Rolls Building
Fetter Lane, London, EC4A 1NL
Before:
THE HONOURABLE MR JUSTICE FLAUX
Between:
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DUBAI ISLAMIC BANK PJSC |
Claimant |
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-and- |
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(1) PSI ENERGY HOLDING COMPANY BSC (a Bahraini corporation) (2) RYAN CORNELIUS (3) CHARLES RIDLEY (4) EREN NIL (5) CCH EUROPE GMBH (a German corporation) |
Defendants |
Robert Anderson QC and William Edwards (instructed by Hogan Lovells LLP) for the Claimant
Max Mallin (instructed by Archerfield Partners LLP) for the First and Second Defendants
David Mills (with the permission of the Court) represented the Third Defendant
Hearing date: 15 October 2013
Judgment
The Honourable Mr Justice Flaux:
Introduction and background
On the fifth day of the trial of this matter I considered applications by the second and third defendants to amend their Defences (in the case of the second defendant by way of re-re-amendment) and to adduce expert evidence of UAE/Dubai law. On the morning after hearing the applications, I informed the parties that the applications would be refused for reasons which I would set out in a reasoned judgment to be handed down at a later date. This is that judgment.
In order to place the applications in context, it is necessary to consider the broad outline of the case and some of the procedural history. The claimant (to which I will refer as “the Bank”) provides banking and financial services in accordance with Islamic law, including short term trade finance or receivables financing. The Bank’s claim against the second, third and fourth defendants is a claim in debt for some US$432 million (after giving credit for recoveries) arising under a restructuring agreement (“the RSA”) dated 19 August 2007, which was entered into after the Bank discovered it had been a victim of a long standing fraud.
From November 2002 onwards the Bank entered into a series of Agency Agreements with the fifth defendant and its associated company, CCH plc (referred to collectively as “CCH”) as the means by which short-term trade finance would be provided to exporters. It is not in accordance with Islamic principles for the Bank to provide trade finance by way of short-term interest bearing loans. Accordingly the model used is so-called murabaha agreements: the Bank itself (through CCH as its agent) would buy the goods from the exporter, then, again through CCH as its agent, would sell the goods to the purchaser. The difference between the purchase price and the sale price represented the Bank’s profit on the transaction. The agency arrangements with CCH succeeded similar arrangements dating back to the 1980s under which the third defendant and his then business partner, Guvan Nil, the fourth defendant’s father, did murabaha deals with the Bank. After Mr Nil senior died in 2000, the fourth defendant became the third defendant’s business partner and they did murabaha deals with the Bank through CCH.
Under the Agency Agreements, once CCH had put the contractual arrangements in place, the Bank was to remit the funds required into an account in the name of CCH. The fact that funds flowed through CCH, rather than directly between the Bank and the exporter and purchaser respectively, enabled the fraud to be perpetrated. When the Bank discovered it had been the victim of fraud in the summer of 2007, it became plain that, of US$501 million outstanding ostensibly advanced for short-term receivables financing, some US$342 million had not been applied in respect of such transactions but instead in unauthorised long term projects. Two such projects are of particular relevance. The Refinery Project was a project by which the second defendant, through a Pakistan incorporated company of which he was 80% shareholder and a director, as was the fourth defendant, proposed to dismantle an oil refinery from the West and rebuild it in Pakistan.
Some US$180 million of the monies needed to finance the Refinery Project came from funds advanced by the Bank for receivables financing, but which the third defendant via CCH advanced to the second defendant for the Refinery Project. Although the second defendant in these proceedings denies being aware that any fraud was being perpetrated, at the time the fraud was discovered when he was interviewed by the Bank and its solicitors, he said that the third defendant told him that false invoices needed to be generated to maintain funding. The second defendant obliged by providing false documentation.
According to the account provided to the Bank and its solicitors by the third defendant at the time the fraud was discovered, the costs of the Refinery Project escalated and CCH attempted to trade out of its difficulties by investing more of the Bank’s monies in other unauthorised but shorter term projects. These included the Plantation Project under which in January 2004, Mr Arthur Fitzwilliam had obtained a lease (hereafter referred to as “the Lease”) of 1.86 square kilometres of desert land on the outskirts of Dubai (forming part of Dubailand) from the Dubai Development and Investment Authority. A special purpose vehicle, Plantation Holdings (FZ) LLC (“Plantation”), was incorporated (in which Mr Fitzwilliam held a 70% shareholding and the second defendant held a 30% shareholding on behalf of himself and the third defendant, in equal shares) to carry out the Plantation Project, which was to be a world class polo and equestrian centre, with a hotel and luxury residential villas and apartments. It is clear that several million dollars of the Bank’s monies were absorbed into the Plantation Project in an unauthorised fashion, notwithstanding which, at the time the RSA was entered in August 2007 (and indeed a year later when the Bank enforced its security) the Project was still in its early stages and construction had barely started, with only some road infrastructure completed and polo fields laid out.
