England and Wales High Court (Commercial Court) Decisions

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

		Royal Courts of Justice Rolls Building, Fetter Lane, London, EC4A 1NL
		13/03/2013

Mr Justice Hamblen :

1. The Claimant is a Bank incorporated in Switzerland, (the "Bank").
2. The Defendants consist of five members of the Khan Family ("the Individual Defendants") and seven family controlled property owning companies ("the Corporate Defendants"), together with an additional company "Octavia Resources Limited" ("Octavia") as the thirteenth Part 20 Claimant.
3. The Khan Family are prominent commercially and politically in Pakistan. The male family members are all (or have been) Senators in the upper house of the Pakistan Parliament. Senator Gulzar Khan has held Federal Ministerial posts in the Government of Pakistan. Senator Waqar Khan and Senator Ammar Khan are sons of Senator Gulzar Khan. Senator Waqar Khan has been Federal Minister for Privatisation and Minister for Investment. Razia Sultana, the wife of Senator Gulzar Khan, has served as a member of the National Assembly of Pakistan. Sehr Asher is a daughter of Senator Gulzar Khan and Razia Sultana.
4. The male family members are senior executives in WAKGROUP, a group of family companies in Pakistan including "Global Broadcasting", "Horizon Construction", "Progress Energy", "WAK Housing", "WAK Steel", and "WAKGAS". According to the WAKGROUP website Senator Gulzar Khan is the Founder and still part of the management team, Senator Waqar Khan is the Chairman, and Senator Ammar Khan is the CEO. "WAKGAS" is described on the website as the flagship of the group, and also as the largest Liquefied Petroleum Gas Company in Pakistan.
5. The seven Corporate Defendants, which are companies incorporated in the Bahamas or the British Virgin Islands, are beneficially owned and controlled by the Khan Family. Their respective roles are as single purpose company owners of one of the seven leasehold and freehold properties charged to the Bank which are the subject of the present proceedings.
6. The present proceedings are concerned with the Bank's claims in debt and for possession of the charged properties.
7. In August 2007, March and May 2008 the Bank lent in excess of £50,000,000 to the Corporate Defendants on a five year facility secured by conventional mortgages on high value residential properties in London. Nearly all of the capital remains outstanding and unpaid along with substantial interest.
8. The Defendants had entered the London property market in 2004 and 2005, buying six flats in Knightsbridge for a total of £12,265,000, and a large property on Bishops Avenue for £12,000,000 ("Dryades"). The Defendants had enjoyed a very substantial rise in the value of the properties, and, as they rose in value, had taken advantage of that rise by remortgaging four of the flats with Coutts & Co to release cash for themselves. Then, by a Facility Agreement ("the Facility Agreement") with the Bank in 2007, the Defendants released a further £18,000,000 for themselves on remortgaging the properties. Shortly afterwards they committed themselves to buying another substantial property on Bishops Avenue, No. 58 ("No.58"), for £23,000,000, which transaction completed on 25 January 2008 with finance from Barclays.
9. Following the collapse of Lehman Brothers in September 2008 property prices in London substantially declined. During 2008 and 2009 the Defendants failed to provide repayment or alternative collateral satisfactory to the Bank or to service the borrowing to its satisfaction. The Bank made demand on 14 February 2011, and commenced proceedings on the debt (in this Court) and for possession (in the County Court initially) in March 2011.
10. In defence of these claims the Defendants rely upon misrepresentations allegedly made before the Facility Agreement and alleged breach of that Agreement. These are said to give rise to substantial counterclaims by them. It is contended that the Defendants should have been able to, and would have, borrowed more than they did in 2007, if they had not been misled or the Facility Agreement had not been breached. These funds would have been used to develop the two properties in Bishops Avenue, Dryades and No. 58, and they would have sold them for very substantial profits of up to £62,000,000. It is also said that the Bank misrepresented the returns available on investment products ("the Investment Products") sold to the Defendants as part of the facility and are liable in damages. Claims are also made to set aside supplemental agreements to the facility, based on unilateral mistake and misrepresentation.
11. At the heart of the Defence and Counterclaim as developed at trial was the allegation that the Bank wrongfully refused to allow drawdown of £10,050,000 in accordance with the Facility Agreement. Further, having insisted that the Defendants agree to new conditions upon which those funds would be released, they then refused to honour those conditions, having misled the Defendants into signing a supplemental agreement which varied those conditions.
12. There were also issues between the parties concerning accelerated termination of the facility and liability for default interest; whether various clauses relied upon by the Bank fall foul of protective legislation and whether the Bank acted in breach of a duty of confidence.
13. By Orders of 9 and 16 November 2012 Andrew Smith J split off claims for liability for breach of any COBS or COBS rules, and most issues of causation and quantification relating to the counterclaims.
14. As a consequence the only issues of quantification for determination at the present trial related to losses said to have been suffered in relation to the Investment Products. The split trial Order also meant that the trial was to cover whether the alleged misrepresentations were made, whether they were true, and whether, "based on what they knew" the Defendants would have entered into the Facility Agreement in any event, or would have withheld and investigated other potential sources of finance. It was not, however, to include an examination of the counterfactual scenario of what such investigations would have revealed or what steps might have been taken as a result.

Evidence at trial

15. The evidence at trial focused on the period of May to September 2007, the period leading up to and immediately following the Facility Agreement dated 12 August 2007.
16. The principal bank witnesses were Laurent Kuster, a Lending Officer with the Bank's Private Wealth Management ("PWM") business in Geneva; Markus Rau, a Relationship Manager with PWM in Geneva, and Nasim Ahmad, a Senior Relationship Manager based in Dubai with good contacts in Pakistan who had a long standing relationship with the Khan Family and had introduced them to the Bank. There was also evidence from Paul Walker, a director of Deutsche Bank AG, London, who worked in its Credit Risk Management ("CRM") real estate valuation division; George Hammon, who was Business Manager for the Bank's Global South Asia sub-Market team ("SMT") and Rai-Rummaan Kharal, an investment adviser in Deutsche Bank AG, Singapore. There were also Civil Evidence Act statements from David Brown and Nico Van der Beken dealing with a document authenticity issue.
17. The principal witness for the Defendants was Senator Waqar Khan. Although he was not a director of any of the Defendant companies he was the family member who had responsibility for their London property investments and was the person who dealt most with the Bank. He has been a senator in the Pakistan national parliament since 1994 and was a minister of the national government of Pakistan and a cabinet minister from 2008 to 2011. His brother, Ammar Khan, gave evidence by video link. He is CEO of the family business, WAKGAS and was a Senator in the Upper House of the Pakistan Parliament until 2012. Oral evidence was also given by Rashad Yaqoob, a director of Middle East at Savills Capital at the material time; Adil Yousfuzai, Market Head for the Pakistan region in the PWM division of Coutts bank from 2005 to 2008, and Sheraz Ijaz (by video link), an office administration manager at WAKGAS. There were also written statements and accompanying Civil Evidence Act notices from Senator Gulzar Khan and his wife, Razia Sultana.
18. There were expert valuation reports and expert reports addressing document authenticity but in the event no expert evidence was called at trial.
19. There were a number of disputed factual issues. Most of these issues turned on disputed recollections. Inevitably recollections over time will fade and attempts at later reconstruction can lead to false but still honest recollections. In resolving the disputed factual issues the contemporaneous documents and the overall probabilities are of particular importance – see, for example, Grace Shipping v. Sharp & Co. [1987] 1 Lloyd's Rep 207, 215 (PC); Inntrepreneur Estates Limited v Hollard and Hollard [2000] EWCA Civ 246 at [85].

