Enron (Thrace) Exploration and Production BV & Anor v Clapp & Ors

This is the second stage in litigation which has already been before Langley J, who, on 20 July 2004, partly set aside a judgment obtained in default of defence. Although Langley J refused permission to appeal, that was granted by Clarke LJ. The date of the appeal hearing had been fixed for March 2005, but it was agreed during the hearing before me that the appeal should be adjourned until the parties had been able to consider my judgment on the two applications that are before me. These relate both to the part of the default judgment that was not set aside by Langley J and also to the part that was. The applications raise interesting and difficult points of law.

The two Claimant companies are part of the Enron group. Neither is in any form of administration or liquidation in the USA, UK or elsewhere. The first Claimant, Enron (Thrace) Exploration and Production BV (“ETEP”), is a Dutch company. The second Claimant, ECT Europe Finance In (“ECT”), is a Delaware Corporation with offices in Texas, USA. I will refer to these two companies together as “Enron”, although I shall have to refer to other Enron companies in the course of this judgment.

The four defendants are individuals, three of whom are resident in the USA and one is resident in the US Virgin Islands. They are all shareholders in Thrace Basin Natural Gas (Turkiye) Corp “(TBNG”), which is a company registered in the British Virgin Islands. Mr Harvey Clapp and Mr Guy Dove direct the business of that company. Mr Clapp is the Chief Executive Officer of TBNG and the Chairman of the Board.

In 1995 TBNG was granted hydrocarbon exploration licences in relation to certain carbon deposits in an area near Tekirdag in the northern region of the Republic of Turkey. During 1999 TBNG, acting through Mr Harvey Clapp, entered into negotiations with the Enron group, acting primarily through Mr Nigel Friend, about setting up a Joint Venture to exploit the Tekirdag concessions. The plan was that the Enron group should provide both financial and technical assistance for the project.

On 4 February 2000 TBNG and ECT concluded a Joint Venture Agreement (“JVA 1”). That Agreement was replaced by a second Joint Venture Agreement (“JVA 2”), which was concluded on 20 December 2000 and was between TBNG, ECT and ETEP (Footnote: ¹). The basic structure of the two JVAs is the same. There are two key aspects of both JVAs. The first is that ECT agreed to fund the costs of an exploration consultant and pipeline engineer in connection with the Exploration Programme as defined. TBNG agreed to repay ECT up to US$ 150,000 of that expenditure (called “the ECT Advance”) in four instalments starting on 10 August 2000. The second key aspect is that TBNG granted ECT an option to acquire a 55% interest in the Tekirdag Assets (which included the Tekirdag Concessions and associated assets) in consideration of a commitment by Enron to fund the capital expenditure (called “Capex”) necessary to undertake the Project, up to to US$ 3 million. That was described in JVA 2 as the “minimum commitment”. (Footnote: ²) The Option was exercisable up to 30 June 2001. By the time JVA 2 was concluded, Enron had started to incur some capital expenditure (ie. “Capex”), but had not exercised the Option.

By a deed dated 21 December 2000, the Defendants (as “Chargors”) and the Claimants (as “Chargees”) entered into a “Charge over Shares”: (“the Charge Agreement”). By Clause 2.1 of the Charge the Defendants covenanted to pay the “Secured Liabilities”, which meant sums due from TBNG to Enron under or in connection with two clauses in JVA 2. Those clauses are Clause 2.5.2 and 5.4.4.

JVA 2 was amended by an agreement dated 23 January 2001. On the same day ETEP exercised the Option. On 25 January 2001 an application was made to the Turkish authorities, (the General Directorate of Petroleum Affairs of the Republic of Turkey – “GDPA”), to transfer a 55% interest in the Tekirdag Concessions from TBNG into the name of ETEP. The transfer was completed by 2 May 2001.

For the present, four important aspects of the terms of JVA 2 should be noted. First, under the terms of JVA 2 there was a “Closing Date”. That was defined in JVA 2 as the date on which all the various conditions set out in Article 5.2 were satisfied or waived. Those conditions concerned the exercise of the Option and requirements about registering Enron’s interest as licensee; obtaining a permit for a proposed pipeline and the receipt by Enron of legal opinions about the validity of certain acts of TBNG. Secondly, the importance of the “Closing Date” is that, following that date (and therefore the fulfilment of all the conditions referred to above), ETEP would fund all capital expenditure (called “Capex”, as defined in JVA 2) up to a minimum amount and also fund further “Capex” as agreed thereafter: Article 5.1. Thirdly, under Article 5.3 of JVA 2, ETEP was entitled (by itself or through ECT) to fund “Capex” in relation to the Tekirdag Assets prior to the Closing Date occurring. If ETEP did that then any such Enron Pre – Closing Tekirdag Capex was to be treated as a loan from ECT to TBNG (and such sums are defined as “the Loan” in Article 5.4.4). That loan became repayable (subject to two terms of JVA 2), on demand from Enron on the earlier of several dates: the “Final Date”; the Closing Date or “the date of termination of…” JVA 2. If repayment was made in those circumstances then it attracted interest at 25% per annum.

The fourth pointto note is that when the Closing Date occurred Enron had to pay to TBNG (as further consideration for the transfer of the Enron interest in the Tekirdag Assets) an amount equal to 55% of the Tekirdag Net Revenues, for the period from the time of exercising the Option until the Closing Date. Langley J held (in para 31 of his judgment) that under the terms of JVA 2, Enron was only entitled to be paid its 55 % share of the net revenues of the Tekirdag Assets after the Closing Date. He also held that the Closing Date had not occurred by April 2001, because the conditions set out in Article 5.2 had not been fulfilled by that date.

Nevertheless, towards the end of April 2001 it was agreed between Harvey Clapp and Mr Friend that TBNG would advance to Enron 55% of the net revenues of the Tekirdag Assets so as to allow Enron to use that credit to fund pre – Closing Date Capital Expenditure. By that time Enron had decided not to invest any further sums in the project except for $350,000 which was invested in a pipeline.

During the remainder of 2001, there was discussion between Mr Clapp and Mr Friend about the financial position that would arise upon “Closing”. There were disagreements about this. Then in December 2001 it was disclosed that there had been serious accounting errors in the accounts of Enron companies. Some companies in the group, (but not the Claimants), filed for Chapter 11 protection in the Federal Court of the Southern District of New York. By the end of 2001 the Claimants had ceased to be involved with the joint venture.

On 11 January 2002 TBNG served on Enron a formal “Notice of Immediate Termination” of JVA 2, pursuant to Article 11 of that agreement. The Notice said that amongst the grounds for termination were, first, that the Closing Date had not occurred before the “Final Date” under the agreement, which was 30 September 2001 and, secondly, that several “Events of Default” had occurred under Article 11 of the agreement. These “Events of Default” were said to be alleged failures by Enron to “close the transaction” as well as various alleged specific breaches and an alleged inability of Enron to pay its debts.

The Notice concluded by stating:

“TBNG will tender the requisite amount of the loan…if and when [Enron] files an application with GDPA in form and substance acceptable to TBNG to transfer back legal titles to the 55% of three concessions now in legal limbo”.

On 23 January 2003 Enron formally demanded from TBNG repayment of the Loan plus interest. On 27 January 2003 Enron itself served a Notice of Immediate Termination of JVA 2 under Article 11.2, claiming that the Closing Date had not occurred prior to the Final Date (of 30 September 2001). Then on 3 September 2003 Enron demanded payment from the four defendants of “The Secured Liabilities” pursuant to Clauses 2.1 and 1.1 of the Charge Agreement. The Claim Form in the current proceedings was issued on 3 October 2003.