Because the monies provided by the Bank to CCH were supposed to be expended in short-term trade finance transactions, it was necessary, as I have already noted, for false documentation to be created and CCH had to “churn” the Bank’s money, that is invent new transactions for which the Bank provided funds, which were then used to pay off the existing fictional transactions. Once the flow of funds was stopped in July 2007 after Mr Naveed Ali took over responsibility at the Bank for the CCH relationship and began to investigate transactions, the almost immediate result was a default on an invoice on the CCH account which should not have occurred if these were independent, genuine, transactions.
Thereafter, negotiations took place with the defendants and Mr Fitzwilliam with a view to a global settlement under which terms would be agreed for the repayment of the US$501 million outstanding and owing to the Bank (“the Rescheduling Amount”). All parties were represented by English solicitors in those negotiations, which eventuated in the RSA, to which the Bank, the two CCH companies, the second, third and fourth defendants, Plantation and Mr Fitzwilliam were parties. In broad terms, the CCH companies agreed to repay the Bank in instalments (CCH Europe for the full amount and CCH plc for US$50 million). However, the obligation to repay the Rescheduling Amount was not only placed upon CCH but, pursuant to clause 7.2, upon all the non-Bank parties except Mr Fitzwilliam to cause non-CCH assets and income streams to be applied against the Rescheduling Amount, specifically the proceeds of the sale of Plantation villas in so far as they exceeded US$150,000 per month.
By clause 6.1 of the RSA, the second, third and fourth defendants assumed two critical obligations: (i) they “jointly and severally and as continuing security guarantee[d] the repayment of the Rescheduling Amount” and (ii) they undertook “jointly and severally [to] indemnify the Bank as principal debtors in respect of any failure or inability to recover the Rescheduling Amount as provided for herein”. Detailed provisions concerning the liability by way of both guarantee and indemnity are contained in Schedule 5 to the RSA, limiting the scope of any defence that might otherwise be available. Clause 8 of the RSA set out the security that was to be provided to the Bank to secure the liabilities of the non-Bank parties except Mr Fitzwilliam. In particular, under clause 8.2: “Plantation shall (and Arthur Fitzwilliam shall procure that Plantation shall) grant to the Bank: (a) a first ranking charge, by way of conditional assignment of the Lease”.
Clause 18 contained detailed provisions for Events of Default and Enforcement events, including at 18.4 an acceleration clause. It is neither necessary nor appropriate in this judgment to look at these provisions in detail, save to note that, on 4 and 9 June 2008, the Bank served two notices of default under these provisions. Whether or not the Bank was entitled to do so is a hotly contested issue in the current trial.
Finally, under clause 27 of the RSA, that Agreement was governed by and construed in accordance with English law “save in so far as inconsistent with the principles of Sharia law”. As a matter of English law, that proviso is of no effect, as a religious law can never apply as the applicable law, so that in construing the RSA, Sharia law is irrelevant: see the decisions of the Court of Appeal in Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain EC [2004] EWCA Civ 19; [2004] 1 WLR 1784 per Potter LJ at [54]-[55] and Halpern v Halpern [2007] EWCA Civ 291; [2008] QB 195 per Waller LJ at [29]. By clause 27, all disputes under the RSA were also subject to the exclusive jurisdiction of the English courts.
On the same day as the RSA was entered into, the Bank, Plantation and the Dubai Tourism and Development Company entered into a Conditional Assignment of the Lease which was governed by UAE law and Dubai law and subject to the exclusive jurisdiction of the Dubai courts. Clause 4.4 of the Conditional Assignment provided that, in the event of a conflict between the terms of the RSA and the Conditional Assignment, the latter was to prevail. For present purposes, it is important to note that, with the exception of Plantation, none of the non-Bank parties to the RSA (and specifically the second and third defendants) was a Party to the Conditional Assignment.
For the purposes of the present judgment, it is only necessary to note that from early 2008, relations began to sour between the Bank and the defendants, particularly the second and third defendants. They were arrested and imprisoned by the Dubai authorities on criminal charges of fraud on 21 May and 27 May 2008 respectively, followed by Mr Fitzwilliam on 6 June 2008. One of the issues I shall have to determine at the current trial is whether, as the second and third defendants allege, those arrests and imprisonment were made at the Bank’s request in order to engineer a situation where the Bank could declare Events of Default, leaving the defendants little if any possibility of remedying any default and enabling the Bank to enforce against security under the RSA, specifically to enforce the Conditional Assignment and thereby take over Plantation.
