Mr Justice Hamblen :
Introduction
- This is an application by the Claimant ("the Bank") for summary judgment against the Second to Fourth Defendants. The claim against them is a debt claim for US$440 million arising under a Restructuring Agreement entered into on 19 August 2007 under which the Defendants assumed guarantee obligations.
The factual background
The RSA
- The Bank's case is that it was the victim of a US$330 million receivables fraud perpetrated by the Second to Fifth Defendants (Mr Cornelius, Mr Ridley, Mr Nil and CCH Europe). From 2002 onwards, the Bank (which is 30% state owned) entered into trade financing arrangements with CCH Europe. If operated as intended, CCH Europe (acting as the Bank's agent) was to enter into trade finance contracts with third parties and the Bank was to provide funding. From around 2002 to 2007 the Bank advanced around US$500 million to CCH Europe (or its parent company). These funds, so the Bank thought, were being applied for the purpose of legitimate trade financing.
- It turned out that a substantial proportion of the monies advanced were not used to fund trade finance transactions despite documentation to that effect being presented. The Bank discovered this in around the summer of 2007. Of the sums advanced by the Bank, only around US$160 million had been applied to fund trade finance transactions. The rest, some US$330 million, had been diverted to companies controlled by Mr Cornelius.
- In the second witness statement of Mr David Mills made with the authority of Mr Ridley it is stated as follows:
"Mr Ridley, whose career has been predominately in trade finance in the Middle East, was party to a receivables fraud pursuant to trade financing arrangements made by the Bank with the Fifth Defendant, CCH (Europe) GmbH, and its parent company in 2002. That fraud involved the presentation to the Bank of false documentation.
The fraud was brought to the attention of the Bank in 2007 by Mr Ridley himself, who recognised the failure of the genuine business schemes in which the Bank's funds had been invested to generate the revenues necessary to repay the Bank. The fraud forms the background to the two agreements of the summer of 2007, but the Bank in comprehensive terms (cl. 12.4 of the RSA) waived and compromised all its claims against Mr Ridley and the other parties. The purpose of the RSA was to ensure that the Bank was repaid all that was owed."
- The discovery of this deception and misuse of funds led to a Restructuring Agreement dated 19 August 2007 ("the RSA") between the Bank and (among others) the Second to Fifth Defendants. The agreement is governed by English law and subject to an English jurisdiction clause. Under that agreement, CCH Europe agreed to repay about US$501 million in accordance with a repayment schedule. Messrs Cornelius, Ridley and Nil guaranteed this repayment obligation, as well as agreeing to disclose their assets and provide security over and transfer to the Bank all proceeds derived from the advances. The RSA also gave the Bank certain security. In particular, it took security over a leasehold interest in Dubai known as Plantation. In return the Bank agreed to waive and compromise any and all claims it had against the Defendants which the Defendants contend includes claims in and complaints for the purpose of criminal proceedings.
- In 2007, CCH Europe repaid around US$10 million and another party to the RSA (CCH Europe's parent company) repaid a further US$50 million. No other payments have been made.
Default in 2008
- On 9 June 2008, the Bank served a notice of breach under the RSA arising out of a default in connection with Plantation. The breach alleged concerned the non payment by Plantation to the Bank of proceeds from the sale of Plantation villa plots. Under clauses 18.3 and 18.4 of the RSA if a breach occurred and remained unremedied after 15 business days, the Bank would then be entitled to demand immediate repayment of the full sum owing under the RSA. That period would have expired on 6 July 2008. On 9 July 2008, Mr Cornelius and Mr Ridley issued a claim in the Commercial Court seeking a declaration that there was no breach entitling the Bank to declare an Event of Default and an injunction to restrain from the Bank from taking enforcement steps. That was initially granted by Simon J but then discharged on the return date by Tomlinson J on 14 July 2008. Tomlinson J held that on the evidence before the court there was no serious issue to be tried on the question of whether a breach had occurred.
- Following Tomlinson J's decision, on 21 July 2008 the Bank then served notice under clause 18.4(a)(i) on (among others) Messrs Ridley, Cornelius and Nil demanding immediate payment under the guarantee obligations of (i) the principal amount of US$440.8 million and (ii) a separate US$30 million "profit element" due under clause 8.4(a) of the RSA. The sum of US$440.8 million remains outstanding and the Bank's claim in these proceedings is for that sum less a credit given in respect of the sale of some polo ponies.
The Plantation development
- The Bank also took enforcement action in respect of its Plantation security following the event of default. Plantation was a lease owned by a company called Plantation Holdings which wished to develop the site to build a luxury villa and polo complex. The person behind the project was a Mr Fitzwilliam, who was the majority shareholder in Plantation Holdings. He was a long-standing business associate of Mr Cornelius. Mr Fitzwilliam needed financing for his Plantation development, and he turned to Messrs Cornelius and Ridley who invested in the project. It turned out that they did so using money from the Bank that had been meant to be used for trade financing purposes. At the time that the RSA was entered into, Mr Fitzwilliam and Plantation Holdings were willing to grant the Plantation lease as security for the debt obligations in the RSA. At that time, Plantation was potentially a valuable property.
- The RSA provided that the Bank was to be given security over the Plantation lease by way of a conditional assignment (clause 8.2). On 27 September 2007, about 5 weeks after the RSA was concluded, Plantation Holdings (and the lessor, Dubailand) consented to the conditional assignment that the RSA had contemplated ("the Conditional Assignment"). This was a condition subsequent of the RSA (clause 19.2). The RSA then took effect on 2 October 2007.
- Following the unremedied event of default notified on 9 June 2008 the Bank claimed to be entitled to enforce its security rights over Plantation. It did so shortly after the judgment of Tomlinson J dismissing the injunction application by perfecting the Conditional Assignment on 20 July 2008. It is the Defendants' case and evidence that at that time the lease was worth in excess of US$1 billion, far more than the outstanding indebtedness.
