BANKING & FINANCE LITIGATION UPDATE - DLA Piper/media/Files/Insights/Publications/2013/0… · Martin Weale of the BofE Monetary Policy Committee has warned that further quantitative

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Contents

Domestic Banking ······································ 2

Domestic General ······································· 4

European Banking ······································ 5

European General ······································· 5

International Banking ·································· 5

International General ··································· 6

Legislation ··············································· 6

Press Releases ··········································· 6

Case Law ················································ 8

BANKING & FINANCE LITIGATION UPDATE

Issue 60

mailto:[email protected]

02 | Banking & Finance Litigation Update - Issue 60

DOMESTIC BANKING

BANK OF ENGLAND

1. Mark Carney, the governor of the Bank of Canada,

will become the highest earning banker in the

world when he becomes the Governor of the Bank

of England ("BofE"). His total package will be

worth £874,000, more than double the salary of

his nearest rival, Mario Draghi, the Governor of

the European Central Bank.

Guardian, 21 December 2012

2. Martin Weale of the BofE Monetary Policy

Committee has warned that further quantitative

easing by the Bank would result in increased

inflation and have no beneficial effect on growth.

Daily Telegraph, 22 November 2012

BARCLAYS

3. Barclays and Deutsche Bank have joined with 12

other banks to become stakeholders in a "bad

bank", called Sareb, created to absorb 60 billion

Euros of Spain's bad debts.

Times, 19 December 2012

4. An American plan that would force Barclays and

Deutsche Bank to put more cash into their Wall

Street operations is threatening to bring about an

international trade war. Daniel Tarullo, a governor

of the Federal Reserve and the man overseeing the

implementation of the Dodd-Frank banking

regulation reforms, wants tougher capital and

liquidity rules for all foreign banks operating in

the US. According to senior financiers and

analysts, foreign banks would be put at a

competitive disadvantage by the rules. A number

of foreign banks and financial institutions are

furious about the plans.

Sunday Times, 9 December 2012

5. Barclays' CEO, Anthony Jenkins, has been in talks

with shareholders about axing its investment bank

as part of a radical restructuring.


6. Former Barclays chairman Martin Agius could be

retained by the bank as a consultant. Agius

resigned in July but is still working on "legacy

issues" at the bank until 1 January 2013 when his

notice period expires.


7. Support staff working in investment divisions of

banks including Barclays and RBS could have

their 2013 bonuses cut in a move to reduce costs.

Executives believe that pay for backroom staff at

investment banks should be aligned with the pay

of their retail counterparts who are doing the same

job.

Times, 19 November 2012

HSBC

8. The first sale of sub-prime loans since the height

of the financial crash is being prepared by HSBC,

as the bank starts to off-load over $40 billion (£25

billion) of toxic US debt that it still has on its

books. Four sub-prime loan portfolios worth a

total of $2.7 billion will be sold in the next year,

with interest already being expressed by hedge

funds. The sale will be the first time HSBC has

sold any of its holding of sub-prime debt since

Lehman Brothers collapsed back in September

2008.

The Daily Telegraph, 3 December 2012

9. HSBC is to launch a global 'know your customer'

programme costing $700 million as part of a plan

agreed with US regulators to settle breaches of

Iran sanctions and money laundering issues.

Financial Times, 14 December 2012

10. HSBC has agreed a record fine of $1.9 billion with

international regulators to settle charges of money

laundering between 2002 and 2009. The bank was

found guilty of wholesale failings in its control

and systems processes but was not found to have

facilitated money laundering. Senior staff at the

bank will defer part of their bonus entitlement

until 2017 to safeguard against any future

wrongdoing.


11. HSBC chairman Douglas Flint wants bankers to

swear an oath similar to that sworn by doctors in

an attempt to rebuild confidence in the profession.

Financial Times, 26 November 2012

12. HSBC has confirmed that it is in talks on the

possible sale of its 15.57 per cent holdings in

Chinese insurance group Ping An. The deal could

be worth $9 billion.

Independent, 19 November 2012

www.dlapiper.com | 03

LLOYDS BANKING GROUP

13. In a deal worth £60 million, restaurants including

Le Pont de la Tour and Quaglino's are set to

change hands. The private equity arm of Lloyds

Bank, LDC, is frontrunner to purchase D&D

London, owner of 30 leading restaurants. It would

get the 51 per cent stake of founder Sir Terence

Conran, and also the 18 per cent owned by Caird

Capital. The remaining 31 per cent would be

retained by management. A number of rivals are

still in the talks so LDC could be outbid, even

though it is the current frontrunner.


14. An estimated 4.8 million Lloyds Banking Group

account holders will begin receiving letters

informing them that their branch has been

transferred to new ownership as part of the Project

Verde sale to Co-operative Bank in July.


SANTANDER

15. A deal is expected to be announced soon between

Santander UK and SAV Credit in relation to

Santander's store card portfolio. SAV currently

serves retailers such as Debenhams and Arcadia.

Santander is worried that its reputation will be

damaged by criticism of the high interest rates

charged on store cards.


THE ROYAL BANK OF SCOTLAND PLC

16. The Royal Bank of Scotland ("RBS") is expected

to be the next bank to agree a settlement with

regulators over attempts to manipulate the LIBOR

rate, following the settlement agreed between UK

and US authorities in December with UBS, and

the one made with Barclays in June 2012.