In the Particulars of Claim it was alleged that between 29 February 2000 and 5 October 2001, Enron made payments totalling US$ 5,236,588.75 “under or in connection with The Loan and the ECT Advance”. In his judgment on the application to set aside the default judgment, Langley J analyses the breakdown of that figure as follows (at paragraphs 45 and 46):

“45….The quantum of the claim has been further explained in the fifth witness statement of Mr Larizadeh. The amount of the “ECT Advance” is unarguably £250,000. The total amounts relied upon are set out in a schedule which totals $5,243,176.57. That total itself is made up of 4 components. “RTV Exp paid to Jersey” and “Ankara” represent respectively payments made by TBNG but reimbursed to TBNG by Enron and payments made by Enron and reinvoiced to TBNG both of which therefore fall within the definition of “Enron Pre-Closing Tekirdag Capex” in the Second Amendment to The JVA2. These two payments total $3,992,587.13. “Penspen” in a total of $679,032.57 and “Madison/Schlumberger” in a total of $571,556.87 represent direct payments made by Enron to suppliers which have not been reinvoiced to TBNG. The total of these two components is $1, 250,589.44. There is no evidence that these were payments “pre-approved” by TBNG and so [there is] no evidence that they fall within the definition.

46.

Mr Larizadeh also referred in his statement to the amounts the defendants claimed had been advanced to Enron by TBNG by way of the 55% share of the gas revenues. Mr Clapp estimated the sum to be $1.7m. Mr Larizadeh said Enron had been unable to confirm or deny the figure but maintained it did not matter on the basis that the Charge Agreement precluded any set-off and (wrongly in my judgment, see paragraphs 31 and 32) that Enron was in any event entitled to the revenues whether or not Closing had occurred”.

Langley J went on to note that, shortly prior to the hearing before him to set aside the default judgment, Enron had served a certificate dated 8 June 2004 which they said was made pursuant to Clause 24 of the Charge Agreement (Footnote: ³) and so provided conclusive evidence against the Chargors that a certain sum was due. The Certificate certified an amount of US$ 8,110,128,82 as due on 11 December 2003, which was said to consist of a principal amount of $5,236,588.75 and the remainder as interest.

The chronology of the proceedings is as follows: permission to serve the Claim Form out of the jurisdiction was granted on 8 October 2003. Service took place in October and November 2003. “Defective” Acknowledgements of Service were filed on 7 and 21 November 2003. Judgments in default were entered on 10 and 11 December 2003, against, respectively, the first three defendants and then the fourth defendant. The sums were (respectively) for US$ 8,106,545.12 and US$ 8,110,128,82. (Footnote: ⁴) The Claimants began the process of enforcing the judgments in New Jersey, USA and these Default Judgments were “docketed” in the Superior Court of New Jersey on 20 February 2004. On 8 March 2004 the defendants issued an application to set aside the Default Judgments. They also applied to stay these Court proceedings in favour of a proposed arbitration by TBNG against the Claimants pursuant to an arbitration clause in JVA 2. (Footnote: ⁵) Then on 12 March 2004 the defendants in this case together with TBNG began proceedings in Texas against Enron, alleging that Enron had “conspired together to defraud” the defendants, who were the plaintiffs in Texas. Enron responded by applying for an anti – suit injunction in the current proceedings.

At the time the defendants issued their application to set the default judgments aside, a draft defence and Part 20 Counterclaim was served. Paragraph 1 of the draft pleading stated:

“This defence and counterclaim is pleaded without prejudice to the right of the Defendants and/or [TBNG] to claim in these proceedings and/or in any other proceedings in any other jurisdiction and/or in any arbitration that [ETEP] and/or [ECT] procured that TBNG and the defendants entered into the joint venture agreements, charge and other agreements referred to below by fraud and/or acted fraudulently in the performance or purported performance of the agreements”.

There was no further elaboration of this plea in those draft pleadings. Now the defendants wish to put allegations of fraud at the centre of their defence.

The hearing before Langley J took place on 10 and 14 June 2003. Mr John Machell appeared as counsel for the defendants. On the application to set aside the default judgments he argued three points. First, that the Closing Date had occurred on or before 30 September 2001. It was agreed that if it could be demonstrated that was the case, then there was a good defence to the claim relating to repayment of the Loan. That is because once the Closing Date had occurred then ETEP was liable to pay the balance due for the purchase of a 55% interest in the Tekirdag Assets. But only when that had been done would TBNG have to repay the Loan. (Footnote: ⁶) If TBNG was not liable to repay the Loan then there could be no liability on the defendants under the Charge. That is because, under Clause 2.1 of the Charge, each Chargor is liable to pay on demand “the Secured Liabilities”. They are defined to include the obligations of TBNG set out in Article 5.4.6 (ii) of JVA 2 (ie. repayment of the Loan). But if there was no liability on TBNG to repay the loan under JVA 2, then there is no “Secured Liability” on which to make a demand against the defendants.

Secondly Mr Machell argued that if the Closing Date had not occurred, then there was still no liability to repay the Loan unless and until ETEP had irrevocably confirmed that it was not entitled to the 55% interest in the Tekirdag Assets. Thirdly, Mr Machell argued that the defendants, as Chargors, were entitled, as sureties, to take advantage of any set – off that TBNG could raise in defence of claims made against it by Enron. He submitted that TBNG was entitled to set – off US$ 1.7 million of gas revenues. Mr Machell also seems to have raised issues on the quantum of the Loan said to be due.

Langley J delivered judgment on 20 July 2004. He decided: first, that the initial question to decide must be the nature of the obligation that Enron sought to enforce in the action it had brought against the defendant Chargors. Langley J continued, at paragraph 54 of his judgment:

“The claim is brought to enforce the “Covenant to Pay” in Clause 2.1 of the Charge Agreement. That Clause requires payment of the “Secured Liabilities” as defined in Clause 1.1. That definition directs attention to the moneys and liabilities due form TBNG to Enron under or in connection with Articles 2.5.2 and 5.4.4. of [JVA 2]. Article 2.5.2 of The JVA relates to the ECT Advance of $250,000. That had to be repaid by 1 December 2001. It was not and The Charge Agreement plainly bites”.

Langley J then considered Clause 5.4.4 of JVA 2. At paragraph 55 of his judgment he stated:

“Clause 5.4.4 directs attention to the “Enron Pre – Closing Tekirdag Capex” as re-defined in the Second Amendment to the JVA 2. That is less easy to apply but I think that it plainly includes the $3,992,587.13 referred to in paragraph 45 [of this judgment] (Footnote: ⁷) but not, or at least not beyond realistic argument on the evidence before the court, the sum of $1,250,589.44 also referred to in that paragraph for the reasons there stated”.

Langley J next considered the issue of whether TBNG might have any set –offs against Enron, which the Defendant Chargors could utilise, as sureties, so as to reduce or extinguish the claim of Enron. (Footnote: ⁸) He concluded that it was arguable that TBNG would have a set – off up to a sum of $1.7 million (as explained in paragraph 46 of his judgment); (Footnote: ⁹) and that there was no clause in the Charge Agreement that prevented the Chargors relying on a set – off of the principal debtor (TBNG) against the creditor (Enron). (Footnote: ¹⁰) So Langley J concluded that the defendant Chargors had a realistic defence that they could set – off the amount of the gas revenues that TBNG had advanced to Enron. The best estimate of those revenues was, he held, $1.7 million.

Then Langley J dealt with the Chargors’ argument that nothing could be due from TBNG to Enron if no “Closing” had occurred and Enron had failed to re-transfer to TBNG the 55% interest in the Tekirdag Assets that had been transferred to Enron when it had exercised the Option. Langley J noted that the Chargors’ arguments were: (i) that Enron was estopped from contending that the conditions precedent to Closing had not been fulfilled; and that (ii) Enron was estopped from contending that the Secured Liabilities were to be repaid without a re – transfer or an undertaking to re – transfer the 55% interest in the Takirdag Assets that Enron had taken on exercising the Option. He concluded that the defendant Chargors’ submissions on both these points were unsustainable.

