Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MRS JUSTICE GLOSTER, DBE
Between :
1) KLÖCKNER HOLDINGS GmbH 2) BALLI GROUP PLC | Claimants |
- and - | |
KLÖCKNER BETEILIGUNGS GmbH | Defendant |
Mr Joe Smouha QC and Ms Susannah Jones (instructed by Messrs Masseys) for the Claimants
Mr Tom Beazley QC and Mr Brian Kennelly (instructed by Messrs Pritchard Englefield) for the Defendants
Hearing dates: 8th April 2005 (further written submissions 13-18 April 2005)
Judgment
Mrs Justice Gloster, DBE:
In this case management conference, I have to decide an application by the current claimants in the action, Klöckner Holdings GmbH (“Holdings”) and Balli Group plc (“Balli”) (collectively “the Claimants”) for a complete stay of these English proceedings.
The Claimants are companies with interests in the steel industry. They allege that they have suffered loss and damage as a result of the deceit of an employee of the former Second Defendant, Klöckner AG (“Klöckner”) which they also allege interfered unlawfully with their business.
Balli is a company registered in the United Kingdom and is one of the world’s largest independent traders of steel products. Klöckner is one of the leading multi-metals distribution companies in the world. Recently, the assets and liabilities of Klöckner passed, by operation of German law, to Klöckner Beteiligungs GmbH as a result of a merger. It has been agreed between the parties as a matter of formality that this company, which now has vested in it Klöckner’s interest and liabilities in these proceedings, should formally replace Klöckner as Defendant. In this judgment I do not need to differentiate further between the original Klöckner, and its successor as a result of the merger.
Holdings, a member of the Balli Group, acquired 94.5% of the shares in Klöckner in October 2001. Part of the purchase monies for this acquisition was advanced by bankers WestLB AG (“WestLB”) to Holdings pursuant to the terms of a facility agreement dated October 2001 (“the Facility Agreement”). The balance was to be financed by Holdings by the intended sale of assets of the target, Klöckner. After the acquisition, Klöckner alleged that the balance of the purchase price had been improperly obtained by the misuse of funds of, or derived from, Klöckner, and that this diversion of funds from Klöckner was illegal under German law, notwithstanding that it had, apparently, been put in place and structured on the basis of professional advice from Clifford Chance, solicitors, and Goldman Sachs, investment bankers. As a result, a number of the Claimants’ executives became the subject of criminal investigations in Germany and the events were widely reported in the press.
As an interim measure, whilst investigations took place, WestLB proposed the appointment of an independent trustee over Holdings’ shares in Klöckner. This was implemented by way of a German law Restructuring Agreement dated 14 March 2002 (“the Restructuring Agreement”). Whilst the trustee was in place, the Claimants hoped to negotiate refinancing of the purchase of the Klöckner shares. The Claimants entered into negotiations with, inter alia, Deutsche Bank AG (“Deutsche Bank”), and PWG Capital Limited (“PWG”) for the purpose of obtaining funds to refinance Holdings’ purchase of the shares in Klöckner. The Claimants allege that these negotiations were unsuccessful because of representations made to Deutsche Bank by Mr Derrick Noe, acting as a director and agent of Klöckner AG, to the effect that, in the event of control of Klöckner returning to the Balli Group, all of the banks and financing institutions then providing finance to Klöckner and its operating companies would withdraw their support, with the result that Deutsche Bank and the other financiers would have to advance a far greater amount that that contemplated in order for Klöckner to survive. The Claimants’ allege that, because of these misrepresentations, Deutsche Bank and PWG withdrew from the refinancing negotiations and, in particular, withdrew from negotiating a particular contract referred to as the “DB Contract”, whereby Deutsche Bank was to provide partial refinancing to Holdings and subject to the conclusion of which PWG was to advance additional funds to Holdings.
