First Gulf Bank v Wachovia Bank National Association

By this application First Gulf Bank (“First Gulf”) seek pre-action disclosure from Wachovia Bank National Association, formerly First Union National Bank, which, despite their change of name, I shall call “FUNB”, the acronym by which they were known at the time when the events to which this application relates occurred.

Between 21^st October 1998 and 8^th March 1999 First Gulf issued 12 deferred payment letters of credit in favour of an English company called Simetal Limited (“Simetal”), operated by a Mr Milton Kounnou, its managing director, who has since been convicted of false accounting offences, from a business park in Shoeburyness, Essex. The Letters of Credit (“LCs”) were opened by First Gulf at the request of its customer, Zeeba Metal Company Limited, (“Zeeba”), a company incorporated in the U.A.E. FUNB was named as the confirming bank under each of these LCs. In exchange for a discounted payment to Simetal FUNB bought Simetal’s rights under the LCs. At the maturity date of the credit First Gulf paid out under the LCs sums which in the end amounted to over $ 6.75 million. First Gulf was never reimbursed by Zeeba. For the most part the goods described in the LCs were not shipped, or were not as stated in the shipping documents, and the documents presented under the LCs were false.

The fraud alleged is said to be part of a large scale fraud carried out on a number of Middle Eastern Banks by a company called Solo Industries Limited (“Solo”) incorporated and based in Sharjah in the U.A.E. This company was run by a Mr Madhev Patel. Solo was the principal in a group of companies including Zeeba.

Between October 2000 and May 2001 several of the banks who had been defrauded (the “Gulf based banks”) namely (i) Arab Banking Corp, (ii) Emirates Bank International PJSC, (iii) Bank Muscat International SAOG, (iv) Albraka Islamic Bank BSC, and (v) Gulf International Bank BSC began proceedings in the Commercial Court against FUNB for fraudulent misrepresentation. The claims, which amounted to about $ 12,000,000, were brought on the basis that FUNB either knew that Simetal, and its linked companies controlled by Mr Kounnou (Albury Mintech, Simetal IOM and Finesight Impex) were engaged in fraudulent transactions, or was reckless as to that, and that FUNB’s requests for payment amounted to fraudulent misrepresentations that it believed that each of the transactions were genuine and that it was entitled to payment.

The claims against FUNB went to trial in November 2002 before Morison, J. Before then, at a CMC held on 5.11.01, Toulson, J. had asked Allen & Overy who acted for the Gulf based banks to write to all other potential claimants to notify them of the litigation so that they had the opportunity to join in, with a view to avoiding a situation where FUNB became subject to different proceedings or sets of proceedings in relation to the same issue. First Gulf received such a letter. FUNB defended the claims on the basis (a) that none of their employees knew or turned a blind eye to the fictitious transactions underlying the LCs; (b) that the issuing banks had not relied on any implied representation by FUNB because they had no concern about the existence of underlying sales transactions and (c) that certain of the banks had themselves known of, or turned a blind eye to, the fraud.

The trial lasted for about three weeks. The oral evidence was begun but not completed. In the course of the trial some of FUNB’s staff accepted in cross examination that FUNB’s conduct was reckless and that FUNB had recklessly ignored obvious indications of fraudulent activity on the part of Mr Kounnou’s companies. On 25^th November 2002 the claims were settled on confidential terms.

The pleadings in the proceedings brought by the Gulf based banks to which First Gulf has had access, indicate, according to the first witness statement of Mr Andrew Cooke, First Gulf’s solicitor, that the statements of account for Simetal are very likely to show that FUNB knew the following matters:

The companies controlled by Mr Kounnou held numerous accounts with FUNB;

Mr Kounnou was signatory to all these accounts;

The scale and volume of the transactions conducted through these accounts was extraordinarily large given the size and nature of the companies involved;

The parties remitting and receiving funds were limited to a small number of counterparties ;

Payment by a regular counterparty would typically be matched by almost immediate payment out of the account in a similar amount in favour of the same or another regular counterparty (subject to a deduction for fees);

A significant proportion of the transactions conducted through the accounts show no commercial rationale, involving payments into an account held at FUNB’s London bank by a counterparty and payment out of a similar amount to the same or another counterparty shortly thereafter;

Large fees were paid out under these accounts;

Although there was a large volume of transactions on these accounts, balances were kept to a minimum;

The accounts show no evidence of the companies incurring normal business expenses;

Significant amounts were regularly received from foreign banks which failed to name the remitter thereof.

