Anglo Irish Bank Corporation Plc v West Lb Ag

This is an application pursuant to CPR 31.16 by the applicant and intended claimant Anglo Irish Bank Corporation PLC for pre-action disclosure against the respondent and intended defendant West LB AG which is a member of another banking group.

The facts are as follows. On 25 August 2006, an institutional salesman at West LB called Mr William Verner contacted Anglo Irish to offer for sale US$55,625,000 of derivative instruments. These derivatives were called “Leveraged Super Senior Portfolio Credit Linked Notes” (the “LSS Notes”). They were issued by Khamsin Credit Products (Netherlands) BV, with a maturity in 2041. West LB acted as dealer as regards the issue. The notes were structured so that they were linked to the performance of part of a separate note issue by Blue Heron Funding II Ltd (the “BH2 Notes”). These notes had been issued in 2005 secured on a portfolio of investments and assets. The way that Anglo Irish put it in its submissions (and I do not think that this is in dispute) is that the LSS Notes were a means for an investor to invest in BH2 Notes without actually holding them. The portfolio supporting the BH2 Notes was managed by Brightwater Capital Management Co, which is part of the West LB group.

So far as this intended action is concerned, Anglo Irish draw attention to two features of the notes that it says are particularly relevant. First, one of the holders of BH2 Notes, which like the parties I shall call the “BH2 Investor” (it was in fact a third bank), had the right to require the redemption of the BH2 Notes on dates at three monthly intervals beginning March 2007. If the BH2 Notes were redeemed then because they were linked, the LSS Notes would also be redeemed on the same terms. Second, the performance of the BH2 portfolio was measured by calculation of a weighted average credit rating factor (“WARF”) of the underlying assets. Because of the leveraged nature of the instruments, if the WARF exceeded a specified trigger level, the LSS noteholder would be required to elect either to post additional collateral or to have the LSS Notes redeemed at a value calculated by reference to the market value of the BH2 Notes.

After negotiations between the parties largely by phone the deal was done, and following a term sheet dated 26 September, Anglo Irish purchased the LSS Notes from West LB. The terms of the notes were set out in a prospectus dated 28 September 2006 issued by Khamsin and provided to Anglo Irish by West LB. Anglo Irish’s case is that the purchase of the LSS notes was made in reliance on two oral representations made by West LB’s salesman during those negotiations.

The first was a representation to the effect that it was almost certain that the BH2 Notes (and therefore the LSS Notes) would be redeemed by the end of March 2007 on a call by the BH2 Investor that held the notes. This I shall call the alleged early redemption representation. The second was that even if the BH2 notes were not redeemed, West LB would buy back the LSS Notes at par value, so that the transaction would in effect be unwound. This I shall call the alleged buy back misrepresentation. In either case, Anglo Irish would hold the notes for a limited period of time in accordance with what it says were its objectives, namely a short term investment.

In fact, the BH2 Investor did not call for the redemption of the BH2 Notes by March 2007, though it did give notice of its intention to do so only to revoke it following a deterioration in market conditions. For its part, West LB declined to buy back the LSS Notes. The upshot was that Anglo Irish was left holding the notes. Following falls in the value of the US residential and commercial property market during 2007, the “WARF” trigger point was exceeded in January 2008, with the result that Anglo Irish either had to post additional collateral in order to continue the investment, or else redeem the notes early. It chose to take the latter course, realising a loss of some US$42.74m

In these circumstances, Anglo Irish wishes to pursue a claim against West LB under s. 2(1) Misrepresentation Act. In other words, it wishes to pursue a claim in negligent misrepresentation. Mr David Quest, counsel for Anglo Irish, made it clear that it did not anticipate bringing a claim in deceit. It is to that end that Anglo Irish seeks pre-action disclosure of certain documents relevant to the issue of whether the representations were true and/or whether West LB had reasonable grounds for making them.

As originally put forward in correspondence and in the application notice dated 29 October 2009, Anglo Irish sought disclosure of: “All documents (including those stored in electronic form) in the period 1 August 2006 to 30 April 2007 (both dates inclusive) which are relevant to [each alleged representation] and which either support West LB’s case that that representation was true or that there were reasonable grounds for West LB [or its salesman] to believe that [the representation] was true, or are adverse to that case”. This would reflect what Anglo Irish would be entitled to on standard disclosure in the course of the intended action.

In a further witness statement of 23 January 2008 (in other words fairly shortly before the hearing), this request was narrowed down. Anglo Irish now requests documents in the following more limited categories:

CPR Pt 31.16(3) provides that the court may make an order for pre-action disclosure only where four conditions are satisfied.

