Abu Dhabi Investment Company & Ors v H Clarkson & Company & Ors

In 1999, Mr Steiger, the fifth defendant, owned and controlled a group of companies having the name Norasia. One such company was Norasia Shipping Limited (“Norasia”), a company registered in Bermuda, now ADX Shipping Limited, the third defendants. Mr Menzel, the sixth defendant, was Mr Steiger’s right hand man.

In February 1999, Mr Steiger on behalf of Norasia introduced to the first claimants, Abu Dhabi Investment Company by means of a Business Plan dated 1^st February 1999, a proposed joint venture relating to the ownership and operation of ten container vessels. Five of these were to be constructed in China and the other five in Germany. By means of the Business Plan and on a number of occasions thereafter, Mr Steiger and Mr Menzel made representations as to the technical and financial capabilities of the vessels which Tomlinson J, in a masterly judgment of the 25^th May 2007 after a hearing lasting about 32 days, found to be deliberately misleading falsehoods in that both Mr Steiger and Mr Menzel knew them to be untrue. ADIC were therefore in principle entitled to damages in deceit arising from the subsequent collapse of the joint venture in which they were induced to participate.

The short effect of the fraudulent misrepresentations was that the vessels had operated at service speeds of 25 knots; and that they were, and had proved themselves to be, able to earn time charter equivalent earnings of $15,000 per vessel per day. These speeds and these earnings were above those normally achieved in the contemporary container vessel market and were said to arise from a novel design by a marine architect, Nigel Gee. Tomlinson J’s judgment is at [2007] EWHC 1267 (Comm) and may be referred to for much detail which this judgment will not need to cover.

The Business Plan contained representations as to earnings in its paragraph 6. It also proposed in its paragraph 4 that, of the proposed investment of $400m. $81.6m. equity finance should be provided by “UAE Nationals”. Thus the first claimants, ADIC, were invited to provide or arrange the investment of this amount.

ADIC had a Project and Investment Division and a Project Team to consider the Norasia proposal. The team was headed by Mr Adel Saudi, and included Ms Nada Hammoudi and Mr Santosh Agarwal. The representations were in the main made to the team whose recommendations to ADIC’s management and Board depended on them. Conversely the Board made decisions on the basis of the team’s recommendations. Thus ADIC relied on the representations.

Between 12^th April 1999 and 19^th October 1999, there were negotiations towards the joint venture of which the following are highlights.

A memorandum of the 23^rd April 1999 gave wholly misleading information as to the actual earnings of the vessels – for the details, see paragraphs 86 to 101 of the judgment.

At a meeting with ADIC on the 27^th April 1999, Mr Steiger, speaking to the memorandum, made the two false representations as to speed and earnings. The vessels in truth suffered from defects and were unable to operate at 25 knots from the outset. They were not earning $15,000 per day – for the detail, see paragraph 102 to 112 of the judgment.

There were further misrepresentations as to the earnings and the speed of the vessels in Mr Steiger’s faxes of the 3^rd May and 9^th August 1999 (judgment paragraphs 129 to 139); at a meeting with Clarkson on the 27^th September 1999 (judgment paragraphs 140 to 149); in Mr Menzel’s fax of the 9^th October 1999 (judgment paragraphs 158 to 188), and at a meeting with Lucas on 15^th October 1999 (judgment paragraphs 189 to 198). As to the misrepresentations in September and October 1999, the judge held that Mr Steiger and Mr Menzel made them recklessly without caring whether they were true or false and without real belief in their truth.

The judge further held that the representations were continuing and that they continued down to the time in the summer and autumn of 2000 when they were acted upon. He held that in December 1999, Mr Steiger and Mr Menzel dishonestly failed to correct representations made in the 9^th October 1999 fax, when they learned of management information which showed that the representations were false. He also held that the false statements were part of a joint enterprise between Mr Steiger and Mr Menzel whose intent was to mislead ADIC.

The second and third claimants were special purpose vehicles established by ADIC to give effect to their part of the joint venture. It had originally been thought to operate through Al Suffun Holding Company LLC alone, but a detail of UAE corporate law necessitated the incorporation of Al Shira’a Marine Investment Company LLC also. The joint venture was undertaken through a specially formed UAE joint venture company, Abu Dhabi Container Lines, which was to acquire and operate the vessels.

