FRAUD
Claim for lost trading profits upheld following broker's fraud
Parabola Investments Limited and others v Browallia Cal Limited and others (2009)
In a notably generous decision of the High Court, claimant traders successfully recouped the entirety of their losses on their investments in circumstances where their broker had made daily dishonest representations that the trading he was conducting on their behalf was profitable. The Court decided that the broker ought to make good the claimant traders' losses and even awarded them damages for the profits they would probably have made on alternative investments.
The claimants were run by Rajesh Gill, an extremely successful trader in derivatives on the world markets. The first and second defendants were financial institutions which Mr Gill had traded through and which had employed Matthew Bomford, the third defendant, a senior futures broker. The claimant alleged that over some eight months, Mr Bomford had, on a daily basis, made fraudulent misrepresentations to Mr Gill so as to give him the impression that his trading was profitable, when in truth it was not. On discovery of the true position, the claimants claimed compensation for their investment losses as well as damages for trades that they would have carried out were it not for the broker's fraudulent misrepresentations.
The High Court found that the claimants had been induced by the third defendant's fraudulent statements to continue trading unprofitably and, had it not been for those statements, a profit would have been made. The Court was particularly critical of Mr Bomford as a witness, and described him as "a complete stranger to the truth".
The claimants were awarded damages for the capital loss by which the trading fund was depleted by the fraud, as well as (i) loss of profits that would have been made by making alternative trades for the period of the fraud (it was not necessary for the claimants to show that they would have entered into a specific alternative transaction), and (ii) loss of profits from discovery of the fraud to the date of the trial, on the basis that if the claimants had more trading capital available, then it was probable that further profits would have been made. In reaching this decision, the Court was influenced by the fact that Mr Gill had an impressive and successful trading track record and had continued to trade profitably elsewhere throughout the period of Mr Bomford's fraud.
The Court firmly dismissed the broker's argument that to award such damages for loss of profit would overcompensate the claimants, stating that "the fact that trading in contracts for differences contained an element of speculation did not mean that the prospect of making a profit trading those derivatives was so speculative that the Court should regard that as not a recoverable loss".
For further detail see the BLG briefing note.
Intention to inflict harm a key ingredient in tort of "unlawful means conspiracy"
Bank of Tokyo-Mitsubishi UFJ Ltd and another v Baskan Gida Sanayi Ve Pazarlama AS and others (2009)
Frauds are increasingly commonplace in challenging economic times, but the law places strict controls on the criteria which must be satisfied before finding a party liable as a conspirator. In this case, the criteria were not satisfied for some of the defendants, the claimants having failed to make out the requisite "intention".
The claimant banks entered into a loan facility with a Turkish hazelnut supplier under which they advanced loans, which were to be repaid through assignment of its right to receive payment from the Ferrero group of companies, one of its largest customers. After drawing down a substantial sum from the facility based on forged documents, and in what appeared to be a premeditated fraud, the hazelnut supplier defaulted on the loans and transferred all its assets to another Turkish company to confound its creditors, including the claimant banks. With the fraudulent supplier disappearing into the sunset, the banks sought to recover their losses from the deeper pockets of the Ferrero group, claiming that it had participated in the supplier's fraud with knowledge and was therefore liable for the tort of "unlawful means conspiracy" (amongst various other causes of action, including one based on trading references).
Finding for the Ferrero defendants, the High Court held (after a six month trial) that the banks had failed to make out their case. The intention to inflict harm on the banks was a key ingredient of the tort and this was missing. Nothing in the evidence came near to justifying the inference that Ferrero had combined with the hazelnut supplier in the obtaining of monies from the banks by deception. Nor was Ferrero liable on any other basis.
Briggs J carried out a careful analysis of the extent to which the Ferrero defendants shared a common objective with the primary fraudsters, and the extent to which that objective was, to Ferrero's knowledge, to be achieved by unlawful means intended to injure the claimants. In doing so, the Court took a wide range of circumstances into account, including Ferrero's long-standing (and trouble free) relationship of trust with the hazelnut supplier, and the lack of any motive for Ferrero in participating in such a fraud.
Barlow Lyde & Gilbert LLP acted for Ferrero in the litigation.
INTERNATIONAL LITIGATION
Irish Supreme Court faced with deciding who should win jurisdiction battle
Goshawk Dedicated Ltd and others v Life Receivables Irl Ltd (2009)
This case presented the Irish Supreme Court with the vexed question of which party should win the jurisdiction battle where there are two competing sets of parallel proceedings.
