Ovlas Trading SA v Strand (London) Ltd & Ors

On 22 April 2009 we heard applications on the part of the Claimant for leave to appeal against two orders made by Proudman J on 3 April 2009 in a pre-trial review. The first order refused the Claimant permission to amend its Particulars of Claim so as to change the basis on which it calculated its damages claim against the Defendants. The second order required the Claimants to disclose certain fiscal returns of its Angolan subsidiary company, Golfrate Holdings (Angola) Limitada. We refused permission to appeal and said that we should give our reasons subsequently in writing. These are my reasons.

The litigation between the parties arises out of the Claimant’s purchase from the First Defendant (“Strand”), by an agreement dated 13 June 2005 (“the purchase agreement”), of the entire share capital of Golfrate Africa Ltd (“GAL”), a company incorporated in the Isle of Man that in turn held all of the issued share capital of Goflrate Holdings (Angola) Limitada (“GHAL”), a company incorporated in Angola that carried on in that country a cash-and-carry business selling food, home and personal care products. Prior to that sale, GHAL had an exclusive distributorship agreement with a subsidiary of Nestle.

The Claimant already carried on business in Angola. Its business competed with that of GHAL. Following its acquisition of GAL and GHAL, it continued to manage the business of the latter, and still does so. Neither company has been wound up, and GHAL still carries on its business.

The Claimant (“Ovlas”) alleges that Strand was and is controlled by the Second Defendant (“Mr Aziz”), with the advice of the Third Defendant (“Mr Noak”), and that Mr Aziz managed the business of GHAL, with the assistance of Mr Noak who, like Mr Aziz, was a shadow director of GHAL. The negotiations leading up to the Claimant’s purchase of GAL were conducted between Hassam and Kassim Tajideen and Nasser Eid on behalf of the Claimant and Mr Aziz.

In September 2007 two claims were commenced. The first, which is the subject of these applications, is a claim by the Claimant for damages for an alleged conspiracy between the Defendants pursuant to which fraudulent representations are alleged to have induced it to purchase GAL. There are alternative claims that the representations were made negligently or give rise to liability under the Misrepresentation Act 1967. The alleged misrepresentations related to the profitability of GHAL and the status of its contract with Nestle. The Defendants denied that they made the representations alleged, and reliance and damages are in issue.

The second claim was by GAL, GHAL and Ovlas against Mr Aziz and Mr Noak. The Claimants alleged that the Mr Aziz and Mr Noak had wrongfully misappropriated funds from GAL and GHAL and had in breach of their fiduciary duties owed to those companies established a competing business in the name of Ninangola Comercio & Industrio Ltda (“Ninangola”), another Angolan company. Ovlas claimed that in establishing Ninangola Mr Aziz had acted in breach of a written non-competition agreement he had entered into collateral to the purchase agreement. The Claimants claimed various declarations and accounts of the alleged misappropriated moneys and orders for their repayment and sought an inquiry as to the loss and damage caused by the alleged breach of the non-competition agreement.

In the first claim the damages claim was principally pleaded as the difference between the price paid by Ovlas for the shares of GAL and the “true value” of the shares, which effectively was the value of GHAL, as at the date of the purchase agreement. That “true value” was based on the actual profits of GHAL.

The parties to the first claim exchanged reports of their accountancy valuation experts at the end of February 2009: both reports are dated 25 February 2009. Ovlas’s expert is Mr Matyszcsyk of Grant Thornton; the Defendants’ expert is Mr Caldwell of BDO Stoy Hayward. Both assessed the value of GHAL at the date of the purchase agreement as a going concern, based on its profitability. Mr Matyszcsyk opined that the difference between the amount paid by Ovlas and the actual market value of GAL was between US$17.3 million and US$19.8 million. He also assessed the loss due to Nestle’s termination of the exclusive distributorship agreement, but that claim is immaterial for present purposes.

In January 2009 Mr Aziz and Mr Noak submitted to judgment in the second claim for in the sum of $51,200 plus interest, representing part of the amount claimed.

On 9 February 2009 the Defendants made a Part 36 offer to settle the second claim. It was made with a denial of liability, but on the basis that the very substantial costs involved in defending it and the distraction from the first claim that was involved in disputing it were not worthwhile. The Defendants offered to pay the total of the moneys alleged to have been misappropriated plus interest, to be paid into an escrow account pending the final resolution of all the litigation. This offer was accepted by Ovlas by letter dated 2 March 2009.

The expert accountants met on 2 March 2009 and agreed a joint statement of matters agreed between them and those that were not agreed. As I understand it, the meeting led to a reduction in Mr Matyszcsyk’s assessment of the damages claim. The matters agreed included the fact that they had both adopted an earnings-based valuation of GHAL. There was no mention of a liquidation basis of valuation.