The first three of these conditions are substantially not in dispute, though Mr Timothy Howe QC for West LB had a point on whether as the proposed order is drafted, all the documents requested would fall within standard disclosure. It is the fourth condition that has been in contention on this application.

In Black v Sumitomo Corp [2002] 1 WLR 1562, which is the leading case on this provision, it was held that the fourth condition combines a distinct jurisdictional and a discretionary element, although these elements may be considered together ([80] to [82], per Rix LJ). The discretion is unconfined, depending on the facts of the case, but among the important considerations are the nature of the loss complained of, the clarity and identification of the issues raised by the complaint, the nature of the documents requested, the relevance of any protocol or pre-action inquiries, and the opportunity which the complainant has to make his case without pre-action disclosure (ibid at [88]). In refusing pre-action disclosure in that case, and differing from the judge below, Rix LJ also took into account the fact that “… the complaint, its factual and legal basis, and the issues which it raises, are speculative in the extreme” (at [91]). In deciding the present application, I shall direct myself in accordance with the guidance in this case.

The first argument that I have to consider is that of West LB, which submits that the intended claims are weak and speculative. The argument was developed at some length in its evidence and submissions. Consequently, there was considerable debate at the hearing in this regard. In his oral submissions, Mr Howe QC submitted that I could form the view that the intended claim had no real prospects of success, but that even if I was not persuaded that far, I should form the view that the claim was a weak one, and that this was a relevant consideration (see eg Snowstar Shipping Co Ltd v Graig Shipping plc [2003] EWHC 1367 (Comm)). Mr Quest on the other hand submits that Anglo Irish’s proposed claims are, at the very least, properly arguable and have real prospects of success.

In Rose v Lynx Express Ltd [2004] 1 BCLC 455, the Court of Appeal set out the approach to be adopted when reviewing the merits of a proposed claim for the purpose of an application for pre-action disclosure. The case concerned the construction of a notice provision in the articles of a company. In the court below, the judge considered that the notice issue was so central to the question whether there should be pre-action disclosure as to be suitable for determination as a preliminary issue. He construed the articles in a way which was fatal to the potential claim and dismissed the application. The Court of Appeal held that the meaning of the articles was a matter for trial and that the applicant’s construction was at least arguable. It made an order for the disclosure sought.

Giving the judgment of the Court, Peter Gibson LJ said at [4] as follows:

“We have reservations about the approach adopted by the Judge. We are concerned whether it is possible, and it is our view certainly unsatisfactory, to have a situation in which what is decided as a straightforward issue of construction is decided one way for one purpose, but may later be reargued and possibly decided differently during the course of subsequent proceedings. Further, whether or not the determination would be binding at the trial of the substantive claim, there are practical dangers about considering any substantive issue, and particularly the core issue in the action, in the context of an application for pre-action disclosure. At the pre-action stage, the parties may not have thought through or seen all the implications of the issue in the same way as they will have done by the time when it comes to be tried. Any pre-action determination will have to take place in the light of assumptions about the factual circumstances, which may prove incomplete or incorrect. The actual factual circumstances, when known, may throw up problems about a particular construction of the articles which may not have been apparent at the pre-action stage. We think therefore that courts should be hesitant, in the context of an application for pre-action disclosure, about embarking upon any determination of substantive issues in the case. In our view it will normally be sufficient to found an application under CPR 31.16(3) for the substantive claim pursued in the proceedings to be properly arguable and to have a real prospect of success, and it will normally be appropriate to approach the conditions in CPR 31.16(3) on that basis.”

With that passage in mind, I shall summarise the parties’ respective points on the merits or otherwise of the proposed action. As I have mentioned, negotiations for the sale of these notes took place over the phone. There appear to have been a considerable number of conversations, and in the normal way these were taped. The case of Anglo Irish is that over the course of the conversations, the West LB salesman made representations to the effect that, while there was a small risk that the LSS Notes might not be called for three years, it was almost certain that they would be called within three to six months of September 2006, in other words by the end of the March 2007. Anglo Irish relies on words on the transcript such as, “I would tell you, 99.99% it’s going to be called”. It was later explained to Anglo Irish that the option to call lay with a single investor (in other words the BH2 Investor) who had “indicated very, very strongly, extremely strongly that they want to try and come out”. These are brief quotations from extensive transcripts, but this in essence is the basis of the alleged early redemption representation.