On 31 October 2002 WestLB purported to terminate the Facility Agreement, and expressed an intention to put Holdings’ shares in Klöckner up for auction. On 18 November 2002 the Claimants issued this claim seeking, inter alia, damages for losses allegedly suffered as a result of Klöckner’s alleged misrepresentations. The original Defendants included WestLB, Mr Noe and members of the management consultant group appointed as trustee (including its controlling mind, a Mr Walter Droege) as Third to Seventh Defendants.
The Claimants allege that, under very considerable commercial pressure and to avoid the sale of the Klöckner shares at an undervalue by auction, the Claimants then entered into two Settlement Agreements with the former Third to Seventh Defendants (amongst others). In summary the settlement provided that:
Holdings’ shares in Klöckner would be transferred to WestLB and another lender in lieu of payment under the Facility Agreement; however, that transfer would not take place for two months; the Claimants were to seek refinancing during this period and in the event of payment by Holdings the transfer provisions would become null and void;
the claims against the Third to Seventh Defendants were to be discontinued and all claims between the Claimants and the Third to Seventh Defendants (amongst others) were fully and finally settled;
a “litigation cap” was put in place in relation to the enforcement by the Claimants of any judgment against the First and Second Defendants, who remained parties to the litigation.
This settlement was formalised in two written agreements dated 6 March 2003; one was a German law agreement by which the share transfer would take place (“the Transfer Agreement”) and one was an English law agreement by which the Proceedings were to be discontinued (“the Settlement Agreement”). In due course, Holdings’ shares in Klöckner were purportedly transferred to the lenders, and the proceedings were discontinued against the Third to Seventh Defendants. The Claimants then served their Particulars of Claim, which have subsequently been amended and reamended. The claims made are for damages for deceit and unlawful interference with the Claimants’ trade or business. The claim against Klöckner is now solely based on its liability as principal for Mr Noe’s alleged misrepresentations. The loss and damage claimed includes the losses alleged to have been suffered because of the transfer of the shares and the settlement with the Third to Seventh Defendants.
In its Defence, Klöckner denies that the alleged representations were made at all, and denies that any representations made by Mr Noe were false. In the alternative Klöckner asserts that the statements were statements of opinion which Mr Noe believed, or had reasonable grounds to believe, were true. In addition, Klöckner denies that any reliance was placed by Deutsche Bank on any misrepresentation and that the necessary causation loss and damages had been made out by Holdings.
However, the above summary of the action conceals the fact that, since the institution of proceedings on 17 November 2002, the action has already progressed through detailed interlocutory stages. Originally the claim was by three Claimants against seven Defendants. It was in various parts. The former First Claimant, Atlantic Shipping Lines Limited (“Atlantic”), claimed against the former First Defendant, Klöckner Limited (“Limited”), relief in relation to an alleged Conditional Sale Agreement. Balli and Holdings claimed against the Second to Seventh Defendants for alleged misstatements, misrepresentations and broken promises. The action has undergone a number of significant changes at the instigation of the Claimants, in particular:
Atlantic, having been ordered to provide security for costs, served notice of discontinuance of its claims (with the ultimate result that the Counterclaim was also discontinued);
Balli and Holdings entered into a settlement with the Third to Seventh Defendants and those Defendants ceased to be involved in the action;
the Claimants materially amended and altered their claim;
Furthermore, there have been extensive pleadings and requests for and provision of further information; there has been disclosure; and there has already been one case management conference.
As I have said, all that now remains is a claim against Klöckner for damages for alleged deceit and unlawful interference with Balli and Holdings’ trade or business.
It is at this stage, after more than 2½ years of litigation and a considerable expenditure of time and money on both sides, that the Claimants apply to stay the entire proceedings. They do so on the basis that, in January and April 2005 respectively, they decided to bring other legal proceedings in Germany and England against other defendants (not including Klöckner), and they wish to stop these present proceedings until the new proceedings in Germany and England have been finally resolved. The reason for the institution of these new proceedings is that the Claimants assert that, in August 2004, they obtained evidence that led them to conclude that the Restructuring Agreement and the two Settlement Agreements (viz. the Transfer Agreement and the Settlement Agreement) are void ab initio.