- In the event, however, the Bank did not sell the lease then or at any time prior to the collapse of the Dubai property market in the spring of 2009. Since then any sale has been problematical and the Bank continues to hold the Plantation lease. The current value of the lease is uncertain.
Proceedings in Bahrain
- In May 2009, the Bank learned that Mr Cornelius was dealing with assets in Bahrain in apparent breach of his obligations under the RSA. This led the Bank to commence proceedings in Bahrain against Messrs Cornelius, Ridley and Nil. The primary purpose of these proceedings was to obtain freezing relief in respect of assets which may otherwise have been dissipated by Mr Cornelius. That claim was limited to US$30 million, being the profit element.
- In February 2010, the Second to Fifth Defendants (and two additional parties) counter-claimed in Bahrain, seeking a declaration that the Plantation lease exceeded the value of the debt under the RSA and for repayment by the Bank of the difference which is said to be some US$650 million. The proceedings in Bahrain are continuing.
The present proceedings
- The Bank began these proceedings in October 2010. The First Defendant (PSI) is a company controlled by Mr Cornelius. The Bank's claim against it is a proprietary claim in respect of certain shares which the Bank alleges are the proceeds of assets to which it has equitable title. PSI has recently filed a Defence and the claim against it continues. The Bank obtained default judgment against CCH Europe.
- The claim against Messrs Cornelius, Ridley and Nil is a debt claim for US$440,468,428.10 million arising under the guarantee obligations in the RSA. This is set out at paragraphs 25 to 32 of the Particulars of Claim. The Bank's application is made prior to any of the Defendants filing Defences. In the case of Messrs Cornelius and Nil, this application is made prior to the filing of acknowledgments of service and the Bank obtained permission to make the application in these circumstances.
- On the Bank's application, Gloster J granted worldwide freezing relief against the First to Fifth Defendants on a without notice basis which was continued by Simon J on 29 October 2010.
- PSI and Mr Cornelius then made a jurisdiction challenge and (together with Mr Ridley) applied to discharge the freezing relief on the ground of material non-disclosure. The basis of the jurisdiction challenge stemmed principally from the parallel proceedings in Bahrain. These applications failed before Beatson J who handed down judgment on 19 April 2011. Permission to appeal was refused on paper but Mr Cornelius intends to renew his application orally. The Court of Appeal has declined to stay the proceedings against him.
- Mr Nil, meanwhile, set about challenging the validity of the order for service on him in Turkey where he is resident. Mr Nil obtained permission from the Court of Appeal to appeal against an order permitting an alternative method of service. In June 2011 the Court of Appeal ordered that he provide security for costs. He did not do so, causing his appeal to stand dismissed.
- The Bank has undertaken to stay the proceedings in England against Mr Cornelius in the event that the Bahrain court decides what has come to be known as the Plantation issue before the English court does so. The Plantation issue is one of the defences raised by the Defendants on this application.
The criminal convictions in Dubai
- As outlined above, the RSA arose out of what the Bank contends was a major fraud against it. Criminal consequences also followed. Mr Cornelius and Mr Ridley stood trial in Dubai for the fraud. On 27 April 2011, the Dubai Criminal Court convicted both. They were sentenced to 10 years imprisonment. In addition the Court ordered that US$501 million be paid in compensation to the Bank and imposed a further US$501 million fine. Following the enactment of a new law in Dubai the Defendants potentially face a further 20 years in jail if the fines have not been paid within 10 years. Mr Nil (in respect of whom an international arrest warrant has been issued but who remains at large in Turkey) was also tried and convicted in his absence. Mr Fitzwilliam was tried and acquitted.
The evidence
- The principal evidence before the court in relation to the Bank's application was as follows.
- For the Bank:
(a) The first affidavit of Mr Hugh Lyons sworn on 5 October 2011. This was the affidavit relied on by the Bank in support of its application for freezing injunctions and related relief in October 2010.
(b) The tenth witness statement of Mr Lyons dated 18 May 2011. This was the evidence specifically served in support of the Bank's summary judgment application.
(c) The twelfth witness statement of Mr Lyons dated 21 September 2011. This and the following two statements were served in reply to the evidence served by the Defendants.
(d) The witness statement of Mr Peter Vivian-Neal dated 13 September 2011.
(e) The witness statement of Mr Khalid Hamrani dated 20 September 2011.
- For the Second Defendant:
(a) The second affidavit of Mr Matthew Dowd sworn on 10 January 2011. This affidavit was relied on in relation to this jurisdiction challenge.
(b) The first witness statement of Mr Cornelius dated 14 March 2011. This statement was also relied on by the Second Defendant in relation to his jurisdiction challenge.
(c) The witness statement of Mr Ahmed Abdulla dated 21 March 2011. This statement was also relied on by Mr Cornelius in relation to his jurisdiction challenge.
(d) The second witness statement of Mr Cornelius dated 8 September 2011. This statement was made in opposition to the Bank's summary judgment application as were the next three listed below.
(e) The witness statement of Mr Yousef Ahmed Ali dated 8 September 2011.
(f) The witness statement of Ms Suzanne Sutherland dated 8 September 2011.
(g) The witness statement of Mr Erin Nil dated 8 September 2011.
(h) The fifth witness statement of Mr Matthew Dowd.
- Shortly before the hearing further evidence was served on behalf of the Second Defendant. The Bank objected to the admission of this late evidence but I allowed it to be adduced having given the Bank time subsequent to the hearing to respond to it. The further evidence was:
(a) Further statements from Mr Cornelius and Mr Yousef Ahmed Ali dated 26 September 2011.
(b) A statement from Dr Makkawi in relation to Sharia/UAE law dated 26 September 2011 was exhibited to Mr. Dowd's sixth witness statement.
- For the Third Defendant:
(a) The second witness statement of Mr David Mills dated 31 July 2011.
(b) The witness statement of Mr Fitzwilliam dated 31 July 2011.