Daily Telegraph, 20 December, 2012

17. RBS is to launch a £200 million Carbon

Reduction Fund aimed at helping businesses

reduce energy costs. The fund will be run by the

bank's corporate and institutional banking

division. RBS will finance a range of sustainable

energy projects and will be able to lend at lower

rates as the fund is backed by Funding for

Lending, with funding available for businesses

with a turnover of over £25 million.

Independent, 10 December 2012

18. RBS has predicted that it will take it ten years to

fully return to the private sector, underlining the

scale of the challenge facing executives and

successive governments. The bank's first aim is to

be ready to begin paying dividends again in late

2014. Eighteen months of further repairs to the

bank's balance sheet should, senior figures at the

bank believe, leave it ready to be returned to the

private sector in four offerings spread over ten

years.


19. Despite having effectively agreed to pay its larger

rival to take the unit off its hands, RBS has been

forced to call off the sale of its Indian commercial

and retail operations to HSBC. RBS said that the

sale had 'lapsed' and it would now begin to 'wind-

down' the 31-branch business. The collapse of the

deal is understood to have come after protracted

talks over the transfer of the ownership of the

business with the Indian regulator.


20. After refusing to cave in to pressure to sell its

American business, RBS is expected to further

shrink its investment bank. RBS has been pressed

by City regulators to consider a sale of its

American retail banking business, Citizens, which

could be worth as much as £10 billion. However

the bank has said it cannot find a buyer quick

enough to meet the timetable of new capital

demands. RBS is believed to be looking at ways to

trim capital-intensive areas of its investment bank

as an alternative.


21. Private equity firm Corsair Capital has become a

potential bidder for the 316 RBS branches to be

sold.

Evening Standard, 26 November 2012

22. Whitehall is proposing that the 316 RBS branches

which are for sale could be nationalised and set up

as a standalone bank if a buyer is not found. The

tax payer, as the majority shareholder in RBS,

would automatically acquire an 83 per cent share

of the new bank.

Sunday Times, 18 November 2012

UK GREEN INVESTMENT BANK PLC

23. The UK Green Investment Bank Plc ("UK GIB")

has officially opened for business and has invested

£8 million in a project to construct an anaerobic

digestion plant in Teesside, and £5 million to

retrofit Kingspan's UK industrial facilities. UK

GIB has been funded with £3 billion of

Government money and will aim to mobilise


additional private capital to develop a green

economy.

Department for Business, Innovation and Skills,

28 November 2012

DOMESTIC GENERAL

24. The Banking Standards Commission has said that

it would like to see the ring-fence between high

street and investment banking "electrified". The

Commission has recommended that if banks do

not implement the proposals in the Independent

Commission on Banking's report to ring-fence the

two areas of banking, the government should have

the power to step in and force them to do so.

Guardian 21 December 2012

25. A review into portable bank accounts is to be

announced by the Treasury, in a move that will

dismay the big banks. A cost-benefit analysis of

switching to a system where customers can move

banks without having to change account numbers

is to be commissioned by Ministers. Such a move

would make it easier for customers to change

bank, but is being strongly resisted by the banks

on costs grounds. The Parliamentary Commission

on Banking Standards is sympathetic to the idea.


26. A report from the Commons Home Affairs

committee has suggested that bankers who allow

drugs barons to launder illegal profits through

their institutions should be punished with a new

criminal law, in place of the current system of

fines. The report also warned that enforcement by

the FSA had been "too weak".

London Evening Standard, 10 December 2012

27. New figures from the Bank of England have

shown that only 6 of 35 banks and building

societies signed up to the Funding for Lending

Scheme have drawn down the cheap loans on

offer to fund mortgages. High street banks have

been criticised for being slow to boost lending,

with the worst affected being first-time buyers.


28. Ex-trader Tom Hayes and two interdealer brokers

who work for RP Martin, Terry Farr and Jim

Gilmour, have been arrested and questioned by

the police in relation to the probe into the potential

manipulation of Libor. These are the first arrests

which have been made in connection with the

scandal which has involved at least 20 of the

world’s largest banks and interdealer brokers.


29. Thomson Reuters, the provider responsible for the

administration of Libor, is set to join Bloomberg

to bid to operate a new and toughened Libor

system.


30. In a move aimed at protecting consumers from

bank collapses the FSA has issued new rules

which will require subsidiaries of foreign banks

taking deposits in the UK to own their own

liquidity. Since 2007 the FSA has permitted only

four foreign banks to open branches which rely on

the parent bank for capital.


31. The Parliamentary Commission on Banking is

expected to raise the possibility of an independent

approval body to deal with directors and bank

managers who are involved in the future in the

collapse of banks.

Sunday Telegraph, 9 December 2012

32. Banks have been told by the BofE to increase the

incentive periods for directors from three years to

between five and eight. New rules could also make

it harder to qualify for a bonus. This latest

crackdown comes after a warning from the FSA

that deferred bonuses should be clawed back this

year in the wake of scandals involving rigging of

Libor rates and the mis-selling of interest rate

derivatives. The BofE is working with European

and global regulators to update remuneration

guidelines that were last published in 2009.


33. The UK Chancellor of the Exchequer has urged

the Banking Standards Commission not to unpick

Government plans to separate off parts of banks

that carry the most risk.


34. Lenders are refusing to invest in high-risk

developments unless greater support is provided

by the UK government in the form of an injection

of cash or the underwriting of banks' refinancing

risk.


35. The BofE must become more accountable to the

UK Parliament if it is to operate effectively


according to the FSA's head of prudential

regulation.


36. Leading investors and pension funds have written

a letter to business secretary Vince Cable saying

that current accounting rules are leading to a

distortion in bank profits and subsequently

harming shareholders.