As already noted, the Bank did send Notices of Breach on 4 June 2008 and 9 June 2008. The latter notice is of particular significance since it was a notice to Plantation, care of its solicitors, Clifford Chance, that it was in default of clause 7.2(d) of the RSA in having failed to pay to the Bank the equivalent of some US$4 million of Plantation villa proceeds. The notice gave Plantation 15 business days to remedy the default. There is a dispute in the current trial as to whether there was a default at all, but, at all events, Plantation did not pay any villa proceeds over to the Bank. On 20 July 2008, the Bank gave notice to Plantation that a so-called Plantation Enforcement Event had occurred under the RSA entitling the Bank to enforce its security over the Plantation land and on 21 July 2008, it gave notice to the second, third and fourth defendants that it was accelerating repayment of the Rescheduling Amount and demanded immediate payment of US440.8 million then outstanding (some US$60 million of the monies due under the RSA having been repaid).
The Bank did not take physical possession of the Plantation land until 4 November 2008. Thereafter, the Bank neither developed nor sold the Lease. Its case is that this was because of the crash in property values in Dubai following the world economic downturn and that, whatever value the Lease had in 2008, it is now valueless or worth very little. That is disputed by the defendants who contend that the Bank is at fault for failing to sell the Lease. Again, that is an issue which will require resolution.
In the meantime, the second, third and fourth defendants (the latter in his absence) and Mr Fitzwilliam were prosecuted in Dubai for the fraud perpetrated on the Bank. With the exception of Mr Fitzwilliam, who was acquitted and released from prison in 2011, they were all convicted and the second and third defendants are currently serving substantial terms of imprisonment in Dubai.
The need for the present application
The Claim Form in the present proceedings was issued on 6 October 2010 and the original Particulars of Claim were served in April 2011. The second and third defendants have inevitably encountered logistical and funding difficulties in defending the proceedings from prison in Dubai. Notwithstanding those difficulties, in December 2011 the second defendant served a detailed Defence drafted and signed by Mr Mallin. A number of defences were raised but the one which is relevant for present purposes is the plea at [42] that any liability of the second defendant under the RSA had been discharged by the fact that the Rescheduling Amount was satisfied by the Bank’s appropriation of the Plantation security. Specifically, it was pleaded that once the irrevocable assignment had taken place pursuant to clause 3.1 of the Conditional Assignment, the Bank became the absolute owner of the Lease. It was originally pleaded that it was an implied term of the RSA and/or the Conditional Assignment that in the event the Lease was not sold within a reasonable period of its assignment, the amount of any indebtedness would be extinguished or reduced pro tanto by the value of the Lease at the time of its assignment.
By an amendment to that paragraph served very recently pursuant to permission granted by me at the pre-trial hearing on 1 October 2013, it was pleaded: “In accordance with the law of the UAE/Dubai (which will be fully particularised by the second defendant’s expert report) the [Bank] received the value of Plantation as repayment of any indebtedness under the RSA. In fact, the value of Plantation at the time of the said transfer far exceeded the amount of any possible indebtedness under the RSA with the result that any such indebtedness was thereby repaid in full.” Mr Robert Anderson QC on behalf of the Bank opposed the calling of the expert evidence referred to in that plea, on the grounds that the second defendant had failed to serve his expert report on UAE/Dubai law by 6 September 2013 in accordance with the Order of Popplewell J at the case management conference on 26 July 2013. Mr Mallin explained to me that the delay in service of the report of his expert, Dr Makkawi, had been caused by the funding difficulties to which I have already alluded.
That plea would of course only be a proper one to make if supported by expert evidence of UAE law. During the course of the present application, Mr Mallin told me and I accept, that the plea was based on what the second defendant’s English lawyers thought was the expert evidence their UAE lawyer Dr Makkawi would give. That makes his complete volte face when his report was eventually exchanged late on Friday 11 October 2013 all the more inexplicable.
A similar pleading was contained in [61]-[62] of the Amended Defence of the third defendant, dated 3 July 2012, drafted and signed by Lindsay Boswell QC. This asserted in essence that if (which the third defendant denied) the Bank had been entitled to declare that a Plantation Enforcement Event had occurred and to exercise its rights under the Conditional Assignment, the Bank became absolute owner of Plantation and obtained the value of the Plantation Lease in July 2008.
At the pre-trial hearing on 1 October 2013, I gave permission to the second defendant to call expert evidence of UAE/Dubai law despite its lateness. It was agreed that expert evidence of UAE law would be exchanged on 10 October 2013, with a view to any oral expert evidence being given in the week of 21 October 2013. However, at the outset of the trial, in the exercise of my case management powers, I indicated that, at an appropriate moment before any actual expert evidence was called, I would hear submissions on the issue whether, given that the debt for which the Conditional Assignment was security was governed by English law, how UAE/Dubai law would treat the Conditional assignment was irrelevant and so the expert evidence was unnecessary. It was subsequently agreed with the parties that legal argument would be heard on Tuesday 15 October 2013.
