Strand, London, WC2A 2LL
B e f o r e :
| (1) MAHME TRUST REG
(3) DR MARIO ZINDEL
(4) KAWTHER AWNI AL ABOOD
(5) MAHMOUD SHAKER AL ABOOD
- and -
LLOYDS TSB BANK PLC
Robert Miles QC, Jeffrey Chapman, Andrew De Mestre (instructed by CMS Cameron McKenna) for the Defendant
Hearing dates: between 1/3/06 – 11/5/06
Crown Copyright ©
Mr. Justice Evans-Lombe :
Other Dramatis Personae
The Background Facts
i) AB and Mrs AB signed various documents for the purposes of opening the Body account at the Bank in their joint names.
ii) AB signed a draft set of by-laws for the Shake Trust. At clause (A) of that document AB, describing himself as the "first beneficiary and settlor of the trust during lifetime [sic]" provides that "Lloyds Bank, Geneva is authorised to manage the assets of the trust on a discretionary basis provided that the following terms and conditions are respected". There then follow, in seven sub-paragraphs, investment guidelines.
By clause (C) AB provides for the appointment of a managing committee after his death consisting of Mr Tayeb, Mrs AB and Najat and continues:-
"This committee will have the right to take any decision whatsoever regarding the management of the assets of the Trust by informing the Bank in writing."
By clause (D) the Managing Committee is empowered to act by any two of its members whose instructions the Bank must accept.
At clause (H) there is a requirement that following the death of AB "the Bank must transfer the 30% of the accumulated yearly income or [sic] the Trust's assets to the family maintenance Trust", [the SMA settlement]. The clause then goes on to provide for the distribution of the capital of the Trust in instalments to Mahmoud on his achieving his 25th, 30th, 35th and 40th birthdays. The draft document then continues:-
"It is my wish that if my son Mahmoud dies before the final distribution as above, the holdings of the Trust should be transferred as they are at that time to the same Trust in Jersey as above [the SMA Settlement]. The committee must give specific instructions to the Bank on this subject. Until the receipt of these specific instructions, the Bank will continue to manage the assets."
The document concludes at paragraph (J) as follows:-
"J Finally, I would like to emphasise that if one or all of the above by-laws can not be applied due to unforeseen circumstances such as war, death or similar events, I ask the Bank to undertake the appropriate steps and precautions in order to protect the interests of my son Mahmoud. This is my last and ultimate wish."
iii) AB signed a "fiduciary contract and mandate agreement" ("the FCMA") between AB and the Bank, governed by Swiss Law authorising the Bank to set up the Shake Trust.
iv) AB signed an agreement ("the Mandate Agreement") between AB and Primeway, governed by Swiss Law, providing for Primeway to be a corporate director/trustee of the Shake Trust.
v) AB signed various documents providing for the opening of the Shake Trust's bank account at the Bank by Primeway.
vi) AB signed a letter to the Bank date 12th February 1986 directing it to transfer assets held in the Body account to the Shake Trust's account once those had been set up.
"The Trust enterprise is organised as follows:
(a) The settlor respectively his legal successor
(b) The Board of Trustees
(c) The auditors, if any"
Then at article 8 under the heading "Board of Trustees"
"The Board of Trustees consisting of one or several natural persons or corporate bodies (trustees) is entrusted with the management and the representation of the trust enterprise. The Board of Trustees is nominated by the settlor respectively his legal successor.
In as far as these statutes or by-laws, respectively the regulations, do not provide anything different, the Board of Trustees decides freely where and in what way the business has to be run. He [this must mean the Board] can nominate directors, signing clerks and general special agents and entrust banks or trust companies with the administration of the funds. The investment of the funds remains in the competence of the Board of Trustees if the statutes do not provide anything else… the members of the Board of Trustees take their decisions by majority of vote of the members present, whereby the president gives if necessary the casting vote. In case there are only two members their decisions must be taken unanimously…all decisions taken must be entered into a minute book and have to be signed by attending members…"
"After the death of the first beneficiary [AB] the Board of Directors will act according to the following rules:
2(a) First of all, the Board of Directors will appoint a managing committee which will be entitled to give written instructions to the Bank concerning the assets management only…. "
"3. In summary, the Claimants' argument is that, during the Bank's custody of the assets, the Defendant failed in its duties and obligations in the following general respects:
(a) The Bank failed to carry out instructions given to it by its principal.