37. 300,000 customers sold credit card insurance by

Credit Card Protection (CPP) will receive £14.5m

in compensation from the company, which has

been fined £10.5m by the FSA. The move makes

it likely that banks which sold the same product to

customers may have to compensate them as well.

UK banks, including RBS, Barclays and HSBC,

are currently in talks with the FSA about the

matter.


EUROPEAN BANKING

CREDIT SUISSE

38. Credit Suisse has announced that it is planning to

carve out its investment banking arm from its

newly merged private banking and wealth

management business, citing "the new regulatory

reality".

Guardian, 21 November 2012

SOCIÉTÉ GÉNÉRALE

39. The Supreme Court has found in favour of a

former Société Générale banker who had claimed

unfair dismissal. Raphael Geys, who was the

head of European fixed income sales, argued that

he was sacked for "being too successful" as the

bank did not want to pay him the large bonuses he

was owed. He could receive a termination

payment of £11 million.

Daily Telegraph, 20 December 2012

UBS

40. The Hong Kong Monetary Authority has

announced that it is to investigate UBS in relation

to the rigging of the local inter-bank rate, HIBOR,

following the Swiss banks record fine by the UK

and US regulators for manipulation of LIBOR, the

London inter-bank lending rate.


41. UBS has been fined £940 million by the US and

UK authorities in relation to its part in the LIBOR

rigging scandal, the largest penalty ever made,

after the bank pleaded guilty to the charges of

fraud. Two former traders at UBS, one British,

have also been charged by the US Department of

Justice with conspiracy to manipulate the

borrowing rate.


42. Kweku Adoboli has been sentenced to seven years

in jail after he was found guilty of two counts of

fraud by abuse of position, following a two-month

trial at Southwark Crown Court. The former UBS

trader gambled away £1.4 billion in Britain's

biggest fraud, which nearly destroyed the Swiss

bank. Adoboli was acquitted of four lesser charges

of false accounting, indicating that the jury did not

believe that personal gain was the motive for his

actions.


EUROPEAN GENERAL

43. Germany has given ground on some of its

objections, including UK demands, paving the

way for a deal on creating a common eurozone

bank supervisor.


44. The European Parliament has indicated that new

laws to cap bankers' bonuses will not take effect

until March 2013, due to difficulties in agreeing

the bank capital rules and finding a compromise

on the cap proposal on bonuses.


INTERNATIONAL BANKING

BANK OF AMERICA MERRILL LYNCH

45. Plans to bring in fees that could have hit more than

ten million current account customers have been

dropped by Bank of America. About $200 a year

per customer is lost by the bank on around a fifth

of its customers who typically only have modest

balances and do not buy any other services from

the bank. A number of Bank of America's rivals

are also looking to raise fee revenue from such

customers.

The Times, 3 December 2012


CITIGROUP

46. Ofgem and the FSA are investigating gas trades

made by traders in the London office of Citigroup.

The investigation follows allegations by Seth

Freedman, an employee for the energy industry

data provider ICIS Heren, who said that he was

concerned there had been an attempt on 28

September 2012 to manipulate the wholesale gas

market.


GOLDMAN SACHS

47. The US Commodity Trading Commission has

fined Goldman Sachs $1.5m (£900,000) for failing

to supervise a former trader. The trader, Matthew

Marshall, is alleged to have hidden an $8.3bn

position that cost $118m to unwind.


MORGAN STANLEY

48. Morgan Stanley has been fined $5 million by the

Massachusetts securities regulator after it ruled

bankers exerted an "improper influence" on

researchers covering Facebook during its IPO.


INTERNATIONAL GENERAL

49. US banks want to relax new Basel III rules on

liquidity requirements, arguing that they would

need to come up with $800 billion in assets under

the proposed standards.


50. The president of the Federal Reserve Bank of

Atlanta has said that cyber-attacks on banks

should not be viewed as isolated actions carried

out by maladjusted teenagers any longer, but

instead seen as Lehman-style threats with the

capability of severely damaging the financial

system. His warning comes as an investigation

began in the United States into a sustained attack

on several banks two months ago. Attacks have

become more sophisticated over recent years and

it has become apparent that state-backed cyber-

terrorism and organised crime syndicate attacks

are increasing. Five banks, including JPMorgan

Chase and Bank of America, were victims of a

denial of service attack that swamped their

websites and locked customers out of their

accounts temporarily in September.

The Times, 3 December 2012

51. The US is being urged to rethink new rules on

international money transfers before their

introduction in February 2013 as it is thought they

will be unworkable. Under the rules, banks

sending more than 100 international wire transfers

a year will be required to disclose extra

information on fees and costs.


52. The Securities and Exchange Commission has

fined JPMorgan Chase and Credit Suisse a

combined total of $416.9 million for negligently

selling sub-prime loans prior to the financial crisis.

Both banks agreed to settle the claim with

payments of $296.9 million by JP Morgan and

$120 million being paid by Credit Suisse. Neither

bank admits any wrongdoing.


LEGISLATION

53. The Controlled Foreign Companies (Excluded

Banking Business Profits) Regulations 2012

SI Number: 2012/3041

Commencement date: 1 January 2013

These regulations provide an exclusion from the

controlled foreign company (CFC) charge for

banking CFCs within banking groups, provided

certain conditions are met, with effect from the

introduction of the new CFC rules on 1 January

2013. As an alternative to the normal

capitalisation rules, the regulations offer a 'safe

harbour' from the charge, based on a comparison

between the capital held by the CFC and the

capital held by the banking group of which the

CFC is a member. A draft of the regulations was

published in October 2012.

