Bahrain trading families win case over bank deal
Manama, January 28, 2014
A landmark decision has been made against an international bank in Bahrain over a controversial deal that left four trading families facing potential losses worth millions of dinars.
The families claim they were mis-sold complex financial products by a bank that offered them preferential rates on currency transactions, said a report in the Gulf Daily News (GDN), our sister publication.
However, they allege the bank never explained the massive liabilities their clients could face if they did not meet their contractual obligations.
When the terms of the contract were questioned by one of the families, Y K Almoayyed and Sons (YKA), the bank took YKA to the Bahrain Chamber for Dispute Resolution (BCDR) - accusing it of failing to honour a payment of $1.4 million (BD528,000).
The bank, which is not being named while cases are ongoing, also demanded a further $17 million as penalty for breach of contract.
However, the BCDR has ordered the company to hand over the $1.4 million requested - but not the $17 million penalty.
An associate from Almoayed Chambers (AC), who represented YKA in the case, described the ruling as a victory for the family business.
He told the GDN that when the trading family first signed the deal in 2005, it was told the contract would give them preferential rates of interest on financial services.
"The idea was that when the bank provided facilities, they would be very cheap facilities," he said.
"They came to the family and said: 'If you only give us a corporate guarantee you will pay seven per cent, a personal guarantee gets you six per cent - but if you sign this contract you will pay five and a half per cent'."
YKA alleges it was not informed the contract was a "derivative" type - which gets its value from the performance of another entity - and the family was effectively gambling on the value of the Japanese yen, the AC associate told the GDN.
The company says that for the first three years or so, the bank neither requested nor received any payment because of the contract.
Its lawyer told the GDN the bank probably absorbed any losses it incurred due to the deal and offset those with any gains made when the exchange rate was more favourable.
But in 2009 demands for money did start to arrive.
The bank asked for comparatively small amounts at first, a few hundred thousand dollars at a time, but YKA claims it met bank officials and received an apology and assurances that the business would be recompensed .
The situation went from bad to worse, however, and by early 2011 the bank was demanding $1 million.
YKA stumped up the cash on condition that the bank provided copies of documentation proving why YKA owed the money.
But the documents were allegedly never shared and three months later another demand for money arrived - this time for $1.4 million.
YKA refused to pay, which is when the bank took the case to the BCDR.
"The judgement that was issued was quite simple," the AC associate said.
"What the tribunal said was that the punitive penalty of between $17 million to $18 million on a $1 million contract was excessive at best and they rejected the bank's claim for any sort of damages because they found that the client didn't do anything wrong."
He described the type of contract between YKA and the bank as "extremely dangerous".
"To put it in perspective, the contract that bankrupted Greece was a derivative contract - and very similar contracts bankrupted entire cities in America," he said.
"We have had to do everything we could to negotiate with the bank and explain to them how unfair the terms of this contract were.
"What they effectively said was we are going to sell you some currency and you are going to continue to buy your currency from us for a set period of time - but if you decide to cancel at any given time, for whatever reason, over the next 10 years, say, you will pay us damages equalling $17 million to $18 million.
"The value of the contract was $1 million, but the penalty for cancelling was $17 million."
Scholarly journals from around the world have contacted Almoayed Chambers since the judgement was issued, the unnamed associate claimed, because it marks an unprecedented legal milestone.
"The reason it is so important is because these are derivative contracts and this is one of the first time that a Gulf court has issued a statement not in favour of international banks," he said.
"It's groundbreaking, absolutely."
Three similar cases involving Bahraini companies are due to be heard, but this initial verdict has set a precedent, the Almoayed Chambers official said.
However, the bank refused to comment on the specifics of the case.
"We are currently reviewing our options and because this is subject to legal proceedings it's not something we can comment on further," said a spokesman.
"We always work with regulators, clients and the legal system to come to an appropriate outcome." - TradeArabia News Service