The Issues

20. There was a much revised detailed List of Issues. I shall set out those issues when addressing each head of dispute. The various heads of dispute and the main issue arising under each head may be summarised as follows:

(1) The Facility Agreement

Whether the Bank was in breach of the Facility Agreement in failing to advance the full Tranche B drawdown.

(2) Pre-Facility Agreement Misrepresentations

Whether actionable pre-facility misrepresentations were made.

(3) The 17 August Oral Agreement and the Undertaking

Whether an oral agreement was made on 17 August which was reflected in the Undertaking and the effect thereof.

(4) The First Supplemental Agreement

Whether an effective agreement was made and, if so, whether it is liable to be rescinded for misrepresentation or is void for mistake.

(5) The Second Supplemental Agreement

Whether an effective agreement was made and, if so, whether it is void for mistake.

(6) The Investment Products

Whether the Bank was in breach of a duty to advise the Khan Family concerning the adverse consequences of the sale of the Second and Third Products prior to maturity.

(7) Interest Default

On what outstanding amounts and at what rate of interest the Bank is entitled to claim default interest under clause 9(d).

(8) Security Shortfall

Whether in support of its claim that there was a shortfall the Bank can rely on valuations which it obtained for itself, whether under clause 15(a) or 15(b) of the Facility Agreement.

(9) Counterclaims generally

Whether any of the counterclaims can be relied upon as defences.

(10) Guarantee

Whether Senator Gulzar Khan is liable on the terms of his personal guarantee or whether it has been discharged.

(11) Statutory relief

Whether the Khan Family are entitled to relief under the Consumer Credit Act 1974 and/or the Unfair Terms in Consumer Contracts Regulations 1999 and/or whether they and the Corporate Defendants are entitled to relief under the Unfair Contract Terms Act 1977.

(12) Breach of confidence

Whether the Bank acted in breach of its duty of confidence.

Factual chronology

21. In setting out the factual chronology I shall make a number of my findings following the evidence at trial.

Events prior to the Khan Family banking with the Bank

22. Prior to banking with the Bank the Khan Family banked with a number of institutions, and in particular at Citibank, Swiss Banking Corporation, and UBS where their relationship manager was Nasim Ahmad. He started being the relationship manager for the Khan Family in the early 1990's. He developed a close personal as well as business relationship with the Khan Family, and in particular Senator Waqar Khan, and they placed considerable trust and confidence in him. He also had knowledge of many of their financial affairs. In the Bank's credit reports, including those signed by him, he was described as the Khan Family's "trusted advisor at UBS".
23. In 2004 the Khan Family decided to acquire properties in the UK, and in particular in London. They initially acquired four of the current security properties.
24. First, they acquired apartments 1.03, 1.05, 1.07, 1.08 (the "First Floor Apartments") at a luxury development in Knightsbridge known as "The Knightsbridge". These were purchased off-plan with finance from Credit Suisse by contracts entered into on 31 August 2004, and completed on 23 September 2005 once the construction work had been finished. The total purchase price of the four apartments was £6,965,000.
25. The First Floor Apartments increased in value following their acquisition and the Khan Family decided to acquire Apartments 3.03 and 3.05 at The Knightsbridge and re-finance the First Floor Apartments. The Khan Family acquired apartments 3.03 and 3.05 (the "Third Floor Apartments") for £2,650,000 each. They re-mortgaged the First Floor Apartments with Coutts, borrowing £15,000,000 from them on the security of the six apartments (the "Apartments"). The re-financing released £6,046,000 after purchase of the Third Floor Apartments and redeeming the outstanding Credit Suisse Mortgages on the First Floor Apartments.
26. Secondly, there was Dryades, in respect of which Camden Invest & Trade Limited ("Camden") entered into a conditional contract for its purchase on 29 June 2005 for £12,000,000. The purchase was subject to Camden obtaining planning permission for the erection of a substantial residential building (not less than 35,000sf) and a 10% deposit was payable on exchange with a further 5% payable six months after obtaining planning permission.
27. On 21 July 2006 planning permission was granted for development of a 46,620sf single residential dwelling at Dryades. The permission was re-issued on 21 September 2006 after the plans had been amended. The result was that the contract of 29 June 2005 was due to become unconditional so that finance was required to complete the purchase.
28. In late 2006 the Khan Family started negotiations with Barclays Private Clients International Ltd Bank to obtain finance for the acquisition of Dryades. These negotiations resulted in a facility agreement on 2 May 2007 between Camden and Barclays for the loan of £13,800,000 to be secured on Dryades and completion of the purchase of Dryades on 10 May 2007 for the final payment of £10,093,491.07 towards the £12,000,000 purchase price after payment of the 10% and 5% deposits.
29. The Khan Family's solicitor was Jenny Palmer of Broome Palmer (formerly Bowles & Co.), who acted for them and the Corporate Defendants in relation to all matters concerning the properties until November 2007. The agent who had arranged the purchase of Dryades was Trevor Abrahmsohn of Glentree Estates Ltd ("Glentree").
30. During mid 2005 the Khan Family wanted to get involved in a property investment in Spain. This was going to involve a payment of US$ 5,000,000 from UBS to a company via Banco Madrid. Unfortunately the Khan Family were the victims of a fraud and the US$ 5,000,000 was paid to a different company with a very similar name. UBS ultimately paid US$ 5,000,000 to the Khan Family in compensation and unsuccessfully pursued Banco Madrid in litigation in Spain which ended in the summer of 2006. There was a dispute between the parties, which it is not necessary to resolve, as to whether Nasim Ahmad was responsible or at least accepted responsibility for what occurred.

The Khan Family opens an account with the Bank

31. On 26 March 2007 Nasim Ahmad wrote a letter of resignation giving up his job at UBS. He had in fact been previously approached by Don Ventura, Business Head of the Global South Asia SMT Team at the Bank, and been offered a job in Dubai with DBAG as a relationship manager for the Bank. During the course of Don Ventura's approaches to him Nasim Ahmad informed various clients of his at UBS, including the Khan Family, that he was proposing to go to the Bank and asked if they would move their banking arrangements to the Bank. The Khan Family agreed and during a visit to Lahore on 16 April 2007 he took various account opening forms with him for the Khan Family to sign. Since this took place before Nasim Ahmad had joined the Bank those forms were ultimately not relied upon by the Bank.
32. Nasim Ahmad accepted in evidence that he had lied to UBS when telling them that he was retiring and that he was undertaking trips so as to facilitate a handover of his clients to his assistant whereas in fact he was seeking to persuade clients of UBS to move to the Bank. He also accepted that he acted inappropriately when he went to see clients about his move whilst still employed by UBS. I have taken this into account in assessing his evidence on factually disputed matters.
33. On 22 May 2007 Nasim Ahmad visited the Khan Family in Lahore and took with him the various account opening forms which they signed. It was Nasim Ahmad's practice to provide a general explanation of the documents he was asking the Khan Family to sign and then to present them for signature. They would usually then sign the documents without reading through them.
34. The Bank needed to conduct detailed "know your client" investigations before taking on the Khan Family as clients and these progressed during May and June 2007. Ultimately, on 1 July 2007 an account was opened in the name of the Individual Defendants known as the "Family Account". The opening payment in was US$ 249,963.21.

