UBS AG (LONDON BRANCH) AND ANOTHER V KOMMUNALE WASSERWERKE LEIPZIG GMBH

[2017] EWCA Civ 1567, Court of Appeal, Lady Justice Gloster, Lord Briggs and Lord Justice Hamblen, 16 October 2017

Banking - Single Tranche Collateralised Debt Obligations - Breach of fiduciary duty - Bribery - Whether agency relationship should be implied

Between 2000 and 2005 KWL entered into four cross-border leases (one with Balaba) under which KWL leased assets to a Trust in return for an upfront premium. KWL used part of the payment to obtain bonds from four institutions. The Trust sub-leased the assets back to KWL on terms that KWL would pay rent to the Trust with the proceeds of the bonds, and the rent was used by the Trust to pay interest on its loans. KWL was thereafter advised by Value Partners on restructuring to secure further funding, and Value Partners contacted UBS which suggested the use of a Single Tranche Collateralised Debt Obligation (STCDO). There was an arrangement between UBS and Value Partners under which Value Partners were to advise their clients to enter into STCDOs with UBS whether or not the STCDO was in the client's best interests. KWL was not aware of that arrangement. The STCDOs were entered into in 2006 and 2007. KWL received a premium of US$28.1 million plus €6.4 million. Only €4.5 million of that sum was retained by KWL. The remainder was siphoned off by Value Partners. From the premium received by Value Partners, a bribe of around US$3 million was paid to one of KWL's managing directors, H. Two banks, LBBW and Depfa, acted as intermediaries. KWL sold credit protection to LBBW and Depfa (Front Swaps) and LBBW and Depfa in turn sold the same protection to UBS on back-to-back terms (Back Swaps). Defaults on the STCDOs occurred. 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. Males J further 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).