UBS AG (London Branch) and Another v Kommunale Wasserwerke Leipzig GMBH UBS Ltd and Another (Third Parties)
| Jurisdiction | England & Wales |
| Judge | Lord Briggs of Westbourne,Lord Justice Hamblen,Lady Justice Gloster |
| Judgment Date | 16 October 2017 |
| Neutral Citation | [2017] EWCA Civ 1567 |
| Docket Number | Case No: A3/2014/4221 |
| Court | Court of Appeal (Civil Division) |
| Date | 16 October 2017 |
and
and
and
[2017] EWCA Civ 1567
Lady Justice Gloster
Lord Briggs of Westbourne
and
Lord Justice Hamblen
Case No: A3/2014/4221
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE MALES
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Falconer, Mr Stephen MoriartyQC, Mr Richard SladeQC, and Mr Edward Harrison (instructed by Mayer Brown International LLP) for the UBS parties
Mr Tim Lord QC, Mr Simon SalzedoQC, Mr Stephen MidwinterQC and Mr Craig Morrison (instructed by Addleshaw Goddard LLP) for KWL
Mr Andrew Mitchell QC and Mr Richard Power (instructed by Dentons UKMEA LLP) for DEPFA
Mr Nicholas Peacock QC, Miss Catherine AddyQC and Miss Fiona Dewar (instructed by Baker & McKenzie LLP) for LBBW
Hearing dates: 15, 16, 17, 18, 19, 22, 23, 24 & 25 May 2017
Lord Briggs of Westbourne and
| INDEX | Para. |
| INTRODUCTION | 2–9 |
| FACTUAL BACKGROUND | 10 |
| KWL and Value Partners | 11–12 |
| The cross-border leases | 13–17 |
| Potential restructuring of the CBLs | 18–19 |
| The nature of STCDOs | 20–24 |
| The corrupt background to the transactions | 25–27 |
| Lead-up to the Balaba STCDO and CDS transactions | 28–41 |
| The Balaba transaction | 42–43 |
| The Value Partners engagement letter | 44–46 |
| The LBBW transaction | 47–48 |
| KWL's Supervisory Board meeting of 7 September 2006 | 49 |
| The expenses scandal | 50 |
| The "letter for K" | 51–55 |
| The Depfa transaction | 56–57 |
| The terms of the transactions | 58 |
| Financial aspects of the transactions | 59–61 |
| Default and commencement of proceedings | 62–64 |
| SUMMARY OF THE CLAIMS, MAIN FINDINGS AND ISSUES APPEALED | |
| The Balaba STCDO | 65–69 |
| The CDSs | 70 |
| The LBBW Back Swap | 71–72 |
| The Depfa Back Swaps | 73–74 |
| The Depfa Front Swaps | 75–76 |
| The UBS GAM portfolio management claim | 77 |
| THE ISSUES ON APPEAL | 78 |
| Issue 1: Agency | |
| Was the judge right on the agency conclusion? | 79–102 |
| Issue 2: Unenforceability due to bribery | |
| Should the STCDOs be rendered unenforceable because of the bribe to Mr Heininger even if not paid by Value Partners as UBS's agent? | 103–121 |
| Issue 3: Conflict of interest | |
| Was the judge right on the conflict of interest conclusion? | 122–156 |
| Issue 4: Rescission of Balaba STCDO | |
| Was the judge right to order rescission of the Balaba STCDO? | 157–177 |
| Issue 5: UBS's deceit claim | |
| Was the judge right to conclude that UBS's deceit claim failed? | 178–193 |
| Issue 6: KWL's indemnity | |
| Was the judge right to conclude that KWL should be indemnified by UBS for any liability it has on the LBBW or Depfa STCDOs? | 194–200 |
| Issue 7: Rescission of Back Swaps | |
| Was the judge right to conclude that the Back Swaps should be rescinded upon Depfa and LBBW undertaking not to enforce the Front Swaps? If not, then what alternative order should be made? | 201–229 |
| Issue 8: KWL's damages claim | |
| Was the judge right to conclude that if the STCDOs had not been rescinded or rendered unenforceable against KWL, KWL would have had a damages claim against UBS GAM equal to the whole of their loss? | |
| — The judge's findings | 230–241 |
| — UBS GAM's appeal | 242–244 |
| — The appeal against the findings of breach | 245–246 |
| (i) Concentrated bet on financials | 247–253 |
| (ii) Maintaining ratings rather than minimising risk | 254–257 |
| (iii) The Moody's Metric | 258–260 |
| (iv) The relevance of spreads | 261–263 |
| (v) Assessment of the impact of different market scenarios | 264–265 |
| (vi) Quarterly reports | 266–269 |
| (vii) No early exit strategy | 270–275 |
| — Conclusion on breach | 276–282 |
| — Causation and assessment of loss | 283–301 |
| — Conclusion on causation and assessment of loss | 302–303 |
| — Conclusion on Issue 8 | 304 |
| Issue 9: Rescission of the CDSs | |
| Was the judge right to conclude that if the STCDOs are rescinded then so must be the CDSs (and that KWL therefore cannot receive/retain the sums due under the CDSs)? | 305–319 |
| Issue 10: Sums stolen by Value Partners | |
| Was the judge right to conclude that KWL had to give credit for the sums stolen by Value Partners? | 320–329 |
| OVERALL CONCLUSION | 330 |
| The Balaba STCDO (Issues 1, 2, 3, 4, 5, 9 and 10) | 331–333 |
| The Front Swaps (Issue 6) | 334 |
| The Back Swaps (Issue 7) | 335 |
| The UBS GAM portfolio management claim (Issue 8) | 336 |
| Summary of conclusions | 337 |
This is a joint majority judgment to which both Lord Briggs and Hamblen LJ have contributed, and with which we both fully agree.
