QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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Deutsche Bank AG |
Claimant |
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- and - |
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Mr Alexander Vik Vik Millahue Agricola y Viňedos Ltd |
Defendants |
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Mr Tim Lord QC and Mr Jasbir Dhillon (instructed by Travers Smith LLP) for the Defendants
Hearing dates: 8 and 9 March 2010
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Crown Copyright ©
Mr Justice Burton :
"Subject to any defences that may arise from the circumstances, a claim for restitution of money paid under a mistake raises three questions. (1) Was there a mistake? (2) Did the mistake cause the payment? And (3) did the payee have a right to receive the sum which was paid to him?
The first question arises because the mistake provides the cause of action for recovery of the money had and received by the payee. Unless the payer can prove that he acted under a mistake, he cannot maintain an action for money had and received on this ground. The second question arises because it will not be enough for the payer to prove that he made a mistake. He must prove that he would not have made the payment had he known of his mistake at the time when it was made. If the payer would have made the payment even if he had known of his mistake, the sum paid is not recoverable on the ground of that mistake. The third question arises because the payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him. The payer may have been mistaken as to the grounds on which the sum was due to the payee, but his mistake will not provide a ground for its recovery if the payee can show that he was entitled to it on some other ground."
"15. A claim is made for a remedy against the defendant as constructive trustee where the defendant's alleged liability arises out of acts committed within the jurisdiction …
16. A claim is made for restitution where the defendant's alleged liability arises out of acts committed within the jurisdiction."
"On the merits of the claim the claimant's application must show that the claim has "a reasonable prospect of success" (CPR 6.21(1)(b)), and it has been confirmed by the Court of Appeal that this threshold is the same as if the claimant were resisting an application by the defendant for summary judgment, i.e. "the claimant has no real prospect of succeeding on the claim" (CPR 24.2): Carville America Inc v Camperdown UK Ltd [2005] 2 Lloyd's Rep 457; and see De Molestina v Ponton [2002] 1 Lloyd's Rep 271, 279-281. It is probable that there is no practical difference between this test and the test for the purposes of RSC Ord. 11, r1(1) of "a serous issue to be tried" in Seaconsar Far East Ltd v Bank Markazi Iran …"
He had reached a similar decision in BAS Capital Funding Corp & Others v Medfinco Ltd & Others [2004] 1 Lloyd's Rep 652 at 673 para 153.
"19. In fact DB London's belief as set out at paragraph 17 was mistaken. Errors in DB's calculation of the Available Cash meant that certain positions were overvalued and certain payments that were made out of an account held under one of the Equities Agreements, namely the Listed F & O Agreement entered into with SHI on 30 January 2008, were not reflected in the system that was used to monitor the level of cash and securities held by DB London as collateral under the Equities Agreements. The effect of these mistakes was to overstate the level of cash and securities held by DB London as collateral under the Equities Agreements and to cause an understatement of the Margin Requirement and thereby to overstate the Available Cash.
20. If DB London had been aware of such errors on 13 October 2008 the relevant officers would have realised that after payment of the four sums requested by SHI there would have been a deficit in the Cash and Securities Accounts and a Margin Requirement."
"16. At the time of the relevant Payments and Transfers, as is apparent from the Carroll Statement, the relevant DB staff were not aware of the errors. DB has since corrected these errors and has calculated that if such errors had not been present in the DBX system, that system would have shown the actual level of Available Cash at the close of business on 10 October 2008 to have been the equivalent of USD 23,720,715. I attach a schedule prepared for the purposes of this statement … which reconstructs the situation and seeks to demonstrate the level of Available Cash in the Cash Account showing on the DBX system both before and after the calculation errors had been corrected."
"9. I note that financial markets were generally very volatile around 13 October 2008 and the period following that date. For that reason, it would be expected that the value of the assets in SHI's accounts as well as DB's margin requirements in respect of those assets may fluctuate from day to day during this period.
10. For the reasons given in paragraphs 6-9, it is not possible to calculate the eventual debt that SHI owed DB by simply subtracting "Available Cash" at the close of business on 14 October 2008 from the further sums that are transferred out of the account at that date."