Meetings in June 2007

35. At the same time as they decided to move some of their banking arrangements to the Bank, the Khan Family decided to seek to take further advantage of rising property prices in London and to re-finance their existing indebtedness secured on the Properties to Coutts and Barclays. They started negotiations with the Bank for the grant of a credit facility.
36. During the summer of 2007 the Khan Family was staying in London. There were several meetings in June 2007 between the Khan Family and personnel of the Bank.
37. There was a meeting on 8 June 2007 involving Laurent Kuster and Markus Rau with Senator Waqar Khan at one of the Apartments. This was an introductory meeting at which Senator Waqar Khan did most of the talking and described what he was looking for in general terms. He explained how the Khan Family owned the Apartments and a property in Bishop's Avenue which they were looking to re-finance. He expressed a positive view of the London property market and mentioned that they were planning to acquire another property in Bishops Avenue and to rebuild their existing property there. He said that they wanted a facility of £100,000,000 which Laurent Kuster and Markus Rau mistakenly understood to reflect the market value of the properties which the Khan Family already owned. He said that he wanted a 100% loan to value ratio ("LTV") and that they currently paid 0.65% above Libor. Laurent Kuster explained how the Bank's LTV was generally 70% and their lending rate 1-1.5% above Libor. He said that he would nevertheless take the request back to Geneva to be discussed internally with the Bank's decision makers. He also explained that if the Bank was to provide mortgage financing it would expect to be provided with investment business as well. Senator Waqar Khan indicated a willingness to do so and mentioned investing on a capital guaranteed basis with a good return. There was no discussion of investment products. Senator Waqar Khan expressed a desire for the Bank to proceed quickly and that he would need to see a Term Sheet by the following Monday. Laurent Kuster replied that this was ambitious but that they would do their best. At the conclusion of the meeting Markus Rau summarised what the next steps would be and said that they would take the information back to Geneva and come back to him with a response. The need for CRM approval and independent valuations of the properties was mentioned. It was made clear that Laurent Kuster and Markus Rau were not the decision makers. Markus Rau produced a note of the meeting on 11 June 2007 which I accept as being generally accurate as to the matters there recorded.
38. After a subsequent telephone conversation on 13 June 2007, Markus Rau sent Senator Waqar Khan an email of 15 June 2007 describing the process of obtaining a loan from the Bank and providing "a summary of the outcome of our initial considerations".
39. Under the heading, "Approval to be obtained from our internal Credit Risk Management", there followed a series of assumptions as to the extent of the lending which depended upon whether the properties discussed were valued at £100,000,000, £75,000,000 or £50,000,000.
40. The note went on to describe the information to be obtained from the Khan Family, including: "Updated evaluation for all properties as discussed on phone on Wednesday". It then described the next steps as follows:

"Workflow for mortgage transaction after obtaining above information

• When all details needed are received, we will finalize the Credit Report and submit it to CRM for conditional approval (based on MV assumptions)

• Upon conditional approval, we will prepare a non-committed term sheet

• Upon client agreement with the term sheet, we will arrange a property appraisal - any existing valuation to be submitted to CRM Real Estate in London for acceptance"

41. Senator Waqar Khan accepted in evidence that as a result of the meeting of 8 June 2007 and this note he was aware that any terms agreed between the parties, and any offers made by the Bank to the Khan Family, would require CRM's approval.
42. Nasim Ahmad and Don Ventura also came over to London during June 2007. There was a meeting between Senator Waqar Khan, Nasim Ahmad and Don Ventura at one of the Apartments with dinner afterwards on 27 June 2007. This is a meeting at which it is contended that misrepresentations were made.
43. Don Ventura was the Business Head of PWM Global South Asia in Geneva and this was a "meet and greet" meeting. Senator Waqar Khan explained what he was looking for the Bank to provide. He mentioned the Apartments and Dryades, re-financing and the Khan Family's plans to develop Dryades. He also mentioned the planned purchase of No.58 and that this provided a possible financing opportunity for the Bank to participate in. He spoke of investing funds with the Bank which would be capital protected and provide a sufficient return to cover part of any loan interest.
44. Senator Waqar Khan's evidence was that Mr Ahmad said to him during the meeting that the Investment Products would generate income of between 10 and 12% on a periodic basis. Mr Ahmad denied this and said that he did not pinpoint any returns and that he did not mention any numbers. Whilst Senator Waqar Khan may have mentioned numbers I am not satisfied that Mr Ahmad did, although he probably did indicate that it should be possible to achieve returns sufficient to cover some of the loan interest. Senator Waqar Khan accepted in evidence that no guarantee of future performance was given.

The Term Sheets

45. At the first meeting on 8 June 2007 Senator Waqar Khan had asked to be provided with a Term Sheet. The first of these was provided on 25 June 2007. It included a condition precedent clause (clause 12), as did all subsequent versions of the Term Sheets. Senator Waqar Khan agreed in evidence that this was conveying to him that the facility would be subject to conditions precedent. The amount of loan offered at that time was £44,000,000.
46. A further Term Sheet was sent by Markus Rau to Senator Waqar Khan on 27 June 2007. The amount of financing remained at £44,000,000 but the interest rate margin had reduced to 0.9% and the LTV had increased to 75%.
47. A further Term Sheet was provided to Senator Waqar Khan on 30 June 2007 by Imran Qayyum, the assistant to Nasim Ahmad. The Term Sheet was reviewed by Jenny Palmer who wrote to the Bank on 3 July 2007 with various suggestions, copying in Senator Waqar Khan.
48. On 6 July 2007 Markus Rau sent another draft Term Sheet to Senator Waqar Khan incorporating amendments suggested by him or Jenny Palmer. He said: "Please review this term sheet one last time so that we know that it meets your expectation." The facility remained at £44,000,000, the interest rate margin was down to 0.8%, which was subsequently corrected to 0.85%, and the LTV remained at 75%
49. Markus Rau's email went on to outline the next steps:

"After having received from you further input on the property evaluations this morning we have finalised our internal document which will now go to Credit Risk Managers for approval. Upon receipt of their approval and green light from your side with regards to the wording of the term sheet we will present the final version bearing correct figures (subject to our due diligence on the official evaluation reports). This will need signature from your side and based on that signature the actual contractual agreements will be established by an external law firm."

50. On 12 July 2007 Markus Rau wrote to Senator Waqar Khan inquiring about the purpose of the loan amongst other matters:

"While we are working hard on getting the approval for the "first" deal we have been discussing - I just had a our meeting with our Credit Risk Managers - I would also like to start preparing for the other deal at Bishops Avenue you are looking into.

If I understood the email you had forwarded lately correctly, the value of the site is MGBP 35. Construction costs would amount to MGBP 5-10. Assuming an advanced ratio of 75% this would mean that your liquidity needs for that transaction would be app. MGBP 10.

I assume the structure of the usage of the loan amount we will grant to you subject to due diligence in the coming weeks as follows:

Total line: MGBP 68

Refinancing of existing credit lines: MGBP 25

Portfolio at DB: MGBP 10

Liquidity for rebuilding Dryades: MGBP 10

Equity for other Bishops Avenue property as outlined above: MGBP 10 Liquidity to be placed with other institutions: MGBP 13

Could you please confirm this for my better understanding."

