Standard Bank Plc & Anor v Agrinvest International Inc & Ors

This is an appeal against an order of Field J. dismissing an application to set aside a judgment in default entered by the respondent, Standard Bank Plc (“SB”), against the appellant, Agrinvest International Inc (“Agrinvest”).

The claim arose out of two pairs of contracts made between SB and Agrinvest on 26^th May 2000 under which Agrinvest sold certain securities to SB for prompt delivery and agreed to repurchase the same securities from SB at a future date at a price which reflected a commercial rate of interest over the intervening period. In commercial terms these transactions amounted to a short term loan on security, but in legal terms they constituted independent, albeit related, contracts of sale. The forward contracts were subject to the terms of a Master Forward Sale Agreement (“the Agreement”) dated 12^th May 2000. The securities in question were bonds issued by the Lakah Group, an Egyptian healthcare company, with a nominal value of US$14 million and global depository receipts (“GDRs”) also issued by the Lakah Group, with a nominal value of US$1,556,000. Under the terms of the Agreement SB was entitled to require Agrinvest to make margin payments if the value of the securities fell below certain levels. Failure to do so constituted an event of default which entitled SB to terminate the transaction and declare all outstanding amounts due and payable immediately.

The settlement date under each of the forward sale contracts was 26^th November 2000. On 8^th June 2000 SB made a margin call for US$2,592,958. Part of it was provided from the coupon on the Lakah Bonds, but the rest remained outstanding. Accordingly, on 16^th June SB sent the following letter to Agrinvest:

“Master Forward Sale Agreement – Default Notice

In accordance with Section 6 of the Master Forward Sale Agreement as agreed between us dated 12 May 2000 (“the Agreement”), we requested pursuant to the Agreement and by a letter dated 8 June 2000 that you make a Margin Transfer to us in the amount of US$1,752,958.

This Margin Transfer, although now overdue under the terms of the Agreement, has not been received by us.

We therefore advise you that an Event of Default has occurred pursuant to Section 13.1(a) of the Agreement.

We reserve all our rights under the Agreement, including (without limitation) our rights pursuant to Section 13 of the Agreement and notify you that we may exercise any such rights at any time without notice.”

On 20^th June 2000 SB wrote again to Agrinvest in the following terms:

“It is now 12 days since we asked you to pay in additional margin. We have given time to your various proposals but have not yet seen any cash. The Russian securities you have offered as additional collateral do not represent a viable alternative.

We have tried to sell some of the bonds and GDRs at or around ‘market’ but have seen negligible interest. We are now under considerable pressure to liquidate the position. We do have an option to sell all of the bonds, off market, but at a price we know you find unattractive. We prefer to help you avoid this loss but cannot allow the position to continue in default without action.

Whilst reserving our right to act at any time, unless we have received cash to cover the margin call or a bank purchase confirmation to repay our exposure by 22^nd June, we will close out the bond position. We would intend to use a price of 65%, releasing $9.1m. However, in order to give you some more time, you may re-purchase the bonds, during the next five weeks, at:

 66% by 28^th June 2000

 67% by 5^th July 2000

 68% by 12^th July 2000

 70% by 26^th July 2000.”

On 23^rd June 2000 Mr. Charles Chawafaty, the director of Agrinvest, replied on its behalf as follows:

“I accept your price level of 65% with the option for Agrinvest to purchase back the Bonds within 5 weeks period at a fixed price of 67.5% by any day on or before the 26^th July 2000 in lieu of the variable progressive interest premiums as indicated. Selling under time pressure always ends up in longer time to close.

I assume that the GDR are freely available for Agrinvest to sell or transfer without restriction. Please confirm today if possible.

I appreciate your help in avoiding a loss for Agrinvest.

If the above meets with your approval, please proceed and confirm execution with particulars of the accounting breakdown, i.e. interest amount, cash received (in and out).”

The proposals made by Mr. Chawafaty did not meet with the approval of SB, but it did not immediately write to Agrinvest exercising its right under the Agreement to close out the position. In July 2000 there was a meeting between representatives of SB and Agrinvest in Cairo at which there were discussions about Lakah’s financial situation and Agrinvest’s position under the forward sale contracts. On 18^th July 2000 SB wrote to Mr. Chawafaty reminding him that Agrinvest still had until 26^th July to meet its liabilities, after which it would have to start selling the securities. It is clear from that letter that SB was seeking to enable Agrinvest to find a buyer for the bonds at a better price than SB itself was likely to obtain in the market.