"15. If, as a result of the payment requests, the value of the assets in the accounts (as determined by DB) would be less than DB's margin requirement in respect of SHI (i.e. Available Cash would reduce from a positive number to a negative number), DB would not process such requests. In that circumstance, DB would be entitled to retain any Available Cash pursuant to clause 10.7.3.4 of the Equities Prime Brokerage Agreement because processing the requests would immediately result in a margin requirement from SHI. There may also be similar entitlement under clause 10.7.3.3."
"10.7.1. Cash held by the Prime Broker for the Counterparty in the Cash Account will be repayable on demand.
…
10.7.3. In no circumstances will the Prime Broker be required to pay cash to, or to deliver Equivalent Securities to or to the order of the Counterparty where:
…
10.7.3.3 the Prime Broker believes in its reasonable discretion that there are potentially payments, expenses, obligations or liabilities which the Prime Broker is or may become subject to in respect of past, current or proposed Transactions; or
10.7.3.4 the Prime Broker reasonable believes that immediately after the payment or transfer there would be a Margin Requirement payable in terms of Clause 4.2 above."
i) The origin or precise nature of such error, amounting to a divergence between the DBX record and alleged reality, as at close of business on Friday 10 October, of US$413 million (and as at close of business on Monday 13 October 2008 of $420 million), was not explained. Someone, or some mechanism, had either inaccurately recorded the position on the DBX or failed to update it, and no explanation was given as to what aspects of the DBX were incorrect. Nor were (or are) any accounts produced, either 'uncorrected' or 'corrected'.
ii) At some, undescribed and unexplained, stage, it seems (though no such evidence is given) that this alleged error was picked up, although never in terms announced to SHI or Mr Vik. Between 14 and 21 October, as a result of requests made by Mr Thomas Brugelmann, a senior officer of the Bank, Mr Vik signed transfer instructions, in favour of the Claimant, for sums from London to be transferred to New York, to offset against the alleged losses there, obviously in circumstances in which the Claimant bank believed that there was a surplus on the Equities Account in London which was to be used or offset against the deficit of the FX account in New York. Mr Vik was asked by Mr Brugelmann to sign and fax to Ms Carroll the appropriate transfer instructions. As referred to in paragraph 13 above, Ms Carroll describes (paragraph 11) how, between 14 and 21 October 2008, she had received "a subsequent series of transfer requests from Vik on behalf of SHI, for sums held in the Cash and Securities Accounts under the Equities Agreements to [be transferred] to separate accounts held by [the Claimant] relating to foreign exchange dealing by SHI". These are the transfers which Mr Vik executed at Mr Brugelmann's request, which totalled during the period between 14 and 21 October US$435 million. Ms Carroll's evidence is that she was still under the belief (now said to be mistaken) "on the basis of the figures displayed in the DBX system … that there was sufficient available cash in the Cash Account to make the transfers without the level of assets in the Cash and Securities Accounts falling below the margin required by DB at that time. [She] therefore passed the transfer request for approval for processing to my manager".
iii) A margin call was allegedly made by email of 22 October 2008, sent by Ms Carroll on behalf of the Claimant (with copies to, inter alia, Mr Brugelmann) in respect of the London Equities Accounts, in the sum of approximately US$320 million. Given that after 13 October there had been the further US$435 million drawn out, it must presumably be assumed (though no such evidence is given) that the calculation of the call was made by reference to a continued reliance on a continuing allegedly false or inaccurate record of the Cash Account on the DBX system.
iv) The Claimant disclosed a Visit Report, prepared seemingly by Mr Brugelmann on 31 October 2008, in respect of a meeting on 30 October between him and a number of other senior representatives of the Claimant (including a Mr Yassine Bouhara) and Mr Vik, which Mr Vik had requested; and in the minute of that meeting (whose accuracy Mr Lord accepts for the purpose of this application he cannot challenge) it is recorded:
"Yassine [Bouhara] outlined the operational error which occurred at the time the client had requested payments in favour of HSBC and other banks totalling NOK 1.5 bln, USD 50 mio and EUR 5 mio. Due to inappropriate mapping of accounts feeding into GPF from GES (F&O) the cash position of the client was overstated by approx. EUR 215 mio, allowing the payments to be executed in spite of the margin calls starting to come in. In effect, the current negative equity position of EUR 200 mio is equal to the payments that were authorized based on the incorrect information."
