Disclosure & Costs

Banks are facing an increasing amount of litigation in the current economic climate and their conduct is being increasingly scrutinised.  Customers are questioning their conduct more readily and it has become even more crucial that the banking and finance sector appear to be behaving fairly.

The recent case of Timothy Duncan Earles -v- Barclays Bank Plc, 8 October 2009 should act as a stark warning to banks and financial institutions that the Courts will not take kindly to a defendant bank's failure to provide relevant information, even if this was not a deliberate step.

The case in question related to an action between a customer and his bank.  The claimant had banked with Barclays for in excess of 30 years and had, at one point, even been a bank manager with Barclays.  He took a bank loan for £2.45 million to fund his property development business.

The Claimant also had a personal account with Barclays.  Regular withdrawals were made from the business account and the overdraft far exceeded the £125,000 personal guarantee, which the claimant had in place.  Barclays thus began transferring sums from the Claimant's personal account to reduce the overdraft on the business account.  The Claimant subsequently alleged that five unauthorised transactions took place causing a loss of £2.4 million plus interest.

Barclays denied that the transfers were unauthorised; the Bank said that the Claimant gave oral telephone instructions to staff at the Bank, which they were obliged to follow in accordance with the terms and conditions governing the account.

Essentially the dispute was very straightforward.  The primary issue was described by the Judge as "beguilingly simple" - were telephone calls made authorising the transfers or not?  This issue would normally be resolved very efficiently by checking the contemporaneous bank records.  Electronically Stored Information (ESI) is nowadays used to record over 90% of all communication - phone records, text messages, emails, bank records etc, all of which are invaluable to a dispute such as this.

ESI are "documents" under the CPR and therefore they form part of the documents which should be disclosed as part of a dispute.  These ESI are vast in number and the court expected a bank would have a system whereby they can efficiently gather together the relevant information if a dispute arises:

"a bank in this day and age of electronic records and communications with an in-house litigation department [should] have an efficient and effective information management system in place to provide identification, preservation, collection, processing, review analysis and production of its ESI in the disclosure process in litigation..."

In this particular case the Claimant wrote a letter before action and complaint in October 2007.  Barclays' legal team responded the very next day.  This should have alerted the Bank to the possibility that a claim may be issued at some point in the near future.  Despite this no one at the Bank took the obvious step of preserving the necessary telephone records and e-mail.

Although there is no duty to preserve documents prior to the commencement of proceedings it should have been obvious, following correspondence from the Claimant that proceedings may follow.  Despite this, Barclay's legal team did not disclose any telephone records and were severely criticised as a result.

Notwithstanding this omission, the Judge decided on the live evidence at trial that the customer had authorised the transfers.  Although he found in favour of the Bank, he severely criticised its failure to comply with the CPR and the Bank recovered only 25% of its costs.

Gibson & Co

November 2009

Lehmans Fallout: The Pitfalls of suing European nationals in the English Courts

The current economic climate has led to an increase in litigation between banks and private individuals.  A number of institutions are now having to sue clients who have become unable to meet their repayment obligations and banks are also facing a rising tide of complaints and/or litigation from clients, a number of those with Lehman backed products.  Allegations by the investors that such products had been mis-sold to them are frequently made in the hopes of recovering the value of the now worthless products from the banks which sold them in the first place.

So great is the tide of complaints to the Financial Ombudsman Service by such investors that the FSA is now reviewing generally the sales of Lehman backed structured products to retail investors under its Wider Implications powers.  The complaints made by UK investors are therefore now effectively on hold pending this review.  There are also however a number of investors domiciled elsewhere in the EC who either owe banks based in the UK money or who are making allegations of mis-selling and may try to reclaim the value of such investments from the selling bank.

The Commercial Court in London is well used to dealing with such disputes and is familiar with the nature of the often complicated products which underlie them. The Commercial Court therefore is usually the natural choice of forum for banks with a UK presence.  Indeed the standard form investment documentation usually provides that the parties agreee to the exclusive jurisdiction of the English courts.

The European Judgments Regulation (EC Regulation 44/2001) provides that claimants may sue in England a defendant domiciled in another member state. This may be possible, for example, if the claim is for breach of contract if England is the "place of performance" of the "obligation in question" (Article 5(1)) or for matters "relating to tort", suits may be brought in England if that is "where the harmful event occured" (Article 5(3)).  Surely therefore banks can chose to sue in London those EC nationals which owe them money notwithstanding that those individuals live elsewhere in the EC?   Or if mis-selling allegations are being made, surely a bank is free to chose to issue proceedings in London for a declaration that there was no breach of any duty to give satisfactory advice about the risks of investing in such products?

In fact this freedom of choice of jurisdiction (whether the subject of express contractual agreement or not) is subject to a number of exceptions.  One frequently relied upon by defendants resident in Convention countries is the consumer contracts exemption. This provides that if the counterparty has entered into the contract "outside his trade or profession...with a person who pursues commercial or professional activities in the Member State of the consumer's domicile" (Article 15(1)) then proceedings must be brought in the courts of the country of the consumer's domicile (Articles 16 and 17).

Thus private individuals domiciled elsewhere in the EC who enter into investment contracts other than in the course of their trading will be able to insist that their local national court has jurisdiction rather than an English Court.  This will be the case even if both parties have agreed in the underlying contractual documentation that the English courts should have exclusive jurisdiction. This question has been considered and upheld by the English courts in the past.  Longmore J [Standard Bank London Limited -v- Apostolakis [2001] 1 Lloyd's Rep Bank 204] considered a situation where a retired Greek domiciled couple had made a number of sophisticated foreign exchange investments with an English bank under contracts with English jurisdiction clauses.  The Judge held that the couple had made the investments "for the purpose of satisfying [their] needs" and so the contracts were "consumer contracts" under which only the Greek Court had jurisdiction to hear the bank's claim against the couple.

This means that obtaining judgments against EC nationals is more difficult than might otherwise be assumed.  Local European courts may be less familiar with sophisticated structured financial products than the Commercial Court and are perhaps more likely to sympathise with an insistence by its citizens, albeit that they may be experienced investors, that they did not appreciate the risks of the investment made.

Gibson & Co

June 2009