51. Senator Waqar Khan provided by telephone the confirmation requested, which Markus Rau recorded in an email the same day. During the course of the negotiations it was accordingly made clear by Senator Waqar Khan and acknowledged by the Bank that part of the proposed facility was intended to be used for the development of Dryades and the purchase of No.58
52. This is also reflected in the Bank's Credit Report dated 11 July 2007 which made reference to the "Purpose of facility" including "(b) redevelopment of the property 'The Dryades' MGBP 10" and to "DB Relationship / Business Case ... The loan proceeds will be used to ... c) redevelopment of the property "The Dryades", d) equity for investment into a further real estate project on Bishop's Avenue on which DBS may take a mortgage in the near future".
53. Both Laurent Kuster and Markus Rau acknowledged in evidence that this was how they understood the Khan Family intended to use the liquidity obtained from the loan.
54. CRM's conditional approval was given on 17 July 2007. This was given on the basis that the "transaction to be fully in line (in particular with regard to legal documentation and processes) with NPA RRE" and would require "confirmation of RRE OMV by external property appraiser and validation of the property valuation by CRM REV".
55. Laurent Kuster sent the final version of the Term Sheet to Senator Waqar Khan on 17 July 2007 and wrote:

"I am pleased to send you the final termsheet regarding the Real Estate deal. It bears all conditions discussed in the previous weeks and updated figures. This termsheet will be the basis for the set up of legal documentation done by our external UK based lawyers and your lawyers respectively. The final loan amount will depend on the due diligence to be done in the coming days and on the external updated evaluations of the properties."

56. The Term Sheet set out the basis of the transaction proposed including a summary of terms and conditions, the Tranche to Camden of £33,700,000, the £45,000,000 value of Dryades, the conditions precedent in clause 12 and the terms of Appendix 3. Under the Term Sheet the loan had increased to £66,000,000. The purpose of the loan was described in clause 3 as being for "general liquidity purposes" and did not tie the Khan Family to any particular use.
57. Thereafter the negotiation of final terms was taken up by the parties' solicitors, Jonathan Ashbridge for the Bank and Jenny Palmer for the Khan Family, with Senator Waqar Khan anxious for progress and being copied in by Jenny Palmer.
58. Senator Waqar Khan agreed in evidence that anything of significance that was to be agreed or committed to was to be put in the Term Sheets. He accepted that the Bank had not committed itself to any of the matters detailed in paragraph 73 of his First Witness Statement.

The valuation reports

59. On 4 and 5 July 2007 Montagu Evans desktop valuations were provided to the Bank by Senator Waqar Khan for the Apartments, Dryades and No.58. The valuation for Dryades involved having "regard to the value of the site with the benefit of the existing planning consent for the single housing as well as the potential to achieve planning consent for the larger, more valuable apartment scheme". On that basis they were of the opinion that "the current Market Value of the site is in the region of £45,000,000". Although it was not so articulated at the time, the element of the valuation which was based on the potential to achieve planning consent for the apartment scheme came to be referred to as "hope value".
60. The Bank agreed, at Senator Waqar Khan's request, to instruct Montagu Evans to provide a valuation report for Dryades. It did so by letter dated 25 July 2007. This recorded that they had been requested to provide their "opinion of the Market Value of the Property".
61. In addition, the instructions stated:

"Your report should include your opinion of the Property as lending security in terms of present saleability, suitability, expected obsolescence and potential….

As such the purpose of the report is not simply to provide a valuation figure, but also to assist us in determining whether to make available the proposed facility and in what amount and to identify matters which may prove significant to its security and the ability of the Borrower to refinance the facility at the end of the term".

62. During the Term Sheet negotiations the Bank had agreed to a LTV of 75%. On this basis the loan figure to Camden in the draft Term Sheets was stated to be £33,700,000, being 75% of the provisional valuation figure for Dryades of £45,000,000 based on the Montagu Evans desktop valuation.
63. Montagu Evans provided the Bank with its draft valuation report on 1 August 2007. That concluded that the current "Market Value" of Dryades was "in the region of £45,000,000". This was arrived at on the same basis as the desktop valuation and expressly referred to the element of "hope value".
64. The value of Dryades was based on its development potential; the current house was not material to its valuation. The basis of the valuation was as follows:

(1) With the current planning permission for a substantial house, the site of Dryades was worth £36,000,000;

(2) If it would be possible to obtain planning permission for a scheme of substantial apartments that would add £18,000,000 to the value, bringing it up to £54,000,000;

(3) Any purchaser would factor in the possibility of obtaining the £18,000,000 enhanced value;

(4) However, a purchaser would not pay the full enhanced price of £54,000,000 because of uncertainty of obtaining permission;

(5) Instead, it would discount the additional £18,000,000 by 50% and pay £45,000,000 being the existing site value of £36,000,000 plus £9,000,000, representing a 50% discount of the additional value with planning for an apartment scheme;

(6) This sum of £9,000,000 is known as "hope value" (i.e. hope of enhanced value due to planning) and results in a market value of £45,000,000 – described as the result of adding "a proportion of this upside or "hope" value to the current value of the site reflecting the planning consent which exists" .

65. In the section dealing with the proposed apartment scheme for Dryades, Montagu Evans wrote:

"Instead, in assessing Market Value, we have added a proportion of this upside or "hope" value to the current value of the site reflecting the planning consent which exists. The amount of hope value is, of course, a subjective amount and depends on the types and levels of risk involved, although in our experience the market normally would bid between 40% and 60% of the upside that exists. In our opinion, the market would be prepared to bid around 50% (or £9,000,000) of this upside in formulating a bid for this site, bearing in mind the fall back position and the planning risks involved."

66. The report continued with section 11 titled "Property as Security" as follows:

"The value of the site on this basis is, in our opinion, in the region of £36,000,000, which reflects around 80% of our opinion of Market Value of £45,000,000. We understand that the Bank's loan to value ratio to be 70% and therefore we consider the Bank's loan to be well secured not only against the Market Value of the Property but also the consented site value, ignoring any hope value."

67. Although it may be said to have been implicit in the desktop valuation previously provided, this was the first time that the Bank appreciated the substantial contribution made by hope value to the market value.
68. On 2 August 2007 Paul Walker emailed Laurent Kuster in relation to this valuation saying that it needed more "scrutiny" and that he had requested the development appraisals and would be visiting the property. He stated that:

"I am nervous about the extent of 'hope value' being attributed to this land. There is no planning for the apartment scheme and whilst Montagu Evans are well placed to advise on the likelihood of a consent being forthcoming, there is potentially a very long way to go before a more intense scheme is permitted and hence the additional value secured."

