This much anticipated litigation in relation to a Saudi law governed Sukuk has established that an arranging bank can owe a duty of care to non-client investors in executing the functions it has assumed in relation to the transaction. Whilst particularly of interest to professional organisations and investors operating in the Middle East, it provides a general lesson of the importance of ensuring compliance with form as well as substance in documenting financing arrangements.
This case concerned the enforceability against the borrower of a Promissory Note in connection with the issuing of a US$650 million Sukuk (the Sukuk). The Sukuk was executed in May 2007 with the ultimate borrower being Saad Trading, Contracting and Financial Services Company (Saad), a limited liability company registered in Saudi Arabia, and was issued by a special purpose vehicle named Golden Belt 1 Sukuk Company (the Claimant in the first action, Golden Belt), which acted as trustee for the Sukuk certificate holders. The Claimants in the second action were certain funds (the Funds) which bought the Sukuk certificates at distressed prices between 2009 and 2011 after Saad’s accounts had been frozen as a result of allegations of fraud and forgery made against Maan Al-Sanea, the chairman of Saad, and other entities in the wider Saad Group.
The Defendant, BNP Paribas (BNPP) was the “Arranger and the Sole Bookrunner” and one of the three Lead Managers of the Sukuk. BNPP was instructed by Saad to arrange the Sukuk and to place the certificates with investors. BNPP assumed responsibility to arrange the entire transaction without input from the other Lead Managers. It also instructed lawyers who were to advise on legal aspects of the transaction and to draft the underlying transaction documentation (the Transaction Documents).
Pursuant to the Transaction Documents, US$650 million was advanced to Mr Maan Al-Sanea pursuant to an English law Head-Lease Agreement whereby Mr Al-Sanea leased to Golden Belt certain “land Parcels” which he owned in Saudi Arabia. The return to investors was provided by means of an English law Sub-Lease Agreement whereby Golden Belt sub-leased the Land Parcels to Saad.
One of the Transaction Documents was an Offering Circular dated 14 May 2007. This contained an “Important Notice” which relevantly included statements to the effect that BNPP, as one of the issuers, made no representation or warranty and accepted no responsibility for the accuracy or completeness of the information in the Offering Circular.
The Transaction Documents also included a Promissory Note in favour of Golden Belt in the sum of US$650 million issued by Saad, and purportedly signed by Mr Al Sanea. The Promissory Note was intended to provide investors with a ready means of enforcement in the event of the default by Saad. It was to be subject to the law of Saudi Arabia and was intended to be subject to the jurisdiction of the Saudi Arabian Committee for the Settlement of Negotiable Instruments Disputes (CSNID). There was contemporaneous advice that obtaining a judgment from the CSNID would be the cheapest and quickest method of enforcement in Saudi Arabia (at ).
In 2009 Saad defaulted on its obligations under one of the lease agreements. Golden Belt sought to enforce the Promissory Note. Under Saudi law, the Promissory Note was required to be executed with a “wet ink” signature. Whilst the purported signature of Mr Al-Sanea appeared on the document, it was subsequently ascertained that the signature had been placed by mechanical means [75-76]. Based on expert evidence on Saudi law, Males J found that based on the failure to satisfy the wet ink requirement it was inevitable that the Promissory Note would be unenforceable in proceedings before the CSNID. Having taken the view by 2014 that any claim brought in the CSNID would fail, Golden Belt commenced proceedings in various Saudi tribunals and in England against Mr Al-Sanea and Saad, as well as the instant action against BNPP.
Issues Before the High Court
The Claimants’ case was that BNPP owed them a duty of care to exercise reasonable care and skill to ensure that the Promissory Note was properly executed. This involved two stages, the first being to find out what were the requirements of the law of Saudi Arabia and the second to take appropriate steps to ensure that those requirements were met. The Claimants’ argued that BNPP breached its duty of care in failing to ensure the Promissory Note was correctly executed by Mr Al-Sanea.
Was a Duty of Care Owed?
In arguing for a duty of care to be imposed, the Claimants relied in particular on BNPP’s role as Arranger of the Sukuk as described in the Offering Circular; the role of BNPP in making arrangements for signature of the Promissory Note; the fact that the investors depended on BNPP to ensure proper execution of the Promissory Note; and the fact that it was both contemplated and intended that there should be a secondary market in certificates after issue (at ).
In response, BNPP argued that the only duty it assumed was to its client, Saad, and that no tortious duty should be imposed on a carefully constructed commercial scheme, and that the imposition of any duty of care to investors was negated by the terms of the Offering Circular, and in particular the Important Notice. It argued that although investors might take comfort from the fact that BNPP had arranged the Sukuk that did not lead to any legal responsibility to investors. It also denied that it owed a duty to Golden Belt, as an SPV vehicle with no particular interests of its own (at ).