(b) The Bank carried out actions that were unauthorised because they were given on the sole instructions of one Mr Nezhet Tayeb, another customer of the Bank, who was not entitled to give sole instructions regarding the Claimants' affairs. As the Court will see, the relationship between the Bank and Mr Tayeb, who was a customer of the Bank, has caused the problems that lie at the heart of this dispute.
(c) The Bank carried out actions which were designed to further its own commercial interests in retaining the Claimants' assets, rather than the interests of the Claimants that such assets might be managed (in whole or in part) independently of the Bank. As the Court will see, the Bank was concerned to ensure that it retained control of the management of the assets that had been transferred to the Shake Trust Reg, presumably to ensure that it continued to receive the, significant, fees that it obtained for the management of the assets. As stated above, these totalled USD 2.78 million.
(d) The Bank carried out actions which were designed to further its own commercial interests in being Mr Tayeb's banker rather than being concerned with the interests of its customers, namely the Claimants.
4. In doing those things the Bank acted in breach of duties owed to the Claimants under Swiss and Liechtenstein law and the Claimants seek accounts and inquiries either because (a) they are entitled to these as a matter of substantive right under Swiss or Liechtenstein law or (b) they are entitled to those remedies from this Court in order to assess and recompense them for their losses. In addition, the Bank has put itself in a position where it would be appropriate for this Court to make orders for accounts and inquiries, based on the Court's in personam jurisdiction over fiduciaries so that the Claimants can identify and make good the deficiency in the assets for which the Bank was responsible.
5. The Court is invited to bear in mind the following theme which is reflected in each and every criticism that the Claimants have to make about the Bank's conduct. The Bank has throughout its dealings with the assets derived from Mr Al Abood preferred its own interests, either directly in wishing to keep control of the assets by any means available, or indirectly, in giving preference to the interests and wishes of Mr Tayeb above those of the Claimants (where Mr Tayeb was a long standing customer of the Bank in his own right). The Claimants submit that the difference in the treatment accorded by the Bank to Mr Tayeb and that accorded to Mrs Al Abood is striking….
7. It is the belief of Mrs Al Abood that assets that belonged to her husband have gone missing after her husband's death. She knew little about his business affairs at the time of his death and then, and for a number of years, she trusted Mr Tayeb. As will be clear to the Court, she now no longer trusts Mr Tayeb. She believes that assets that belonged to her husband, and that should belong to her son, have been misappropriated, perhaps by Mr Tayeb and/or Mrs El Shamari.
8. This belief of Mrs Al Abood, who was of course herself a client of the Bank, has been ridiculed and mocked by the Bank, who describe it as "the missing black hole". This trial is not concerned with the black hole or with Mrs Al Abood's belief, or the reasons for that belief, or whether those reasons are justified or not. The Claimants accept that and assume that the Bank does as well.
9. This trial is concerned with the stewardship of the Bank of the assets that it received following the death of Mr Al Abood in 1986. The Claimants submit that the evidence reveals that the Bank's stewardship of those assets was, on any view, not satisfactory and that the Bank has preferred its own interests and those of Mr Tayeb and that questions remain unanswered as to what the Bank did and why.
10. In the light of the role of Mr Tayeb, the fact that the Bank has, over a long period of time, sided with, or appeared to side with, Mr Tayeb, and the manner in which the Bank has dealt with the Claimants' complaints and requests for information, it is perhaps not surprising that there is clear and understandable anger on the part of the Claimants, and in particular, Mrs Al Abood, at the conduct of the Bank.
