Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE BURTON
Between :
Deutsche Bank AG | Claimant |
- and - | |
(1) Mr Alexander Vik (2) Vik Millahue Agricola y Viňedos Ltd | Defendants |
Mr David Foxton QC and Mr Damien Walker (instructed by Freshfields Bruckhaus Deringer LLP) for the Claimant
Mr Tim Lord QC and Mr Jasbir Dhillon (instructed by Travers Smith LLP) for the Defendants
Hearing dates: 8 and 9 March 2010
Judgment
Mr Justice Burton :
This action by Deutsche Bank (the Claimant) is the latest instalment in a continuing dispute between the Claimant and the company, Sebastian Holdings Inc (“SHI”), of which the First Defendant in this action, Mr Vik, a resident of Monaco, is the controlling mind, as he is alleged to be of the Second Defendant in this action (“Millahue”), a company incorporated in Chile. The litigation between the Claimant and SHI is taking place in New York and London (“the SHI proceedings”), and is the subject of an issue of competing jurisdiction as to where the claim and counterclaims of the Claimant and SHI arising out of the relationship by which the Claimant provided prime brokerage and other investment services to SHI in London and New York, should be tried. It is unnecessary to set out the detail of those disputes, which appear from the judgment of Walker J in that action ([2009] EWHC 2132 (Comm)) and in my own judgment in that action ([2009] EWHC 3069 (Comm)).
This claim relates to the fact that, just prior to the breakdown of the relationship at the end of October 2008, three payments were made by the Claimant at the request of SHI, which are said to be recoverable as monies paid under a mistake and/or in respect of which the recipients are said to be constructive trustees. These payments were all made on Monday 13 October 2008 in the sum of US$10 million to a bank account of Millahue in Chile, €5 million to a bank account of Mr Vik in Monaco and US$10 million to an account in Uruguay which is said by the Claimant to be beneficially the entitlement of Mr Vik (a fact which has not been the subject of challenge on this application). Two other payments were made at almost the same time by the Claimant on the instruction of SHI, which are not the subject of claim in this action, a payment made on Friday 9 October in the sum of 1.5 billion NOK to an account of SHI in Geneva and a payment of US$10 million to an SHI bank account in Delaware on 13 October, simultaneously with the three payments complained of. No explanation is given by the Claimant as to why no claim is put forward upon the mistake/constructive trust basis with regard to the Geneva transaction, and the only explanation given as to why no claim is made in respect of the payment to Delaware is contained in the Particulars of Claim at paragraph 29, which simply states that SHI is not a party to these proceedings.
The primary cause of action by the Claimant in these proceedings, by reference to the three payments, is by reference to the quasi-contractual remedy of restitution, the principles of which were enunciated in Barclays Bank Ltd v W J Simms Son Cooke (Southern) Ltd [1980] QB 677 at 695C and Chase Manhattan Bank NA v Israel-British (London) Bank [1981] Ch 105, and further addressed by Lord Hope in Kleinwort BensonLtd v Lincoln CC [1999] 2 AC 349 at 407:
“Subject to any defences that may arise from the circumstances, a claim for restitution of money paid under a mistake raises three questions. (1) Was there a mistake? (2) Did the mistake cause the payment? And (3) did the payee have a right to receive the sum which was paid to him?
The first question arises because the mistake provides the cause of action for recovery of the money had and received by the payee. Unless the payer can prove that he acted under a mistake, he cannot maintain an action for money had and received on this ground. The second question arises because it will not be enough for the payer to prove that he made a mistake. He must prove that he would not have made the payment had he known of his mistake at the time when it was made. If the payer would have made the payment even if he had known of his mistake, the sum paid is not recoverable on the ground of that mistake. The third question arises because the payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him. The payer may have been mistaken as to the grounds on which the sum was due to the payee, but his mistake will not provide a ground for its recovery if the payee can show that he was entitled to it on some other ground.”
As for the claim in constructive trust, which would enable the Claimant to trace the monies into the hands of the recipients, the seminal passage in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 in the speech of Lord Browne-Wilkinson at 714-715 articulates that, when money is paid under a mistake of fact, a constructive trust will arise if a recipient receives money with knowledge that it has been paid under a mistake and may arise when a recipient, who has received monies in ignorance of a mistake, subsequently retains the monies after learning of it.
Given that both Defendants, as described above, are out of the jurisdiction, permission to serve out of the jurisdiction was necessary, and was granted by Andrew Smith J on 20 April 2009, and the application before me, persuasively made by Mr Tim Lord QC and Mr Jasbir Dhillon on behalf of both Defendants, has been primarily dedicated to setting aside that order, although there are subsidiary issues relating both to jurisdiction and to the service in Chile of the Second Defendant. It is not in any doubt that there are relevant subparagraphs of paragraph 3.1 of Practice Direction B of CPR Part 6, which can justify the grant of permission to serve out of the jurisdiction in respect of such claims as are put forward in these proceedings, by the claimant namely where:
“15. A claim is made for a remedy against the defendant as constructive trustee where the defendant’s alleged liability arises out of acts committed within the jurisdiction …
16. A claim is made for restitution where the defendant’s alleged liability arises out of acts committed within the jurisdiction.”
