England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		16th May 2001

Mr Justice : Colman

The Applications

1. The proceedings in relation to which these applications arise are unusual. They raise an important point as to the strength of the case on the merits to be established in order to obtain leave to serve out of the jurisdiction and its relationship to the strength of the claim to be established to avoid being struck out under CPR 3.4 or 24.2. The nature and factual allegations of the claim may be summarised as follows. It is, however, necessary to set out many of the undisputed facts in some detail.

1.1 The first and second claimants ("Maria Elena" and "Isabel" respectively) are sisters, the daughters of the late Luis Noboa Naranjo ("Luis Noboa") who died in April 1994. He controlled and substantially owned the sixth defendant ("FSL"). It was a holding company for all the businesses controlled by Luis Noboa external to his place of residence, Ecuador, and it was incorporated in the Bahamas. As at 31st December 1997, according to its accounts, its assets were valued in excess of US$ 850 million.

1.2 The third claimant ("Harrington") and the fourth claimant ("Dressage") are both connected to Maria Elena. Harrington is incorporated in Bermuda. It acts as trustee for two trusts under which Maria Elena is both the settlor and, during her lifetime, a beneficiary. These are the Hanover Trust, constituted under the laws of Bermuda, and the Dressage Trust. The latter wholly owns Dressage which is incorporated in the British Virgin Islands.

1.3 The first defendant ("Alvaro") is the brother of Maria Elena and Isabel. He is resident in Equador and currently controls FSL.

1.4 The second defendant ("Earth") and the fifth Defendant ("Water") are both incorporated in the Bahamas and are both currently controlled indirectly by Alvaro.

1.5 In the course of 1993-4 Luis Noboa transferred the beneficial ownership of practically the entire issued share capital of FSL to his second wife ("Mercedes"), who was the step-mother of Maria Elena, Isabel and Alvaro, to Maria Elena and Isabel and to their sister, Diana. The shares were distributed as to (i) 48 per cent to a company owned and/ or controlled by Mercedes ("St. Etienne"), (ii) 4 per cent to a company called Cairncross Inc. owned by a trust, the Cairncross Trust, to be held for Mercedes during her life and after her death on behalf of Maria Elena (1.5 per cent) and a grandson of Luis Noboa ("Luchito") (1per cent), (iii) 48 per cent to a trust, the Tarland Trust, to be held for the benefit of Maria Elena, Isabel and Diana in equal shares. In the result Mercedes was beneficially interested in 52 per cent of FSL (480 Ordinary shares and 480 B shares) together with a life interest in 40 ordinary shares and 40 B shares, and Maria Elena, Isabel and Diana were each interested in 160 ordinary shares and 160 B shares.

1.6 Alvaro, who had previously worked in FSL, was therefore excluded. So was a fourth sister, Maria Leonor. She was in a comatose condition in hospital.

1.7 It is alleged by the claimants - and must be accepted for the purpose of these applications - that Alvaro was not prepared to accept his exclusion from FSL and he therefore took various steps both before and after his father's death to exclude his step-mother, Mercedes, from FSL and to enable him to intervene in and take over ownership and/or control of the company. Amongst those steps was the commencement of legal proceedings in Ecuador by which he challenged the so - called sociedad conjugal between Luis Noboa and Mercedes and its dissolution before Luis Noboa's death by which means Luis Noboa had put himself in a position to distribute the share capital in FSL in the manner already described. In the course of December 1996 Alvaro informed Mercedes that if she wished to escape the political pressure which Alvaro had procured to be exerted on her she must sell her shares in FSL to him.

1.8 Mercedes was unwilling to sell out to Alvaro and he therefore tried to induce Maria Elena and Isabel to help him to persuade Mercedes to relinquish her FSL shares.

1.9 By 10th January 1997 Mercedes had agreed to sell back to FSL her entire interest in that company in exchange for which FSL would transfer to her various assets. Alvaro agreed to end the legal proceedings in Ecuador. Mercedes did not sign this agreement until 7th March 1997. It is common ground that she became bound to its terms on that date. It became known as "the Master Agreement". The other parties were FSL, the ninth defendant, "Tarland", a Bahamian company wholly owned by the Tarland Trust, of which a Bermudan company called Codan Trust Company was trustee, Cairncoss Inc. (see para. 1.5 (ii) above), St. Etienne (see para. 1.5 (i) above) and Inversiones Cialiga S.A.

1.10 I interpose that if matters had stopped at the Master Agreement it is common ground that the position would have been that the issued share capital of FSL would have been reduced from 1000 each of the ordinary and B shares to 520 of each class. It would have been distributed as follows:

Isabel: 175 shares( her original 160 plus 15 shares in which she now had an immediate interest held by Cairncross);

Maria Elena: 175 shares (her original 160 plus 15 shares held by Cairncross);

Diana: 160 shares (her holding remaining unchanged);

Luchito: 10 shares held by Cairncross, in which he now had an immediate interest.

Therefore, Isabel's interest in FSL would have been 33.65 per cent, Maria Elena's interest 33.65 per cent, Diana's interest 30.77 per cent and Luchito's interest 1.9 per cent. Clearly that would have left Maria Elena and Isabel in control of FSL and Alvaro no further forward in his objective of gaining control of that company. To the extent that FSL had used assets to pay out Mercedes its disposable asset base had been reduced.

1.11 On or about 6th and 9th January 1997, about the same time as, or immediately following the agreement of Mercedes to sell her FSL shares under what came to be the Master Agreement, Alvaro, who is a qualified lawyer, persuaded Maria Elena and Isabel and their husbands to meet him in Guayaquil, Ecuador. The purpose of the meetings was stated by Alvaro to be to discuss the future of FSL which was a family matter. It is alleged that in the course of those meetings Alvaro is said to have made certain oral representations and/or given orally certain warranties to his sisters in relation to FSL. These are, as set out in the particulars of claim:

(1) his only objective was that he should have a share in FSL equal to and no greater than the share held by each of Maria Elena and Isabel;

(2) he was acting for and representing the interests of Maria Leonor, their incapacitated sister, as well as her minor children;

(3) any shares in FSL which Maria Elena and Isabel agreed should be issued or distributed to or for the benefit of Maria Leonor or her minor children would be placed in a trust for the benefit of Maria Leonor and the minor children until the children were 30 years old;

(4) he did not wish for, and would not seek to exercise, power or control in relation to FSL alone. Rather, Alvaro, Isabel and Maria Elena would jointly exercise such power and control. All material decision-making in relation to FSL would be on the basis of the consent of all of them;

(5) in order to ensure that there should be parity both in relation to ownership and control of their respective holdings:

(a) Alvaro would not, without the consent of Maria Elena and Isabel, seek to acquire any additional shares in FSL (nor would he sell any shares without their consent);

(b) Alvaro would not seek to vote any shares to be issued or distributed to or for the benefit of Maria Leonor and/or her minor children provided that Maria Elena and Isabel would not seek to vote the shares held by Tarland (over which they exercised voting control).

I interpose that although these statements are pleaded as in substance promissory warranties and mostly not as representations as to any existing fact, those representing the defendants have stated in the course of the hearing that they treated the pleading as if it contained a series of allegations that at the time of these meetings and subsequent meetings Alvaro made representations of fact, namely what his present intention was. This understanding is consistent with paragraph 47 of the particulars of claim which contains an allegation that neither at the time when those meetings took place nor subsequently did Alvaro intend to act in accordance with those representations.

1.12 On 13th January 1997 there was a further meeting between Alvaro, Maria Elena and Isabel at which it is alleged that he sought to persuade them to allow him to become the majority and/or controlling shareholder in FSL. It is alleged that he did not wish to be placed in a position in which he could be outvoted by his sisters. It is said that at a further meeting on 20th January 1997 the sisters rejected this suggestion.

1.13 At some stage in the course of the next few days the position changed significantly in as much as Isabel informed Alvaro by telephone that she did not wish to have any role in FSL if he was to have any role in the company. She indicated that she would be prepared to sell most of her shares in FSL back to that company but only if Alvaro would agree that Maria Elena would have management control of FSL if necessary jointly with Alvaro and that he would not attempt to gain ownership or control of the company. Alvaro is alleged to have agreed to this.

1.14 The details of the compensation to be paid to Mercedes and the other consideration for her relinquishing her shares in FSL were the subject of an agreement arrived at on 26th January 1997 with the assistance of a mediator, Dr. Leon Febres-Cordero ("the Febres-Cordero Agreement") and entered into by Mercedes, Alvaro on his own behalf and on behalf of Maria Leonor, Maria Elena, and Isabel on their own behalf and on behalf of their sister Diana. Clause 11 of that agreement provided that it was to be of no effect unless it had been implemented within 30 days from signature or during any agreed extension of that period. Implementation included the renunciation by Mercedes of her rights to any part of the estate of Luis Noboa in favour of his children (excluding one son), but including Alvaro, payment of the consideration for that renunciation to Mercedes and the termination of all litigation (necessarily including Alvaro's proceedings in relation to the sociedad conjugal between his father and Mercedes). It is to be observed that at this stage there had been no agreement as to the precise extent to which Alvaro could participate in FSL.

1.15 At numerous meetings at Guayaquil during the period 23rd to 30th January 1997 between Alvaro, Maria Elena and Isabel those three agreed in principle how Isabel was to be compensated for relinquishing most of her interest in FSL and how her shares were to be re-distributed. Their agreement as to compensation was recorded in a document dated 30th January 1997. Essentially, after disposal of her shares back to FSL, Isabel was to be left with a 3 per cent interest in FSL.

1.16 The following day, 31st January 1997, at a further meeting at Guayaquil, Maria Elena and Isabel signed a document indicating how the entire share capital of FSL relinquished by Mercedes and Isabel should be re-distributed. The result of that agreement was that

(i) 25% of FSL would be held by or for the benefit of Maria Elena;

(ii) 25.1% of FSL would be held by or for the benefit of Alvaro;

(iii) 25% of FSL would be held in trust by or for the benefit of Maria Leonor and her minor children until they reached the age of 30;

(iv) 1% of FSL would be held jointly by or for the benefit of Maria Elena and Alvaro for later distribution;

(v) 3% of FSL would be held by or for the benefit of Isabel;

(vi) 16% of the shares would be held by Tarland for Diana;

(vii) 1.9% of the shares would be held by a trust and a company for Luchito;

(viii) 3% of the shares would be held for the benefit of another brother and his children.