In preparation for that hearing, Mr Anderson QC produced supplementary written submissions in support of the Bank’s case that: (a) since the RSA and thus the debt was governed by English law, the question of the effect on the debt of enforcement of the security for it was also a matter for English law; (b) English law would treat the Conditional Assignment as a mortgage, as reflected in the wording of clause 8 of the RSA which described it as a “first charge” and, as a matter of English law, the Bank should only have to give credit against the debt for actual recoveries from the security, for example if the Plantation land were sold; and (c) the fact that the law governing the security, UAE/Dubai law, would treat the exercise by the Bank of its rights under the Conditional Assignment as an absolute assignment conferring ownership on the Bank and regard its value as at the date of taking possession as extinguishing or reducing the debt even though that value had not been realised by a sale at that date, was wholly irrelevant.
In support of those propositions, Mr Anderson QC relied upon a line of cases which he described as of considerable authority but rather obscure, which established that an English law contract to mortgage or charge foreign land takes effect in England as an English mortgage or charge, with all the rights and liabilities attached to such a mortgage or charge, even if the foreign law does not recognise the equity of redemption or the validity of the security interest created. Of these cases, Lord Cranstown v Johnston (1796) 3 Ves Jun 170, Re Courtney ex parte Pollard (1840) Mont & Ch 239 and British South Africa Co v De Beers Consolidated Mines Ltd [1910] Ch 502, it is only necessary for present purposes to consider the judgments in the Court of Appeal in the last case.
Sir Herbert Cozens-Hardy MR stated the principle at 514:
“To take a simple case, if A. by an English contract agreed to give a mortgage to secure an English debt upon land in a foreign country, the law of which country does not recognize the existence of what we call an equity of redemption, which was the case of our common law, and if a mortgage was given and duly perfected according to the lex situs, I feel no doubt that our Courts would restrain the mortgagee from exercising the rights given by the foreign law and would treat the transaction as a mortgage in the sense in which that word is used by us. In doing this our Courts would not in any way interfere with the lex situs, but would by injunction, and if necessary by process of contempt, restrain the mortgagee from asserting those rights. Similar observations would apply to a trustee, if the lex situs does not recognize trusts.”
To the same effect is a passage in the judgment of Farwell LJ at 517-8:
“Then it is said that our Courts must apply the lex situs to the land in Southern Rhodesia, and this is true to the extent that our judgment cannot directly affect land out of the jurisdiction. But the jurisdiction in personam is too well settled to need discussion: the case comes before us on a claim for specific performance, and it is quite plain, as Lord Cottenham says in Ex parte Pollard, that our Courts “in the exercise of their jurisdiction over contracts made here, or in administering equities between parties residing here, act upon their own rules, and are not influenced by any consideration of what the effect of such contracts might be in the country where the lands are situate, or of the manner in which the Courts of such countries might deal with such equities.” Here the Court is dealing with an English contract to give a charge on property, which includes some foreign property: such a charge must be one in accordance with English law and must not contravene any principle of justice adopted here: in settling a charge in such a case the Court would no more allow the insertion of a clog on, than it would allow the total elimination of, the power to redeem. The same principle on which the Court of Chancery acting in personam compelled the mortgagee whose estate had become absolute at law to treat it as a security only and to restore it on payment in full of all that was due enables this Court to compel the mortgagee of foreign land under an English contract to mortgage to treat such land as a security only and redeemable on the terms which this Court considers equitable.”
There is a passage to similar effect in the judgment of Kennedy LJ at 523-4:
“If it is apparent that the contract affects immovables situated out of the jurisdiction, the lex loci rei sitæ, in general at least, must be taken as the proper law of the contract. In the case of a contract with regard to an immovable, “its proper law is, in general but not necessarily, the law of the country where the immovable is situate”: see Dicey, Conflict of Laws, 2nd ed. p. 510. But whilst I believe it to be true that an English Court will not assume jurisdiction to deal directly with either the property in or the possession of real estate which forms part of a foreign country or a colony, as I had occasion to point out in the recent case of Bank of Africa v. Cohen in the judgment which was read by the appellants' counsel in the course of his argument, yet, as I there also pointed out, when an English Court has before it parties to a contract affecting immovables out of the jurisdiction, it will, acting in personam and not in rem, “upon the conscience,” as it has been put, “of the person living here,” when it finds an equitable right enforceable by a judgment in personam, give effect to that equitable right, and so indirectly affect the interests of the litigants in immovable property abroad. Our Courts in so acting may possibly be found, I think, to be paying to the lex loci rei sitæ less regard than would be paid to it by the jurisprudence of some foreign countries. But this Court has to administer the law of England as established by authoritative decisions, and the law which I have just stated appears to me to be fully established by the judgments in Lord Cranstown v. Johnston and Ex parte Pollard.”