Mr Lord submits that there is no serious issue to be tried on the facts put before the Court in relation to either of such causes of action. Plainly if there is no serious issue as to the existence of a causative mistake, then not only does the restitutionary claim fall away, but with it the constructive trust claim. If however there is a serious issue to be tried as to the restitutionary claim, then in order to justify the constructive trust claim there must also be a serious issue to be tried as to the knowledge/awareness of the mistake on the part of the Defendants. Although Mr Foxton QC (appearing (with Mr Walker) for the Claimant) submits that the exercise which Mr Lord is inviting the Court to carry out is inappropriate at the jurisdiction stage, he accepts that the onus is upon him to show that there is a serious issue to be tried on the merits: see Seaconsar Far East Ltd v Bank Markazi [1994] 1 AC 438 at 452D, which has been the subject of subsequent discussion in more recent decisions, most succinctly in the judgment of Lawrence Collins J in Islamic Republic of Pakistan v Zardari [2006] EWHC 2411 at para 136, where he said:
“On the merits of the claim the claimant’s application must show that the claim has “a reasonable prospect of success” (CPR 6.21(1)(b)), and it has been confirmed by the Court of Appeal that this threshold is the same as if the claimant were resisting an application by the defendant for summary judgment, i.e. “the claimant has no real prospect of succeeding on the claim” (CPR 24.2): Carville America Inc v Camperdown UK Ltd [2005] 2 Lloyd’s Rep 457; and see De Molestina v Ponton [2002] 1 Lloyd’s Rep. 271, 279-281. It is probable that there is no practical difference between this test and the test for the purposes of RSC Ord. 11, r1(1) of “a serous issue to be tried” in Seaconsar Far East Ltd v Bank Markazi Iran …”
He had reached a similar decision in BAS Capital Funding Corp & Others v Medfinco Ltd & Others [2004] 1 Lloyd’s Rep 652 at 673 para 153.
It is important that permission be not given, or, if given, should not be sustained, for the exercise of the exorbitant jurisdiction of this Court against non-resident defendants, if the claimant has no real prospect of success on his claim. Christopher Clarke J in Cherney v Deripaska (No 2) [2009] 1 AER (Comm) 333 at 337 para 12 has described the test as “a relatively low threshold”, but he emphasised the requirement that the “claimant must first establish that each cause of action in respect of which he claims stands a reasonable prospect of success”.
On this application to set aside service out of the jurisdiction made by non-resident Defendants, the Claimant must be able, now nearly 12 months after the issue of proceedings and some 15 witness statements later, to show that, on the evidence before the Court, there is such a reasonable prospect. This requires an assessment by the Court of the Claimant’s case on the evidence before it, and not just by reference to an assertion of the existence of the relevant cause of action. The assertion here is that the payments were made under a mistake of fact. There must be some evidence to support that assertion which is more than fanciful or speculative, particularly where (i) evidence is put in by the Defendants (ii) the opportunity has been taken by the Claimant to deal with that evidence, in no less than 10 witness statements (including one put in during the hearing, and one undertaken to be served after the hearing for the purpose of exhibiting a schedule produced just prior to the hearing). All the more so when, by a witness statement as long ago as 7 July 2009, Mr Leslie, of the Defendants’ solicitors, on their behalf, while setting out what he submitted to be facts which were inconsistent with the existence of a mistake, pointed out that no letter before action setting out the Claimant’s case had been sent to the Defendants, despite the existence of lengthy correspondence since November 2008 relating to the SHI proceedings (in the pleadings of which these three payments were recorded as having been made), and in particular stated that the Claimant “has never provided any statements of account showing when, how and why it had made the alleged mistake, or how and when it was discovered”. As will be seen, this, despite further such requests, is still the case.
Mr Foxton submits that Mr Lord’s submissions about the absence of evidence which might have been produced for the Claimant, and in particular his contention that inferences should be drawn from the absence of such evidence that the Claimant is in no position to produce it, are misconceived. Nevertheless he accepts, as he must, that the onus is upon him to establish that the evidence that is before the Court establishes a serious issue to be tried as to the existence of facts capable of establishing one or other or both of the two causes of action.
The Claimant asserts that there was a mistaken payment sufficient to trigger its claims in the following circumstances. Ms Carroll, an employee in the Global Prime Finance Department of the Claimant, has stated in her witness statement that she received four faxed payment requests (the three now challenged and the Delaware payment request referred to in paragraph 2 above) from Mr Vik on behalf of SHI, at 12.10pm on 13 October 2008. They totalled (treating the Euro payment, only for the sake of approximation, as equivalent to dollars) some US$35 million. She checked the Claimant’s internal system, known as DBX, to determine the Available Cash, being the assets held in the Cash and Securities Account less the Margin Requirement, namely being the amount required pursuant to Clause 4.1 of the Equities Prime Brokerage Agreement (“PBA”) made between the Claimant through its London branch and SHI of 30 January 2008. She describes, in paragraph 7 of her witness statement, Available Cash as meaning “the excess cash in the Cash Account which is not required by [the Claimant] for margining purposes and can therefore be transferred out of the account without the Client failing to meet its margin requirements”.
Ms Carroll says that the DBX system showed that there was the equivalent of US$437,311,872 of Available Cash in the account, as at close of business on Friday 10 October 2008, the immediately preceding working day. Consequently she concluded that there was more than sufficient Available Cash to allow the four payments to be made. She consequently “passed the payments for authorisation to [her] manager, who approved the Payments for processing”. There is no identification of such manager, nor any evidence from him, although it would seem from her evidence that this unidentified manager was the ultimate source of authorisation/approval of the payments, and there is consequently no evidence as to whether he too was labouring under the same (allegedly mistaken) belief as Ms Carroll.
If, Ms Carroll says, the Available Cash in the Cash Account had been lower than the total amount of the requested payments, she would not have authorised (presumably in the sense of passing to her manager for authorisation) the payments, as this would have resulted in a net deficit in the Cash Account, and she would have “escalated the payments to the GPF Risk Monitoring Team” (paragraph 10 of her witness statement).
