Koo Golden East Mongolia v Bank of Nova Scotia & Ors

This appeal arises out of a Norwich Pharmacal order made by Royce J on Monday 10 December in which he ordered the first and second defendants by 16:00 on 13 December to serve on the claimants a signed witness statement answering a number of specific questions. The judge refused permission to appeal but permission was subsequently granted on paper by Buxton LJ who also granted a stay of execution of the order pending determination of the appeal. Because the appeal was said to be urgent we heard the appeal on Monday, which was 17 December, and reserved judgment until today, 19 December.

The order was made against the first and second defendants. Although it appears that the relief is really sought against the first defendant no distinction is drawn between the position of the first and second defendants in this appeal. It is convenient to refer only to the position of the first defendant (the bank). It is a Canadian bullion bank with a London branch. The third defendant is the Central Bank of Mongolia (MongolBank). The claimant’s principal dispute is with MongolBank but this appeal is only concerned with the claimant’s attempt to obtain information and documents from the bank. In order to focus on the issues in this appeal it is appropriate to say a word about the underlying dispute between the claimant and MongolBank and then the development of these proceedings and the role of the bank.

The facts are set out in some detail in the claimant’s skeleton argument. Mr Fulton accepts on behalf of the bank that the facts are correct or at least arguably correct. It is necessary for present purposes only to refer to some of them. The claimant is a gold mining company based in Mongolia. Mr Sergey Paushok is the indirect majority shareholder in the claimant and its executive director. The claimant says that it is an established, large and successful company. Under Mongolian banking law the right to hold deposits of gold is limited to MongolBank and other banks authorised by MongolBank. In practice gold mining companies place their mined gold with MongolBank for safekeeping, usually releasing it for sale at a later date. On 19 July 2006 the claimant entered into a “safe custody/sale and purchase of precious metal agreement” (the agreement) with MongolBank.

The terms of the agreement, which is governed by the law of Mongolia included the following:

The respondent agreed to deliver to MongolBank gold bullion bars (metal) for safe custody and subsequently to sell metal to MongolBank on certain terms (clause 1.1).

The sale and delivery period was subsequently extended to 25 December 2007 (clause 1.2.1) as varied by supplementary agreement number one dated 5 October 2006.

The sale date would be any date designated by the claimant during the sale period (clause 1.2.2).

The amount of metal to be sold would be at least one million grams, ie one metric tonne (clause 1.2.4).

The price would be the metal price per ounce as set by MongolBank at 9.30am Ulan Bator Time on the date the claimant delivers a letter containing the request to sell the metal to MongolBank (the metal sale letter) (clause 1.2.5).

The claimant was obliged to deliver not less than one million grams of metal to MongolBank (clause 2.1.1).

The claimant was obliged to issue the metal sale letter within the period in clause 1.2.1, that is to say on or before 25 December 2007 (clause 2.1.2).

MongolBank was obliged to ensure acceptance of metal for safe custody in an amount of not less than one million grams (clause 2.2.1).

MongolBank was obliged to ensure the security of the metal delivered for safe custody from the moment of the acceptance of the metal into MongolBank’s depository until its sale by the claimant (clause 2.2.2).

MongolBank was obliged to issue a certificate confirming the amount of metal kept in safe custody on the claimant’s request within one business day of receipt of such request (clause 2.2.3).

MongolBank had the right to accept metal in an amount greater than provided under the agreement (clause 2.4).

During the metal sale period the claimant must sell to MongolBank metal in the amount set forth in clause 1.2.4, that is one million grams, and MongolBank must accept metal for safe custody and to purchase metal as the claimant requires in the metal sale letters (clause 3.1).

Risk in the metal will pass on delivery into the safe custody of MongolBank but ownership will only pass on the delivery of the metal sale letter designating the sale date and metal sale request and execution of the metal sale statement (clause 4.1).

MongolBank would pay 85% of the value of the metal deposited into safe custody on the date of delivery and that sum would be deducted from the actual purchase price. The balance would be payable to or by the claimant (clauses 5.5 to 5.8).