69. On 6 August 2007 Laurent Kuster emailed Paul Walker asking for an update and stating that he understood "from the RM and the client that we may lose the transaction should the value be below GBP 45 mio". Paul Walker replied the same day that he had just had a very useful and bullish conversation with Knight Frank who had "verified much of the information in the Montagu Evans report".
70. On 7 August 2007 Paul Walker emailed Laurent Kuster attaching the sensitivity analysis he had received. He stated that he expected the valuers to be able to support a value of £53,500,000 based on obtaining planning consent, "resulting in a Market Value reflecting circa 50% of the upside as Hope Value" and that the Market Value would therefore probably remain at £45,000,000.
71. On 9 August 2007 Laurent Kuster emailed Paul Walker asking him if he had "some conclusions regarding the minimum value of the Dryades that could be confirmed". Paul Walker replied the same day stating that:

"Minimum value is a difficult one. The only reliable number is the Market Value which at the moment remains at 45m GBP. This is the price that the valuers think the borrower would get now given sensible marketing i.e. 3-6 months. It would not be right to ignore the real value attached to the planning consent and similarly it would be inappropriate to ignore the Hope Value associated with a better planning consent albeit that it has not been achieved yet. By asking for a minimum DB would have to set out the special assumptions such an approach would be based upon. These might be ignoring all the planning issues and valuing the existing house or ignoring any hope value or setting an unreasonable period in which to sell the asset i.e. 1-2 months. All of these would reduce the price/value but you have to question the logic of doing this."

72. Laurent Kuster responded on 10 August 2007 and suggested that they talk the following Monday, 13 August 2007, but raising the following query:

"Many thanks for your clarifications. In order for Markus and I to bring this point to CRM (will be also useful for other transactions), could you please kindly explain the way valuations are done for properties having a heavy work planning?

Given the width of the work to be done, we will also have to provide CRM with the worst scenario in having to liquidate the property at worst time during the work. Can we get an estimated value at that time?"

The Facility Agreement

73. As at 12 August 2007 the Bank had still not received the final valuation report. Nevertheless the Facility Agreement dated 12 August 2007 was issued by the Bank that day, although it was not finally agreed until an exchange of emails between Jonathan Ashbridge and Jenny Palmer on 15 August 2007.
74. Under the Facility Agreement the Bank agreed to loan Tranche A to the Khan Family, being £8,500,000 for investment in investment products provided by the Bank and Tranches B-H to the Corporate Defendants being up to £57,500,000 on the security of the Properties, with Tranche B being to Camden in the sum of up to £33,700,000. It was a pre-condition to drawdown that there would be valuation reports in respect of the Properties satisfactory to the Bank in form and in substance (clause 12).
75. The Defendants emphasised that the signing of the Facility Agreement at this stage involved a significant departure from the Bank's usual procedures.
76. The Bank had a written procedure for conducting high value residential real estate transactions set out in the New Product Approval ("NPA") guidelines and lending criteria. The NPA prescribes a six step procedure for the steps to be followed during a mortgage transaction.
77. The "Cheat Sheet" was an internal Bank document produced in 2008 which summarised the six steps in the NPA:

STEP
1	Pre-Approval If proposed deal appears doable, the Lending Officer ("LO") establishes a Credit Report based on the info provided by the RM and submits it to CRM for conditional approval.
2	Term Sheet If conditional approval is given, LO prepares a non-committed Term Sheet, which is sent to the client for approval.
3	Appraisal a) If client agrees with the Term Sheet, the LO arranges a property appraisal (if the client already has a valuation it will be submitted to CRM-REV to check its acceptability) through CRM -Real Estate Valuation (REV) in London. They ask for quotes to eligible valuers and submit the result to the LO, who will pick the cheapest. b) The selected appraiser then visits the property and produces a detailed report. c) The report is reviewed and validated by CRM-REV.
4	Approval Once all conditions of the pre-approval are met, the LO requests final approval to CRM.
5	Documentation a) Once approval is given, the LO prepares a Loan Contract and liaises with internal and external legal counsels to finalize the documentation: First-rank mortgage, assignment of insurance, of rents if applicable. b) The RM and/or the counsel ensure that documentation is signed by the client (signature checked by CSC). c) Legal counsel then confirms in writing to LO that the mortgage is secured.
6	Drawdown Once all the documentation is in order, LO indicates to the RM that the loan can be drawn. The RM arranges the funding and books the loan.

78. The Defendants stressed that under this procedure the "final approval" from CRM occurs in step 4 and should occur before the Facility Agreement becomes binding, which it did not in this case.

Events between the making of the Facility Agreement and drawdown

79. On 14 August 2007 Paul Walker emailed Laurent Kuster explaining how hope value worked. He stated that:

"You have asked me to comment as to the approach valuers adopt when valuing property where there is a high dependency on planning. In the subject case there is a significant difference between the value of the existing property 'as is' without any planning (not actually identified), the value of the property with the planning permission to redevelop for a single dwelling (50,000 sq ft) and the value of the property having regard to the possibility of achieving a more intense planning permission (apartment scheme).

Market Value should therefore reflect all of the issues affecting the property and Montagu Evans have rightly adopted this basis of valuation in their report. They state that the value of the property with the extant planning consent is £36m and the value of the property with a more intense planning permission is ca £54m meaning that there is an upside, were planning to be achieved, of ca £18m. This is what is called 'Hope Value'. The market, in assessing how much a prospective purchaser should pay for the site with the benefit of the existing consent and with the potential for a better consent, will bid part of that Hope Value reflecting the relative risks associated with successfully negotiating the more intense scheme. Montagu Evans is of the view that the prospects for the larger scheme are very good and that there is a precedent for doing this in The Bishops Avenue and have therefore allocated 50% of the Hope Value to arrive at a Market Value of £45m. Their experience with this location gives them a degree of authority and, as you know, I have independently checked this out with Knight Frank in Hampstead who generally concur with Montagu Evans.

The major downside risk here is associated with a shift in the market between funding and building out the existing or subsequently negotiated revised planning. At this end of the market values can be very volatile and were the 'top end' players to withdraw from the market for whatever reason, the value of the property could inevitably be very adversely affected. There is also borrower risk. With so much Hope Value included in the Market Value there is a significant degree of risk of value erosion were the borrower not to pursue the amended scheme or pursue it too aggressively or on an ill-advised basis resulting in a refusal of planning consent and even a refusal on appeal as well. In this scenario there is clearly the impact of delay which means the ultimate scheme is exposed to potential market shift for much longer. As we discussed therefore, I strongly recommend that we have Montagu Evans (or another planning adviser) report to us regularly with regard to progress on the revised planning including the preparation of the scheme drawings, negotiations with the planning authority and advice regarding any decision that is issued by the council. This process could take up to a year to complete."

80. Later on 14 August 2007 Steve Thomas of Montagu Evans sent to Paul Walker updated draft valuations. In the report on Dryades there were changes to correct the LTV from 70% to 75% and also to the emphasis placed on the reliability of hope value in the "Property as Security" section of the report. There was a further paragraph stating that:

"That said and as we have outlined earlier in the report, the amount of hope value that purchasers in the open market would be prepared to bid is a highly subjective amount and will vary according developers perceptions of and appetite for risk, in this case planning risk. As the planning situation crystallises, the amount of hope value likely to be bid in this case may vary; if the planning becomes more robust or an even larger scheme seems feasible the amount of hope value would increase and conversely if the apartment scheme of the size proposed looks less likely or the affordable housing outcome appears less favourable then the amount of hope value is likely to reduce. In any event, the base scenario of the house consent is secured, at least until the consent elapses in 2011 and notwithstanding any major change in pricing the value of the Property is unlikely to fall below the value of the consent."