She also describes how, between 14 and 21 October 2008, she authorised further sums to be paid out of the London accounts and transferred to the New York accounts to cover an alleged deficit on the SHI’s FX transactions, which has been the subject matter of the SHI proceedings. Those payments too she authorised (paragraph 11 of her witness statement) on the basis of the figures displayed in the DBX system, which showed that there was sufficient Available Cash in the Cash Account to make those transfers without the level of assets in the Cash and Securities Account falling below the margin required by the Claimant bank at that time.
The assertion is made by the Claimant, upon which these proceedings are based, that that belief of Ms Carroll was mistaken, because it is said there was not US$430 odd million of Available Cash as at close of business on 10 October, but in fact Available Cash of only some US$23 million. Consequently, had that alleged fact been known to Ms Carroll, she would not have passed the three payments to her manager for authorisation.
The existence and nature of that alleged mistake was unsatisfactorily pleaded and, even at this hearing, unsatisfactorily explained, by the Claimant. There is no doubt about the clarity of Ms Carroll’s evidence (although some uncertainty about the role of the manager), but it all depends upon whether indeed there was on 13 October (by reference to close of business on 10 October) a factual situation so entirely different from that which she believed by reference to looking at the DBX system. The case is pleaded in paragraphs 19 and 20 of the Particulars of Claim. In the course of the hearing Mr Foxton put forward a minor alteration to the paragraph, which I incorporate as underlined (the Claimant is referred to as “DB”):
“19. In fact DB London’s belief as set out at paragraph 17 was mistaken. Errors in DB’s calculation of the Available Cash meant that certain positions were overvalued and certain payments that were made out of an account held under one of the Equities Agreements, namely the Listed F & O Agreement entered into with SHI on 30 January 2008, were not reflected in the system that was used to monitor the level of cash and securities held by DB London as collateral under the Equities Agreements. The effect of these mistakes was to overstate the level of cash and securities held by DB London as collateral under the Equities Agreements and to cause an understatement of the Margin Requirement and thereby to overstate the Available Cash.
20. If DB London had been aware of such errors on 13 October 2008 the relevant officers would have realised that after payment of the four sums requested by SHI there would have been a deficit in the Cash and Securities Accounts and a Margin Requirement.”
The first piece of evidence which sought to expand upon what the errors were was contained in paragraph 16 of the second witness statement of Mr d’Arville, an assistant solicitor at the Claimant’s solicitors:
“16. At the time of the relevant Payments and Transfers, as is apparent from the Carroll Statement, the relevant DB staff were not aware of the errors. DB has since corrected these errors and has calculated that if such errors had not been present in the DBX system, that system would have shown the actual level of Available Cash at the close of business on 10 October 2008 to have been the equivalent of USD 23,720,715. I attach a schedule prepared for the purposes of this statement … which reconstructs the situation and seeks to demonstrate the level of Available Cash in the Cash Account showing on the DBX system both before and after the calculation errors had been corrected.”
I shall refer further below to this schedule, which was subsequently explained by Mr Foxton as having been prepared (at some unspecified date, but presumably considerably subsequent to the actual events in October, if not actually for the purposes of these proceedings) by Mr Kam Singh, a member of the Claimant’s Global Prime Finance Risk team. Further supplementation to the evidence was given by Mr Entwistle, the Claimant’s legal counsel who, on information supplied to him by Mr Kam Singh, refers in paragraphs 6 to 10 of his witness statement, to the margin requirements applied by the Claimant, and concludes:
“9. I note that financial markets were generally very volatile around 13 October 2008 and the period following that date. For that reason, it would be expected that the value of the assets in SHI’s accounts as well as DB’s margin requirements in respect of those assets may fluctuate from day to day during this period.
10. For the reasons given in paragraphs 6-9, it is not possible to calculate the eventual debt that SHI owed DB by simply subtracting “Available Cash” at the close of business on 14 October 2008 from the further sums that are transferred out of the account at that date.”
As to what would have happened if Ms Carroll had “escalated” the matter, as she described in paragraph 10 of her statement, i.e. if, when she looked at the DBX system, the Available Cash as at close of business on 10 October did not exceed the amount of the requested payments, such that a deficit in the cash account would have resulted, Mr Entwistle, in paragraph 14 of his statement, states that the Claimant would then have considered in more detail the events of the 13 October i.e. the bank’s officers would have “considered in more detail any transfers that had already occurred on that particular day as well as intra-day market movements, rather than relying on the value at the close of business” on 10 October: and “this would have provided an up-to-date measure of [the Claimant’s] margin requirements in respect of SHI and therefore the Available Cash”. He continues:
“15. If, as a result of the payment requests, the value of the assets in the accounts (as determined by DB) would be less than DB’s margin requirement in respect of SHI (i.e. Available Cash would reduce from a positive number to a negative number), DB would not process such requests. In that circumstance, DB would be entitled to retain any Available Cash pursuant to clause 10.7.3.4 of the Equities Prime Brokerage Agreement because processing the requests would immediately result in a margin requirement from SHI. There may also be similar entitlement under clause 10.7.3.3.”
Clause 10.7 of the PBA there referred to reads in material part:
“10.7.1. Cash held by the Prime Broker for the Counterparty in the Cash Account will be repayable on demand.
…
10.7.3. In no circumstances will the Prime Broker be required to pay cash to, or to deliver Equivalent Securities to or to the order of the Counterparty where:
…
10.7.3.3 the Prime Broker believes in its reasonable discretion that there are potentially payments, expenses, obligations or liabilities which the Prime Broker is or may become subject to in respect of past, current or proposed Transactions; or
10.7.3.4 the Prime Broker reasonable believes that immediately after the payment or transfer there would be a Margin Requirement payable in terms of Clause 4.2 above.”
