Bi-Annual Banking Litigation Update April-October 2018

Welcome to our latest Banking Litigation Update in which we highlight a number of the most important cases and developments affecting UK financial institutions over the past 6 months.

One of the most significant developments during this period is the Court of Appeal's privilege decision in SFO v ENRC. Financial institutions and their legal advisers alike will breathe a sigh of relief at the return to the orthodox position in respect of litigation privilege. However - in finding itself bound by Three Rivers No 5 - the Court of Appeal has confirmed that the problematic narrow definition of who is the "client" for the purpose of legal advice privilege, is here to stay until the Supreme Court has the opportunity to consider it (which will not happen in this case since the SFO has withdrawn its application for permission to appeal).

Another privilege development, which has received less attention in the legal press but potentially represents a very real erosion of privilege, is the High Court's decision in FRC v Sports Direct. The decision suggests that, where privileged documents are provided to a regulator for the purposes of an investigation into the conduct of a regulated person – and the privilege belongs to the client of the regulated person – there is no infringement of the client's privilege. This may have problematic implications for financial institutions (notwithstanding s.413 Financial Services and Markets Act 2000 ("FSMA")) in circumstances where both the regulated person and its client are regulated by the FCA. Permission to appeal to the Court of Appeal has been granted, and we will be monitoring developments.

A key development in this period relates to so-called 'basis clauses', said to define the basis of the parties' relationship and prevent liability from arising by way of a contractual estoppel, rather than excluding liability, and thereby escaping the scrutiny of the Unfair Contract Terms Act 1977 ("UCTA"). The Court of Appeal's decision in First Tower (a landlord and tenant case) is the most significant development in this context. The Court of Appeal held that a "non-reliance" clause in a lease excluded liability for misrepresentation and was therefore within the scope of s.3 of the Misrepresentation Act 1967 ("MA") and subject to the UCTA reasonableness test. It suggested that only clauses delimiting the parties' primary obligations would be effective to create a contractual estoppel. The Court of Appeal will have another opportunity to consider this issue (in a financial services litigation case) in the Marz Limited v Bank of Scotland plc appeal at the beginning of 2019.

In financial product mis-selling litigation, the courts continue to take a robust approach to creative attempts by claimants to impose wider duties of care and contractual obligations on banks in normal bank-customer relationships. In particular, the Court of Appeal has rejected claims that a bank owed contractual obligations to its customers in the conduct of its past business review into the sale of interest rate hedging products ("IRHPs"). The High Court has also rejected the first IRHP mis-selling claim brought by private persons under s.138D FSMA.

There have been a number of cases on the contractual interpretation of Master Agreements used in financial services (notably, ISDA and GMRA). The ISDA jurisdiction clause has received attention from both the High Court and Court of Appeal. Helpfully contributing to market certainty in this area, the courts have given primacy to ISDA English jurisdiction clauses in circumstances where there have been theoretically competing jurisdiction clauses in separate but related agreements between the parties. It is hoped that the Court of Appeal will maintain this consistency when it has the opportunity to consider this issue again in the forthcoming BNP v TRM appeal.

Looking to the future, a key regulatory development is the possible introduction of a new duty of care for financial services firms, following publication in July 2018 of the FCA paper on its "Approach to Consumers" and accompanying discussion paper (DP18/5). The discussion paper seeks views on whether there is a gap in the existing legal and regulatory framework, or the way the FCA regulates, that could be addressed by introducing a new duty and deliberately leaves open for discussion the nature of any new duty. This has the potential to increase claims against financial institutions and is therefore a development we are monitoring closely.

We hope you find our update useful and, as ever, please feel free to contact one of us or your usual Herbert Smith Freehills contact if there are any topics which you would like to discuss further.

Read our full Banking Litigation Update.