v) Mr Bouhara, who apparently outlined, and therefore presumably had some knowledge of, the alleged operational error, has not given any evidence to explain it in these proceedings, nor has Mr Brugelmann nor any representative of the Claimant bank. It is apparent that this assertion of an error in the sum of €215 million does not accord with Mr Kam Singh's calculations. Indeed, if it had only been an error of €215 million, then, either by reference to the DBX recorded credit at close of business on the Friday of US$437 million, or even the DBX recorded credit at close of business on the Monday of US$331 million (to which the US$35 million paid out must be added back), there would have been sufficient to meet the payments now impugned in these proceedings.
i) He submitted (as set out in paragraph 25 above) that there would have been a consequential (he said 'automatic') need for an adjustment of the Margin Requirement in the light of the allegedly unappreciated loss or disappearance of US$300 million in the F & O Account[4]. There is no evidence about this adjustment, except that the Kam Singh Schedule, without any explanation or breakdown, adjusts upwards the figure for Margin Requirement, "after fixing errors in DBX system", by US$100 million. It is hard to see how and why it is justified to increase the Margin Requirement by US$100 million, on top of making provision for the alleged US$300 million – that is certainly not what was done in the Brugelmann F & O Account in relation to the deficit on US$25 million, which was simply added to the previous unsecured initial margin, and, as I have said, there is no explanation of it.
ii) Insofar as there is need to bridge the gap further between US$300 million and US$437 million, Mr Foxton refers, as mentioned in paragraph 22 above, to Mr Entwistle's evidence (referred to in paragraph 18 above) that, had there been "escalation from Ms Carroll to other DB officers", then they would have considered Monday trading ("intra-day market movements"), and, according to the Kam Singh Schedule, there would have been some further losses in the NAV Equity PB account, which would have then have been taken into account.
i) The evidence of Ms Carroll is that she would only have escalated i.e. failed to comply with the request if "the Available Cash [as at close of business on the Friday] in the cash account was lower than the total amount of the payment" (paragraph 10 of her statement). It is only therefore if such balance would have fallen below US$35 million that consideration of Monday trading would have arisen, which therefore cannot assist in 'bridging the gap'. That means that concentration has to be in the US$120 million as at Friday (paragraph 23 above) and that Monday intra-day issues trading results cannot help.
ii) Mr Foxton's submission assumes that, if the alleged US$300 million error had been picked up, there would have been an adjustment to the Margin Requirement[5]. Mr Lord relies heavily on the terms of Clause 10.7, set out in paragraph 19 above, to establish that contractually the Claimant is only entitled to refuse to pay monies to, or to the order of, SHI "on demand" in one of the eventualities there referred to, and the subclauses relied on by the Claimant are Clauses 10.7.3.3 and 10.7.3.4. This would enable them to form a reasonable belief, or a belief in its reasonable discretion, that there needs to be an increased Margin Requirement, such as to justify non-payment. The Claimant did not have such a reasonable belief at the time: and, Mr Lord submits, the Claimant's own unilateral mistake cannot enable them, not having exercised that reasonable discretion at the time, retrospectively to do so. I shall return to this point later, but it would be an answer as to whether the Claimant can 'bridge the gap' between US$300 million and US$437 million. Even without such legal argument, I have already pointed out the difficulty of the absence of evidence as to in what way and why the reasonable belief would have been formed and the reasonable discretion exercised, so as to increase the Margin Requirement, whether as included in the Kam Singh Schedule, or otherwise.