At paragraph 62, Langley J’s rejected Enron’s submission that they could rely on the Officer’s Certificate to state conclusively what was due. His next conclusion, set out under the heading “Quantum”, is stated as follows:

“As I have already indicated I do think the defendants have established a real prospect of a defence to the quantum of Enron’s claim in two respects. First as regards the revenues paid to Enron in the amount of $1.7 m (paragraph 46) and second as regards the sum of $1,250,589,44 included in the claim (paragraph 45). I do not think this conclusion is affected by the last production of the Officer’s Certificate (paragraphs 47 – 49). The defendants have had no opportunity to investigate the certificate; it is not relied upon in the Particulars of Claim and I think it can realistically be argued that the certificate cannot override a conclusion, if it e concluded at a trial, that some of the items in it or not “Secured Liabilities” within the definition of the Charge Agreement or that sums are not “due” from TBNG because TBNG has a set – off”.

Langley J then rejected an argument of Enron that they had a right to recover moneys expended on the project that did not come within the definition of “Enron Pre – Closing Tekirdag Capex”. He held that Enron were confined to recovering sums that were within the definition of “Secured Liabilities” in the Charge Agreement.

Langley J concluded his judgment on this point as follows, at paragraph 64:

“It follows that in my judgment the defendants have failed to establish that they have a realistic prospect of successfully defending Enron’s claim save on issues of quantum. Those issues leave a substantial sum due to Enron to which Enron have established that they [ie. the Defendants] have no such prospect. In terms of principal the sum to which no defence has been shown is the sum of $3,992,57.13 less the sum of $1.7m. To that extent (together with interest as appropriate) the default judgments should not be set aside and I will expect the parties to prepare a suitable order to reflect he terms of this judgment when it is formally handed down.”

The formal Order reflected this, stating, at paragraph 3:

“The Judgments shall be varied as follows: the Claimants shall have judgment in the sum of US$3,900,538 (being the principal sum of US$2,292,587 plus contractual interest of US$1,607,951) and the Judgments for the balance of the Claimants’ money claim as set out in their Particulars of Claim dated 2 October 2003 be set aside”.

The Defendants applied for permission to appeal the judgment of Langley J on 8 August 2004. On 13 October Clarke LJ granted permission, although he expressed some doubts as to the merit of the appeal and was concerned at the scope of the issues raised in the application for permission, some of which seemed to have been dropped before Langley J. On 23 November 2004 the Court of Appeal granted the Claimants permission to cross – appeal.

On 10 September 2004 the four Defendants served a Defence and Counterclaim. This was significantly different from the draft that had been served as an exhibit to Mr Harvey Clapp’s witness statement of 8 March 2004. In this defence it was asserted, for the first time, that JVA 2 and the Charge Agreement had been entered into by TBNG and the defendants respectively as a result of false representations made on behalf of ETEP and ECT by Mr Friend and others and also in published financial information concerning Enron group companies. At that stage no allegation of fraud was made. However the Defendants did claim a declaration that the Charge Agreement had been rescinded by virtue of this new defence. Other than the wording at the head of the draft Defence and Counterclaim (produced in March 2004) there had been no hint of a misrepresentation defence until the pleading of 10 September 2004 had been served.

The service of this Defence and Counterclaim prompted the Claimants to issue an Application Notice on 15 October 2004. In that Notice the Claimants sought an order that the defence of misrepresentation raised in the Defence and Counterclaim be struck out. The Notice says that the reasons for seeking the order are that the Defence and Counterclaim: (i) raises issues that the Defendants are not permitted to raise at this stage “without the leave of the court”; (ii) seeks to reopen issues which are now res judicata; and (iii) raises issues (as to misrepresentation) that have no real prospect of success, so they should be summarily disposed of now.

The Defendants countered this with their own application dated 9 December 2004. That application sought: (i) permission to amend further the Defence and Counterclaim served on 10 September 2004. The proposed new pleading asserted that JVA 2 and the Charge Agreement had been concluded as a result of fraudulent misrepresentations made by Enron companies as agent for the Claimants. The application also sought: (ii) an order that the balance of the default judgments dated 9 and 10 December 2003 be set aside (relying on CPR Pt 13.3(1)(a)); and (iii) Summary Judgment on the misrepresentation defence. At the hearing before me, item (iii) was not pursued.

At the hearing I was provided with very full written arguments and I heard over two days of oral argument between 7 and 9 February 2005. The key question is whether the Defendants are entitled to mount a case that JVA 2 and the Charge Agreement were only concluded by TBNG and the Defendants respectively as a result of fraudulent misrepresentations made on behalf of the Claimants. I think that the following issues arise and should be dealt with in the following order:

The judgments in default that were entered by the Claimants on 9 and 10 December 2003 were obtained under CPR Pt 12. A judgment entered under Part 12 can be set aside using the procedure set down in CPR Pt 13. The Defendants had argued before Langley J that they were entitled to set aside the default judgments as of right (CPR Pt 13.2) and on the merits (CPR Pt 13.3). Langley J dismissed the first argument outright. (Footnote: ¹²) The Defendants say that they are entitled to make a second application now under CPR Pt 13.3, “on the merits”, to set aside the balance of the default judgments.

CPR Pt 13.3 provides:

The Defendants filed evidence to deal with the reason why misrepresentation had not been in issue before Langley J. The Defendants had raised the question of Enron’s fraud or misrepresentation with their English legal team before the hearing to set aside the default judgments. But, it is said, there was not enough time to investigate and gather the necessary material prior to the hearing before Langley J. (Footnote: ¹³) Therefore, there was insufficient material available to plead full and proper particulars of a misrepresentation or fraud defence, given the duties of the Defendants and their lawyers to the Court. So a decision was made to include the statement (referred to above) at the head of the draft Defence, so as to preserve the position. The detailed information that was used to plead the misrepresentation defence was collated by the Defendants’ US attorney, Mr Monty Crawford, during July and August 2004, ie. after Langley J’s judgment. (Footnote: ¹⁴) It is clear that there was no consideration of a misrepresentation argument by the legal team before March 2004. There is no explanation in the evidence as to why there was no investigation of the question of misrepresentation before July or August 2004. However it seems that Mr Clapp, at least, had fraudulent misrepresentation in mind long before the application to set aside the default judgment. This is clear from an email dated 30 December 2002, from Mr Harvey Clapp to various parties, including Weil, Gotshal & Manges, solicitors for the Claimants, discussing the merits of a claim against the Chargors. In it Mr Clapp states: “In addition, TBNG could allege a “fraud in the inducement” claim based on evidence that Enron’s claim to ge a $80 billion business who could and would develop this Project and pay 100% of all capital costs. Enron also claimed to be able to provide in house expertise through its staff in Houston”. (Footnote: ¹⁵)

Given this material it is unsurprising that Mr Alexopoulos, a solicitor acting for the Defendants, says in his witness statement that “It is accepted that the misrepresentation defence could have been advanced at the time of the original application to set aside the default judgments”. (Footnote: ¹⁶)There is no suggestion that some new evidence or facts emerged in July or August 2004, which were not or could not have been available at the time of preparing for the hearing before Langley J.

Mr Briggs’ submissions for the Defendants on this point were: (i) entering a default judgment is an administrative action which involves no judicial decision on the merits. An application to set aside a default judgment is an application to set aside an administrative act; (ii) there is nothing in the CPR to prevent a party from making a second application to set aside a default judgment; (iii) therefore, if it is just and convenient, a defendant should be permitted to apply a second time; (iv) the matters that a court should consider are (a) the conduct of the applicant; (b) the merits of the defence proposed on the second occasion; (c) the reasons why that defence was not put forward first time round; (d) whether irreparable mischief has been caused by the delay in putting forward the proposed defence.

Mr Briggs referred me to the decision (in 1878) of Atwood v Chichester (Footnote: ¹⁷), which is a decision of the Court of Appeal, which had been inaugurated some 5 years before in 1873. A married woman was sued on a bill of exchange and a cheque that she had signed at the request of her husband. Judgment against her was entered in default of appearance. She applied to set the judgment aside, first to a Master, then on appeal to Field J. He ordered that she pay the debt in instalments. She did not pay and she applied again to set the judgment aside. Pollock B dismissed that application. She appealed to the Queen’s Bench Division, which refused to interfere and she then appealed to the Court of Appeal, which set aside the judgment. There was no argument before the Court (Footnote: ¹⁸) on whether the defendant had the right to apply serially to set aside the default judgment. The Court held that the defence was meritorious and substantial and the fact that the application was made late was not a bar. The report does not indicate whether the application was made under the Rules of Court; nor do the judgments consider at all the basis on which jurisdiction to set the judgment aside was being exercised. I consider below the pronouncements made in two much more recent cases (Footnote: ¹⁹) about the restricted jurisdiction of the High Court and the Court of Appeal to review decisions, even when it is alleged that fresh evidence is now available. Given the statements in these recent cases, I have concluded that Atwood v Chichester is not sound authority for the proposition that the High Court has a general discretionary power to hear a second application to set aside a default judgment.