For further information: Click here

http://www.legislation.gov.uk/uksi/2012/3041/contents/made


PRESS RELEASES

54. Treasury appoints new Director General

Financial Services

Charles Roxburgh has been appointed Director

General, Financial Services at HM Treasury. He

will have responsibility in the Treasury for all

issues relating to financial services, the financial

system and financial stability.

HM Treasury 21 December 2012

Further information can be found on the HM

Treasury website:

Click here

55. BBA response to PCBS report

The BBA has welcomed the Parliamentary

Commission on Banking Standards' First report,

which it said broadly endorsed the Government’s

approach to banking reform. The BBA said the

industry is strongly committed to taking the

necessary steps to ensure that taxpayers are never

again asked to bail out failing banks.

British Bankers Association, 21 December 2012

Further information can be found on the BBA

website:

Click here

56. Financial Services Bill receives Royal Assent

The Financial Services Bill, which will deliver

fundamental reform of financial regulation in the

UK, has received Royal Assent. The Bill, which

has now become an Act of Parliament, will be

known as the Financial Services Act. It sets out a

clear and coherent regulatory framework,

replacing the uncertainty and inadequacy of the

failed Tripartite system.

HM Treasury, 19 December 2012

Further information can be found on the HM

Treasury website:

Click here

57. BBA reports findings of LIBOR reform

consultation

The British Bankers' Association (BBA) has

published its feedback statement concerning the

consultation on Libor reform. The statement

summarises the key findings of the consultation,

as well as the BBA's timescale for the phased

discontinuation of certain Libor rates.

British Bankers Association, 18 December 2012

Further information can be found on the BBA

website:

Click here

58. Implementation of the Basel III Framework

The Basel Committee on Banking Supervision has

discussed the progress of its members in

implementing the capital adequacy reforms within

Basel III. Eleven of its member jurisdictions have

published the final set of Basel III regulations

effective from January 1, 2013, including

Australia, India, Japan, Mexico and Chile. Brazil,

the European Union and the United States have

issued draft regulations which will be published

early in 2013.

Bank for International Settlements, 18 December

2012

Further information can be found on the BIS

website:

Click here

59. Investibility of UK banks

The Association of British Insurers has issued a

report on the investibility of UK banks which

reflects UK investors' views in the continuing

debate on UK banks' capital structure, funding,

liquidity and balance sheet risk weighting.

Association of British Insurers, 11 December 2012

Further information can be found on the ABI

website:

Click here

60. The regulation and supervision of benchmarks

The FSA has issued a consultation seeking views

on proposed new rules and regulations for

financial benchmarks following the

recommendations of the Wheatley Review of the

London Interbank Offered Rate (LIBOR). The

FSA also seeks comments on ensuring the

continuity of LIBOR and broadening participation

in the rate. Comments by 13 February 2013.

Financial Services Authority, 5 December 2012

http://www.hm-treasury.gov.uk/press_128_12.htm

http://www.bba.org.uk/media/article/bba-response-to-pcbs-report


http://www.bba.org.uk/download/8545

http://www.bis.org/press/p121214a.htm

http://www.abi.org.uk/Publications/65318.pdf


Further information can be found on the FSA

website:

Click here

61. Implementing the Wheatley Review

The government has launched a public

consultation on the regulation of the Libor

benchmark. The consultation requests views from

industry and the public on legislation intended to

implement the key recommendations of the

Wheatley Review of Libor, which the government

has accepted in full. The regulation of Libor is

part of an attempt to restore public confidence in

the benchmark. The consultation will close on 24

December 2012.

HM Treasury, 29 November 2012

Further information can be found on the Treasury

website:

Click here

62. Opinion of the European Central Bank of 27

November 2012 on a proposal for a Council

regulation conferring specific tasks on the

European Central Bank

In its opinion on a proposal for a regulation

conferring specific tasks on the European Central

Bank (ECB) concerning policies relating to the

prudential supervision of credit institutions and a

proposal for a regulation amending Regulation

1093/2010 establishing a European Supervisory

Authority (European Banking Authority), the

ECB broadly welcomes the proposals and states

that it supports the establishment of the single

supervisory mechanism.

European Central Bank, 29 November 2012

Further information can be found on the ECB

website:

Click here

63. Governor of the Bank of England

The Queen has approved the appointment of Mark

Carney as Governor of the Bank of England from

1 July 2013. He will succeed Sir Mervyn King.

Mr Carney is currently Governor of the Bank of

Canada, having taken up his office on 1 February

2008. He also currently serves as Chairman of the

Financial Stability Board (FSB) and as a member

of the Board of Directors of the Bank for

International Settlements (BIS). He is also a

member of the Group of Thirty and of the

Foundation Board of the World Economic Forum.



website:

Click here

64. Re-appointment of Deputy Governor of Bank

of England for Monetary Stability

The Queen has approved the re-appointment of

Charles Richard Bean as Deputy Governor of the

Bank of England for Monetary Stability from 1

July 2013. Mr Bean has agreed to stay on for a

year to help oversee the extension of the Bank of

England’s responsibilities and the transition to the

new Governor. He has asked to stand down on 30

June 2014.



website:

Click here

65. Strengthening Oversight and Regulation of

Shadow Banking: An Integrated Overview of

Policy Recommendations

The Financial Stability Board has published a

consultation paper seeking views on policy

recommendations to strengthen oversight and

regulation of the shadow banking system through

measures including the mitigation of the spill-over

effect between the regular banking system and the

shadow banking system and the reduction of the

susceptibility of money market funds to "runs".

