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With such legal uncertainty in the financial markets, how can the courts assist? Lord Justice Briggs explains the ‘certainty principles’ slowly gaining ground and efforts to mitigate the complex snakes and ladders
Modern, sophisticated economies are becoming increasingly vulnerable to legal uncertainty, which can affect the financial markets in two main ways.
First, any doubt as to the legal effect of widely used forms of financial instruments (such as the ISDA Master Agreement) has considerable knock-on consequences for the markets, by virtue of the sheer amount of ongoing business being contracted under those provisions. Second, uncertainty as to the legal effects of major past events – such as the collapse of Lehman Brothers or the insolvency of the Icelandic banks – can lead to long drawn-out battles about who owned what when the music stopped. This in turn affects the vitality of the distressed debt market.
In theory, the legal systems of countries which are based upon the common law should be well equipped for the challenge of assisting with legal certainty in the financial markets. The respect which the common law affords to the doctrine of binding precedent provides a basic level of predictability. Usually, the pronouncement of a sufficiently senior court is the end of the matter. It is for this reason that English law continues to be the law of choice for many international financial transactions and instruments.
Yet it is important to ask ourselves whether our courts are currently using this excellent platform as well as they might be. Do our senior courts treat legal certainty as a desirable policy objective? And do our court procedures facilitate the resolution of uncertainty in a swift and affordable manner?
Traditionally, English law has viewed certainty as a desideratum, rather than as a core principle. More recently, the idea of a ‘certainty principle’ has been slowly gaining ground. Yet commercial legal certainty cannot be treated as a unitary concept, but rather as one comprising a number of related but distinct manifestations which often all pull together, but occasionally pull vigorously in opposite directions. For this reason, it may be more accurate to speak of four distinct ‘certainty principles’.
First, we have certainty in its most obvious sense, namely that senior appellate courts may avoid departing from a series of non-binding but well-known decisions which appear to lay down a consistent principle. The Golden Strait case is an excellent example (Golden Strait Corp v Nippon Yusen Kubishika Kaisha [2007] UKHL 12). Here – albeit by a bare majority – the House of Lords held that the damages payable for the repudiation of a commercial contract should not be slavishly assessed as at the breach date, where subsequent unforeseen events showed that the victim of the breach would have suffered a large part of the loss anyway. In so doing, the court declined to depart from an existing line of authority establishing a general compensatory principle to that effect.
Secondly, certainty can mean that the legal rules for ascertaining the consequences of a breach of contract minimise uncertainty. Once again turning to the Golden Strait, this facet of the certainty principle is reflected in the minority judgments of Lords Bingham and Walker. Emphasising the need for predictability in commercial transactions, Lord Bingham viewed the decision of the majority as undermining ‘the quality of certainty which is a traditional strength and major selling point of English commercial law’ (p 368).
Thirdly, certainty might require the law to favour an approach to the interpretation of commercial transactions which maximises the likelihood that parties will know what they are letting themselves in for when they contract. This acts as a restraint on the courts’ recognition of implied terms, and militates against excessive reference to the matrix of fact when construing express terms.
In the Lehman Brothers Side Letter litigation (Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 1072 (Ch) and [2013] EWCA Civ 188), the Court of Appeal refused to imply a term into the 2002 ISDA Master Agreement to the effect that, in the event of early termination, it must be assumed that the agreement would have run its full course, however commercially unlikely that seemed. This was despite a long line of first instance and Court of Appeal authority establishing that this so-called ‘value clean principle’ had applied under the 1992 ISDA standard terms. In so doing, the Court of Appeal may be said to have preferred this limb of the certainty principle over the first.
Fourthly, certainty may militate in favour of restricting the effect of policy-based principles in avoiding the agreed outcomes of bargains between commercial parties. This aspect of certainty has sparked off some of the most interesting litigation of all. One notable example can be drawn from the insolvency context, where the Supreme Court has held that where entered into in good faith, apparently deprivatory provisions in commercial transactions would not be invalidated on public policy grounds under the anti-deprivation principle (Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38).
A second example is provided by the law on penalties, recently considered by the Supreme Court in the conjoined cases of Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67. In both cases, the penalty clauses in issue were upheld – perhaps to the bewilderment of law students everywhere, who have had the general prohibition on penalties drummed into them since day one of contract law class.