Subject then only to Mr Kam Singh’s very short and unparticularised schedule, the evidence before Mr Lord, when he came to prepare his skeleton, simply consisted of an assertion that Ms Carroll was acting on the basis of a mistaken belief, because of an assertion that the figures before her in the DBX, which showed a substantial surplus of Available Cash, were incorrect, but:
The origin or precise nature of such error, amounting to a divergence between the DBX record and alleged reality, as at close of business on Friday 10 October, of US$413 million (and as at close of business on Monday 13 October 2008 of $420 million), was not explained. Someone, or some mechanism, had either inaccurately recorded the position on the DBX or failed to update it, and no explanation was given as to what aspects of the DBX were incorrect. Nor were (or are) any accounts produced, either ‘uncorrected’ or ‘corrected’.
At some, undescribed and unexplained, stage, it seems (though no such evidence is given) that this alleged error was picked up, although never in terms announced to SHI or Mr Vik. Between 14 and 21 October, as a result of requests made by Mr Thomas Brugelmann, a senior officer of the Bank, Mr Vik signed transfer instructions, in favour of the Claimant, for sums from London to be transferred to New York, to offset against the alleged losses there, obviously in circumstances in which the Claimant bank believed that there was a surplus on the Equities Account in London which was to be used or offset against the deficit of the FX account in New York. Mr Vik was asked by Mr Brugelmann to sign and fax to Ms Carroll the appropriate transfer instructions. As referred to in paragraph 13 above, Ms Carroll describes (paragraph 11) how, between 14 and 21 October 2008, she had received “a subsequent series of transfer requests from Vik on behalf of SHI, for sums held in the Cash and Securities Accounts under the Equities Agreements to [be transferred] to separate accounts held by [the Claimant] relating to foreign exchange dealing by SHI”. These are the transfers which Mr Vik executed at Mr Brugelmann’s request, which totalled during the period between 14 and 21 October US$435 million. Ms Carroll’s evidence is that she was still under the belief (now said to be mistaken) “on the basis of the figures displayed in the DBX system … that there was sufficient available cash in the Cash Account to make the transfers without the level of assets in the Cash and Securities Accounts falling below the margin required by DB at that time. [She] therefore passed the transfer request for approval for processing to my manager”.
A margin call was allegedly made by email of 22 October 2008, sent by Ms Carroll on behalf of the Claimant (with copies to, inter alia, Mr Brugelmann) in respect of the London Equities Accounts, in the sum of approximately US$320 million. Given that after 13 October there had been the further US$435 million drawn out, it must presumably be assumed (though no such evidence is given) that the calculation of the call was made by reference to a continued reliance on a continuing allegedly false or inaccurate record of the Cash Account on the DBX system.
The Claimant disclosed a Visit Report, prepared seemingly by Mr Brugelmann on 31 October 2008, in respect of a meeting on 30 October between him and a number of other senior representatives of the Claimant (including a Mr Yassine Bouhara) and Mr Vik, which Mr Vik had requested; and in the minute of that meeting (whose accuracy Mr Lord accepts for the purpose of this application he cannot challenge) it is recorded:
“Yassine [Bouhara] outlined the operational error which occurred at the time the client had requested payments in favour of HSBC and other banks totalling NOK 1.5 bln, USD 50 mio and EUR 5 mio. Due to inappropriate mapping of accounts feeding into GPF from GES (F&O) the cash position of the client was overstated by approx. EUR 215 mio, allowing the payments to be executed in spite of the margin calls starting to come in. In effect, the current negative equity position of EUR 200 mio is equal to the payments that were authorized based on the incorrect information.”
Mr Bouhara, who apparently outlined, and therefore presumably had some knowledge of, the alleged operational error, has not given any evidence to explain it in these proceedings, nor has Mr Brugelmann nor any representative of the Claimant bank. It is apparent that this assertion of an error in the sum of €215 million does not accord with Mr Kam Singh’s calculations. Indeed, if it had only been an error of €215 million, then, either by reference to the DBX recorded credit at close of business on the Friday of US$437 million, or even the DBX recorded credit at close of business on the Monday of US$331 million (to which the US$35 million paid out must be added back), there would have been sufficient to meet the payments now impugned in these proceedings.
In this unexplained state of things, Mr Lord in his skeleton concluded that the explanation must be that what seemed to him to be an alleged retrospective shortfall was to do with the alleged losses in the FX accounts in New York, the subject matter of the SHI proceedings, and related to the transfer of the $435 million between 14 and 21 October to offset those losses referred to in paragraph 20(ii) above. His skeleton was therefore dedicated towards submitting that the Claimant was not entitled to have achieved an alleged deficit in London in that way, and certainly not to have done so retrospectively, such that he alleged that there was no case in law or in fact for the existence of an operative mistake as at 13 October in relation to the London accounts.