Later on in the negotiations, West LB’s salesman is said to have responded to questions about what would happen if the BH2 Notes were not redeemed by saying that, “all we do is take it back and put into this other one”. Again the transcripts are extensive but in essence this is the basis for the alleged buy back representation. Anglo Irish’s case is that it relied upon the representations in deciding whether or not to purchase the LSS Notes. It is said that the representations were false representations of fact, and caused the loss on the unwinding of the notes that I have mentioned above.

On its side, West LB contends that Anglo Irish had significant amounts of information relating to the proposed purchase, and that its internal credit risk function formed an independent opinion on the purchase. It points to the fact that the BH2 Investor did actually exercise the call in February 2007 in line with expectations. The subsequent change of mind, it says, resulted from the deterioration in market conditions and lack of liquidity at that time. There was it submitted no representation of fact that was inaccurate at the relevant time (citing in support IFE Fund SA v Goldman Sachs International [2007] 2 Lloyd’s Rep 449). Furthermore, West LB relies upon disclaimers in the prospectus for the issue which is dated 28 September 2006. It is said that these negate the making of any representations by West LB, making it clear that it accepted no responsibility to Anglo Irish as purchaser of the notes. The parties are in dispute as to the correct construction of the disclaimers, but on the basis that its construction is the correct one, West LB relies upon JP Morgan Chase Bank v Springwell Navigation Cooperation [2008] EWHC 1186 (Comm) to submit that the disclaimers precluded the making of any actionable representation. A considerable body of evidence and argument was deployed in support of West LB’s case on these points.

Those being the arguments as to the merits, I state my conclusions in this respect as follows. There are cases in which the court is unable to conclude that there would be a claim at all, let alone a claim with a real prospect of success: eg Gwelhayl Limited v Midas Construction Limited [2008] EWHC 2316 (TCC) (Coulson J). This is not a case of that nature. Nor does West LB submit as I understand it that the complaint is “speculative in the extreme” (Black v Sumitomo, ibid, at [91] per Rix LJ). In the present matter, to evaluate the prospective claim would potentially involve forming a view on the following factors: whether any, and if so what, statement of fact was made by West LB to Anglo Irish, what was the meaning and effect of any such statement, whether any such statement was an actionable representation to Anglo Irish, whether West LB owed Anglo Irish any duty of care in making of any such statement, whether Anglo Irish reasonably relied on, and was induced by, any such statement to purchase the LSS Notes, and if so, whether any such statement was false when acted upon. West LB’s submissions suggest that all these points are potentially in issue. Furthermore, there is the dispute as to the effect of the disclaimers in the prospectus.

There seem to me to be particularly good reasons for the court to avoid becoming drawn into expressing views about the merits of this claim at this stage, even to the extent of saying that the claim is a weak one. The subject matter concerns complex financial instruments, and if pursued is likely to raise difficult questions of law and fact. As Peter Gibson LJ pointed out in the passage from Rose v Lynx Express that I have set out above, at the pre-action stage the parties may not have thought through or seen all the implications of the issues. An expression of view as to the merits would have to be given in the light of assumptions about the factual circumstances which may prove incomplete or incorrect. In my view, Mr Quest was right to submit that this is not a case where the weakness or otherwise of the intended claim weighs in the exercise of the court’s discretion.

So I come back to the requirements of CPR 31.16(3)(d), and ask whether the pre-action disclosure now sought is “desirable” to (i) dispose fairly of the anticipated proceedings, (ii) assist the dispute to be resolved without proceedings, or (iii) save costs. Anglo Irish submits that each of these propositions is satisfied, and West LB submits that none of them is.

Mr Quest puts the case of Anglo Irish as follows. He accepts that there is sufficient material already available to plead the case that the intended claimant is considering bringing. But without pre-action disclosure, it would be compelled to commence proceedings, wait for the material to be produced on standard disclosure, and then perhaps amend if necessary. Much time and money would be wasted in getting to that stage. In particular, he submits that under s.2(1) Misrepresentation Act 1967, the key issue will be whether West LB had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts represented were true. Whether this case has any serious merit depends therefore to a large extent on whether West LB had reasonable grounds to support what Anglo Irish was being told as to the position. He says that it is not correct that Anglo Irish is resolved to pursue a claim in any event, even if West LB produces documents which exonerate its conduct. Pre-action disclosure will enable Anglo Irish, he submits, to take a view whether to proceed with the claim or not and thereby “dispose fairly of the anticipated proceedings”. Further, he submits that without knowing whether West LB has as he puts it a “clip of documents” that answers the case one way or the other, Anglo Irish cannot enter into meaningful negotiations to resolve the dispute without proceedings. Anglo Irish is not, he says, bent on pursuing the claim at all costs. Finally, if pre-action disclosure can prevent proceedings starting, there will thereby be a saving in costs.