Mr Briggs also referred me to a number of Australian authorities, where Atwood v Chichester has been relied on as authority for the proposition that there can be more than one application in relation to an interlocutory order. (Footnote: ²⁰) I think that they are not particularly relevant to the present situation and so are not helpful to me.

After the hearing had finished I directed counsel’s attention to two English authorities which I think are more pertinent. The first is In re Barrell Enterprises, (Footnote: ²¹)a decision of the Court of Appeal. In that case Pennycuick V-C made an order committing a contemnor. She appealed to the Court of Appeal, who dismissed the appeal. Through an oversight, the order of the Court of Appeal was not perfected. The contemnor then applied to Brightman J to set aside the committal order, on the basis of fresh evidence. He heard the application but refused it. The contemnor then sought to re-open her appeal on the basis of fresh evidence.

The Court of Appeal discussed the issue of whether Brightman J had jurisdiction to hear the application to set aside the committal order at all. They concluded that he did not have jurisdiction. They reviewed the cases and concluded that although, prior to the Judicature Acts, the High Court had the power to reconsider its own decisions on the ground of fresh evidence, that was because the Court of Appeal did not then exist. Any such power to review by the High Court had long since lapsed, because that power was now vested in the Court of Appeal. (Footnote: ²²) They regarded it as highly desirable that only the Court of Appeal should have the power to set aside a judgment on the ground that fresh evidence had been obtained (Footnote: ²³).

In re Barrell Enterprises was reviewed in a further decision of the Court of Appeal consisting of five judges: (Footnote: ²⁴)Taylor v Lawrence. (Footnote: ²⁵) That case arose out of an action between neighbours that was heard in the County Court. The defendant, who had appeared in person, lost. He appealed on the ground that there was an appearance of bias in the judge, because (as the judge had told the parties before the trial, with no objection) the claimant’s solicitor had drafted the judge’s will. In the Court of Appeal it was revealed that the claimant’s solicitors had amended the judge’s will and that of his wife the night before he gave judgment in the parties’ case. The Court of Appeal dismissed the appeal. Then the defendant learnt (by underhand means) that the judge had not paid for the solicitor’s services. The defendant sought to re-open the appeal. The Court of Appeal held that it had jurisdiction to re – open an appeal that had already been heard and determined, but only if it was clearly established that a significant injustice had probably occurred and that there was no alternative effective remedy, eg. there could be no appeal to the House of Lords. They dismissed the application.

In giving the judgment of the Court, Lord Woolf emphasised that it was a fundamental principle of the common law that where an issue has been determined by a decision of the court, “that decision should definitely determine the issue as between those who were a party to the litigation. Furthermore, parties who are involved in litigation are expected to put before the court all the issues relevant to that litigation. If they do not, they will not normally be permitted to have a second bite at the cherry: Henderson v Henderson (1843) 3 Hare 100”. (Footnote: ²⁶)

Lord Woolf then noted that it was “not uncommon” for fresh evidence to come to light after a judgment had been perfected which put the judgment in doubt. That fresh evidence might be used on appeal. He continued:

“Once the judgment is perfected, however, the court that has delivered the judgment, be it a court of first instance or the Court of Appeal, would not entertain an application to reopen the judgment in order to consider the effect of the fresh evidence. This is not because of any express statutory prohibition. In considering the extent of their jurisdiction the courts have ruled that a perfected judgment exhausts their jurisdiction because this accords with the fundamental principle that the outcome of litigation should be final. This can be demonstrated by reference to the judgment of Russell LJ in In re Barrell Enterprises”.

Lord Woolf then analysed that case in detail and he considered other cases. He concluded that the Court of Appeal had jurisdiction to reopen an appeal that had already been determined if there was no other court which could provide a remedy and it should do so to avoid injustice in exceptional circumstances. (Footnote: ²⁷)

Towards the end of the oral hearing before me attention was drawn to CPR Pt 3.1.7, which provides that “A power of the court under these Rules to make an order includes a power to vary or revoke the order”. Mr Briggs hinted that this might apply to an order in which a judge dealt with the status of a default judgment, as Langley J had done in this case. The scope of that provision has been considered by Patten J in Lloyd’s Investment (Scandinavia) Limited v AGER – Hanssen. (Footnote: ²⁸)In that case a Deputy Judge of the Chancery Division had ruled that a default judgment would be set aside and the defendant permitted to defend the case if he complied with certain conditions. The defendant did not do so. So the claimant entered judgment against the defendant. The defendant then applied to vary the terms of the earlier order of the Deputy Judge. Patten J dismissed the application, holding that he had no jurisdiction to review the Deputy Judge’s exercise of discretion, as that would be a matter for the Court of Appeal. Patten J said that there might be limited circumstances in which a court could reconsider an earlier order. But he held that those circumstances would not include a case where a party sought to re – argue the matter relying on submissions or evidence that was available to him at the time of the earlier hearing but which, for whatever reason, the legal team had not then deployed.

I note that CPR Pt 3.1.(7) refers to “orders”, but not to “judgments or orders” which is a formulation used elsewhere in the Rules permitting revocation and variations. In this case there was a default judgment, which was confirmed, in part, by a judgment of Langley J after a consideration of the merits of certain proposed defences. In my view CPR Pt 3.1.(7) does not embrace the current situation. Even if it does, for the reasons I set out in the next paragraph, I would not exercise my jurisdiction under that Rule.

In the present case the Defendants have an appeal pending in the Court of Appeal. They claim that they should be permitted to set aside the balance of the default judgment that Langley J refused to set aside, on the basis of a new case that they say that they were unable to raise before because they lacked the evidence to do so. In my view, given the approach of the Court of Appeal in In re Barrell’s Enterprises and Taylor v Anderson, I do not have any jurisdiction to reconsider the question of whether the balance of the default judgment should be set aside. Or, even if I have, I would not exercise a discretion to use the jurisdiction. This is because: (a) Langley J has made a decision on the issue after full argument by both sides and an Order has been drawn up; (b) the Defendants have a pending appeal on the question of whether or not the whole of the default judgment should be set aside. It is open to them to try and persuade the Court of Appeal to let them introduce the new misrepresentation plea; (c) the Defendants have been unable to point to any exceptional circumstances which would entitle me to review Langley J’s decision in advance of the Court of Appeal being asked to consider the question.

For these reasons I hold that the Defendants are not entitled to make a second application to the High Court to set aside the balance of the default judgment.

I had considered whether or not I should leave all the further issues undecided. The Defendants have their pending appeal and they can seek the Court of Appeal’s permission to raise the misrepresentation issue as part of their argument to set aside the whole default judgment. If the Court of Appeal decided to permit this new point to be raised on appeal and if they decided that it had a real prospect of success as a defence to the claim of the Claimants, then the whole of the default judgment would be set aside. All the other issues that arose before me would then be irrelevant. However, as it is possible that the Court of Appeal might regard the arguments on issue estoppel, abuse of process and the merits of the proposed misrepresentation case as relevant to their decision on the threshold issue of whether the misrepresentation case can be raised at all, I will deal with the other points as shortly as I can.

The two points

Having concluded that I cannot reopen Langley J’s decision that only part of the default judgment should be set aside, the next question is whether the existence of the default judgment for US$3.9 million precludes the Defendants from advancing the misrepresentation case as a defence (by way of set – off or counterclaim) to the remainder of the Claimants’ claims. Those claims against the Chargors are, of course, for the balance of the Loan which TBNG is liable to repay under Article 5.4.4 of JVA 2 and which is a “Secured Liability” within Clause 1.1 of the Charge Agreement on which the Defendants are sued.

