Included in this issue: Application of UCTA to a facility agreement – standard or non-standard terms?; FCA wins case against Asset Land in the Supreme Court; FCA and PRA jointly publish proposals to enhance enforcement decision-making processes and more...


Litigation

Application of UCTA to a facility agreement – standard or non-standard terms?

In African Export-Import Bank v Shebah Exploration & Production Company Limited, the Commercial Court considered whether the use by the Claimant of a Loan Market Association (LMA) standard document as the basis for a syndicated facility agreement could constitute its standard terms of business so as to engage section 3 of the Unfair Contract Terms Act 1977 (UCTA). Section 3 of UCTA applies a reasonableness test to contract terms excluding or restricting a party's liability for breach where that party is acting on its written standard terms of business.

African Export-Import Bank, along with two other banks (the Lenders), entered into a $150 million facility agreement with Shebah Exploration & Production Company Limited as borrower (Shebah) (the Agreement). The Agreement was based on a model form recommended by the LMA. The Agreement was modified and amended by the parties during their pre-contract negotiations. Shebah failed to meet the repayments due under the Agreement. The Lenders therefore accelerated the lending and applied for summary judgment against Shebah and its guarantors.

Shebah contended that it had arguable defences to the Lenders' claim arising out of counterclaims that could be set-off against the amounts claimed by the Lenders. The Agreement, however, contained provisions expressly excluding any set off rights.

Shebah argued that the Agreement constituted the Lenders' written standard terms of business and that, as a result, those three contractual provisions and whether or not they were reasonable were issues that should be considered at a full trial.

To succeed, Shebah needed to show that the Lenders "habitually put forward the LMA form" as the basis for their syndicated loan transactions and that they refused to negotiate the terms, leaving them "effectively untouched" each time.

The Court found that the Agreement did not constitute the Lenders' standard written terms. It held there was no basis to infer that the Lenders habitually put forward the LMA form for their syndicated loan transactions, nor any basis for saying that the Lenders refused to negotiate the terms. In fact the evidence showed that the Agreement in this case was negotiated and incorporated changes proposed by Shebah. In the circumstances the set off provisions were not subject to a test of reasonableness and applied with full contractual force. Summary judgment was therefore given in favour of the Lenders.

The Court commented that in circumstances where commercial parties represented by solicitors had utilised a "neutral" industry model form as the basis for a complex and detailed financial contract, executed after negotiations, then it would require "cogent evidence" to raise even an arguable case that the contract was made on the standard terms of one of the parties. The Court accepted that, in theory, it was possible but that it would be an "uncommercial and highly unlikely approach".

Suremime-type duty would drive a coach and horses through a clearly defined statutory scheme

In CGL Group Limited v Royal Bank of Scotland [2016] His Honour Judge Bird declined to follow the His Honour Judge Havelock-Allan QC's judgment in Suremime Limited v Barclays Bank plc [2015] and refused to allow amendments to the particulars of claim which would have allowed CGL to assert claims based on a potential common law duty of care in tort relating to the way in which the Bank conducted the FSA/FCA review of swap sales.

In 2006 and 2007 CGL purchased a base rate collar and a base rate swap from RBS. Following a fall in RBS' base rate in early 2009, CGL's payments due in respect of these products increased significantly. In mid 2009 CGL complained to RBS that CGL had been mis-sold these products. Both transactions were closed out in 2010. In mid-2012 the FCA redress scheme relating to the sale of Interest Rate Hedging Products was established. The agreement between the FCA and RBS relating to this scheme- provided that no third party would have the right to enforce it in contract or otherwise.

CGL was told in August 2014 that it qualified for redress under the scheme in relation to the collar but not the swap. In January 2015 CGL issued a mis-selling claim against RBS in respect of both trades. RBS defended all the claims asserted based on breach of duty on the basis that they were over six years old and therefore statute barred. RBS applied for summary judgment and/or to strike out CGL's claims.

For the purposes of the hearing, the parties proceeded on the basis that the primary limitation period had expired and that what was in issue was when CGL had the requisite knowledge to bring a claim for the purposes of section 14A of the Limitation Act – CGL said that despite its complaints in 2009, it only had that knowledge in 2012 after media reports about the FCA/FSA review. CGL also applied to amend their claim to plead the tortious breach of duty claims relating to the review referred to above. CGL relied upon the decision in Suremine in support of its case.

The Court was "entirely satisfied" that by mid November 2009 and certainly before January 2012 CGL had acquired the relevant knowledge for the purposes of s.14A. As the claim was issued in January 2015 it was therefore statute barred and should be struck out.

In relation to the alleged duty of care arising in connection with the review, the Court held that no duty of care arose in the circumstances of this case and that the amendment would not therefore be permitted. Unlike in Suremine where the judge was not confident that all of the relevant facts necessary to determine the case were known and before the court, here there was no substantive dispute about the facts. The Bank could not be treated as having taken on a duty of care when it had in its agreement with the FCA expressly excluded any possibility of that duty arising. It would not be just or reasonable to impose such a duty where its imposition would "drive a coach and horses through a clearly defined statutory scheme". The decision has been appealed.

Regulatory Decisions

FCA wins case against Asset Land in the Supreme Court

The Supreme Court found that Asset Land had been operating an unauthorised collective investment scheme (CIS) under which investors were persuaded to buy small plots of land for between £7,500 and £24,000. This is a confirmation of the High Court's decision in February 2013 and the subsequent Court of Appeal decision in April 2014.

In March 2013 a court ordered the Defendants, David Banner-Eve, Stuart Cohen, Asset Land Investments plc and Asset L.I. Inc, to make a payment of £21 million as part repayment for investors.

Following the Supreme Court’s decision the FCA can now take action to enforce the interim payment order against the Defendants, whose assets had been frozen. However, it is understood that the FCA consider it unlikely that the value of the Defendants' frozen assets will be sufficient to pay the £21 million ordered by the High Court.

General

FCA and PRA jointly publish proposals to enhance enforcement decision-making processes

The FCA and the PRA published proposals aimed at strengthening the transparency and effectiveness of their enforcement decision-making processes.

The proposals arise out of recommendations made by HM Treasury in its "Review of enforcement decision-making at the financial services regulators’ and Andrew Green QC's 'Report into the FSA's enforcement actions following the failure of HBOS".

The FCA has also proposed amendments to the Enforcement Guide and the Decision Procedure and Penalties Manual to provide a framework and incentives for partly contested cases. There is no proposal to change the process for agreeing a full resolution of all issues, which will continue to have a 30% discount applied to the penalty at Stage 1.

It is understood that the PRA plan to consult separately on the recommendations dealing with settlement and contested decision-making, once the Bank of England and Financial Services Bill has passed through Parliament. The PRA plans to publish more detail about its enforcement process alongside its implementation of the other HMT enforcement review recommendations.

Key contacts

Chris Brennan

Chris Brennan

Partner, Financial Regulation
London

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Richard Clayton

Richard Clayton

Partner, Dispute Resolution
London

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