It is alleged that this agreement was induced by the representations which Alvaro made to the sisters and repeated during the course of the meetings in the last week of January. On that basis, that is to say provided that Alvaro gave effect to the intentions which he represented that he held, he, Maria Elena and Maria Leonor would each have an approximately equal interest in FSL and Alvaro would not be able to exercise control over FSL without Maria Elena. Together they would hold and be beneficially interested in 50.11 per cent of the shares. Importantly, it is further alleged in the particulars of claim that at the meeting on 31st January and at a further meeting held some days later Alvaro warranted and represented that:

(i) he did not wish, and would not seek, to exercise power or control in relation to FSL alone; rather, Alvaro and Maria Elena would jointly exercise such power and control, and all decision making in relation to FSL would be on the basis of the consent of both of them;

(ii) although he represented the interests of Maria Leonor and her minor children, any shares which Maria Elena and Isabel agreed should be issued or distributed for the benefit of Maria Leonor and/or her minor children were to be, and would be, held on trust until the minor children reached 30 years of age;

(iii) he would not without the consent of Maria Elena and Isabel seek to acquire any additional shares in FSL (including those to be distributed to or for the benefit of Maria Leonor and/or her minor children) and he would not without her consent sell any shares either;

(iv) he would not seek to vote any shares to be issued or distributed for the benefit of Maria Leonor and/or her minor children provided that Maria Elena and Isabel would not seek to vote the shares held by Tarland (over which they exercised voting control).

(v) the Board would consist of four persons, namely himself, Maria Elena and their spouses;

(vi) the Board would, in relation to major decisions, require approval from at least three board members.

1.17 On 4th February 1997 there were incorporated four Bahamian - registered companies, Earth Ltd, Wind Ltd, Water Ltd and Fire Ltd. It is not in issue that these were created to act as vehicles to give effect to the agreement reached on 31st January.

1.18 At this point it is necessary to refer to three Share Distribution Agreements all dated 26th February 1997. These agreements ("the February SDA's") are said by the claimants to be irrelevant to their claim and to these applications because they never became binding contracts or because they were subsequently superseded by the three Share Distribution Agreements executed on 2nd April 1997 ("the April SDA's"). It is, however, necessary to refer to them at this stage because the circumstances giving rise to these agreements are largely uncontroversial, whatever their legal effect, and are relied upon by the defendants. In the course of the period 20th to 26th February 1997 steps were taken by the legal representatives of interested parties to give legal effect to the agreements made on 30th and 31st January 1997 and to the Febres - Cordero Agreement. This exercise involved three aspects:

(i) the drafting and execution of the Master Agreement, one of the main purposes of which was to provide for Mercedes to relinquish her interest in and to transfer back to FSL her shares in that company and for the consideration which she was to receive;

(ii) the drafting and execution of an agreement to give effect to the 30th January agreement in principle relating to Isabel's disposal back to FSL of most of her shareholding;

(iii) the drafting and execution of an agreement to give effect to the sisters' agreement in principle made on 31st January in relation to the redistribution by FSL of the shares to be transferred to it by Mercedes and Isabel to those other interests who were to receive them, including in particular Alvaro, Maria Leonor and Luchito.

It is to be observed that the 30 day time limit for performance of the Febres - Cordero Agreement expired on 26th February 1997 so it would be open to Mercedes to revoke her agreement if that date passed and FSL had not bound itself to take up her shares. If that were to happen, the family settlement would collapse. The parties were, it may safely be inferred, under some pressure to give legal effect to their agreements in principle by that date. For this purpose it was agreed that the redistribution arrangements should not be disclosed to Mercedes and that, for reasons which do not matter for present purposes, there should be three redistribution agreements, each binding a separate interest or group of interests to the agreed redistribution.

1.19 The lawyers therefore prepared three Share Distribution Agreements, each of which provided for FSL to sell and distribute at US$2.86 per share 250 Ordinary shares and 250 B shares to Earth (Alvaro's vehicle), 251 Ordinary shares and 251 B shares to Water (Maria Leonor's vehicle), 10 Ordinary shares and 10 B shares to Wind (Alvaro's and Maria Elena's joint interest) and 30 Ordinary shares and 30 B shares to Fire (the vehicle of the other brother Lucho). Although these three February SDA's all appear to have been signed by all parties, including FSL, by 26th February 1997, that company had not executed these agreements under seal. The agreements were signed on its behalf by Mr. Aguirre, one of its directors, and it warranted that it had the necessary corporate power to enter into the agreements and that by the Closing Date it would have all other necessary authority to enter into, execute and deliver the February SDA's and to perform all its obligations. It is unnecessary for present purposes for me to express any view on whether that company ever became bound and, if it did not, whether the legal consequence was that none of the other parties to the February SDA's became bound inter se. It is sufficient to identify the incontrovertible attribute of these three agreements, namely that it was regarded as necessary by all the parties or at least those advising them that they should sign these documents at that time to reflect the agreements in principle that had already been arrived at in January. It is further to be noted that by 25th February 1997 Alvaro, Maria Elena and Isabel and the Hanover Trust and Brunswick Trust had all executed the Master Agreement in the space of two days. It was eventually executed by all the other parties, including Mercedes, on 7th March, but was dated "as of 26th February" no doubt to comply with the Febres - Cordero Agreement time-limit.

1.20 Finally, it is to be observed that it was expressly provided by the February SDA's that they incorporated the terms and conditions of the 30th January 1997 agreement and stated that those terms and conditions were to be set forth in the Brunswick Share Purchase Agreement ("the Brunswick Agreement"). The sale and delivery of the shares provided for under the February SDA's was expressly stated to be subject to performance of the Brunswick Agreement.

1.21 It is further alleged that in or about late February 1997 Maria Elena caused a draft "Memorandum of Agreement" dated 26th February 1997 to be sent to Alvaro for signature in order to record their agreements as to their management of FSL. It provided that:

(1) the parties to the agreement would, in relation to any election of directors of FSL, vote all shares owned by the parties or over which those parties had voting control so as to fix the number of directors of FSL initially at four. Two of the four directors were to be nominated by Maria Elena and the Hanover Trust trustee (at the time, Codan). The number of directors might be increased and elected with the consent of, among others, Maria Elena and the Hanover Trust trustee.

(2) none of the parties to the agreement would sell, transfer, convey, assign, charge, hypothecate or otherwise dispose of or grant any security interest with respect to any shares owned or held by them without the consent of, among others, the Hanover Trust trustee and Maria Elena.

At a meeting in early March 1997 Alvaro told Maria Elena that he did not consider it appropriate that he should sign as they were brother and sister and ought to trust each other, but he represented and agreed that he would run FSL jointly with her and would abide by each of the terms of the Memorandum of Agreement.

1.22 Following the signature by all parties of the Master Agreement, the parties negotiated the terms of the Brunswick Agreement which was eventually executed by 1st April 1997 and dated as of 2nd April 1997. The parties to it were FSL, Maria Elena, Isabel, Alvaro, Tarland (the ninth defendant), Codan (as trustee of the Brunswick Trust (Isabel's interest) and of the Hanover Trust (Maria Elena's interest) and Pembroke (the eighth defendant) as nominee for Codan). Under the agreement Brunswick sold 145 Ordinary shares and 145 B shares (most of Isabel's interest) back to FSL. It also provided for certain related transactions and in substance gave effect to the agreement in principle of 30th January 1997.

1.23 The three April Share Distribution Agreements were each dated 2nd April - the same date as that of the Brunswick Agreement. They were not identical to the February Share Distribution Agreements, but the distribution of the FSL shares which that company had bought in from Mercedes under the Master Agreement and from Isabel under the Brunswick Agreement was substantially that which had been arrived at in the agreement in principle of 31st January and which was reflected in the February Share Distribution Agreement. The parties to the three agreements were:

(i) FSL, Dressage (the fourth claimant), Earth, Water, Wind, Fire and Tarland, this being conveniently referred to as "Diana's SDA";

(ii) FSL, Dressage, Earth, Water, Wind, Fire, Pembroke (as nominee for Codan as trustee of the Brunswick Trust) and Codan (as trustee of the Brunswick Trust), this being conveniently referred to as "Isabel's SDA".

(iii) FSL, Dressage, Earth, Water, Wind, Fire, Codan (as trustee of the Hanover Trust) and Pembroke (as nominee for Codan as trustee of the Hanover Trust), this being conveniently referred to as "Maria Elena's SDA".

By these agreements it was agreed that 616 of the 625 Ordinary and B shares sold back to FSL should be sold at par (US$2.86 per share) as follows:

(i) 251 Ordinary and 251 B shares to be sold to Earth ( Alvaro's vehicle);

(ii) 250 Ordinary and 250 B shares to be sold to Water (Maria Leonor's trust vehicle);

(iii) 10 Ordinary and 10 B shares to be sold to Wind (Maria Elena's and Alvaro's joint share vehicle);

(iv) 30 Ordinary and 30 B shares to be sold to Fire ( the vehicle for the other brother, Lucho);

(v) 75 Ordinary and 75 B shares to be sold to Dressage (Maria Elena's vehicle).

Dressage was incorporated in March 1997 for the purpose of holding these shares. Further, by a board resolution on 2nd April 1997, FSL sold 9 of its Ordinary shares and 9 B shares to Luchito. These were the last of its remaining shares out of the 625 relinquished by Mercedes and Isabel.

1.24 Following completion under the Master Agreement, the Brunswick Agreement and the three April Share Distribution Agreements the total issued shares of FSL were held as follows representing the following percentages of the total:

(i) Isabel Interests 30 shares 3%

(ii) Diana Interests 160 shares 16%

(iii) Maria Elena 250 shares 25% (partly through Dressage - 75)

(iv) Alvaro 251 shares 25.1% (through Earth)

(v) Maria Leonor 250 shares 25% (through Water)

(vi) Lucho 30 shares 3% (through Fire)

(vii) Luchito 19 shares 1.9%

(viii) Maria Elena and Alvaro jointly

10 shares 1% (through Wind)

1.25 The Master Agreement, the Brunswick Agreement and the three Share Distribution Agreements all contained terms referring all disputes to the exclusive jurisdiction of the Commercial Court in England.

1.26 It is alleged that, but for Alvaro's representations, Maria Elena would never have consented to and/or requested and/or authorised and/or recommended Codan (as trustee) and/or Pembroke (as nominee) and/or Dressage and/or Tarland and/or FSL to enter into the three (SDA's). The impact on Maria Elena personally is extended to the corporate parties to the agreements by the allegation that the representations induced them (through her) to enter into the agreements. By proposed amendments the allegations of inducement are extended to the February Share Distribution Agreements. It is pleaded that, if necessary, it will be contended that the warranties and/or representations made by Alvaro were made by him as agent for any company that he would procure to execute those February and April Share Distribution Agreements and were addressed to Maria Elena on her own behalf and/or as agent and/or on behalf of any company that she would procure to execute those agreements.

1.27 It is common ground that in October 1997 Alvaro informed Maria Elena that he had directly or indirectly acquired the entire holding of 250 FSL shares which had been transferred in April 1997 to Water on trust for Maria Leonor. It is alleged that this acquisition was procured without the prior consent of Maria Elena, Isabel, the trustees of the Hanover Trust or the trustees of the Brunswick Trust or of Maria Leonor or her children or their father or guardian. The consequence of this acquisition has been that Alvaro has exclusive direct or indirect ownership and control of more than 50 per cent of FSL's issued shares. It is alleged that since October 1997 Alvaro has excluded Maria Elena from the management of FSL contrary to his represented intentions and warranties which induced her to enter into the three Share Distribution Agreements.

