IN THE SUPREME COURT OF JUDICATURE
COMMERCIAL COURT
MR JUSTICE DAVID STEEL
27 September 2002
-and-
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Ewan McQuater (instructed by Denton Wilde Sapte)
for the claimant.
Geraldine Andrews QC (instructed by Trowers & Hamlins) for the defendant
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1. The Claimant (“NBEI”) is an English bank operating in London and is a subsidiary of the National Bank of Egypt, an Egyptian bank. The Defendant (“OHB”) is a bank registered in the Sultanate of Oman.
2. In these proceedings, NBEI claims repayment of an inter-bank short term money market deposit placement facility dated 26 July 1999 (the “placement”) under which NBEI made available to OHB a sum of US$5 million. The transaction took place in London and the sum of $5 million was credited to OHB’s account with NBEI in London for value on 26 July 1999. The placement was initially due to mature on 26 January 2000 but was subsequently extended to the 26 April 2000. On 26 April 2000 NBEI demanded repayment of the deposit. OHB has failed to repay.
3. The placement was the third of three transactions between NBEI and OHB since 1998. The first transaction took place in May 1998 and was a short-term loan by NBEI to OHB in the sum of $1 million for six months. The principal and interest was repaid to NBEI in November 1998.
4. The second transaction took place in December 1998 when NBEI agreed to grant to OHB a money market deposit placement facility in the sum of $2 million for six months. That facility expired in June 1999 and was repaid.
5. Immediately following arrangements for the July 1999 placement, the $5 million was credited to the current account of OHB pursuant to instructions emanating from OHB by tested telex. OHB then gave instructions by letter and/or tested telexes for five payments to be made from that account as follows:
(1) On 27 July 1999, the sum of $2,150,000.00 was initially paid to Nations Bank, New York for the credit of an account at Oman International Bank (“OHB”), the beneficiary being OHB. This payment was initially authorised by OHB’s letter dated 26 July signed by two authorised OHB signatures. The payment was subsequently recalled and sent to OHB on 9 August 1999 via Citibank New York pursuant to tested telex instructions from 01-113.
(2) On 27 July 1999 the sum of $1,350,000.00 was paid to Bank Muscat, Oman for credit of an account in the name of International Consultancy Services LLC.
(3) On 28 July 1999 the sum of $326,006.29 was made to Chase Manhattan Bank, New York for the credit of an account in favour of Merrill Lynch International.
(4) On 3 August 1999 the sum of $1,200,000.00 was paid to National Australia Bank Limited, Singapore for the credit of an account in the name of Messrs GIES & P Limited.
(5) On 10 August 1999 the sum of $11,000.00 was paid to Bank Muscat, Oman for the credit of an account in the name of International Consultancy Services LLC.
6. It now appears that these transactions were implemented as part of a fraud perpetrated by the General Manager of OHB, Mr Bahrain, and others. Mr Bahrain was arrested in Oman in early 2000 and made various admissions that he had defrauded OHB. He sought to implicate certain officers of NBEI in his admissions. In the event Mr Bahrain and eleven others (including three officers of NBEI) were tried on criminal charges in Oman. Mr Bahrain was convicted of fraud, as was OHB chairman Mr Al Nasri. Both were sentenced to terms of imprisonment. The NBEI officials were all acquitted.
7. It is now common ground that Mr Bahrain and Mr Al Nasri were parties to a fraud. It formed no part of OHB’s case that NBEI officers were implicated in or profited from the fraud.
8. In this action NBEI claims:
(1) Repayment of the monies advanced under the placement
(2) Alternatively, $5 million as money advanced to OHB on the current account.
(3) In the further alternative, restitution of the monies that NBEI paid to OHB for its benefit.
9. As to the claims for a repayment of the placement OHB raises two defences: -
(1) It was contended that the placement was ultra vires OHB because, when entering into the placement, OHB failed to comply with circular BM864 issued by the Central Bank of Oman. It was said that OHB was required by Article 3(d) of its Articles of Association to comply with the circular.