In cases not covered by the agreement liability would be determined in accordance with Mongolian law (clause 6.6).

All disputes and controversies not expressly addressed in the agreement were to be resolved by negotiation on the basis of Mongolian law (clause 9.1).

If the matters in dispute could not be resolved through negotiation the disputes were to be resolved in court – by which I understand was meant in a court in Mongolia – pursuant to the procedures established by Mongolian law (clause 9.2).

It is the claimant’s case that the following terms were implied into the agreement under Mongolian Civil Law:

In addition, by article 103.1 of the Mongolian Civil Law the rights of an owner may only be curtailed or restricted in ways expressly provided for by specific legal provisions and there are no provisions of Mongolian law which would have the effect of depriving the respondent of title to the gold as a result of any transaction entered into by MongolBank with any third party. Article 106 of the Mongolian Civil Law provides that an owner may reclaim its property from those holding it illegally or without proper authorisation.

Mr Fulton accepts on behalf of the bank that in these circumstances the claimant has an arguable case under the agreement and/or Mongolian law that:

The claimant accepts that it could not require redelivery of any of the gold without repaying the 85% of the value of the gold redelivered. Although Mr Fulton submits that the claimant has an arguable case along the lines I have just described he submits that the true position is much more likely to be as follows:

It is accepted on all sides that the resolution of these questions depends upon Mongolian law and upon the application of Mongolian law to the terms of the agreement. It is not to my mind without significance that by clause 9 of the agreement the claimant and MongolBank had submitted their disputes to the courts in Mongolia for their resolution under Mongolian law.

I return to the facts. Between 21 July 2006 and 19 January 2007 the claimant delivered a total of 3,299,184.13 grams of gold bars to MongolBank. There is some evidence that the chemically pure element of that gold was or was estimated to be 2,951,024.21 grams. On 12 March 2007 the claimant asked MongolBank to “confirm the amount of gold held in safe custody by MongolBank” in accordance with the agreement. MongolBank replied on 14 March saying that in accordance with the agreement MongolBank held 3,299,184.13 grams as of 13 March 2007. In the meantime in November 2006 the claimant was assessed by the Mongolian tax authorities for windfall profit tax and royalties on about one metric tonne of gold out of two metric tonnes delivered to MongolBank for safe custody. By that time no metal sale letter had been issued, as indeed is still the case. Mr Paushok wrote to MongolBank on 4 November 2006 asking for confirmation of the position. MongolBank replied on 8 November saying that no final settlement or payments had been made but that given the gold price fluctuations in the international market, “a certain portion” had been exported for refining.

Somewhat later, on 24 August 2007, MongolBank issued a press statement, which seems to me to be of some importance in this appeal and which is in these terms:

I will return to the second paragraph in a moment but the statement expressly stated that the gold “has been refined and placed abroad”. It also reflects MongolBank’s case under the agreement, namely that the gold “will be definitely purchased by MongolBank”, presumably on or before 25 December 2007. The claimant responded by issuing a statement to the effect that MongolBank was in breach of the agreement. On 27 August the claimant asked MongolBank to make a statement under clause 2.2.3 of the agreement stating what amount of gold owned by the claimant and delivered to MongolBank for safe custody “is currently physically kept in Mongolia” pursuant to the agreement. MongolBank replied stating the weights I gave earlier, namely 3,299,184.13 and 2,951,024.21 grams. On 10 September MongolBank wrote to the claimant spelling out the amount of gold received and the prepayment of 85% and complaining that the claimants had not been willing to finalise a settlement. The letter concluded:

No doubt in response to the last paragraph of that letter the claimant replied on 11 October. It set out the relevant figures and added:

As Smith LJ observed in the course of the argument that letter does not amount to a tender of repayment of the 85% but it does indicate a willingness to do so. I should add that in the meantime, according to his statement, Mr Paushok telephoned MongolBank on 20 or 21 September and was told by a former president of MongolBank that MongolBank had exported the gold and that it had been refined and placed with the bank in London. He was also told that some or all of the refined gold had been sold. As can be seen, the underlying dispute is between the claimant and MongolBank. It was information that the bank was in possession of the gold that prompted these proceedings.