Post-Cavendish, the more nuanced principle is that a clause will be void as a penalty only if it cannot be justified by a legitimate commercial interest of the innocent party which extends beyond the prospect of pecuniary compensation flowing from the breach in question (provided also that the burden on the wrongdoer is not disproportionate to the interest sought to be protected). The result is a protean test in which the public policy limits on party autonomy are defined by reference to the legitimate commercial interests of the party relying on the provision in question.
Of course these four limbs of certainty may, in due course, introduce uncertainties of their own. For the time being, however, it appears as though the English courts are bringing the certainty principles increasingly to the fore – with both the intention, and probably the effect, of reinforcing commercial autonomy as the basis for the adjudication of issues affecting market structures.
English Chancery and commercial courts have long prided themselves on their ability to provide a speedy resolution to legal issues causing commercial uncertainty. For example, if there is no real dispute of fact necessitating a trial, the court can decide questions of law or construction summarily. Yet the courts’ ability to resolve disputes quickly has always been best conceptualised as a game of procedural snakes and ladders. Whilst some procedural innovations may save the court and parties much time, these savings are too commonly squandered by procedural inefficiencies arising at other stages of our dispute resolution process.
Procedural ladders were used to great effect in the Lehman Brothers litigation which followed the 2008 financial crash. A whole series of cases about the consequences of the collapse of Lehman Brothers was conducted using the procedural vehicle of an application for directions, made by an insolvency office holder to the Chancery Division of the High Court. Reliance on lists of issues, position statements, and statements of assumed fact made it possible for the High Court to decide the many issues in these cases with reasonable speed and coherence.
Yet, inevitably, there are also procedural snakes. The first and most obvious is that certainty is by no means achieved before a trial judge at first instance – nor even in the Court of Appeal. Our common law regards every legal issue as having a right and wrong answer. Aside from questions of fact, we have no concept of a permissible range of answers, within which the trial judge has a margin of appreciation provided he or she acts rationally.
The trial judge’s decision, therefore, is often simply a first stab at the problem. The decisive answer will often not emerge until the Supreme Court’s determination several years later. The result is, self-evidently, delay and continued market uncertainty. Moreover, the procedure for ‘leap-frogging’ a case from the High Court to the Supreme Court is hardly ever employed in relation to financial cases. In the writer’s view, it is time that issues concerning the financial markets are properly recognised as affecting our national and economic health, and as deserving of expedition on that basis.
The second snake relates to the sheer complexity of modern financial structures, which is a generator of uncertainty in itself. Few of our commercial and Chancery judges can claim any real familiarity with such structures prior to being asked to adjudicate on their most complex and technical components.
Finally, the most serious and intractable problem has arisen from the traditionally unassailable principle that the court will not pronounce on merely hypothetical issues. Put shortly, the court will usually practice only remedial, not preventative, medicine. The result is that issues of uncertainty are not decided in principle up front, but only after they have led to dispute, damage and disaster.
There are a number of recent procedural developments which indicate a relatively new focus on the need for a joined-up – and certainty-maximising – approach to the determination of financial market issues.
The first is the new Financial List, which is a group of eight presiding High Court judges, drawn equally from the Chancery and commercial judiciary. The Financial List will hear cases of only the very highest value and importance affecting the financial markets, the object being to concentrate the requisite experience and skill to maximise the quality of judicial decision making. Accordingly, the Financial List has the potential to mitigate the effects of both the first and second of the procedural snakes described above.
Secondly, there is now an established process of regular judicial seminars on financial market matters, organised by the Financial Markets Law Committee based at the Bank of England. This programme means that judges will no longer – or at least, not always – come cold to a complex financial market issue. Equally importantly, it may help those tasked with the resolution of financial disputes to spot a market problem coming down the line before anyone has issued proceedings about it.
Thirdly, the Rolls Building Courts are promoting a new Flexible Trial process, to be used where the parties agree, or the court decides that it would be appropriate to do so. Under this process the established procedures for pleadings, disclosure and witness statements are replaced by a bespoke set of directions to suit the particular case. The result is a focus on the key issues in dispute, and the steps needed to prepare for their determination. Expense, waste and delay are thereby excised, and a speedier trial eventuates.
Finally, the Financial List is now able to accommodate market test cases, providing a forum for the determination of looming financial market issues before the emergence of a particularised dispute. A market custodian (such as ISDA, or a market regulator) may bring any such dispute before the court, which would determine it promptly on the basis of assumed facts. Representatives of sections of the market with an interest in a particular outcome could be joined as parties. Whilst this opportunity has yet to be taken up, it does provide a genuine facility for avoiding the third snake if only the markets can gear themselves up to use it.