West LB’s case is that in reality this application is in the nature of a fishing exercise with a view to improving Anglo Irish’s position in relation to the intended proceedings and giving it a tactical edge over West LB in any future ADR/settlement negotiations which may take place. It points to the amount of material which is already in the possession of Anglo Irish. It further says that the issue as to reasonable grounds for belief is a statutory defence under s.2 Misrepresentation Act 1967, and pre-action disclosure would not address the factors that Anglo Irish would have to establish to make good the claim itself. It submits that pre-action disclosure would not be desirable in order to dispose fairly of the anticipated proceedings.

Mr Howe QC says (in my view with some force) that the making of what is inevitably an inherently one-sided order of this kind could risk tipping the balance unduly. Anglo Irish has sought to meet this objection by voluntarily disclosing all relevant documents of its own that it has been able to locate. West LB response however is that these documents consist almost entirely of telephone transcripts (which are available in any case to both parties) and contain only one internal document. That point aside, it is submitted, again in my view with some force, that standard disclosure on a reciprocal basis following the exchange of properly particularised statements of case represents the norm in Commercial Court proceedings of this kind between two large, well-resourced and evenly matched counterparties such as the parties here. As regards disclosure in order to assist the dispute to be resolved without proceedings, it submits that given the magnitude of Anglo Irish’s losses, it is commercially unrealistic to suppose that it would simply abandon its threatened claims.

So far as the costs, scope and implications of the disclosure exercise requested, Anglo Irish submits that the exercise is a reasonable one in the limited form in which the pre-action disclosure is now pursued. It points out that in the usual way, the cost will be met by Anglo Irish. West LB submits that even in the reduced form now sought, the categories of documentation remain very wide. Compliance with the recast requests, it says, would still necessitate the identification, retrieval from physical or electronic archive, search and review of a very substantial volume of hard copy documentation, e-mail folders, taped telephone conversations and other electronic records of a number of employees, including former employees, in Dusseldorf, New York and London. Even though the costs of this exercise would be borne by Anglo Irish, the burden of the disclosure itself would still rest on West LB. With regard to the alleged early redemption representation, it is said that this process would need to extend to the files of any current or former West LB employee who had relevant communications with the BH2 Investor or anyone acting on its behalf during the relevant period. It would also need to include not only all communications relating to the BH2 Notes but also potentially all communications relating to two other BH collateralised debt obligations in which the BH2 Investor was also invested, since communications in relation to those may have referred to the position in relation to BH2. In summary, it says the exercise even as cut down would still be disproportionately costly, time-consuming and burdensome for West LB.

Persuasively though Mr Quest put the arguments, I am not persuaded that this is an appropriate case in which to order pre-action disclosure. Although there is an apparent attraction in the submission that such disclosure would enable Anglo Irish to take a view as to whether to proceed with the claim or not, it is to be noted that “the Court has warned against ordering pre-action disclosure ‘to encourage fishing expeditions to enable a prospective plaintiff to discover whether he has in fact got a case at all’” (BSW Limited v Balltec Limited [2006] EWHC 822 (Ch) at [81], per Patten J citing earlier authority). In the light of the careful evidence that has been filed, I think it would be wrong to characterise the present application as a “fishing expedition”. Nevertheless, it appears to me that the principle referred to by Patten J applies. The protagonists in this matter are both financial institutions. Deals in financial instruments are often entered into between such institutions with relatively limited documentation. But conversations are taped, so that a record exists as to what was said at the time. That is the situation here. To go further, and require disclosure by one of the institutions of its internal documentation relating to the deal, should I think be rare in this kind of situation. Also, I am satisfied that even in the more limited form now proposed the disclosure sought would potentially be a burdensome exercise. It is one thing to require such an exercise mutually in the course of proceedings which have been commenced, but another to impose it unilaterally on a party against whom no proceedings have been taken.

In any event, it is hard to say whether the disclosure sought would really resolve the merits of the case one way or the other. It might do so, but it is also possible, as Rix LJ put it in Black v Sumitomo, that more documents would only raise more questions (at [100]). In my view, Anglo Irish has not made out the requirements in CPR Pt 31.16(3)(d). As Christopher Clarke J pointed out in First Gulf Bank v Wachovia Bank National Association [2005] EWHC 2827 (Comm), a pre-action disclosure order, even if not exceptional, is unusual ([24]). I have come to the conclusion that it is not an order that I should make here. Of course, if there are any concerns as to the retention of documents or other material in hard or electronic copy I will consider those, but this application is dismissed.