iii) Reliance by the Claimant in this regard upon the Brugelmann F & O Account of 14 October is a startling change:
a) It (together with the rest of the attachments) was relied upon previously as part of a case (paragraph 33(ii) of the Particulars of Claim) that Mr Vik was thereby made aware of the alleged mistake, though it is difficult to see how receipt by Mr Vik of that account can support a case that he (or Millahue through him) knew of the alleged mistake in the DBX system. Also included in the enclosures to Mr Brugelmann's email of 14 October was a statement of what seems to have been the balance of the Equities Account, ending with a credit balance of NOK 2,987,217,354.71 (approximately US$850 million). However, the Brugelmann F & O Account is now relied upon as corroboration of the difference between the US$285 million (said in the Kam Singh Schedule to be the entry for the F & O Account forming part of the allegedly mistaken credit balance, as at close of business on 13 October, of US$331 million), as compared with the minus US$25 million.
b) It is further surprising that it is nowhere said by the Claimant in its witness evidence that the error was a misrecording or a mis-valuation of US$300 million in the F & O Account. On the contrary, there is a dealing with the F & O Account by Mr d'Arville in his second witness statement, at paragraphs 37 and 38:
"37. I am told by Mr Brugelmann that the second attachment to his email (…) is a statement of the value of Vik's F & O positions. The second page of the statement shows a negative account balance of approximately USD -136.7 million which, after the value of Vik's open position of approximately USD 111 million (…) is taken into account together with the margining requirement, leaves a margin deficit of approximately USD 67.9 million.
38. Upon receipt of this email, it would therefore have been apparent to Vik that there was a significant deficit in his F & O account and DB's failure to issue a margin call to cover the margin deficit should have revealed to Vik that DB was mistaken as to the amount of Available Cash when it authorised the Payments. In addition, as set out at paragraph 34 above, Vik was, it is submitted, already aware of the losses that were being incurred with respect to his New York trading and that the margin calls in respect of those losses would be met by transferring sums from his Cash Account to the collateral accounts relating to the FX trading, thereby further depleting the Available Cash."
This only illustrates or explains the alleged mistake (and Mr Vik's alleged awareness of it) by relating it to the deficit of US$67.9 million in the Brugelmann F & O Account, which was not of course in fact an increase in a Margin Requirement, but simply an addition of the deficit of US$25 million to the initial, but seemingly now uncovered, Margin Requirement. But there is no reference to the alleged US$300 million. In the light of what Mr D'Arville there states, it is perhaps not surprising that Mr Lord, in his skeleton, in attempting to understand the Claimant's case, understood that there was a US$67 million deficit in the F & O Account, which was implicitly being said to have been ignored, and, in looking for any further explanation of how the gap between that US$67 million and US$437 million, could be bridged, he would be directed by paragraph 38 of Mr D'Arville's statement to look at the losses incurred with respect to New York FX trading, a matter now firmly abjured by Mr Foxton.
c) The next problem is the pleading at paragraphs 19 and 20, which I have set out in paragraph 15 above, without - but even with - the proposed minor underlined amendment. This asserts that "errors in DB's calculation of the Available Cash meant that certain positions were overvalued and certain payments that were made out of [the F & O Account] … were not reflected in the [DBX] system". It is not easy to marry this with the alleged US$300 million error. Positions (such as there were) in the F & O Account are valued on a mark to market basis.
d) On the second day of the hearing, two further witness statements were put in, one by either side. First there was a statement by a Mr Laws, an employee of the Claimant in the Global Exchange Services Division, who had no knowledge (or at any rate did not depose to any) of the facts of this case, but was familiar with the computer systems, and, after being referred to the Brugelmann F & O Account, with its deficit of US$-25 million, he simply says:
"5. This statement was obtained from the Global Prime website to which DB London's clients have access. The reporting of the F & O positions within the Global Prime website is separate to the DBX system and was unaffected by the errors that DB has discovered were present in the DBX system in October 2008. The USD liquidating value figure referred to above is therefore a correct statement of the USD liquidating value of the positions under the F & O Agreement as at 13 October 2008 and is unaffected by the errors I understand were present in the DBX system at that time."