Mr Foxton’s response in his skeleton was to make it clear that he was not in any way relying upon any transfers to New York nor upon any right to offset, which, as Mr Lord has accepted, neutralised or rendered irrelevant for this hearing a good part of the arguments which, in those understandable circumstances, he had included in his skeleton. Mr Foxton made it clear that his case rests, and rests alone, upon the existence of an error in the DBX record of the London accounts. That consisted, he submitted, of a substantial error in relation to the balance in the Futures and Options (F & O) account, coupled with the need for consequent (Footnote: 1) reconsideration of the Margin Requirement. Relying on Clause 10.7 of the PBA, he submitted that, once a very substantial, error is identified in relation to the F & O account, then it is inevitable (Footnote: 2) that the Margin Requirement would have altered, and, relying on Mr Entwistle’s evidence, that regard would then have been paid to further losses during the day on 13 October, which are apparent from Mr Kam Singh’s figures, in the light of what he called the volatile market in those troublesome times of October 2008. Mr Foxton produced, just prior to the hearing, an expanded version of Mr Kam Singh’s schedule (the “Kam Singh Schedule”), which showed a breakdown of his four material figures of (i) inaccurate and accurate, as at close of business on Friday 10 October, and (ii) inaccurate and accurate, as at close of business on Monday 13 October. Although the evidence was not supported by a witness statement, Mr Foxton undertook to have it attached to a witness statement, presumably by Mr d’Arville (Footnote: 3). Mr Kam Singh has given no evidence whether to support or to explain the Kam Singh Schedule, or in particular to identify the alleged mistake in the DBX system and how it arose.
From the figures in this breakdown, from which alone, in the absence of any explanation, inferences have to be drawn, it is apparent that there are two major differences between the allegedly accurate and allegedly inaccurate figures on both those dates. The first is that, whereas the F & O figure is said to have been recorded as at the Friday close of business on the DBX system as US$326,077,273, the actual figure “after fixing errors in DBX system” (some kind of reconstruction exercise) is said to have been US$15,133,291. This alleged massive divergence between recorded and actual figures accounts for more than US$300 million of the alleged mistake, and means that by close of business on 10 October 2008 the content of the F & O account was being overvalued by more than 200 times, or, put another way, that 95% of its value had been wiped off. That this was the major ingredient in the alleged mistake did not become apparent until deep into Mr Foxton’s oral submissions in response to Mr Lord’s opening. If that was indeed a mistake in the record, then that of itself would mean that the recorded figure of US$437,311,872 should have been something like US$120 million as at close of business on 10 October.
As for the figure of $331,348,533 as at close of business on Monday 13 October (if that is to be considered), to this sum there needs to be added back the approximate US$35 million of the four payments, which had by that time been drawn out. Subtracting the US$300 million, this leaves an approximate balance of some US$60 million.
Mr Foxton then submitted that, given the right of the Claimant to have reconsidered the margin requirements in the light of the true position had it been known, on the basis of the US$300 million error alone, on the balance of probabilities, the payments would not have been authorised, by reference to either date.
It was at this stage of his submissions, in answer to questions from me about the statement of the F & O Account sent to Mr Vik by Mr Brugelmann (the “Brugelmann F & O Account”) as part of a very substantial set of attachments to an email dated 14 October 2008 (the following day), that Mr Foxton placed reliance upon that document, whereas (as will be seen) previously it had only been relied upon in support of the allegation of knowledge.
The statement shows the F & O Account with an “Account Balance” of US$136,754,600 debit, “Futures OTE” with a credit valuation of US$111,026,880, and a consequent debit in the account of US$25,727,720. This debit balance, together with an “unsecured initial margin” of US$42,203,200, amounted to a negative figure on the F & O Account of US$67,930,920. This minus US$25,727,720 was almost identical to the figure (minus US$25,662,709) included in the Kam Singh Schedule for the F & O Account as at close of business on 13 October 2008. This US$25 million is then compared with the figure recorded in that Schedule for the F & O Account as at that date, said to have underlain the (allegedly incorrect) DBX balance, of US$285,261,208. Here, Mr Foxton said, was the US$300 million differential. He appreciated of course that he had then to ‘bridge the gap’ (referred to in paragraph 23 above) between US$300 million and US$437 million which was, according to Ms Carroll, what was showing on the DBX system, in order to justify a case that authorising US$35 million would have sent it into deficit. He would need approximately a further US$100 million “error”.
The two ways in which he sought to do this, by submission, without any evidence from the Claimant, other than that I shall now mention, to support it, were as follows:
He submitted (as set out in paragraph 25 above) that there would have been a consequential (he said ‘automatic’) need for an adjustment of the Margin Requirement in the light of the allegedly unappreciated loss or disappearance of US$300 million in the F & O Account (Footnote: 4). There is no evidence about this adjustment, except that the Kam Singh Schedule, without any explanation or breakdown, adjusts upwards the figure for Margin Requirement, “after fixing errors in DBX system”, by US$100 million. It is hard to see how and why it is justified to increase the Margin Requirement by US$100 million, on top of making provision for the alleged US$300 million – that is certainly not what was done in the Brugelmann F & O Account in relation to the deficit on US$25 million, which was simply added to the previous unsecured initial margin, and, as I have said, there is no explanation of it.
Insofar as there is need to bridge the gap further between US$300 million and US$437 million, Mr Foxton refers, as mentioned in paragraph 22 above, to Mr Entwistle’s evidence (referred to in paragraph 18 above) that, had there been “escalation from Ms Carroll to other DB officers”, then they would have considered Monday trading (“intra-day market movements”), and, according to the Kam Singh Schedule, there would have been some further losses in the NAV Equity PB account, which would have then have been taken into account.
This is where Mr Foxton left the mistake at the close of his submissions: US$300 million, in some unexplained fashion, overstated in the F & O Account as recorded in the DBX system (whether because the DBX system was simply not working properly or at all, or had become disconnected from the other ledger accounts, or had omitted or misrecorded one or more transactions, is not explained) plus the consequential effect of increased Margin Requirement and, if and as necessary, reconsideration in the light of Monday trading.