81. Following a discussion with Laurent Kuster, Markus Rau emailed Nasim Ahmad later that day with a summary of the steps needed to be taken to "finalize the Senator deal". In relation to the valuation and the hope value issue he stated as follows:

"Based on that sensitivity analysis which PW will send to our CRM colleagues here in Geneva, the final approval will be given by them, however only once they have assessed the input and most probably after a discussion with us (i.e. Laurent, myself if need be or yourself). At this stage I would like to highlight that it can still happen that our CRM, who is the final decision maker, doesn't feel comfortable with the amount. They could decide that the amount needs to be lowered from MGBP 45 for Dryades to e.g. MGBP 36. In such case what's your consideration of the situation? If I were the RM I would perhaps do the following: I would go back to the client and tell him that our CRM colleagues really advised us that the risk involved for the client as borrower was very high and that the borrower for the sake of his safety should reconsider what amount he wants to borrow (also given the enormous costs involved). Maybe the Senator family would then also decide from their side to accept a lower amount? We should perhaps know that before going into discussions with CRM."

82. In the event none of them thought it necessary or appropriate to warn Senator Waqar Khan of this risk. It was thought better to wait and see and not to trouble him with a concern which might never materialise. Markus Rau sent an email to him on 14 August 2007 summarising the steps which needed to be undertaken. In relation to this issue he stated that:

"Once ME has finalized the evaluation they'll send it to whom had instructed them to establish it which is our London based CRM Real Estate Team. Paul Walker is the responsible colleague and he will upon receipt of the evaluation establish his final report. This should not take longer than half a day.

Based on that sensitivity analysis which PW will send to our CRM colleagues here in Geneva, the final approval will be given by them, however only once they have assessed the input and most probably after a discussion with us (i.e. Laurent, myself if need be or Nasim)."

83. At the time when the Facility Agreement was finally agreed on 15 August 2007 Senator Waqar Khan accordingly knew that the final valuation report was still awaited and that it would require CRM's approval. As he acknowledged in evidence, from the beginning he was aware that the valuation had to be approved by CRM. He would also have been aware that the final report had not yet been issued as he was in direct contact by telephone with Steve Thomas of Montagu Evans during the first couple of weeks of August 2007, as his notebook showed.
84. On 16 August 2007 Montagu Evans issued their final valuation report. This confirmed a "current "Market Value" of Dryades of "in the region of £45,000,000" arrived at on the same basis as before.
85. On 17 August 2007 Paul Walker emailed Laurent Kuster stating that:

"This is to confirm that the valuation CP has now been fully satisfied for the above as set out below ... Dryades ... market value £45m":

86. The final report was sent for consideration and approval by CRM in Geneva on 17 August 2007. Laurent Kuster emailed Peter Lay of CRM stating that:

"As the client is pushing to close the transaction today (the reason being that the family will leave London for Pakistan this week-end), please find below the current status and the remaining steps in order to be reactive when sign off from Jonathan Ashbridge (external UK lawyer) is received ... Dryades valued at £45 (unchanged) – I will forward you separately two e-mails from Paul Walker: one explaining the way the Dryades has been valued (due to the fact important work will be done) and the other being his confirmation of the respective OMVs".

87. Peter Lay, however, then started to raise concerns about the hope value element of the valuation. It was the Defendants' case that in so doing he was acting as if this was a CRM approval under the Bank's NPA process (step 4 of the Cheat Sheet) and ignoring the fact that the Facility Agreement had been signed and that the only outstanding matter was fulfilment of the conditions precedent.
88. Peter Lay emailed Laurent Kuster on 17 August 2007 stating that:

"Hereby my feedback: RE valuation ...

The Dryades (e-mail 14.08.07 from P Walker):

It appears to be rather a real estate development project (outside of DBS credit policy) than RE financing, the valuator market value of MGBP 45 includes MGBP 9 of 'hope value' which represents the value were planning to be achieved. These figures are not in line with the information given in the CR. We have no information regarding the project/planning (stakeholders, time frame, etc). furthermore the valuator clearly highlights the price risk and borrower risk 'with so much Hope Value included in the market value there is a significant degree of risk of value erosion were the borrower not to pursue the amended scheme or pursue it too aggressively or on an ill-advised basis resulting in a refusal of planning consent and even a refusal on appeal as well. In this scenario there is clearly the impact of delay which means the ultimate scheme is exposed to potential market shift for much longer. based on the above mentioned - RE development project and RE value not in line with CR - the approval for this part of the transaction will have to be reconsidered respectively certain parameters amended."

89. Later the same day he emailed Thomas Eggenschwiler, the Bank's PWM Global Head of (CRM) and Klaus Halfmann (in Geneva), a Bank director and PWM Regional Head of CRM stating that:

"CR 11.07.07: open market value MGPB 45 'current estimated OMV is based on the site value and will remain unchanged at any time until the project is completed ... final value MGBP 80'

e-mail 14.08.07 from CRM-REV/P Walker: the site value is MGBP 36. The market value is MGBP 45 but includes MGBP 9 of 'hope value' (value were planning to be achieved). The final value is MGBP 54.

Two points to be noted:

a) We do not finance RE development projects

b) We are meant to take as collateral MGBP 9 of 'hope value' while we do not know anything about/have no control over the project

Assuming that [the Bank] is willing to enter the financing of a RE development project (until now we have not approved such requests and such approval would set a precedent) the following options could be considered:

a) we accept the collateral at the site value (MGBP 36) or

b) we take into consideration the 'hope value' but request a detailed assessment of the RE development project and have the site visited/project monitored by the external valuator/CRM-REV another possibility could be to have part of the transaction taken over by CRM-REV (I will check with P Walker)."

90. There then followed a conference call about the matter between Paul Walker (in London) and Laurent Kuster, Peter Lay, George Hammon, Francois Deswarte and Klaus Halfmann (in Geneva). During that discussion Peter Lay repeated the concerns set out in his emails about the uncertainty and risks of the hope value element of the valuation.
91. George Hammon explained in evidence that the meeting was in two parts and that the first part concerned whether to lend against £36,000,000 or £45,000,000. Their concern was that the element of hope value beyond £36,000,000 had an uncertain and speculative element to it and so the Bank was not prepared to lend on the strength of that. On the other hand the Bank wanted to lend on the strength of £45,000,000 if it could, but it was not happy to do so without conditions to protect the Bank's position. This resulted in the suggestion of a £10,000,000 retention. The basis of that figure was not final value but the borrower's perceived funding needs. The outcome was that it was decided to retain £10,000,000 of the Camden advance pending satisfaction of certain conditions.
92. Paul Walker was asked to draft some language for the proposed retention and emailed Laurent Kuster suggesting the following:

"Further to our recent conference call the release of the 'held back' £10m should only be permitted when a formal legal and detailed planning consent had been issued by the Local Planning Authority permitting an enhanced apartment scheme approving a minimum of 55,000 sq ft net saleable floor area. This planning consent must also crystallise the existing 'Hope Value' into a tangible realisable Market Value of the site of not less than £54m."