I agree with Mr Anderson QC that the effect of the application of that principle in the present case is that the English courts would never treat the Bank as having become the absolute owner of the Plantation land, even if a Dubai court would, so that there is no basis for applying the consequences that would follow under Dubai law from such treatment. It can make no difference to the application of the principle that the party seeking to rely upon it is the mortgagee rather than the mortgagor seeking to invoke the equity of redemption.
When the report of Dr Makkawi was eventually served on the afternoon of Friday 11 October 2013, it emerged that he did not support the pleading of UAE/Dubai law for which I had given permission to amend only ten days earlier. On the contrary, he expressly disavowed that case and put forward a different proposition of UAE/Dubai law, to the effect that there had been an unlawful misappropriation of the Plantation land by the Bank and that the value of the property misappropriated was to be assessed at the date of the misappropriation in 2008, so that, on the assumption that the Plantation land was worth more than the outstanding debt at that date, the debt was extinguished.
It will be necessary to consider this report in more detail later in this judgment, but for the present I simply note that nowhere in the report is there any explanation for how it was that he had previously provided advice on which the pleading for which I gave permission to amend on 1 October 2013 was based, and yet he had now performed a complete volte face. At all events, whatever the reason for that volte face, it means that the pleading for which I gave permission to amend is unsustainable. Accordingly, if the second defendant wishes to maintain a case that the effect of UAE/Dubai law is that, upon alleged misappropriation of the Plantation land by the Bank in 2008, the debt was extinguished, he needs to obtain further permission to re-amend his Defence.
Recognising that permission was required, Mr Mallin attached to his skeleton argument for the legal argument served late on Sunday 13 October a draft re-amendment which deleted the pleading of an irrevocable assignment by which the Bank became the absolute owner of the Lease so that in accordance with UAE law the Bank received the value of Plantation as the repayment of any indebtedness under the RSA. The plea now sought to be put forward is said to be based on the conclusions in [53] of Dr Makkawi’s report and asserts that the Conditional Assignment gave the Bank no right of possession or ownership, so that the Bank’s appropriation of the Lease by taking possession was a usurpation under UAE law, the effect of which was that the value of the Lease at the time of the usurpation must be applied in diminution of the Rescheduling Amount.
Although Mr Mills for the third defendant has not produced a draft amendment to the third defendant’s Defence, he also sought permission to amend to plead the same case on UAE law as the second defendant. Thus, I have considered the legal argument as to the relevance of UAE law in the context of applications for permission to amend the respective Defences of the second and third defendants.
The present application
Before considering the expert report of Dr Makkawi in more detail, it is important to have in mind the principles which the court should apply in considering whether to permit late amendments to the pleadings. Mr Anderson QC relied upon the decision of the Court of Appeal in Swain-Mason v Mills & Reeve [2011] EWCA Civ 14; [2011] 1 WLR 2735 and, specifically, the judgment of Lloyd LJ at [68]-[72]:
“68 Mr Simpson showed us a decision of the Court of Appeal, powerfully constituted by Lord Bingham LCJ, Peter Gibson LJ and Waller LJ, in Worldwide Corporation Ltd v GPT Ltd, [1998] EWCA Civ 1894, decided on 2 December 1998. It seems to me unfortunate and surprising that this case features neither in any report nor in the notes to the White Book. Searches on electronic databases reveal that it was referred to and followed in at least six cases in the Court of Appeal between 1999 and 2004, as well as in a number of first instance decisions. Particularly worthy of note is the endorsement in paragraph 79 of the judgment of Rix LJ in Savings & Investment Bank Ltd v Fincken [2003] EWCA Civ 1630:
‘As a postscript I would add that, although decided prior to the introduction of the CPR and concerned with an egregious application to change direction in the course of trial itself, the judgment of this court in Worldwide Corporation Ltd v. GPT Limited contains a full compendium of citation of authorities as at that date which emphasises that, even before the CPR, the older view that amendments should be allowed as of right if they could be compensated in costs without injustice had made way for a view which paid greater regard to all the circumstances which are now summed up in the overriding objective.’