Comments by January 14, 2013.

Financial Stability Board, 19 November 2012

Further information can be found on the FSB

website:

Click here

66. The creation and sale of Northern Rock plc:

Eighteenth Report of Session 2012-13: Report,

together with formal minutes, oral and written

evidence

This Committee of Public Accounts report on the

creation and sale of Northern Rock Plc concludes

that: the rescue of Northern Rock is expected to

cost the taxpayer some £2 billion; the Treasury

was unable to respond promptly because it lacked

the right skills and understanding; it is unlikely

that the taxpayer will make a profit on the sale of

RBS and Lloyds which remain in public

http://www.fsa.gov.uk/library/policy/cp/2012/12-36.shtml

http://www.hm-treasury.gov.uk/d/implementing_wheatley_review281112.pdf

http://www.ecb.int/ecb/legal/pdf/en_con_2012_96_f.pdf



http://www.financialstabilityboard.org/publications/r_121118.pdf


ownership; and that there is a risk that the £66

billion invested in RBS and Lloyds may never be

recovered.

House of Commons Committee of Public

Accounts, 16 November 2012

Further information can be found on the

Parliament website:

Click here

CASE LAW

67. Doctrine of merger does not apply to

determinations made by Financial Services

Ombudsman

The issue in this case was whether a claimant can

accept a determination made by the Financial

Services Ombudsman ("FOS") which gives them

some compensation for their loss but then go on to

also claim damages in court to cover their "full

loss".

Here, Mr and Mrs Clark made a complaint to the

FOS claiming that Focus Asset Management and

Tax Solutions Ltd ("FAMTS Ltd") had wrongly

advised them about their investments and that they

had lost in excess of £500,000. FOS found in their

favour and determined that FAMTS Ltd should

pay them compensation in accordance with a

formula designed to put them back in the position

they would have been in had the advice not been

given. The maximum amount FOS could award

under the Ombudsman Scheme at the time was

£100,000 but FOS recommended that FAMTS Ltd

also pay the balance due under the formula over

and above this amount to the Clarks as well.

The Clarks were told that if they accepted the

Ombudsman's final decision they "would be bound

by the decision" which would be "final". Their

solicitor queried the meaning of "final" and

"binding" and whether their rights to pursue their

additional losses would in any way be prejudiced

by accepting the final decision. FOS responded by

stating that if FAMTS Ltd did not pay the

recommended balance and the Clarks decided to

sue for the balance in court, then the court would

make its own decision as to whether to award

anything.

The Clarks accepted the Ombudsman's decision

but indicated in writing that they reserved the right

to pursue the matter further through the courts.

FAMTS Ltd paid only £100,000 to the Clarks in

compensation so the Clarks subsequently issued

proceedings in the county court for their additional

losses. Their claim was struck out. The judge

regarded himself bound by the decision in

Andrews v SBJ Benefit Consultants Ltd [2010]

EWHC 2875 ("Andrews"), a case which had been

determined some 9 months after the Clarks had

decided to accept the Ombudsman's final decision.

Andrews decided that the doctrine of merger

applies in complaints made to FOS and that once a

complainant accepts an Ombudsman's decision

this extinguishes his right to make a further claim

through the courts. This doctrine of merger

operates so that a person who obtains a final

judgment from a tribunal of competent jurisdiction

cannot later obtain a second judgment from a court

for the same relief in respect of the same subject

matter. The cause of action initially advanced

merges with the judgment and there is therefore no

existing cause of action to pursue on the second

occasion. Applying that logic, by accepting the

Ombudsman's decision the Clarks' cause of action

had merged with that decision and they were

barred from further litigation.

The Clarks appealed.

On appeal, the judge decided that the doctrine of

merger does not apply to Ombudsman's

determinations and he declined to follow

Andrews. In his view the Ombudsman deals with

"complaints" not "causes of action". The doctrine

of merger turns on a "cause of action" being

extinguished - if the Ombudsman consider

"complaints" not "causes of action" then the

doctrine of merger is not relevant.

Also the judge was not persuaded that the

Ombudsman is a "tribunal" for the purposes of

applying the doctrine of merger. The issue as to

whether the doctrine of merger applies to the

Ombudsman should be determined by a detailed

analysis of the Ombudsman's functions.

For a number of reasons the functions of the

Ombudsman differ from those of a typical

tribunal. The correct approach was to consider the

Ombudsman scheme as a whole. The statutory

aims of the scheme were to provide a scheme for

the summary and informal resolution of disputes.

The Ombudsman does not have to apply the law in

reaching a fair and reasonable disposal of any

complaint and the procedure is designed to be

expeditious. Complainants can accept or reject the

Ombudsman's determination but if they do accept

a determination then it is binding on the parties

and final.

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/552/552.pdf


The fact that an award, even though accepted,

might not lead to the end of proceedings in any

one case would not undermine the statutory aims.

The scheme would still yield a final outcome in

cases where there was no prospect of recovering

more than £100,000 in compensation.

In cases involving amounts above £100,000, the

Ombudsman's non-binding recommendation to the

respondent under s. 229(5) of the Financial

Services and Markets Act 2000 Part XVI might

well encourage parties to compromise without

recourse to the courts.

If a complainant uses an award of £100,000 from

the Ombudsman to finance the legal costs of

bringing court proceedings for a greater amount

then this is not inconsistent with the statutory

aims. The term "final" simply means the end of

the Ombudsman's process.