The structure of the joint venture was comprised in the following documents:

As I have said, $81.6m. of the $400m. investment was to come from or through ADIC. Of this, $6m. came from ADIC itself through ASH, the remainder coming through ASMIC by means of a $77.5m. loan to ASMIC by a syndicate led by Paribas.

The Letter of Intent dated 31^st May 1999 described the basic structure of the joint venture and the respective financial contributions. Under it, Norasia agreed to grant ADIC an exclusive private placement to raise the 51% equity contribution of $81.6m. which was to be the share of ADIC and its UAE co-investors. The co-investors were not identified, but the initial investment was financed through ASH and ASMIC. Norasia were to make available to ADIC all financial and other information concerning the ships’ business and operations.

On the 27^th June 1999, ADIC’s Board of Directors decided in principle to invest $6m. in the joint venture. In about July 1999, they entered into discussions with Paribas for the balance of the $81.6m. which Paribas soon agreed in principle to provide.

By fax of the 31^st July 1999, ADIC informed Mr Stieger that they would be arranging the UAE equity contribution to ADCL through the creation of a special purpose vehicle subject to the satisfactory outcome of a due diligence exercise.

On the 18^th November 1999, the Board of Directors of ADIC resolved to proceed with the joint venture with Norasia. There followed the Memorandum of Agreement dated the 22^nd November 1999, whose first recital was that ADIC intended to create a special purpose vehicle to hold its shareholding in the project. ADIC’s participation in the project was subject to the formation and legal creation of the special purpose vehicle and the finalisation of bridging loan facilities with Paribas. ADIC was to be responsible for finalising the special purpose vehicle financing arrangements. The special purpose vehicle would fund its capital investment in the joint venture by the Paribas bridging finance. The Memorandum of Agreement was signed by Mr Saudi on behalf of ADIC and the SPV and by Mr Steiger on behalf of Norasia. Thus Mr Steiger and Norasia had express knowledge that ADIC proposed to effect its equity contribution by a special purpose vehicle by means of a loan from Paribas and that the SPV would hold its investments in the joint venture company. Neither ASH nor ASMIC had been incorporated at the time, but the intention was clear.

On the 27^th December 1999, Norasia gave a Letter of Indemnity to both ADIC and ASH holding them harmless against Norasia’s German’s bank cancelling the long term financing of the vessels on account of information provided by Norasia.

On the 28^th December 1999, ADIC advanced $6m. to ASH which was then in the course of being established. ASH was actually incorporated on 15^th February 2000. In due course it used the $6m. to make a subordinated loan to ASMIC, which ASMIC used to buy shares in ADCL and to meet the other costs of the investment. ASMIC was established because, in April 2000, ADIC were advised that for technical reason of UAE law ASH as founder shareholders were not able to sell shares in ADCL for a minimum of two years. ASMIC thus eventually became the principle SPV envisaged by the Memorandum of Agreement. Mr Steiger and Mr Menzel were aware of the intended role of ASMIC before the Shareholders’ Agreement was signed. ASMIC was incorporated on the 24^th July 2000.

The Shareholders’ Agreement dated the 3^rd July 2000 between ASH and Norasia provided for the share capital of ADCL to be increased; for ASH and Norasia to be offered further shares; and for ADCL to acquire the vessels on the basis stated in the Business Plan attached to the Shareholders’ Agreement.

On 29^th July 2000, ADIC gave a Letter of Comfort to Paribas in respect of its loan of $77.5m. to ASMIC to enable ASMIC to subscribe to its shares in ADCL. The letter was expressed not to constitute a guarantee obligation upon ADIC. On 31^st July 2000, the Paribas loan facility of $77.5m. was executed between Paribas and ASMIC.

On the 1^st August 2000, Norasia, ASH and ASMIC entered into the Accession Agreement, by which ASMIC acceded to the Shareholders’ Agreement and became a party to it. ASMIC was to subscribe for and be issued with the additional shares in ADCL which were to have been issued to ASH. Thereafter, between 25^th September and 14^th November 2000, the vessels were transferred to ADCL. Upon delivery, ASMIC drew down money from the Paribas facility and advanced the money to ADCL, which ADCL used with other money to pay for the vessels. The representations continued in effect until the last vessel was transferred.

It is ADIC’s and ASMIC’s case that Norasia, Mr Steiger and Mr Menzel knew quite well that ADIC would enter into the joint venture, as they did, by means of one or more special purpose vehicles; that the special purpose vehicles would secure funds through Paribas; and that, not only ADIC, but the special purpose vehicles would and did rely on the continuing representations when they acceded to the Shareholders’ Agreement and subscribed to the shares in ADCL. In my judgment, all this is obviously correct.