- A third witness statement of Mr Mills dated 25 September 2011 was also before the court despite the Bank's objections to the lateness of its service.
- In response to the late served evidence the Bank adduced Mr Lyons thirteenth witness statement dated 27 September 2011 and fourteenth witness statement dated 4 October 2011, the witness statement of Mr Jody Waugh dated 4 October 2011 and a statement of Dr Hassan was exhibited to the witness statement of Jody Waugh in relation to Sharia/UAE law.
- The Second Defendant then sought to adduce further evidence from Dr Makkawi in response to that of Mr Waugh and Dr Hassan in relation to Sharia/UAE law. The Bank ultimately did not object to this evidence and I allowed it to be adduced notwithstanding its late production.
- The application was heard on 27 and 28 September 2011 and there was a further hearing on 10 October 2011 to allow final oral submissions to be made.
The defences
- A large number of different defences were raised by the Second and Third Defendants. Some of these were raised shortly before the hearing and some at the hearing itself. By the conclusion of the hearing the defences raised were as follows.
- For the Second Defendant:
(a) The Bank engineered a default under the RSA and is not entitled to claim against the Second Defendant in respect of such default.
(b) The RSA is to be construed such that the value of Plantation had to be ascertained at the time of transfer to the Bank with such value being applied against the Rescheduling Amount or the Bank is estopped from denying that this is the effect of the RSA and/or the RSA should be rectified to so provide.
(c) The RSA is illegal/void (as asserted by the Bank itself) and/or the effect of the Bank's stance towards the RSA is that is has effectively renounced or elected to reject the RSA with the result (on either or both bases) that this claim cannot succeed.
(d) The value of the Plantation lease had to be ascertained at the time of its transfer to the Bank and applied against the Rescheduling Amount. Since the value of Plantation at that time was in excess of the Rescheduling Amount, any debt due under the RSA has been extinguished.
(e) Even if (contrary to the Defendants' case on this issue) the transfer of Plantation to the Bank put the Bank in the position of a mortgagee in possession, the Bank has acted in breach of equitable duty owed to the Second Defendant as guarantor with the result that the Second Defendant's guarantee is discharged.
- For the Third Defendant:
(a) There was no pleaded breach by Mr Ridley of the provisions of the RSA relied upon on their true construction and no breach by Plantation nor Mr Ridley. In any event there is no evidence which establishes breach of the provision, on their true construction.
(b) Termination of the RSA pursuant to clause 21.1 by repayment of the Rescheduled Amount prior to the Notice of Demand.
(c) The Bank was in repudiatory breach of the RSA so that the Third Defendant's liability under its terms was discharged.
(d) Alternatively, as a matter of construction of the RSA the Bank obtained the value of the Plantation Lease at the date of its assignment and liability under the RSA was discharged.
(e) Alternatively, if (as is contended by the Bank) it holds the Plantation lease as a "mortgagee in possession pending sale" the Bank is in breach of its equitable duties as mortgagee in possession.
(f) It would be inequitable through these proceedings for the Bank to obtain double recovery.
- Each of the Second and Third Defendant relied on the other's defences in so far as they were not covered by the points specifically addressed on behalf of each of them.
The summary judgment test
- The relevant principles were not in dispute and are conveniently summarised by Lewison J in The Federal Republic of Nigeria v Santolina Investment Corporation [2007] EWHC 437 (Ch) at para 4:
i) The court must consider whether the defendant has a "realistic" as opposed to a "fanciful" prospect of success: Swain v Hillman [2001] 2 All ER 91;
ii) A "realistic" defence is one that carries some degree of conviction. This means a defence that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8]
iii) In reaching its conclusion the court must not conduct a "mini-trial": Swain v Hillman
iv) This does not mean that the court must take at face value and without analysis everything that a defendant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10]
v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550;
vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63;
vii) Although there is no longer an absolute bar on obtaining summary judgment when fraud is alleged, the fact that a claim is based on fraud is a relevant factor. The risk of a finding of dishonesty may itself provide a compelling reason for allowing a case to proceed to trial, even where the case looks strong on the papers: Wrexham Association Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237 at [57]."
Whether the summary judgment test is satisfied
- In order to succeed on its summary judgment application the Bank needs to establish that none of the various defences raised on behalf of the Defendants have a realistic as opposed to fanciful prospect of success. Having carefully considered the extensive evidence and submissions advanced on behalf of the parties I am not satisfied that it can do so. In my judgment there are at least two defences raised which have a realistic prospect of success and which will require factual investigation at trial, namely: (1) that the default was engineered by the Bank and (2) that there was a shared understanding or common intention that if the assignment of Plantation was enforced but it was not sold within a reasonable time pursuant to Clause 18.3 then the Defendants and Mr Fitzwilliam should have the benefit of the value of Plantation at the date of its assignment.
(1) Engineering of default by the Bank
Relevant principles
- The Defendants relied upon the general statement of principle set out in O'Donovan & Philips: The Modern Contract of Guarantee in paragraph 10-08:
"Not every default justifies the creditor enforcing the guarantee. Where the default is caused by the creditor's own conduct or by the creditor's failure to accept the debtor's proper performance of the principal obligation, the guarantee cannot be enforced. Nor is the surety liable for a default which occurs with the connivance of the creditor."
- In this connection they referred to MacTaggart v Watson (1835) 3 Cl. & Fin. 535 at 542-3 in which Lord Brougham stated that:
"It is, however, undeniable that the courts of equity will look narrowly to everything in the conduct of the obligee which has a direct tendency to wrong the surety and injure his rights and equities, and will, as Lord Loughborough said in Rees v Berrington, lay hold of such errors to release him….
…..yet it cannot avail to discharge a surety who has expressly bound himself for a person's doing certain things, unless it can be shown that the party taking the security has, by his conduct, either prevented the things from being done, or connived at their omission, or enabled the person to do what he ought not to have done, or leave undone what he ought to have done, and that but for such conduct the omission or commission would not have happened."
