One the basis of the decisions handed down over the last three decades, and in particular since 2008, this book has argued that the English ‘Financial Courts’ have taken a market-minded or ‘macro’ perspective when adjudicating derivatives disputes. This approach has evolved with the markets themselves, as the courts have sought to respond to the exigencies of global markets operating on standard terms containing the default choice of English law and the English courts. In this sense, the English courts coped well with the unprecedented demands of the last financial crisis, including the spike of cases relating to the collapse of Lehman Brothers and novel and complex challenges to the administration of valuation and close-out in volatile markets. This approach has, however, proved more problematic in those cases reflecting the sheer diversification of the modern derivatives markets, so that end-users now include individuals and other types of non-sophisticated customers, an issue which does not have to be factored in by cases on standardised commercial terms used in sectors such as shipping.

The preceding chapter showed the piecemeal nature of regulatory protections for participants in the derivatives markets and explained how it has been justified on the basis that an alternative means of redress is available, namely private claims for mis-selling based upon ‘contract and negligence’. This chapter explores the reality of this type of private law claim. The argument focuses on those claims that are typically deployed by participants in the OTC derivatives markets and on the patterns that emerge from these mis-selling cases. The next chapter considers the related topic of contractual defences relied upon in this context. Together, these two chapters demonstrate why there have been so few successful mis-selling claims and question the assumptions behind the prevailing regulatory scheme.

Every position in the financial markets, from a vanilla interest rate swap to a syndicated loan, from a repo to a bond, is a contract. Contractual risk mitigation techniques, such as Events of Default, are more significant in sectors where parties enjoy fewer public sector regulatory protections, as is the case in syndicated loans and derivatives, but contractual relationships underpin all financial positions. More complex structures, such as synthetic securitisations or a chain of interests in intermediated securities may involve multiple parties and span diverse jurisdictions, but in legal terms they are merely combinations of contracts. The same applies to products which are shrouded in jargon or which seem exotic at the time.

This chapter addresses the vital issue of which law which should apply to substantive proceedings between parties to derivatives contracts. The discussion presumes that the jurisdiction of the English courts has been chosen or otherwise settled, as discussed in the Chapter 8. Accordingly, the impact that a contractual choice of law may have on disputes about jurisdiction is not addressed here.

To challenge a contractual counterparty’s decision-making is to invoke different and (for financial market participants) less familiar types of legal standards to those examined thus far, requiring a different type of scrutiny by the courts and raising questions about the boundaries between public and private law.

‘Over-the-counter’ (‘OTC’) derivatives have attracted unprecedented levels of scrutiny since the global financial crisis which broke out in 2007–8. Yet this would be the wrong place to start in order to understand the modern derivatives markets and the courts’ role in relation to them. This chapter argues that in order to understand post-crisis developments in the OTC markets, including the unprecedented surge of litigation after 2008, it is necessary to place these developments in historical, legal and regulatory context. Having set out important definitions and discussed the main uses of derivatives by way of introduction, the chapter explores the evolution of the modern derivatives markets, highlighting the particular significance of contractual standardisation and market diversification.

The previous chapter explored the pivotal role of the ISDA Master Agreement in the evolution of the OTC derivatives markets and highlighted the combination of legal techniques behind the various ‘self-help’ remedies in this contract. These contractual remedies, which culminate with Close-out, are designed to manage disruption arising during the lifespan of a derivatives contract without requiring recourse to the formal procedures associated with enforcing rights under general law. While versions of these self-help remedies appear in many types of financial contracts, including in market standard syndicated loan agreements and in the terms and conditions of debt securities, they have reached unmatched levels of sophistication in the derivatives context. As such they have been referred to in a recent English case as amounting to ‘an exclusive code’ under which parties manage the implications of a breach of contract, to the exclusion of the general law. As is now well-documented in the literature addressing the transnational qualities of modern finance, these arrangements underpin the cross-border markets in OTC derivatives by promoting autonomy from national insolvency law, a strategy which has, in turn, enjoyed generous regulatory treatment. The questions to which this chapter now turns is what role is left for the courts in relation to such a tightly designed, closely maintained and ‘exclusive’ contractual framework, and, as a starting point, why such litigation arises in the first place.

This book evaluates thirty years of cases arising from the global derivatives markets. This period starts with the landmark House of Lords’ decision in Hazell v. Hammersmith and Fulham London Borough Council, takes us through the surge of litigation triggered by the 2008 global financial crisis and up to the United Kingdom’s exit from the European Union. The book details how these cases have evolved in line with the markets themselves, growing more complex, more international and more technically challenging over time, but it also identifies remarkably consistent legal themes. Most importantly, it finds that the process of resolving disputes between participants in the derivatives markets across this period has, after a notorious start, been a source of robust rules for this systemically significant sector of the global financial markets and has helped to shape commercial law more broadly. This study also finds, however, that are important and ongoing challenges associated with this recent manifestation of ‘international business justice’.

Financial markets litigants may, for different reasons, seek to bypass the legal landscape discussed thus far. Where parties have agreed to contracts expressly selecting English law and, in some version of a jurisdiction clause, the English courts, this may give rise to a preliminary dispute about the effects of the parties’ contractual choices. If so, the result is a classic example of what Robert Wai refers to as ‘“touchdown” points’ between a private regime and state law. The concern of the current and the following chapter is how the English courts navigate challenges to the choice of jurisdiction and governing law provided for in derivatives contracts, and the related legal issues that arise as a result of the global reach of the modern OTC markets. The principal focus here is claims arising out of or connected to the parties’ contract; where allegations relate to a broader, fraudulent scheme, the tort of conspiracy or deceit different principles will apply to determine governing law and jurisdiction.

So far, we have seen that derivatives mis-selling cases have three typical features: multiple claims; complex trials; and, as many of the recent cases suggest, unsuccessful outcomes for claimants. The cases show that there are two fundamental reasons why many mis-selling claims based upon contract and tort are unsuccessful. The first is the claimant’s failure to establish all of the necessary elements of the claim, and the second is the defendant’s successful reliance upon contractual disclaimers. The preceding chapter considered the high bars involved in establishing certain types of claims associated with mis-selling litigation. Overall, it argued that it would be exceptional for a claimant to be in a position to establish fraud, while the core claims for mis-representation and breach of duty require claimants to establish certain elements with a high degree of precision and specificity. At the same time, statutory schemes of redress offer piecemeal coverage only, while the courts have been unpersuaded by attempts to construct alternative avenues for redress based upon tort or equity. These factors heighten the relevance of private law claims within the regulatory matrix, and help to explain why mis-selling claims involve such a diverse set of market participants.

Paradigmatic mis-selling claims involving OTC derivatives are based upon contract and tort law. Those types of claims, and the defences routinely deployed against them, are explored in subsequent chapters. We shall see in those chapters, as in later parts of the book, how the specialist mode of contractual interpretation adapted to the derivatives markets is integral to every stage of such claims. In many cases, in fact, it is decisive. However, the paradigmatic claims arising in this part of the financial markets are important not only for their own sake and for commercial law more broadly, but also because of how they relate to the regulatory rules in place to protect participants in the OTC derivatives markets, which is the concern of this chapter. In particular, as this chapter shows, the limitations of the regulatory schemes of redress in this context commensurately increase the significance of the private law claims explored in the remainder of this study.