69 The appeal in Worldwide Corporation v GPT Ltd was by the Claimants against the refusal of Moore-Bick J in the Commercial Court to permit amendments to the claim in the first week or so of the trial, amendments prompted not by discovery of some unsuspected evidence or fact but by a re-appraisal by newly instructed Counsel of the merits of the case. It was said that he felt that the case previously pleaded would fail and that only by way of the amendment could the case be put on an arguable basis. Waller LJ gave the judgment of the court, setting out the reasons why the appeal had been dismissed. Mr Stanley Brodie Q.C. for the Claimants relied on observations as to the generous approach of the court to amendments required to enable the true issues between the parties to be resolved, so long as any injustice can be avoided, mainly by terms as to costs: Bowen LJ in Cropper v Smith (1884) 26 Ch. D. 700 at 710-711 is one of the classic statements of this attitude. Another is that of Brett MR in Clarapede & Co v Commercial Union Association (1883) 32 WR 262 at 263. More recent statements include that of Millett LJ in Gale v Superdrug Stores plc [1996] 1 WLR 1089 at 1098 and following. The court in Worldwide Corporation v GPT said this about this attitude:
‘We are doubtful whether even applying the principle stated by Bowen LJ, the matter is so straightforward as Mr Brodie would seek to persuade us. But, in addition, in previous eras it was more readily assumed that if the amending party paid his opponent the costs of an adjournment that was sufficient compensation to that opponent. In the modern era it is more readily recognised that in truth the payment of the costs of an adjournment may well not adequately compensate someone who is desirous of being rid of a piece of litigation which has been hanging over his head for some time, and may not adequately compensate him for being totally (and we are afraid there are no better words for it) "mucked about" at the last moment. Furthermore the courts are now much more conscious that in assessing the justice of a particular case the disruption caused to other litigants by last minute adjournments and last minute applications have also to be brought into the scales.’
70 Later in the judgment the court said this under the heading ‘Approach to last minute amendments’:
‘Where a party has had many months to consider how he wants to put his case and where it is not by virtue of some new factor appearing from some disclosure only recently made, why, one asks rhetorically, should he be entitled to cause the trial to be delayed so far as his opponent is concerned and why should he be entitled to cause inconvenience to other litigants? The only answer which can be given and which, Mr Brodie has suggested, applies in the instant case is that without the amendment a serious injustice may be done because the new case is the only way the case can be argued, and it raises the true issue between the parties which justice requires should be decided.
We accept that at the end of the day a balance has to be struck. The court is concerned with doing justice, but justice to all litigants, and thus where a last minute amendment is sought with the consequences indicated, the onus will be a heavy one on the amending party to show the strength of the new case and why justice both to him, his opponent and other litigants requires him to be able to pursue it.’
71 The court also recognised, as I do, the reluctance with which an appellate court will interfere with discretionary case management decisions, perhaps especially those of a trial judge.
72 As the court said, it is always a question of striking a balance. I would not accept that the court in that case sought to lay down an inflexible rule that a very late amendment to plead a new case, not resulting from some late disclosure or new evidence, can only be justified on the basis that the existing case cannot succeed and the new case is the only arguable way of putting forward the claim. That would be too dogmatic an approach to a question which is always one of balancing the relevant factors. However, I do accept that the court is and should be less ready to allow a very late amendment than it used to be in former times, and that a heavy onus lies on a party seeking to make a very late amendment to justify it, as regards his own position, that of the other parties to the litigation, and that of other litigants in other cases before the court.”
It seems to me that, adopting the approach which that case advocates, there is a balancing exercise which involves doing justice between the parties whilst having regard to the interests of other litigants. I recognise that the second and third defendants are in prison in Dubai and have inevitable funding difficulties, but whilst that no doubt explains why expert evidence on UAE law was served late and therefore goes some way towards justifying the late service of a pleading relying upon that expert evidence, what remains unexplained is the apparent volte face by Dr Makkawi and consequent need for yet another very late amendment. Having granted the second and third defendants one indulgence of serving a late amendment on 1 October, it seems to me the court should be sceptical and reluctant to grant yet another indulgence of serving a very late re-amendment completely contradicting the pleading for which permission was so recently given, particularly where the reason for the volte face remains unexplained.
It follows that I would have been disinclined to allow the proposed amendments anyway, on the grounds that they came far too late. However, even if I had been prepared to permit such late amendments, it would only have been on the basis that the second and third defendants discharged the heavy onus on the amending party recognised by the Court of Appeal in Swain-Mason. At the very least this involves the second and third defendants demonstrating that the proposed amendment gives rise to a defence which has a real prospect of success. In my judgment, for the reasons set out below, this proposed amendment does not give rise to any sort of arguable defence, let alone one with a real prospect of success.
Regrettably the report of Dr Makkawi is not as clear as it might be but he seems to be saying now:
Whilst the Conditional Assignment is an agreement, as a matter of UAE law it does not provide protection as either an assignment or a secured mortgage. The bank had no right to possession of the Plantation land, and its appropriation of that land was a wrongful usurpation. Under the Civil Code of the UAE, the Bank is bound to return the property to Plantation and, to the extent that the property has been diminished in value or damaged by the usurpation, the Bank must make good or pay damages for any shortfall in value ([45] and [48]-[49] of his report).