11. The Claimants submit that it is surprising, in the light of the allegations that are made, and in the light of the position as revealed by the Bank's own documents, that the Bank has not sought to ensure that material witnesses come to Court to support the Bank and to explain their actions. This is particularly so in relation to Mr Klonis, who was the relationship manager at the Bank responsible for the Bank's relationship with Mr Al Abood, Mrs Al Abood and the Shake Trust Reg and also, apparently, Mr Tayeb. Mr Klonis' evidence had to be taken by the Claimants on deposition: that evidence is inevitably treated with scepticism by the Claimants. It extends to other senior managers who, as appears below, played important parts in the story, including Mr Andrew Scott Plummer of the Bank's London head office, legal department. It includes Mr Tayeb, who it is believed remains a client of the Bank."
The effect of the Claimants' amendments
"(1) Information explaining describing and demonstrating what the Defendant has done and the reasons for what the Defendant has done, in relation to the assets belonging to or beneficially owned by the Claimants as specified above"
But not including anything which had already been provided to them; and
(2) Confirmation from the Bank, from an appropriate officer of its Head Office in London that nothing further of relevance to the Claimants and the issues raised above, is in the Bank's possession or control."
(1) The Envelope;
(2) The French Franc deposit in the amount of FFr168,766.28;
(3) The failure to transfer 20% of the assets of the Shake Trust to Goldman Sachs in February 1997;
(4) The abolition of the founder's rights;
(5) The Landglaze payments;
(6) Improper investments identified as the Barclays shares, the Venezuelan bonds and certain forex transactions;
(7) The costs incurred by the Claimants in seeking accounts since January 1998;
(8) Two breaches of confidentiality;
(9) The failure by the Bank to supervise its personnel;
(10) Excessive fees charged by the Bank to the Shake Trust;
(11) Payments to third parties;
(12) Payments to Drake Securities and Quijano
(13) Certain fees paid by the Shake Trust to ATU or Meier & Holzhacker.
As to item (3):-
"(1) As a matter of substance the claim in respect of the 20% transfer was originally made under Liechtenstein law on the basis that Bank was liable as a de facto trustee/organ for the decision not to transfer the funds. However, as a result of their own expert evidence, the Claimants accepted that this claim was barred by limitation. The claim is now put purely as a matter of Swiss contract law. It also originally included the difference between the investment yield obtained by the Bank on the 20% and the corresponding yield which would have been obtained by Goldman Sachs. This alleged damage was deleted and the claim is now limited to the fees obtained by the Bank in respect of the 20% retained by it."
As to item (5):-
"(2) The claim in respect of the Landglaze payments originally included a claim for the difference between the interest obtained from Mr Tayeb pursuant to the judgment of Rimer J and the investment yield which could have been obtained on the total of the payments made to Landglaze. This alleged damage was deleted and the claim is now limited to the difference between the costs incurred by the Claimants in the Landglaze proceedings and the amount in respect of costs recovered from Mr Tayeb."
As to item (6):-
"(3). The claim in respect of improper investments originally had three elements: Barclays shares, Venezuelan bonds and forex transactions. It is now limited to the forex claims only."
The Claim relating to the failure by the Bank to transfer 20% of the assets of the Shake Trust to Goldman Sachs to be managed by that bank.
(c) The Bank's refusal to transfer 20% of the value of the assets of the Shake Trust to Goldman Sachs in accordance with the request made by letter dated 21st February 1997 referred to at paragraph 170 above, including [324.2(b)] fees which the Bank would not have been paid but for the breach of duty identified in sub-paragraph 324.1(c) above, namely 20% of the fees earned by the Bank as a result of managing the assets of the Shake Trust from 21st February 1997 to September 2000."
The Landglaze payments
"The Managing Committee of the Trust is hereby authorising Mr Nezet M Tayeb to give instructions to the Bank about the payment of an administration fee starting as from 1st of January 1992.
