England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		25 November 2002

Mr Justice Andrew Smith:

1. This is an application by the claimant, Mr Adolfo Altman, for the summary determination of three issues, and for consequential orders. It is made in proceedings in which Mr Altman is suing the Australia and New Zealand Banking Group Limited ("ANZ") in respect of an investment in restructured loans by a Russian state-owned bank, Vnesheconombank.
2. ANZ are an international investment bank with offices in London, from which until the end of 1998 they operated a department called the Emerging Markets Group ("EMG"). One of the investments in which the EMG dealt in 1997 was known as a "Russian Prin When & If". "Prin" is an abbreviation for a "Principal Restructured Loan", the loan having been incurred before 1992 by or on behalf of the Government of the former Soviet Union. Following restructuring, the new Prin was to be issued by Vresheconombank. The terms of the proposal were described in a document dated 10 June 1996. On 6 October 1997, Vresheconombank made a restructuring agreement with other banks, including Bank of America NT and SA as the Restructuring Agent and ANZ as a holder of what was called Eligible Debt. It was subject to certain conditions precedent. The investment was described as "when & if" because it was in respect of a specified amount of Prin if and when there was restructuring, at a price agreed at the time when the investment contract was made.
3. Mr Altman is a Chilean national, living in Santiago. On 22 October 1997 a Chilean company, Isaac Alaluf & Asociados SA ("IAA"), made an agreement by telephone with ANZ on Mr Altman's behalf that he would invest in Russian Prin When & If. This agreement is referred to as the "W & I Contract". Mr Altman invested US$ 767,750 in Prin with a face value of U$S1 million. He paid ANZ the sum of US$77,000, of which $76,750 represented a 10% deposit, in October 1997, the balance being payable on what was called the Settlement Date, which was expected to be in December 1997.
4. ANZ sent two notes confirming the W & I Contract dated 23 and 24 October 1997. There is no dispute that for the purpose of these applications I should take it that the latter note accurately records what was agreed on 22 October, and I shall refer to this as the "Confirmation". It was on ANZ's letter paper and countersigned by IAA on behalf Mr Altman. I set it out:

"CONFIRMATION

…

This confirmation is in substitution for and is not in addition to our confirmation dated 23^rd October 1997 under reference 13333/13334 RUPRINWI which is hereby cancelled.

Re: Russian Restructured Loans (the "Asset") as rescheduled pursuant to the 1996 Financing proposals for Vnesheconombank of the Russian Federation (the "Financing Proposals"); terms defined in the Financing Proposals have the same meaning herein.

We are please to confirm that following sale (on a when and if rescheduled basis) of the Asset, on the following terms:

Trade Date: 22^nd October 1997

Settlement Date: The date on which all conditions precedent to the rescheduling of the Asset shall be satisfied (the "Rescheduling Date")

Obligor: Vnesheconombank

Interest Basis: Six month US Dollar LIBOR plus 13/16 pct

Face Value: USD1,000,000.00

Consideration: USD767,500.00 being 76.75pct of Face Value, of which USD76,750.00 (the "Deposit") shall be paid to Seller not later than 30^th October 1997 and the balance of USD690,750.00 on the Rescheduling Date which sums Buyer authorises Seller to debit from the account of Buyer with the Seller.

Governing Law: English

Expiration: If the Rescheduling Date has not occurred prior thereto, the agreement reflected in this Confirmation will expire upon whichever is the earlier of:-

(i) 31^st December 1997; or

(ii) the date on which a material change in the terms of the Asset, as determined by the Emerging Markets Traders Association, from those set forth in the Financing Proposals, occurs.

(A) In the event that this agreement expires an amount equivalent to the Deposit plus interest accrued thereon at Libid shall be paid by Seller to Buyer at the account of Buyer with Seller.