- Reliance was also placed upon the principle set out in the Privy Council decision of Black v Ottoman Bank (1862) 12 Moo P.C.C. 472 that a surety would be discharged if there has been "some positive act done by [the creditor] to the prejudice of the surety, or such degree of negligence, as in the language of Vice-Chancellor Wood in Dawson v Lawes, 'to imply connivance and amount to fraud'. Fraud, in this context, has been said to encompass conduct which is unfair to a surety.
- This is discussed in O'Donovan & Philips at paras. 8-106 to 8-114 in which the principle is recognised but it is observed that it is difficult to find clear examples of its application.
- In Bank of India v Patel (1982) 1 Lloyd's Rep 507 at p515 Bingham J stated his understanding of the law in the following terms:
"…as a matter of principle I cannot accept Mr. Murray's submission that a surety is discharged if a creditor acts towards the principal debtor in a manner which is irregular and prejudicial to the interests of the surety. Leaving aside what may be the special case of fidelity guarantees, I consider the true principle to be that while a surety is discharged if the creditor acts in bad faith towards him or is guilty of concealment amounting to misrepresentation or causes or connives at the default by the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety, other conduct on the part of the creditor, not having these features, even if irregular, and even if prejudicial to the interests of the surety in a general sense, does not discharge the surety."
- This was approved by Robert Goff LJ in the Court of Appeal (1983) 2 Lloyd's Rep 298 at p 302 in the following terms:
"With that statement of principle I find myself in agreement, subject to the comment that I would perhaps have preferred to state it the other way round, that is to say that there is no general principle that "irregular" conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety, though there are particular circumstances in which the surety may be discharged, of which the instances specified by the learned Judge provide certainly the most significant, and possibly the only, examples".
- The case law accordingly provides support for the Defendants' argument that a surety may be discharged where a creditor causes a default or acts in bad faith towards the surety, or positively acts so as to prejudice the surety in an unfair way.
- The Defendants' case is that the Bank took positive steps to cause a default under the RSA and to prevent any payment of the principal sums due which would have had the effect of releasing the security and the guarantees. It was submitted that the reason for it doing so was a desire by the Bank to confiscate Plantation and take the full benefit of the development for itself.
- I accept that if these facts were proved there would be a realistic prospect of the Defendants being entitled to rely on the legal principles set out above.
- The Bank, however, submitted that these equitable principles apply to a contract of guarantee but not to a contract of indemnity and that on the proper construction of the RSA (and in particular clause 6 and Schedule 5) the Defendants' payment obligations involved both a promise to guarantee and a promise to indemnify.
- Even if that be correct, however, which the Defendants disputed, the Defendants' case involves an allegation that it was the Bank's own deliberate acts which caused the default and, if so, that would give rise to an arguable defence as a matter of causation. In particular, I accept that it is arguable that as a matter of the construction of clause 6.1(b) there is no agreement to indemnify if and to the extent that a "failure or inability to recover the Rescheduling Amount" is caused by the Bank's own deliberate actions – see O'Donovan and Philips paras. 5-15 and 5-16 and the cases referred to therein. Further, on the Defendants' case, the Bank's actions in engineering the default were not only deliberate but involved illegal conduct and a deliberate breach by the Bank of its equitable duty not to impair the security – see O'Donovan and Philips para. 8-113; 8-104.
The factual case
- The main alleged facts relied upon in support of the Defendants' case were as follows and are for the most part set out in the witness statement of Mr Fitzwilliam:
(a) In early 2008, Mr Mohammed al-Shaibani ("the Chairman") was recalled from London to Dubai to run the Ruler's Court. The Dubai Financial Audit Department ("FAD") and the security police came under his control. Importantly, he was also appointed as Chairman of the Bank.
(b) As part of a general attempt to clean up commercial practice in Dubai, the Chairman caused Audit to look into events at the Bank. As a result, Audit formed the view that the RSA was "not acceptable" and that a massive fraud had taken place. This led to a "witch-hunt" to find and prosecute those responsible.
(c) From this point in time, the Bank formed the intention to "escape from the RSA while still holding on to Plantation". This conclusion is based upon the inferences to be drawn from events as they, in fact, unfolded when compared with what Mr Fitzwilliam was being told at the time.
(d) A warrant was issued for the arrest of Mr Fitzwilliam on 15 March 2008 but he was not informed. For a criminal investigation to begin a Complaint must be made at a police station but no such Complaint appeared in Mr Fitzwilliam's file during the course of the subsequent proceedings. It was Mr Fitzwilliam's firm belief and the Defendants' case that the Bank was the maker of the initial Complaint. Although the Bank had always denied this some support for it is to be found in a document unearthed by the Defendants shortly before the hearing.
(e) The Second and Third Defendants were arrested and imprisoned at the end of May 2008. This was at a time when all repayments due under the RSA had been made and was some 5 months before the Second Defendant's first payment obligation in October 2008. It was Mr Cornelius' evidence that but for his imprisonment he would have been able to raise the necessary funds to meet his obligations under the RSA.
(f) Mr Fitzwilliam planned to fly from Dubai to London on 6 June 2008. The purpose of his trip was to arrange the sale of 30% of Holdings for US$600 million. He intended paying off the money due to the Bank so that he could continue the development of Plantation.
(g) For the reasons explained in his statement Mr Fitzwilliam firmly believed that the Bank was aware of his trip to London and believes that it was aware of the purpose of that trip.
(h) On 6 June 2008, Mr Fitzwilliam was arrested at the airport and held incommunicado in state security cells for 10 days.
(i) The Default Notice in respect of Holdings was served on the following Monday, 9 June 2008.
(j) Mr Fitzwilliam disputes the defaults relied on by the Bank but it is his evidence that, in any event, he had no time or ability to remedy the alleged defaults by reason of his continued imprisonment.