Mr MacLean QC, for the Claimants, argued that there are two bases on which the Defendants are prevented from raising the misrepresentation case as a defence. The first is by applying the doctrine of issue estoppel. The second is that it would be an abuse of the process to permit the Defendants to raise the point now. Mr Briggs submits that neither of those arguments is sound.

The proposed pleading on misrepresentation

First I should examine the way the misrepresentation issue is pleaded. For this purpose I will analyse the draft that was handed in to the court on the last day of the hearing before me, which Mr Briggs said was his “final” draft. The relevant passages are very long, so they are set out in an appendix to this judgment.

The scheme of the misrepresentation pleading is as follows: (i) from 1999 there were negotiations between Mr Harvey Clapp of TBNG and the Enron group of companies (called “Enron” in the pleading) on the possibility of a joint venture or other contractual relationships. The negotiations were mostly with Mr Nigel Friend. During these discussions Enron made representations to TBNG in two ways: first as to the financial condition of the Enron group of companies. Those representations were made in public reports such as financial statements. Secondly, there were representations in statements made by employees of Enron. The “employee representations” are set out in elaborate detail. (Footnote: ²⁹) (ii) These representations were made to TBNG with the intent to induce TBNG to enter into a joint venture or other contractual arrangement with Enron. (Footnote: ³⁰) (iii) The negotiations were undertaken by TBNG and the Defendants with employees, particularly Mr Friend, who were employed by various companies in the Enron group. At the time of the negotiations the identity of the Enron company that would enter into a joint venture was not known. But it was envisaged that it would be a subsidiary of Enron Corp. Both ECT and ETEP, which was incorporated on 20 June 2000 as a special purpose vehicle, (Footnote: ³¹) are ultimately owned by Enron Corp. (Footnote: ³²) (iv) The representations (both in public documents and as made by Mr Friend and other Enron employees) as to the financial condition of the Enron group of companies, were continuing representations. Once ECT and ETEP were identified as contracting parties to the JVAs, then “Enron Corp became agent for ECT/ETEP for the purposes of continuing and completing the negotiations (and acted in such capacity through the Employees)….The representations made before each subsidiary was identified (which were continuing representations) were, by virtue of their continuing nature, repeated by Enron Corp (acting through the Employees and n behalf of ECT/ETEP) after ECT and ETEP were selected and continued to have effect down to the execution of [JVA 1] and [JVA 2] and the Charge…”. Thus at all times representations made by Enron Corp were made on behalf of ECT/ETEP. (Footnote: ³³) (v) The representations as to the financial condition of the Enron group were relied on by TBNG when deciding to enter the JVAs and by the Defendants in entering the Charge Agreement. (Footnote: ³⁴) (vi) The representations were false and were made fraudulently by officers (“the directing mind and will”) of Enron Corp and the Claimants are responsible for the fraud of their agent, Enron Corp. (Footnote: ³⁵) (vii) Had TBNG and the Defendants known the truth they would not have entered into the JVAs or the Charge Agreement, respectively. (Footnote: ³⁶) (viii) Both TBNG and the Defendants are therefore entitled to rescind JVA 2 and the Charge Agreement respectively and have done so, by a notice given on 10 September 2004. Therefore TBNG is not liable to ECT/ETEP under JVA 2 and the Defendants are not liable on the Charge Agreement. (Footnote: ³⁷) (ix) Alternatively TBNG and the Defendants are entitled to damages at common law or under sections 2(1) and 2(2) of the Misrepresentation Act 1967. Those damages can be set off by TBNG against any sums due to ECT/ETEP under Articles 2.5.2 and 5.4.4 of JVA 2; and can be set off by the Defendants against any sums due under the Charge Agreement. (Footnote: ³⁸) (x) Both TBNG and the Defendants are entitled to be put in the position they would have been in had no representation been made. In TBNG’s case the losses total over US$ 11 million. In the Defendants’ case the losses are “equal to any sum for which the Defendants are liable to the Claimants under the Charge”. (Footnote: ³⁹)(xii) The defendants claim rescission of the Charge Agreement or damages.

Mr Briggs’ concessions

Mr Briggs accepted that underlying Langley J’s decision was an assumption that both JVA 2 and the Charge Agreement were valid and binding on the parties. There was no express statement of this in his judgment, but there was no need for it as the arguments on behalf of the Defendants proceeded on the assumption that the two contracts were effective and bound the parties.

Mr Briggs therefore accepted that if the balance of the default judgment could not be set aside (at least in this court), then the Defendants cannot assert a claim to rescind the Charge Agreement. He accepted that such an assertion would be inconsistent with the underlying assumption on which the whole of Langley J’s judgment rested, viz. the validity of the two contracts. Mr Briggs accepted that, so long as Langley J’s judgment stood, there was an issue estoppel between the parties to the present action that JVA 2 and the Charge Agreement were valid and binding.

In my view he was right to make those concessions. The precise scope of what issue estoppels can be created by a default judgment, even where there has been an adjudication following an unsuccessful attempt to set it aside, may be unclear and will depend on the facts of each case. (See, for example such cases as Hoystead v Commissioner of Taxation; (Footnote: ⁴⁰) Kok Hoong v Leong Cheong Kweng Mines Ltd; (Footnote: ⁴¹)Mullen v Conoco Ltd; (Footnote: ⁴²) Lunnun v Singh (Footnote: ⁴³)and, under CPR Pt 13.3, the Court of Appeal’s decision in Pugh v Cantor Fitzgerald International (Footnote: ⁴⁴)). But there can be no doubt that the effect of the default judgment, as affirmed by Langley J’s decision, is that JVA 2 and the Charge Agreement were valid and binding on the parties concerned. Therefore, on those points, as Mr Briggs conceded, there must be issue estoppel as between the Claimants and the Defendants and so the Defendants must be estopped from asserting a claim which is inconsistent with a judicial conclusion that the Charge Agreement is valid and binding. A claim for rescission of the Charge Agreement would plainly be inconsistent with a finding that the Charge Agreement is valid and binding. So Mr Briggs was right to accept that such a claim could not be raised until Langley J’s judgment had been successfully challenged.

Are the defendants barred by Issue Estoppel from raising the misrepresentation case for damages?

But the question remains: are the Defendants estopped from raising the case that both JVA 2 and the Charge Agreement were concluded as a result of fraudulent misrepresentations made on behalf of ECT/ETEP, so that both TBNG and the Defendant Chargors have claims for damages for misrepresentation? Mr Briggs emphasised that in the current circumstances the claims for damages would be of the following types: (a) at common law, for deceit and/or negligent misrepresentation; or (b) under section 2(1) of the Misrepresentation Act 1967 for a negligent misrepresentation. (Footnote: ⁴⁵)

Mr Briggs submits that the Defendants, as sureties, would be entitled to take advantage of any set – off or counterclaim that would be available to the principal debtor, ie. TBNG in this case. If JVA 2 was concluded as a result of misrepresentations for which ECT/ETEP is responsible, then TBNG must be entitled to damages that are caused by those misrepresentations inducing TBNG to enter into JVA 2. TBNG’s damages have been pleaded as totalling US$ 11,360,334. They are said to represent the money difference between the position TBNG is in now (as a result of the misrepresentations) and the position it would have been in if no misrepresentations had been made, in which case it would not have concluded JVA 2 and it would have exploited the Tekirdag Assets with others, to greater advantage. Mr MacLean accepts the general principle that a surety can take advantage of a set – off or defence that is available to the principal debtor, but he says that this cannot be done in the circumstances of this case.

As for the Defendants’ claim for damages, Mr Briggs argues that they also are entitled to damages to put them in the position they would have been in had the misrepresentations not been made. Therefore they can recover as damages any sums that they have to pay to the Claimants under the Charge Agreement.