(2) It was also contended that OHB’s authority for this transaction was not properly given because Mr Bahrain did not have the authority to act on his own. It was said that the transaction had to be authorised by two signatures, one of whom had to be category A in accordance with OHB’s signature book and this did not happen.
10. As regards the claims for monies advanced on the current account, OHB argued in addition that the payments made out of the current account were not monies lent but that, as a matter of law, they represented a payment of the balance due from NBEI to OHB.
11. As regards the claim in restitution, OHB submitted that it had not benefited from any of the $5 million advanced to it and/or that there is a defence of change of position.
12. In addition to the criminal proceedings in Oman, OHB brought civil proceedings against NBEI before the Commercial Court of Oman seeking a declaration that OHB was not liable to NBEI in relation to the placement. In those proceedings NBEI has throughout contested the jurisdiction of the Omani Court and has not submitted to the Omani jurisdiction. However on 28 April 2001 the Commercial Court of Oman decided that the fact of OH13’s non-compliance with the circular was to render the placement void under Omani law. NBEI’s appeal to the Omani Court of Appeal was dismissed shortly before this hearing.
13. It was common ground in these proceedings that OHB’s capacity to enter into the placement was a question governed by Omani law. NBEI accepted that if the transaction was indeed ultra vires, this was fatal both to the claim for repayment of the monies advanced under the placement and repayment of the monies advanced to OHB on the current account. Further, it was common ground that any such conclusion would preclude any need to investigate the authority of Mr Bahrain and his colleagues.
14. Despite the decisions of the Omani courts, the Claimant sought to contend that the transaction was not ultra vires. The reasoning was as follows: -
(1) Since it was common ground that NBEI had not submitted to the Omani court’s jurisdiction, the judgment of the Omani Court was not capable of creating an issue estoppel by way of res judicata.
(2) Given that the Claimants had the right of appeal to the Supreme Court of Oman, and the firmly held views of their expert that the judgment of the Commercial Court and the Court of Appeal was wrong, this court should form its own view as to the issue.
(3) This court was in any event faced with conflicting decisions of the Omani courts in that the decision of the Omani criminal court, that Mr Bahram had been guilty of embezzling public funds, constituted an implicit finding that OHB were bound by the terms of the placement. Accordingly it was open to this court to prefer the view to be inferred from the outcome of the criminal court proceedings in preference to that of the decision of the Court of Appeal.
15. At the commencement of the hearing, it was suggested to me that it would be desirable for the court to reach a conclusion on the issue of ultra vires as a preliminary issue since, if the Defendants were correct on the point, the time and expense of investigating the authority issue would be avoided and it would be possible to focus immediately on the alternative claim in restitution.
16. At that stage both parties were contemplating calling expert evidence on Omani law. But it seemed to me appropriate, in the exercise of the Court’s case management powers, to shut out the parties from calling expert evidence given that the Omani Commercial Court and the Omani Court of Appeal had decided the very issue.
17. I gave my ruling on the first day of the trial and there is no purpose in repeating it in detail here. Suffice it to say that in MCC Proceeds Inc v. Bishopsgate Investments Trust plc (No 4) [1999] CLC 418, the Court of Appeal summarised the function of expert witnesses on foreign law as follows: -
1. To inform the court of the relevant contents of the foreign law identifying statutes or other legislation and explaining when necessary the foreign court’s approach to their construction;
2. To identify judgments or other authorities explaining what status they have as sources of the foreign law; and
3. Where there is no authority directly in point to assist the English judge in making a finding as to what the foreign courts’ ruling would be if the issue was to arise for a decision there.
18. I need hardly repeat that this is a case in which there is authority directly in point. Accordingly, I concluded there was no justification for the assistance of experts in determining what the foreign court’s ruling would be if the issue was to arise for a decision. In fact the Claimant’s purpose in seeking to adduce expert evidence was not to predict the likely decision of the foreign court. It was simply to impress upon this court their expert’s view as to what the foreign law ought to be rather than what the Court of Appeal in Oman has decided.
