Arrangers of bond liable to investors in tort, 14 December 2017

Update: Arrangers of bond liable to investors in tort
Raymond Cox QC

“The Arranger of a eurobond-like issue, owed a duty in tort to investors in the secondary market to ensure that the Arranger did what it had said it had done in the published information memorandum, according to Golden Belt 1 Sukuk v BNP Paribas [2017] EWHC 3182, Males J, on 7.12.17.

On the face of it, this looks striking because within the whole complex financial structure the Arranger had no contract with the investors (or exclusions), and because of the prospect of unlimited liability.

On examination, however, the tort duty recognised was narrow, though still no doubt worrying enough to make existing Arrangers look to their disclaimers and insurance cover.

The case is the latest in a long chain of cases arising from disputes between Saad group companies and Al-Sanea.  The issue in 2007 was a sukuk Islamic finance transaction which Males J described as equivalent in economic effect to a eurobond issue.

The proceeds from sales were to benefit Saad Trading (Saad). Saad engaged BNP Paribas (BNPP) as the Arranger. Although the edges of the duties of an Arranger are not precise, it was common ground that the contractual duties included ensuing the transaction documents were properly executed.

One of the key documents was a promissory note to be signed by Saad in favour of the issuer of the sukuk to secure payment by Saad to the issuer as trustee for the investors.

Unfortunately, the promissory note was not properly executed under the Saudi law applicable to it because it was not signed in “wet ink”, but by a laser printer. The effect was to render it much less certain that the investors would be able to recover anything from Saad in Saudi Arabia.

The investors were distressed debt specialists which had purchased their interests in the sukuk in 2009, after it was apparent that Saad was in major financial difficulties, although without knowing of the problem with the promissory note.

The key issue was whether or not BNPP owed a duty of care in tort to the investors. There was no previous case where it had been found that such a duty was owed, and in IFE v Goldman Sachs [2006] EWHC 2887 (Comm) it was held the Arranger did not owe a duty to disclose to potential investors if the Arranger became aware of mistakes in the information memorandum or in the annexed accountant’s reports.

Males J found that BNP owed a duty of care to the investors. On any view, this was an extension of liability. The key point was that although novel the extension was relatively modest.  It was merely to do what BNP had agreed with Saad to do, i.e. to ensure that the promissory note was properly signed.  This was different from the duty to disclose alleged in IFE, and did not cut across the contractual duty BNP owed Saad to do the same thing, though it supplemented it. Further:

·         for all practical purposes the promissory note was for the benefit of the investors who were entirely reliant on BNP ensuring the promissory note was duly signed, and had no way of checking that, as BNP knew

·         the very purpose of BNP’s contractual duty to Saad was to create a promissory note which would only be required by investors in the event that Saad was in financial difficulties

·         although the class of potential investors was unlimited, liability was limited to investors who invested during the 5 year life of the sukuk, and to the amounts invested by them.

This case is no cause for panic on the part of Arrangers, and banks more generally. There will not be many cases where points such as those above can be made in support of a duty in tort owed to investors.

However, Golden Belt is a relatively rare sighting of a case where the court was ready to step in, even in a heavily-documented commercial context, provided the intervention was incremental, focussed and moderate. Another recent sighting in a different area was the decision that a stockbroking firm owed a duty to its customer not to comply with instructions given on its behalf within mandate but amid obvious signs the payments were for wrongful purposes in Singularis Holdings and Daiwa Capital Markets [2017] EWHC 257 Ch.

For the future, it may be expected that Arrangers will look closely at the language of disclaimers in the information memorandum to encompass investor liability.

See Raymond’s recent Banking and Finance work.