Mr Briggs submits that neither claim for damages for misrepresentation would impugn the validity of JVA 2 nor the Charge Agreement. Therefore they are consistent with the default judgment and Langley J’s conclusions so that there can be no issue estoppel that would prevent the Defendants from raising these claims either as an equitable set – off or counterclaim to the Claimants’ current claims.

Mr MacLean submits that the effect of a claim for damages for misrepresentation is to obtain “rescission by the back – door” and so would be inconsistent with the underlying assumption of the default judgment and Langley J’s judgment, which is that JVA 2 and the Charge Agreement are valid and binding.

A claim for damages for deceit, or fraudulent misrepresentation can be made without impugning the validity of a contract said to have been concluded as a result of the fraudulent misrepresentation. Although a fraudulent misrepresentation will give the representee a right to rescind the contract, he does not have to do so and the right to claim damages is not dependent on exercising that right. Similarly a claim for damages for negligent misrepresentation made at common law under the Hedley Byrne principle can be made without impugning the contract said to have resulted from the misstatement. It is also clear from the wording of section 2(1) of the 1967 Act that a claim for damages under that section, for negligent misstatement, is independent of the right to rescind the contract.

Although the basis for the damages claim is that JVA 2 and the Charge Agreement would not have been concluded if the misrepresentation had not been made, that is not claiming “rescission by the back door”. It is postulating, correctly, the basis on which damages for fraudulent or negligent misrepresentation can be claimed where it is asserted by a claimant that he would not have concluded the contract at all had the misrepresentation not been made. Even though the same facts concerning misrepresentation might have given rise to a remedy of rescission as well as the remedy of damages, that does not prevent the Defendants from raising the misrepresentation case. As the Court of Appeal pointed out in Lunnun v Singh, (Footnote: ⁴⁶)after a default judgment a party can raise an issue (in that case it was both causation and quantum of damages claimed) that might have been raised earlier, just so long as it is consistent with the judgment that has been entered.

Accordingly, I have concluded that the Defendants are not prevented from pursuing their misrepresentation defence by reason of any issue estoppel. However, this leaves two further questions to be answered; first: would it be an abuse of process for the Defendants to raise the misrepresentation defence at this stage? Secondly, on the merits, does the misrepresentation case have a real prospect of success?

Mr MacLean’s argument is that it is an abuse to raise the misrepresentation case for the first time only after the contested hearing before Langley J. He submits that the case should have been presented before Langley J. He submitted that the position is similar to that described by Lord Woolf in Taylor v Lawrence, (Footnote: ⁴⁷) viz. “…parties who are involved in litigation are expected to put before the court all the issues relevant to that litigation. If they do not, they will not normally be permitted to have a second bite at the cherry”.

I cannot accept that argument. The position, assuming I am right so far, is that the Defendants have the right to defend any claim the Claimants make against them based on the Charge Agreement above the sum of US$ 3.9 million, provided that their defence does not impugn the validity of either JVA 2 or the Charge Agreement. Mr MacLean has not pointed me to any principle or authority that states that if a defendant successfully sets aside all or part of a judgment by default, then he is restricted to raising issues that were canvassed during the application to set aside the judgment. By definition, the part of the judgment that has been set aside remains simply a claim of the Claimants. It has to be fully investigated by the court on the merits. That will be the first investigation on the merits. I find it difficult to see how it could be an abuse of process to raise a defence to the claim unless the defence impugns the basis of the default judgment that has been upheld by Langley J. I have held that the misrepresentation case will not do so.

Mr MacLean relied on the doctrine of “abuse of process” estoppel, as now set out by the House of Lords in Johnson v Gore Wood. (Footnote: ⁴⁸)In my view that doctrine has no place in the current circumstance. There is no question of a second process. If I am right that the misrepresentation case does not amount to “rescission by the back door” then there is no “collateral attack” in the default judgment as confirmed by Langley J. Nor is there any question of dishonesty, because it is not suggested (and could not be on the evidence) that the Defendants deliberately held back their misrepresentation defence until after Langley J had considered the matter in June/July 2004. Furthermore, by raising the misrepresentation defence now, at the time when the other defences are being raised in the proposed defence and counterclaim, it is not “unjust harrassment” (Footnote: ⁴⁹) of the Claimants. It is no different from an application to amend a defence in the course of an action. The Claimants have not suggested that they are fatally prejudiced by this defence being raised at this stage.

For these reasons the proposed defence is not an abuse of the process.

Mr MacLean submits that even if the Defendants have the right to advance the misrepresentation case, they should not be permitted to do so because, as pleaded, it has no chance of success and so must be struck out. He accepts that the burden is on him to demonstrate that this is so.

As I have already indicated, the shape of the proposed defence based on misrepresentation is that fraudulent misrepresentations were made on behalf of the Claimants that induced Mr Harvey Clapp and Mr Guy Dove to conclude JVA 1 and JVA 2 on behalf of TBNG. The representations concerned the financial well – being and “muscle” of the Enron group or Enron Corp, the ultimate parent company of the group.

Although in the parties’ written Outline Arguments there were a number of points on the question of whether the Defendants had a real prospect of success on the misrepresentation case, by the end of the hearing and after Mr Briggs had further refined the proposed pleading, there were only two points remaining. (Footnote: ⁵⁰) One of those is fundamental to the Defendants’ misrepresentation case.

The two points on which the Claimants say that the Defendants do not have a real prospect of success are: (i) whether Enron Corporation or some other Enron entity other than the Claimants or Mr Friend could be the agent of the Claimants in making the misrepresentations that are alleged by the Defendants; and (ii) whether there is any pleaded case or any evidence to support the proposition that either Ann Clapp or David Clapp knew of or relied on any representation for which it is said (by the Defendants) that the Claimants are responsible. The Claimants say that the answer to both questions is “no”. But in order to consider the points I must explain the proposed pleading further.

The proposed pleading: the alleged misrepresentations

In the final draft of the proposed amended Defence and Counterclaim the allegation that representations were made are set out in paragraph 8, 8A and 8B, under the general heading “The Negotiations with Enron” (Footnote: ⁵¹). As I have already pointed out, it is pleaded that there were two sorts of representation that were made to TBNG. These were (i) representations as to the financial condition of Enron that were made in Enron’s publicly filed quarterly and annual financial statements, which are called “the Public Financial Representations”, and (ii) representations made by employees of Enron in the course of the negotiations, called the “Employee Representations”.

In paragraph 8A, the draft alleges that the Public Financial Representations were made in the quarterly financial reports from early 1999 until the third quarter of 2000 and in the annual reports for 1998 and 1999. Those would all be reports on activity before the dates of any particular report. So, for instance, statements in the quarterly financial report published at the end of the third quarter of 2000 would only contain material up to September 2000, at the very latest. It is pleaded that the various financial statements “purported to show that Enron was an extremely profitable and financially sound group”. (Footnote: ⁵²)

Paragraph 8B of the draft sets out in elaborate detail the allegations concerning the “Employee Representations”. The principal representations appear to be: first, one made in February 1999 by a “Financial Originator in Enron’s London office”. Next, it is alleged that Mr Jay Hellums, a director of Enron Europe Finance & Trading Limited, made representations about the strong financial position of Enron to Mr Harvey Clapp, who is referred to in the pleadings as “Mr Clapp”.

Then it is alleged that Mr Hellums supplied someone (unidentified) in TBNG with the Enron annual statement for 1998 and the quarterly financial statements for 1998. It is said that by referring to these reports “Enron” represented that the facts in them were true.

Further, it is also asserted that in February 2000, after JVA 1 had been negotiated, Mr Friend, Mr Gordon Aird and Mr von Bock (both of Enron Europe Limited) represented that Enron would and could spend up to $100 million on the Tekirdag Concessions if there was enough gas in them. Further representations are said to have been made during February and March 2000 by Mr Friend about Enron’s financial status and its ability to spend money on the Tekirdag Concessions.

More representations are alleged to have been made by Mr Mike Horn, a Vice President of Enron Global Exploration and Production Inc, at Houston, Texas in March 2000. These concerned the financial strength of Enron.

Lastly it is said that in November 2000, at the first meeting of the Operating Committee established under JVA 1, Mr Friend made representations about Enron’s commitment to the Tekirdag project.