Although the judge found that the representations were false and fraudulent and that they were continuing, he held that ASH and ASMIC had no claim in deceit nor in negligence, and that ADIC’s own claim was limited to the $6m. it had advanced to ASH, less amounts recovered in settlements with other defendants. ASH and ASMIC appeal with the judge’s permission against his decision that they have no claim in deceit against Norasia, Mr Steiger or Mr Menzel. I shall consider this appeal later in this judgment. It is first, however, convenient to deal with the application for permission to appeal by Respondents’ Notice by Mr Steiger and Mr Menzel against the judge’s finding of fraudulent misrepresentation against them.

Mr Pike was instructed by Mr Steiger and Mr Menzel to promote their application for permission to appeal and he did so in writing and orally at the hearing of the appeal. He was not instructed to appear on the appeal. We refused the necessary extension of time and dismissed the application at the hearing, reserving our reasons. These are my reasons for doing so.

The Respondents’ Notice was issued very late and required a substantial extension of time. The judgment was handed down on the 25^th May 2007. The Respondents’ Notice was not filed until the 9^th April 2008. The explanation for the delay is in short as follows. Soon after judgment was given the Respondents parted company with their solicitors and counsel in a dispute over costs. New solicitors were instructed who came on the record on 5^th September 2007. There were then difficulties in acquiring a full set of documents. A request was made to the claimants (but not to the court) for an 8 week extension of time which was not agreed. Towards the end of that 8 week period, counsel was seriously injured in a road accident and subsequently lost his computer in a burglary. These matters do not explain more than part of the long delay which remains substantial, and which requires strong grounds of appeal to justify the necessary extension. The hearing date for the appeal was fixed in December 2007 and the appellants would plainly now suffer prejudice if their appeal had to be adjourned to accommodate an antecedent cross-appeal.

There were nominally 19 grounds of appeal, but most of these were variants of three themes. First, it was submitted that the judge was wrong to find that ADIC relied on the representations. There were two sub-strands of argument. The first sub-strand was that the decision was made by ADIC’s Management Board and Board of Directors, but no senior executive was called to give evidence and there were no papers evidencing reliance. The second sub-strand was that, because ADIC unilaterally undertook their own exercise of due diligence, they were thereby declaring that they were relying on their own enquiries to the exclusion of the representations, which thus became immaterial. As to the first sub-strand, there was in my view ample evidence, including documents, for the judge to conclude that ADIC, ASH and ASMIC relied on the representations. The Project Team made recommendations to the Board in the light of and in reliance on the representations. The Minutes of the Board Meeting of the 18^th November 1999, for instance, expressly recalled that the Company’s Project Department had submitted a detailed presentation of all technical and financial aspects with a risk analysis and other material. It was at that Board Meeting that it was resolved to participate in the incorporation of ADCL in partnership with Norasia and to undertake the financial aspects of the commitment which I have described, including obtaining the Paribas Financing.

As to the second sub-strand, there is no principle that a party who undertakes due diligence necessarily ceases to rely on representations that have been made. On the judge’s findings, ADIC plainly did not do so, not least when some of the later misrepresentations were made during the due diligence inquiries and were addressed to those undertaking those enquiries.

The second theme was that the representations were immaterial because they were made with reference to the historic performance of the vessels on routes which were no longer to be undertaken. This is entirely unpersuasive. The vessels’ speed was plainly material irrespective of the trading routes in which it was said to have been achieved. Their capability of earning $15,000 per day historically, being in part dependent on speed, was also obviously material to their capability of doing so in the future, even if the intention was to operate on different routes. There may, of course, be ups and downs in the market generally, but that does not make historic earnings immaterial. Why make the representations if they are not material? They were not, as Mr Pike suggested, mere puff, as is shown by the judge’s careful and lengthy analysis.