The way to give effect to the agreement in the Conditional Assignment would be by a sale of the Lease either by agreement with Plantation or, absent such agreement, by the Bank commencing legal proceedings in Dubai to attach the Plantation land and sell it through the Court, in which case the property would “in normal circumstances” be evaluated at the time of default or the institution of proceedings ([52]-[53] of his report).
Although this third point is far from clear, Dr Makkawi seems to be saying that where the Bank has not applied to the Court in the UAE for attachment and sale, there is an appropriation (or as Mr Mallin characterises it, a misappropriation) in which case there is an evaluation of the value of the property as at the time of the appropriation [i.e. in 2008] ([53] of his report).
If the sale price or the evaluation price in the case of an appropriation is equal to the debt then the Bank will have received the amount outstanding and the debt will be discharged. If it is less than the amount of the debt, the debtors [i.e. for present purposes the second and third defendants] will be liable to pay the balance to the Bank ([53] and [75] of his report).
In my view, there is considerable force in Mr Anderson’s submission that what Dr Makkawi is describing in [51] to [53] of his report is what the procedure would be in a Dubai court if the matter were before that Court rather than stating that, in the event that the Plantation land was equal in value to or worth more than the debt as at the date of appropriation, the debt is discharged by operation of law. That much seems to me to emerge from [54] of the report:
“This final outcome will only be an issue of fact, I suppose, before the Court in the UK when addressing the issue of discharge of the debt under the RSA which is governed by English law. If the debt expires through arrangements under the CA, then it is discharged under the RSA as a matter of fact.”
Having said that, for the purposes of the present application I am prepared to assume in the second and third defendants’ favour that the effect of Dr Makkawi’s evidence is as Mr Mallin contends and that, as a matter of UAE/Dubai law (on the assumption that the Lease was worth more than the amount outstanding at the date of appropriation in 2008), the debt has been discharged. However, even assuming that issue in the second and third defendants’ favour, in my judgment it is irrelevant and does not provide a defence to those defendants in the present proceedings. This is because of the application of two related principles of English law.
The first principle is that where a debt is governed by English law, as in the present case, the question whether the debt has been discharged is also a matter for English law. Where English law would not regard the Bank having taken possession of the Plantation land without having in any sense realised its value by a sale as discharging the debt, the fact that a foreign law (whether as the lex loci situs of the land constituting the security or otherwise) would regard the debt as discharged does not provide the debtor with a defence.
Thus, it is well-established that an obligation to pay under a contract governed by English law is not extinguished by the fact that a foreign bankruptcy law (which is not the applicable law of the relevant debt or contractual obligation) would regard the obligation as discharged: see the decision of the Court of Appeal in Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 899 followed and applied many times since, most recently by Teare J in Global Distressed Alpha Fund v PT Bakrie Investindo [2011] EWHC 256 (Comm); [2011] 1 WLR 2038 at [11]-[13] (where the earlier authorities are summarised) and [25]-[27] (refusing an invitation not to follow the Antony Gibbs case) and by myself in Erste Bank v Red October [2013] EWHC 2926 (Comm) at [126].
Equally, a law or act of a foreign legislature, albeit that of the place of incorporation or domicile of the debtor cannot discharge the debtor or its guarantor from its obligation to pay a debt or other contractual obligation governed by English law: see the decision of the House of Lords in Adams v National Bank of Greece [1961] AC 255. Two passages from the speech of Lord Reid enunciate this principle:
“We do not refuse in all cases to recognise a moratorium in force in a foreign country: when an action is brought here for money payable in England we recognise it as affecting rights of which the proper law is the law of that country but we do not recognise it as affecting rights of which the proper law is English law (at 279-280).
As I have already said, it is well settled that English law cannot give effect to a foreign law which discharges an English liability to pay money in England and the appellants' contracts were English contracts under which they were to be paid in England (at 282).
Lord Denning states the same principle at 286-7:
“Sellers J. held that the proper law of these Greek bonds is English law and his ruling on this point has never since been challenged. It follows that the bonds must be paid according to their terms by English law. No Act of the Greek legislature can suspend the obligation to pay; nor can it discharge the debtor or the guarantor from their duty to honour the bonds.
All that happened in 1956 was that the Greek legislature by law 3504 attempted to discharge it from some of the liabilities it had assumed. But this could have no effect on these bonds. They were governed by English law; and the liabilities under them cannot be discharged by foreign legislation: see Anthony Gibbs & Sons v. Société Industrielle et Commerciale des Métaux.”