The proposed pleading: the liability of the Claimants for the alleged misrepresentations

The Defendants’ proposed case on how the Claimants are liable for the Public Financial Representations and the Employee Representations is set out at paragraph 42A of the draft. In summary the Defendants’ case runs as follows: (i) the negotiations on the Enron side (that led to the conclusion of JVA 1, then JVA 2 and the Charge) were conducted by employees of various companies in the Enron group. (ii) At the time of the negotiations the identity of the Enron contracting party to enter into JVA 1 was not known, although it was contemplated that the entity would be a subsidiary of Enron Corp (either existing or to be incorporated for the purpose). (iii) ETEP was incorporated on 20 June 2000. ECT already existed and it originally entered into JVA 1. However the rights of ECT (Footnote: ⁵³) under JVA 1 were transferred to ETEP under the Deed of Novation of 22 July 2000. Therefore it appears that ETEP was formed specially for the purposes of the Project. (iii) ECT and ETEP entered into JVA 2 and the Charge. (iv) ETEP is wholly owned by Enron Thrace Holdings BV (“ETHBV”) (Footnote: ⁵⁴), which was also formed on 20 June 2000. ETHBV is owned by ECT Europe Inc, which is owned ultimately by Enron Corp. ETEP and ETHBV each have a single corporate director, Equity Trust Co NV. (v) Both types of representations were made “on behalf of the Enron Group, that is to say, Enron Corp”.

I must set out in full the next stages of the reasoning in full. Stage (vi), as set out in proposed paragraph 42A (e), is as follows:

“The representations were of continuing effect. Upon identification of ECT and (later) ETEP as the contracting parties, Enron Corp became agent for ECT/ETEP for the purposes of continuing and completing the negotiations (and acted in such capacity through the employees). The representations made before each subsidiary was identified (which were continuing representations) were, by virtue of their continuing nature, repeated by Enron Corp (acting through the Employees and on behalf of ECT/ETEP) after ECT and ETEP were selected and continued to have effect down to the execution of the 1^st JVA, the 2^nd JVA and the Charge. Alternatively, they were adopted or ratified by ETEP. Alternatively ECT and ETP became vicariously liable for such representations.”

Stage (vii), set out in proposed paragraph 42A (f), is:

“The Representations made after ECT/ETEP were selected were made by Enron Corp (acting through the Employees) on behalf of ECT/ETEP. In the premises the Representations were made by ECT/ETEP. In any event, ECT/ETEP are responsible for the representations made by their agent Enron Corp”

The last stage in the argument is that the representations that were made by Enron Corp as the agents of the Claimants. The Officers of Enron Corp, who were its directing mind and will, (Footnote: ⁵⁵) knew they were untrue. (Footnote: ⁵⁶) Therefore the Claimants are liable for the fraudulent representations of their agent, Enron Corp, which were made on the Claimants’ behalf.

The argument of the Defendants as to why the Claimants are fixed with the representations alleged to have been made by Enron

Mr Briggs submits that the position is this: negotiations that resulted in JVA 1, JVA 2 and the Charge were led by Mr Nigel Friend, who was employed by Enron Europe Limited. The other negotiators on the Enron side were employed by various Enron Group subsidiaries in London and Houston. These negotiators should be regarded as agents of either the Enron group as a whole or Enron Corp, the ultimate owner of the group. Moreover, these negotiators were either the “directing mind and will” of Enron group/Enron Corp, or their agents.

It was always contemplated that the entity contracting with TBNG would be either Enron Corp or one of its subsidiaries, as was ultimately the case. Once Enron selected ECT and ETEP as the vehicles to be the contracting parties with TBNG (for the JVAs) and the Defendants (for the Charge), the negotiators became the agents of the Claimants as principal. The representations that the negotiators had made on behalf of Enron group/Enron Corp continued to be made by the negotiators, but once ECT and ETEP had been identified, the representations were made on behalf of the Claimants; see: Briess v Woolley. (Footnote: ⁵⁷)These continuing representations continued to be false to the knowledge of Enron group/Enron Corp. Therefore they were made fraudulently by the Claimants, because Enron group/Corp became and then continued to be agents of the Claimants.

The proposed amended defence had also pleaded, as alternatives to the agency argument, that the representations of Enron group/Enron Corp were “adopted or ratified” by ECT/ETEP, alternatively ECT/ETEP “became vicariously liable” for them. At the hearing before me Mr Briggs did not pursue those alternative ways of putting his case.

Analysis of the Agency argument

For present purposes I will assume that the quarterly and annual financial statements and reports do contain matters that can be regarded as representations about the financial status of the Enron group and Enron Corp. I will also assume that there is an arguable case on the facts that Mr Friend and other Enron employees made statements to the effect that those reports were true. Further, I will assume that the Officers of Enron Corp were, in fact, the “directing mind and will” of the Enron group/Enron Corp, and that the Officers knew that the group and the ultimate parent company were in a very poor financial state from mid 1999 onwards, when Enron Corp became insolvent. I am also prepared to assume that if representations were made then they were material and that Mr Harvey Clapp and Mr Guy Dove were induced by them to conclude, (on behalf of TBNG), JVA 1 and 2 with the Claimants and, on their own behalf, the Charge.

That leaves the key question of whether the Defendants have a real prospect of success in making the Claimants responsible for these misrepresentations. Mr Briggs’ legal argument is based on the House of Lord’s decision in Breiss v Woolley. In that case the managing director (Z) of a food making company(A Co) deliberately and dishonestly increased the production of its product (synthetic cream) by diluting the ingredients with water, thus contravening the government approved formula. He then approached another company (B Co) and proposed that it should buy the shares in A Co. Z did not disclose that the accounts of A Co were based on dishonest trading. All this was done without the knowledge or approval of the other directors and shareholders of A Co. Then Z told his fellow directors and the shareholders in general meeting that there was a proposal from B Co to buy A Co’s shares. The general meeting authorised Z to carry on and conclude the negotiations, which he did. After B Co had purchased the shares, it discovered the fraud and purchasers of the shares brought an action against shareholders of A Co, who had no actual knowledge of the fraud of Z. The House of Lords held that the fraudulent representations made by Z (that the accounts were based on the true position of A Co) continued after the general meeting of A Co’s shareholders. Although Z was not the agent of the shareholders of A Co prior to the general meeting, he became so after the resolution was passed that he should carry on and complete the share sale agreement. Therefore Z made the continuing representations as agent for the shareholders of A Co and they must be liable for them, even though they did not know at any stage that he was making fraudulent misrepresentations. (Footnote: ⁵⁸)

In my view there are several factual differences between Breiss v Woolley and the facts put forward in the Defendants’ pleading. First, there is the position of the persons who are said to have made representations on behalf of Enron group/Enron Corp, ie. Mr Friend and others. Mr MacLean pointed out, correctly, that they were employed by Enron Europe, not Enron Corp. He submitted that there was no evidence to show that they either had actual authority to make representations on behalf of Enron Corp or the Enron Group as a whole. That is true. But, as Mance LJ points out in Primus Telecommunications Plc v MCI WorldCom International Inc, (Footnote: ⁵⁹) the law recognises that in modern commerce an agent who has no apparent authority to conclude a particular transaction may sometimes be clothed with apparent authority to make representations of fact. And the fact that the person concerned is actually employed by a subsidiary may not be important if it is clear that the person is plainly entrusted with the negotiations of terms on behalf of the relevant corporate entity. Therefore I think that it is arguable that Mr Friend and other persons engaged in the negotiations could be clothed with the apparent authority of the Enron group or Enron Corp to make representations of fact about the group or Enron Corp’s financial status. There is a plea that the “Employees” acted on behalf of Enron group or Enron Corp in making representations of fact. I cannot say that is unarguable on the facts. Nor can I conclude that this aspect has no real prospect of success as a matter of law.

