HSBC Bank Plc v 5th Avenue Partners Ltd & Ors

This is an adjourned application for permission to appeal from a trial conducted by Walker J in the Commercial Court, a trial which took six weeks and was rich in fact, incident and evidence.

At this stage, the dispute is essentially between two investors, a Mr So and a Mrs Lu, and HSBC Bank plc, to whom they transferred $30 million for deposit in an account in the name of 5^th Avenue Partners Ltd and themselves. There was no such account, although the account number which they used in their transfer instructions identified a euro account in the name of 5^th Avenue (to shorten the name of that company) by itself. 5^th Avenue was the creature of a Mr Brown, and I should state straightaway that as Mr Brown is still facing a trial alleging fraud on his part there must continue to be, as there was at the judge’s judgment below, reporting restrictions, any breach of which may be treated as a contempt of court, pending at least the outcome of that trial. For the purposes of the trial and for the purposes of today, it is simply assumed that Mr Brown was fraudulent in his dealings with the investors, Mr So and Mrs Lu.

The background to this transfer is very much a part of the richness of the facts of this case but in essence it included the bringing into existence by Mr Brown of a document which became known as the Letter of Instruction (“LOI”) and which Mr Brown got his bank, HSBC, to acknowledge as having been received from him. The Letter of Instruction is headed “Irrevocable Bank Instruction”. It refers to instructions given by 5^th Avenue on behalf of its clients, named as Mr So and Mrs Lu; went on to give instructions to the bank in relation to bond trading with the monies in the account in question, which was described in the document as a segregated account; and included instructions that under no circumstances should the principal amount be permitted to be withdrawn, save as stated within: that is to say, for the purposes of bond trading, as they are described, or for the payment of charges. The document also stated that these irrevocable instructions would be valid until instruction of termination and closing of the account was given.

That document was received by the bank, stamped as acknowledged as being received by the bank and permitted by the bank to be sent to Mr So and Mrs Lu. The essential case made at trial, amongst other cases, by Mr So and Mrs Lu (the “investors”) was that in permitting these documents to be acknowledged by the bank before being put into the hands of the investors, the bank was being negligent in misrepresenting to the investors that such irrevocable instructions had been given to the bank and accepted by them. As the bank itself pleaded in paragraph 23 of its Particulars of Claim:

“The 5^th Avenue letters [that is to say, the LOIs] are not genuine documents, in that they refer to instructions having been given by 5^th Avenue to HSBC which had not, in fact, been given by 5^th Avenue and/or accepted by HSBC. They can only have been created for the purpose of giving a misleading impression that such instructions had been given by 5^th Avenue and accepted by HSBC.”

That pleading by HSBC was, in effect, the case made by the investors in their counterclaim against HSBC, visiting the misrepresentation begun by Mr Brown on the bank itself. That case, therefore, depended upon showing a duty of care, possibly created by an assumption of responsibility within a special relationship, owed by the bank to the investors in respect of a misrepresentation relied upon by the investors to their detriment.

Oddly enough, at any rate as the case is now presented to this court on the investors’ application for permission to appeal, a straightforward case was not made at the trial below to the effect that the investors had given transfer instructions through their bank, HSBC in Hong Kong, to HSBC, the party in this case, to transfer the $30 million to an account to which they were parties as account holders, an account which did not exist. That is now a case which the investors would seek to make on appeal if given permission to do so and if they have the necessary permission to amend their pleadings to do so. That is a case that they wish to add to their case in negligence but also, I think, to have as a free-standing element of such a case in negligence. The investors also seek to present their case in negligence by reference to the description of the LOI as “a dangerous document” which the bank put into circulation and thereby negligently allowed Mr Brown to misuse.

There was another document, apart from the LOI, of which complaint was made by the investors, and that was described below as the “Letter of Reference”. That is tied in, however, with the LOI because it is a letter which, albeit sent to Mr Brown, was known to be intended for the investors, in which the bank:

“…also confirm that we hold in our files a copy of the instructions issued by yourself on April 11, 2005, pertaining to your clients, Kevin So and Lucy Yan Lu.”