When pressed by me as to how he could distinguish these authorities, Mr Mallin submitted that the difference between those cases and the present case was that the system of law applicable to the security in the present case was one contractually agreed by the Bank under the Conditional Assignment and not simply the lex loci situs of the security as in the British South Africa Co case. That argument is based upon a fallacy which is highlighted by the second principle of English law applicable here, that since the second and third defendants are not parties to the Conditional Assignment, they cannot rely upon defences which might be available to Plantation under the Conditional Assignment as a matter of UAE law as discharging them from liability whether as guarantors or as sureties.
This principle in fact emerges most clearly from the decision of the Court of Appeal of New South Wales in Lord v Direct Acceptance Corporation Ltd (1993) 32 NSWLR 362. Although that is an Australian case, the Court followed and applied a decision of the Divisional Court in Bowyear v Pawson so that the statement of the principle by Sheller JA at 371F-372B equally represents English law:
“Me and Angus Pty Ltd was owed the amount of the deposit by Direct Acceptance Corporation Ltd and was entitled to be repaid that amount if and when the principal debt was repaid unless Direct Acceptance Corporation Ltd, in its absolute discretion, appropriated the deposit in satisfaction of the principal debt. I can see no basis whatever in equity for permitting the appellant guarantor to set off the amount of that deposit against his liability to Direct Acceptance Corporation Ltd under the guarantee. Indeed to do so would be to ignore the principle that when a surety is sued by a creditor in an action to enforce the guarantee the surety cannot set off a claim which a co-surety has against the creditor arising from a separate transaction: see Bowyear v Pawson (1881) 6 QBD 540. In that case the Divisional Court (at 544) pointed to the inability of the defendant to show that he had any right to call on a co-obligor to appropriate the debt due to him from the plaintiff to the exoneration of the defendant nor any contract with the plaintiff to accept a set off of the co-obligor’s debt as a discharge of the defendant. This was merely an attempt to enforce indirectly any claim the guarantor might have to contribution from the co-surety.”
Even though in commercial terms the RSA and the Conditional Assignment are related, in the sense that the Conditional Assignment was the means by which Plantation provided the security which it had undertaken the Bank would have by way of mortgage, they are nonetheless separate transactions. It is important to have in mind that the RSA creates the debt and the Conditional Assignment is only a security interest securing the debt, which English law would always regard as a mortgage subject to the equity of redemption: see per Lord Neuberger in Cukurova Finance International Limited v Alfa Telecom Turkey Limited [2013] UKPC 20 at [74]:
“As Sir George Jessel MR put it in characteristic terms in Campbell v Holyland (1877) 7 Ch D 166, 171,
‘The principle in a Court of Equity has always been that, though a mortgage is in form an absolute conveyance when the condition is broken, in equity it is always security; and … the doctrine arose when mortgages were made in the form of a conditional conveyance, the condition being that if the money was not paid at the day, the estate should become the estate of the mortgagee; that was the contract of the parties; yet Courts of Equity interfered with actual contract to this extent, by saying there was a paramount intention that the estate should be security, and that the mortgage money should be a debt; and they gave relief in the shape of redemption on that principle’.
As Harman LJ explained in Grangeside Properties Ltd v Collingwoods Securities Ltd [1964] 1 WLR 139, 142-143, "Chancery would treat as a mortgage that which was intended to be a conveyance by way of security … . Once a mortgage always a mortgage, and nothing but a mortgage" – and see eg per Lord Lindley in Samuel v Jarrah Timber Wood and Paving Corporation Ltd [1904] AC 323 , 329 to the same effect.”
Furthermore, as I have emphasised, the second and third defendants are not parties to the Conditional Assignment. Mr Mallin cannot overcome that fundamental obstacle by contending, as he did, that there has been a discharge of the debt by agreement between the parties. Even if there has been a discharge of the debt between the Bank and Plantation because the Conditional Assignment is governed by UAE law, the second and third defendants are not entitled to avail themselves of that defence because they are not parties to the contract in question. As Mr Anderson QC correctly submitted, in the present case there is no mutuality between any claim or defence Plantation might have against the Bank under UAE/Dubai law and the second and third defendants’ obligation to discharge the debt. As a matter of English law, which governs the RSA and the debt, the taking of possession of the Plantation land by the Bank has not extinguished or reduced the debt because the Bank has not realised the value of the security by a sale or otherwise. The fact that UAE/Dubai law would or might reach a different conclusion is wholly irrelevant for the reasons I have given.
Conclusion
It follows that the proposed amendment does not give rise to a defence which has a real prospect of success and the expert evidence from Dr Makkawi is irrelevant and inadmissible. The application by the second and third defendants to amend their defences is refused as is the application to adduce the expert evidence of Dr Makkawi.