The second difference is that the Claimant companies (ie. the ultimate “principals”) did not exist or were not identified as the contracting entities at the time that the alleged representations were first made. That distinguishes the current case from Breiss v Woolley, where the shareholders of A Co always existed, both before and after the general meeting at which Z was given authority to act on their behalf as the principals of Z. At the time before the Claimants were identified, the “Employees” could not have had any actual authority from them, nor been clothed with any apparent authority to make representations on their behalf as principals, because the Claimants could not be identified as the source of the clothes, as it were. (Footnote: ⁶⁰)

I appreciate that Mr Briggs’ case is that in the period before the Claimant entities are identified as contracting parties, the “Employees” made representations on behalf of the Enron group or Enron Corp. But that exacerbates the problem, because, even assuming that were the case, Mr Briggs then has to demonstrate a case that the continuing representations of fact were subsequently made on behalf of the Claimants, as principals.

That leads to the third difference. In Breiss v Woolley, Z was authorised by the shareholders of A Co at general meeting and it was found as a fact that the effect of that was that the shareholders gave Z authorisation to negotiate the sale of the shares, which implicitly authorised him to make representations on their behalf. But in the present case there is no evidence to suggest that the Claimant companies authorised Mr Friend or other individuals or Enron Corp to make representations (as to Enron’s financial status) on their behalf at any stage. Moreover it is not pleaded in the all - important proposed paragraph 42A (e) that this was the case.

In my view this is fatal to the proposed pleading, for two reasons. First, the lack of any evidence or pleading that the Claimants authorised Mr Friend, other individuals or Enron Corp to make authorisations on their behalf means that there can be no case that the representees had any actual authority from the Claimants to continue to make the alleged representations. Secondly, there is no evidence or pleading to suggest that the identification of the Claimants as parties to the JVAs meant that the Claimants were clothing Mr Friend or other individuals or Enron Corp to make representations on the Claimants’ behalf. Whilst I am prepared to accept that the Employees acted on behalf of the Claimants, (as their principals) in completing the negotiations for the JVAs and the Charge, it does not follow that these Claimants clothed them with authority to continue to make all representations of fact regarding Enron Corp. I repeat what I noted earlier, ie. that Mr Briggs disavowed any allegation that ECT or ETEP either adopted or ratified representations previously made and continued by or on behalf of Enron Corp.

There is, I think, a further difficulty in the way of the proposed pleading. In a case where it is alleged that a corporate entity is liable for fraudulent misrepresentations, there are two ways that the entity can be fixed with liability. First, it can be alleged that the individuals that constitute the “directing will and mind” of the corporate entity knew (or were reckless) as to the falsity of the representations that were innocently made on the company’s behalf by other, more subordinate, employees or agents. Secondly, it can be alleged that a subordinate employee or agent (not part of the “directing will and mind” of the company) knew of the falsity of the representations, for which the company (as principal) is vicariously liable.

In this case the Defendants do not plead that the “directing will and mind” of ECT and ETEP knew that the continuing representations about Enron Corp’s financial status were false. (Footnote: ⁶¹) It is pleaded that Mr Friend and others made representations about the financial status of Enron Corp (the so – called “Employee Representations”), but there is no plea that those employees knew that the representations were false. So the only way that the Claimants can be held liable for the fraudulent misrepresentations about Enron Corp’s financial status is by saying that the Claimant companies are vicariously liable for fraudulent misrepresentations made by Enron Corp in its Public Financial Representations, which were known to be false by its directing will and mind, ie. its “top men”. But that then brings the Defendants back to the problem that they have not pleaded or pointed to any evidence to demonstrate that Enron Corp itself, (not the employees who have been identified), had the authority of the Claimants to make representations on their behalf.

There must be similar problems in relation to negligent or “innocent” misrepresentations.

In relation to the other point raised by Mr MacLean, there is no plea (or evidence to support such a plea) that either Ann Clapp or David Clapp relied on the representations pleaded. However, that, by itself, might be remedied.

However, for the reasons that I have given, I have concluded that the proposed re – amended pleading has no prospect of success in any event.

It is pleaded that the fraudulent, negligent and innocent misrepresentations give rise to two defences to the claims based on the Charge. The first is based on the premise that JVA 2 is rescinded. That is not currently relevant. The second is that, by virtue of the misrepresentations, TBNG and the Defendants are entitled to claim as damages the amounts for which TBNG are liable under JVA 2 or the Charge, thus extinguishing the Claimants’ claim. If, as I have concluded, the whole of the misrepresentation pleading has no real prospect of success, then this basis of defending the claim must be struck out. That is one of the heads of relief sought by the Claimants in their Application Notice dated 15 October 2004 and that must be granted.

My conclusions are as follows:

The parties should prepare a draft order to reflect these conclusions. I am very grateful to counsel for their most helpful and interesting arguments.

From early 1999, TBNG engaged in discussions, and later negotiations, with the Enron group of companies (“Enron”) as to the possibility of a joint venture or other contractual relationship between Enron and TBNG. The Claimants are companies in the Enron Group.

Representatives of TBNG (namely, Harvey Clapp (“Mr Clapp”) and on one occasion Professor Ahmet Ayan) met representatives of Enron at conferences / seminars in Dallas, Ankara and Istanbul in late 1998 and early 1999. At these conferences / seminars:

During the discussions and negotiations, Enron made the following representations to TBNG (“The Representations”). The Representations comprised (i) representations as to the financial condition of Enron made in Enron’s publicly filed quarterly and annual financial statements (“the Public Financial Representations”) and (ii) representations made by employees of Enron in the course of the negotiations (“The Employee Representations”).

The Representations set out in paragraphs 7 and 8 above (“The Representations”) were made by Enron (including the Claimants) to TBNG with an intent to induce TBNG to enter into, and amend the terms of, a joint venture or other contractual arrangement with Enron.

The Representations were material to TBNG’s decision to, and TBNG reasonably relied on the Representations in making its decision to, enter into a joint venture with Enron and in deciding to enter each of the 1^st JVA, the Deed of Novation, the 2^nd JVA and the 2^nd Amendment Agreement (together “the JVA Contractual Documents”). The Representations were important and material factors in TBNG’s decision to choose Enron as a contractual partner over other companies, such as Wilco, Amity Oil, and Callon Petroleum, or continuing to develop the Terkidag Assets from its own resources or from funds to be raised from its shareholders. In particular from 1999 onwards, Guy Dove read and relied upon Enron’s quarterly and annual reports. Mr Dove was impressed with the (apparent) financial strength of Enron and felt sure that a group of such size and profitability would be an ideal partner of TBNG. Mr Dove relied on the information contained in the publicly filed statements when recommending to Mr Clapp that TBNG enter into a joint venture with Enron and the Defendants enter into the Charge. Mr Clapp would not have seriously considered seeking a partner that did not have a strong balance sheet and profitability. TBNG chose to enter into a joint venture agreement with the Claimants because of Enron’s (apparent) financial strength disclosed in its Financial Statements.

Further, Enron the Claimants knew, or ought to have known, that the Defendants would rely upon the Representations, including those made in November 2000, in deciding whether to enter into the Charge and that the Defendants would be induced thereby. In any event, by the time of the execution of the Charge, the Representations had not been retracted and they were material to the Defendants’ decision to, and the Defendants reasonably relied on the Representations in making their decision to enter into the Charge.

In fact, the Representations were false. The Representations, so far as they related to the financial condition of Enron, were made fraudulently. Alternatively, and (without prejudice to the burden of proof on the Claimants under section 2(1) of the Misrepresentation Act 1967), Enron did not have any reasonable grounds for believing (at the time that each of the JVA Contractual Documents and the Charge were entered into) that the Representations were true.

Had TBNG and the Defendants known the truth, it and they would not have entered into the JVAs and the Charge

In the premises:

Further or alternatively, TBNG and the Defendants are entitled to damages at common law and/or under section 2(1) and/or 2(2) of the Misrepresentation Act 1967, which damages can, in the case of TBNG, be set off in extinction or reduction of any sums due under clauses 2.5.2. and/or 5.4.4. of the 2^nd JVA (as amended) and, in the case of the Defendants, be set off in extinction or reduction of their liability under the Charge.