- It was the Bank's position that it had nothing to do with the criminal proceedings and any difficulties which may have been caused to the Defendants and Mr Fitzwilliam in performing the RSA as a result thereof. It stated that it did not make the criminal Complaint and that even if it had any action taken thereafter was the responsibility of the prosecuting authorities and nothing to do with the Bank. It further pointed out that the Plantation defaults pre-dated the arrests of the Defendants and Mr Fitzwilliam and that there was no reason why they could not have made suitable financial arrangements to put matters right from prison.
- Before considering the Bank's various points I would observe that there are features of the case which suggest that it may not be the simple debt collection exercise portrayed by the Bank. In particular:
(a) The alleged failure to pay over Plantation sale proceeds had taken place between October 2007 and April 2008 and one would expect this to have been known to the Bank for some time (although the Bank disputed this). No complaint or allegation of breach was, however, made until the service of the Notice of Default on the Monday following the Friday when Mr Fitzwilliam was arrested. As Tomlinson J observed "services of notices of this sort so soon after the relevant individuals had been incarcerated leaves an extremely unpleasant taste in the mouth".
(b) Following the perfection of the assignment of the Plantation lease the Bank did not sell it so as to recoup its debt. Rather, it made a public announcement that it would be developed as planned and a subsidiary of the Bank was publicly stated to be the Bank's "preferred partner" for the development.
- The Bank contended that the alleged motive for the Bank's actions made no sense as there was no basis upon which the Bank could keep more from Plantation than the sums due under the RSA. However, that assumes that the Defendants' other defences fail. If the Defendants made out their case that in the event that Plantation was not sold there was to be an accounting for its value at the date of assignment then the Bank would have a means to obtain Plantation for itself and take the benefit of its development. In any event, on the Bank's own case taking over the lease entitled them to develop it so as to protect its security and thereby the opportunity to develop it through its own subsidiary, which indeed it was announced that it would do.
- The Bank further contended that it would not have wanted to instigate the arrest of Mr Cornelius at this time since it was in the process of finalising with him the granting of security over US$40 million of assets. However, it is the arrest of Mr Fitzwilliam that is central to the Defendants' case and on the Bank's own case there was no reason why financial arrangements could not continue to be dealt with notwithstanding imprisonment.
- As to whether the Complaint was made by the Bank, aside from the inferential points explained by Mr Fitzwilliam in his witness statement, the Defendants relied in particular upon a Police Report dated 2 June 2008 which referred to a "Report of Fraud under a Complaint filed by Dubai Islamic Bank". The Bank said that this was a mistake and explained through a further statement from Mr Lyons that the Complaint had been made by the Financial Audit Department of the Ruler's Court ("FAD") and referred to evidence earlier in 2008 of the fact of an FAD investigation. However, on the evidence before the Court this remains a disputed and unresolved issue. No Complaint was ever provided to Mr Fitzwilliam and none has been put before the court.
- In any event, the Defendants contended that even if the Complaint had been made by the FAD it was likely that it was the Bank which prompted it given that the Chairman of the Bank was also the head of the Ruler's Court and the Audit Commission and was opposed to the waiver deal which had been made by the RSA. The Defendants further contended that the most likely source of the documents upon the basis of which the criminal charges were made was the Bank since it had in its possession the key documents relating to the application of the advances by the Defendants although there were strict contractual confidentiality restraints under the RSA on the use and distribution of those documents. The Bank denied that it had supplied any documents in breach of its obligations under the RSA.
- As to whether the Bank was in any position to influence the actions taken by the prosecuting authorities, the Defendants contended that it was given the fact that the Chairman was also the head of the Ruler's Court and (although this was denied) of the secret police. Further, the Defendants relied upon express statements allegedly made by the CEO of the Bank, Mr Al Hamli, that it was behind and in a position to procure the arrests. In a witness statement provided by Mr Nil dated 11 July 2008 it was said that senior officers at the Bank had stated as follows:
"Connection between the Bank and the UAE Government
I understand that it has been alleged on behalf of the Bank that it has nothing to do with the arrest of Messrs Ridley and Cornelius in Dubai. I firmly believe that this is untrue. I wish to draw the Court's attention to a recent meeting I had (in early June, in Istanbul) with Mr Al Sharif (the Banks' CFO) in Istanbul, where he said that the Bank's management had been replaced by representatives of the UAE government "who have a different approach to the RSA". As was explained to me during this meeting, the new management was most interested about the former Chairman's affairs and were investigation his past with a view to bringing corruption charges against him.
Rather disturbingly, Mr Al Sharif told me that the RSA was a "corrupt agreement" and that it had been signed by Obaid Al Shamsi, the former Head of Legal Council of the Bank in order to protect the ex-Chairman. He also said that the suspected the Chairman to be secretly behind the certain companies owned by Mr Cornelius.
Following the arrests of Messrs Ridley and Cornelius, I sent an email to Mr Al Sharif asking for a meeting with authorised Bank representatives in order to discuss the overall strategy following the arrests.
In reply, on Monday 9th June 2008, I had a call from Mr Al Sharif. He told me that one of two top executives of the Bank appointed by the government was in Istanbul. This was Abdullah Al Hamli, apparently second only to the new chairman of the bank, Mohammed Al Shebaini who also has official titles with the Diwan, the ruling Council of UAE. I agreed to meet Mr Al Hamli the following day. We also spoke about the directors of the public company in the UK, and as to the guarantees under the RSA. Mr Al Sharif assured me that the Bank would never claim on that guarantee because the directors did not know that they signed a "corrupt agreement" at the time of the RSA.
The following day (10th June 2008) I met Mr Al Hamli at the Ciragan Palace hotel in Istanbul. Mr Al Hamli reiterated the Banks's requests for disclosure and immediate repayment of the whole of the outstanding amount due under the RSA. I started to talk about my experience with the Bank and the Bank executives. After less than a minute, Mr Al Hamli interrupted me, saying that he only had five minutes to allocate to me; that unless I gave specific information in five minutes, this would be the last time I saw anyone from the Bank; and that they would make life very "difficult" for me.