First Gulf have it in mind to issue proceedings against FUNB on the same, or a similar, basis to that relied on by the Gulf based banks, namely that at the time of the negotiation of the documents under the Letters of Credit FUNB knew of the fraud, or were reckless as to its existence, and that when it sought reimbursement from First Gulf it impliedly represented, contrary to the truth, that it believed the underlying transaction to be genuine. This knowledge is said to arise as a result of its knowledge of Simetal's accounts and is said to be established by the recklessness accepted by its employees at the trial in November 2002.

The disclosure that is sought is of the following documents:

Statements of account between May 1996 and May 1999 for all accounts held with FUNB by Simetal, Albury Mintech, Simetal IOM and Finesight Impex;

Insofar as separate from such statements of account, statements of fees paid by Simetal to FUNB;

All credit spread analyses carried out by FUNB on Simetal;

Payment instructions given to FUNB on behalf of Simetal; and

Letters of introduction for Abbey Mintech to become a customer of FUNB.

Under CPR Part 31.16 (3) the court has discretion to order pre-action disclosure if, but not unless, certain conditions are met. Those conditions, as applied to this case, are that:

If proceedings had started FUNB’s duty by way of standard disclosure set out in CPR Part 31.6 would extend to the documents or classes of documents of which FUNB seeks disclosure; and

Disclosure before proceedings have started is desirable in order to.

dispose fairly of the anticipated proceedings

It is not disputed (a) that, if proceedings are issued following disclosure of the requested documents, then it is extremely likely that they will be issued by First Gulf against FUNB and that this satisfies the requirement under CPR Part 31.16 (3) (a) as explained in Black v Sumitomo [2002] 1 WLR 1562; and (b) that all the documents requested would fall within standard disclosure since they relate directly to FUNB’s knowledge of Simetal's business. These conclusions are not, however, enough to secure pre-action disclosure. First Gulf need also to establish that such disclosure is desirable for one of the stated purposes and that as a matter of discretion an order should be made.

Miss Clare Ambrose, on behalf of First Gulf, submits that disclosure of the statements of account and the other material is desirable for the fair disposal of the anticipated proceedings. The pleadings in the Gulf based banks’ litigation indicate clearly that the account documents sought will show that FUNB knew of obvious signs of fraud. But, as she submitted, without these documents, First Gulf do not have a sufficiently complete case to be able to plead fraud, although they would be able to do so if they had the documents which show the matters to which I have referred in paragraph 7 above. If the anticipated proceedings are to be fairly disposed of it is desirable that they should be provided with this documentation. There would be no unfair disadvantage to FUNB in providing them, since, with their experience of the earlier litigation, they will be well prepared to meet the allegations that are likely to be made. Nor will there be any unfair advantage to First Gulf.

The evidence as to First Gulf’s ability to make a case without pre-action disclosure contains, as Mr Richard Slade for FUNB submitted, mixed messages. In his first witness statement Mr Cooke referred, at paragraph 15, to a transcript of some of the evidence of the cross examination at the trial. He stated that in the evidence to which he referred:

In his witness statement in reply Mr Hardy on behalf of FUNB asserted that “First Gulf do not state straightforwardly that they will be unable to bring proceedings against [FUNB] without pre-action disclosure”. In reply Mr Cooke said that:

It is the last sentence that comes closest to saying that the material now available to First Gulf does not enable them to plead fraud. It does not, in fact, say so in so many words. Further, there is no explanation of what it is that is missing or how, if at all, the cross-examination does not go far enough for their purposes. I note also (i) that Miss Ambrose’s skeleton argument claims that, absent the documents, First Gulf “cannot make a fully informed decision as to whether to commence proceedings”; and (ii) that Norton Rose’s letter before action of 8^th June 2005 to FUNB made a claim on the basis of fraudulent misrepresentation, sought pre-action disclosure and stated that, in the absence of a Limitation Standstill Agreement, proceedings would be issued without further reference to them.