The matter was then complicated by the fact that the investors sought a more direct means of assurance from the bank as to the account in question and its operation in a letter which they sent to Ms Arnull at the bank, who was responsible under Mr Leonard for the management of Mr Brown’s account, in which they refer to the LOI and ask for verification that the account, which they identify by the number in question and by the name of it -- that is to say, an account in the name of the three parties concerned, 5^th Avenue and the two investors -- was a segregated and non-depletion account. Mr Brown persuaded the bank, through Ms Arnull, not to respond to that so-called Enquiry Letter, and, in the absence of a response from the bank, Mr Brown had an associate of his, a Mr Lopatin, to speak to Mrs Lu and reassure her that she could continue to rely upon the LOI, in the absence of a response from the bank, which was not to be expected because things, he assured them, did not work in that way. As the judge found at paragraph 89 of his judgment:

“Mr Lopatin said that if there had been any problem with the HSBC Letter of Instruction, the HSBC Fraud Department should have contacted Mr So/Mrs Lu right away. Mr Lopatin emailed Mrs Lu to similar effect. Mrs Lu also asked Mr Lopatin about the lack of response to Mr So’s Enquiry Letter emailed directly to Mrs Arnull. Again Mr Lopatin reassured her: he told her that HSBC legally received the enquiry, but because it was not in legal bank verbiage they might not get a reply.”

The judge also found, at paragraph 11 of Annex B to his judgment, as follows:

“I consider that the true course of events was that he [that is, Mr So] and Mrs Lu grasped at Mr Lopatin’s explanations about banking practice, nonsensical though they were, and allowed themselves to be persuaded that all was well. Thus at the time that they transferred funds I am willing to accept that they believed that HSBC intended to comply with the instructions in the LOI. The basis of that belief, however, was not anything said or done by HSBC -- what HSBC had said and done, and not said and not done, had led them to doubt whether they had the assurances that they wanted. When they transferred the funds they were relying on what Mr Lopatin had told Mrs Lu.”

There was also a claim against the bank in dishonest assistance. It was said originally that Mrs Arnull and Mr Leonard, the two managers of Mr Brown’s account, had dishonestly assisted Mr Brown to defraud the investors. However, at trial the case of dishonesty against Mrs Arnull was abandoned and the judge found in his judgment that Mr Leonard, although seriously at fault in a dishonest cover-up of his own ineptitude in failing to look properly at, digest and deal with the significance of the LOI, had nevertheless not originally been dishonest until, when the balloon went up somewhat later in relation to Mr Brown’s affairs, this led Mr Leonard to take dishonest steps, including destruction of the documents within his files, to cover his position within the bank.

The investors lost on both their points of negligence in Hedley Byrne v Heller & Partners Ltd ([1963] 2 All ER 575) and dishonest assistance. They lost in dishonest assistance because the judge found that Mr Leonard had not been dishonest; they lost in negligence because the judge did not accept that the LOI or the Letter of Reference contained any misrepresentations at all or any misrepresentations that were reasonably there to be relied upon and that in any event there was no assumption of responsibility within a special relationship.

As for duty of care, however, the judge said that he need not decide that issue. He said that he need not decide reliance, but he decided it obiter against the investors. He said that he need not decide a defence run by the bank in relation to the absence of vicarious liability, but expressed his opinion briefly that there was no vicarious liability.

On this application, the investors wish to revisit those two main issues. In respect of the first of them, that of negligence, as I have said, they wish to elaborate that issue by reference to a complaint about dangerous documents and a complaint about the bank’s failure to act upon the transfer instructions which it had been given and instead making a transfer to an account which was not that described in those instructions, and to do so without any enquiry to the investors.

In my judgment there is a reasonable prospect of success in relation to the issue of negligence. Despite Mr McQuater QC’s strong submission that the judge’s obiter findings in relation to the non-reliance by the investors puts the whole issue out of court, nevertheless it seems to me that it is reasonably arguable that, carefully looked at, the judge’s express findings on reliance are somewhat equivocal and that in any event it is reasonably arguable, even if it may turn out to be a difficult argument, that in the light of the judge’s findings as a whole, it was not open to him to find - if indeed he did so intend to find - that in transferring $30 million to the account which they had described, in the light of the LOI and the Letter of Reference that they had received, the investors were solely relying on the final assurances of Mr Lopatin, which in any event referred back to the LOI, and were not also to some material degree (which is all that is in law apparently necessary) relying upon the LOI and Letter of Reference.