These developments are a result, in part, of the cohabitation of Chancery and commercial judges in the new Rolls Building. They have also been spurred on by an apprehension of the increasing competition from commercial courts based outside the UK, for example in Singapore and Dubai. Taken together, they have the potential considerably to advance the cause of certainty in the English courts.
Finally, it is important to consider the above specific developments in the context of the Court Service’s Reform Programme, which has been funded by a promised government investment of £730m. One of the Programme’s main aims is to achieve complete digitisation of all our court processes. All cases will be issued online and brought to trial on a paperless basis. Freedom from the tyranny of paper offers big advantages in the flexibility, speed, efficiency and cost effectiveness of our courts – particularly in heavily documented financial cases.
Curing uncertainties
We are heading in the right direction. Certainty is increasingly treated as a principle in its own right, and the courts appear willing to accord it appropriate weight. Whilst some aspects of our court procedures remain slow (and disproportionately expensive), others are newly focused on allowing the courts to cure uncertainties within an acceptable time-frame. Structures are in place for striking a balance between dealing with historical cases and providing reliable guidance for the future, and our judges are well on their way to developing the requisite expertise in complex financial instruments.
Contributor Lord Justice Briggs. The author is grateful to the Banking & Financial Services Law Association and Journal of International Banking and Financial Law for permission to publish this article: based on an August 2016 lecture to BFSLA and first published in (2017) 2 JIBFL 63
THE FINANCIAL LIST: SWIFT AND SPECIALIST
The Financial List became operational on 1 October 2015. Its introduction was announced by the Lord Chief Justice in his speech at the Mansion House in the City of London on 8 July 2015.
A key feature of the list is the particular financial expertise and experience of nominated judges from the Commercial Court and the Chancery Division, who are responsible for cases allocated to them from inception through to enforcement if necessary.
Disputes that are eligible for inclusion are those that principally relate to financial disputes of over £50m or equivalent, or which require particular market expertise, or raise issues of general market importance.
There have been eight judgments so far:
Source: judiciary.gov.uk.
Sir Michael Briggs is a Lord Justice of Appeal and Deputy Head of Civil Justice. He was the judge in charge of the Chancery Modernisation Review in 2013. He has been the Personal Support Unit liaison judge since 2013.
First, any doubt as to the legal effect of widely used forms of financial instruments (such as the ISDA Master Agreement) has considerable knock-on consequences for the markets, by virtue of the sheer amount of ongoing business being contracted under those provisions. Second, uncertainty as to the legal effects of major past events – such as the collapse of Lehman Brothers or the insolvency of the Icelandic banks – can lead to long drawn-out battles about who owned what when the music stopped. This in turn affects the vitality of the distressed debt market.
In theory, the legal systems of countries which are based upon the common law should be well equipped for the challenge of assisting with legal certainty in the financial markets. The respect which the common law affords to the doctrine of binding precedent provides a basic level of predictability. Usually, the pronouncement of a sufficiently senior court is the end of the matter. It is for this reason that English law continues to be the law of choice for many international financial transactions and instruments.
Yet it is important to ask ourselves whether our courts are currently using this excellent platform as well as they might be. Do our senior courts treat legal certainty as a desirable policy objective? And do our court procedures facilitate the resolution of uncertainty in a swift and affordable manner?
Traditionally, English law has viewed certainty as a desideratum, rather than as a core principle. More recently, the idea of a ‘certainty principle’ has been slowly gaining ground. Yet commercial legal certainty cannot be treated as a unitary concept, but rather as one comprising a number of related but distinct manifestations which often all pull together, but occasionally pull vigorously in opposite directions. For this reason, it may be more accurate to speak of four distinct ‘certainty principles’.
First, we have certainty in its most obvious sense, namely that senior appellate courts may avoid departing from a series of non-binding but well-known decisions which appear to lay down a consistent principle. The Golden Strait case is an excellent example (Golden Strait Corp v Nippon Yusen Kubishika Kaisha [2007] UKHL 12). Here – albeit by a bare majority – the House of Lords held that the damages payable for the repudiation of a commercial contract should not be slavishly assessed as at the breach date, where subsequent unforeseen events showed that the victim of the breach would have suffered a large part of the loss anyway. In so doing, the court declined to depart from an existing line of authority establishing a general compensatory principle to that effect.