Mr Slade submitted that First Gulf in fact enjoy a position of signal advantage when compared with an ordinary litigant They appear to have access to, and could in any event apply for, the statements of case in the Gulf based banks’ proceedings. They can also apply to the court for the Skeleton Arguments. It is apparent that they already have a transcript of at least some of the evidence. It has not been suggested to me that, if they do not have it already (Footnote: ¹), they could not obtain it all. They can see the lines of attack made at trial by Mr Mark Howard, Q.C. for the Banks and the lines of defence adopted by Mr Nicholas Stadlen, Q.C., for FUNB. The statements of account featured prominently at the trial. Mr Slade suggested that it was unrealistic to suppose that First Gulf could not plead a case; and that, if they really could not do so, it was not appropriate for the court to assist them to do so by advance disclosure – an action which would tip a balance of forensic advantage already considerably in First Gulf’s favour even more in their favour– and unfairly so.

Taking the evidence as a whole I am not persuaded that without pre-action discovery First Gulf cannot plead a case against FUNB. The tenor of Mr Cooke’s original witness statement, including the express statement that the cross examination “will support a plea that FUNB knew or should have known that Mr Kounnou’s companies were involved in fraudulent activities”, suggests to me that what First Gulf really seek is further material to improve their case and to allow them to be better informed in deciding whether or not to proceed.

In the Sumitomo case Lord Justice Rix observed:

In the present case one of First Gulf’s concerns is as to whether, and to what extent, they can plead (with the necessary statement of truth in support) what the pleadings in the trial indicate that the documents show without having copies of those documents before them. The allegations in the pleadings have been made by responsible pleaders. They have never been struck out, although they have been extensively responded to. FUNB’s witnesses have been cross examined upon some of the documents in order to support the allegations or some of them. In those circumstances it would seem to me that there is considerable scope for First Gulf to be able properly to adopt at least some of the allegations, and I did not understand Mr Slade to contend to the contrary, although he made it plain that it would be necessary also to take into account what had been pleaded by FUNB in response in reaching any decision as to what could properly be alleged.

Miss Ambrose submitted that it was not necessary for her to establish that First Gulf could not commence proceedings without pre-action disclosure. Even if First Gulf could commence proceedings without it the fair disposition of the claim would be assisted by such disclosure. Further the giving of such disclosure would enable ADR to take place on an informed basis, without which there was no realistic prospect of resolution.

Mr Slade made plain that FUNB themselves will seek disclosure. It transpires that a Mr P K Bahri worked for Emirates Bank as a senior manager in 1994 and was a party to the decision of that bank to terminate its account with Solo on the grounds that Solo had knowingly used false documentation in an LC transaction. In 1995 Mr P.K. Bahri left Emirates Bank and moved to First Gulf where he arranged for large lines of credit for Solo and Zeeba. FUNB have asked a number of questions of First Gulf both about matters germane to the relationship between First Gulf and Zeeba/Solo/Mr Patel (in their letters of 28^th July and 3^rd November 2005 and about Mr Bahri (in their letter of 3^rd November), which have now been answered. In addition FUNB wish to review a number of First Gulf documents namely (1) internal credit analyses and reports undertaken by First Gulf on Solo and Zeeba between 1995 and 1999; (2) First Gulf bank statements from those accounts of Solo and Zeeba held by First Gulf between 1995 and 1999; internal reports undertaken for First Gulf on the causes of First Gulf’s losses following the revelation of Mr Patel’s fraud in May 1999. These are likely to reveal what role Mr Bahri played in the provision of banking facilities to Solo or Zeeba. If pre-action disclosure is ordered, there will, he submits, be a further unacceptable imbalance between the position of FUNB and that of First Gulf. Miss Ambrose’s response was an acceptance that First Gulf would have to be “realistic” about giving pre-action discovery for the purposes of ADR and that I should not assume that ADR before proceedings were commenced would be fruitless. She also pointed out that the documents to which I have referred had not been asked for until reference to them appeared in Mr Slade’s skeleton argument.

