ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
MR JUSTICE EDER
Strand, London, WC2A 2LL
B e f o r e :
SIR STANLEY BURNTON
| OTKRITIE INTERNATIONAL INVESTMENT MANAGEMENT LIMITED
|- and -
|GEORGY URUMOV (a.k.a. GEORGE URUMOV)
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr. Steven Berry QC and Mr. Anton Dudnikov (instructed by Hogan Lovells LLP) for the respondents
Hearing date: 24 September 2013
AS APPROVED BY THE COURT
HTML VERSION OF JUDGMENT
Crown Copyright ©
Sir Stanley Burnton:
Introduction: the claims and procedural history
The illegality defence
The Judge's reasons for refusing permission to amend: the first judgment
(1) The Court is bound to take notice of illegality if the transaction in question is manifestly illegal or if there is persuasive and comprehensive evidence of illegality.
(2) There was no evidence of any clearly illegal act on the part of any of the Claimants' witnesses or any proper basis for raising a defence of illegality.
(3) The proposed new case did not fit in with the Appellants' existing defence.
(4) The Appellants' arithmetical calculations, on the basis of which they asked the Court to infer that the profit anticipated by the sale of the warrants to Threadneedle obviously exceeded any honest profit, were not relevant calculations and did not provide a proper basis for the new case.
(5) The Appellants' new case involved taking unrepresentative "snippets" from the evidence of certain witnesses, and to that extent was not a fair representation of their evidence.
(6) It had not been put to any of the Claimants' witnesses that they had known that expected profit rates on the resale of the warrants were dishonest, or that they had suspected or closed their minds to the fact that the acquisition of the warrants was part of a plan to defraud Threadneedle.
(1) The proposed illegality defence was inconsistent with the Appellants' existing defence, and such inconsistency required the Court to look very carefully at their new case: paragraph 9.
(2) The reasons given by him for refusing the first application to amend remained in place; his focus had to be on what, if any, material change of circumstances existed since his original decision: paragraph 10. As to this, the Appellants relied on a recently disclosed transcript of an internal telephone conversation on 9 March 2011 between Mr Popkov and Mr Gherzi, a recently served witness statement of Mr Popkov relating to that conversation, the oral evidence of Mr Gersamia (who had been an employee of Threadneedle) and the evidence of Mr Katorzhnov: paragraph 10 of the judgment.
(3) The disruption to the trial that would be caused by the amendment was itself a sufficient reason to refuse permission to amend. Preparation of material to address the new case would delay the restart of the trial by something like a month, and the hearing of the further evidence that would be required would probably take 3 to 4 days on the Appellants' estimate, and in excess of five days on the Claimants' estimate. Furthermore, since the Appellants contended that they had no assets, if the new defence failed and the Claimants succeeded, the substantial additional costs that would be incurred would result in the Claimants suffering irremediable loss: paragraphs 13 and 14.
(4) The Appellants had accepted that this was not a case where the transaction in question was "manifestly" or "clearly" illegal. Furthermore, the case was not one which was sufficient to give the Court real concern that without some investigation compensation might be ordered in circumstances which would undermine the integrity of the justice system. Had it been such a case, he would have granted the amendment: paragraphs 15 and 16.
(5) The transcript of the telephone conversation between Mr Popkov and Mr Gherzi might be evidence of their intention to mislead a regulator as to the parties to and terms of the transactions in question, but the Appellants did not rely on any such regulatory infringement. Furthermore, the reference in the transcript to the return of 8 per cent expected by Otkritie on its purchase of the warrants and their resale (or on-sale) to Threadneedle was inconsistent with the Appellants' case. The transcript was not evidence of fraud or illegality sufficient to support a case of ex turpi causa: paragraph 23.
(6) Mr Katorzhnov's evidence did not take the Appellant's new case any further: paragraph 24.
(7) Mr Gersamia's evidence, that Mr Lokhov of Otkritie sought to bribe him to purchase the warrants on behalf of Threadneedle at a price some 4 times their true value, was not new: it had been referred to in his original witness statement served over seventeen months before the beginning of the trial. The Appellants' attempted reliance on his evidence to justify their very late application to re-amend was without proper justification. Furthermore, while it was evidence of an intended fraud in May-August 2011, it was no proper basis to plead a fraud on Threadneedle before or on 9 March 2011, when the Claimants acquired the warrants: paragraphs 25 to 29 of the judgment.
The principles applicable to an application to amend a defence to plead illegality
(1) If the facts giving rise to the illegality are such that the illegality is "manifest" or obvious, the Court must take the point of its own motion so as to ensure that its process is not abused in furtherance of the illegality: see, e.g., Bingham J in Bank of India v Patel  1 Lloyd's Rep 427.
(2) If the illegality is not manifest or obvious (for example, because it depends on disputed facts or inferences from those facts), the normal rules applicable to amendments apply. The merits of the amendment must be set against the forensic and other consequences for the parties and for the Court. The assessment or balancing of the desirability that the real issues in the case should be determined against the prejudice to the parties and to the Court and public that would be caused by allowing the amendment is regarded as a matter of discretion, and the trial judge's decision will not be set aside absent an error of principle or of law or other defect justifying an appellate court in interfering with his decision.
(3) If the trial judge concludes that there is no properly pleadable case of illegality, his decision is not a matter of discretion, and will be reviewed by an appellate court in the normal way.
The approach of the Court of Appeal on an appeal such as the present
The parties' contentions
7. There is in my view but one principle that is applicable to actions based upon contract, tort or recovery of property. It is, that public policy requires that the courts will not lend their aid to a man who founds his action upon an immoral or illegal act. The action will not be founded upon an immoral or illegal act, if it can be pleaded and proved without reliance upon such an act.
8. The immoral or illegal act relied upon by PNSC was the attempted deception of Incombank. No doubt it is unethical for one bank to attempt to deceive another bank, but I doubt whether an unsuccessful attempt amounts to an act which would prevent a good cause of action in deceit being enforced. Certainly in equity there is authority for the proposition that where the unlawful act has not been carried into effect, the court is able to uphold, despite the attempted illegality, an equitable interest. (See Tinsley v Milligan  1 AC 340. at page 257 [sic]) In any case SCB's cause of action in deceit against PNSC does not require the attempted deceit to be pleaded nor does it involve any reliance upon it. Their case as pleaded and proved was that PNSC made false statements in the bill of lading that the goods had been shipped by 25th October 1993. That statement was made knowing it to be false. SCB relied on it and therefore suffered loss because it paid out over $1 million to Oakprime.
9. Mr Young submitted that but for the attempted deceit or the decision to deceive by SCB, there would have been no loss as there would have been no payment to Oakprime. SCB would not have paid unless they thought they would be able to obtain reimbursement from Incombank and to do that they must have known that they needed to deceive Incombank. Accepting that to be correct, it does not provide PNSC with a defence based upon the principle "ex turpi causa non oritur actio" as SCB's action is not founded upon the attempted deceit. The court, when upholding SCB's claim, is not lending its aid to enforcing an action which involves pleading or reliance upon an immoral or illegal act. The fact that damage may not have resulted but for a decision to deceive is irrelevant to the cause of action when pleaded and proved. It follows that the judge was right to hold SCB's claim against PNSC succeeded. (Emphasis added)
Lord Justice Moore-Bick :