Secondly, certainty can mean that the legal rules for ascertaining the consequences of a breach of contract minimise uncertainty. Once again turning to the Golden Strait, this facet of the certainty principle is reflected in the minority judgments of Lords Bingham and Walker. Emphasising the need for predictability in commercial transactions, Lord Bingham viewed the decision of the majority as undermining ‘the quality of certainty which is a traditional strength and major selling point of English commercial law’ (p 368).
Thirdly, certainty might require the law to favour an approach to the interpretation of commercial transactions which maximises the likelihood that parties will know what they are letting themselves in for when they contract. This acts as a restraint on the courts’ recognition of implied terms, and militates against excessive reference to the matrix of fact when construing express terms.
In the Lehman Brothers Side Letter litigation (Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 1072 (Ch) and [2013] EWCA Civ 188), the Court of Appeal refused to imply a term into the 2002 ISDA Master Agreement to the effect that, in the event of early termination, it must be assumed that the agreement would have run its full course, however commercially unlikely that seemed. This was despite a long line of first instance and Court of Appeal authority establishing that this so-called ‘value clean principle’ had applied under the 1992 ISDA standard terms. In so doing, the Court of Appeal may be said to have preferred this limb of the certainty principle over the first.
Fourthly, certainty may militate in favour of restricting the effect of policy-based principles in avoiding the agreed outcomes of bargains between commercial parties. This aspect of certainty has sparked off some of the most interesting litigation of all. One notable example can be drawn from the insolvency context, where the Supreme Court has held that where entered into in good faith, apparently deprivatory provisions in commercial transactions would not be invalidated on public policy grounds under the anti-deprivation principle (Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38).
A second example is provided by the law on penalties, recently considered by the Supreme Court in the conjoined cases of Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67. In both cases, the penalty clauses in issue were upheld – perhaps to the bewilderment of law students everywhere, who have had the general prohibition on penalties drummed into them since day one of contract law class.
Post-Cavendish, the more nuanced principle is that a clause will be void as a penalty only if it cannot be justified by a legitimate commercial interest of the innocent party which extends beyond the prospect of pecuniary compensation flowing from the breach in question (provided also that the burden on the wrongdoer is not disproportionate to the interest sought to be protected). The result is a protean test in which the public policy limits on party autonomy are defined by reference to the legitimate commercial interests of the party relying on the provision in question.
Of course these four limbs of certainty may, in due course, introduce uncertainties of their own. For the time being, however, it appears as though the English courts are bringing the certainty principles increasingly to the fore – with both the intention, and probably the effect, of reinforcing commercial autonomy as the basis for the adjudication of issues affecting market structures.
English Chancery and commercial courts have long prided themselves on their ability to provide a speedy resolution to legal issues causing commercial uncertainty. For example, if there is no real dispute of fact necessitating a trial, the court can decide questions of law or construction summarily. Yet the courts’ ability to resolve disputes quickly has always been best conceptualised as a game of procedural snakes and ladders. Whilst some procedural innovations may save the court and parties much time, these savings are too commonly squandered by procedural inefficiencies arising at other stages of our dispute resolution process.
Procedural ladders were used to great effect in the Lehman Brothers litigation which followed the 2008 financial crash. A whole series of cases about the consequences of the collapse of Lehman Brothers was conducted using the procedural vehicle of an application for directions, made by an insolvency office holder to the Chancery Division of the High Court. Reliance on lists of issues, position statements, and statements of assumed fact made it possible for the High Court to decide the many issues in these cases with reasonable speed and coherence.
Yet, inevitably, there are also procedural snakes. The first and most obvious is that certainty is by no means achieved before a trial judge at first instance – nor even in the Court of Appeal. Our common law regards every legal issue as having a right and wrong answer. Aside from questions of fact, we have no concept of a permissible range of answers, within which the trial judge has a margin of appreciation provided he or she acts rationally.
The trial judge’s decision, therefore, is often simply a first stab at the problem. The decisive answer will often not emerge until the Supreme Court’s determination several years later. The result is, self-evidently, delay and continued market uncertainty. Moreover, the procedure for ‘leap-frogging’ a case from the High Court to the Supreme Court is hardly ever employed in relation to financial cases. In the writer’s view, it is time that issues concerning the financial markets are properly recognised as affecting our national and economic health, and as deserving of expedition on that basis.
The second snake relates to the sheer complexity of modern financial structures, which is a generator of uncertainty in itself. Few of our commercial and Chancery judges can claim any real familiarity with such structures prior to being asked to adjudicate on their most complex and technical components.