This adds nothing to the sum of anyone's knowledge or understanding in relation to this case, or the alleged mistake. More significant was the evidence on behalf of the Defendants in the shape of a fifth witness statement by their solicitor Mr Leslie, who explains what the investment was which is represented in the Brugelmann F & O Account as "Futures OTE" with a credit of some US$111 million (as set out in paragraph 27 above). This was, as stated above, the only investment in the account, and it consisted of a short position of 8,116 futures contracts on the Dec08 NYBT Russell 2000 mini index. Because this was a short position, it would benefit from a decline in the market prices (which of course was sadly what was happening at this dreadful time in international financial affairs): hence it had substantial value. Far from being "volatile", it had substantially increased its value since its purchase and largely retained that value, by reference to the daily market prices, which Mr Leslie produces. It is apparent that the profitability of US$111 million is accurately reported, and that it is impossible to see how an alleged US$300 million shortfall could have anything to do with that investment. The only other item in the Brugelmann F & O Account is the "Account Balance US$136,754,600 DR." No evidence is adduced in relation to that by Mr Kam Singh or anyone else on the Claimant's behalf.
iv) The Brugelmann F & O Account, containing the US$25 million and US$67.9 million negative figures was, as I have said, sent by Mr Brugelmann to Mr Vik on 14 October. There is no suggestion that Mr Brugelmann was looking at the DBX system, indeed he cannot have done, because he sent to Mr Vik what are said to be the accurate accounts, with which it is now said the DBX system was inconsistent. It is he who, at 01.57am on 14 October, sent to Mr Vik the draft transfer instruction to send the first tranche of the US$435 million over from London to bolster New York (this being something slightly short of US$100 million – itself three times as much as the US$35 million now impugned, paid out on the day before). At 09.23, later in the same morning, he sent the accurate accounts to Mr Vik, including the Brugelmann F & O Account, from which he, at least, must have deduced that there was sufficient to allow for the US$100 million which he was then asking Mr Vik to send. Further, he was, as set out in paragraph 20(iii) above, party to the alleged margin call on 22 October (after he had sent similar email draft transfer instructions to Mr Vik on 15, 17 and 21 October making up the total of US$435 million, which had been executed) in the sum of approximately US$320 million. It must either be the case that Mr Brugelmann was thus acting, and making calculations, in accordance with what was in fact, and remained, the true position of the accounts, or that, although he himself had sent the statements with the true position to Mr Vik on 14 October, he was somehow then subjected to its alleged erroneous recording in the DBX system (seemingly not yet picked up by 22 October when the margin call was made). In any event, so far as Mr Vik's knowledge is concerned, if, notwithstanding himself sending the F & O statement to Mr Vik, Mr Brugelmann did not realise that there was, or had been, a mistake, it is difficult to see why or how Mr Vik could or should have reached such conclusion by virtue of receiving it. The accounting (and notification) obligations under the PBA were plainly the Claimant's.
i) in the Kam Singh Schedule, unexplained and unsupported.
ii) in the note of the meeting of 30 October 2008, when it was said that Mr Bouhara "outlined the operational error which [led to] the cash position of the client [being] overstated by approx EUR 215 mio". Quite apart from the fact that this assertion of an overstatement of €215 million seems difficult to match with the alleged US$300 million shortfall in the F & O Account, Mr Bouhara, who allegedly outlined such error at the meeting, has not outlined it to the Court, nor has he caused Mr D'Arville to do so; and, in any event, insofar as this is the only evidence before the Court at all of the existence of any error, it is, as pointed out in paragraph 20(v) above, insufficient to justify the non-payment of the US$35 million, leaving, as it would, a very substantial balance of Available Cash.
i) as to the existence and nature of the error in the DBX system, and as to the fact that the DBX system showed an amount incorrect by US$300 million with regard to the F & O Account, and how that came about:
ii) as to the consequences, by way of adjusted Margin Requirement or otherwise, so as to 'bridge the gap' between that US$300 million and the approximately US$400 million which would require to be deducted from the US$437 million spoken to by Ms Carroll, before there could be refusal of all (or each) of the three payments.
iii) as to the circumstances in which such alleged mistake was discovered and/or remedied and when such occurred.
