dealer who mistakenly, due to carelessness, gives the customer false information without which he would not have bought the vehicle, but attempts to exclude any liability by getting the buyer to agree that no representation has been made.
The point is that while there are circumstances where exclusion clauses are acceptable, there are others where they depart from reality – and, therefore, on that basis, clauses cannot be considered by an institution as a sure-fire get-out.
Furthermore, Kerr in Crestsign stressed that each case should be dealt with on its own merits, quoting Crestsign’s counsel Richard Edwards of 3 Verulam Buildings (3VB): “A bank which undertakes to explain the nature and effect of a transaction owes a duty to take reasonable care to do so as fully and properly as the circumstances demand.”
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