Merrill Lynch v Commune Di Verona

MR JUSTICE TEARE: This is the trial of an action in which two Merrill Lynch entities, Merrill Lynch International Bank Limited and Merrill Lynch International, seek a number of declarations against the defendant, the Comune Di Verona.

It has been an unusual trial, which took place yesterday. The defendant filed a defence saying that the claim does not disclose a cause of action, that there is no real or present dispute between the parties and that the claimant's claims are an abuse of the process of the court. Yet, despite filing such a defence, the defendant failed to attend the trial to advance those contentions.

The claimants have been represented by Mr Handyside QC. He and his junior, Mr Sher, have prepared a very full skeleton argument in which the basis of the claimant's claim and the reasons why it is appropriate to grant declaratory relief have been set out in full and commendable detail, by reference to many of the relevant modern authorities.

In addition, counsel have considered what arguments the defendant might have advanced in support of its pleaded defence and have explained why those points should not be regarded as good reasons for refusing the declaratory relief which has been sought.

The claimant's claim arises out of an amortising interest rate swap and sinking fund transaction. The transaction was initially entered into in October 2006, but was subject to an amendment or restructuring dated April 2007.

The transaction is governed by the terms of a 1992 ISDA Master Agreement and schedule thereto, dated December 2006. The transaction is governed by English law and, within the European Union, is subject to an exclusive jurisdiction clause in favour of the English courts.

The transaction derives from three earlier transactions, which it supersedes. They have been referred to as the "first", "second" and "third" transaction. The present transaction has been referred to as the "fourth transaction".

The reason why the proceedings have been commenced are to be found in (a) meetings and telephone calls between the parties in late 2009 and early 2010; and (b) media reports in Italy between October 2010 and January 2011.

The meetings and telephone calls are summarised in paragraphs 19 to 23 of the skeleton argument and are derived from the evidence of Mr Sallustio, the claimant's Italian lawyer, who gave oral evidence before the court.

It is apparent from his evidence that the defendant, in the wake of criminal investigations in Italy involving other cities and other banks, wished to restructure the transaction in a manner which did not appeal to the claimants.

When it became apparent, in March 2010, that the claimants did not agree with the suggested restructuring, the defendants said that the parties would "see each other in the relevant venues", which Mr Sallustio understood, probably correctly, as "see you in court".

These proceedings were then commenced in July 2010. In them the claimant seeks several declarations; the effect, in broad terms, being that the transaction was binding on the defendant.

The media reports to which I was referred reported that the Mayor of Verona intended to challenge the proceedings and that he had alleged that the defendant had paid more than was due. Other reports mentioned that the defendants intended "to wage war" with the claimant. Mention was made of an allegation that hidden commissions had been paid. The mayor was reported as saying that it was right that the transaction be judged in an Italian court. Those media reports are summarised in paragraph 26 of the skeleton argument.

Because the defendant's solicitor said that the media reports published after the date on which proceedings had been commenced could not be relied on by the claimants, a further action was issued, relying upon those matters in order to show that there was a dispute between the parties. The two actions have been consolidated.

In July 2011 the first CMC took place. Mr Justice David Steel made clear that if the defendant wished to raise any issue not pleaded at that time, it must do so. It could not have an argument as to whether it was appropriate to grant declaratory relief and, if it lost that argument, bring forward further allegations at a later date. An opportunity was therefore given for an amended defence by 30 September 2011. When it was served, no positive case was advanced beyond that which had already been pleaded.

At a further CMC in November 2011, I gave directions for trial of the claimant's claim for declaratory relief. The defendant informed the court that it would not be taking any steps with regard to disclosure or evidence. That has proved to be the case.

On the basis of the sole point taken in the defence, Mr Handyside has submitted that there are three Issues for the court to determine. Firstly, does the claim disclose a cause of action? Secondly, is there a real and present dispute between the claimant and the defendants? Thirdly, if so, should the court exercise its discretion to grant the declarations sought?

The first issue, therefore, is whether there is a need for there to be an independent cause of action. This arises because the defendant has not in fact failed to pay any sum which is due to the claimant.

However, as explained by Mr Handyside in paragraph 55 of his skeleton argument, there is no need for an independent cause of action. That is stated both in the notes to The White Book and in the authority of Gouriet v Union of Post Office Workers [1978] AC 435, at page 501.

The second issue to be determined is whether there is a real and present dispute between the parties. This arises because such a dispute is generally required before it is appropriate for the court to exercise its jurisdiction to grant declaratory relief; see Rolls Royce v Unite [2010] 1 WLR 318, at paragraph 120. In determining whether this requirement is satisfied, the court now takes a pragmatic approach; see Messier Dowty v Sabena [2000] 1 WLR 2040. The court looks to see whether the claimant has a real commercial interest in the declaratory relief sought; see Nokia Corporation v Interdigital Technology [2006] EWCA Civ 1618. The existence of a real and present dispute can be shown by the making of a veiled threat to issue proceedings; see L'Oreal v Johnson & Johnson [2000] ETMR 691. A fuller account of those and other authorities can be found at paragraphs 61 to 66 of the skeleton argument.

