Out-Law News 2 min. read
08 Jan 2018, 10:48 am
The bank arranger of a $650 million Islamic bond financing deal has been found negligent for failing to ensure that a promissory note, used as security, was properly signed.
The High Court ruled that BNP Paribas owed a duty to investors to take reasonable care that the note had been properly executed, something which required a handwritten signature that was appropriately witnessed. Although the document appeared to have been executed correctly, under a microscope experts agreed that the signature had been laser printed rather than signed in 'wet ink'.
Commercial litigation expert Stuart McNeill of Pinsent Masons, the law firm behind Out-Law.com, said that the case was an interesting one as the successful investors were hedge funds that had purchased the debt on the secondary market, rather than the original subscribers to the bond issue; and that the deal had been structured in such a way that the bank's client was the debtor, not anyone else.
"Usually, such purchasers are considered too remote for a duty of care to apply and the courts are concerned about the floodgates argument of imposing a duty on an indeterminate class of investor" he said.
"However, the decision may not be as valuable to the investors as it first appears. Irrespective of any appeal, if it transpires that the investors would still have received nothing had the promissory note been valid, nothing will be payable as damages. Indeed, Mr Justice Males has granted permission to appeal on the question of duty, but not on the breach or loss points," he said.
In 2007, BNP Paribas arranged a $650m financing with one of the Saad companies in Saudi Arabia. The transaction was the economic equivalent of a Eurobonds issue, but using a sukuk, an Islamic financial instrument similar to a bond. Saad provided security in the event of its default in the form of a promissory note.
Following Saad's default, investors including the original issuer and a number of distressed debt funds attempted to enforce the security in the Saudi courts but were unable to do so as it was missing a handwritten signature. It was "common ground" between the parties that the absence of a handwritten signature would not have been obvious on the original note. In addition, three legal opinions had been provided on the validity of the overall sukuk, although none of the law firms had expressed any view on the validity of the promissory note.
After analysing the facts around the purported witnessing and signing of the document, Mr Justice Males concluded that BNP Paribas "did indeed 'drop the ball' in failing to live up to the standard of the ordinary skilled banker engaged in a transaction of this nature", which is the legal test for negligence. The promissory note was "an important protection for certificate holders", and it "was to be expected that Saad would take whatever points it could, whether or not well founded, to avoid liability", he said.
"Despite this, [BNP] allowed Saad to provide witnesses who were neither known nor independent and who, in the event, were content to attest to Mr Al Sanea's signature when, as is now known, he had not in fact signed the promissory note," he said. "In all the circumstances this was a necessary and entirely practical precaution which needed to be taken and [BNP] was negligent for failing to take it."
The funds would be entitled to recover as damages the difference between what they would have been able to recover had the promissory note been valid, and the recovery that they would in fact achieve, the judge said. However, he said that there was a "serious prospect" that they would not have been entitled to recover anything even with a valid promissory note.