When I attempted to say that the Bank's priority was getting repayments, and that the Dubai government's priority was pinpointing people responsible, he interrupted me and said. "I am the bank and I am the government. I want immediate repayment and the difference between me and all the previous DIB executives that you have met previously is that we now have Ryan Cornelius and Charles Ridley arrested… We have detained five people and will detain as many as necessary. Ryan Cornelius and Charles Ridley are melted, they will not walk we will take all their assets, including Plantation, Refinery, Bahrain property. Obaid was a corrupt individual and has been fired. So will Hugh Lyons be fired... I do not recognise the Restructuring Agreement and have not even read all of it. This is a corrupt agreement and we will not play by its terms I want immediate repayment irrespective of the Restructing Agreement…This is the last time you will ever see DIB again. We will make life very difficult for you'. While I was talking he walked away in mid-sentence. The meeting lasted less than five minutes in total."
- The Defendants further relied upon evidence of negotiations for rescheduling of the repayments covered by the RSA in return for the freedom of the Defendants – the so called "cash for freedom" negotiations.
- In this connection the Defendants referred to emails sent by Mr Tim Taylor QC, a partner in SJ Berwin who was acting for the Defendants in those negotiations. These emails referred to the Bank securing Mr Taylor QC's clients' freedom as being "the base currency for this negotiation" and proposed the "withdrawal of criminal charges on execution of amendment agreement and perfection of security".:
- The Defendants explained that they had sought to get a witness statement from Mr Taylor but that:
"In response to this request, Mr Taylor QC confirmed to me that he does not consider himself able to provide a witness statement at present, as he considers that the ongoing professional obligations he owes to the Second and Third Defendant preclude him from doing so without careful consideration of, inter alia the issues of privilege that may arise. Mr Taylor QC has confirmed to me that as an officer of the court and Her Majesty's counsel he will, of course, attend court to give evidence at the trial of this claim if summoned to do so. It is the Second Defendant's intention to summon Mr. Taylor QC to give evidence at the trial of this claim so that the Court may have the opportunity to fully consider all material evidence relevant to the issues in dispute."
- The need to have evidence from Mr Taylor QC was advanced as a compelling reason why a trial was necessary.
- The Bank denied at the time any involvement with or influence over the prosecuting authorities and it has consistently maintained that position. However, it has not chosen to put before the court any witness statement from the Chairman, Mr Al Hamli or indeed any other Bank representative to dispute or seek to explain away the allegations made.
- The evidence of the Bank's lawyers was that Mr Taylor QC was assuming in the negotiations that the Bank could do something which it could not and that nothing was done or said to encourage this false assumption. However, Mr Taylor QC is clearly a very experienced solicitor and one would not expect him to be putting forward proposals that had no foundation in reality.
- As to causation, it is correct that none of the matters relied upon by the Defendants can have caused the original default in failing to pay over the Plantation sale proceeds. However, the Defendants put their case more broadly and allege that the Bank's actions were the effective cause of Mr Fitzwilliam's inability to remedy the default and indeed to pay off the outstanding loan, as he says he intended and was in a position to do. The Bank pointed out that there were other employees of Plantation, including senior managers, and that it was not alleged that Mr Fitzwilliam was incommunicado throughout the relevant period and that it was implausible that matters could not have been arranged from prison. However, Mr Fitzwilliam is clearly the directing mind of Plantation and the person in charge of financial matters and it is his evidence that as a result of the imprisonment he had no time to remedy the defects alleged; that there was nothing he "could practically do from jail" and that "but for imprisonment" he would have been able pay off the loan. Whilst this was criticised as being mere assertion one can well understand how, in particular, negotiations to pay off the loan might require Mr Fitzwilliam's continued personal involvement.
- Having carefully considered the parties' evidence and submissions, and whilst recognising that this is a defence of a type which is not easy to establish, for the reasons outlined above and those advanced by the Defendants, I am satisfied on the evidence currently before the court that this is a defence with a realistic rather than fanciful prospect of success and one which raises issues of fact which can only be resolved at trial.
(2) Whether there was a shared understanding or common intention that if the assignment of Plantation was enforced but it was not sold within a reasonable time pursuant to Clause 18.3 then the Defendants and Mr Fitzwilliam should have the benefit of the value of Plantation at the date of its assignment.
- It was the Defendants' case that on the proper construction of the RSA and the Conditional Assignment the Bank obtained absolute title to the Plantation lease on the enforcement of the assignment but subject to a contractual obligation to account for the sale proceeds in accordance with Clause 18.3 of the RSA should the lease be sold within a reasonable time. It was also the Defendants' case as a matter of construction of those agreements when read together, alternatively by reason of an implied term, that in the event that the Bank did not exercise that right of sale within a reasonable time then the Defendants and Mr Fitzwilliam would have the benefit of the value of Plantation at the date of its assignment.
- The Defendants submitted that this construction/implication was supported by Article 246 of the UAE Civil Code, which is part of the proper law of the Conditional Assignment, under which the parties are required to act in accordance with the contents of that agreement, and in a manner consistent with the requirements of good faith. They further submitted that it was supported by the core Shari'a principles of Islamic Finance, with which all of the parties were familiar, which includes that property taken by way of the enforcement of security falls to be valued at the time it is taken.
- The Bank vigorously disputed this construction of the agreements and denied that there was any basis for the implied term alleged. In this connection it placed particular reliance upon Beatson J's judgment in relation to the unsuccessful application to discharge the freezing injunction at paras. 86-90. However, the Defendants advanced a further essentially factual argument that even if their construction of the agreements was wrong in law it reflected the mutual understanding of the parties when the agreements were entered into and the Bank is estopped by convention from contending otherwise.