(B) For the avoidance of doubt, the Deposit shall belong to Seller and shall be held in Seller's name. In the event that in Seller's opinion at any time the ratio of the market price of the Asset to the Balance Owing falls to or below 1.054 to 1, Seller shall be entitled to call upon Buyer to pay a cash sum to Seller sufficient to reduce the Balance Owing so as to bring such ratio back to 1.11 to 1 or better, and failing receipt by Seller of any cash sum within 1 business day of Seller calling same, Seller shall have the right (but not obligation) to sell the Asset. In the event of Seller effecting such a sale, then if the amount due to Seller on the Rescheduling Date with respect to such sale exceeds the Balance Owing, then on the Rescheduling Date Seller shall remit such excess to Buyer, and if the Balance Owing exceeds the amount due to the Seller on the Rescheduled Date with respect to such sale, Buyer shall remit such excess amount to Seller upon Seller's demand, provided always that in the event that this agreement expires, Seller shall pay to Buyer an amount equivalent to any such excess amount received by Seller from Buyer together with the sum payable to Buyer pursuant to (A) above. (For the purposes of the foregoing, the "Balance Owing" shall mean the amount that is from time to time owed by the Buyer to the Seller, whether contingently or otherwise, pursuant to this agreement).

Without prejudice to the obligations of Buyer hereunder the obligations of Seller to complete the transaction hereby contemplated shall be subject to and dependent upon Seller's receipt from Buyer of compliance documentation for Buyer satisfactory in all respects to Seller ("Satisfactory Completion"). Buyer shall be required to make the payment(s) detailed herein on the date specified notwithstanding that Satisfactory Completion may not have occurred. Subject to Satisfactory Completion and to the terms of any documentation relating hereto executed by Seller and Buyer, Buyer shall be entitled to receive any interest accruing on the asset the subject hereof from the date of receipt by Seller of such payment(s). Buyer shall promptly deliver to Seller any information and documentation that Seller may require in connection with the foregoing.

Except in so far as anything herein conflicts therewith, this transaction is subject to all "agreed Market Practices" adopted by the Emerging Markets Traders Association…."

5. The Confirmation refers to the 1996 Financing Proposals. By the time of the Confirmation, and indeed of the telephone agreement, the proposals had been overtaken by the restructuring agreement. It is common ground both that I should proceed on the basis that the Confirmation is to be interpreted as referring to the restructuring agreement rather than the proposals, and that the terms of the agreement were incorporated by reference into the Confirmation and into the W & I Contract.
6. Under the terms of the Restructuring Agreement (which was governed by English law), Vnesheconombank undertook with each Participating Creditor to assume on the applicable restructuring date an obligation to pay the loan. Participating Creditor meant any creditor who was or became a party to the agreement (including ANZ), and "any other person to whom all or part of any rights and obligations of such Creditor have been transferred pursuant to Clause 45". Clause 45 provided that any Participating Creditor might (after a specified date and by means of a signed transfer certificate substantially in a stipulated form) transfer his rights and obligations in respect of a loan to "a Transferee", the definition of which term was confined to a bank or financial institution. It is agreed that the effect of these provisions is that ANZ could not assign to the claimant their rights and obligations under the agreement in respect of Prin.
7. I should refer to two other provisions of clause 45 of the Restructuring Agreement. Clause 45(8) provides as follows: "Nothing in this Clause 45 shall prevent any Participating Creditor from granting any participation in its rights under this Agreement if the existence of such participation does not affect the rights or obligations of any of the other parties to this Agreement". Clause 45(9) provides that, "For the purposes of this Clause 45 only, "transfer" shall be construed, in relation to any interest in a Loan, to include any assignment, novation or other transfer of legal title to or beneficial title in such interest, excluding, for the avoidance of doubt, any grant of participation in such Loan permitted by Clause 45.8". "Participation" is not defined in the restructuring agreement. In view of clause 45(9) I consider it at least arguable that the agreement precludes not only any assignment of Prin to a person other than a bank or financial institution but also a declaration of trust in favour of such a person.
8. The Confirmation also refers to "agreed Market Practices" adopted by the Emerging Markets Traders Association ("EMTA"). The EMTA is a trade association of market counter-parties dealing with emerging market instruments, which aims to promote good market practice by way of voluntary self-regulation, and was concerned with market practice between market professionals. On the evidence before me, it had no "agreed Market Practices". It issues what it calls "Recommended Market Practices", one of which was dated 25 November 1996 and was about Restructured Russian Loan Trades. I need only observe that this recommended that settlement of "when restructured" trades should be by way of "execution by Seller and Buyer of a Transfer Certificate transmitted by either Seller or Buyer to Bank of America, as the Restructuring Agent with an Effective Date of December 2, 1997". However, this could apply only to a transfer to a Bank or financial institution, and is of no direct relevance here.
9. By about the first week of November 1997, the value of the investment had fallen to such an extent that ANZ called upon Mr Altman to make further payment under the provision set out in clause (B) of the Confirmation. Mr Altman did not do so. He has not made any payment other than the US$77,000 to which I have referred.
10. On 20 November 1997 ANZ sent IAA a fax that stated that "the rescheduling is due to settle on 5th December 1997, with an effective date of 2^nd December 1997", and attaching a "specimen Participation Agreement that will have to be executed between us to reflect the terms on which we will hold the new loan for your client". The attached agreement provided for Mr Altman to "participate" in the loan on the basis of a relationship of debtor and creditor between ANZ and Mr Altman, without the transfer "by way of assignment, declaration of trust or otherwise of any legal or equitable interest" in Prin or any monies received by ANZ in respect of it. Within five business days of receipt of any interest paid by Vnesheconombank in respect of the loan, ANZ were to pay Mr Altman a sum equal to the interest payment. The attached agreement also provided for Mr Altman to pay to ANZ an annual fee, and stated that "Such fee shall be paid in full upon the sale of the Loans to a third party and shall be waived (proportionately, in the case of a partial re-sale) in the event of a re-sale of the Loans to [ANZ]". Mr Altman did not enter into such a participation agreement.
11. In these proceedings, Mr Altman sues for the return of the US$77,000 that he paid to ANZ or for damages in that sum. He puts his claim on a number of bases: that the agreement of 22 October was ineffective or invalid because a condition precedent was not satisfied, or because of mistake, or because of uncertainty as to its terms; that misrepresentations were made to Mr Altman by IAA, who were ANZ's agents; that ANZ were in breach of a duty of care; and that ANZ are liable for damages under section 62 of the Financial Services Act, 1986 ("FSA") because ANZ were in breach of the rules of Investment Management Regulatory Organisation Limited ("IMRO"). Specifically with regard to the section 62 of the FSA, Mr Altman's allegations include one that this investment was a Contingent Liability Transaction ("CLT") within the meaning of the IMRO rules, and so under rule 3.13 ANZ were prohibited from arranging the investment for Mr Altman in these circumstances or recommending it to him.
12. Mr Altman seeks the following summary determinations:

i) That he was entitled to be treated by the Defendant as a Private Customer for the purposes of the IMRO Rules.

ii) That the contract (if any) made on or around 22^nd October 1997 was not upon the terms contended in sub-paragraphs 39(a) and (b) of the Defence.

iii) That such contract (if any) was a CLT for the purposes of the IMRO Rules.

13. I do not need to consider the first of these issues. Although it reflects an issue raised in the pleaded defence, ANZ have made in clear that they now accept that Mr Altman was a Private Customer within the meaning of the IMRO Rules and entitled to be treated as such.
14. The second issue refers to paragraph 39 of the Defence, which reads as follows:

"….the Defendant will contend

(a) that under the terms of the W & I Contract as evidenced by, inter alia, the Confirmation the Defendant was entitled to discharge its obligations on the Settlement Date by inviting the Claimant to enter into a participation arrangement (by way of a Participation Agreement or a Deferred Purchase Agreement) and performing the same; alternatively,

(b) that there is to be implied into the W & I Contract, by reason of custom and practice and/or for reasons of business efficacy, a term that the interest would or could be passed under the contract on the Settlement Date pursuant to the Defendant's standard Deferred Purchase Agreement and/or Participation Agreement as the case may be".

The term "Participation Agreement" is not defined in the pleading, but a form of Participation Agreement used by ANZ is a schedule to the Defence. The term "Deferred Purchase Agreement" is defined to mean a Master Deferred Purchase Agreement (Loans), and ANZ's form of such an agreement is another schedule to the Defence. It is sufficient for the purpose of this application to say that the Deferred Purchase Agreement is similar to the Participation Agreement except that it extends credit to the investor. As for the form of Participation Agreement that was appended to the Defence, its terms were very similar to those sent to IAA on 20 November 1997, but are not identical. ANZ say that the differences are insignificant variations in drafting, and that seems to me to be the case.