The claimant’s first step was to make an application without notice on 19 October to Saunders J for an order that the bank, the second defendant and MongolBank be restrained from moving or otherwise dealing with the gold. Saunders J declined to make the order on the ground that there was no good reason for the application to be made without notice. The application was subsequently made on notice to the bank but not, so far as I can see, to MongolBank. It came before Lloyd-Jones J on 25 October. He drew the claimant’s attention in particular to section 1(2) and section 14(4) of the State Immunity Act 1978 (the 1978 Act). He adjourned the hearing for a short time to enable the claimant to prepare submissions on the question whether an injunction should be granted against MongolBank as a central bank. After hearing those submissions he held that it should not. He held that the effect of section 14(4) was that a central bank has the same protection as a state under section 13(1) to (3) and that their effect is that no injunctive relief can be granted against a central bank. He accordingly declined to grant an injunction against MongolBank. MongolBank was not represented before him. He adjourned the applications against the bank. In doing so he expressed doubt about whether he could grant an injunction in the light of sections 13(2)(b), 13(4) and 14(4) of the 1978 act.

He also expressed doubt as to whether the claimant could meet the undertaking in damages. He did however direct the bank through an appropriate officer to make a statement, to which it did not object. He directed the service of a claim form in seven days. On 31 October the claimant issued a claim form naming the bank the second defendants and MongolBank as defendants. The claim was expressed in these terms:

It can be seen that the claim is based on alleged possession of the gold by the bank and claims an order for delivery up of the gold, an account and damages and/or disgorgement of profits. It does not include a claim for Norwich Pharmacal relief. In the meantime Mr Simon Weeks who is a director of the bank made a statement pursuant to the order of Lloyd-Jones J. The statement included the assertion that in the period from July 2006 MongolBank had not deposited with the bank or the second defendant any gold ingot whether refined or unrefined. It also stated that MongolBank did not hold an allocated account with the bank but did hold an unallocated account to which I will return in a moment. The claimant’s solicitors complained this statement did not comply with the order.

In a letter dated 1 November the bank’s solicitors confirmed that it had received no physical gold from MongolBank in the relevant period. By a letter dated 16 November the claimants again asked MongolBank for the whereabouts of the gold. It replied as follows on 19 November:

The claimant decided to restore the application which had been adjourned by Lloyd-Jones J. It did so because the contents of that letter appeared to be inconsistent with Mr Weeks’ statement that MongolBank had not deposited any gold at the bank. The claimant accordingly issued an application in which it sought injunctive relief against the bank and an affidavit in relation to the physical gold in its possession. The application did not include an application for Norwich Pharmacal relief of the kind ultimately ordered by Royce J.

On 6 December Mr Weeks made a second witness statement. He exhibited a letter he had written to MongolBank asking for an explanation of the statement about the physical gold in the letter from MongolBank dated 22 November quoted above. His letter included this sentence:

MongolBank replied on 5 December clearly stating that it had never delivered any physical gold to the bank. MongolBank did however decline to answer another question in Mr Weeks’ letter which asked what had happened to the physical gold where it was refined and who took the physical out turn in exchange for a “loco London credit” into MongolBank’s account with the bank. MongolBank declined to answer that question because:

Mr Weeks however described in his second statement what was likely to have happened to the gold as follows, MongolBank probably placed the claimant’s gold over a period of time with a European refinery to be refined. The European refinery then placed the refined gold with a European, possibly English, bank. The European bank then arranged for a credit of the equivalent number of ounces to MongolBank’s unallocated account with the bank. The European bank would do this either on its own account if it were a clearing bank or via a clearing bank. Mr Weeks added that once the material is refined it may become co-mingled with other similar material and therefore it would be impossible specifically to identify the original material. Thus where a bank takes physical possession of refined out-turn the material may come from a variety of sources.