- The applicable principles in relation to estoppel by convention are summarised in paragraphs 3-107 to 3-114 of Chitty on Contracts (30th ed.). In summary: estoppel by convention may arise where both parties to a transaction "act on an assumed state of facts or law, the assumption being shared by both or made by one and acquiesced in by the other. The parties are then precluded from denying the truth of that assumption, if it would be unjust or unconscionable to allow them (or one of them) to go back on it".
- The alleged shared assumption was addressed by Mr Fitzwilliam's statement in which he stated as follows:
"I spotted that Clause 18 did not require DIB to sell Plantation in the event they called in the guarantee. I was assured by all that as a bank this was the natural course of action. DIB nevertheless avoided inserting wording into the RSA obliging them to sell, but my lawyers did not find this suspect or worrying. I thought it self-evident that DIB, having already said they were interested only in the villa plots, would simply take a sufficient number of villa plots to cover their outstanding debt and leave me the rest. This is why, when DIB foreclosed, I immediately obtained valuations. The purpose of those valuations was to determine the value so that I could seek the difference from DIB.
I saw the device of selling off plots at an artificially low value as a way that they could possibly cheat me of Plantation's true value and thus obtain more for themselves (or one of their friends or subsidiaries). I therefore insisted on Clause 18.3 to thwart this possibility. Without that provision, DIB could have sold at an undervalue shortly after taking title and then argued that the sale price rather than any independent valuation was the true value of Plantation for determining the transfer value. Therefore, I required that any sale be at a market value, and as a further measure of protection, I would be allowed to match any offer if I so chose. This, I thought, would effectively block any sale at undervalue. Crucially, this clause only applied at a second stage: "in the event that", makes it clear that the bank first had to decide to sell. That there was no obligation to sell is clear from the words of the RSA itself, even without reference to the Conditional Assignment. My expectation was that if DIB chose not to sell, as was their right, the value of the plots and therefore the number of plots that they would be entitled to would be determined by the then current valuation. No other basis would have made sense.
Apart from Mr Cornelius, who attended some of the negotiations in London, I was the only non-lawyer at the meetings. I repeatedly asked all the lawyers – Clifford Chance for me, Timothy Taylor (now QC) of SJ Berwin for Mr Cornelius and Mr Ridley and Mr Lyons at Lovells for DIB whether the RSA would work in the way I understood, including that the value would be assessed at the time of the security. They all, including DIB said that this was the case.
….
..my understanding of the commercial deal we struck was that the security right was the right to perfect the CA. Upon perfection, all Holdings' interest in the site was to pass to DIB and there would then be an accounting to settle how much change I should receive. This is also how DIB presented the proposal to me. When I asked the RSA negotiations if it would work like this, all the lawyers on all sides, including DIB, said "yes".
….
The obligations do not exist "if the bank enforces its security" but if, having enforced its security, DIB then decides to sell. All the parties understood that if DIB chose to develop and not to sell, we apply the current value to set off the debt: no other figure makes sense and no other calculation would have been equitable to both parties. Hence my haste in applying for valuations."
- Mr Cornelius stated in his witness statement that:
"During the negotiations which led to the signing of the Restructuring Agreement in August 2007 (the "RSA"), Mr Fitzwilliam was very concerned as to how Plantation would be valued in the event that the Bank called in the Guarantee. It was agreed that Plantation was to operate as a type of security that could be enforced in the event that there was a default under the RSA. As to the valuation of the land, I understood, and firmly believe all parties to the RSA (and their lawyers) shared this understanding, that in the event that the Bank called in the Plantation security, it would be valued at the market rate prevailing at the time at which it was assigned to the Bank. My understanding was that Mr Fitzwilliam would be able to regain ownership of Plantation by paying any outstanding amounts owed to the Bank pursuant to the RSA at that time; or the Bank could elect not to sell and proceed with the development themselves, in which case it would have to pay Mr Fitzwilliam the difference between the market value of Plantation and the debt owed pursuant to the RSA. Given that all parties and their lawyers shared this understanding of how the Plantation security would operate, I was surprised that this did not seem to be properly reflected in the terms of the RSA.
My understanding of the valuation mechanism was confirmed to me in December 2007 by Mr Ayman Adil, who was head of the bank's property department at that time. Mr Adil and I met in Bahrain in or around December of 2007 so that I could show him the Marina West site. During the course of our meeting and site visit I had discussed the RSA with Mr. Adil and we talked about the effect of default and what this would mean to the parties in financial terms. His unequivocal response was that a value would be attributed to Plantation upon the Bank exercising its right of assignment and any additional value over and above the outstanding sums owed under the RSA would be remitted to Mr. Fitzwilliam."
- There was no evidence from Bank personnel disputing these allegations but it was denied by its lawyers. It was further submitted that the alleged understanding is not reflected in the agreements as finally concluded between the parties' lawyers, that there is no legal basis for going behind the terms so agreed, that an agreement such as that alleged is implausible and uncommercial, and that it is precluded by the entire agreement clause in the RSA – clause 25.6.
- There is clearly force in the Bank's contention that given that the negotiations for the RSA were conducted by experienced lawyers it is unlikely that there would be any agreement of contractual or like effect which was left out of the final agreements.
- There is also force in the Bank's contention that estoppel by convention is generally concerned with post-contractual rather than pre-contractual matters. In relation to pre-contractual matters the appropriate remedy is rectification. However, as the Defendants pointed out, in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at para. 47 Lord Hoffmann did recognise the possibility of estoppel by convention applying to pre-contractual matters, although it may be that this is most likely to arise where a particular clause or expression has an agreed or mutually understood meaning. The Defendants contended that there is no reason in principle why estoppel by convention cannot arise in respect of pre-contractual matters. Alternatively, if necessary they relied on the doctrine of rectification.