This fee cannot exceed 0.5% pa of the total assets of the Trust and will be based on quarterly valuation of the Bank. The payments will be effected every three months beginning at the end of March 1992."
"Shake Trust A/C No. 174284
Further to our previous conversations, I am sending you the original of a resolution for the aforementioned Trust dated 6th March 1992 and duly signed by the President and members of the Trust's Committee. Please enter this document in your records and give appropriate instructions to IMS [the Bank's Investment Management Service] so that they follow the Committee's new directives. I shall personally contact Mr Tayeb to ask him for precise instructions as regards payment of the administration commission which I will forward to you on receipt."
"PS: in case you would like more informations [sic] please contact the manger of the account Mr Klonis. Thank you."
The payments started on the 8th February 1992 and were continued quarterly the last payment on the 30th June 1998. They were made inter-account transfers from the Shake Trust's account with the Bank to Landglaze account. Each transfer order was signed by Primeway's duly authorised signatories at the material time. Primeway was a duly authorised sole signatory on that account pursuant to clause 2 of the fiduciary contract and mandate agreement, made between AB and the Bank and a mandate agreement made between AB and Primeway, both these documents being signed on or about the 12th February 1986 by AB, and the account opening documentation.
"19. I was provided with the original of the 6 March 1992 resolution under cover of an internal memorandum from Mr Klonis dated 20 March 1992. The resolution, signed by Mr Tayeb and Mrs Al Abood, recited at the outset that the Managing Committee had decided to play a more pro-active role in the Shake Trust's investment strategy. Consequently, it instructed the Bank to replace the existing investment guidelines with new investment guidelines as set out. The Bank was asked to provide a quarterly US dollar valuation to Mr Tayeb and a full report on its performance. The resolution also stated that.
"- The Managing Committee of the Trust is hereby authorizing Mr Nezet M. Tayeb to give instructions to the Bank about the payment of an administration fee starting as from the 1st of January 1992.
- This fee cannot exceed 0.5% p.a. of the total assets of the Trust and wi11 be based on the quarterly valuation of the Bank. The payments will be effected every three months beginning at the end of March 1992."
Mr Klonis explained to Mrs Didisheim that part of the purpose of the 6 March 1992 Resolution was to enable the Shake Trust to make payments to Mr Tayeb as remuneration for his services as Chairman of the Managing Committee of the Shake Trust. It is almost certain that I discussed the terms of the 6 March 1992 Resolution with Mrs Didisheim given the way in which she worked although I do not now have any specific recollection of that conversation. There was nothing about the resolution which in any way seemed suspicious. It appeared to be simply a change of investment guidelines and an authorisation to pay an administration fee.
20 Primeway notified Mr Des Arts of IMS of the new investment guidelines under cover of my memorandum dated 30 March 1992. This memorandum is signed by Mrs Didisheim and myself (which is another reason why I am sure Mrs Didisheim and myself discussed the terms of the 6 March 1992 Resolution) on behalf of Primeway as one of the Shake Trust's trustees giving instructions to the Bank. On 27 April 1992, Mr Tayeb gave written instructions (as anticipated in the 6 March 1992 Resolution) to pay the 'quarterly administration commission of 0.5% of the above Trust as on 31 March 1992 and quarterly thereafter to the account of Landglaze Holdings with yourselves.' Mr Klonis sent a copy of this fax to me under cover of an internal memorandum of 27 April 1992. I sent an internal memorandum on behalf of Primeway to Mr Des Arts of IMS dated 29 April 1992 referring to the new investment guidelines and the calculation of the administration fee. IMS calculated the fee that was due on the basis of the 6 March 1992 resolution and informed Primeway so that it could authorise the payment to Landglaze in accordance with Mr Tayeb's instructions. The Bank was of course obliged to follow the instructions of Primeway in this respect.