Mr Fulton prepared a skeleton argument dated 7 December before the hearing before the judge which was limited to the injunctive relief claimed. He did not address a Norwich Pharmacal application because none had been made. However in the light of Mr Weeks’ second statement the claimant abandoned its claim for injunctive relief but now sought Norwich Pharmacal relief. In Mr Miller’s skeleton argument on behalf of the claimant which was also dated 7 December, which was a Friday, he said that in the light of Mr Weeks’ second statement the claimant must of course accept that the bank does not physically hold the gold. The claimant accordingly abandoned its claim for injunctive relief. Instead it sought wide ranging Norwich Pharmacal relief in order to try to discover who the refiner was, what had happened to the gold and what had happened to the proceeds of sale of the gold through the international banking system.

In a nutshell the submission made to the judge as set out in paragraph 24 of Mr Miller’s skeleton argument was that the bank, possibly through no fault of its own, has been mixed up in the tortious act of MongolBank and possibly others involved in the conversion of the gold and has facilitated wrongdoing by allowing credits to be made on MongolBank’s account with the bank. The only case relied upon in the skeleton was Norwich Pharmacal Company v Commissioners of Customs and Excise [1974] AC 133. The judge essentially accepted Mr Miller’s submissions and made the order sought.

It is plain that the argument before us which lasted a whole day was much more extensive than that before the judge. In particular the judge does not mention the possibility that an order should not be made on the ground of state immunity whereas it played a significant part in the argument before us. I have set out the background and the facts in some detail because in my opinion they are of some importance in the resolution of this appeal. The thrust of the case until 7 December had focused on the assertion that the bank was in physical possession of the gold and that the claimant wanted to preserve the gold in order to be able to pursue its claims against MongolBank. Mr Black QC, who, with Mr Miller, represents the claimant in this appeal, now puts the case on the basis that Norwich Pharmacal relief is necessary in order to pursue a claim for damages against the refiners of the gold on the basis that they are liable for conversion or some form of interference with goods. It is conceded by Mr Fulton that if MongolBank had no right to have the gold refined, on the basis that it did not own the gold, it is at least arguable that the claimant has a cause of action against the refiners. However for his part Mr Black correctly concedes that the claimant cannot be in a better position against the refiners or indeed any bank or entity further down the line than he would be against MongolBank. If MongolBank is in breach of duty owed to the claimant then the refiners may also be but, if the claimant does not have a valid claim against MongolBank it follows that it does not have a valid claim against the refiners. The claimant has all the information that it needs to pursue a claim against MongolBank, because it is conceded that MongolBank delivered the gold or most of it for refining outside Mongolia. Either MongolBank was entitled to do that or it was not. It does not need Norwich Pharmacal relief against the bank to pursue that claim.

The claimant can pursue that claim by discussion with MongolBank or, if that should fail, by action in the courts of Mongolia as it agreed to do in the agreement. The claimant does not say that the courts of Mongolia are not competent to determine such a claim. Recognising this position, Mr Black expressly said that the claimant would not proceed with a claim against MongolBank in England. Thus the sole purpose of the Norwich Pharmacal relief is as a preliminary to a possible action against the refiners, wherever they might be possibly, or against an intermediate bank.

The bank now resists the claim on three bases: one, that the conditions for Norwich Pharmacal relief were not satisfied; two, that the court cannot grant relief because of the state immunity of MongolBank; and three, that relief should be refused in the exercise of the court’s discretion. Mr Fulton submits that the judge erred in principle or was plainly wrong in granting the relief. I will consider each of those points in turn.

The facts asserted for this purpose are these: the gold was refined by a gold refiner outside Mongolia and according to Mr Weeks probably a European refiner. It is not clear where the refined gold has been held physically after refining or by whom. Nor is it clear whether the unrefined gold is, as it were, still identifiable in its refined form or whether it has been mixed with other gold so as to lose its identity. It seems to me to be quite likely that there has been mixture of the gold but this is really no more than speculation.