On 24 March 2009 Ovlas issued an application to amend its Particulars of Claim to add an alternative basis for the calculation of the true value of GAL and GHAL. It sought to allege that this value was to be determined on a liquidation basis, i.e., on the basis that it was not a going concern and its assets would have to be realised separately. It incorporated by reference all of the allegations pleaded in the second claim, and alleged that this dishonesty in the administration of GHAL resulted in the impossibility of its being sold to a reasonable purchaser with knowledge of the facts.

Not surprisingly, the effect of the new basis of determination of the value of the companies was very substantially to reduce their “true value” and concomitantly to increase the damages claim, by about $13 million to approximately $22.1 million.

This application, together with the Defendants’ specific disclosure application, was considered by the judge at the pre-trial review on 1 and 2 April 2009. Ovlas had not then produced a further report of Mr Matyszcsyk supporting the new basis of assessing its damages claim. Judgment was given on 3 April 2009.

The trial of the first claim is set for a window commencing on 27 April with an estimated duration of 15 days.

The judge refused permission to amend and refused permission to appeal.

In her full and careful judgment, the judge summarised the litigation between the parties and the effect of the proposed amendment. Having cited the observations of Peter Gibson LJ in Cobbold v London Borough of Greenwich (unreported, 9 August 1999), she accepted, in paragraph 26, that Ovlas would suffer prejudice if its amendment were disallowed. In paragraph 26, 11 considerations that led her to exercise her discretion by refusing permission were set out. In paragraph 29 she added that she was troubled by the attempt to bring back into the litigation the issues as to misappropriation that had apparently been settled on the express basis that the Defendants did not wish to bear the disproportionate costs of litigating them. Lastly, in paragraphs 31 to 56, she considered and upheld the Defendants’ contention that the attempt to revive those issues was, as a result of the settlement of the second claim, an abuse of the process.

Mr Marshall submitted that in refusing permission to make the amendment, the judge had erred in principle, that her reasons for refusing permission were based on factual inaccuracies or misunderstandings, and that she had failed to consider whether her decision was a proportionate response to the application, having regard to the very substantial potential prejudice to Ovlas and the availability of measures that would meet or minimise any prejudice to the Defendants, including a requirement that Ovlas consent to the adjournment of the trial or to a split trial of liability and quantum if, after consideration of Mr Matyszcsyk’s new expert report (which had not yet been served), that proved necessary.

A decision to grant or to refuse permission to amend a pleading is made in the exercise of judgment in circumstances in which there are often conflicting considerations. It is usually referred to as an exercise of discretion, with which the Court of Appeal will interfere only in narrow and well-defined circumstances. In the present case, the judge’s decision was made in a pre-trial review, and thus in the context of case management. This Court is even more reluctant to interfere with such a decision in such circumstances. In Morris v Bank of America & National Trust Savings Association& others [2002] EWCA Civ 425, Chadwick LJ, at [9],referred with approval to what Jonathan ParkerLJ had said in Wembley National Stadium Ltd v Wembley (London) Ltd (unreported, 28 November 2000):

“By its nature case management is quintessentially a matter for the court in which the proceedings are being conducted, and the scope for intervention by an appellate court in relation to case management decisions taken by that court is necessarily limited in my view. Only in the most compelling circumstances, as I see it, would intervention of that kind be warranted.”

I would accept some of Mr Marshall’s criticisms of the judge’s reasons for refusing permission to amend. However, her principal reasons were the lack of any convincing reason for the lateness of the amendment, the difficulties the amendment would create for the Defendants, the lack of any particularisation of the damages calculation and the potential for a very significant addition to the evidence relevant to the new issues. In my judgment, she was entirely justified in placing the weight she did on these factors.

The pleaded justification for the liquidation basis for the assessment of damages was, first, the statement in paragraph 5.6 Mr Caldwell’s expert report that “the Defendants believed that [Ovlas] were the only potential purchasers of GHAL who had available funds in mid 2005 to follow through their interest in GHAL and complete the purchase quickly”. This was said to have led Mr Matyszcsyk to reconsider his earlier view that a going concern basis was appropriate. This statement, even when viewed in isolation from the remainder of Mr Caldwell’s report, does not justify the conclusion that GHAL was not a going concern. But it cannot be viewed in isolation. In the earlier part of paragraph 5.6, Mr Caldwell gave as Mr Aziz’s reason for seeking to sell GHAL not that it was in financial difficulties, but that he wished to extricate himself from Angola in order to focus on property development in the UK. In paragraph 5.16 Mr Caldwell said that he had seen no evidence to suggest that at June 2005 GHAL was not viewed as a going concern. Lastly, if Mr Caldwell’s expert report had led to Mr Matyszcsyk’s change of opinion, it is curious, and unexplained, why in the joint experts’ statement he had confirmed they had both adopted an earnings-based valuation of GHAL, and did not raise the question of a liquidation basis.