Other submissions included that no sufficient inspection of the vessels was undertaken – but this does not negative the materiality of the dishonest representations made by Mr Steiger and Mr Menzel as to the vessels’ speed and performance; that the judge’s findings of dishonesty are unsupportable – but the judge’s detailed and careful findings and analysis are entirely persuasive and not amenable to appeal; that the claimants themselves were guilty of unconscionable behaviour, lack of good faith and general manipulation – but these suggestions were never put to witnesses and formed no part of the case at trial; that the misrepresentations did not cause the loss – but, on the judge’s findings, they were relied on and the investment was recommended on the faith of that reliance, and the investment was lost because of the commercial and technical inadequacies of the vessels’ performance; that the lapse of time between the representations and the conclusion of the transaction after due diligence had been undertaken meant that the representations ceased to be causatively operative – but the judge found otherwise on the facts and was plainly entitled to do so; that the alleged representations were no more than expressions of opinions by Mr Steiger and Mr Menzel in a language not their own and should not therefore have been characterised as dishonest – but the judge was amply entitled in this and other respects to find the facts as he did; and that the trial process was unfair because of the impact on it of the claimants’ settlement with the other defendants whose presence had formed a basis for the court’s jurisdiction – but the proceedings were properly constituted and no application was made for an adjournment, a stay or a dismissal, when the Respondents’ former solicitors had disavowed an intention to challenge the court’s jurisdiction.

In my judgment there was little, if any, substance in any of the proposed grounds of cross-appeal and therefore no proper basis for extending time for the Respondents’ Notice. For these reasons, I adhered to the court’s decision to refuse an extension of time and to dismiss the application for permission to appeal.

As I have said, the judge decided that ADIC was entitled to recover $6m. plus damages for loss of use of that sum from Mr Steiger, Mr Menzel and Norasia subject to the effect of settlements with other defendants; but that ASH and ASMIC have no claim in deceit against Mr Steiger, Mr Menzel or Norasia. ASH and ASMIC appeal against this latter decision.

The judge accepted that a cause of action in deceit may lie even where the misrepresentation was not made to the claimant directly. A representation made to a third party with the intention that it would be passed on to the claimant to be acted on and relied on by him will suffice, if it is passed on and acted and relied on. What must be shown is an actual intention to deceive the claimant. The precise identity of the claimant need not be known when the false representation is made, provided that he belongs to a class of persons within the contemplation of the defendant as likely and intended to be deceived by the misrepresentation. I consider this to be a correct formulation of the relevant law. It is not contentious on this appeal. It is sufficiently supported for present purposes by reference to Clerk and Lindsell on Torts 19^th Edition (2006) paragraphs 18-29 to 31; Cartwright on Misrepresentation, Mistake and Non-Disclosure (2007) paragraph 5-19; Spencer Bower, Turner and Handley 4^th Edition (2000) paragraphs 166 to 168, 170; and the authorities there referred to, including Polhill v Walter (1832) 3 B & Ad. 114 at 123-4; Royal British Bank ex parte Brockwell (1857) 26 LJ Ch 855 at 862; Swift v Winterbottom [1973] LR 8 QB 244 at 252-3; Bradford Equitable Building Society v Borders [1941] 2 All ER 205 at 211; Hedley Byrne v Heller [1964] AC 465 at 503, 514; Standard Chartered Bank v Pakistan National Shipping Corporation (No. 2) [1998] 1 Lloyd’s Rep. 684 at 696; and Clef Aquitaine v Laporte [2001] 1 QB 488 at 503, 506, 513.

The judge observed that the Letter of Intent spoke of Norasia granting ADIC an exclusive private placement mandate to raise 51% of the equity from UAE nationals. Norasia would have had no control over that operation. ADIC itself was only going to invest $6m. The rest would be placed with other investors. The proposed bridge financing of which Mr Steiger was also aware did not alter the essential structure of what was proposed. The judge thought it very unlikely that either Mr Steiger or Mr Menzel had any very clear idea by October 1999 of what, if any, precise role would be played by an ADIC special purpose vehicle. If they had any understanding, it would have been that a special purpose vehicle was necessary to insulate ADIC from exposure in excess of $6m. In these circumstances, the judge found it difficult to conclude that Mr Steiger and Mr Menzel intended that their representations should reach ASH and ASMIC in order to induce them to act upon them. It was not demonstrated that they made their representations to ADIC intending that they would pass them on to others. For ASH and ASMIC to succeed it would be necessary to conclude that Mr Steiger and Mr Menzel intended their representations to be passed on to any person whom ADIC might wish to interest in the joint venture. The judge doubted whether ASH and ASMIC could truly be regarded as within that class. A good test of whether ASMIC should be able to claim was to enquire whether Paribas should be regarded as having a cause of action in deceit against the Norasia defendants. That would clearly be a step too far, and so was the claim by ASMIC. I am inclined to think that the question whether Paribas might have a cause of action in deceit is not helpful either way. More pertinent perhaps might be the same question of other potential UAE investors, but even that does not, to my mind, determine the question whether ASMIC has a good claim.