1.28 The claimants allege that all the representations by Alvaro to which I have referred were false and/or misleading and made fraudulently without any belief in their truth and with intent to deceive Maria Elena and Isabel in as much as Alvaro never intended to act in accordance with them but instead only to achieve his objective of obtaining exclusive ownership and control of FSL.

1.29 The primary remedy claimed by Maria Elena, Harrington and Dressage (they being her vehicles for holding the FSL shares) is rescission of the three April Share Distribution Agreements, and, if necessary, the February Share Distribution Agreements, on account of the fraudulent misrepresentations made by Alvaro. It is contended that the parties to those agreements should be restored to the position they were in prior to entering into those agreements to the effect that all re-distributions of FSL shares should be reversed so that Alvaro no longer has any direct or indirect ownership or control of FSL. Paragraph 51 of the Particulars of Claim is in somewhat unusual terms:

"(1) although Isabel does not herself make a claim for rescission, she supports the claim for rescission made by the other Claimants;

(2) the Claimants (including Isabel) undertake themselves to comply with any order made requiring them to restore the benefits (if any) received by them pursuant to the said agreements."

This is to be explained partly by reference to the course adopted in other proceedings in this court, in which Codan claimed payment from FSL under a promissory note issued pursuant to the Brunswick Agreement. That claim was brought in Codan's capacity as trustee of the Brunswick Trust of which Isabel was the beneficiary. The promissory note was part of the consideration for the sale back to FSL of 145 of Isabel's shares under the terms of the Brunswick Agreement. In the course of those proceedings for summary judgment before Mr Justice Longmore, counsel for Codan, Mr Anthony Boswood QC, told the court that Codan did not seek and would never seek rescission of any of the agreements to which it was a party. It was of course a party in the same trustee capacity to the Isabel SDA. In subsequent correspondence Macfarlanes, Codan's solicitors, confirmed that Codan stood by counsel's representations and would not seek rescission "of any of the related agreements signed in February and April 1997". This clearly included the Isabel SDA and the February Share Distribution Agreement to which Codan as trustee of the Brunswick Trust was a party. It is therefore common ground that Isabel has affirmed her SDA and the Brunswick Agreement. It has more recently become clear that she does not maintain that she relied on Alvaro's representations since she did not believe in their truth. She therefore cannot claim rescission. Since she makes no claim but is a party to the proceedings her position cannot go further than that of neutrality in respect of the claim of any of her co-claimants to rescind that Share Distribution Agreement. Since she is not a party to any other Share Distribution Agreement her support is irrelevant.

1.30 There are alternative claims by Maria Elena and Isabel for specific performance of agreements relating to the sharing of management of FSL and of the undertaking by Alvaro not to acquire the FSL shares issued to Water for the benefit of Maria Leonor and/or her minor children. In the further alternative Maria Elena and/or Harrington claim damages against Alvaro for deceit alternatively breach of contract, alternatively in lieu of rescission.

2.1 There are applications by Alvaro, Earth and Water for the claim for rescission to be struck out under CPR 3.4.2, alternatively for summary judgment under CPR 24.2 dismissing the claim for rescission. There is an application by FSL that service of the claim form against it in London and the order of Mr Justice Longmore of 1st February 2000 granting leave to serve process upon FSL in the Bahamas and the service of it there be set aside. It is submitted on behalf of Alvaro, Earth and Water that the rescission claim should be struck out because the Particulars of Claim disclose no reasonable grounds for the claim for rescission and/or that such claim is an abuse of process or is otherwise likely to obstruct the just disposal of the proceedings. They further submit that they should be granted summary judgment dismissing the claim for rescission because the claimants have no real prospect of succeeding on it and there is no other reason why the issue should be disposed of at trial. FSL submits in relation to the order for service out that in as much as it is only a party to these proceedings by reason of the claim for rescission and that for specific performance which is connected to it, that being the only part of the relief claimed by which it is affected and as to which it would need to be bound by any judgment, jurisdiction can only be based on the relevant parts of the claim giving rise to a serious issue to be tried. It is submitted that, since there is no serious issue as to rescission of the share distribution agreements, the order for service on FSL in the Bahamas should be set aside.PRIVATE 

2.2 The issue on all these applications, therefore, is whether there is insufficient substance in the claim for rescission of the April Share Distribution Agreements to the effect that the claim should be struck out under CPR 3.4.2 or dismissed under CPR 24.2 or does not present a serious issue to be tried or a real issue which it is reasonable for the court to try under CPR 6.20.

It is therefore appropriate to consider this issue first before turning to other issues, in particular those raised on behalf of FSL. Before doing so, however, it is necessary to identify the tests to be applied for the purposes of these three provisions.

2. The Tests to be applied

3.1 The most recent authority on the tests to be applied under CPR 3.2 and 24.2 is the decision of the House of Lords in Three Rivers District Council v. Bank of England [2001] UKHL 16. The issue was whether the facts alleged by the claimants, if proved, were capable of amounting to the tort of misfeasance in public office on the part of the Bank. The claim against the Bank arose out of its decision to close down BCCI in July 1991. Fundamental to the allegation of misfeasance in public office was the allegation that the Bank permitted BCCI to continue to take deposits during a period when it knew that there would be no effective and comprehensive rescue or was reckless as to whether there would be one. The essential issue on the applications to strike out was whether there was such little substance in that allegation that it should not be permitted to go to trial. The House of Lords considered by a majority of three to two that the claim should not be struck out.

3.2 The leading judgment is given by Lord Hope. He referred at para 90 to a passage from the judgment of Lord Woolf MR in Swain v. Hillman [2001] 1 All ER 91,92:

"Under r24.2, the court now has a very salutary power, both to be exercised in a claimant's favour or, where appropriate, in a defendant's favour. It enables the court to dispose summarily of both claims or defences which have no real prospect of being successful. The words 'no real prospect of being successful or succeeding' do not need any amplification, they speak for themselves. The word 'real' distinguishes fanciful prospects of success or, as Mr Bidder QC. submits, they direct the court to the need to see whether there is a 'realistic' as opposed to a 'fanciful' prospect of success."

Lord Hope then drew attention to Lord Woolf's explanation in the course of the same judgment for the different wording in CPR 3.4.2 - "that the statement of case discloses no reasonable grounds for bringing .... the claim" - and CPR 24.2 - "that the claimant has no real prospect of succeeding on the claim or issue" - as being that in the former case the court is generally only concerned with the matters pleaded in the statement of case whereas under CPR 24.2 a wider investigation may be involved.

3.3 As regards the application of the test, Lord Hope emphasised at para 92 that it was essential to keep in mind the overriding objective of dealing with each case justly consistently with Article 6.1 of the European Convention on Human Rights. He observed:

"In more difficult and complex cases such as this one, attention to the overriding objective of dealing with the case justly is likely to be more important than a search for the precise meaning of the rule".

At para 93 Lord Hope cited Lord Woolf's "further guidance in Swain v. Hillman, at pages 94-95:

"It is important that a judge in appropriate cases should make use of the powers contained in Part 24. In doing so he or she gives effect to the overriding objectives contained in Part 1. It saves expense; it achieves expedition; it avoids the court's resources being used up on cases where this serves no purpose, and, I would add, generally, that it is in the interests of justice. If a claimant has a case which is bound to fail, then it is in the claimant's interests to know as soon as possible that that is the position. Likewise, if a claim is bound to succeed, a claimant should know this as soon as possible....

Useful though the power is under Part 24, it is important that it is kept to its proper role. It is not meant to dispense with the need for a trial where there are issues which should be investigated at the trial. As Mr Bidder put it in his submissions, the proper disposal of an issue under Part 24 does not involve the judge conducting a mini trial, that is not the object of the provisions; it is to enable cases, where there is no real prospect of success either way, to be disposed of summarily."

Lord Hope then observed at para 95:

"For the reasons which I have just given, I think that the question is whether the claim has no real prospect of succeeding at trial and that it has to be answered having regard to the overriding objective of dealing with the case justly. But the point which is of crucial importance lies in the answer to the further question that then needs to be asked, which is - what is to be the scope of that inquiry?

I would approach that further question in this way. The method by which issues of fact are tried in our courts is well settled. After the normal processes of discovery and interrogatories have been completed, the parties are allowed to lead their evidence so that the trial judge can determine where the truth lies in the light of that evidence. To that rule there are some well-recognised exceptions. For example, it may be clear as a matter of law at the outset that even if a party were to succeed in proving all the facts that he offers to prove he will not be entitled to the remedy that he seeks. In that event a trial of facts would be a waste of time and money, and it is proper that the action should be taken out of court as soon as possible. In other cases it may be possible to say with confidence before trial that the factual basis for the claim is fanciful because it is entirely without substance. It may be clear beyond question that the statement of facts is contradicted by all the documents or other material on which it is based. The simpler the case the easier it is likely to be take to that view and resort to what is properly called summary judgment. But more complex cases are unlikely to be capable of being resolved in that way without conducting a mini-trial on the documents without discovery and without oral evidence. As Lord Woolf said in Swain v. Hillman, at p95 that is not the object of the rule. It is designed to deal with cases that are not fit for trial at all."

It is to be observed that Lord Hope referred to the remarks of Lord Templeman in Williams and Herbert Ltd v W&H Trade Marks (Jersey) Ltd [1986] AC 368 at 435H-436A - that if an application to strike out involves a prolonged and serious argument the judge should, as a general rule, decline to proceed with the argument unless he not only harbours doubts about the soundness of the pleading, but in addition, is satisfied that striking out will obviate the necessity for a trial or will substantially reduce the burden of preparing for the trial or the burden of the trial itself. However, at para 97, he agreed with the Court of Appeal that the judge before whom the strike-out application had been made was "right to embark on the exercise". This notwithstanding the considerable complexity of the evidence. The hearing, in the House of Lords, I am told, lasted about four weeks and Lord Hope noted at para 11 that the claimants' written case extended to 385 pages and that of the Bank to 737 pages, there being also nearly 1000 pages of documents.

3.4 The fact is that there may exceptionally be cases of great factual complexity where, if the application to strike out the claim is under CPR 24.2, it may be essential for the judge before whom the application is made to conduct a careful investigation of the evidence to ascertain whether, in spite of the intrinsic complexity, there is obviously no substance in the claim. If that conclusion cannot be reached on the basis of the facts pleaded by the claimant and on any further facts which are indisputable, either because they have been admitted or because they have gone unchallenged when there was a reasonable opportunity to challenge them, or because they are the only realistic inference from other pleaded or admitted or unchallenged primary facts, the claim should be left to go to trial. However, as Three Rivers District Council shows, where the application in such complex cases relies on inferences of fact, the overriding objective may well require the claim to go to trial in the interests of a fair trial. That is because the relevant inference could not be safely drawn without further discovery and oral evidence at the trial. It is thus necessary, where such inferences are relevant, to guard against the temptation of drawing them as a matter of probability, because the achievement of the overriding objective requires a much higher degree of certitude. Where, in a complex case, as may often be the situation, the frontier between what is merely improbable and what is clearly fanciful is blurred, the case or issue should be left to a trial.