I would for myself permit the negligence issue, therefore, to be revisited on appeal, and for it to be revisited decorated with the additional complaints in relation to dangerous documents and the transfer instructions. In saying that, I do not mean to anticipate whether the court hearing the appeal will give permission to amend in any way that may be necessary to permit those elaborations to be advanced nor to pre-empt any issue that may arise as to whether there are sufficient findings within the existing findings of the judge to permit the investors to argue that elaborated case of negligence. I also mean to anticipate whether or not there is as well any unfairness to the bank in permitting those elaborations, as might arise out of an argument that if the case had been put in those new ways, the trial might have proceeded in some different way and some different evidence might have been provided or elicited. So there will be an appeal in relation to the first main issue, that of negligence, upon that basis.

I turn to the other ways in which the investors wish to put their case on appeal. They wished to put their case, once again, in dishonest assistance; but in the light of an indication given by the court at an early stage of this hearing they abandoned that part of their application. What they still wish to do, however, is to resurrect a plea of knowing assistance, which was pleaded and opened before the trial judge but abandoned at trial before the evidence began to be called. There is not complete clarity as to the basis upon which it was abandoned; it is said on behalf of the investors by Mr Milligan QC that it was abandoned on the basis of a mistaken belief of counsel, not Mr Milligan, then representing the investors, that the test of knowing receipt was exactly the same test of dishonesty as arose in dishonest assistance. On that basis, the case of knowing receipt added nothing to dishonest assistance; and it may be that the abandonment was done on that basis, although that is not accepted by Mr McQuater. Nevertheless it is argued by Mr Milligan that the court should permit that concession at trial to be withdrawn and for the argument to be made on appeal, on the basis that knowing receipt does not require dishonesty on the part of the bank but only requires such inequitable conduct as has been described in the cases as commercially unacceptable conduct; see for instance Niru Battery Ltd v Milestone Trading [2004] QB 985.

Mr McQuater responds and submits that the test of commercially unacceptable conduct is a test which is neither that of negligence, it is beyond that of negligence, nor that of dishonesty, it falls short of dishonesty. It is thus a test which the judge has not specifically addressed. He submits that if the knowing receipt case had been pursued, then the judge would have had to have turned his mind and the crafting of his facts with that different and separate test specifically in mind. The findings that he has made should not be hit upon incidentally or cumulatively so as to create a case of commercially unacceptable conduct, which was not a case raised before him. Cross-examination would have proceeded in a different way, or it may be that other evidence would have been tendered; and for that reason, amongst others, permission should not be granted to resile from the abandonment of that case. Mr McQuater adds that the case of knowing receipt cannot be said to have been clearly wrongly abandoned, if account is also taken of the arguably important question of whether the bank’s receipt of the money was other than merely ministerial in the sense which was discussed by Millett J in AGIP (Africa) v Jackson [1991] Ch 265.

Further causes of action, and entirely new causes of action, which the investors wish to raise on appeal, are a claim for restitution based on payment by mistake and a claim based on a Quistclose-type failed purpose trust for the return of the $30 million. It is accepted that those are entirely new ways of putting the case which would require amendment to the pleadings. It is acknowledged that the judge had not in terms made findings by reference to mistake or purpose and again had not addressed the separate test of commercially unacceptable conduct which would arise on a defence of change of position, which the bank would be expected to have raised to a restitutionary claim in respect of payment by mistake.

Nevertheless Mr Milligan submits that these new ways of putting the investors’ claim should be permitted, on this basis at any rate: that the investors would be bound by the primary findings of fact by the judge; that it would be their task to persuade the Court of Appeal that the further findings which they need, for instance in relation to commercially unacceptable conduct, were there to be discovered, inevitably inherent in the findings which were made by the judge, and also that there would be no unfairness to the bank in raising these new claims, such as might arise if the bank had been unfairly deprived of further ways of putting their evidence or eliciting advantageous answers in cross-examination.

