National Westminster Bank Plc v Rabobank Nederland

This application by Rabobank is advanced in somewhat unusual circumstances. In substance it asks for permission to rely on the allegations advanced in a document called Misrepresentation Statement of Case (“MSC”) by way of substitution for, and partial amendment of, Rabobank’s Amended Defence and Counterclaim, together with ancillary directions as to supplemental witness statements and expert evidence.

The MSC arises from a problematic pleading history in these proceedings the details of which do not for the most part matter and which can be outlined as follows.

Rabobank’s counterclaim against National Westminster Bank (“NWB”) arises out of the participation of both banks in certain financing facilities under which both advanced credit facilities to Yorkshire Food Group (“YFG”). Certain of the officers and directors of YFG were private customers of NWB to whom or to whose nominees NWB had also extended credit facilities for purposes which, it is alleged, gave rise or would inevitably give rise to breaches of the officers’ and directors’ duties to YFG. Given that those private credit facilities were in part secured on shares in YFG, and given further that the security of credit facilities extended by NWB and Rabobank to YFG were dependent upon the financial viability of YFG and the maintenance of its operation in business as a profitable and independent going concern, it is alleged by Rabobank that in deciding what further financial commitments it ought to take on in order to keep YFG going, when it had encountered severe financial difficulties, it was material that it should be given by NWB a full picture of its commercial relationship with the officers and directors who were its private customers. As the financial condition of YFG deteriorated still further in 1996 – 1997 NWB resolved to disengage from its financial backing of YFG. This it did by persuading Rabobank to cause an associated company to buy out YFG’s outstanding indebtedness to NWB at a discount, leaving Rabobank and its associated company as aggregate creditors of YFG in a substantially increased amount which was likely to increase still further unless YFG were liquidated.

The essence of Rabobank’s case is that, in persuading Rabobank to continue to keep YFG afloat in 1996 and to procure the buyout of YFG’s indebtedness to NWB, the latter deliberately failed to disclose information very material to Rabobank’s decision-taking on these matters, with the effect that the information about YFG and its officers and directors that was disclosed was rendered so highly misleading as to amount to half-truth misrepresentations. Rabobank also relied on one particular free-standing misrepresentation as fraudulently made (the Van der Schrieck Misrepresentation).

The case in fraud developed to include the half-truth misrepresentations by an Amended Defence and Counterclaim (“ADC”) in June 2005. The trial was then fixed for October 2006.

The manner in which the fraud claim had been pleaded was not satisfactory. Requests for further information as to the misrepresentation claim were unproductive and the matter came before me on 3 March 2006. It was at once apparent that the ADC was insufficiently explicit as a claim for fraudulent misrepresentation and in as much as it included claims for breach of fiduciary duty, negligent misstatement under Section 2(1) of the Misrepresentation Act 1967 and negligence at Common Law and relied heavily on pleas by cross-reference to other parts of itself, it presented a veritable bramble thicket of allegations which were extremely hard to understand. Consequently, I directed that Rabobank should serve a free-standing statement of its case on misrepresentation. This was to be done before the exchange of factual witness statements and was scheduled to cater for there being adequate time for witnesses to be able to deal with the case against them. I indicated that the statement should cover fraud and what appeared to be a case in equitable negligence (Nocton v. Ashburton).

On 3 April 2006 Rabobank served a schedule – the Misrepresentation Schedule - which was intended to clarify all aspects of Rabobank’s misrepresentation case in fraud but did not cover negligence. It was considered at a hearing before Tomlinson J. on 16 June 2006. He considered it to be “unworkable” and said that it could not be used at the trial but gave Rabobank a last chance to identify its case on misrepresentation in explicit form, but without pre-judging whether Rabobank would be given permission to amend its existing pleading by reference to the contents of the further document.