On 26^th July Mr. Hall of SB wrote a letter concerning Lakah to Mr. Chawafaty. It included the following passage:

“Your option to repay the forward sale with a 2.5% fee expires today. I don’t particularly [want] to close out your position because I know you believe the bonds to be worth more than the approximate 65% level that we would use to repay your outstandings. . . . Nevertheless, we are carrying a considerable equity risk on Lakah and must facilitate a commensurate return. As such we will increase your purchase fee to 5% for the next two months, expiring 26^th September 2000. During this period, and for as long as the forward sale remains in default, we reserve our rights to sell the assets at any price at any time and without further notice.”

On 24^th November 2000 Mr. Chawafaty sent a fax to SB asking it to extend the settlement date under the forward sale transactions by two weeks and on 27^th November SB asked Agrinvest for its proposals for the payment of additional monies towards the Lakah forward sale. SB said that if it received acceptable proposals by 4^th December it would consider extending the sale for a further period, giving Agrinvest the opportunity to recover some of the value of the securities. On 30^th November SB issued two amended trade confirmation notes extending the settlement date under the two Lakah forward sales to 3^rd January 2001.

For reasons that will become apparent it is unnecessary for the purposes of this appeal to describe the subsequent correspondence between SB and Agrinvest. Suffice it to say that SB continued to accommodate Agrinvest in various ways until August 2005, when its patience finally ran out. On 11^th August 2005 its solicitors wrote to Agrinvest on its behalf declaring Agrinvest to be in default under the two forward sale contracts and giving notice terminating each of them.

On 24^th January 2006 SB started proceedings against Agrinvest in the Commercial Court to recover the amount outstanding under the two forward sale contracts. The proceedings were served on Debevoise and Plimpton on the understanding that they had been constituted by the Agreement as agents to accept service. Agrinvest failed to respond to the proceedings and judgment in default was entered against it under CPR Part 12. SB then obtained an interim charging order over shares in three English companies owned by Agrinvest with a return date of 25^th May 2006. That stirred Mr. Chawafaty into action. He wrote to the court on 22^nd May 2006 asserting that Agrinvest had not been properly served with the proceedings and asking to have the judgment set aside. The court refused to accept that letter as an application to set aside service and so on 21^st June 2006 Agrinvest made a formal application for that purpose. In due course SB accepted that the proceedings had not been properly served and the judgment was set aside by consent on 24^th July 2007.

On 26^th July 2007 SB started a second action to recover the amounts outstanding under the forward sale contracts. This time Agrinvest was duly served with the proceedings in Arizona, but once again it failed to file an acknowledgment of service and on 19^th February 2008 SB entered judgment in default against it for US$7,595,454.43 and costs. On 6^th March 2009 Agrinvest applied to have the judgment set aside on the grounds that it had a real prospect of successfully defending the claim at trial. On 23^rd June 2009 the matter came before Field J.. He considered that Agrinvest had a real prospect of successfully defending the claim, but he held that it had failed to make its application promptly, as required by the Civil Procedure Rules, and dismissed it on those grounds.

The application to set aside the judgment was made under CPR 13.3, which provides as follows:

In the ordinary way a defendant who seeks to set aside a regular default judgment must be able to show that he has a real prospect of successfully defending the claim. Whatever the circumstances of the case, there is nothing to be gained, and much to be lost, by setting aside a judgment that will be reinstated after the parties have incurred the cost and delay of a trial. If that requirement has been satisfied, however, the court will still need to consider the circumstances of the case more generally before deciding whether to grant the relief sought. One factor that it is required to take into account, as the rule makes clear, is whether the application was made promptly.