In the judge's view the judge in Andrews was

wrong to regard the doctrine of merger as

applying to the determinations of the

Ombudsman. The Clarks' claim was therefore

reinstated.

(1) Barry Clark (2) Julie Clark v In Focus Asset

Management & Tax Solutions Ltd, Queen's Bench

Division, 19 December 2012.

68. Solicitor in breach of trust relieved of liability

under s. 61 of the Trustee Act as he had acted

honestly and reasonably

If a solicitor is found to be liable for breach of

trust he may be relieved of liability under s.61 of

the Trustee Act 1925 if he has acted honestly and

reasonably. In this case the issues were whether

the solicitor had acted in breach of trust, and, if so,

whether he should be relieved of liability and

whether he was liable otherwise for breach of

retainer.

Davisons Solicitors ("Davisons") were instructed

by Nationwide Building Society and its borrower,

Mr Patel, in connection with the purchase and

mortgage of a property. The property was

registered in the name of the vendor, Shamsun

Naher Begum, and was subject to a registered

charge in favour of G.E. Money Home Lending

Ltd ("G.E."). Davisons were instructed on the

basis of the Council of Mortgage Lenders

Handbook current at that time ("CML

Handbook") which amongst other things at

paragraph 10.3.4 required them to hold any loan

money released to them on trust for Nationwide

until completion.

Davisons had not previously dealt with the

solicitors purporting to act for the vendor,

Rothschild, so they checked their existence and

the existence of their branch office in Small Heath

as recommended in paragraph A3.2 of the CML

Handbook and the Law Society's Green Card.

They did this by checking websites maintained by

the Law Society and the Solicitors Regulation

Authority. Everything seemed to be in order.

Rothschild confirmed that they would have

sufficient funds on completion to discharge the

existing mortgage. Davisons asked for replies to

the standard protocol requisitions on Form TA13

but were sent completed requisitions on title on

the OYEZ form not TA13. These confirmed that

the charge in favour of G.E. would be discharged.

Rothschild also confirmed in the replies to the

requisitions that they would comply with the Law

Society's Code for completion by post (1998

Edition) which provides that when completing the

vendor's solicitor undertakes to redeem or obtain

discharges for existing charges.

Nationwide released the loan money to Davisons.

Contracts were signed and exchanged and the

charge in favour of Nationwide was executed by

Mr Patel. The purchase price was sent to

Rothschild by CHAPS. Mr Patel was registered as

proprietor but the charge in favour of G.E. was not

discharged and Nationwide's charge was not

registered.

It turned out that whilst there was a legitimate firm

called Rothschild it had never had premises in

Small Heath. An impostor had notified that

business address to the Law Society and the

Solicitors Regulation Authority.

Nationwide issued proceedings against Davisons

seeking damages for breach of retainer and

repayment of the money transferred by

Nationwide to Davisons or equitable

compensation for breach of trust. Davisons denied

liability and in the alternative sought relief under

s.61 of the Trustee Act 1925 on the ground that it

had acted honestly and reasonably and ought fairly

to be excused for any breach of trust for which it

might be liable.

At first instance Davisons were found to be in

breach of contract and in breach of trust. Davison's

were refused relief under s.61 on the basis that

they had not acted reasonably. They did not have

anything capable of being construed as a solicitor's

undertaking to discharge the G.E. charge and the

replies to the requisitions did not contain anything

capable of being construed as a solicitor's


undertaking to discharge the G.E. charge.

Davisons had not got an undertaking in the Law

Society's recommended form and had not got

replies to requisitions in the form they had

themselves requested. It was insufficient for them

to proceed without clearly worded undertakings

that the prior charge would be redeemed on

completion and that evidence of its discharge

would be provided after completion. They could

not assume that because the Code for completion

by post provided that undertakings had to be given

that they had them already.

Davisons appealed.

The Court of Appeal held that Davisons had acted

in breach of trust. It could not be implied from the

terms of paragraph A3.2 of the CML Handbook

that by carrying out the verification steps required

that a solicitor had the requisite authority to part

with the lender's funds. The trust imposed by

paragraph 10.3.4 of the CML Handbook could

only be discharged by completion of the purchase

or return of the money to Nationwide. No such

completion ever took place and the money was

not returned.

On the s.61 point, there was no dispute that the

solicitor at Davisons had acted honestly

throughout. The agreement to adopt the Law

Society Code for completion by post constituted

the giving of an undertaking as provided for by

paragraph 9 (ii) of the Code. The solicitor had

acted reasonably in believing that he had an

undertaking to redeem the G.E. charge from a

person whom he believed was a solicitor. Whilst

in reality he did not have an undertaking because

the person who had given it was not a solicitor, he

could not know that having made the required

checks. Whilst he had not obtained an undertaking

to submit evidence of the discharge of the

mortgage which he would have done had

Rothschild used Form TA 13, no such document

could have been provided in advance of

completion and by that time Davisons would have

parted with the purchase money anyway.

S.61 only requires a solicitor to have acted

reasonably, he is not required to have complied

with best practice in all respects. In the

circumstances Davisons had acted reasonably and

the court was prepared to exercise its discretion

under s.61 to grant relief from liability.

That left Nationwide's claim that Davisons had

been in breach of their retainer. In this regard

Nationwide sought to argue that paragraph 5.8 of

the CML Handbook imposed an absolute

obligation on Davisons to obtain a fully

enforceable first legal charge by way of legal

mortgage over the property and to ensure that all

existing charges were redeemed on or before

completion.