In the course of the 16 June 2006 hearing Tomlinson J. was invited to strike out certain parts of the ADC as disclosing no cause of action or as bound to fail. He did indeed strike out paragraph 51 which alleged that NWB owed Rabobank a duty of care when disclosing to Rabobank information relevant to the achievement of what the pleading described as Common Goals. This was not a Hedley Byrne duty of care to avoid making misstatements by way of advice or information. Also struck out were allegations of breach of that duty, including all the particulars of such breaches of duty in paragraph 52. At sub-paragraph 13 of the Particulars of breach of duty struck out with regard to breach of that duty of care there appear the words:

Quite obviously the function of this sub-paragraph was to deploy the facts and matters pleaded in paragraphs 53, 54 and 55.6 as facts in addition to those particularised at (1) to (12) of paragraph 52 upon which the allegations of breach of fiduciary duty and breach of duty of care were based. When Tomlinson J. ordered that allegation of breach of duty of care be struck out, the consequence was therefore that there ceased to be any allegation of negligence to which paragraph 52(13) could apply. Since it had never performed the function of a free-standing allegation of negligence in addition to that under paragraph 51 which had been struck out, it had been rendered otiose as regards a breach of duty of care claim by Tomlinson J’s order. There was no other allegation of a duty of care or the breach of it in the ADC.

The new document – Rabobank’s MSC – emerged on 3 July 2006. It was divided into three sections A, B and C. Section A was intended to present the case on fraudulent misrepresentation, Section B on section 2(1) negligent misrepresentation and Section C on negligent misstatement at Common Law under Hedley Byrne v. Heller.

There can be no doubt that Section C introduced a cause of action not hitherto pleaded in the ADC in which, as I have held, there was no surviving claim for breach of duty of care.

It was not the only new allegation in the MSC. Misrepresentations 7, 8 and 9 were entirely new. They were deployed as part of the fraudulent misrepresentation claim and as part of the basis for the claim for negligent misrepresentation under section 2(1).

At the Pre-trial Review, the hearing of which took place on 7 July 2006, I directed that Rabobank’s application for permission to rely on the MSC, whether as a re-formulation of its existing case or by way of amendment, should be determined by written submissions and without a hearing. Pursuant to this direction NWB relied on a witness statement from Mr King, its solicitor, explaining the problems of trial preparation that would be likely to arise should the new allegations be relied upon by Rabobank. The written submissions were complete by 26 July 2006.

In determining whether at this point of time permission should be given to Rabobank to rely on its MSC it is necessary to bear in mind that only two months remain before the start of the trial and that for most of those concerned in trial preparation a significant part of that period will be taken upon by holidays.

Secondly, of the four key NWB factual witnesses, Messrs Hamilton, Catton and Havelock no longer work for NWB and their availability for interview access by NWB’s solicitors is extremely limited and of subsidiary priority to their current workload with different employers. In this connection, Mr Catton alone is alleged to have been involved in each of the three misrepresentations not relied upon until the MSC, namely those numbered 7, 8 and 9. Mr Havelock’s position in the management stream at NWB would make him at least a potential witness with regard to the system of administrative control and information transmission between the representee employees and management at NWB. Investigation of this field may be of importance not only with regard to the fraud claim but also the section 2(1) negligent misrepresentation claim.

Thirdly, NWB would wish to rely on the evidence of its UK Banking Expert, Mr Paul Thompson, who is likely to be able to give evidence directly pertinent to the section 2(1) claim and, if permitted to be pursued, the Hedley Byrne negligent misstatement claim. Self-evidently he cannot complete that evidence unless and until he has had an opportunity of reading the factual witness statements in their final form.

Fourthly, it can be assumed that, except to the extent that the MSC introduces new causes of action or allegations, all the factual witnesses and Mr Thompson are now in the same position with regard to evidence preparation as they would have been in if the MSC had never been served, for their evidence will have been prepared on the basis of the existing allegations in the ADC. If and in so far as the MSC contains differences in emphasis or formulation of misrepresentations already pleaded in the ADC these are unlikely to require wholesale re-writing of witness, statements or extensive or any re-interviewing of witnesses.