It is common ground that MongolBank has an agreement with the bank substantially on the terms of the standard unallocated precious metals account agreement (the UPMAA). It has what is known as an unallocated account in which a certain quantity of gold is credited to MongolBank’s account. In the agreement unallocated account is defined as meaning:

Clause 2.3 provides for reports to be made from time to time by the bank to MongolBank. The gold is denominated in an unallocated account in ounces. Clause 3 of UPMAA provides:

Mr Weeks says that in this case book entry transfers were made in accordance with clause 3.1(a)(ii). Clause 3.5 provides:

In the event, the evidence is that MongolBank does not have an allocated but only an unallocated account with the bank. The bank does not hold any gold for MongolBank and its obligations are purely contractual. The claimant wishes to know who the refiners were and who holds the gold. Mr Black recognises that the bank may not know who the refiners were but submits that it is likely to have information which will lead the claimant to the name of a gold clearing bank, of which I think there are five, which will have information which may lead to the whereabouts of the gold. It is, I think, likely that the bank does have such information which would take the claimant a step nearer the gold or the name of the refiner, even if the claimant may have to make further Norwich Pharmacal applications in the future.

The classic statement of principle is that of Lord Reid in the Norwich Pharmacal case itself where he said at page 175 B to C:

Mr Fulton submits that that is not this case because the bank was not, “mixed up with the tortious acts of others so as to facilitate their wrong-doing”. He submits that the bank was not mixed up with the refining process or with the subsequent movement of the refined gold, if there was any such movement. The judge rejected that submission on the basis that it is too narrow. So would I. I do not think that Lord Reid intended to put it so narrowly.

Some of the other members of the house put it more broadly. For example, Lord Morris said at page 178H to 179A:

It seems to me that, whereas here the alleged tort involves dealing with the claimant’s property without its consent, Norwich Pharmacal relief should in principle be available against a person who holds an account which contains the proceeds of sale of the product, here the refined gold. Indeed that would, to my mind, be a classic case for such relief. In the present case the account does not hold the proceeds of sale but (it appears) the quantity of gold which, in one sense at least, represents the refined gold. I agree with the view expressed by Lightman J in Mitsui and Co Ltd v Nexen Petroleum UK Ltd [2005] EWHC 625 (Ch), [2005] 3 All ER 511 at [20] that Norwich Pharmacal relief is a flexible remedy. See also Ashworth Security Hospital v MGN Ltd [2002] UKHL 29, [2002] 1 WLR 2033 per Lord Woolf CJ at [57].

In these circumstances this is a case in which, in my opinion, Norwich Pharmacal relief is, in principle, available. However Lord Cross made it clear at page 199F to G that this is a discretionary remedy. He said:

As I have already indicated, this aspect of the case did not play any significant part in the argument before the judge, perhaps because Mr Fulton had only a short time to prepare the argument. However, it was put at the forefront of his submissions in this appeal and it was not suggested that the point was not now open the bank. The 1978 Act provides so far as relevant:

a commercial transaction entered into by the State; or

an obligation of the State which by virtue of a contract (whether a commercial transaction or not) falls to be performed wholly or partly in the United Kingdom …

any contract for the supply of goods or services;

any loan or other transaction for the provision of finance and any guarantee or indemnity in respect of any such transaction or of any other financial obligation; and

any other transaction or activity (whether of a commercial, industrial, financial, professional or other similar character) into which a State enters or in which it engages otherwise than in the exercise of sovereign authority; but neither paragraph of subsection (1) above applies to a contract of employment between a State and an individual.

relief shall not be given against a State by way of injunction or order for specific performance or for the recovery of land or other property; and

the property of a State shall not be subject to any process for the enforcement of a judgment or arbitration award or, in an action in rem, for its arrest, detention or sale.

It is not in dispute that MongolBank is the central bank of Mongolia or that it is a state entity within the meaning of the 1978 Act. If these were proceedings against MongolBank, MongolBank would have state immunity if these were proceedings relating to a transaction or activity of a commercial, financial or other similar character into which MongolBank had entered in the exercise of sovereign authority. MongolBank entered into a contract with the bank which was of a commercial financial or similar character. If these proceedings were against the bank they would relate to such a transaction. It follows that the question is whether MongolBank entered into the contract in the exercise of sovereign authority. In my judgment it did.