Accordingly, on 21 January 2005, Holdings issued a claim before the Regional Court of Düsseldorf against WestLB in respect of the two German law agreements (the Restructuring Agreement and the Transfer Agreement), seeking declarations, damages and return of the shares in Klöckner (“the German proceedings”). Holdings’ allegations in the German proceedings, in summary, are that:
In January 2002, WestLB decided, unbeknownst to Holdings, to attempt to seize control of Klöckner. WestLB considered that the Holdings had made an unusually good deal and that WestLB should transfer to itself that economic advantage.
WestLB therefore engineered a situation in which Holdings would be forced to default under the Facility Agreement. In particular WestLB procured the appointment of Droege Comp Internationale Unternehmung Beratung GmbH (a consultancy firm with which it had it now appears a long standing and close relationship) (“Droege”) as “independent” trustee under the Restructuring Agreement. It is further alleged that, unbeknownst to Holdings:
On 6 February 2002, WestLB had entered into a secret loan agreement with Mr Droege and/or with his investment firm Deutsche Investors Capital Holdings AG (“DIC”), to provide a loan for the acquisition of up to 50% of the shares in Klöckner. In the event that the acquisition took place, WestLB was to participate up to 35% in DIC.
WestLB and Mr Droege planned to implement a strategy they had deployed before under which WestLB would install Mr Droege’s company as consultant to its customers, and, as well as providing consulting services to the customer, Mr Droege would acquire a stake in it.
Following the appointment of Droege GmbH as trustee Holdings was cut off from Klöckner and in particular lost access to its liquid funds which it intended to use to repay the loan facility. Thus it was only a question of time before Holdings defaulted under the Facility Agreement. Further, WestLB, Droege GmbH, Mr Droege and Mr Noe took various steps in pursuit of their own interests, with the result that Holdings had to acquiesce to WestLB’s demands to agree to the Transfer Agreement and Settlement Agreement, thus losing its shares in Klöckner.
On the basis of these factual allegations, Holdings alleges that the Restructuring Agreement, the Transfer Agreement and the act of transfer of the shares are void ab initio under German law. It is said that the German law bases for this are analogous to public policy, duress and deceit.
However, the validity of the Settlement Agreement cannot be litigated in Germany because it contains an English law and jurisdiction clause. Accordingly, on 2 April 2005, Holdings began further proceedings before this Court (“the new English proceedings”) seeking a declaration that the Settlement Agreement is also void. The Defendants are those parties to the Settlement Agreement who maintain its validity - including WestLB, Mr Droege, Droege, DIC and Mr Noe. They do not include Klöckner, not surprisingly, because it was not party to the Settlement Agreement. In summary, the grounds of the new English claim are that the Settlement Agreement is void because:
by its express or implied terms the Settlement Agreement fails if the Transfer Agreement is void.
there was a total failure of consideration.
Holdings entered into the Settlement Agreement under a mistaken belief that the transfer of the shares would be valid. The Claimants anticipate that the new English proceedings will be stayed pursuant to Article 28 of Regulation 44/2001 in favour of the German proceedings and will be very quickly resolved after judgment has been handed down in the German proceedings.
It is against this background that the Claimants seek an order that the current proceedings be stayed pending final resolution of the German proceedings (including any appeals) and of the new English proceedings.
Mr Smouha QC, who appeared with Ms Susannah Jones, on behalf of the Claimants, submits that a stay is appropriate for the following reasons:
If the claims in the German proceedings were to succeed, Holdings would gain ownership of 94.5% of Klöckner, and in that event these proceedings would be otiose, since there would be no point in Holdings suing its own subsidiary.
If the three agreements have been validly avoided, the Claimants’ claim for losses suffered because of the transfer of the shares and the settlement with the Third to Seventh Defendants will not arise.
Klöckner has alleged that the effect of the litigation cap is to render these proceedings pointless. The Claimants dispute this. However, if Klöckner were correct, it is crucial that the validity of the litigation cap be determined before these proceedings continue.