Here, one set of proceedings was within the EU (Ireland) and the other set was outside the EU (the United States). The Court was faced with deciding whether the Brussels Regulation allowed it to decline jurisdiction in deference to the US proceedings which had been commenced first in time. If it permitted the Irish proceedings to proceed, this would satisfy Article 2(1) of the Brussels Regulation, which requires that proceedings commenced in the member state where the defendant is domiciled should be allowed to proceed there.
However, such a decision would disregard the well established doctrine of "lis alibi pendens" which provides that where parallel proceedings between the same parties concerning the same cause of action are brought, any court other than the court first seised must stay its proceedings or decline jurisdiction. Although Article 27 of the Brussels Regulation does enshrine the same principle by providing that, where the competing jurisdiction is a member state (and subject to the Brussels regime), it must decline jurisdiction, it does not offer any guidance or set out applicable criteria where the alternative jurisdiction is a non-member state, as was the case here. In the end, the Irish Supreme Court decided that it could not make a decision and decided to refer this question to the European Court of Justice.
NB: The case reported below (Catalyst Investment Group Ltd v Lewinsohn and others (2009)) states that this referral to the ECJ did not, in fact, occur as the parties resolved their dispute privately.
www.bailii.org/ie/cases/IESC/2009/S7.html
Proceedings in EU member state must be allowed to proceed even if non EU proceedings commenced first in time
Catalyst Investment Group Ltd v Lewinsohn and others (2009)
In a decision which follows Goshawk (see above) and brings welcome clarity to the difficult question faced by the Irish Supreme Court in that case, the High Court decided that, where there are parallel proceedings in an EU member state and a non-EU member state, the EU proceedings must be allowed to proceed under the terms of the Brussels Regulation, even if the non-EU proceedings were commenced first in time.
The UK-domiciled defendants sought a stay of three sets of UK proceedings on the basis that the Utah Court of the United States was a more appropriate forum. The US proceedings involved the same parties and the same cause of action. The defendants argued that Article 27 of the Brussels Regulation (which provides for member states to decline jurisdiction if another member state is seised first) should be applied by analogy such as to give the English court discretion to stay its proceedings in favour of the courts of the non-EU state, either because it is the better forum for the dispute or, alternatively, simply because it was seised first. The defendants also referred the Court to Article 23 of the Brussels Regulation which permits it to stay its own proceedings in favour of non-EU states where there is an exclusive/non-exclusive jurisdiction clause designating that state as the proper forum.
The High Court disagreed that Article 27 should be extended in this way. To do so would undermine the harmony and predictability of approach to jurisdiction intended by the Brussels Regulation since not all member states would adopt the same approach to the question of whether to stay proceedings in favour of non-EU states, in light of differences in their national laws on this issue. Regarding Article 23, this provision dealt with a situation where the parties had agreed upon a jurisdiction, which was a situation distinct from the one here, where there was no such agreement. To permit itself a discretion to consider whether the non-EU state was a better forum for the dispute would also contradict the 2005 decision of the European Court of Justice in Owusu v Jackson (C281/02), reported on in previous issues of this publication and available from the BLG website.
Court of Appeal adopts common sense approach to applicability of exclusive jurisdiction clause...
UBS AG and UBS Securities LLC v HSH Nordbank AG (2009)
An exclusive jurisdiction clause stipulating a particular forum will not automatically "trump" proceedings pending in another forum, where the clause was not, in reality, intended by the parties to apply to those proceedings. In reaching this conclusion, the Court of Appeal adopted a common sense, purposive and commercial approach and construed the clause in light of the parties' transaction as a whole.
The two parties were each banks, one American ("UBS") and the other German ("HSH"). The latter agreed to purchase derivatives from UBS. UBS commenced proceedings in the New York courts for, broadly, misrepresentation by HSH. HSH issued proceedings in the English courts for a negative declaration in relation to the claims brought in the US proceedings, claiming that the English courts had jurisdiction by virtue of the exclusive English jurisdiction clause in one of the parties' agreements which, under Article 23 of the Brussels Regulation, required the English courts to hear the matter.
The transaction, somewhat confusingly, involved various different agreements, each containing differing jurisdiction clauses. The agreement relied upon by HSH (the "dealer's confirmation") contained an English exclusive jurisdiction clause stating that the English courts "had jurisdiction to settle disputes arising out of or in connection with the agreement". However, two other agreements, (the offer circular and indenture and another agreement relating to the management of the investment portfolio) were governed by New York law and contained exclusive jurisdiction clauses in favour of the New York courts.