Fifthly, the newly pleaded misrepresentations 7, 8 and 9 are based on extremely narrow factual foundations. The taking of a supplemental witness statement to cover these matters could, in my judgment, be accomplished on the basis of at the most a forty minute interview by any reasonably competent and experienced City litigation solicitor. In truth, there is no real reason why any interview would be necessary: the exercise could be perfectly well conducted by email. I interpose that the increasingly prevalent over-elaboration of factual witness statements by a process of review by junior counsel and sometimes by leading counsel is to be strongly deprecated. It increases the time required to prepare witness statements and it unnecessarily increases the cost of commercial litigation in London. I decline to attach any weight whatever to the so-called need to engage in this process.

Sixthly, although the four key NWB witnesses are not due to be called to give evidence until late November 2006, it is essential to the fair conduct of the trial that each of the Rabobank factual witnesses should have had access to any supplemental witness statements by NWB factual witnesses before being called to give evidence. For that reason, the supplemental witness statements referring to newly pleaded misrepresentations should be available by the start of the oral evidence.

Seventhly, it is not essential that the expert evidence on new allegations should be finalised before the start of the trial. The expert evidence is not due to be called until December. A period of four weeks before it is due will be quite early enough for supplemental reports on the new points.

Eighthly, even if it were possible in practical terms for supplemental factual witness statements to be served in good time before the trial, permission should not be given to introduce such allegations if the consequence of doing so would involve a serious risk of substantial dislocation of the trial itself in a manner which might well cause injustice to either party or which might present the court with substantial unanticipated problems of the reception of evidence or of listing, for example, by substantially interfering with the trial timetable or increasing the length of the trial.

Against this background, my conclusions are as follows.

Rabobank may unconditionally rely on all the allegations in MSC Section A with the exception of Misrepresentations 7, 8 and 9.

Reliance by Rabobank on Section A Misrepresentations 7, 8 and 9 will be permitted subject to the following conditions.

Messrs Travers Smith will make all reasonable efforts to obtain a supplemental witness statement with regard to those misrepresentations from Mr Catton to be ready for service by noon on 26 September 2006.

Messrs Travers Smith will, if so advised, make all reasonable efforts to obtain a supplemental witness statement with regard to those misrepresentations from Mr Havelock by noon on 26 September 2006.

The reasonableness of those efforts will be defined by reference to the considerations expressed in paragraph 18 above.

If in spite of such efforts, Messrs Travers Smith are unable to obtain either or both such supplemental witness statements for service by the time specified, this application will be restored to this court for further hearing and directions at 10.00am on 27 September 2006.

A supplementary expert report as to Misrepresentations 7, 8 and 9, if so advised, may be served by NWB by 6 October 2006.

Rabobank will be permitted to rely on the case advanced in Section B of the MSC but it may not deploy Misrepresentations 7, 8 or 9 for this purpose unless it has first complied with the requirements of paragraph 22(i) and (ii) above or otherwise obtained the permission of the court.

Rabobank will not be permitted to rely on the allegations in Section C of the MSC. In this connection, I reject Rabobank’s submission that the allegation as to negligent misstatement in Section C involves a substantially co-extensive factual investigation with that required by the allegation of the Section 2(1) misrepresentations under Section B. The most obvious difference is that, whereas a claim under Section 2(1) is based on the elements of the tort of deceit save for that of fraudulent intent and subject to belief in the truth of the representation being reasonably held by the representor, in a case, such as the present, in which most of the alleged representations are said to arise from non-disclosure of material facts creating half-truth, the construction of the witness statements of the representors must necessarily be directed first and foremost to whether the representor appreciated that his words and conduct were capable of being understood in the sense of the misrepresentation and secondly to whether the representor intended that the representee should rely on the representations in that sense in entering into a contract. Then the representor would have to be asked whether he believed that sense to be true and finally, if so, he would have to be asked about any matters which went to the reasonableness of that belief. By contrast, if a representor witness statement were being prepared in order to meet a claim for Hedley Byrne negligent misstatement, the witness would have to be asked about facts within his knowledge going to the existence of a duty of care, particularly the circumstances in which the statement was made which would be material to whether there was a voluntary assumption of responsibility for the accuracy of the representation in the sense described in BP v. Aon[2006] EWHC 424 (Comm), Williams v. Natural Life[1988] AC 830 and HM Commissioners of Customs and Excise v. Barclays Bank[2006] UKHL 28. Investigation would then have to be made as to whether the witness ought to have appreciated that the representation was inaccurate in the sense alleged.