3.5 The same general approach must apply in a case where the issues involve mixed questions of fact and law and where the application of the law is complex because it depends crucially on detailed findings of fact. It is, however, necessary at the application stage to be completely satisfied that all the relevant facts can be identified, whatever may be the conclusion on the issues of law, and that those facts are in reality incontrovertible. That said, the fact that the law is to some extent uncertain may not in itself necessarily be a reason for postponing to a trial full argument upon it, for, if the law can be as fully argued on the application as it can be at a trial, the achievement of the overriding objective can be as fully satisfied and may be more fully satisfied by the disposal of the issue of law on the hearing of the application. The latter is true because considerations relevant to the achievement of the overriding objective, such as the expeditious and most economical disposal of the case in terms of costs and of the court's time, may often call for the disposal of the case or issue at an earlier stage than after what in a complex case could be a considerable delay before a trial could take place. In this there is no unfairness, if there is no issue as to any conceivably relevant facts, particularly when it is remembered that if there is pronounced uncertainty on an issue of law, it is almost inevitable that it can be tested on appeal.

3.6 So far I have been considering the threshold test under CPR 3.4.2 and CPR 24.2. However, consideration of the cases on Order 11, now CPR 6.20, would not suggest that the test for service out of the jurisdiction is in substance materially different. Moreover, there are strong policy considerations why it should not be. The most recent decision of the House of Lords on this area is Seaconsar Ltd v. Bank Markazi [1994] 1 AC 438. It is clear that Lord Goff founded his analysis of the required evidential burden as to the merits of the claim on the speech of Lord Davey in Chemische Fabrik Vormals Sandoz v. Badische Anilin und Soda Fabriks (1904) 90 LT 733 at 735 and in particular the following passage cited at p451 by Lord Goff:

"An injunction is sought to restrain the defendants from doing some act within the jurisdiction. Rule 4 of [Order 11] prescribes that the application is to be supported by evidence stating that in the belief of the deponent the plaintiff has a good cause of action, and no such leave is to be granted unless it be made sufficiently to appear to the court or judge that the case is a proper one for service out of the jurisdiction under this Order. This does not, of course, mean that a mere statement by any deponent who is put forward to make the affidavit that he believes that there is a good cause of action is sufficient. On the other hand, the court is not, on an application for leave to serve out of the jurisdiction, or on a motion made to discharge an order for such service, called upon to try the action or express a premature opinion on its merits, and where there are conflicting statements as to material facts, any such opinion must necessarily be based on insufficient materials. But I think that the application should be supported by an affidavit stating facts which, if proved, would be a sufficient foundation for the alleged cause of action, and, as a rule, the affidavit should be by some person acquainted with the facts, or, at any rate, should specify the sources or persons from whom the deponent derives his information. A more difficult question is where it is in dispute whether the alleged or admitted facts will, as a matter of law, entitle the plaintiff to the relief which he seeks. If the court is judicially satisfied that the alleged facts, if proved, will not support the action, I think the court ought to say so, and dismiss the application or discharge the order. But where there is a substantial legal question arising on the facts disclosed by the affidavits which the plaintiff bona fide desires to try, I think that the court should, as a rule, allow the service of the writ. The words at the end of the Order do not, I think, mean more than that the court is to be satisfied that the case comes within the class of cases in which service abroad may be made under the first rule of the Order."

Lord Goff's test of a serious issue to be tried (page 452) reflects this explanation. However, application of the overriding objective may in this field, as in the application of CPR 3.4.2 and 24.2, involve a slight qualification. That is to say if the law is in issue but there is no serious issue to be tried in relation to any conceivably relevant fact, there may in some cases be good reason to determine the question of law at the application stage and decline permission to serve out rather than imposing upon a foreign defendant the inconvenience and expense of subsequently applying to strike out the claim under CPR 3.4.2 or 24.2. There can be no unfairness in declining to postpone argument on the law. A requirement that in all such cases legal argument must automatically be postponed until after permission to serve out has been given would be to perpetuate that procedural formalism against which CPR was directed.

3.7 Further, a powerful argument in favour of the same test of the strength of the claim being applicable, particularly where there are other defendants inside the jurisdiction and it is the basis of the application for permission to serve out that the foreign defendant is a necessary or proper party under CPR 6.20(3), is that the requirement for proper service on the domestic defendants involves a merits threshold test ("a real issue which it is reasonable for the court to try") which must be as good for them as it is for the foreign defendant. On the face of it a different standard for that test would be acutely undesirable.

3.8 I therefore conclude that the merits threshold test under CPR 6.20 should not differ in substance from that under CPR 24.2. That, in my judgment, is demanded by the whole philosophy of the overriding objective under the CPR. The fact that the defendant is foreign should make no difference in principle. As emphasised by Lord Goff in Seaconsar at page 455, that circumstance is dealt with exclusively by the forum conveniens control mechanism.

3. The Defendants' Submissions: Rescission

4.1 The point is taken by all the Defendant Applicants, including FSL, that there is no real prospect of the claimants succeeding at trial on their claim for rescission. If this is correct, it not only disposes of that issue in favour of Alvaro, Earth and Water, but also of the issue as to service out in favour of FSL. I therefore consider this point first.

4.2 In summary, the defendants make the following points:

(i) The fundamental obstacle to rescission on the basis of the facts relied on by the claimants and, in so far as is necessary, other undisputed or indisputable facts is that the three April Share Distribution Agreements sought to be rescinded represent inseparable parts of a larger transaction which involved both the Master Agreement and the Brunswick Agreement neither of which, as the claimants accept, can be rescinded.

(ii) It is an established principle of English law that the rescission of part of a contract induced by misrepresentation, whether fraudulent or not, is not an available remedy. In essence, the scope of the equitable jurisdiction of the court to make rescission subject to adjustment to the financial position of the parties, such as by providing for the payment by the misrepresentor of an indemnity to the misrepresentee in respect of expenses incurred under the contract or by requiring the misrepresentee to give undertakings relating to restitutio in integrum as a condition of an order for rescission, does not extend to creating a fundamentally different bargain between the parties.

(iii) That the April Share Distribution Agreements were an inseparable part of a larger bargain between the siblings is demonstrated beyond dispute by the following:

(a) The agreement formalised in the Master Agreement that FSL should buy out Mercedes and, on the part of Alvaro, to abandon his legal proceedings in Ecuador and his other efforts to dislodge her from the company would never have been entered into in the absence of a contemporaneous agreement as to the proportions in which her shares in FSL were to be redistributed amongst the siblings, it being the overt common intention that Alvaro should have an interest and some management role in the company.

(b) The interdependent linkage between the Master Agreement and the agreements as to distribution of the shares is shown by the fact that the February Share Distribution Agreements were signed by all parties within the 30 days deadline imposed in respect of the Master Agreement under the Febres-Cordero Agreement.

(c) The agreement of Isabel to relinquish the greater part of her shares in FSL expressed in the 30 January 1997 agreement in principle gave rise to the need to bring those shares into account, in addition to those to be bought in from Mercedes, for the purpose of achieving the ultimate agreements on redistribution, the overall relative percentage distributions being essential in order to determine the distribution of management control over FSL. Therefore the February Share Distribution Agreements took into account and indeed incorporated the terms of the 30th January agreement.

(d) The evidence that the Master Agreement already signed by Alvaro, Maria Elena and Isabel was held by Mr Cephas, Alvaro's United States attorney, on instructions from Alvaro that it should not be released for signature to Mercedes until the share distribution agreement had been signed corroborates the otherwise obvious interdependence of those agreements. That evidence could have been but was not challenged by the claimants' Bermuda solicitor, Mr Anderson of Conyers Dill & Pearman.

(e) The Brunswick Agreement both gave effect to the 30th January 1997 agreement by Isabel to relinquish most of her holding of FSL shares, thereby increasing the number of FSL shares available for redistribution under the share distribution agreements and also provided for the disposition of other assets as between FSL and the siblings. Thus under section 1.2(c)(i), (ii) and (iii) Maria Elena and Alvaro jointly undertook to procure the transfer to Isabel of shares in other companies which they apparently controlled and section 1 provided for Maria Elena and Alvaro to substitute cash compensation for Isabel in case they could not procure transfer of the shares. Further, under section 1.3(a) FSL promised to cause to be cancelled, or otherwise relieve Maria Elena of, a debt of US$6.8 million to Intercredit Bank and Trust Limited of Nassau. Section 1.3(b) to (e) provides for further transfers of shares affecting Maria Elena, Alvaro and FSL. These are interrelated adjustments in asset distribution attributable to the overall family settlement. The Brunswick Agreement was the machinery employed to effect all the assets distributions except the redistribution of FSL shares.

(f) All the agreements, the share distribution agreements and the Brunswick and Master Agreement were closed on 2nd April 1997.

(g) A number of contemporary documents demonstrate the inextricable relationship between the Share Distribution Agreements and the Brunswick Agreement. Notably the former provided at section 2(a) (in terms similar to section 2(a) of Exhibit A to the February Share Distribution Agreements):

"The shares to be distributed to each of Earth, Water, Wind and Fire pursuant to this Agreement shall equal 25.1%, 25%, 1% and 3%, respectively, of the aggregate shares of the Company's Ordinary Shares and B Ordinary Shares issued and outstanding immediately after (a) the consummation of the transactions contemplated by this Agreement, the Master Agreement and the Brunswick Share Repurchase Agreement and (b) certain other distributions of the Company's Ordinary Shares and B Ordinary Shares, which are expected to occur substantially contemporaneously with the consummation of the transactions contemplated by the agreements referred to in this Section 2(a)."

Further, the defendants rely on the recitals to the Resolutions of the Board of Directors and of the Members of FSL, both dated 2nd April 1997 approving FSL's participation in the transactions provided for under the Master Agreement, the Brunswick Agreement and the Share Distribution Agreements as strong evidence of the interdependence between these agreements.

(h) In the New York proceedings by Maria Elena and Isabel against Alvaro for rescission of the Share Distribution Agreements and breach of and specific performance of the alleged promises by Alvaro regarding management and control of FSL the complaint stated:

"Mrs Noboa's agreement to relinquish her interest in FSL was part of a larger arrangement among the siblings to redistribute the shares of FSL to allow Luis Noboa' children who were excluded by Luis Noboa from any interest in FSL to share in the ownership of the company."

And in the London proceedings brought by Codan to enforce the consideration provisions of the Brunswick Agreement, to which I have already referred, it was accepted on behalf of Codan (Isabel's trustee) that it could not claim rescission of any other of the agreements in view of the fact that it asserted its right to payment under the Brunswick Agreement.

