| At the end of March the National Bank of Yugoslavia (NBY) issued a writ against the Republic of Slovenia, Banka Slovenije (the Republic of Slovenia’s central bank), various other Slovenian banks and almost 400 commercial banks around the world. The NBY is the central bank of the Federal Republic of Yugoslavia (FRY), i.e. Serbia and Montenegro. Its fellow plaintiffs are FRY commercial banks: Beograndska Banka, Montenegrobanka, Jugobanka and Vojrodjanske. Various aspects make this action appear confusing: the mix of central and commercial banks as plaintiffs and defendants; the apparent involvement of questions of state succession now that the Socialist Republic of Yugoslavia (SRY, former Yugoslavia) no longer exists; and the role of the NBY as paying agent under that agreement. But in fact the action is simple. It is about breach of contract and joint and several liability. Joint and several liability has surfaced most recently in the context of large awards against accountancy and law firms for negligence. Because these firms are partnerships, each partner is jointly and severally liable for the whole award. The plaintiff can seek recompense from each partner for the full amount and in that way ensure complete recovery. In the case of the accountancy firms this liability has generally arisen in the context of audit work. Sometimes the shareholders have brought an action, alleging that the accounts gave a misleading view of the company. Sometimes an acquirer of a company has sued the target’s auditors where the target has turned out to be a dud. In each case the action is generally in tort (from the French for “wrong”) because there is no direct contractual relationship between the auditor and the plaintiff. The plaintiff can succeed only by showing that the auditor owed the plaintiff a duty of care and was in breach of it. KPMG’s decision to incorporate its audit practice does not protect the audit company or the negligent auditor from liability, but incorporation does protect those partners not otherwise involved in the negligent act. Joint and several liability can also arise in contract. Until 1988, borrowing by the SRY was haphazard and carried out at central and commercial bank level in an uncoordinated way. In the early 1980s a Croatian bank teetered on the brink of collapse. This prompted an attempt to coordinate international borrowing across the SRY which culminated in a number of refinancing agreements, entered into between 1983 and 1985. These provided for joint and several liability on the part of the borrowers. This was important for the lenders. It meant they could look to any borrower for repayment of the whole. But – and this is the point relevant to the current litigation – it was important for the borrowers, too. If you are all, individually, liable for a debt, you make sure you stick together. “It means everyone stays in line, otherwise the last one left has to put out the lights,” says Christopher Grierson, an international banking litigation partner at Lovell White Durrant, the UK firm advising the plaintiffs in the action. This was the principle underpinning the New Financing Agreement (NFA) of 1988, alleged breach of which is the basis of the current action. Under the NFA some of the borrowers were entitled to substitute other indebtedness – for instance, bonds issued in the capital markets – for debt under the NFA. The effect of any such substitution was to reduce the debt across the board for the benefit of all borrowers. Indeed, by substitutions which exploited variations in the dinar exchange rate, the overall debt under the NFA was reduced from $7 billion to just over $4 billion by the time of the break-up of the SRY in 1992. One of the consequences of the war has been the freezing of assets by, among others, the Bank of England, which has hit Serbia and Montenegro hard. However, the asset freeze and the intense negotiations over how the SRY’s assets should be divided up have nothing to do with the litigation except insofar as the assets will help to discharge liabilities under the NFA. In an ideal world, the division of the assets and the NFA litigation would be resolved by sitting around one table. More relevant is the destruction the war has caused. Its effects have not been borne evenly across what was the SRY. Slovenia, for example, escaped relatively unscathed. It therefore has a much greater possibility of rehabilitating itself with the international capital markets. To that end, last year Slovenia and the Slovenian banks entered into a side agreement with the SRY’s commercial lenders – the 385 commercial banks on the receiving end of the writ – called the Slovenian Exchange Offer (SEO). The SEO is due to take effect this month (June). Under its terms Slovenia will take over 18% of the SRY’s debt with the commercial lenders and in return be discharged by them from the NFA. Slovenia intends to tap the Euromarkets later this year, hence the importance of disengaging itself from the NFA which carries the risk of lumbering Slovenia with the credit-rating of the weakest borrower, because of the joint and several liability. Now that Croatia is heading down the same path as Slovenia there is a risk that it too will be joined in the action. The heart of the NBY’s claim is that Slovenia is procuring a breach of the NFA. The NFA was premised on the understanding amongst all SRY borrowers that all of them would remain jointly and severally liable for all of the debt until it had all been discharged. The SEO flies in the face of that. All borrowers agreed that if an agreement like the SEO were contemplated, it could be undertaken only with the approval of the NBY, whose job it is to ensure that all borrowers are treated fairly and equally. Finally, the SEO interferes with the NBY’s role of paying agent under the NFA. “The idea,” says Grierson, “is that everyone should sit at the table until the end.” There are three possible remedies. The first is that the SEO is declared null and void, which would have severe consequences for any Slovenian bonds once they were in the market – SRY debt is trading at half its par value. Secondly, the NBY could obtain damages. Finally, the breach could be regarded as a breach of such a fundamental term of the NFA that the NFA could itself be discharged, so freeing the borrowers from their liabilities under it. Chemical Bank, advised by Clifford Chance, is coordinating the commercial banks’ response to the issue. Watch this space. |