If this claim were to continue:
this court, in order to determine quantum, would have to resolve issues of German law to determine whether the restructuring and Transfer Agreements are void. The German courts are seised of these issues, and to require them to be litigated twice would increase costs unnecessarily and lead to a risk of inconsistent judgments;
this court would have to resolve the question whether the Settlement Agreement is void. Klöckner is not a party to this agreement. This court may wish to consider consolidating this action with the separate claim in relation to the Settlement Agreement, a claim that should clearly be stayed under Article 28 of Regulation 44/2001.
The new evidence obtained by Holdings fundamentally changes the nature of this action. A substantial part of the Claimants’ damages claim is premised on the validity of the agreements which are being challenged in Germany and before this court, and it is undesirable for the validity issues to be determined in this action.
Mr Tom Beazley QC, who appeared on behalf of Klöckner together with Mr Brian Kennelly, on the other hand, submitted that there should not be a complete stay of the current proceedings, but merely a partial stay of particular issues. He argued that there should be no stay of the trial of the liability issues relating to the alleged misrepresentations . He argued that the following issues (“the Misrepresentation Issues”) should be tried now:
whether Klöckner, by Mr Noe, made or instigated the alleged misrepresentations;
whether Klöckner had the relevant intention alleged, and knew that the representations were false;
whether the alleged misrepresentations were indeed false;
whether, because of the alleged misrepresentations, Deutsche Bank decided not to enter into the DB contract and accordingly the refinancing negotiations failed;
He submitted that there was no reason or basis for the determination of the Misrepresentation Issues to await the outcome of the new German and English proceedings.
On the other hand, Mr Beazley accepts that the issues which can and should sensibly await the resolution of the new German and English proceedings, are the issues relating to loss, as opposed to liability, and which concern the effect of the failure of the buyout negotiations. As the Re-amended Particulars of Claim demonstrate (see paragraphs 34 and 34A), the claim for loss and damages in the current proceedings depends in part upon whether the Settlement Agreement and the Transfer Agreement could be validly avoided or not.
In my judgment, relevant factors which guide the court in the exercise of its discretion to stay proceedings include (in the circumstances of the present case) the following:
The court has a wide discretion to stay proceedings, but in circumstances where the claimant itself has voluntarily brought the two sets of proceedings, a stay should only be granted in very rare circumstances: see Ledra Fishers v Turner [2003] EWHC 1049 Ch, paragraphs 14 and 38; Reichhold Norway ASA v Goldman Sachs [2000] 1 WLR 173 at pp 179-180.
Even where there are such reasons for a stay, a stay should only be granted if the benefits of doing so clearly outweigh any disadvantage to the other party (Reichhold, page 180).
A particularly compelling case would be required for a stay to be granted to the Claimant years after he has brought the claim (Ledra para 39).
A stay will not, at least in general, be appropriate if the other proceedings will not even bind the parties to the action stayed, let alone finally resolve all the issues in the case to be stayed.
A stay will not, at least in general, be appropriate if the parties to the other proceedings are not the same.
A Defendant against whom a serious allegation (such as deceit) is made is entitled to an expeditious hearing, and should not be left for years waiting for the outcome of another case over which he (and the Court) has no control. An action alleging fraud should come to trial quickly; thus unwarranted delay may lead to an action being dismissed for want of prosecution even before the limitation period has expired: e.g. Clerk & Lindsell on Torts (18th ed., 2003) 15-38, Yiannides v Radley Gowns Ltd (1975) 119 SJ 711, the overriding objective (CPR 1.1, 1.2 and 1.4(2)(l)) and Article 6 of the ECHR.
In my judgment, it is appropriate in the present case that there should be a stay, but only the limited stay for which Mr Beazley contends. I consider that it would be wrong for there to be a complete stay of the current proceedings against Klöckner pending the resolution of the new proceedings brought by Holdings against different parties in Germany and England. The Misrepresentation Issues should in my judgment be tried without delay. My reasons may be summarised as follows.