4.3 The defendants also contend that, even if the Share Distribution Agreements are not part of a single settlement transaction, they must all stand or fall together. However, it was not alleged that the representations were made by Alvaro to any party or to the agent of any relevant party to either the Diana or the Isabel SDA other than, in the latter case, Isabel herself who now concedes that she never believed in their truth. Therefore the only party to those agreements connected to a relevant representee is Dressage, Maria Elena's vehicle. But that company did not exist until some time in March 1997 when it was incorporated. That was after all the representations relied upon had first been made. Accordingly, it could not be a relevant misrepresentee under any of the Share Distribution Agreements. In any event it was the vehicle of Maria Elena and a party to the April Share Distribution Agreements merely for the purpose of taking delivery of the redistributed shares over which she was to be given control and it entered into the Share Distribution Agreements because it was procured to do so for that limited purpose and not because it was induced to do so by any misrepresentation.

4.4 The Defendants further submitted that Dressage had in any event affirmed the Share Distribution Agreements by certain proceedings against FSL in which it was a co-claimant in the courts of the Bahamas. These proceedings, which were commenced on 12th May 1999, involved applications for disclosure of certain of FSL's books and records under the International Business Companies Act 1989. In order to mount that application Dressage and its co-claimant, Pembroke, had to establish that they were members of the company. In fact, those claimants relied on a 28 per cent shareholding between them including 9 per cent owned by Dressage of which it acquired 7.5 per cent under the Maria Elena share distribution agreement. However, the complaint in the New York proceedings in which Maria Elena and Isabel claimed rescission of the Share Distribution Agreements against Alvaro had been served on 3rd November 1998. Therefore, at the very time when her trustee company, Dressage, was pursuing its application in the Bahamas her knowledge of the right to rescind the Share Distribution Agreements was imputed to Dressage and by its application for disclosure it affirmed the Share Distribution Agreements in as much as it asserted its current shareholding as against FSL.

4.5 Finally it was originally contended that since it was not pleaded that any representation was made by or to any of the parties to the Share Distribution Agreements the claim for rescission must fail. Subsequently, just before the commencement of the hearing of these applications, the claimants circulated draft amended particulars of claim in which they introduced at para 41B:

"To the extent necessary, the Claimants will contend that:

(1) the warranties and/or representations made by Alvaro were made on his own behalf and/or as agent for and/or on behalf of any company that he would procure to execute the Share Distribution Agreements and/or the 'February SDAs' (namely, Earth and/or Water and/or Wind and/or Fire);

(2) such warranties and/or representations were addressed to Maria Elena on her own behalf and/or as agent for and/or on behalf of any company that she would procure to execute the Share Distribution Agreements and/or the 'February SDAs' (namely, Codan (as trustee) and/or Pembroke (as nominees) and/or Dressage and/or Tarland and/or FSL.)"

4. The Claimants' Submissions: Rescission

5.1 Mr Gordon Pollock QC submitted on behalf of the Claimants first that the severance of the issue of rescission was of no procedural advantage and would probably be procedurally disadvantageous and unfair. There was to be a full trial in October 2002 at which the court would have to decide on the truth of the allegations that Alvaro made the representations relied upon. The conclusion on that issue had a direct bearing on the way in which the court exercised its discretion on the claim for rescission which was a discretionary remedy involving a mixed question of fact and law. The only advantage in excluding rescission at this stage was to let out FSL before trial. This would be of little practical advantage in reality because no allegations of wrong-doing or complicity in Alvaro's fraud had been made against FSL and it need therefore take only a relatively small part in the trial. From the point of view of Alvaro and the other defendants there was little or no advantage in knowing the answer on rescission earlier than the trial. As regards the position of Maria Leonor there would have to be a considerable investigation at the full trial as to whether her children's interest would be prejudiced by rescission because the court would need to take this matter into account in exercising its discretion.

5.2 It was further contended that it was to Alvaro's tactical advantage to confine the claimants to their claim for damages and to remain in control of FSL. That would prove a difficult area for them because they would be left with their considerable holdings of FSL shares and, in the case of Isabel, other consideration the value of which would have to be taken into account in calculating their losses. Even if they could establish significant financial loss it might be difficult to enforce an English judgment against Alvaro in Ecuador.

5.3 However, the primary submissions of the claimants were that:

(i) there was considerable uncertainty as to the law relating to whether it was possible to rescind part of the contract;

(ii) the February and April Share Distribution Agreements were in any event not an inseparable part of a larger transaction but were distinct contracts which could be considered separately for the purposes of rescission.

5.4 As to (i) Mr Pollock relied on the decision of the High Court of Australia in Vadasz v. Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 where the court had declined to follow the decision of the Court of Appeal in TSB Bank Plc v. Camfield [1995] 1 WLR 430.

5.5 As to (ii) the following points were advanced.

5.5.1 The agreement by Mercedes to relinquish her share of FSL was a separate and distinct stage in the family arrangements quite independent of the subsequent redistribution stage. In particular, it could not be inferred that if, following Mercedes's agreement to leave the company in January 1997, Maria Elena and Isabel had told Alvaro that they declined to allow him to become a shareholder or to have any part in the management, he would not have preferred simply to leave things there and drop his claims in the Ecuador courts which, according to the claimants, were hopeless. In that event the redistribution agreements would never have been entered into. Alvaro might simply have hoped to persuade his sisters to agree to his participation in the ownership and management of the company, but if they had refused, he might have been content to enter into the Master Agreement without any such agreement. That was a matter that could be tested only at a trial involving oral evidence from Alvaro.

5.5.2 In the period between Mercedes's agreement in principle to withdraw from FSL and Isabel's decision to relinquish the great bulk of her shares the position was that if Alvaro had been content to accept a position of equality with his sisters, Maria Elena and Isabel, there would have had to be a share distribution agreement to give effect to that agreement.

5.5.3 The Brunswick Agreement and its earlier stage, the 30th January agreement, simply provided a solution to the new situation that arose when Isabel changed her mind and decided to relinquish most of her FSL shares. Those agreements did no more than provide for that sale back to FSL and its function was therefore no more that to add to the accumulation of shares in FSL which were then available for subsequent redistribution.

5.5.4 The alleged misrepresentations by Alvaro which are said to have induced the 31st January agreement in principle and the February and April Share Distribution Agreements would, if made, have induced whatever distribution agreement had been made, even if Isabel had not sold her shares and the Brunswick Agreement had never been needed.

5.5.5 The February Share Distribution Agreements never became binding because one of the parties, FSL, never executed them under seal and there was no board resolution authorising the company's participation. If it were relevant, that would be at least an issue which could not be resolved before trial. In any event, there was no conclusive evidence that Alvaro or any of the other parties wanted the February Share Distribution Agreements signed by 26th February - the last day of the 30 day period in the Febres-Cordero Agreement. Although the highest it could be put was that Alvaro might have aimed to have the share distribution agreements signed in case his sisters later changed their minds about distribution, there was no documentary evidence that all parties agreed to enter into the share distribution agreements by 26th February. Maria Elena and Isabel had never been told about any such requirement. The failure of the parties to draft and execute by 26th February a formal agreement to give effect to the 30th January agreement as to Isabel's shares as well as the apparent inability of FSL formally to bind itself to the share distribution agreements by 26th February suggested that no great importance was attached to the agreements other than the Master Agreement meeting that date.

5.5.6 As to the alleged so-called "escrow" instructions from Alvaro to Mr Cephas not to release the Master Agreement for signature by Mercedes until the share distribution agreement had been executed, that could not be an effective escrow instruction because it was unilateral to Alvaro and not known to Maria Elena or Isabel or Mercedes. That did not suggest any effective interlinkage between the Master Agreement and the share distribution agreements.

5.5.7 Whether there was sufficient interlinkage to engage the operation of the principle (if any) that there could not be rescission of part of a contract was a fact-sensitive issue which needed to be explored at the trial.

5.5.8 One must test the nature of the required interlinkage by asking whether and, if so, to what extent the part of the transaction sought to be rescinded was independent of the residue not sought to be rescinded. Mr Pollock conceded that it made no difference whether there was in form one single contract or one single transaction formally expressed in more than one separate contract. The questions in both cases were (i) whether the unrescinded residue would be performable in an essentially unchanged manner and (ii) if so, whether it would be fair to rescind part while leaving the residue to be performed.

5.5.9 In view of the need in the present case for orders ancillary to rescission in order to effect restitutio in integrum, the claimants relied on the court's equitable jurisdiction to grant rescission, including the exercise of its discretion to put the claimant on terms by means of undertakings. That approach could provide sufficient flexibility to enable the court to grant rescission in this case, but, in order for the court to do so, it would have to judge what was fair and that was not possible on an application under CPR 24.2. Fairness required that this should be decided at a full trial.

5.5.10 As to the Master Agreement, there was a strong case that it could stand independently of the Share Distribution Agreements and at least an arguable case that it was fair to rescind the latter, particularly as Alvaro had provided his part of the consideration for the Master Agreement.

5.5.11 As to the Brunswick Agreement, that was performable in accordance with its terms independently of the Master Agreement and independently of the share distribution agreements, in the sense that, although its performance had an impact on the Share Distribution Agreements by providing Isabel's shares for redistribution, it did not depend on performance of those agreements. In any event, it had already been entered into before the April Share Distribution Agreements were entered into.

5.5.12 There could be no unfairness to any of the interests concerned if the Share Distribution Agreements were rescinded. Alvaro would lose his 25.1 per cent, but, as that had been acquired at par, it was effectively "a gift" obtained by fraud and all that he had given up was a valueless claim against Mercedes in respect of his father's estate. There was at the lowest a triable issue in relation to that. As to Maria Leonor's interest, there was an issue as to whether there would be unfairness to her or her children because there was an issue as to whether Alvaro had ever committed himself to his sisters that the shares distributed to Water would not be controlled by him. There was also an issue as to whether knowledge of fraud on his part would be imputed to Water. There would be no unfairness to FSL either by reason of loss of continuity of management or on any financial basis. To go back now to the position after the Brunswick Agreement had been signed by rescission of the Share Distribution Agreements would involve each of the parties not complicit in Alvaro's fraud being returned to roughly the same percentage of ownership of FSL as before the Share Distribution Agreements were entered into.

5.6 The affirmation of her Share Distribution Agreement by Isabel did not as a matter of law prevent it or any other of the Share Distribution Agreements being rescinded by any of the other parties.

5.7 The argument advanced by the claimants that Dressage and therefore Maria Elena had affirmed the Share Distribution Agreements was to be rejected because, at the time of the commencement of the proceedings in the Bahamas against FSL, Maria Elena had by the commencement of the New York proceedings already rescinded the agreements and her conduct or that of Dressage by which she was bound could not operate as an affirmation of already terminated agreements. Alternatively, FSL must have known that the claimants were not affirming because of the on-going proceedings in New York and the litigation in the Bahamas was therefore not an unequivocal indication of affirmation.

5. Rescission: the relevant Principles

6.1 There can be no doubt that, according to the present state of development of English law, this court is bound by the general principle that a misrepresentee is permitted to rescind the whole of a contract but not part of it. This has been recognised as well-established since the eighteenth century: see Myddleton v. Lord Kenyon (1794) 2 Ves 391 at 408, per Lord Eldon:

"The deed may be set aside in toto ...... I cannot make a new bargain for the parties .... The consequence is not, that a new agreement is to be made, to be introduced by this Court; but they must be reinstated in their former situation."