The Court of Appeal considered that obtaining a

"fully enforceable first charge by way of legal

mortgage" was not comparable to obtaining a pre-

packed commodity to be supplied to a customer's

order. It would involve issues of title and the

exercise of professional skill. Likewise, the

requirement that all existing charges "must be

redeemed", necessarily involved reliance on the

acts and omissions of the vendor's solicitors. Each

of those ingredients was inconsistent with an

absolute obligation.

The effect of an absolute undertaking would be to

impose on Davisons the equivalent of a guarantee

that all existing charges would be redeemed and

that Nationwide would obtain a fully enforceable

first charge by way of legal mortgage. If that was

the intention of the parties then almost all of the

rest of the CML Handbook would be redundant.

The obligation in paragraph 5.8 went no further

than an obligation to exercise reasonable skill and

care in seeking to procure the outcome it referred

to.

Davisons Solicitors (A Firm) v Nationwide

Building Society, Court of Appeal, 12 December

2012.

69. Lender not entitled to normal Part 36 costs

order due to failure to comply with pre-action

protocol

In this case the court had to decide what costs

order to make after a professional negligence

claim brought by a lender against a firm of

solicitors settled following acceptance of a Part 36

offer.

In July 2010 Webb Resolutions Limited

("Lender") sent a Letter of Claim, purportedly in

accordance with the Professional Negligence Pre-

Action Protocol ("Protocol"), to Waller Needham

& Green ("Solicitors"). The Letter of Claim

alleged that the Solicitors had been negligent in

their handling of a mortgage transaction and that

had they not been negligent the Lender would not

have lent. The claim was valued at £165,000.

On the same day the Lender made a Part 36 offer

offering to settle for £140,000 plus costs.


On 12 January 2011 the Solicitors asked for

disclosure of 12 classes of documents which they

said they needed in order to prepare their Letter of

Response.

The Lender provided some of the documents but

argued that the Solicitors did not need the other

documents in order to assess their liability.

The Solicitors wrote again on 17 and 22 February

2011 explaining in some detail why they needed

the underwriting file and repossession and sale

files which, they argued, were essential for them

to be able to assess the extent of their possible

liability.

The relevant documents were not disclosed. On 8

April 2011 the Solicitors wrote stating that they

could not make a Protocol Letter of Response

because of the failure to provide the documents.

On 12 April 2011 the Lender replied arguing that

it had complied with the Protocol and that the

Solicitors were not entitled to any further

disclosure until they formally admitted liability.

On 17 May 2011 the Lender made a Part 36 offer

offering to settle for £30,000. The offer was

calculated on the basis that the Lender would

recover on a lesser loan basis rather than a no

transaction basis.

On 17 June 2011 the Lender gave 14 days' notice

that proceedings would be commenced.

On 5 July 2011 the Solicitors reminded the Lender

that no Protocol Letter of Response had in fact

been served as they had been unable to respond to

the issue of causation pending disclosure of the

documents which had been requested on 17

February 2011.

The Lender served proceedings on 12 September

2011. In March 2012 the Lender provided

standard disclosure. On 23 May 2012 the

Solicitors accepted the Lender's Part 36 offer of

17 May 2011.

The Lender argued that the normal order for costs

when a claimant's Part 36 claim is accepted out of

time is that the claimant should have an order for

costs on the standard basis and that it was entitled

to an order on this basis. The Solicitors on the

other hand argued that the Lender should only be

entitled to its costs up to 12 January 2011 (when

the Solicitors had requested disclosure) and that

the Solicitors should be entitled to their costs

thereafter. Alternatively they argued that the

Lender should have its costs up to 21 days after

the Part 36 offer made on 17 May 2011 and the

Solicitors should have their costs thereafter or, that

there should be no order for costs thereafter.

The court regarded it as settled law that CPR Part

36 establishes what might be called the "normal

order" for costs but that the court has a discretion

to depart from that order. The court should make

the "normal order" unless it would be unjust to do

so. In deciding whether it would be unjust the

court must take into account all the circumstances

of the case including those expressly set out in

CPR Rule 36.14(4). In deciding whether it would

be unjust to depart from the normal order it was

relevant to consider whether there had been

substantial compliance with the Protocol or

whether sanctions might be appropriate.

The aim of the Protocol is to establish a

framework in which there is an early exchange of

information so that the claim can be fully

investigated and, if possible, resolved without the

need for litigation. Parties are expected to act

reasonably and sanctions will only be imposed if

there is substantial non-compliance.

Although the Solicitors early requests for

disclosure might have been ambitious, it was

apparent from the correspondence that they were

placing emphasis on two important files and were

explaining why disclosure of those files was

necessary for them to be able to properly assess

the claim.

A claimant acting reasonably would, in the

circumstances of this case, have supplied copies of

those files at an early stage and not merely extracts

from them. Instead, the Lender either refused to

supply the documents requested without giving

any good reason or failed to respond to the letters

of request at all. Such conduct was not in

accordance with the Protocol. It was neither

helpful nor conducive to an early disposal of the

case. When the Lender refused to give further

disclosure unless liability was admitted it was

clearly acting well outside the letter and spirit of

the Protocol. Its conduct was not designed to

achieve early resolution of the dispute with a

proportionate expenditure on costs.

The Lender's non-compliance with the Protocol

made it unjust for the "normal order" under CPR

36.(10)(4).

The judge concluded that the Lender was not

proceeding properly in accordance with the

Protocol by not properly responding to the letters

of 17 and 22 February 2011 and by rejecting any

obligation to provide further disclosure until

liability was admitted. It would therefore be unjust


to require the Solicitors to pay any costs after 17

June 2011.