i) there was no reason to believe that a new case could be put forward: but
ii) even if it could, it would inevitably be a different one from that which was put before the judge on the ex parte application. In this regard, he could only argue by analogy with those cases where (see Parker v Schuller [1901] 17 TLR 299 CA) a different cause of action was being relied upon in support of the service out than that upon which the service out had been granted. I am not persuaded that this would necessarily apply to a case based upon the same cause of action but substantially different or amplified facts:
iii) nevertheless, and in any event, the Claimant should not now be given time to put forward a case which it had made, as Mr Foxton told the Court, a conscious and deliberate decision not to address by evidence, resisting requests to clarify its case for nearly a year.
iv) the right course was for the Court to reject the present proceedings. If the Claimant had a case which it could make, then it would be free to seek fresh permission to serve out of the jurisdiction (see Parker v Schuller itself), although subject to any application that the Defendant might make that, prior to doing so, they would be expected to have satisfied any costs orders in respect of these proceedings.
i) there has been a conscious decision to 'stick' on evidence, which I am satisfied, for the reasons given above, is inadequate to establish a case that there was a mistake and/or that payment was made as a result of that mistake, and secondly that there was knowledge of that mistake on the part of the Defendant such as to create a case of knowing receipt.
ii) even now there is no indication of what the answers would be in relation to the three areas identified by Mr Foxton, as set out in paragraph 32 above. Given the proximity to this Court of the London branch of the Claimant, it seems to me that at any rate some inkling of the nature of the evidence, which, in my judgment, should have been produced many months ago, could have been given in order to support the adjournment. Even in the last minute witness statement of Mr Laws, referred to in paragraph 29(iii)(d) above, he speaks only of the "errors I understand were present in the DBX system at that time", and still vouchsafes no explanation or evidence[7]. If the Claimant can put together a sufficient case to justify service out of the jurisdiction with regard to either of the two causes of action which the Claimant asserts, then, subject to questions of costs, it can seek to do so.
i) He submits, by reference to the "third question" in Kleinwort Benson in the passage in Lord Hope's speech set out in paragraph 3 above, that, pursuant to Clause 10.7, the Claimant was obliged to make payment in response to SHI's requests for the three payments, and was only entitled to withhold payment if it had the relevant reasonable belief, and the fact that (if such be the case) it did not have that reasonable belief due to its own mistake is no answer to such obligation (and to SHI's entitlement) nor gives rise to any cause of action by the Claimant.
ii) According to the Kam Singh Schedule, in arriving at the Available Cash there is a debit (as at close of business on Friday 10 October) of US$302,088.099 in respect of "UK PB FX position". Mr Lord asserts, but Mr Foxton denies, that, within the ambit of the PBA, the Claimant was not entitled to take such sums into account in its calculations, being FX transactions, and, according to Mr Lord, consequently not within the definition of Transactions for the purposes of Clause 10.7.3.3, and in the light of the definitions of Securities and Transaction in Part I of the Agreement and Clause 1.1 of Part II.
Note 1 But see Footnote 4 below. [Back] Note 2 But see Footnote 4 below. [Back] Note 3 In the event the witness statement provided subsequent to the hearing exhibiting the Kam Singh Schedule was by Mr Kam Singh. [Back] Note 4 Subsequent to the hearing, by letter dated 12 March 2010, Mr Foxton informed the Court that there had been an error, and that he was now instructed that the adjustment to the Margin Requirement was not consequential upon the US$300 million mistake, but was (in some unexplained way) independent of it. [Back] Note 5 See Footnote 4 above: the new information from Mr Foxton, while decoupling the alleged margin adjustment from the US$300 million, in no way detracts from Mr Lord’s point. [Back] Note 6 The fact that, as in Footnote 4 above, the margin adjustment is not now said to be consequential makes the Claimant’s case about the alleged error(s) even less comprehensible and even less persuasive. [Back] Note 7 The revelation of the Claimant’s mistaken submission as per Footnote 4 makes it even clearer that the Claimant should have, but has not, got its case in order. [Back]