The House of Lords has affirmed this position in United Share Machinery Co v. Brunet [1909] AC 330 where Lord Atkinson observed that the defrauded party could not avoid one part of a contract and affirm another part "unless indeed the parts are so severable from each other as to form two separate contracts". More recently the Court of Appeal has re-affirmed this principle in TSB Bank Plc v. Camfield [1995] 1 WLR 430. In that case the wife of the borrower had been induced by him to consent to stand surety and to their granting a legal mortgage over the matrimonial home as security for personal borrowing by her husband. He had innocently misrepresented to her that the security was limited to £15,000 when in truth it was unlimited. The trial judge had given judgment against the husband for the full amount due (£47,315) but against the wife for £15,000 in effect rescinding her contract of suretyship pro tanto the extent of the misrepresentation. The Court of Appeal allowed her appeal. Nourse LJ expressly rejected the argument that in a case of rescission the court could impose terms the effect of which would be that rescission was subject to the wife making the payment which she would have been obliged to make under the contract she believed herself to be entering into. In adopting the approach to a similar problem taken by Ferris J. in Allied Irish Banks Plc v. Byrne (unrep) Nourse LJ. founded his conclusion on Lord Browne - Wilkinson's speech in Barclays Bank Plc v. O'Brien [1994] 1 AC 180 at page 199:

"It seems to me that setting aside must refer to setting aside in its entirety. Indeed the concept of a partial setting aside is, to my mind, an elusive one, although I can see that if a different equitable remedy were appropriate a charge might be left on foot, but the chargee could be restrained from enforcing it beyond a particular extent. This is what Purchas LJ seems to have had in mind. Mr Malik relied upon the flexibility of equity in relation to restitution. He cited Chitty on Contracts 26th ed (1989) p 313 para 468 and O'Sullivan v. Management Agency and Music Ltd [1985] QB 428, 458. But for my part I cannot escape the fact that what Mrs Byrne claims, and what she is in my judgment entitled to, is to set aside the transaction which, to my mind, is an all or nothing process. This is consistent with the fact that a party who complains of having entered into a transaction on the basis of a misrepresentation is saying that if he had been aware of the truth, he would not have entered into the transaction. If this claim is upheld, the court seeks to put that party into the position in which he would have been if the representation had not been made." (emphasis added)

Roche LJ observed (at page 439):

"Normally, if the representee is entitled to rescind the legal charge, that will have been effected by the representee's pleading that the transaction has been or should be set aside; that is to say, the transaction would have been set aside before the matter reaches the court. The court is not being asked to grant equitable relief; nor is it, in my view, granting equitable relief to which terms may be attached."

In the earlier case of Thorpe v. Fasey [1949] 1 Ch 649 Wynn-Parry J. referred to the judgment of the Divisional Court in Sheffield Nickel & Silver Plating Co Ltd v. Charwin ( 1877) 2 QBD 214 per Lush J:

"A contract voidable for fraud cannot be avoided when the other party cannot be restored to his status quo: Clarke v. Dickson. For a contract cannot be rescinded in part and stand good for the residue. If it cannot be rescinded in toto, it cannot be rescinded at all; but the party complaining of the non-performance, or the fraud, must resort to an action for damages.'"

Wynn-Parry J. commented:

"There, again, the language used indicates that the court there intended to pray in aid a well-established general principle that a contract cannot be rescinded in part and stand good for the residue. If it cannot be rescinded in toto it cannot be rescinded at all; and one reason for not directing rescission is that the parties, or one of them, cannot be restored to their status quo."

6.2 These authorities do, in my judgment, make it very clear that the principle that there cannot be partial rescission is part of the wider requirement that there cannot be rescission unless there can be restitutio in integrum. Further, that requirement is the conceptual consequence of the basic nature of the remedy of rescission which is to discharge all the parties from the bargain into which the misrepresentor has induced them to enter. It is not and never has had the function of providing compensation for the misrepresentation or some hybrid solution to reflect what would be fair between the parties having regard to the nature of the representation and the extent to which one party has been misled by another. Consistently with that, the court has no power to create a new bargain for the parties. What has been induced is the original bargain and it is the purpose of the remedy to return the parties to their position before that particular bargain was made. There is therefore no room for any form of equitable engineering directed to re-constructing the fabric of the original contract.

6.3 Consideration of those authorities which have been concerned with restitutio in integrum shows that rescission will not be withheld where substantial restitution is possible, but this remedy is not fettered by some overriding equitable test as to whether the consequences would work unfairly to the misrepresentor. Thus there are numerous cases where rescission has involved the return of property by the representee which has substantially diminished in value through no fault of the representee: eg Armstrong v. Jackson [1917] 2 KB 822. That said, there is undoubtedly a degree of flexibility in the approach to restitution. It has to be possible to achieve substantial restitution, albeit precise restitution of what passed under the contract may no longer be possible. What the courts are doing in those cases where they deploy that flexibility which involves, for example, the taking of an account or an order for the payment of compensation or an indemnity, is to make adjustments ancillary to and in aid of restitution to take account of changes to property or benefits derived from the contract by one side or another during the period between the making of the contract and the proceedings for rescission. This is clearly reflected in the speech of Lord Wright in Spence v. Crawford [1939] 3 Al ER 271 at pages 288 to 289:

"The remedy is equitable. Its application is discretionary, and, where the remedy is applied, it must be moulded in accordance with the exigencies of the particular case. The general principal is authoritatively stated in a few words by Lord Blackburn in Erlanger v. New Sombrero Phosphate Co, where, after referring to the common law remedy of damages, he went on to say at p1278:

'but a court of equity could not give damages, and, unless it can rescind the contract, can give no relief. And on the other hand, it can take accounts of profits, and make allowance for deterioration. And I think the practice has always been for a court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.'

In that case, Lord Blackburn is careful not to seek to tie the hands of the court by attempting to form any rigid rules. The court must fix its eyes on the goal of doing "what is practically just". How that goal may be reached must depend on the circumstances of the case, but the court will be more drastic in exercising its discretionary powers in a case of fraud than in a case of innocent misrepresentation. This is clearly recognised by Lindley MR in the Lagunas case. There is no doubt good reason for the distinction. A case of innocent misrepresentation may be regarded rather as one of misfortune than as one of moral obliquity. There is no deceit or intention to defraud. The court will be less ready to pull a transaction to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff. Restoration, however, is essential to the idea of restitution. To take the simplest case, if a plaintiff who has been defrauded seeks to have the contract annulled and his money or property restored to him, it would be inequitable if he did not also restore what he had got under the contract from the defendant. Though the defendant has been fraudulent, he must not be robbed, nor must the plaintiff be unjustly enriched, as he would be if he both got back what he had parted with and kept what he had received in return. The purpose of the relief is not punishment, but compensation. The rule is stated as requiring the restoration of both parties to the status quo ante, but it is generally the defendant who complains that restitution is impossible. The plaintiff who seeks to set aside the contract will generally be reasonable in the standard of restitution which he requires. However, the court can go a long way in ordering restitution if the substantial identity of the subject-matter of the contract remains. Thus, in the Lagunas case, though the mine had been largely worked under the contract, the court held that, at least if the case had been one of fraud, it could have ordered an account of profits or compensation to make good the change in the position. In Adam v. Newbigging, where the transaction related to the sale of a share in a partnership, which had become insolvent since the contract, the court ordered the rescission and mutual restitution, though the misrepresentation was not fraudulent, and gave ancillary directions so as to work out the equities. These are merely instances. Certainly in a case of fraud the court will do its best to unravel the complexities of any particular case, which may in some cases involve adjustments on both sides."

6.4 The principle that rescission of part of a contract is not an available remedy has been applied in cases where there is as a matter of form more than one contract comprised in a wider transaction. Thus in A H McDonald & Co Pty Ltd v. Wells [1931] 45 CLR 507 the High Court of Australia held that where a contract had been entered into and then replaced some months later by a second contract - both having been induced by innocent misrepresentation - the remedy of rescission could be available only if the entire transaction, including the earlier contract, were rescinded and the question whether restitutio in integrum could be substantially achieved had to be tested by reference to restoration of the position before the earlier contract had been made. That was not possible because it would have involved treating the representor as if he had had the benefit of exploiting the patents in question for a period of three years during which the representee was entitled to that benefit. No relief could be moulded "which will accomplish an approximate restoration that will be just". (page 513)

6.5 The claimants have relied on the submission that English Law, or at least the Common Law, is in a state of development which makes it so uncertain that the issue of rescission cannot suitably be determined on an application for summary judgment dismissing the claim. In support of this argument Mr Pollock relies on the decision of the High Court of Australia in Vadasz v. Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 182. That case dealt with the question whether, if the representee guarantor was induced to enter into a written guarantee of the past and future indebtedness of his company by a representation that it was confined to future indebtedness, he was entitled to avoid the guarantee to the extent of past, but not future, indebtedness. It was therefore similar on its material facts to TSB Bank v Camfield, supra. The High Court of Australia adopted a very different approach to that of the Court of Appeal. It held on the basis of the speech of Lord Blackburn in Erlanger v. New Sombrero Phosphate Co (1878) 3 App Case 1218 and the observations of Lord Wright in Spence v. Crawford, supra, which I have already cited, that the guarantor's liability was limited to future indebtedness. The court concluded that it was appropriate to look at what was practically just for both parties, not only the guarantor, and stated at p115:

"To enforce the guarantee to the extent of future indebtedness is to do no more than hold the appellant to what he was prepared to undertake independently of any misrepresentation."

It observed that a similar approach had been taken in a number of cases, including in the footnote Barclays Bank v. O'Brien [1993] QB 109 in the Court of Appeal and noting that the appeal had been dismissed by the House of Lords, but apparently entirely overlooking the fact that such an approach was diametrically inconsistent with the passage from the speech of Lord Browne-Wilkinson which I have already cited as one of the bases for the conclusion of the Court of Appeal in TSB Bank v. Camfield.

6.6 In Far Eastern Shipping Co Public Ltd v. Scales Trading Ltd (20.11.00), an unreported decision of the Judicial Committee of the Privy Council on an appeal from the Court of Appeal of New Zealand in respect of the enforceability of a guarantee induced by non-disclosure, one of the arguments advanced by the guaranteed supplier was that as held by the New Zealand Court of Appeal, on the basis of Vadasz, rescission of the guarantee should be permitted only if the guarantor paid the principal debt so far accrued before rescission. The Privy Council found it unnecessary to decide whether Vadasz was to be preferred to Camfield and decided to allow the appeal on the grounds that there was no factual basis for the conclusion that if full disclosure had been made, the representee would still have been prepared to guarantee part of the debt. Although Lord Scott described the issue whether Vadasz should be preferred to TSB Bank v. Camfield as "an important one", there is nothing in the judgment to suggest that the Privy Council held any concluded or even provisional view on the matter.