The second justification put forward in the draft pleading for the liquidation basis of valuation was that corruption is endemic in Angola, so that it was important for a purchaser to be assured that GHAL had not engaged in it. Whether the premise was true was known to Ovlas, who carry on business in Angola. It is not suggested that any relevant pre-contract inquiry was made by Ovlas. The evidence of alleged corruption pleaded was a single relatively minor payment made by Mr Aziz to the local police to ensure protection for GHAL’s employees. This would hardly seem to justify the conclusion that the company was unsaleable. Furthermore, the alleged corruption had been known to Ovlas since witness statements were exchanged, at the beginning of January 2009. This single alleged act of corruption is unrealistically alleged, in paragraph 37.2 of the draft pleading, to raise the question whether the company would be viable if it were to cease to make corrupt payments.

The third reason put forward for the liquidation basis of valuation was that Mr Aziz and Mr Noak had engaged in the misappropriations that were the subject of the second claim. It is said that a reasonable purchaser would not have been prepared to purchase a company that had been the subject of such frauds. But these alleged misappropriations had been known to Ovlas when it instituted both sets of proceedings. It is suggested that Mr Matyszcsyk may have been unaware of them. If so, that was an egregious error on the part of Ovlas, an undertaking that is not new to commerce in what it itself says is an environment in which corruption, and therefore fraud, are rife, since endemic misappropriations were liable to affect the reliability and accuracy of the financial statements of GHAL on which its expert was basing his valuation. In fact, I note that what Mr Matyszcsyk states in his latest report is not that he was unaware of the allegations of misappropriation, but that he was not instructed to take them into account. I am bound to say that if the allegations were relevant to the valuation of GHAL, Mr Matyszcsyk did not require instructions to take them into account.

The difficulties that the proposed amendment could cause to the Defendants is obvious. As Lord Justice Sedley remarked during the course of argument, Ovlas did not come before the Court accepting that it was in reality seeking an adjournment of all or part of the trial, with a view to the orderly exchange of experts’ reports on the new basis of the claim. Instead, it sought to place the onus on the Defendants to seek an adjournment. Moreover, neither the judge nor the Defendants was in a position to assess the extent of the new evidence that would be required, because the particularisation of the damages calculation was to be contained in an expert’s report that had not yet been produced. There was therefore an element of the Claimant seeking a blank cheque.

Lastly, it seems to me that if a liquidation basis of claim was adopted, it would be necessary for an assessment to be made of the realisable value of the individual assets of GHAL. It might well be impossible to base that assessment on accounting entries or book values. It is difficult to see that Mr Matyszcsyk or Mr Caldwell could give expert evidence on the realisable value of goods in Angola.

The judge clearly had in mind the prejudice to Ovlas in refusing permission to amend, and weighed it in the balance. The fact that she did not use the words “proportionate” or “disproportionate” does not invalidate her conclusion.

In these circumstances, the judge was entitled to refuse permission to amend, and permission to appeal was refused.

It is unnecessary in these circumstances to reach a concluded view as to the correctness of the judge’s conclusion that the attempt to rely on the allegations of misappropriations pleaded in the second claim was an abuse of process. It is sufficient for me to say that I have my doubts as to whether it was correct as a matter of law, given that no attempt was made to plead a cause of action arising from the alleged misappropriations, but to rely on them only as factual matters relevant to the value of GHAL. I accept, however, that the attempted reintroduction of those allegations in the circumstances was relevant to the exercise of discretion.

This matter is now moot, other than in relation to costs. It would be disproportionate to grant permission to appeal, with the associated costs, in such circumstances.

I agree, and wish to add only that I do not, as at present advised, share the doubts of Lord Justice Stanley Burnton about the abuse of process issue.

I also agreed that the applications should be refused, and for the reasons now given by Stanley Burnton LJ.

I add that the judge’s finding at her paragraph 29, mentioned by Stanley Burnton LJ at paragraph 17, appears to me to be important to a decision whether to grant permission to amend. The misappropriation action, described by Stanley Burnton LJ at paragraph 6, was settled following a Part 36 offer expressly made as “an entirely commercial approach” and “without any admission of liability”. Mr Marshall QC, for the applicants, commented that the defendants could have protected themselves, when making the offer, against the possibility of allegations of fraud in the present action by an appropriate reservation in the Part 36 offer.

When the Part 36 offer was made, however, there was no pleaded allegation of fraud against which protection was required. Within a very short time after the settlement of the misappropriation action, the present application to amend by adding allegations of fraud, which were transferred from the pleadings in the settled action, was made.

I am prepared to assume that other factors contributed to the coincidence in timing but, in the event, allowing the amendment would leave the defendants open to allegations against which they could have protected themselves when settling the parallel misappropriation action. They have been prejudiced by the loss of that opportunity.

Taking that factor along, of course, with the other factors considered by the judge and by Stanley Burnton LJ, the judge was in my view entitled to refuse permission to amend. I am content to have regard to that factor under the discretionary aspect of the application and do not find it necessary to go on to consider abuse of process.

It will of course be for the trial judge to decide what evidence and cross-examination should be allowed on the present state of the pleadings.