Miss Ambrose urged on me that if pre-disclosure was ordered costs might be saved because (a) proceedings might be averted; (b) even if they were not, they might, in the light of such disclosure, be settled at an earlier stage than would otherwise be the case; and (c) the cost of having to amend the proceedings to take account of disclosure, if subsequently given, would be saved.

I am not persuaded that it is desirable to order pre-action disclosure for the purpose of fairly disposing of the proceedings or, if the jurisdictional threshold is crossed, that, as a matter of discretion, I should do so. In this respect I do not find it easy to separate out the jurisdictional threshold – characterised by Rix L.J. in Sumitomo as being whether there is “a real prospect of such an order being fair to the parties if litigation is commenced” - from discretionary considerations as to whether such an order ought to be made. Indeed I venture to wonder whether the jurisdictional requirement is not more aptly expressed by the words of the rule namely that it should appear desirable for an order to be made for the stated purposes, albeit that, as Rix L.J., observed those words themselves call for a discretionary, or at any rate, value judgment (“desirable”).

I have reached that conclusion as a result of a combination of reasons. Firstly I remind myself that such an order, even if not exceptional, is unusual. Secondly, as I have said, this is not, in my view, a case in which First Gulf cannot start proceedings without pre-action disclosure and in which the court should, on that account, be disposed to assist them to do so. On the contrary they would, as a result of the previous litigation, appear to enjoy a number of advantages over the ordinary litigant. Thirdly, I take the view that a reconciliation between the concerns that Rix L.J. identified and to which I refer in paragraph 18 above, is most appropriately met by requiring First Gulf to plead such case as they can rather than requiring pre-action disclosure without any pleading at all. Such a course would indicate what is alleged without allowing dishonesty “to spread its cloak over the means by which it can be detected and revealed”. Fourthly, I think that I should be tipping the balance unduly in First Gulf’s favour if I were to order pre-action disclosure, in circumstances where FUNB themselves have what appear to be legitimate claims for disclosure, so that the parties will not be on an equal footing.

Fifthly I give some, but not great, weight to the delay that has occurred in this case. First Gulf was invited to join the claims of the other banks by Allen and Overy. I have not seen the letter in which they were invited to do so. First Gulf declined to join in because, according to the second witness statement of Mr Cooke, they did not have access to the same information as was available to the Gulf based banks and were advised by Allen & Overy that they had insufficient evidence of wrongdoing on the part of FUNB. It was not until the beginning of 2005 that they discovered that one of the Gulf based banks had come to an agreement directly with FUNB on a Solo related claim. As a result Norton Rose were instructed and reappraised the potential bad faith of Wachovia reflected in their admissions made under cross examination in the litigation in November 2002. I find this evidence somewhat puzzling since the purpose and effect of the Gulf based banks joining together would appear to have been a pooling of information, certainly in respect of that which was deployed in court; and one might have expected that First Gulf would have taken steps to apprise themselves of the result of the proceedings before learning of it in 2005, two years after the settlement. Indeed, Mr Hardy’s statement indicates that the fact that there was a confidential settlement was a matter of public knowledge.

I am equally not persuaded that it is desirable that I should make an order for pre-action disclosure for the purpose of assisting the dispute to be resolved without proceedings or of saving costs, or that, if there is a prospect of achieving either of those results, so that the jurisdictional threshold is crossed, it is sufficiently enticing to justify making the order sought. The reality of the present case appears to me to be that there is very little prospect of it being disposed of without pleadings and standard disclosure being given by both sides in the ordinary way. There seems to me equally little prospect that the giving of the disclosure sought before an action is brought is likely to produce a significant saving in costs in comparison with the costs that would be involved if discovery was given after the proceedings were commenced. Any saving that might arise because pre-action disclosure might avoid the need to amend the proceedings subsequently appears to me to be of marginal significance in the context of a claim of this nature.

For these reasons I decline to make the order sought.