19. In these circumstances I shut out the expert evidence. It thus became common ground that I should conclude that Claimant’s claim based on both the placement and the loan must fail on the grounds of the transaction having been ultra vires the Defendant and that the Claimant could only succeed on the basis of its claim in restitution.
20. As regards to the claim for restitution in respect of the five payments made out of the current account, the issues further narrowed during the course of the hearing. The Claimants made no positive case that there was a good claim in respect items (c) (d) and (e) in that prima facie none of those payments was for the benefit of OHB. They were direct payments to those engaged in the fraudulent activity.
21. By the same token, the Defendant abandoned resistance to restitution of item (b) as being by way of discharge of a debt to Merrill Lynch in the normal course of business.
22. The focus was thus only on item (a), the payment of $2.15 million via Citibank for the account of Bank Muscat. The payment arose in the following circumstances:-
(a) On the 14 June 1999, Bank Muscat deposited US$2.1million with OHB at 5.15% for one month.
(b) The money was placed in a transit account entitled “Suspense Account Debtors”.
(c) Thereafter the money was forwarded pursuant to an instruction from the General Manager to Chase Manhattan Bank New York for an account in favour of NBEI.
(d) The internally advertised purpose of this deposit by OHB with NBEI was to “establish our business relationship with international banks”.
(e) In fact the money was used to repay the earlier placement as recorded in OHB’s letter of the 18th June:-
We have arranged through Bank Muscat International to credit US$2.1m ... being US$2,061,614.58 settlement of our liability towards you with accrued interest and the balance of US$38,385.42 may be credited to our US dollar current account.
(f) Following the arrangement for the new placement and the crediting of OHB’s current account with the $5million, arrangements were made by OHB for the transfer of US$2.15million to OHB subject to the following instructions:-
(1) Please pay US$2,1045,877.08 to Chase Manhattan New York for the credit of ... Bank Muscat,
and
2) Balance amount of US$44,122.92 converted to Rials Omani ... to be credited to our current account with you.
23. It was accepted by the Defendant that these payments, at least up to the amount of $2,111,614.58, were for the benefit of OHB (this figure reflecting a deduction from the $2.15million of $38,385.42 being the extent to which the Claimant’s current account was in credit by virtue of the deposit originally made exceeding the sums due on repayment of the earlier placement). The Defendant maintained that it nonetheless could rely on a defence of change of position in regard to that amount.
24. In response to an order of Toulson J made shortly before the hearing that OHB should clarify its case as regards the restitution claim, OHB put their case in various ways. The primary theme emerges from the terms of paragraph 14 of their consequential statement:-
OHB cannot be said to have been unjustly enriched by the transfer of US$2.15million which (apart from a relatively minor sum, less in amount than the sum already credited to the current account) was never actually received by it. Its position is analogous to that of an agent who accounts to his principal on the faith of a payment made to him, and which he is unaware at the time was made by mistake or without consideration. Although the payments to Bank Muscat incidentally happened to discharge any indebtedness of OHB to Bank Muscat in respect of the deposit transaction, the payment to OHB appeared at the time to be a simultaneous discharge of NBEI’s indebtedness to OHB which was an integral part of the deposit transaction.
25. The relevant legal principles are outlined in Lipkin Gorman v. Karpnale Ltd [1991] 2 AC 548. The speech of Lord Goff contains the following passage:-
I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration. They do not arise in the present case. Here there is no doubt that the respondents have acted in good faith throughout, and the action is not founded upon any wrongdoing of the respondents. It is not however appropriate in the present case to attempt to identify all those actions in restitution to which change of position may be a defence. A prominent example will, no doubt, be found in those cases where the plaintiff is seeking repayment of money paid under a mistake of fact; but I can see no reason why the defence should not also be available in principle in a case such as the present, where the plaintiffs money has been paid by a thief to an innocent donee, and the plaintiff then seeks repayment from the donee in an action for money had and received.