It will at once be seen that, although there might well be a considerable overlap between this part of a witness statement and that part directed to a Section 2(1) misstatement case, the preparation of such evidence would involve a basically different area of enquiry. If, therefore, Rabobank were now to be permitted to raise a Hedley Bryne negligence claim, NWB would be obliged to make very substantial additional enquiries of all four of their witnesses, as well as of their expert witnesses. The supplemental witness statements would, I have no doubt, involve many hours work and that would have to be fitted into the next eight weeks. Further, even if this supplemental evidence could be prepared for service sufficiently before the start of the trial, its introduction would involve significant prolongation of the time already set aside for the evidence of the four NWB factual witnesses and the expert evidence by my orders of 7 July 2006. The timetable for the trial up to the end of the expert evidence presently extends to but four working days of the end of the Michaelmas Term with time for the preparation of written submissions to start immediately after 14 December, with the object of their being made available prior to oral submissions soon after the commencement of the following terms. The introduction of substantial additional evidence which introduces a significant risk of delay to the conclusion of those submissions is an eventuality to be avoided in the interests of other court users. A fortiori, delaying the start of the trial to accommodate preparation of such additional evidence is not an available option for the same reasons.

Finally, the claim founded on Hedley Byrne negligent misstatement could have been introduced into Rabobank’s pleading at the latest at the time when it was first amended in June 2005. It is not suggested that new facts have since come to light which were not available or reasonably ascertainable by Rabobank at that time. Given that the events said to amount to breaches of duty of care took place in 1996-7, it was important that Rabobank should introduce any substantial amendment which raised a new cause of action without delay, particularly if the recollection of witnesses was likely to play an important part in the trial of that issues. This they have failed to do.

For these reasons I have formed the very clear view that for this court now to permit the introduction of the Hedley Byrne negligence claim in Section C of the MSC would be contrary to the Overriding Objective in CPR 1.1 and inconsistent with the proper exercise of the courts powers of case management under CPR 1.4. Accordingly, the application should to that extent be refused.

The written submissions advanced on behalf of NWB in opposition to this application contain substantial material going to the substance of the case on fraudulent misrepresentation, particularly with regard to Misrepresentations (1) to (4), (6) to (9), (11) and (12) and paragraph 198 of Rabobank’s MSC. Those submissions also include criticisms which go to the substance of Rabobank’s case on the claim under section 2(1) for negligent misrepresentation. In the course of the Pre-Trial Review I made it clear that, given the very limited availability of time following completion of the written submissions on the application and the need for the parties to know my decision as soon as possible, there would be no consideration of the intrinsic merits of new claims but that my decision would be confined to the issues of identifying any such new claims and determining whether, regardless of their intrinsic merits, it was appropriate in the interests of justice to permit them to be introduced at this late stage. All merits issues were to be postponed for decision at the trial. To the extent that NWB’s submissions nevertheless raised the merits they were therefore otiose.

As to the draft order proposed by Rabobank, paragraph requires amendment to reflect the conditional character of the permission to introduce Misrepresentations 7, 8 and 9 as well as the deletion of the reference to negligent misstatement. Paragraph 2 also needs amendment to confine the supplemental witness statements to Misrepresentations 7, 8 and 9 and to introduce the special provisions for the evidence of Messrs Catton and Havelock (see paragraph 22(ii) above). I note that Rabobank do not seek permission to serve any supplemental evidence with regard to those misrepresentations and I have therefore not included any such provision. Paragraph 3 needs amending to reflect the conditional and limited nature of the permission to NWB to serve a further expert report. The date needs amending. There is no need to confine it to 15 pages. Not even the most inventive expert could possibly write more than five pages on these extremely narrow and circumscribed allegations unless his primary objective was to maximise his fees rather than to assist the court by precise, focussed and objective expert evidence. The order does not provide for Rabobank to serve further expert evidence and I have therefore not introduced a provision to that effect. As to costs, paragraph 4 can stand. Each party shall bear its own costs of preparation of the written submissions and of considering this judgment.