It is convenient to begin with the question whether Agrinvest has a real prospect of successfully defending the claim. The Agreement provided in clause 13.2 as follows:

“If an Event of Default occurs, the Seller shall at any time thereafter be entitled with or without notice, which notice, if given, may be oral or in writing, to the Buyer to terminate all or any of the Transactions in its sole discretion and declare all amounts payable by the Buyer immediately due and payable including, without limitation, the amount of any Unpaid Amount payable by the Buyer and the amount of any losses, costs or expenses of the Seller arising as a result of this termination and the sale (or deemed sale) of the Assets as contemplated herein, following which:

SB’s claim is for the amounts outstanding under the two forward sale contracts on 11^th August 2005 when it contends that the contracts were finally terminated. By way of defence, however, Agrinvest asserts that by its letter of 20^th June 2000 SB irrevocably exercised its right to terminate each of them with effect from 22^nd June and is not entitled to recover on the basis that they continued in effect until August 2005. The argument derives its significance from the decline in the market value of the securities between June 2000 and July 2005. By August 2005 the value of the securities was negligible, but Agrinvest contends that if SB had accounted for their value in June 2000 there would have been a significant balance owing to it from SB which it seeks to recover by way of counterclaim.

The argument depends entirely on the meaning and effect of the letter of 20^th June 2000; it is not suggested that SB terminated the contracts at any other time before 11^th August 2005. Mr. de Lacy submitted that the letter contained a clear and effective election on the part of SB to exercise its right to terminate the contracts, albeit that the termination was not intended to take effect until 22^nd June. Mr. Auld Q.C. submitted that the letter contained nothing more than an indication of how SB intended to act and that in the event it chose not to exercise its right to terminate the transactions. Instead it repeatedly extended the settlement date at the request of Agrinvest until 10^th September 2004 and did not finally give notice of termination until August 2005.

In my view the letter of 20^th June 2000 cannot be read as a notice of termination pursuant to clause 13.2 of the Agreement. Although in some respects SB was willing to conduct its business with Agrinvest in a relatively informal way, both parties were aware of the nature of the transactions and of the fact that they were governed by the terms of the Agreement. The circumstances constituting events of default were carefully defined in the Agreement and the rights of SB on the happening of an event of default were spelled out in detail in clause 13.2. The first thing to notice is that the occurrence of an event of default in this case did not automatically result in the termination of the contracts. In that respect the Agreement differed significantly from that considered in Socimer International Bank Ltd v Standard Bank London Ltd [2004] EWHC 1041 (Comm) (unreported, 11^th May 2004), on which Agrinvest placed some considerable reliance. In the present case the occurrence of an event of default gave SB the right to terminate the contracts, which it was free to exercise or to refrain from exercising at its option. I agree with Mr. de Lacy, therefore, that on the happening of an event of default SB was faced with the need to choose which of those inconsistent courses to take and that its choice, once exercised, was binding as an election.

It is well-established that a clear and unequivocal choice between inconsistent rights is required in order to give rise to a binding election. Moreover, where the rights arise under a contract which provides for the manner in which the choice must be made, it is necessary to have regard to its terms when considering whether such a choice has been made. In this case the Agreement required SB to give notice to Agrinvest to terminate a transaction and declare all amounts payable under it to be immediately due and payable. A notice of that kind is normally given in writing (though under the Agreement writing was not essential) and however given must be sufficient to make it clear that the contract is terminated and that all outstanding amounts have become payable immediately. The letter of 11^th August 2005 provides a good example of how one would expect such a notice to look, but no specific formalities are needed, provided the meaning is clear. What the Agreement does not contemplate, however, is a conditional notice that will take effect in the future if the condition is not satisfied.

Against that background I do not think it is possible to construe SB’s letter of 20^th June 2000 as a notice of termination under clause 13.2 of the Agreement. Having recognised that the current market value of the bonds was unattractive to Agrinvest, SB indicated that it was willing to help Agrinvest avoid the loss that a sale (and indeed any disposal of the bonds pursuant to clause 13.2) would create. That was clearly inconsistent with the immediate termination of the contracts. What then followed was a statement by SB that it would close out the contract for the sale of the bonds if payment were not made by 22^nd June. In my view that cannot amount to the immediate exercise of any right, either on that date or in the future. It was nothing more than a statement of intent which SB remained free to implement or ignore at its option. It is striking that the letter did not contain any reference to amounts payable under the contract falling due immediately or what those amounts might be. By writing this letter SB was applying commercial pressure by threatening to terminate the transactions if Agrinvest failed to make a further payment promptly. In the event, however, it did not carry out the threat and the contracts remained on foot.