Whilst the Court of Appeal agreed that jurisdiction clauses ought to be interpreted widely and generously and could apply in principle to pre-contract matters such as misrepresentation, the clause must be interpreted commercially in light of the transaction as a whole. The dealer's confirmation agreement had a limited purpose. It merely confirmed the type of consideration paid by HSH for certain assets in the investment pool. The Court held that the parties cannot have intended that its jurisdiction clause, which was a "boiler-plate" bond issue jurisdiction clause, would determine the forum for disputes arising out of the other contracts between them. The Court must look at all of the agreements as connected and part of one package and give priority to the jurisdiction clauses in the agreements which were at the "commercial centre" of the transaction. The Court assumed that the parties were sensible business people and would not have intended an uncommercial result.
Although not an issue in this case, given the Court's decision that the English jurisdiction clause did not apply here, the Court of Appeal emphasised that, where England has jurisdiction to hear a dispute under the Brussels Regulation, the English courts cannot decline jurisdiction on the ground that another forum is more convenient. This follows previous authority (see the ECJ's decision in Owusu v Jackson (2005) in Issue 13 of this Briefing, Goshawk Dedicated Ltd and others v Life Receivables Irl Ltd (2009) and Catalyst Investment Group Ltd v Lewinsohn and others (2009) (both covered above)).
...and the High Court follows suit in relation to contradictory jurisdiction clauses
Deutsche Bank AG v Sebastian Holdings Inc (2009)
This decision of the High Court endorses the Court of Appeal's common sense approach in Nordbank (see above) in relation to jurisdiction clauses. A German investment bank ("D") and a company incorporated in the Turks and Caicos Islands ("S") entered into a series of complex agreements concerning equities and foreign exchange trading carried out by S. When disputes over the agreements arose, S brought proceedings in New York for misrepresentation and D brought proceedings in London for debts relating to the equity trading.
The various agreements between the parties contained competing jurisdiction clauses.
Following Nordbank, the Court had to construe the clauses commercially to determine whether there was any bar on D bringing proceedings in London. In doing so it looked at how the overall contractual position between the parties had developed over time.
The first agreement contained a non-exclusive English jurisdiction clause which, the Court held, meant that the parties must have contemplated the possibility of parallel proceedings. Later agreements were not inconsistent with that position, but the final set of agreements relating to equity trading did create scope for a clash, as they contained exclusive English jurisdiction clauses and the parties could not have intended that these would give way to the non-exclusive jurisdiction clauses in earlier agreements. Because D's claim was for debts relating to equity trading and arose out of these agreements, it was therefore entitled to bring its claim in England.
Parallel proceedings are not necessarily vexatious or justify the imposition of an anti-suit injunction
Highland Crusader Offshore Partners and others v Deutsche Bank AG and another (2009)
Whilst undoubtedly inconvenient, parallel proceedings in two different jurisdictions are normal and to be expected when the parties have not made a particular forum "exclusive" and have opted for a non-exclusive jurisdiction clause. Furthermore, the existence of two sets of proceedings does not automatically mean that one set is vexatious and justifies the imposition of an anti-suit injunction.
Here, the parties were both sophisticated financial institutions, one a major United States hedge fund ("H"), the other a German bank ("D"). H agreed to purchase asset back collateralised loan obligations from D. Their agreements were governed by English law and the parties submitted to the jurisdiction of the English courts, although this did not limit their right to pursue proceedings in the courts of any other "competent jurisdiction". After a dispute arose between the parties, H commenced proceedings for misrepresentation in the courts of Texas. D issued proceedings in the English Commercial Court and sought, and was granted, an anti-suit injunction preventing H from prosecuting the Texas action.
Setting aside the injunction, the Court of Appeal stated that the prosecution of parallel proceedings in different jurisdictions was undesirable but not necessarily vexatious or oppressive and the decision whether or not to grant an anti-suit injunction involved the Court exercising its discretion in a flexible manner. By agreeing non-exclusive jurisdiction, the parties had anticipated and accepted the possibility of parallel proceedings. As a result, only foreign proceedings which were vexatious and oppressive, and for some reason independent of the mere presence of the non-exclusive jurisdiction clause, should be restrained by injunction. The Court pointed out that instances where parties have agreed non-exclusive jurisdiction clauses are numerous but there are only a handful of exceptional cases where anti-suit injunctions have been granted. The Court also highlighted the importance of comity between states, i.e. the importance of respecting foreign courts' freedom to decide disputes and the need to treat anti-suit injunctions with caution, given that they necessarily interfere with the foreign court's process. The Court commented that the stronger the connection of the foreign court with the parties and the subject matter of the dispute, the stronger was the argument against intervention.
Harmful act occurs where money should have been received
Dolphin Maritime & Aviation Services Ltd v Sveriges Angartygs Assurans Forening (2009)
A party can bring a claim in the country where he should have received money as this is the place where the harmful event occurred under the Brussels Regulation.
