Banks blocked from relying upon the ‘pass-on’ defence – but is this defence past its best?

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Allianz Global Investors GMBH and others v Barclays Bank plc and others [2022] EWCA Civ 353.

Last month the UK Court of Appeal prevented a group of major banks from relying on the ‘pass-on’ defence, to escape claims brought by investment funds in relation to the banks’ alleged manipulation of Foreign Exchange (FX) markets more than a decade ago.


The claimants’ case

In ongoing proceedings, a group of claimants (more than 170), of which almost all are investment funds, have brought an action in the UK Commercial Court, to seek damages from a number of defendant banks. The claimants’ case, based on a European Commission ruling, is that they have suffered losses as a result of the defendant banks’ illegal and anti-competitive manipulation of the foreign exchange markets during the period of 2003-2013.

The defendants’ case

The defendants deny liability. Their position is that in the event that the infringements are proven, and losses are established, the claimant investment funds have mitigated their loss in part by passing this on to the individual investors, by virtue of the investors’ investment being redeemed or withdrawn at a price negatively impacted by the defendants’ alleged manipulation of the FX (the pass-on defence).  It is the defendants’ case that it is the investors that have the legal title to bring a claim for damages, not the investment funds.

Application to strike out the defendants’ ‘pass-on’ defence

The claimants sought to have the defendants’ pass-on defence struck out on the basis that it is wrong in law and has no real prospect of success.

The claimants submitted that when an individual investor redeems or withdraws its investment, the only legal entity with title to sue for the alleged wrongdoing of the defendant banks is the investment fund, not the investors on an individual basis. The claimants argued that given the individual investors have no legal title to bring a claim for the losses they have suffered, the pass-on defence, barring the investment funds from being able to bring a claim for losses incurred, would allow the banks to escape liability entirely.

Decision of the strike-out application

Sir Nigel Teare sitting as a first instance judge dismissed the claimants’ application to strike out.

The Claimants appealed.

The Appeal

In its judgment, the UK Court of Appeal sought to move the focus away from the legal debate as to whether and in what circumstances the individual investors (whether a beneficiary, shareholder, or partner) can sue for losses suffered, stating that Sir Nigel Teare had erroneously allowed these issues to be the focus of the strike-out application. Instead, the UK Court of Appeal at [24] stated that:

The true question is whether the [investment funds] have avoided or mitigated their loss by reason of redemptions so that the amount recoverable by them is reduced...[E]ither:

  1. The loss has not been avoided and so the Fund can claim for the full amount, regardless of whether an investor also has a claim for part of it; or
  2. The loss has been avoided, in which case the Fund can, by definition, no longer claim it regardless of whether the investor has acquired a claim for the amount avoided.

The UK Court of Appeal, in dealing with the key issue of avoided loss, therefore had to establish whether:

  • The lower redemptions by investors arose directly as a result of the defendants’ alleged manipulation of the FX; or
  • whether the lower redemptions arose independently of the alleged manipulation of the FX, even if occasioned by it.

The defendant banks contended that the benefit of the lower redemption arose directly as a result of their alleged wrongdoing, being in effect the “passing on” to the investor of the loss suffered by the investment funds in the form of a reduced share of the relevant funds’ net assets.

The UK Court of Appeal did not accept the defendant banks’ submissions in this regard, instead deciding that the investors’ redemptions and any benefit the investment funds derive from them, are independent of the investment funds’ losses owing to the alleged manipulation of the FX for the following reasons:

  • redemptions usually occur pursuant to, and on the terms of, contracts between the investment funds and their investors. The investment funds and the investors have contractually agreed that the investors follow the fortunes of the investment fund and that the redemptions are calculated on the basis of the net asset value of the fund;
  • investment funds are structured to pass on all losses (as well as gains) to their investors over time. It follows that the logical conclusion of the defendant banks’ arguments must be that the investment fund cannot itself ever suffer any recoverable loss, because inevitably that loss will be avoided when the assets are distributed; and
  • the relationship between the investors and the investment funds is independent of and collateral to the rights and remedies of the investment fund as a corporate entity.

It is on this basis that the UK Court of Appeal decided that the investment funds’ loss, allegedly caused by the defendant banks, is not avoided by the investors redeeming at a lower level. The lower redemption rate is determined independently by the terms of the contract between the investment fund and the investor, even if occasioned by the alleged manipulation of the FX markets by the defendant banks.

The UK Court of Appeal also considered trust, company, and partnership issues in the context of the central question of whether the investment funds have avoided some or all of their loss and decided that an investor would not have their own separate claim for loss that escapes the established English legal principles.

The UK Court of Appeal unanimously allowed the claimants’ appeal and ordered for the defendant banks’ ‘pass-on’ defence to be struck out.

This is a useful decision for institutional claimants, such as investment and pension funds, who often have to overcome complex and technical defences in order to recover damages from those who have participated in cartels.

It is a further example of why the UK courts are widely considered to be the leading claimant-friendly jurisdiction for antitrust litigation and are the jurisdiction of choice for businesses seeking to initiate claims for damages they have suffered as a result of infringements of competition law.

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