15. However, in the course of the argument before me, Mr Charles Flint QC, who represents ANZ, did not seek to argue that the proper interpretation of the Contract is that pleaded in paragraph 39(a) of the Defence or that it included the implied term as pleaded in paragraph 39(b). Specifically, he acknowledged that, while it is possible that the parties might have agreed to enter into a Deferred Purchase Agreement, neither party was entitled to require the other to do so. Moreover, he did not maintain that Mr Altman was obliged to enter into any form of participation agreement with ANZ. Instead ANZ now submit that the contract contained the following implied term: "that at the restructuring date (a) participation in the Prin would be offered to the Claimant by the Defendant on the Defendant's usual terms as to participations; (b) at the election of the Claimant, the Defendant would transfer the Prin to a nominated financial institution able to accept a transfer".
16. In these circumstances, it is strictly true to say that ANZ concede the second issue identified in Mr Altman's application. However, this does not acknowledge the real difference between the parties that lies behind this part of the application. The agreement, as recorded in the Confirmation, was one of "sale … of the Asset", that is to say of the Prin. Mr Andrew Onslow QC, who appears for Mr Altman, submits that this connotes that the Prin was to be transferred from ANZ to Mr Altman.
17. ANZ argue that on its proper interpretation the Agreement did not oblige them to assign the Prin or to transfer it by way of novation, and the agreement was "a conditional contract for the sale, by way of participation, of an economic interest" in the loan, namely the right to receive an amount equivalent to the income an capital paid under the loan. In support of this, they point out that (as Mr Altman accepts for the purpose of this application) the Confirmation is to be interpreted together with the Restructuring Agreement and that under the Restructuring Agreement ANZ could not transfer to anyone other than another bank or financial institution any part of the loan. Hence, they submit, the contract must contemplate that Mr Altman would participate in the loan in some other way, pointing out that in the Restructuring Agreement clause 45.8 contemplates that there might be such participation.
18. ANZ do not put forward a definition of "participation". However, they draw to my attention a discussion in The Law and Practice of International Banking by Penn, Shea and Arora (1987), where such participation is described as "the most popular legal technique used in the off-balance sheet disposal of assets", and is explained as follows: "The term has no technical legal meaning in English law but is normally used to describe a funding arrangement between the seller and the participant under which the participant places funds with the original lender on terms that those funds will only be repaid to the participant together with interest thereon as and when corresponding amounts of principal and interest are received from the borrower under the loan to which the participation relates. The participation is thus "non-recourse" to the selling bank in the sense that the seller is not liable to make payments to the participant if the corresponding amounts are not received from the borrower". The authors go on to observe that in a participation there is no contractual nexus between the participant and the borrower, such as would be created if the loan were transferred by assignment or novation, and that, "From this legal distinction between participations, assignments and novations flows an equally significant commercial distinction. The party taking a loan participation acquires a double credit risk – that of the borrower and of the original lender". This is undoubtedly so, assuming that the nature of the participation does not involve the participant acquiring an equitable interest in the loan: see Lloyds TSB Bank plc v Clarke, Privy Council Appeal no 41 of 2001, 29 May 2002.
19. I have much sympathy with the broad thrust of ANZ's argument that in order to give business effect to what was undoubtedly intended to be a binding agreement, the W & I Contract should be interpreted as an agreement for ANZ to participate in Prin held by ANZ. However, Mr Onslow rightly emphasises that an implied term must be capable of clear expression and must be so obvious that "it goes without saying": BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1978) 52 ALJR 20. In face of these considerations, both parties canvassed in argument how the agreement might properly be carried out by ANZ. Perhaps because ANZ's submissions during argument departed from their pleaded case, the submissions were somewhat inconclusive. However, the fundamental difficulty, it seems to me, in making any order on the second issue is that I was to assume that the W & I contract is valid, and specifically is not invalid for uncertainty.
20. I consider it artificial for the court to seek to resolve differences of this kind without facing the question (which is an issue in the proceedings) whether the W & I contract is too uncertain to be given legal effect. It is intimately connected with ANZ's submission that the W & I Contract on its proper interpretation contemplates participation and that business efficacy therefore requires that there be an implied term in order to give effect to that intention. In these circumstances, I decline to grant relief upon the second issue beyond recording that ANZ do no longer maintain their contention as pleaded in paragraph 39 of the Defence.
21. I therefore turn to the third issue that Mr Altman applies for me to determine. In his opening, Mr Onslow's submission concentrated on the second issue on the basis that if his client succeeded on the second issue, the third issue falls away. ANZ's contention that the W & I Contract was not a CLT depends upon the nature of the rights to which Mr Altman was entitled under it. Before considering whether it is appropriate for me, in these circumstances and having regard to my view on the second issue, to determine the third issue summarily, I should explain how it arises.
22. Section 62 of the FSA provides that a contravention of IMRO rules "shall be actionable at the suit of a person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty". Rule 3.13(1) of the Rules provides that a member of IMRO (as ANZ were) must not effect, arrange or recommend a CLT with, for or to a Private Customer (subject to irrelevant exceptions). CLT is defined to mean "a Derivatives transaction under the terms of which the Customer will or may be liable to make further payments (other than charges, and whether or not secured by margin) when the transaction falls to be completed or upon the earlier closing out of his position". "Derivatives" is defined to mean "Options, Futures and Contracts for Differences", and Mr Altman's contention is that the W & I contract was a future. A "future" is defined in the Rules as "an Investment falling within paragraph 8 of Schedule 1 to the Act", that is to say the FSA.
23. Paragraph 8 of Schedule 1 provides that Futures are "Rights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date and at a price agreed upon when the contract is made". Sale is given a wide meaning and includes "any disposal for valuable consideration", and disposal includes "in the case of an investment consisting of rights under a contract or other arrangements, assuming the corresponding liabilities under the contract or arrangements": paragraph 28 of Schedule 1.
24. However, an investment is not to be regarded as falling within paragraph 8 of the schedule if it falls within paragraph 4 of the schedule: see note (2) to paragraph 4. Paragraph 4 refers to "Warrants and other instruments entitling the holder to subscribe for investments falling within paragraph 1,2 or 3" of the schedule. ANZ contend that the W&I Contract was an instrument entitling the holder to subscribe for investments falling within paragraph 2, namely "Debentures, including debenture stock, loan stock, bond certificates of deposit and other instruments creating or acknowledging indebtedness…".
25. At one time ANZ contended that the W & I Contract did not involve any contingent liability and for that reason could not fall within the definition of CLT. Mr Flint rightly abandoned that argument, Mr Onslow having pointed out that the definition of CLT refers to further payments that the customer "will or may be liable" to make. The issue between the parties as to whether the W & I Contract is a CLT turns solely upon whether it falls within paragraph 4 of Schedule 1 to the Act, being an instrument entitling the holder to subscribe for investments falling within paragraph 2.
26. The argument that Mr Altman advances is that it is misleading to describe the W & I Contract as "an instrument entitling the holder to subscribe for" an investment. He submits that, "The W & I Contract is a sale and purchase, not an issue in return for a subscription. It obliges (not merely entitles) the counterparty to buy. It is very artificial to treat the counterpart as a "holder" of anything".
27. However, these submissions do not seem to me conclusive of the third issue, and do not, in my judgment, avoid the need for a precise determination of the terms of the investment. Specifically,