Finally, the most serious and intractable problem has arisen from the traditionally unassailable principle that the court will not pronounce on merely hypothetical issues. Put shortly, the court will usually practice only remedial, not preventative, medicine. The result is that issues of uncertainty are not decided in principle up front, but only after they have led to dispute, damage and disaster.
There are a number of recent procedural developments which indicate a relatively new focus on the need for a joined-up – and certainty-maximising – approach to the determination of financial market issues.
The first is the new Financial List, which is a group of eight presiding High Court judges, drawn equally from the Chancery and commercial judiciary. The Financial List will hear cases of only the very highest value and importance affecting the financial markets, the object being to concentrate the requisite experience and skill to maximise the quality of judicial decision making. Accordingly, the Financial List has the potential to mitigate the effects of both the first and second of the procedural snakes described above.
Secondly, there is now an established process of regular judicial seminars on financial market matters, organised by the Financial Markets Law Committee based at the Bank of England. This programme means that judges will no longer – or at least, not always – come cold to a complex financial market issue. Equally importantly, it may help those tasked with the resolution of financial disputes to spot a market problem coming down the line before anyone has issued proceedings about it.
Thirdly, the Rolls Building Courts are promoting a new Flexible Trial process, to be used where the parties agree, or the court decides that it would be appropriate to do so. Under this process the established procedures for pleadings, disclosure and witness statements are replaced by a bespoke set of directions to suit the particular case. The result is a focus on the key issues in dispute, and the steps needed to prepare for their determination. Expense, waste and delay are thereby excised, and a speedier trial eventuates.
Finally, the Financial List is now able to accommodate market test cases, providing a forum for the determination of looming financial market issues before the emergence of a particularised dispute. A market custodian (such as ISDA, or a market regulator) may bring any such dispute before the court, which would determine it promptly on the basis of assumed facts. Representatives of sections of the market with an interest in a particular outcome could be joined as parties. Whilst this opportunity has yet to be taken up, it does provide a genuine facility for avoiding the third snake if only the markets can gear themselves up to use it.
These developments are a result, in part, of the cohabitation of Chancery and commercial judges in the new Rolls Building. They have also been spurred on by an apprehension of the increasing competition from commercial courts based outside the UK, for example in Singapore and Dubai. Taken together, they have the potential considerably to advance the cause of certainty in the English courts.
Finally, it is important to consider the above specific developments in the context of the Court Service’s Reform Programme, which has been funded by a promised government investment of £730m. One of the Programme’s main aims is to achieve complete digitisation of all our court processes. All cases will be issued online and brought to trial on a paperless basis. Freedom from the tyranny of paper offers big advantages in the flexibility, speed, efficiency and cost effectiveness of our courts – particularly in heavily documented financial cases.
Curing uncertainties
We are heading in the right direction. Certainty is increasingly treated as a principle in its own right, and the courts appear willing to accord it appropriate weight. Whilst some aspects of our court procedures remain slow (and disproportionately expensive), others are newly focused on allowing the courts to cure uncertainties within an acceptable time-frame. Structures are in place for striking a balance between dealing with historical cases and providing reliable guidance for the future, and our judges are well on their way to developing the requisite expertise in complex financial instruments.
Contributor Lord Justice Briggs. The author is grateful to the Banking & Financial Services Law Association and Journal of International Banking and Financial Law for permission to publish this article: based on an August 2016 lecture to BFSLA and first published in (2017) 2 JIBFL 63
THE FINANCIAL LIST: SWIFT AND SPECIALIST
The Financial List became operational on 1 October 2015. Its introduction was announced by the Lord Chief Justice in his speech at the Mansion House in the City of London on 8 July 2015.
A key feature of the list is the particular financial expertise and experience of nominated judges from the Commercial Court and the Chancery Division, who are responsible for cases allocated to them from inception through to enforcement if necessary.
Disputes that are eligible for inclusion are those that principally relate to financial disputes of over £50m or equivalent, or which require particular market expertise, or raise issues of general market importance.
There have been eight judgments so far:
Source: judiciary.gov.uk.
With such legal uncertainty in the financial markets, how can the courts assist? Lord Justice Briggs explains the ‘certainty principles’ slowly gaining ground and efforts to mitigate the complex snakes and ladders
Modern, sophisticated economies are becoming increasingly vulnerable to legal uncertainty, which can affect the financial markets in two main ways.
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