21. The first administration fee payment of US$35,917 was made pursuant to an inter-account transfer order signed by Mrs Didisheim and I and dated 8 May 1992 and from 8 July 1992 they were made quarterly. There were 26 payments made in all: each of them calculated by IMS and authorised by two individuals duly authorised to sign on behalf of Primeway. A table showing the, date of each payment and identifying the relevant signatories is at Appendix 1 to this statement."
"Unfortunately we cannot allow you to commence proceedings against Mr Tayeb on behalf of the Trust for the reasons put forward in your letter.
It seems curious to us to say the least that Mrs Al Abood wants to bring an action against Mr Tayeb for something that she has required and accepted herself by countersigning the demand made by the Managing Committee to the Trustees on the 6th March 1992.
Therefore we would like on the contrary that your client explains to us why she made such a request at the time, i.e. to be paid for the role of member of the Managing Committee, and required us to follow the instructions given by Mr Tayeb in this respect? We hold her fully responsible for the payments made to Mr Tayeb on behalf of the Managing Committee."
"57. I am also aware that Mr Justice Rimer has found that the Managing Committee was not entitled to authorise the commission paid under the authority of the 6 March 1992 Resolution and that a joint resolution of Primeway and Dr Meier was required. This was not the understanding of Mrs Didisheim and myself in 1992 or at any time subsequently.
58. Primeway's understanding was that, given the terms of the 6 March 1992 Resolution and the fax from Mr Tayeb dated 27 April 1992, it was entitled to authorise the Bank to pay commissions to Landglaze without Dr Meier's joint approval. If the position had been otherwise, Primeway would of course have sought Dr Meier's consent. The Bank paid the commissions to Landglaze on the basis of instructions given to it by two authorised signatories of Primeway. Whatever the fault of Primeway in this regard, the Bank was bound to follow the instructions given to it by Primeway."
" Conclusions on fees
The expenditure on the professional fees of solicitors and accountants was, as I have held, expenditure incurred by the plaintiffs in reasonably mitigating their loss. Prima facie therefore, it is claimable under the ordinary rules relating to mitigation. However, litigation costs have traditionally been subject to special rules for policy reasons. Prior to the change in the taxation rules there was an established distinction between such costs incurred in proceedings between the same parties, and those incurred in proceedings against third parties. This was anomalous, given that similar policy considerations applied in each case. The most recent cases show that the position must be reconsidered in the light of the changes to the taxation rules. This enables the anomaly to be resolved. Under the new dispensation, taxation on the standard basis is to be regarded as equivalent to the solicitor and client basis referred to by McGregor. Accordingly, where costs on the standard basis have been recovered from the defendant in other proceedings, there is no basis for an additional claim by way of damages."
"The costs which are the basis of this part of the claim in the present case are the exact equivalent of the costs considered in the Hextall Erskine case. It is not possible to distinguish that case. It therefore becomes necessary to consider the second question referred to above, namely whether the Hextall Erskine decision ought to be followed in this case.
I confess that I am impressed by the criticism in the latest edition of McGregor on Damages of this part of the decision of Carnwath J and of the dicta in the Court of Appeal on which it is based. The general rule is that one judge at first instance is not strictly bound by the decision of another judge of co-ordinate jurisdiction. But a judge of first instance should, as a matter of judicial comity, follow a decision of another judge of first instance unless he is convinced that it is wrong (see the statement of 'the modern view' in Police Authority for Huddersfield v Watson  1 KB 842,  2 All ER 193 at page 848 of the former report, and compare Colchester Estates (Cardiff) v Carlton Industries plc  Ch 80,  2 All ER 601 at page 85 of the former report). While I have doubt, I am certainly not convinced that Carnwath J was wrong. Moreover he based himself on clear dicta in the Court of Appeal. Great confusion might arise if I were to take a different view. If the matter is to be further considered this must, in my judgment, be done by the Court of Appeal.
Accordingly in respect of this head of damages I shall direct an inquiry to determine what amount would be payable in respect of Nicola and Gabrielle's own costs if these costs were taxed on the standard basis and I shall award as damages the amount so found."