At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full. I wish to stress however that the mere fact that the defendant has spent the money, in whole or in part, does not of itself render it inequitable that he should be called upon to repay, because the expenditure might in any event have been incurred by him in the ordinary course of things. I fear that the mistake assumption that mere expenditure of money may be regarded as amounting to a change of position for present purposes, has led in the past to opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions. In this connection I have particularly in mind the speech of Lord Simonds in Ministry of Health v. Simpson [1951] A.C. 251, 276.
26. Despite the requirement to consider “all the circumstances”, it has nonetheless been held that it is not appropriate to balance the respective fault of the two parties: Dextra Bank v. Bank of Jamaica [2002] 1 ALL ER (Com) 193 at p.207.
Their Lordships are, however, most reluctant to recognise the propriety of introducing the concept of relative fault into this branch of the common law, and indeed decline to do so. They regard good faith on the part of the recipient as sufficient requirement in this context. In forming this view, they are much influenced by the fact that, in actions for the recovery of money paid under a mistake of fact, which provide the usual context in which the defence of change of position is invoked, it has been well settled for over 150 years that the plaintiff may recover ‘however careless [he] may have been, in omitting to use due diligence’: see Kelly v. Solari (1841) 9 M & W 54 at 59, [1835-42] All ER Rep 320 at 322 per Park B. It seems very strange that, in such circumstances, the defendant should find his conduct examined to ascertain whether he had been negligent, and still more so that the plaintiffs conduct should likewise be examined for the purposes of assessing the relative fault of the parties. Their Lordships find themselves to be in agreement with Professor Peter Birks who, in his article already cited on ‘Change of Position and Surviving Enrichment’ at p.41, rejected the adoption of the criterion of relative fault in forthright language.
27. A good example of the payment which would not constitute a change of position would be one towards a mortgage: see Scottish Equitable plc v. Derby [2001] 3 All ER 818:-
Mr Weatherill submitted that the payment off of the mortgage was a change of position, but I cannot accept that submission. In general it is not a detriment to pay off a debt which will have to be paid off sooner or later: RVC Dominions Secutities v. Dawson [1994] 111 DLR 4th 230. It might be, if there were a long term loan on advantageous terms but it was not suggested that this was the case here ... (per Robert Walker LJ at p.828).
28. The essence of the Defendants’ case as urged by Miss Andrews QC on their behalf was that OHB had the status of an intermediary or conduit in regard to the money that was being transferred first by Bank Muscat to NBEI and then back to Bank Muscat from NBEI. Thus, it was contended, although there was an appearance of two separate transactions for the movement in each direction, OHB was in the position of making use of the money paid to it only for the purpose which it was understood that it was intended for i.e. transmission up or down the line respectively. Thus, it was submitted, there had been a change of position.
29. I am unable to accept this submission:-
(a) Whilst it is well established that an agent, who accounts to his principal before learning that the money has been paid to him by mistake, is not liable in restitution, it is accepted that OHB was neither acting as an agent nor was OHB under any obligation to account for the money.
(b) No evidence was adduced by the Defendants as to OHB’s “expectations” or “anticipation” in regard to this money: absent such evidence it is not possible to infer that OHB understood that the monies were intended for transfer to Bank Muscat “down the line”.
(c) To the contrary, the evidence of Mr Al Saqry from the Defendant’s audit department, which I accept, was that the liability of Bank Muscat was recorded in the books of OHB in accordance with conventional accounting principles: absent the discharge of the obligation with monies derived from NBEI, he accepted that OHB would have had to have discharged the debt from other sources.
30. The position is clear. OHB were throughout acting as principal. The monies borrowed from NBEI were used to pay off a genuine debt to Bank Muscat. Albeit the loan by NBEI was ultra vires, it may nonetheless be recovered in restitution: see Goff and Jones, Law of Restitution 5th Ed. p. 167 and the cases there cited. Further, in my judgment, it is not in all the circumstances inequitable to require the Defendant to effect restitution in the sum of $2,111,617.58.