The dispute about the meaning and effect of the letter raises a short point of construction which does not depend on a fuller understanding of the surrounding circumstances for its resolution and is therefore one which is amenable to determination on an application of this kind. For the reasons I have given I am unable to accept Mr. de Lacy’s submission concerning the letter of 20^th June 2000 and since Agrinvest’s defence depends entirely on establishing that SB terminated the forward sale contracts on 22^nd June 2000, I think the judge was wrong to hold that it had a real prospect of defeating the claim at trial. I would therefore dismiss the appeal on that rather different ground. That makes it unnecessary to consider whether Agrinvest made its application promptly and whether, in dismissing it for failure to act promptly, the judge erred in the exercise of his discretion. However, since the question is of more general interest, I think it worth making a few observations about the importance of applying promptly to set aside a default judgment.

Before the introduction of the Civil Procedure Rules judgment could be entered in default of notice of intention to defend under O.13 of the Rules of the Supreme Court. Applications to set aside default judgment were governed by O.13, r.9, which provided as follows:

“Without prejudice to rule 7(3) and (4) the Court may, on such terms as it thinks just, set aside or vary any judgment entered in pursuance of this Order.”

The authorities relating to setting aside default judgments laid considerable emphasis on the desirability of doing justice between the parties on the merits. Delay in making an application to set aside rarely appears to have been a decisive factor if the defendant could show that he had a real prospect of successfully defending the claim against him. Thus in J.H. Rayner (Mincing Lane) Ltd v Cafenorte S.A. Importadora e Exportadora S.A. [1999] EWCA Civ 2015 judgment was set aside after 7½ years on the applicants’ showing that they had a defence with a real prospect of success.

The Civil Procedure Rules were intended to introduce a new era in civil litigation, in which both the parties and the courts were expected to pay more attention to promoting efficiency and avoiding delay. The overriding objective expressly recognised for the first time the importance of ensuring that cases are dealt with expeditiously and fairly and it is in that context that one finds for the first time in rule 13.3(2) an explicit requirement for the court to have regard on an application of this kind to whether the application was made promptly. No other factor is specifically identified for consideration, which suggests that promptness now carries much greater weight than before. It is not a condition that must be satisfied before the court can grant relief, because other factors may carry sufficient weight to persuade the court that relief should be granted, even though the application was not made promptly. The strength of the defence may well be one. However, promptness will always be a factor of considerable significance, as the judge recognised in paragraph 27 of his judgment, and if there has been a marked failure to make the application promptly, the court may well be justified in refusing relief, notwithstanding the possibility that the defendant might succeed at trial.

In the present case the application was made a little over a year after judgment had been entered. Agrinvest has sought to explain the delay by saying that Mr. Chawafaty did not become aware of the decision in Socimerv Standard Bank until late in 2008 and that it was then unable for some time to obtain sufficient funds to instruct solicitors on its behalf. Neither of those arguments impressed the judge and they do not impress me either. The important questions for these purposes are when did Agrinvest learn that SB had entered judgment against it and how quickly did it take steps to have it set aside. Evidence filed on behalf of SB shows that a copy of the judgment was sent by e-mail to Mr. Chawafaty on 20^th February 2008 and that he acknowledged its receipt on 22^nd February. Socimer v Standard Bank was decided in 2004. It did not represent a new development in the law and, as I have observed, has very little relevance to this case. More importantly, however, it is clear from the manner in which Mr. Chawafaty acted when judgment in default was entered against Agrinvest on the earlier occasion that he was quite capable of taking prompt and effective steps to protect its position, with or without the benefit of legal representation. Indeed, in that letter he had put forward the very argument that has been advanced on behalf of Agrinvest in these proceedings.

Mr. de Lacy drew our attention to a number of cases decided since the introduction of the Civil Procedure Rules which he submitted support the conclusion that the court will set aside a default judgment despite a delay of several months, or in some cases years, in making the necessary application. Since, on the view that I have taken of the merits of Agrinvest’s defence, the issue does not arise for determination on this appeal, it would be inappropriate to embark on a detailed analysis of those decisions, the effect of which was disputed by Mr. Auld. It is clear, however, that much is likely to depend on the particular circumstances of the case. In the present case the judge described the defence as “far from overwhelming” (which suggests that he did not think it carried a great deal of weight) and the explanation for the significant delay in making the application to set aside was conspicuously unconvincing. In those circumstances, even if I had agreed with the judge that Agrinvest had a real prospect of successfully defending the claim, I should have been slow to hold that he had erred in exercising his discretion not to set the judgment aside.

For these reasons I would dismiss the appeal.

I agree.

I also agree.