i) Although I agree that the term "instrument" is not an immediately natural description of the W & I Contract, the term is given an extended definition in Schedule 1 of the Act, including "references to any record whether or not in the form of a document": see paragraph 28(1)(b).

ii) In response to the submission that the W & I Contract does not merely give Mr Altman an entitlement but puts him under an obligation, ANZ rely in part upon their submission that the true effect of the W & I Contract is that Mr Altman is entitled to choose whether to enter into a participation agreement with them or to have another bank or financial institution hold the Prin as his nominee. I am far from convinced that this contention can be sustained (ever assuming ANZ contemplate a nomineeship consistent with clause 45(9) of the Restructuring Agreement). However, I do not consider that ANZ's argument that the W & I Contract falls with paragraph 4 of the Schedule necessary depends upon this part of their argument. It seems to be arguable that an obligation to subscribe entails an entitlement to do so, and certainly I am not prepared to conclude otherwise upon an application of this kind.

28. There is, as far as counsel who appeared before me are aware, no authority on the proper interpretation of these paragraphs of the Schedule to the FSA. Despite the arguments adduced by Mr Altman, the question whether the W & I Contract falls within paragraph 4 depends, in my judgment, upon the precise rights conferred upon him by the contract. For the reasons that I have explained, it does not seem to be appropriate to determine this summarily on the basis of an assumption that the W & I Contract was sufficiently certain to be a valid contract. I therefore decline to grant relief on the third issue.
29. I shall hear submissions about the order that I should make in light of this judgment.