There are however numerous difficulties in the way of such speculation or hypothesis, particularly in the absence of any evidence other than the Kam Singh Schedule and the Brugelmann F & O Account:
The evidence of Ms Carroll is that she would only have escalated i.e. failed to comply with the request if “the Available Cash [as at close of business on the Friday] in the cash account was lower than the total amount of the payment” (paragraph 10 of her statement). It is only therefore if such balance would have fallen below US$35 million that consideration of Monday trading would have arisen, which therefore cannot assist in ‘bridging the gap’. That means that concentration has to be in the US$120 million as at Friday (paragraph 23 above) and that Monday intra-day issues trading results cannot help.
Mr Foxton’s submission assumes that, if the alleged US$300 million error had been picked up, there would have been an adjustment to the Margin Requirement (Footnote: 5). Mr Lord relies heavily on the terms of Clause 10.7, set out in paragraph 19 above, to establish that contractually the Claimant is only entitled to refuse to pay monies to, or to the order of, SHI “on demand” in one of the eventualities there referred to, and the subclauses relied on by the Claimant are Clauses 10.7.3.3 and 10.7.3.4. This would enable them to form a reasonable belief, or a belief in its reasonable discretion, that there needs to be an increased Margin Requirement, such as to justify non-payment. The Claimant did not have such a reasonable belief at the time: and, Mr Lord submits, the Claimant’s own unilateral mistake cannot enable them, not having exercised that reasonable discretion at the time, retrospectively to do so. I shall return to this point later, but it would be an answer as to whether the Claimant can ‘bridge the gap’ between US$300 million and US$437 million. Even without such legal argument, I have already pointed out the difficulty of the absence of evidence as to in what way and why the reasonable belief would have been formed and the reasonable discretion exercised, so as to increase the Margin Requirement, whether as included in the Kam Singh Schedule, or otherwise.
Reliance by the Claimant in this regard upon the Brugelmann F & O Account of 14 October is a startling change:
It (together with the rest of the attachments) was relied upon previously as part of a case (paragraph 33(ii) of the Particulars of Claim) that Mr Vik was thereby made aware of the alleged mistake, though it is difficult to see how receipt by Mr Vik of that account can support a case that he (or Millahue through him) knew of the alleged mistake in the DBX system. Also included in the enclosures to Mr Brugelmann’s email of 14 October was a statement of what seems to have been the balance of the Equities Account, ending with a credit balance of NOK 2,987,217,354.71 (approximately US$850 million). However, the Brugelmann F & O Account is now relied upon as corroboration of the difference between the US$285 million (said in the Kam Singh Schedule to be the entry for the F & O Account forming part of the allegedly mistaken credit balance, as at close of business on 13 October, of US$331 million), as compared with the minus US$25 million.
It is further surprising that it is nowhere said by the Claimant in its witness evidence that the error was a misrecording or a mis-valuation of US$300 million in the F & O Account. On the contrary, there is a dealing with the F & O Account by Mr d’Arville in his second witness statement, at paragraphs 37 and 38:
“37. I am told by Mr Brugelmann that the second attachment to his email (…) is a statement of the value of Vik’s F & O positions. The second page of the statement shows a negative account balance of approximately USD -136.7 million which, after the value of Vik’s open position of approximately USD 111 million (…) is taken into account together with the margining requirement, leaves a margin deficit of approximately USD 67.9 million.
38. Upon receipt of this email, it would therefore have been apparent to Vik that there was a significant deficit in his F & O account and DB’s failure to issue a margin call to cover the margin deficit should have revealed to Vik that DB was mistaken as to the amount of Available Cash when it authorised the Payments. In addition, as set out at paragraph 34 above, Vik was, it is submitted, already aware of the losses that were being incurred with respect to his New York trading and that the margin calls in respect of those losses would be met by transferring sums from his Cash Account to the collateral accounts relating to the FX trading, thereby further depleting the Available Cash.”
This only illustrates or explains the alleged mistake (and Mr Vik’s alleged awareness of it) by relating it to the deficit of US$67.9 million in the Brugelmann F & O Account, which was not of course in fact an increase in a Margin Requirement, but simply an addition of the deficit of US$25 million to the initial, but seemingly now uncovered, Margin Requirement. But there is no reference to the alleged US$300 million. In the light of what Mr D’Arville there states, it is perhaps not surprising that Mr Lord, in his skeleton, in attempting to understand the Claimant’s case, understood that there was a US$67 million deficit in the F & O Account, which was implicitly being said to have been ignored, and, in looking for any further explanation of how the gap between that US$67 million and US$437 million, could be bridged, he would be directed by paragraph 38 of Mr D’Arville’s statement to look at the losses incurred with respect to New York FX trading, a matter now firmly abjured by Mr Foxton.
The next problem is the pleading at paragraphs 19 and 20, which I have set out in paragraph 15 above, without - but even with - the proposed minor underlined amendment. This asserts that “errors in DB’s calculation of the Available Cash meant that certain positions were overvalued and certain payments that were made out of [the F & O Account] … were not reflected in the [DBX] system”. It is not easy to marry this with the alleged US$300 million error. Positions (such as there were) in the F & O Account are valued on a mark to market basis.
On the second day of the hearing, two further witness statements were put in, one by either side. First there was a statement by a Mr Laws, an employee of the Claimant in the Global Exchange Services Division, who had no knowledge (or at any rate did not depose to any) of the facts of this case, but was familiar with the computer systems, and, after being referred to the Brugelmann F & O Account, with its deficit of US$-25 million, he simply says:
“5. This statement was obtained from the Global Prime website to which DB London’s clients have access. The reporting of the F & O positions within the Global Prime website is separate to the DBX system and was unaffected by the errors that DB has discovered were present in the DBX system in October 2008. The USD liquidating value figure referred to above is therefore a correct statement of the USD liquidating value of the positions under the F & O Agreement as at 13 October 2008 and is unaffected by the errors I understand were present in the DBX system at that time.”