- The Defendants' case was that if, as they alleged, the agreements were entered into on the basis of a confirmed understanding that if the assignment of Plantation was enforced but it was not sold within a reasonable time pursuant to clause 18.3 then the Defendants and Mr Fitzwilliam should have the benefit of the value of Plantation at the date of its assignment then by one legal route or another effect should be given to that understanding.
- The Bank submitted that the alleged understanding was wholly uncommercial. As it turns out, the Bank has not been able to sell this property and it may now be worth very little. The Bank remains out of the pocket to the tune of US$ 440 million. On the Defendants' case, despite the Bank having realised nothing from the lease, the debt has been cleared. In fact, it gets worse for the Bank. The proceedings brought by the Defendants and Plantation Holdings in Bahrain seek payment by the Bank of some US$650 million, apparently being the difference between the notional value of Plantation at the time of enforcement and the sum due under the RSA. On that basis, therefore, (i) the Bank starts US$440 million down as the victim of a fraud; (ii) it enforces the Plantation security but cannot realise any proceeds from it; and (iii) it is then required to pay out US$650 million. So the Bank, far from being restored to its pre-fraud position, ends up around US$1 billion out of pocket.
- However, although that is how matters have actually turned out they did not need to do so. At the time of the assignment and for many months thereafter the Plantation lease was on the Defendants' evidence worth far more than the outstanding indebtedness and, if so, the Bank should have been able to fully recover its outstandings by selling the lease. It chose not do so because, the Defendants allege, its real interest was in developing the project, and it was caught out when the Dubai property market crashed.
- Further, from Mr Fitzwilliam's perspective there was every reason for him to insist on the agreement alleged. He was not involved in procuring the advances. He was putting up his valuable lease as security to help out business associates. The last thing he would have wanted was for the lease and the project to be tied up indefinitely whilst it was held by the Bank as security. There was every reason for him to want a "clean break" should the security be enforced, as he explains in his statement. That was to be done through cl. 18.3 and, if that power was not exercised, by accounting for the lease's value. In either event the Bank was protected. It could sell the lease and keep the proceeds; or it could keep the lease but account for its value.
- The Bank disputed the valuation of the Plantation lease and the ease with which it could be sold and submitted that this made it unlikely that the Bank would ever agree to account for its value. However, those underlying facts were in dispute and subject to contrary evidence.
- The Bank submitted that the Defendants' case and evidence was unclear as to what the common assumption or continuing intention actually was. It pointed out that there was no evidence of an agreement that any power of sale be exercised within a reasonable time. However, if, as asserted by Mr Fitzwilliam, the Bank had a choice whether to sell the lease or keep it for itself it would not be difficult to infer that that choice was to be made within a reasonable time. It was also submitted that it was not clear at what time the valuation was to be made, but I accept that it is reasonably plain that Mr Fitzwilliam is referring to the value at the time of the assignment, as is borne out by Mr Cornelius' evidence.
- The Bank stressed that the alleged understanding was not asserted at the time of the notice of default, the consequent legal proceedings or the perfection of the assignment and referred in particular to a letter from Denton Wilde Sapte ("DWS") on behalf of Mr Fitzwilliam of 30 July 2008. However, this is very much an evidential point and it is to be noted that DWS stressed that their instructions were incomplete due to the limited time they had been able to spend with Mr Fitzwilliam.
- The Bank submitted that there must be evidence of the parties continuing to act on the basis of the alleged assumption following entry into the RSA. I am not persuaded that this is a necessary legal requirement of estoppel by convention but in any event there is such evidence from Mr Cornelius.
- The Bank further submitted that nothing said to Mr Fitzwilliam, who is not a party to the proceedings, could found an estoppel which the Defendants could rely upon. However, there is evidence from Mr Cornelius that he shared Mr Fitzwilliam's understanding and in any event if the Bank has to give credit for the value of the Plantation lease at the time of the assignment then that ensures for the benefit of the Defendants, or at least arguably so.
- The Bank submitted that the comments allegedly made to Mr Cornelius six months after the RSA cannot found any estoppel not least because it cannot have led to any relevant change of position. However, the main significance of that uncontradicted evidence is that it is consistent with what the Defendants contend was the mutual understanding of the parties at the time that the agreements were entered into.
- As to the Bank's reliance upon the entire agreement clause, the Defendants' case rests on the construction and understanding of the RSA and the Conditional Assignment when read together, not merely the RSA. In any event I accept that it is arguable that such a clause does not preclude arguments of estoppel by convention, notwithstanding the first instance decision to the contrary of Deputy Judge Christopher Nugee QC in Sere Holdings Ltd v Volkswagen Group United Kingdom Ltd [2004] All ER (D) 76. As the Defendants pointed out, there is authority that such clauses do not preclude claims for rectification, a principle which, like estoppel by convention, is based on considerations of unconscionability – see Hodge on Rectification paras. 3-165 to 3-168. Further estoppel by convention in this context, unlike a collateral warranty claim, does not involve the assertion of an additional contractual promise, but rather precludes a party from enforcing an existing contractual promise in a way contrary to the parties' shared understanding. In any event, the Defendants do, if necessary, claim rectification.
- Having carefully considered the parties' evidence and submissions, and whilst recognising that both estoppel by convention and, in particular, rectification are claims of a type which are not easy to establish, for the reasons outlined above and those advanced by the Defendants, I am satisfied that on the evidence currently before the court that is a defence with a realistic rather than fanciful prospect of success and one which raises issues of fact which can only be resolved at trial.
Conclusion
- In the light of my conclusion on the above two issues it follows that the Bank's summary judgment application fails and must be dismissed. In such circumstances it is neither necessary nor appropriate to address the various other defences raised. It is now for the Defendants to plead out such defences as they wish to assert.
- Although the Fourth Defendant has not participated in the application, in the light of the nature of the defences advanced it must follow, as the Bank accepted, that if it is not an appropriate case for summary judgment against the Second and Third Defendants, it is equally not an appropriate case for summary judgment against the Fourth Defendant.