In this case, a vessel was wrecked off the Gibraltar coast. Underwriters of the cargo onboard the vessel contracted with the claimant, an English cargo recovery agent, to recover compensation in respect of the cargo. The terms stated that the claimant would be paid by commission on the recoveries and also stated that the underwriters would not negotiate the matter themselves, and would inform the claimant if they were approached. However, the underwriters subsequently entered into negotiations with the defendant, a well known Swedish P&I club (a type of marine insurer) which led to a settlement of $8.3million, which was paid directly to underwriters in Turkey. The claimant brought proceedings in England against the P&I club for the tort of procuring or inducing breach of contract. The P&I club disputed that the English courts had jurisdiction to deal with the claim.
Under the Brussels Regulation, parties should normally be sued in the country where they are based. However, in matters of tort, a party can bring an action in the place where the consequences of a harmful act complained of occurred. In this case, the claimant argued that, under its contract with underwriters, it was entitled to take a commission from the settlement sum, which should have been paid directly to it, rather than to the underwriters. Since the money should have been received in its English bank account, the harmful act occurred in England, entitling it to sue in this jurisdiction. The High Court agreed with this analysis, and refused to strike out the tort claim.
MEDIATION
Mediator required to give evidence
Farm Assist Limited (in liquidation) v The Secretary of State for the Environment, Food and Rural Affairs (No. 2) (2009)
A mediator may, in certain circumstances, give evidence notwithstanding confidentiality provisions in the mediation agreement.
This noteworthy decision concerned an application to set aside a settlement agreement reached at a mediation on the basis that it was entered into under economic duress. The defendant issued a witness summons requiring the mediator to attend the trial of the action, which the mediator applied to set aside on the basis that her evidence was confidential, legally privileged and subject to express provisions concerning confidentiality and non-attendance, to give evidence pursuant to the mediation agreement signed by the parties.
The High Court held that, although the mediation agreement stated that communications relating to the mediation were to be "without prejudice" (and therefore evidence relating to them would not be admissible in litigation), that privilege belonged to the parties rather than the mediator and had been waived by them. Furthermore, although the confidentiality provisions in a mediation agreement could be enforced by the mediator (rather than just the parties) and the court would normally uphold that confidentiality, in this case the interests of justice meant that evidence concerning what happened at the mediation should be given by the mediator.
The provision in the mediation agreement under which the parties agreed not to call the mediator as a witness "in relation to the dispute" was not applicable in this instance, because the dispute contemplated under the mediation agreement was the underlying litigation. That was not the same as the dispute in question (which was whether the settlement reached at the mediation was entered into under duress).
Although confidentiality is central to the mediation process, this case demonstrates that in some circumstances, particularly where serious allegations are made as to conduct at the mediation, the court is prepared to examine what happened in the course of the mediation and to require the mediator to give evidence.
SHAREHOLDER CLAIMS
Shareholders fail to challenge basis of compensation following bank nationalisation
(1) SRM Global Master Fund LP (2) RAB Special Situations (Master) Fund Ltd (3) Dennis Grainger and others v The Commissioners of Her Majesty's Treasury (2009)
In a sober ruling which reflects the impecunious state of the national purse, the Court of Appeal has rejected former Northern Rock shareholders' plea for greater compensation following nationalisation of the bank.
Northern Rock was nationalised in February 2008 following critical liquidity problems which threatened to destabilise the economy and a period of financial support provided by the Government. Under the provisions set out in the compensation scheme devised by the Government, the bank's former shareholders were entitled to compensation following nationalisation, to be calculated as the value of their shares. Such share "value" would be determined on the following assumptions: (i) all financial assistance previously provided by the Government would be withdrawn from Northern Rock and (ii) the bank was unable to continue as a going concern and was in administration. The former shareholders argued that this meant that they would be entitled to nothing (or a derisory amount) for their shares. They claimed that such assumptions were manifestly disproportionate and a violation of their rights under the European Convention on Human Rights.
The Court of Appeal held that, in determining whether the compensation scheme was fair, the Court had to balance the demands of the general interest of the community and the shareholders' fundamental human right to protection of private property, by determining what was proportionate in the context of the specific circumstances. In particular, the European Court of Human Rights granted the Court a discretion to take into account local needs and conditions in circumstances where a convention right may be endangered. As a result, if the national court considered that the interference with convention rights fell within the scope of the legitimate discretion of the Government, then there would be no violation of the shareholders' rights.
Normally, compensation should reasonably relate to the value of the property taken. However, where the rescue of the bank was motivated by the need to preserve the national economy, the Government had a wide discretion to make what payment it considered reasonable in the public interest. On this occasion, the assumptions in the compensation scheme would not automatically value the shares as worthless, they were merely designed to put the shareholders in the position they would have occupied had the Government never provided any support.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