This adds nothing to the sum of anyone’s knowledge or understanding in relation to this case, or the alleged mistake. More significant was the evidence on behalf of the Defendants in the shape of a fifth witness statement by their solicitor Mr Leslie, who explains what the investment was which is represented in the Brugelmann F & O Account as “Futures OTE” with a credit of some US$111 million (as set out in paragraph 27 above). This was, as stated above, the only investment in the account, and it consisted of a short position of 8,116 futures contracts on the Dec08 NYBT Russell 2000 mini index. Because this was a short position, it would benefit from a decline in the market prices (which of course was sadly what was happening at this dreadful time in international financial affairs): hence it had substantial value.Far from being “volatile”, it had substantially increased its value since its purchase and largely retained that value, by reference to the daily market prices, which Mr Leslie produces. It is apparent that the profitability of US$111 million is accurately reported, and that it is impossible to see how an alleged US$300 million shortfall could have anything to do with that investment. The only other item in the Brugelmann F & O Account is the “Account Balance US$136,754,600 DR.” No evidence is adduced in relation to that by Mr Kam Singh or anyone else on the Claimant’s behalf.
The Brugelmann F & O Account, containing the US$25 million and US$67.9 million negative figures was, as I have said, sent by Mr Brugelmann to Mr Vik on 14 October. There is no suggestion that Mr Brugelmann was looking at the DBX system, indeed he cannot have done, because he sent to Mr Vik what are said to be the accurate accounts, with which it is now said the DBX system was inconsistent. It is he who, at 01.57am on 14 October, sent to Mr Vik the draft transfer instruction to send the first tranche of the US$435 million over from London to bolster New York (this being something slightly short of US$100 million – itself three times as much as the US$35 million now impugned, paid out on the day before). At 09.23, later in the same morning, he sent the accurate accounts to Mr Vik, including the Brugelmann F & O Account, from which he, at least, must have deduced that there was sufficient to allow for the US$100 million which he was then asking Mr Vik to send. Further, he was, as set out in paragraph 20(iii) above, party to the alleged margin call on 22 October (after he had sent similar email draft transfer instructions to Mr Vik on 15, 17 and 21 October making up the total of US$435 million, which had been executed) in the sum of approximately US$320 million. It must either be the case that Mr Brugelmann was thus acting, and making calculations, in accordance with what was in fact, and remained, the true position of the accounts, or that, although he himself had sent the statements with the true position to Mr Vik on 14 October, he was somehow then subjected to its alleged erroneous recording in the DBX system (seemingly not yet picked up by 22 October when the margin call was made). In any event, so far as Mr Vik’s knowledge is concerned, if, notwithstanding himself sending the F & O statement to Mr Vik, Mr Brugelmann did not realise that there was, or had been, a mistake, it is difficult to see why or how Mr Vik could or should have reached such conclusion by virtue of receiving it. The accounting (and notification) obligations under the PBA were plainly the Claimant’s.
I am entirely satisfied that there is no sufficient evidence, no case with a realistic prospect of success, no serious issue to be tried, on the basis of the present evidence as to either restitution by virtue of payment under a mistake of fact, or constructive trust based on knowing receipt or retention. The only evidence given is from Ms Carroll (and not from her manager) that she believed that there was sufficient cash to meet US$35 million. It is said that there was some error in some way connected with the DBX system, which made that a mistaken belief, now crystallised as being an alleged error in the F & O Account of US$300 million, with consequential necessary adjustments (Footnote: 6). The only evidence there is from which any such mistake could be hypothesised is:
in the Kam Singh Schedule, unexplained and unsupported.
in the note of the meeting of 30 October 2008, when it was said that Mr Bouhara “outlined the operational error which [led to] the cash position of the client [being] overstated by approx EUR 215 mio”. Quite apart from the fact that this assertion of an overstatement of €215 million seems difficult to match with the alleged US$300 million shortfall in the F & O Account, Mr Bouhara, who allegedly outlined such error at the meeting, has not outlined it to the Court, nor has he caused Mr D’Arville to do so; and, in any event, insofar as this is the only evidence before the Court at all of the existence of any error, it is, as pointed out in paragraph 20(v) above, insufficient to justify the non-payment of the US$35 million, leaving, as it would, a very substantial balance of Available Cash.
The constructive trust case would not only depend upon the success of the mistake case, but, in addition, would require proof of Mr Vik’s knowledge of that mistake. Other than his having been made aware, on the assumed basis of the accuracy of the 30 October minute, of an error which would be insufficient to have rendered the payments recoverable as paid under a mistake (nor indeed is there any record of any demand for their repayment in the minute), there is, in my judgment, not a scintilla of evidence which could establish, even if there was such a mistake as the Claimant alleges, that Mr Vik had knowledge of it.
In the light of what had become clear, as above, by the close of submissions, Mr Foxton asked for an adjournment in order to obtain evidence, as he put it:
as to the existence and nature of the error in the DBX system, and as to the fact that the DBX system showed an amount incorrect by US$300 million with regard to the F & O Account, and how that came about:
as to the consequences, by way of adjusted Margin Requirement or otherwise, so as to ‘bridge the gap’ between that US$300 million and the approximately US$400 million which would require to be deducted from the US$437 million spoken to by Ms Carroll, before there could be refusal of all (or each) of the three payments.
as to the circumstances in which such alleged mistake was discovered and/or remedied and when such occurred.