ASH and, in particular, ASMIC challenge the judge’s findings. Their reasoning is in summary as follows.

From the Business Plan onwards, it was proposed (and Mr Steiger and Mr Menzel knew and intended) that ADIC would arrange an equity investment of $81.6m. There was original reference to UAE co-investors, but by 23^rd June 1999, Mr Steiger envisaged that, until co-investors were found, there would be bridging finance. From the date of ADIC’s fax of 31^st July 1999, Mr Steiger knew that ADIC would be arranging the 51% equity contribution to ADIC through the creation of a special purpose vehicle. This was to be subject to satisfactory outcome of the due diligence exercise. Thus Mr Steiger and Mr Menzel knew, not only that there would be bridging finance, but that ADIC was conducting the due diligence exercise, in the course of which relevant representations were made, for its own and its special purpose vehicle’s benefit. The Norasia defendants intended the representations to be relied upon in the due diligence exercise. They must thus have intended whatever special purpose vehicle was ultimately used by ADIC to rely on the representations. The Memorandum of Agreement signed on the 22^nd November 1999 expressly recorded the intended role of a special purpose vehicle which the Norarsia defendants thus knew. The fact that ASH and ASMIC had not then been incorporated is immaterial in the light of the legal test which the judge correctly accepted; nor is the fact that in the event there was more than one special purpose vehicle and that they were wholly owned subsidiaries of ADIC. It was obvious that representations made to ADIC would feed through to, and be relied on by, the wholly owned special purpose vehicle or vehicles. ASH and ASMIC were, to the knowledge of the Norasia defendants, specifically incorporated to implement ADIC’s decision to invest. It is further submitted that the judge’s adverse conclusion did not take account of his own correct conclusions that the representations were continuing and that the Norasia defendants were in dishonest breach of their duty to correct them.

In my judgment, these submissions are persuasive and correct. It is clear beyond argument that the Norasia defendants knew that ADIC intended to achieve their initial investment, subject to the satisfactory completion of due diligence, by means of a special purpose vehicle; and that the special purpose vehicle would subscribe to its shares in ADCL with money borrowed from Paribas. In my view, the understanding by the Norasia defendants of ADIC’s commercial purpose in arranging the investment in this way is not of central importance. The judge was aware of incomplete litigation in Abu Dhabi in which ADIC were seeking to resist a direct claim against them by Paribas arising from the collapse of the joint venture. It may or may not have been ADIC’s purpose in effecting their investment through one or more special purpose vehicles to insulate themselves from exposure to Paribas or others. The fact remained that the Norasia defendants knew that a special purpose vehicle was to make the investment and that it would borrow money from Paribas to do so. Equally it does not seem to me to be decisive or even relevant whether Paribas or even ultimate unidentified UAE investors would have had a claim in deceit against the Norasia defendants – quite probably not upon the facts presently under consideration.

I do not consider that the judge was correct to hold that it was very unlikely that either Mr Steiger or Mr Menzel had any very clear idea in the autumn of 1999 what, if any, precise role would have been played by an ADIC special purpose vehicle. Certainly by the date of the Memorandum of Agreement of the 22^nd November 1999, the Norasia defendants knew quite well that the role of the special purpose vehicle was to be subscribed to the shares with money largely derived from a Paribas bridging loan. The underlying commercial thinking which led ADIC to adopt this structure is unimportant. What mattered was that the Norasia defendants knew that this was to be the structure, and that they plainly intended, by their dishonest misrepresentations, to deceive the controlling minds of the special purpose vehicle to induce them to give effect to the proposed investment by means of the proposed structure. It is not necessary, for ASH and ASMIC to succeed, to conclude that the Norasia defendants intended their representation to be passed on to any person whom ADIC might wish to interest in the investment. It is only necessary to conclude, as I do, that the Norasia defendants, knowing as they did the structure by means of which ADIC intended to, and did in fact, effect the investment, plainly intended that their representations should be passed on to those parts of the structure, that is ASH and ASMIC, which effected the investment. In fact, of course, those who controlled the special purpose vehicle were the same people who controlled ADIC, so that in reality the passing on of the representations is a lawyers’ construct.

For these reasons, I would allow the appeals of ASH and ASMIC, thus holding the Norasia defendants liable to ASMIC in particular for the full amount of their lost investment.