First, it will inevitably take a considerable time for the new German proceedings to be resolved. Klöckner’s estimate is that, including possible appeals, the new German proceedings are unlikely to be resolved before 2010/2011. Even the Claimants accept that, with appeals, the German proceedings will not be determined until 2009.
Second, moreover, and in any event, the German proceedings will not be determinative of the Misrepresentation Issues of liability as against Klöckner in the present case. Whether the Restructuring Agreement and the Transfer Agreement (or indeed the Settlement Agreement) are void or valid as between WestLB and Holdings (or the other parties to the Settlement Agreement) is irrelevant to the issue whether Klöckner, by Mr Noe, misrepresented Klöckner’s financial position in the course of Holdings’ negotiations with Deutsche Bank in relation to the proposed refinancing, and whether the latter relied upon such misrepresentations in coming to its decision not to proceed with refinancing.
Third, it is highly undesirable, in my judgment, that the Misrepresentation Issues, involving allegations of fraud and deceit as they do, should be delayed for perhaps many years while the other proceedings are heard. At the time of hearing, Mr Noe was the Chief Executive Officer of Klöckner. I have been advised that subsequently, on 30 June 2005, he ceased to act in this capacity. Irrespective of his departure from Klöckner, in my judgment, it is most undesirable that he should have these allegations against him outstanding and unresolved for a period of four to five years when they can, in my judgment, be separately determined at this stage, in isolation from the issues relating to losses. I accept that the substance of such allegations does have an adverse effect both on the reputation of Mr Noe and upon Klöckner, the corporate entity, and they should in my judgment be resolved as speedily as possible.
Mr Smouha submits that the notion that there will be personal finality for Mr Noe and Klöckner, if there is only a partial stay and the Misrepresentation Issues are resolved first, is illusory. He emphasises that there is a much wider dispute being fought in the German proceedings, where Mr Noe is a compellable witness and where his actions will be scrutinised. He also referred to further proceedings brought by Klöckner in Germany against certain other executives.
However, I do not consider that the fact that Mr Noe will be a compellable witness in the German proceedings between Holdings and WestLB in relation to the Restructuring Agreement and the Transfer Agreement (where the allegations relate to a wholly different transaction and to which neither Klöckner nor Mr Noe is a party) affords any sort of reason why the trial of the Misrepresentation Issues (which involve serious allegations of deceit) should be postponed indefinitely. The German proceedings do not appear to have alleged misrepresentation. Mr Noe may have to give evidence in such proceedings, but the focus there clearly will not be directed at the misrepresentations relating to the failure of the proposed Deutsche Bank funded refinancing. Nor am I persuaded that the existence of the other German proceedings relating to the Holdings takeover brought by Klöckner before the Regional Court in Duisberg against former executives is any reason why these current proceedings should be completely stayed.
Fourth, I accept Mr Beazley’s submissions that the resolution of the Misrepresentation Issues is heavily dependent upon oral evidence, and that it is highly undesirable that there should be a delay in the presentation of that evidence. I reject Mr Smouha’s argument that these problems can be addressed by the taking of detailed witness statements.
Fifth, I refer to Mr Smouha’s submission that, if the German claim were to succeed in its entirety and the Klöckner shares were to be retransferred to Holdings, this action would be otiose because Holdings would again own 94.5% of the Klöckner shares, and thus become part of the Balli Group. This appears to me to be a wholly unconvincing reason for granting a blanket stay. First of all, the evidence (including information supplied to me after the hearing by means of further statements and letters) shows that ownership of the Klöckner shares was transferred on 16 March 2005 from the WestLB subsidiary and other nominees holding them to an independent third party, which is not under the corporate control of WestLB, for a consideration of approximately €320 million. It may, of course, be possible that, in the German proceedings, such a third party could be joined as a defendant to the proceedings and have the sale of the Klöckner shares to it set aside on the grounds of the purchaser’s bad faith and knowledge of Holdings’ claim (as envisaged in the Claimants’ evidence). But the possibility of such an event occurring after so many years, when damages would appear to be an adequate remedy must be highly questionable.