He accepted that, if such an adjournment were granted, then the Claimant would have to pay the wasted costs, whether described as the costs of and occasioned by the adjournment, or otherwise. He recognised that such costs would be substantial; and, it seems to me, particularly if the case were revamped with some clear evidence as to what the mistake was, who laboured under it, and how it affected the payment, with or without the full particularity referred to in (i) to (iii) above, as the Defendants’ solicitors have been requesting, if not entreating, since July 2009, but which, Mr Foxton told me, it had been a conscious strategic decision not to give, then it could be that all or most, at any rate, of the evidence and preparation for this hearing would have been wasted. He further recognised that it would be likely that there would be an application, and if such were made, an order, for a substantial interim payment on account of such costs.
Mr Lord opposed such adjournment. His succinct words were “enough is enough”. He submitted that it would be entirely inappropriate for there to be any other result than the setting aside of the Order for these proceedings to be served out of the jurisdiction and of the service of them, when there is no case with a reasonable prospect of success at trial, and when ex parte orders have been made on the basis of such a case, with the result that non-resident defendants had been brought within the jurisdiction in order to challenge, and spent substantial sums in challenging, the existence of such a case: it is, he submitted, exactly that which the jurisdiction filter is intended to eliminate. Further he submitted that:
there was no reason to believe that a new case could be put forward: but
even if it could, it would inevitably be a different one from that which was put before the judge on the ex parte application. In this regard, he could only argue by analogy with those cases where (see Parker v Schuller [1901] 17 TLR 299 CA) a different cause of action was being relied upon in support of the service out than that upon which the service out had been granted. I am not persuaded that this would necessarily apply to a case based upon the same cause of action but substantially different or amplified facts:
nevertheless, and in any event, the Claimant should not now be given time to put forward a case which it had made, as Mr Foxton told the Court, a conscious and deliberate decision not to address by evidence, resisting requests to clarify its case for nearly a year.
the right course was for the Court to reject the present proceedings. If the Claimant had a case which it could make, then it would be free to seek fresh permission to serve out of the jurisdiction (see Parker v Schuller itself), although subject to any application that the Defendant might make that, prior to doing so, they would be expected to have satisfied any costs orders in respect of these proceedings.
For the reasons articulated by Mr Lord (save for the Parker v Schuller point) I do not consider that it is appropriate to grant an adjournment. This is a case in which the exorbitant jurisdiction of the English court is in operation, and it is not similar to a domestic case where, rather than a claim being struck out, a claimant is sometimes given a locus poeniteniae to come back with an amended, or particularised, claim, if such seems possible. No limitation point arises, such as to put the Claimant at any prejudice of losing any right it may have to bring such a claim, and, in my judgment, the differential in relation to paying all or much of the costs to date, on a wasted basis, and paying all costs of the proceedings and then starting again, may not be that substantial. However, I conclude that an adjournment is, in any event, inappropriate where:
there has been a conscious decision to ‘stick’ on evidence, which I am satisfied, for the reasons given above, is inadequate to establish a case that there was a mistake and/or that payment was made as a result of that mistake, and secondly that there was knowledge of that mistake on the part of the Defendant such as to create a case of knowing receipt.
even now there is no indication of what the answers would be in relation to the three areas identified by Mr Foxton, as set out in paragraph 32 above. Given the proximity to this Court of the London branch of the Claimant, it seems to me that at any rate some inkling of the nature of the evidence, which, in my judgment, should have been produced many months ago, could have been given in order to support the adjournment. Even in the last minute witness statement of Mr Laws, referred to in paragraph 29(iii)(d) above, he speaks only of the “errors I understand were present in the DBX system at that time”, and still vouchsafes no explanation or evidence (Footnote: 7). If the Claimant can put together a sufficient case to justify service out of the jurisdiction with regard to either of the two causes of action which the Claimant asserts, then, subject to questions of costs, it can seek to do so.
In the light of my conclusion set out at paragraph 31 above, I do not need to deal in those circumstances with Mr Lord’s two further arguments by way of challenge to the Claimant’s claim:
He submits, by reference to the “third question” in Kleinwort Benson in the passage in Lord Hope’s speech set out in paragraph 3 above, that, pursuant to Clause 10.7, the Claimant was obliged to make payment in response to SHI’s requests for the three payments, and was only entitled to withhold payment if it had the relevant reasonable belief, and the fact that (if such be the case) it did not have that reasonable belief due to its own mistake is no answer to such obligation (and to SHI’s entitlement) nor gives rise to any cause of action by the Claimant.
According to the Kam Singh Schedule, in arriving at the Available Cash there is a debit (as at close of business on Friday 10 October) of US$302,088.099 in respect of “UK PB FX position”. Mr Lord asserts, but Mr Foxton denies, that, within the ambit of the PBA, the Claimant was not entitled to take such sums into account in its calculations, being FX transactions, and, according to Mr Lord, consequently not within the definition of Transactions for the purposes of Clause 10.7.3.3, and in the light of the definitions of Securities and Transaction in Part I of the Agreement and Clause 1.1 of Part II.
The hearing was conducted by reference only to the primary, and eventually determinative, question whether there is a serious issue to be tried by reference to the merits of the two claims, and I heard Mr Lord, then Mr Foxton, then Mr Lord in response, in relation to that question. At the close of such oral submissions, I indicated what my conclusion was, reasons for which I have now given in this judgment, and asked the parties whether they wished to proceed to resolve the other questions raised by the Defendant, to which I have made brief reference in paragraph 5 above. Both Counsel agreed that they did not wish me to do so, and, after some discussion, I agreed to take that course. Even without resolving these further challenges, in the light of my conclusions there must be an order discharging the Order of Andrew Smith J for service out of the jurisdiction, discharging the service on both Defendants, and consequently dismissing the proceedings on jurisdictional grounds.