6.7 I conclude that on this issue the present state of English Law is not in any doubt at all and nothing in Vadasz renders it doubtful, whatever may be the position in Australia. By reference to the state of English law as so far developed at House of Lords level that case was wrongly decided. Unless and until the House of Lords overrules the analysis by Lord Browne-Wilkinson in Barclays Bank v. O'Brien and its particular application in TSB Bank v. Camfield, the principles binding on this court are well-settled. The scope of the equitable discretion in a rescission claim is confined to adjustments to achieve substantial restitution to accommodate events that have occurred after the contract has come into force and does not extend to the general reconstruction of the bargain to achieve an objectively overall fair result.

6.8 I therefore reject Mr Pollock's submission that on grounds of uncertainty in the law, these applications cannot suitably be determined before a full trial.

6.9 The crucial issue in the present applications is, however, one of mixed fact and law and it is how one identifies the criteria for determining whether a number of separate contracts are part of a single overall transaction for the purposes of the rule against rescission of part of a transaction. On this point there is little or no help in the authorities, but application of general principles strongly suggests the necessary criteria. If a representee is induced to enter into separate contracts A&B by the same misrepresentation, it may be that performance of contract B depends on the prior performance of contract A. In that case one cannot rescind contract A without also rescinding contract B. To permit the survival of contract B would be inconsistent with the principles of restitutio in integrum. But there may be cases where, although both contracts were induced by the same misrepresentation either can be performed without performance of the other. In that case the representee may rescind unless the contract not sought to be rescinded would never have been entered into by the parties without also entering into the other. Thus, for example, in a case where the transaction is divided into different contracts simultaneously negotiated, it may be that the consideration for the whole bargain is written into one contract, leaving only nominal consideration in the other contract. In that event it would not be open to the representee to leave open the contract that gave him the main consideration while rescinding the other contract under which his primary performance obligation lay. Again, to do otherwise would not effect restitutio in integrum. Or there may be cases where it is clear from the terms of the contracts and the matrix evidence that the subject matter of the contracts is so interrelated that, although it would be theoretically possible to perform each separately, one would never have been entered into without that contract sought to be rescinded. However, in the absence of structural interdependence between separate contracts, the most usual determinant of inseparability is likely to be the distribution of consideration for the whole bargain between the separate contracts.

6. Rescission: Application of the Principles

7.1 The three Share Distribution Agreements are clearly interdependent. Maria Elena/Dressage could not rescind one without also rescinding the other two. The three agreements contain identical terms but bind in the trustee of each of the three sisters' trust vehicles separately. They are structurally interdependent and one would never have been entered into without the other two.

7.2 The Share Distribution Agreements could be rescinded without interfering with the performance of either the Master Agreement or the Brunswick Agreement. Neither of those two agreements are structurally dependent on the share distribution agreements for performance to be effected. If the three Share Distribution Agreements had never been entered into, the Master and Brunswick Agreements could, as a matter of contractual structure, still have been performed according to their terms.

7.3 The Share Distribution Agreements expressly provide by clause 2 and clauses 5(a)(ii) and 5(b)(ii) of Exhibit A for the "consummation" of the purchase of shares under the Master Agreement and the Brunswick Agreement to be a condition precedent to FSL's obligation to close. That was obviously essential, otherwise FSL might not obtain from Mercedes and Isabel the shares to be redistributed to the transferees, including Alvaro. However, that term would not in itself prevent the Share Distribution Agreements from being sufficiently free-standing from the Master Agreement or the Brunswick Agreement to be rescinded without affecting performance of the latter.

7.4 There is therefore no structural reason why the Share Distribution Agreements should not be rescinded. The question therefore arises whether the Share Distribution Agreements and the Master Agreement or the Brunswick Agreement were inseparable parts of a single composite agreement or transaction. Whereas it is unquestionably true that the Share Distribution Agreements would never have been entered into in the absence of either the Master Agreement or the Brunswick Agreement, that is not, in my judgment, the relevant test, for the Share Distribution Agreements could be characterised as representing merely the third stage in a series of sequential bargains for the transfer of assets which depended upon each of the earlier stages having been completed. The relevant test is whether it was the mutual intention of the parties, expressed or to be imputed to them, that they would only enter into either of the other two earlier agreements if they also entered into the Share Distribution Agreements. In this connection, it is to be emphasised that it is not enough that one party - such as Alvaro - unilaterally held that intention. The composite character of the transaction which renders its individual parts inseparable depends upon the mutual intention of all the parties to the relevant contracts. That mutual intention may be established from the terms of the separate contracts as well as from what passed in the course of the negotiations in respect of all the relevant contracts.

7.5 It is common ground that the family settlement was put together in stages. The first stage was negotiating the agreement of Mercedes with the siblings for her to relinquish her interest in FSL and the consideration which she was to receive. With the assistance of the Febres-Cordero Agreement a negotiated position on that stage had been arrived at in late January 1997. Towards the end of that period discussions between Maria Elena, Isabel and Alvaro took place on the subject of the extent of his participation in control and ownership of FSL. Isabel clearly did not trust him when he represented that he was only interested in joint control and in the course of the negotiations decided to disengage from FSL to the extent of most of her shareholding. Then, according to the particulars of claim (para 28), there followed the series of "closed door" meetings in the absence of legal advisers in the course of which agreement was reached on all the main terms of what ultimately because the Brunswick Agreement. These terms involved not only the sale by Isabel of her shares in FSL and the complex consideration arrangements but also what were to be described as "related transactions". These were a series of extremely complicated transfers of shares and other property involving FSL and both Maria Elena and Alvaro and companies controlled by them which were apparently directed to providing Isabel with part of the compensation for her FSL shares, the remainder being provided by FSL. That company also agreed to release Maria Elena from US$6.8 million of indebtedness to a related company. The 30th January agreement signed by Alvaro, Maria Elena and Isabel covered both compensation to Isabel and at least some of the "related transactions" in the Brunswick Agreement, but it is difficult to relate all the Brunswick Agreement provisions to the contents of the 30th January document signed by the siblings. These are transactions of considerable complexity. Although the siblings signed up to that agreement, it must obviously have been anticipated that it would be expressed in a formal contract to be executed not only by them, but by other necessary parties, such as FSL.

7.6 At that stage, therefore, the Febres-Cordero Agreement had become binding, but subject to the condition subsequent that it would lapse unless implemented by 26th February 1997, that is to say, unless the Master Agreement had been entered into by then. Most of the main terms of the Master Agreement had already been agreed. The 30th January agreement had been entered into thereby settling at least most of the terms to be included in a formal contract under which Isabel was to sell most of her FSL shares to FSL. There remained to be agreed how the shares to be sold back to FSL by Mercedes and Isabel were to be distributed. It appears that at the 31st January meeting Maria Elena and Isabel put forward a distribution agreeable to them which by 4th February at the latest Alvaro was prepared to accept. That agreement was formally set out in the February Share Distribution Agreements which all parties had signed by 26 February 1997 - the date which the Febres-Cordero Agreement set as the last date for implementation of the Master Agreement. At that time Alvaro apparently required his lawyers not to release the partially signed Master Agreement, which had yet to be signed by Mercedes. Eventually, all the agreements were closed on 2nd April 1997.

7.7 On the unchallenged and indisputable evidence now before the court can it now be concluded with complete confidence that the Share Distribution Agreements and the Master and Brunswick Agreements were mutually intended by the parties to those agreements to be inseparable parts of a single bargain, whatever further evidence might emerge at a full trial?

7.8 There can be no doubt that there are strong grounds for inferring that Alvaro would never have entered into the Master Agreement had it not been for his intention to acquire at least a significant part of the shares in and control over FSL. But the Master Agreement was entered into by the siblings and FSL and Mercedes, who it is accepted had no idea what was to be agreed about the redistribution of her shares. It is hard to see that there can be any basis for characterising a multiparty agreement such as that as an inseparable part of a wider transaction unless all the parties to it held that intention. Since Mercedes for one clearly did not, it is at least likely to be held that the Master Agreement and the Share Distribution Agreements were not inseparable parts of the same transaction. This conclusion is reinforced by the fact that the Master Agreement had been negotiated in some detail before the terms of the Share Distribution Agreements had been negotiated. Whether Maria Elena and Isabel would have entered into the Master Agreement, but for the Share Distribution Agreements must be a matter of some speculation.

7.9 There are also strong grounds for inferring that Alvaro would not have entered into the Brunswick Agreement but for the Share Distribution Agreements. Had there been no redistribution of the FSL shares bought in from Mercedes and Isabel, he would have derived no tangible benefit in terms of ownership or control of FSL notwithstanding that he had contributed to the consideration for Mercedes's shares by giving up his claims against the estate. Further, he had provided part of the consideration under the related transactions provided for by the Brunswick Agreement. If it be assumed that the Master Agreement and the Brunswick Agreement were entered into, but not the Share Distribution Agreements the resulting shareholders and their percentage holdings in FSL would have been very different from those provided for by the Share Distribution Agreements. Then there would have been 375 shares in issue distributed as follows:

"a. Isabel Interests 30 shares 8%

b. Maria Elena Interests 175 shares 46.66%

c. Diana Interests 160 shares 42.666%

d. Luchito Interests 10 shares 2.66%

e. Alvaro 0 shares 0%"

That would leave Maria Elena, the largest single shareholder, with a much higher percentage than she had before the Master Agreement (16%) or than she would have held under the Share Distribution Agreements(25%). It would also have given Isabel a payment of over US$100 million as consideration and a percentage of 8% of the issued shares compared with 3% under the Share Distribution Agreements.

7.10 There are also strong grounds for concluding that, had it not been for the mutual intention of the siblings that Alvaro would have at least some participation in the management, the Brunswick Agreement would not have been necessary because Isabel would not then have wanted to relinquish most of her interest. That, however, does not conclusively establish that the agreements as made were inseparable parts of the same transaction.

7.11 In my view, these and the other matters urged by the defendants on these applications suggest that they have a strong case on their submission that the Share Distribution Agreements and the Brunswick Agreement are inseparable parts of one transaction. But, in my view, they are far from being conclusive on this issue.

Thus, a potentially relevant area of investigation which has not been comprehensively addressed in the evidence is the course which the negotiations between the siblings took during the period in January 1997 leading up to the 30th and 31st January agreements in principle.

In particular when they were negotiating the terms of the 30th January agreement were they already making mutually agreed assumptions as to the share distributions specified by Maria Elena and Isabel in the 31st January agreement? For example, was Isabel's 3 per cent residual holding arrived at by reference to the ultimate percentage of any other interest? Was the complicated network of related transactions under the Brunswick Agreement based on or influenced by any assumptions as to the ultimate share redistribution? How was the consideration arrived at? These are all matters which would be relevant to the question whether the Brunswick Agreement and the Share Distribution Agreements were inseparable parts of the same transaction. Where it is necessary to test, albeit objectively, whether there was a mutual intention and where, as in this case, the express terms of the relevant contracts are inconclusive, consideration of that kind of matrix evidence is at least potentially relevant.