The Forex claim
"- The Managing Committee of the Trust has decide to play a more pro-active role in the definition of the investment strategy and the administration of the assets of the Trust.
- Consequently the Bank is instructed to replace the guidelines of the first page of the by-laws referring to the management of assets with the following conditions:
a) Cash or assimilated assets (maturity maximum 12 months between 10% and 15%.
b) USA treasury stripes approximately 5%.
c) ECU zero coupon Bonds, Public Sector issues including supranationals, rating AAA or equivalent approximately 5%.
d) Bonds AAA or equivalent up to a maximum of 5 years maturity, between 75% to 80%.
e) The reference currency of the Trust's assets remains the US Dollar, with an approximate split: 80% in US Dollars 20% in other currencies.
- The above percentages refer to the total assets of the Trust presently managed by LLOYDS BANK PLC, GENEVA BRANCH."
(a) Under the Power of Administration signed by AB the Bank was authorised to manage the assets of the Shake Trust (when it came into existence and obtained assets).
(b) Once the Trust was established, Primeway, for the Trust, duly confirmed that appointment.
(c) The width of this general mandate contract can be cut down by particular instructions from the client.
(d) For the purpose of this issue those instructions are contained in the Managing Committee's Resolution of the 6th March 1992 the relevant parts of which are set out above. In particular the Resolution stipulated that the total assets of the Trust should be split as to 80% in investments denominated in US Dollars and as to 20% in other currencies.
(e) The Investment Policy for the Trust assets should reflect a conservative investment approach.
(f) If viewed as separate investments the hedging transactions incurred total loses of US$892,437.95. It is however accepted on behalf of the Trust that all the Forex transactions were designed to protect the Trust's non-dollar investments from an appreciation in the value of the US Dollar which was the reference currency of the Trust.
(g) The Bank did not get specific instructions from the Trust to enter into the forward exchange transactions but embarked on them as part of a general investment policy which was not specific to the Shake Trust. The Claimants' case is that entering into these hedging transactions distorted the pattern of the Trust's holdings of assets so that it did not conform to the 80/20 split prescribed by the Resolution of the 6th March 1992 by having the effect of converting non-dollar investments into what amounted to US Dollar investments.
"I also do not accept KPMG's conclusion that the effect of the transactions was to convert the Shake Trust portfolio essentially into US Dollars and therefore in breach of the by-laws requiring 20% to be held in other currencies. The foreign exchange transactions only hedged the currency exchange rate risk. They did not remove the interest rate and performance risk of having investments in currencies other than the Trust's reference currency. The hedging of the interest rate risk would have required exchange rate swaps as well. Thus in my view the interest rate and performance risk of the portfolio remained diversified between US Dollars and other currencies as provided by the by-laws. KPMG's conclusion is only correct if the underlying assets were foreign currency deposits being hedged. As to this, the first hedging transaction on the KPMG list related to a Deutschmark deposit which, due to the hedge, was considered part of the US Dollar element of the portfolio in the relevant quarterly report. However, the balance of the hedging transactions related to underlying bond investments and not deposits."
The ATU/Meier/Holzhacker fees claim
"In order to withdraw the current complaint against Lloyds Bank in Geneva on the subject of Shake Trust Reg. (herein after "Shake Trust") and put an end to past controversies, the parties agree as follows:"
There is then at clause 1 a provision for the appointment of three new Trustees whereupon Primeway and Dr Meier will resign as such Trustees. At clause 2 are provisions for the registration of the new Trustees and at clause 3 for the Bank to transfer the assets to other banks appointed by the new Trustees or the Managing Committee. Then at clause 4:-
"The plaintiffs [Mrs AB and Mahmoud] shall, with discontinuance, and in execution of this Agreement, withdraw the complaint lodged by them against Lloyds."
Then at clause 5:-
"The plaintiffs give full discharge to the Bank, to ATU and to the Trustees in all matters concerning Shake Trust, including management of the commissions paid to the Managing Committee."