I accept Mr Handyside's submission that, on the facts of this case, which I have summarised, there has been, in reality, a threat by the defendant to commence proceedings in Italy to recover alleged overpayments and commission. The defendant's solicitors have said in correspondence that the defendant has never intended, and "as matters presently stand" does not intend to commence proceedings in Italy, but there is no evidence to that effect. What evidence there is suggests the contrary.

At paragraph 70 of his skeleton argument Mr Handyside has suggested four arguments which might have been advanced by the defendant had it been represented at the trial. They are: firstly, there is no dispute, because the defendant is continuing to make payments under swap transaction; secondly, the facts and matters pleaded in the reply relating to the discussions between the parties and the media reports are not sufficient evidence of a real or present dispute; thirdly, the matters relied upon, which postdate the original claim, cannot be relied upon; fourthly, the interviews given by the defendant and the reports in the Italian press relied upon by the claimant cannot be used as evidence to justify the proceedings, because they were allegedly responsive to the service of proceedings by the claimant in England and are therefore not significant, as to treat them as significant would be to give the claimant the benefit of the illegitimate conduct of which the defendant complains.

I do not consider that any of those arguments would avail the defendants, for the reasons set out by Mr Handyside in paragraphs 72 to 76 of the skeleton argument.

In short, there has been a very clear threat to pursue proceedings against the claimant in Italy. It is true that such intention has been disavowed by the defendant's solicitors in correspondence, but the events and media reports from late 2009 to early 2011 clearly evince such a threat.

There is nothing in the point that matters which postdated the original claim cannot be relied upon, because that defect, if it was a defect, has been cured by the second action.

There is, therefore, in the material sense, a clear and present dispute between the parties.

The third question is whether the court should exercise its discretion to grant the declarations which have been sought.

Apart from the final two declarations, the declarations sought stem from representations made by the defendant in the transaction and from other terms of the transactions; for example, the representation by the defendant that its obligations are valid and binding.

The court can be satisfied that such declarations can properly be made, because the defendant is contractually estopped from denying the truth of these matters; see JP Morgan Chase v Springwell [2010] EWCA 1221, at paragraphs 141 to 169.

The claimant has an obvious commercial interest in clarifying the validity of the transactions, which are of substantial value. The claimant has a legitimate interest in ensuring that the parties chosen forum, this court, resolves disputes concerning the transactions. In the light of the exclusive jurisdiction clause and of the Judgments Convention, which places emphasis on the court first seized, the claimant has a legitimate interest in not being harassed by proceedings against it in Italy. This is not a case where judgment is being sought in default of a defence; there has been a defence. Judgment is being sought after a trial in which evidence has been adduced.

In my judgment, the doing of justice in this case requires that the declarations which have been sought should be granted. The importance of the court doing justice is emphasised by the authorities referred to in paragraph 83 of the skeleton argument, in particular Patten v Burke Publishing [1991] 1 WLR 541, and JP Morgan v Primacom Management [2005] EWHC 2426 Com.

Having regard to the representations made by the defendant, and the other terms of the transactions, there is no injustice to the defendant in granting the declarations sought.

For those reasons, I shall make the declarations numbers 1 to 11 in the draft order. They reflect the representations and other terms of the transactions as indicated in the table of comparison between the wording of the declarations sought and the wording of the representations and terms, which has been helpfully prepared by counsel.

There are two further declarations which are sought in the draft order, they are numbers 12 and 13. It is necessary to read them.

12 is as follows:

Declaration 13 provides:

These two declarations do not derive from the representations and terms of the transactions. They are wide-ranging; in short, a declaration that the claimants have no liability to the defendants of any sort whether, contractual, tortious, fiduciary or of any other nature.

No evidence has been led on this topic for the very obvious reason that the defendant has not advanced any case that the claimant has acted in breach of any duty to the defendant.

Although the absence of evidence is understandable, the fact is that the court is being asked to make a declaration of non-liability in the absence of any evidence on the question. That seems to me to be a serious obstacle in the claimant's way.

Mr Handyside sought to get over that obstacle in this way: he submitted that the defendant should not be in a better position by reason of not having advanced a positive case of breach of duty than it would have been in had it advanced such a case. If it had pleaded a positive case of breach of duty and failed to establish it, the defendant would, as a matter of English law and res judicata, and following the principles set out in Henderson v Henderson, be estopped from thereafter advancing any other case of breach of duty.

A declaration of non-liability will simply put the claimants in the same position. That, it is said, is fair and appropriate in circumstances where Mr Justice Steel made clear that if the defendant had any such complaints about the conduct of the claimants, they should be pleaded and not reserved for some later date.

That is an attractive submission. However, I am not persuaded that it is appropriate for the court to make declarations when there is no evidence to support them. I must therefore refuse to make declarations 12 and 13.

This court cannot itself restrain the defendant from commencing proceedings in Italy. If the defendant does so, it will be a matter for the Italian courts to determine whether that should be permitted, in the light of the jurisdiction clause in the transaction documents, in the light of the fact that this court is the court first seized, pursuant to the Judgments Convention, and in the light of the declarations that the court has made.