7.12 I have therefore come to the conclusion that, although on the basis of the particulars of claim and on the face of the unchallenged and indisputable evidence, the defendants have a strong case on this issue, it cannot be said with the necessary degree of certitude that if the matter went to trial they would necessarily succeed. The facts relating to these agreements are complex and the negotiations were long and detailed, spread across many meetings. Resolution of the issue whether the agreements are inseparable parts of a single transaction depends at least in part on factual matters which may well be disputed. In any event it would not, in my judgment, be consistent with the fair trial component of the overriding objective to shut out the claimants from this issue at this stage and without the opportunity of calling oral evidence as to the contractual matrix.

7. Rescission: Issues as to whether any and, if so, which of the claimants can claim to

rescind

8.1 It is, in my judgment, at least arguable that knowledge of misrepresentations made to a beneficiary such as Maria Elena is to be imputed to her vehicle trust company which she has procured to enter into an agreement. Hence it is arguable that Harrington as successor to Codan as trustee of the Hanover Trust and Dressage Trust could rely on the alleged misrepresentations to Maria Elena as a basis for rescinding the Maria Elena SDA. I was referred to no authorities on this point and the issue will have to be fully argued.

8.2 However, the trustee of the Hanover and Dressage Trusts was not a party to the Diana or Isabel Share Distribution Agreements. The curious division of the Share Distribution Agreements into three separate contracts - one for each of the three sisters' trusts - left only one party connected to any of the sisters as a party to all three agreements. That was the company Dressage. This was made a party only for the formal reason of receiving transfer of the 75 FSL shares redistributed to Maria Elena's interest. In other words, she procured her vehicle company, Dressage to enter into all three Share Distribution Agreements. That company is said to be owned by the Dressage Trust and is therefore subject to control by Maria Elena as beneficiary of that trust. If there is, as I have held, an arguable case that a misrepresentation to Maria Elena which induced her to cause the trustee to enter into the SDA to which it was a party entitled that trustee to rescission, there is in my judgment, a somewhat weaker arguable case that a misrepresentation to her could be relied upon to justify rescission by a company wholly owned and controlled by her trust. The point has not been fully argued on this application. It may have a factual aspect which I have not been able to explore at this stage.

8.3 The argument advanced on behalf of the defendants that Dressage had affirmed the Share Distribution Agreements by its application to the court in the Bahamas for disclosure of FSL's internal corporate documents encounters two distinct questions:PRIVATE 

(a) whether the commencement by Maria Elena and Isabel on 3rd November 1997 of the proceedings for rescission in New York operated as a rescission of all three Share Distribution Agreements which rendered subsequent conduct by Dressage incapable of amounting to affirmation;

(b) whether, if the answer to (a) is No, Dressage's conduct amounted to an unequivocal election to affirm.

8.4 As to (a), there can be no doubt that there is authority that, once effectively rescinded, a contract cannot be resurrected by affirmation. In a note to the report of the decision of the Court of Appeal in Foulkes v. Quartz Hill Consolidated Gold Mining Company (1883) Cab & E 156 it is stated that it was held that the issue of a writ claiming rescission of a share allotment contract was not affected by the plaintiff's subsequent participation in and voting at a meeting of shareholders. In re Thomas Edward Brinsmead & Sons [1898] 1 Ch 104 Wright J. expressed doubts as to whether the Court of Appeal had meant to lay down a rule as widely stated as that in Palmer's Company Law based on the statement: "if a man once determines his election it shall be determined for ever" (Com Dig, Elections, C.2). Change of position by a party who has already affirmed a contract or treated a contract as terminated for breach is a difficult area of law, notwithstanding the confident statement in the 4th edition (2000) of Spencer Bower, Turner & Handley on Actionable Misrepresentation at para 247: see for example my own judgment and the observations by Lord Goff in Stoczina Gdanska v. Latvian Shipping Co. [1997] 2 LR 228 at 236-237 and [1998] 1 LR 609 at 623. Before arriving at any concluded view on the point I would want to hear much fuller argument on it. For the present, I am satisfied that it is certainly arguable that the commencement of the New York proceedings operated as an irrevocable rescission even though it was Maria Elena and not Dressage who pursued those proceedings.

8.5 As to (b) I am firmly of the view that it is arguable - indeed very strongly arguable - that the commencement of the Bahamas proceedings did not amount to an unequivocal election by Dressage to affirm the Share Distribution Agreements. It has to be established that such conduct would be perceived to be reasonably explicable only on the assumption that Dressage was treating itself as continuing to be bound by those agreements. Yet it is at least arguable that it must have been obvious to FSL (then under Alvaro's control) that, alongside the pending proceedings in New York, Dressage, Maria Elena's vehicle, could not be representing by the application for documents that she abandoned or, through her, it abandoned the rescission of the Share Distribution Agreements. This is a fact-sensitive issue which does not lend itself to any conclusive view before trial.

8.6 Finally, as to Dressage, it is argued that it could not derive rights of rescission from misrepresentations made to Maria Elena before Dressage was incorporated (in March 1997). However, those misrepresentations continued to have effect up to the time when Maria Elena caused Dressage to enter into the Share Distribution Agreements on 2nd April and it is therefore arguable that, if Dressage was affected by representations to Maria Elena, those representations affected it on 2nd April. In the absence of much fuller argument and, if necessary, further evidence I would not, therefore, consider it unrealistic to conclude that, if this matter were allowed to go to trial, it would be held that Dressage was entitled to rescind all three Share Distribution Agreements.

Restitutio in Integrum

8. It is argued, particularly on behalf of FSL, that rescission could not be granted because restitutio in integrum is impossible. It is said that FSL, against which no wrongful act, such as misrepresentation, is alleged, will be seriously prejudiced by rescission of the three Share Distribution Agreements. Firstly, it has paid a very substantial amount - some US$100 million - to Isabel for purchase of her shares. If the redistributed shares are returned to it upon rescission of the Share Distribution Agreements it may not be able to dispose of them at a price which recompensed it for what it had paid out under the Brunswick Agreement. Further there would be changed ownership percentages and disruption of its management if there were rescission.

9.1 The question of whether there can be restitutio in integrum is closely related to the question whether the Share Distribution Agreements were an inseparable part of the composite transaction. If they were not, the scope of substantial restitution would have to be defined by reference to what had passed under those three agreements and not by reference to what had passed under the Master Agreement or the Brunswick Agreement neither of which passed on to third parties property or other rights derived from the Share Distribution Agreements or depended on performance of the latter. That would be simply because the purpose of restitution would be to restore the parties - not to the position they were in before the series of linked transactions which culminated in the Share Distribution Agreements - but to the position they were in before the Share Distribution Agreements were entered into. That exercise would certainly be subject to consideration of any inability to restore what had passed under those agreements, but if that restoration could be substantially accomplished it is at least strongly arguable that losses attributable to there being no restitution of what has passed under separable, albeit linked, contracts are irrelevant and must lie where they fall. This is clearly an issue which is to some extent fact-sensitive and raises difficult matters of law which should not be resolved at this stage.

9.2 Further, the relevant impact of rescission on FSL - the disposition of restored shares and the disruption of its management continuity will have to be the subject of full evidential enquiry at a trial. I am not prepared to draw any concluded inferences on these matters from the affidavits and witness statements in evidence at this stage.

Conclusion on Rescission

9. For these reasons I have reached the conclusion that although there are serious legal and factual obstacles to be overcome by the claimants if they are to establish that they are entitled to rescind the Share Distribution Agreements in isolation from the Brunswick Agreement, none of the issues that arise can be conclusively determined prior to a full trial. Accordingly, the applications by Alvaro, Earth and Water under CPR 3.4.2 and CPR 24.2 and that by FSL to set aside service on it outside the jurisdiction must be dismissed.

Service on FSL within the Jurisdiction?

10. The application by FSL to set aside service on it outside the jurisdiction having been dismissed, it is unnecessary to decide whether it had been effectively served within the jurisdiction before it applied for leave to serve out. However, since this point has been argued, I shall briefly express my views.

11.1 Clause 14 of the Share Distribution Agreements provided as follows:

"Notices Any notice, request, authorisation, consent or other communications required or permitted to be given by any party to another pursuant to this Agreement shall be in writing and shall be deemed given upon delivery by hand or transmission by telecopier (with confirmation of receipt at the number to which sent), or upon delivery by registered or certified air mail, return receipt requested, postage and registry fees pre-paid, and addressed as shown on Schedule A hereto, or at such other address as a party may designate by providing written notice to the other parties in accordance with this Section 14."

Clause 16 provided:

"Agent for Service of Process In connection with Section 14 of this Agreement, each of the parties to this Agreement have appointed the following as agent for service of legal process in England:

Jordan Company Secretaries Limited

20-22 Bedford Row

London WC1R 4JS

England

Any party may appoint a new agent for service of legal process in England upon written notice to the other parties in accordance with Section 14 of this Agreement."

After the New York court had stayed those proceedings on condition that Alvaro agreed to proceedings in the Commercial Court in accordance with clause 15 - the Governing Law and Jurisdiction clause - the claimants' solicitors by a letter of 15th November 1999 asked Ince & Co whether they were in a position to accept service on behalf of FSL. On 19th November at 1848 Ince replied by fax asking for clarification on certain matters and stating that on receipt of draft proceedings they would take FSL's instructions. However, the letter also stated:

"In any event, we would remind you that the three Share Distribution Agreements each make specific provision for the service of proceedings on the parties thereto. Should you find yourself unsure as to how best to make good service, you might consider following these express provisions."

Prior to receipt of that letter a representative of Claimants' solicitors had at 15.35 on the same day already served Jordan Company Secretaries Ltd with the proceedings in London. The claimants had originally argued that the defendants were estopped from saying that there had not been effective service because of what Ince & Co had written in the passage which I have quoted. This, however, proved to be an unsustainable argument because service had been effected on Jordan Company Secretaries Ltd before receipt of Ince's letter and therefore not in reliance upon it. However, that letter contains on its proper construction a representation that service under the clause 14 procedure would be effective and accordingly it could operate as a waiver of any objection to service that, as it happened, had already taken place under that procedure. Reliance does not matter. If there had been agreement six hours earlier by Ince & Co to service by that means, nobody could have objected to such service and it can make no difference that Couderts anticipated that waiver.

11.3 The argument advanced that Maria Elena and Isabel cannot avail themselves of this waiver because they were not parties to the Share Distribution Agreements and therefore could not take advantage of clause 14 has greater weight. I do not consider that they would have effectively served the defendants FSL in the absence of an express agreement to that effect. That would be a virtually impossible contention on the basis of the reference in Ince's letter which expressly confined itself to the parties to the agreements.

11.4 In these circumstances, I conclude that as regards Maria Elena and Isabel process was never effectively served on FSL within the jurisdiction, but that as regards Dressage it certainly was. As Harrington is described as "successor" to Codan as trustee of the Hanover Trust, it is probable that it too effectively served process.

11.5 In view of my decision that the order of Longmore J. granting all the claimants leave to serve outside the jurisdiction should not be set aside, this point is of little practical importance.