As has been clear to counsel in the remarks which I and my Lord have made during the course of the hearing, my mind at any rate has wavered over this matter, but ultimately I am persuaded, and in my judgment safely and surely persuaded, that permission to appeal should not be advanced into these new areas or into the old abandoned area of knowing receipt. I say that essentially for these reasons: I accept the validity of Mr McQuater’s submission that these new ways of putting the case, or resurrection of old ways of putting the case, do go into areas of fact-finding which the judge has not had to address explicitly for himself; that it is potentially dangerous and unfair to the bank to explore and seek to exploit findings here and there which have been addressed to other issues; and that, in any event, there is an unfairness in permitting the bank to undertake a six-week trial on one basis -- presenting evidence and eliciting evidence by way of cross-examination for one set of purposes -- while there lies as it were in the future another set of purposes which they could not have had in mind at the time.

I also feel, having considered the submissions I have heard today in the round, that at the end of the day these new or resurrected areas would not be, as Mr Milligan beguilingly submits, a simple and straightforward matter of proceeding directly from implicit and inherent findings of fact to obvious legal conclusions. It seems to me that if the judge’s findings had to be examined for the purposes of these new and further ways of putting the investors’ case, the court would find itself inevitably drawn into a detailed and meticulous consideration of the evidence against which those findings were made; of the conduct of the trial for the purpose of seeing whether the bank was unfairly exposed; and also, on the question of law, would be drawn into extensive and difficult areas of further legal argument and citation of authority. It seems to me that it is very much against the principles upon which the permission to appeal jurisdiction is conducted by this court that an appeal should be opened so extensively to fresh argument on fact and the process of trial and law on entirely new matters, or in the one case a matter which had been abandoned, on the application of litigants who were assisted by legal representatives who included their former leading counsel.

So for those reasons, which amount to saying that I do not consider that there would be a real prospect of this court allowing the amendment or concluding that it had, safely within the judgment, findings of fact on the new issues free of any unfairness to the bank, I would, in short, refuse permission to appeal on those three areas: to repeat, the resurrection of the case of knowing receipt and the making of new cases in restitution by way of payment by mistake and in equity by reference to a failed purpose trust.

But to go back to the beginning, I would give permission to appeal in relation to the whole case of negligence which the investors now wish to make, including their additional ways of putting that case. It will be for the court hearing the appeal to decide whether any amendment needed in respect of those new ways of putting the negligence case can properly be made and whether that elaborate case can fairly be advanced in the light of the much better understanding which the court hearing the appeal will have of this case as a whole than it is possible for us to have in this brief hearing.

I agree with all that my Lord has said. As to the negligence-based claims, I have made some sceptical comments during the argument about the alternative case sought to be advanced on the basis that by carelessly putting “dangerous documents” into circulation, HSBC enabled Mr Brown to defraud Mr So and Mrs Lu. Mr Milligan cited in support of this line of argument the judgment of Kerr J in The Odenfeld [1978] 2 Lloyd’s Rep 357. That case was decided at a time when the law relating to liability in negligence for economic loss resulting from the circulation of misleading information was less developed than today; it was 12 years before the seminal decision of the House of Lords in Caparo Industries plc v Dickman & Ors [1990] 2 WLR 358. No doubt the law in this area is capable of further development as fresh cases arise but I cannot see the law being improved by developing a new sub-species of liability in negligence for economic loss resulting from the circulation of misleading information under the heading of carelessly putting dangerous documents into circulation; and I regard the analogy with dangerous chattels as unhelpful. But I concur in the order proposed by my Lord, Lord Justice Rix.

As to the other claims, I rather surmise that a motive for seeking to introduce at the appellate stage complex alternative ways of putting the case, which were either not advanced below or abandoned below, is that they are not liable to be met by a defence of contributory negligence. If so, that does not in my view afford any good reason in itself for allowing them to be introduced. The critical questions are whether it is just, in all the circumstances, that those claims should be allowed to be advanced and whether they have a real prospect of success. As to those issues, I agree with all my Lord has said, and I share his view as to the proper order.

We will say that this case should be heard by three Lords Justices, who should include at least one Commercial Justice. We will not say it should include two Lords Justices but that is a matter which listing might well wish to consider, if possible, without tying their hands. We will say two to three days.