This appears from the press statement dated 24 August which I quoted earlier. I repeat the second paragraph, which is in these terms:

The same can be seen from the first paragraph of the letter dated 19 November from MongolBank to the claimant, which I quoted earlier. That evidence shows that the purpose of the transactions including the refining of the gold and the placing of a quantity of refined gold on the unallocated account at the bank was for the purposes of increasing Mongolia’s currency reserves. In my judgment that was an exercise of sovereign authority within the meaning of the 1978 Act. That conclusion seems to be entirely consistent with that of Aikens J in the slightly different context in AIG Capital Partners Inc v Kazakhstan [2005] EWHC 2239 (Comm), [2006] 1 WLR 1420 at paragraph 58.

As I understand it, Mr Black accepts the analysis so far. However, he submits that this is not now a claim against MongolBank. Indeed, he has indicated the claimant’s intention to abandon the claim in these proceedings against MongolBank. He submits that this is simply a claim by the claimant against a commercial entity, namely the bank, in order to discover either the physical whereabouts of the gold or the name of the refiners who arguably committed a tort actionable at the suit of the claimant. Mr Fulton responds that, while that may be so, the application is for an order for the disclosure of information that is confidential as between the bank and its client which is a central bank. He submits that in the circumstances the information is held in a real sense on behalf of MongolBank as the central bank of Mongolia and that to require the bank to disclose it would be for the claimant to obtain relief against the agent of a central bank in circumstances in which it could not obtain relief against the central bank itself.

He submits that the claimant should not be entitled to obtain relief against those who, for this purpose, were the agents of MongolBank, namely the bank. Mr Fulton relies upon Twycross v Dreyfus (1877) 5 Ch D 605 where it was held that it was impermissible to obtain relief against the agents of a foreign state per Sir George Jessel MR at 618 and James LJ at page 618-9. James LJ said this:

It appears that in that case the defendants may have been commercial agents for the Peruvian Government in a way that is not quite the case here. On the other hand the mere fact that the contractual relationship between the defendants and the government was a relationship between principals so that the defendants would have to account to the government for the guano or indeed for any monies held for the government did not destroy the immunity. The facts are thus not so dissimilar from those in the instant case. In a similar way, the bank was bound to account to MongolBank for the amount of gold shown on its unallocated account. In the recent case of Jones v The Ministry of the Interior of the Kingdom of Saudi Arabia [2006] UKHL 26; [2007] 1 AC 270, in a very different context, Lord Bingham said at [10] that:

Mr Black accepts the principle but submits that the bank is neither the servant nor the agent of MongolBank. That is true in a narrow sense but not as I see it in the wider sense that James LJ had in mind. Further, Mr Fulton relies upon Article 6(2)(b) of the 2004 United Nations Convention on Jurisdictional Immunities of States and their Property, which provides:

Mr Fulton accepts that that Convention is not part of English municipal law but submits that it is valuable guidance on the extent of state immunity. The Convention was approached in a similar way by Aikens J in the AIG Capital Partners case at [80]. I would hold that on the facts of this case the bank was an agent of MongolBank for the purpose of the principle in Twycross v Dreyfus. In the light of section 1(2) of the 1978 Act, which provides that

I would only add that I was at one time concerned whether this conclusion would be inconsistent with the fact that, as is almost certain to be the case given the standard terms of the UPMAA, there is a waiver of immunity clause in the agreement between the bank and MongolBank. That is no doubt the position as between the bank and MongolBank but it is not the position as between the claimant and MongolBank. Lloyd-Jones LJ so held. In these circumstances I would allow the appeal on the ground of state immunity.

This is a discretionary remedy. If I were wrong on the state immunity point I would allow the appeal under this head for these short reasons:

In all these circumstances I have reached the conclusion that the judge should not have made the order in the exercise of his discretion. He did not take all these considerations into account. In particular he did not take into account the state immunity aspects of the case. I do not blame him in any way for that since the argument before us has been very much more extensive in all areas of the case.

I add three points by way of postscript:

For these reasons I would allow the appeal.

I agree.

I also agree.