Introduction
The Appellants, UBS AG, a bank incorporated in Switzerland, and UBS Ltd, an English subsidiary of UBS AG (together "UBS"), are an investment bank. The main Respondent, Kommunale Wasserwerke Leipzig GmbH ("KWL"), is the Leipzig municipal water company, responsible for the supply of water and sewage services to the people of Leipzig.
In 2006 and 2007 KWL was persuaded to sell credit protection to UBS and to two intermediary banks, Landesbank Baden-Württemberg ("LBBW") and Depfa Bank plc ("Depfa"), the other Respondents. It did so by means of complex derivative products known as Single Tranche Collateralised Debt Obligations ("STCDOs").
The effect of these STCDOs was that if a certain number of the entities in the reference portfolios defaulted during an eight or ten year period, KWL would be liable to pay the banks hundreds of millions of dollars. Defaults duly occurred following the global financial crisis of 2008–9 and the banks sought payment of the sums due, making claims in excess of €350 million.
KWL was persuaded to enter into the STCDOs by its corrupt financial advisers, Value Partners Group AG ("Value Partners") (a Swiss company), assisted by a bribe of around US$3 million paid by Value Partners to Mr Klaus Heininger, one of KWL's two managing directors. This bribe was paid out of the premium of just over US$30 million paid to KWL for providing credit protection under the STCDOs, all bar €4.5 million of which was siphoned off by Value Partners. The premium payments were funded, and UBS's booked profit of over US$25 million was made, by UBS selling equivalent protection to the market through collateral hedging contracts.
Although UBS was not aware of the bribe, it had entered into an arrangement with Value Partners whereby Value Partners would advise their municipal clients to enter into STCDOs with UBS regardless of the clients' interests. KWL was the first client "delivered" under this arrangement. KWL was not aware of this arrangement.
The trial judge, Males J, held that KWL was entitled to rescind the STCDOs with UBS on the grounds of bribery and conflict of interest. The judge further held that Depfa and LBBW were entitled to rescind the STCDOs they had entered with UBS on the grounds of fraudulent misrepresentation.
In addition, the judge held that even if the STCDOs were valid and binding the losses on the portfolios were caused by their negligent management by the portfolio manager UBS Global Asset Management (UK) Ltd ("UBS GAM").
UBS and UBS GAM appeal the judgment on various grounds and there are 10 agreed issues to be determined on the appeal, including two grounds of cross appeal by KWL.
Factual background
A detailed narrative of events is set out in the judgment of Males J. It is not necessary to repeat that full account in this judgment since there is only one main factual finding which is challenged relating to the knowledge of Dr Andreas Schirmer, KWL's other managing director. Instead a brief summary of the key events relevant for the purposes of the appeal will be set out, drawing on and giving cross-references to the judgment. More detailed reference to the judge's findings will be made when considering the various issues which arise on the appeal.
KWL and Value Partners [50]–[54]
KWL is a German municipal water company. At all relevant times, its Executive Board consisted of two managing directors, namely Mr Heininger and Dr Schirmer. Mr Heininger took the lead on commercial matters while Dr Schirmer did so on technical matters. It also had a Supervisory Board to provide oversight of the Executive Board's activities.
In 2002, KWL engaged Global Capital Finance ("GCF") as a financial adviser. The key principals of GCF were Mr Berthold Senf, and Mr Jürgen Blatz. In around April 2004, Mr Senf and Mr Blatz left GCF and formed another financial advisory company called Value Partners. A corrupt relationship developed between KWL and Messrs Senf and Blatz of GCF (and later Value Partners). This began with the giving of generous gifts and expenses paid luxury trips to Mr Heininger and others at KWL from 2002 onwards.
The cross-border leases [111]–[115]
Between 2000 and 2005, KWL entered into four cross-border lease transactions ("CBLs"), the provisions of which were materially identical for present purposes. Under each of these agreements, KWL leased certain of its infrastructure assets to a special purpose vehicle ("the Trust"). The Trust was funded by deposits from overseas investors and loans. It was domiciled outside Germany, allowing it to take advantage of depreciation provisions under foreign tax laws which KWL was not itself able to realise. This enabled the Trust to pay an upfront...
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