Moreover, it is highly unsatisfactory for this court to have to approach its decision whether to order a stay on the basis that the Claimants may decide at some stage in the future no longer to pursue their claim because they will have acquired control of the Defendant. It appears to me that the Claimants have a choice: either they decide that their remedies in the other actions against other defendants are adequate and they do not need to pursue these claims against Klöckner (in which case they discontinue) or they should proceed to trial expeditiously with their allegations of deceit. It is wholly undesirable that such allegations, the making of which have reputational issues for Mr Noe and others, should be left in abeyance pending the litigation of a different complaint against different parties in a different jurisdiction.
Sixth, I am not persuaded that to separate out the trial of the Misrepresentation Issues from the trial of the remaining issues relating to loss would be impractical or duplicative, as suggested by Mr Smouha. In the current trial, there will have to be determined whether the alleged misrepresentations were made with the requisite knowledge of Klöckner and whether by reason of such misrepresentations (if any) Deutsche Bank decided not to enter into the DB contract and accordingly the refinancing negotiations failed. But those issues are factually and logically separate and distinct from the issues as to what were the consequences of Deutsche Bank’s decision, as an analysis of the Re-amended Particulars of Claim demonstrates. Thus subparagraphs 32(a)-(c) and 34 and 34A relate to the consequences, and thus the loss that the Claimants have allegedly incurred.
Mr Smouha submitted that inevitably there would have to be cross-examination in the current proceedings of Mr Noe’s role in relation to WestLB, Mr Droege and the subject matter of the German proceedings because the conduct was in effect one long continuum. I am not convinced that it will be necessary for this to happen since the misrepresentation allegations are very specific. In case management terms, one can well envisage that the trial judge might well restrict wide-ranging cross-examination that traversed the WestLB transaction.
Seventh, disclosure has to a significant extent already taken place and will have to be completed in relation to the Misrepresentation Issues. But in my judgment, the evidence does not suggest that restrictive disclosure will be a problem. The fact that, at a subsequent stage, witnesses may have to produce further statements relating to the remaining loss issues and return to give evidence is, of course, a consideration, but, although further costs will inevitably be incurred at that stage, I do not accept that the further evidence will involve material duplication or materially increase costs. Nor do I accept Mr Smouha’s submission that the costs of a trial to determine the Misrepresentation Issues would be little different from the costs that would be incurred if the matter were to be litigated in one trial in four or five years time. On the contrary, there will, in my judgment, be a current cost saving if the loss issues are deferred. Indeed, if the Claimants fail on the Misrepresentation Issues such costs will never be incurred. On the other hand, if they succeed, it is to be anticipated that, after the conclusion of the new German proceedings, albeit that any judgment will not be binding on Klöckner in these proceedings, the question of what loss the Claimants have actually suffered will be far more sharply defined, and costs will not therefore be spent in the current proceedings exploring hypothetical loss issues.
Eighth, contrary to Mr Smouha’s submissions, I do not consider that trying the Misrepresentation Issues would unduly prolong the resolution of the dispute. On the contrary, the trial in the near future of the Misrepresentation Issues might well serve to produce an opportunity for compromise of that dispute, or, at least, a compromise conditional upon the ultimate outcome of Holdings’ other litigation in Germany and in the new English proceedings.
Ninth, the respective arguments relating to the issue of the litigation cap, and whether, as Klöckner contends, and the Claimants deny, it would prevent the Claimants from execution is, in my judgment, irrelevant to the question whether there should be a limited or a complete stay.
For all the above reasons, in my judgment, Mr Beazley’s submissions are to be preferred. Accordingly, I direct that the determination of the Misrepresentation Issues should proceed to trial and that there should be a stay of the loss issues pending resolution of the new German proceedings and the new English proceedings. I will hear argument as to the precise form of the directions as to the future conduct of the trial.