In considering whether a duty was owed, Mr Justice Males commenced by reviewing the law in relation to pure economic loss, as stated in the judgment of Lord Bingham in Customs & Excise Commissioners v Barclays bank plc  1 AC 181. His Lordship focused in particular on the importance of the contractual background to the allegation of a duty of care, including how the parties had sought to regulate their relationships to allocate risk. Males J noted that what was important was the performance by BNPP of its own responsibilities as the Arranger of the Sukuk, rather than the complexity of the contractual relationships formed. (Hamblen J in Standard Chartered Bank v Ceylon Petroleum Corporation  EWHC 1785 (Comm) (at ) and Gloster J in JP Morgan Bank v Springwell Navigation Corporation  EWHC 1186 considered). A broad disclaimer of responsibility for the contents of the Offering Circular did not necessarily mean that an Arranger was also disclaiming any responsibility for the performance of its own functions (at ).
Males J continued by considering a number of relevant factors, including:
Drawing these factors together, it was found “not only that investors would rely on BNPP to ensure that the Promissory Note was properly executed, but that it was reasonable for them to do so. That was how the transaction and the market worked” (at ). His Lordship found that on the facts of the case BNPP did owe a duty to investors, including the Funds, to ensure the Promissory Note was properly executed, as they stood to incur loss should Saad default and the Promissory Note found to be unenforceable. In particular, his Lordship found that “it was foreseeable that if reasonable care was not exercised, certificate holders would suffer loss because the package of rights which they acquired would be intrinsically flawed; the relationship between BNPP and certificate holders was sufficiently proximate; and it would be fair, just and reasonable that BNPP as the arranging bank should owe such a duty” (at ).
On the other hand, Males J found that no duty was owed to Golden Belt, which was merely a special purpose vehicle analogous to a shell or conduit which was not at risk of suffering direct loss (at ).
Was There a Breach of Duty?
The standard of care BNPP was required to exercise was that of a reasonably competent bank specialising in transactions of this nature. The Claimants argued that BNPP breached its duty in relation to the signing of the Promissory Note by allowing Saad to take over the execution arrangements in circumstances where there would be no independent check on whether the Promissory Note was properly signed on behalf of Mr Al-Sanea.
In order to determine whether, applying this standard, there was a breach of duty by BNPP, Males J considered the evidence concerning: (1) the relationship between BNPP and Saad; (2) press reports in which Mr Al-Sanea was alleged to be guilty of money laundering; (3) the arrangements made for execution of the Promissory Note; (4) the extent to which BNPP relied on its independent lawyers to make the relevant arrangements, (5) the advice given by Saudi lawyers , and (6) the instruction of Jamal Al Muzein, the law firm in Al Khobar which was to supply witnesses to Mr Al-Sanea’s signature.
Considering each of these in turn, Males J concluded that BNPP “dropped the ball” in failing to live up to the standards of the ordinary skilled banker engaged in a transaction of this nature, in particular by allowing Saad to provide witnesses who were neither known or independent, and were content to attest to Mr Al Sanea’s signature, when, it was now known, he had not in fact signed the Promissory Note (at ).
Causation and Loss
The Judge had no difficulty in finding that BNPP’s negligence was the cause of any loss suffered by the Funds, but the extent of that loss was far from obvious. The primary argument of BNPP was that even if the Promissory Note had been properly executed, the Funds would still have recovered nothing, due to Saad’s insolvency. The actual calculation of loss was not the subject of these proceedings, and will be subject of a separate trial. Despite this, Males J set about outlining the principles with which loss could be measured as a matter of principle. His Lordship found that the Funds were entitled to recover as damages the difference between (1) the recovery, if any, which would have been made if the Promissory Note had been valid, and (2) the recovery, if any, which they will in fact achieve (for example, by taking action under the sub-lease agreement). Calculation of this loss will not be simple. As Males J noted in his judgment, no international creditor of Saad has as yet recovered anything and it may prove to be the case that even with the benefit of a valid Promissory Note and a judgment in its favour from the CSNID, the Claimants would never have made any recovery. Whether the Funds do recover anything, either in different litigation, or in the trial on loss to follow, or whether victory on breach in this case was indeed a pyrrhic victory, will be the subject of further closely-monitored litigation.
The case is significant for the importance of financiers arranging transactions in Saudi Arabia to closely follow all legal requirements to ensure enforceability is possible in Saudi Arabia. More generally, it also establishes that an Arranger of a financing transaction can owe a duty to non-client investors, and that it can breach this duty if it fails to fulfil the obligations it has assumed in relation to the transaction.