It was possible that a substantial amount of costs

were incurred after 17 June 2011. It was

significantly more likely than not that those costs

would not have been incurred had the Lender

acted reasonably and responded properly to the

requests for disclosure. The fair order to make was

that the Lender should have its costs until 17 June

2011 but should pay the Solicitors costs thereafter.

Webb Resolutions Limited v Waller Needham &

Green (a firm), Chancery Division, 11 December

2012

70. Payment guarantee was an on demand bond

not a traditional guarantee

The central issue in this case was whether a

payment guarantee was actually a traditional

guarantee or an on demand bond.

Wuhan Guoyu Logistics Group Co Ltd and

Yangzhou Guoyu Shipbuilding Co Ltd ("Seller")

jointly operated a shipyard in China. They entered

into a shipbuilding contract ("Contract") with a

buyer ("Buyer"). Emporiki Bank of Greece S.A.

("Bank") provided finance to the Buyer.

The Contract price was payable in five

instalments. The first instalment due was paid

after receipt by the Buyer of a Refund Guarantee

issued by the Seller's bank, Bank of China,

securing the first instalment for the Buyer. The

second instalment was payable within "5 New

York banking days of receipt by the Buyer of a

Refund Guarantee" in a specified form issued by

the Seller's bank together with "a certificate of the

cutting of the first steel plate of the Vessel in the

Seller's workshop."

The Buyer assigned to the Bank all the moneys

and claims for moneys due to the Buyer under the

Contract at any time and also the Refund

Guarantee and any other guarantee given to the

Buyer as security for the money due to it under

the Contract. Notice of Assignment was given to

the Seller which was duly acknowledged.

The Bank then issued what was described as a

guarantee ("Payment Guarantee") in respect of the

second instalment. That instalment was not paid.

There was a dispute as to whether the cutting of

the first steel plate had taken place. The Seller

made a demand under the Payment Guarantee

stating that the steel had been cut. The Buyer

disputed that the second instalment was due,

claiming that there was no proof that the steel had

been cut, that no representative of the Buyer had

given its approval (as provided for in the Payment

Guarantee) and that the Seller had not provided a

Refund Guarantee in respect of the second

instalment in a form finally approved by the banks

of both Buyer and Seller. These issues and others

were to be determined at arbitration.

The Contract came to an end with both parties

arguing that the other was in repudiatory breach.

The Seller issued proceedings against the Bank

and claimed summary judgment for the principal

and interest it said was due under the Payment

Guarantee. It argued that the Payment Guarantee

was in the nature of a demand or performance

bond and that payment was due upon written

demand whether or not the payment was actually

due.

The Bank disputed this. It argued that the Payment

Guarantee was a traditional guarantee. If the

second instalment was not due, there could be no

liability under the guarantee. As there was a

dispute as to whether the Buyer was liable to pay

the second instalment which could not be

determined summarily the Seller must await the

determination of that question in arbitration. If

successful then it could then recover under the

Payment Guarantee.

At first instance the court held that the payment

guarantee was a traditional guarantee and that the

Bank could argue that it was not liable under the

guarantee as no payment had become due under

the contract containing the obligation guaranteed.

On appeal, the Court of Appeal noted that whilst

every bond has to be construed in accordance with

its terms there is a presumption that where the

instrument:

■ relates to an underlying transaction between

the parties in different jurisdictions;

■ is issued by a bank;

■ contains an undertaking to pay "on

demand" (with or without the words "first"

and/or "written"); and

■ does not contain clauses excluding or limiting

the defences available to a guarantor;

it will almost always be construed as a demand

guarantee and not a traditional guarantee.

This presumption, which is set out in Paget's Law

of Banking (11th Edition), was approved by the

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legal advice in any specific situation. DLA Piper UK LLP and DLA Piper SCOTLAND LLP will accept no responsibility for any actions taken or not taken on the basis of

this publication. If you would like further advice, please contact Hugh Evans (Leeds) T: 0113 369 2200 E: [email protected] or Ioannis Alexopoulos

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Court of Appeal in Gold Coast Ltd v Caja de

Ahorros [2002] 1 Lloyd's Rep. In that case the

document in question was held to be an on

demand guarantee even though the fourth element

of the presumption was absent (as in this case) but

the others were present.

The first instance judge had thought that there

were pointers in both directions but that there

were more pointers in favour of the instrument

being a traditional guarantee. These could have

been serious points if the court had been

approaching the document on a wholly fresh basis

without regard to previous authority. However,

there were also factors pointing to the document

being an on demand guarantee and given the

presumption set out in Paget (now contained in

almost identical words in the 13th edition) and

supported by previous authority, the first instance

judge should have paid more regard to the

presumption than he did. He should have been

guided by the general tenor of previous authority

enunciated by past judges of great distinction.

The document sued on was an on demand

guarantee.

(1) Wuhan Guoyu Logistics Group Co Ltd (2)

Yangzhou Guoyu Shipbuilding Co Ltd v Emporiki

Bank of Greece SA, Court of Appeal, 7 December

2012

This bulletin is intended as a general overview and

discussion of the subjects dealt with. It is not

intended, and should not be used, as a substitute for

taking legal advice in any specific situation. DLA

Piper UK LLP will accept no responsibility for any

actions taken or not taken on the basis of this

publication. If you would like further advice, please

contact:

Leeds: Hugh Evans

T 0113 369 2200

E [email protected]

London: Jean-Pierre Douglas-Henry

T 020 7153 7373

E [email protected]

Manchester: Stewart Plant

T 0161 235 4544

E [email protected]

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