93. Laurent Kuster's understanding of what had been agreed was that the conditions were that planning consent for the apartment scheme be obtained and that the funds be used for refurbishing Dryades under that scheme. Although he understood that a further valuation might well be required as and when planning consent was obtained he did not understand a crystallised market value of £54,000,000 as being a condition of the retention.
94. Having discussed the matter with Markus Rau, who was on a business trip to Pakistan, they together drafted an email which Laurent Kuster sent to Senator Waqar Khan explaining developments and the required retention. He stated as follows:

"A long time has been necessary to address all points raised by our risk managers on the market value of the Dryades that includes a £9 million "hope value". They are now ready to accept it at £45 million. In this regard, they require a minor amendment on the loan agreement which is to incorporate the family's consent that an amount of £10 million will exclusively be used to refurbish Dryades. These £10 million will be kept with us beside the amount to be reinvested into a managed portfolio until a formal legal and detailed planning consent has been issued by the Local Planning Authority permitting an enhanced apartment scheme."

95. Markus Rau texted Senator Waqar Khan to explain that he was being sent an email. Senator Waqar Khan immediately telephoned Markus Rau. Markus Rau summarized what had been discussed in an internal email sent the same evening in which he stated as follows:

"I am taking reference to an email which Laurent had sent to Senator on Friday evening following up on the discussions taking place on Friday afternoon – you had been copied in. I had drafted that email together with Laurent on phone and sent an SMS to Senator to inform him that an email had been sent.

Senator immediately called me without having read Laurent's email. I communicated status quo and tried to be as "undramatic" as possible when communicating the additional CRM request, i.e. an appendix to the loan agreement to be signed by S Family (sic) stating that an additional MGBP 10 Mio is to stay with DB until planning consent for apartment complex is received or funds start to be drawn down for the sole purpose of refurbishing Dryades. I explained that the request had to do with the all time (sic) value of the site and the implied "hope value" etc.

Obviously he was a bit upset about the fact that we are now coming with another condition compared to the initial proposals. I addressed that by discussing together with him the actual amounts needed outside of DB. It brought about that such amounts add up to MGBP 47. This means that MGBP 19 will stay with DB. Senator explicitly pointed out to me that he wouldn't have any problem with confirming that these assets will stay with DB. ...

Senator made clear that if that statement was not enough there wouldn't be a deal!"

96. He emailed Senator Waqar Khan stating as follows:

"Thanks for the phone call from 8pm London time in which you confirmed to me that the amount in excess of MGBP 29 for coverage of existing loans with Barclays and Coutts and MGBP 18 for remittances to Julius Baer and Coutts will stay with DB, i.e. MGBP 19.

From my perspective this fulfils the request made by our approving CRM unit communicated to you in an earlier email from our Laurent Kuster. Upon this confirmation I expect approval of the case by respective CRM on Monday morning and confirm money will be sent out thereafter as to instructions to be prepared by signatories of offshore company.

Please also note that we will need documents from offshore companies describing their structure (explained in detail in Laurent's email - please review - before remittances take place)."

97. I find that Markus Rau's internal email is a generally accurate note of the matters there recorded relating to his conversation with Senator Waqar Khan. I accept his oral evidence that he did state that he had not been involved in the discussions, did not have the documents with him and that the Senator ought to read Laurent Kuster's email. I also accept that the main focus of the discussion was the use of the funds and the Khan Family's immediate liquidity needs. He nevertheless sought to explain the retention requirement and did so in the terms reflected in his internal email. This involved the retention being released on the obtaining of planning consent or on funds being used for the refurbishment of Dryades (emphasis added).
98. Although the Defendants' pleaded case was that an oral agreement was reached between Markus Rau and Senator Waqar Khan during this telephone conversation this was not borne out in evidence. Senator Waqar Khan accepted that Markus Rau could not make an agreement and that it all had to go to CRM:

"Q. So you were aware, as you had been throughout indeed,

that CRM would have to approve any proposal.

A. That's correct. From the beginning, I was told that

once the -- any term sheet has to be approved by CRM,

credit and any facility document has to be approved by

CRM and the valuation has to be approved by CRM. I was

aware of that.

Q. It wasn't a case of him saying they will agree; he was

asking for them to agree.

A. Obviously he made that clear to me, that he was not in a

position to approve himself but he has to suggest it to

his people.

Q. Yes. So there was no question of him making

an agreement that evening. It all had to go to CRM.

A. That's correct."

99. Senator Waqar Khan had expressed his anger and frustration at this condition being imposed by the Bank at this late stage to Markus Rau in their telephone conversation and also in a conversation with Nasim Ahmad the same evening. He was also pressing for drawdown to take place as soon as possible. Nasim Ahmad went to his office on the morning of Sunday 19 August 2007 and sought to find a way to advance matters. To this end he drafted an Undertaking for the Khan Family to sign which he hoped would enable drawdown to occur without delay. The Undertaking was based on Markus Rau's internal email and expressed the conditions of the retention in the same alternative terms. It stated as follows:

"We the undersigned joint account holders of account number 2012346 with Deutsche Bank Geneva unconditionally & irrevocably commit as follows.

That upon Deutsche Bank agreeing to disburse the full amount of loan facility ... pending signing of addendum to the Loan agreement, irrevocably undertake to keep a sum of £ 10 million in our subject account on deposit or invested in a portfolio until planning consent for apartment complex is received or funds start to be drawn for the sole purpose of refurbishing property owned by Dryads. (sic)"

100. The Khan Family other than Senator Waqar Khan were in Dubai on their way back to Pakistan. Nasim Ahmad took the Undertaking round to them and got it signed by them. He then faxed it to Senator Waqar Khan for his signature, which he provided. He explained to them that it was a solution that he was proposing which he hoped would be acceptable to CRM.
101. Once Nasim Ahmad had the completed version, he sent it to Don Ventura under cover of an email later that day which referred to the "option" he was "proposing" in the following terms:

"Further to Markus's email dated 18th August & our telephone conversation, attached please find a scanned copy of self explanatory undertaking signed by all the family members which subject to approval of CRM could facilitate a full drawn down.

I am proposing this as an option to appease the client as addendum to the loan agreement (last minute decision) cannot be signed in view of four members of the family (in Dubai for 48 hours) having travelled back to Pakistan. In all fairness somebody will have to fly to Lahore from Dubai to get the addendum signed by the family members which will take time.

Alternatively client is allowed a draw down of loan amount less £10 million pending signing of the addendum".

102. The terms of the Undertaking reflected Markus Rau's internal email of 17 August 2007 and differed from those set out in Laurent Kuster's email which did not set out the alternative condition of drawing down funds for the refurbishment of Dryades. Although Nasim Ahmed said in evidence that he became aware of this difference during the afternoon of 19 August 2007 when he read Laurent Kuster's email I find that he is mistaken about this. Had he been aware of the difference he would have brought it to the attention of Senator Waqar Khan and indeed others in the Bank, which he did not do.
103. Although Senator Waqar Khan disputed that the Undertaking was merely a proposal he accepted in evidence that it would be CRM who would have to decide on any agreement and that Mr Ahmad was not saying that he could commit the Bank to anything.
104. On Monday 20 August 2007 there were discussions between the lawyers of the Bank (Jonathan Ashbridge) and the Defendants (Jenny Palmer) about the terms of the proposed retention. Another lawyer involved in assisting the Khan Family on other legal matters, Caroline Crawford, also became involved.
105. That same day there was a meeting to discuss investments in London between Senator Waqar Khan, Laurent Kuster and Jonathan Marriot, Director of Discretionary Portfolio Management, Deutsche Bank AG. Nasim Ahmad attended by telephone. At that meeting Senator Waqar Khan raised no particular issue about the Facility Agreement other than frustration at how long everything had taken.
106. Jonathan Marriot made a record of the meeting the following day which I find to be generally accurate. At the meeting Senator Waqar Khan made it clear that he was only interested in guaranteed capital products with significant returns, and mentioned figures of around 20%. He claimed that there were other banks who could provide this. Mr Marriot said that he was not aware of any portfolios which could match this but that he would look at any term sheets offered by other banks and see what he could do. There was no discussion of GIM portfolios that the Bank might be able to offer as it was apparent that these would not meet Senator Waqar Khan's stated requirements.
107. The Final Credit Report authorizing drawdown was signed on 20 August 2007. The Report referred to a market value of £36,000,000 for Dryades on the basis that "a portion of the loan (MGBP 10) will not be made available before a formal legal and detailed planning consent has been issued by the Local Planning Authority (as per email 17.08.07 from CRM REV/P Walker)."
108. Under "Collateral Details" the Credit Report stated:

"Based on the external valuation July 31 2007 and conf call Fr 17.08.07 with CRM-REV/P Walker the value of this property is as follows:

1. Market value of the property/land in its actual state is less than MGBP 20 (no exact figure available)

2. Market value of the property/land inc the approved development project (larger family house) is MGBP 36

3. Market value of the property/land inc the approved development project as well as the expected additional value (50% of the "hope value") to be created by having an extended development project (apartments scheme) approved is MGBP 45

The approval of the extended development project is uncertain and is not to be expected prior to the end of 2008. During that period DBS faces mainly but not only the following risks: legal (e.g. dispute regarding the project approval), market (e.g. price fall in the RE market), project (e.g. project goes wrong due to bad advice, default of contractors etc.) and borrower (e.g. absence of revenues on RE investments during development project etc.)."

109. The Credit Report also required the following:

"Loan Contract under UK law: appendix stating that 'held back' GBP 10m should only be permitted when a formal legal and detailed planning consent has been issued by the Local Planning Authority permitting an enhanced apartment scheme approving a minimum of 55,000 sq ft net saleable floor area (to be signed after drawdown; undertaking to do so signed before drawdown)."

110. In relation to drawdown, Utilization Requests had been made on 14 August for a total sum of £57,500,000 including £33,700,000 for Camden. The draft form of Utilization Request had been provided by the Bank's solicitors to Jenny Palmer on 10 August 2007.
111. On 17 August 2007 Senator Waqar Khan gave instructions to Laurent Kuster to "wire transfer the amount of £18,000,000 being sent to Julius Baer and Coutts from Camden's account. Approximately £29,000,000 needs to go to J. Palmer Client Acct to pay the mortgagers and the balance of the monies should be held in our account # 2012346 at DB for further investment". In evidence he agreed that this was instructions for payment of the total sum of £47,000,000 with the balance to be left in the account for further investment.
112. On 20 August 2007 the Bank received instructions from Camden to pay out £29,500,000 and £18,000,000. The result of the transactions which then followed was that £47,500,051 was paid out of the Camden Account and £24,850,000 paid in leaving a balance of £22,650,051 amounting to the sums loaned to Camden.
113. Monika Haesli of the Bank explained this to Tom Ellis of Julius Baer over the telephone and by email of 21 August 2007. He responded to ask if that should not be £33,700,000 for Camden, and she replied as follows:

"For the moment the requested loan amount is GBP22,650,051 which is the difference between the requested transfer amounts processed 21.08.2007 GBP 47,500,000 and the amounts collateralised by the other 6 companies GBP 24,850,000 and this balance is the loan to be booked for Camden GBP 22,650,000 plus the bank transfer fees.

We have not yet received confirmation regarding the additional investment of GBP10mio and I'm not aware that any decision has been finalised."

114. No response was given to that email.
115. The end result was that £47,500,051 was drawn down by the Corporate Defendants, of which some £29,000,000 was used to pay off the existing indebtedness owed to Coutts and Barclays, leaving a cash payment of some £18,000,000 available to the Khan Family.

Events leading up to the signing of the First Supplemental Agreement

116. Following on from his conversation with Jenny Palmer on 20 August 2007, Jonathan Ashbridge sent to Laurent Kuster and Jenny Palmer a draft First Supplemental Agreement in the form of a supplemental letter to the Facility Agreement designed to cover the additional conditions precedent to the "held back" £10,000,000. This was forwarded by Jenny Palmer to Senator Waqar Khan. The material condition was:

"The Borrower shall have obtained Planning Permission for the construction on that Property known as Dryades, Bishops Avenue, London, planning permission for the construction on the Property of a residential apartment development with a minimum of 55,000 square feet of net saleable floor area and which is free from Onerous Conditions and the Borrower has delivered evidence of the same to the Bank.".

117. Laurent Kuster responded to Jonathan Ashbridge's email of 22 August 2007, and asked for the new limit breakdown to be incorporated. That email was sent to Jenny Palmer who forwarded it to Senator Waqar Khan amongst others that day.
118. On 24 August 2007 Jonathan Ashbridge sent a revised draft First Supplemental Agreement to Jenny Palmer which she forwarded to Senator Waqar Khan amongst others. It had a similar retention condition.
119. On 27 August 2007 Laurent Kuster wrote to Jonathan Ashbridge to thank him for the amendments to the First Supplemental Agreement and to say that it first needed approval by CRM before execution by the clients. This email was copied to Jenny Palmer who forwarded it to Senator Waqar Khan.
120. On around 31 August 2007 or shortly afterwards, Nasim Ahmad spoke to Senator Waqar Khan about a possible amendment to the loan agreement. This conversation is referred to in an email of Markus Rau dated 3 September 2007:

"Following up on the below the RM Nasim Ahmed has spoken to the client regarding options discussed on Friday. The client would feel comfortable with sending in MGBP 2 in order to raise the overall assets held. In exchange the idea is to allow the retention amount to be invested in products with RFs at 85%, so that the overall retention amount of MGBP 10 is still fulfilled.

Please send me your considerations with regards to this request.

Further to that the RM is going to meet with the client in Pakistan in a few days. He would appreciate if he could take along the amendment of the loan agreement for signature by all family members. Could we make sure that the document is sent to Nasim by email tomorrow, or will it not be possible to provide it within that time frame?"

121. At the end of August and early September 2007 there were oral discussions between Nasim Ahmad and Senator Waqar Khan relating to the ability to invest the £10,000,000 in investment products pending satisfaction of the retention conditions. Nasim Ahmad put forward the idea that the Khan Family use the retained £10,000,000 for investments pending its release. To this end it was suggested that the Khan Family deposit a further £2,000,000 which would allow the retained £10,000,000 to be used for investment purposes. Senator Waqar Khan agreed to this.
122. During one conversation between Nasim Ahmad and Senator Waqar Khan at around this time when Nasim Ahmad was in South Africa he said to Senator Waqar Khan that the £10,000,000 would be retained by the Bank and would only be made available once planning consent had been obtained or for the development of Dryades as a house. This reflected the terms of the Undertaking and remained Nasim Ahmad's understanding at that time.
123. Meanwhile, on 27 August 2007 Ammar Khan wrote a letter to Nasim Ahmad in which he stated:

"I urgently require the additional drawdown of the l0m still outstanding under the terms of our loan agreement. As discussed with you, this is in order to fund the acquisition of 58 Bishops Ave which is due to exchange very shortly and to which I have already committed, Many thanks for your assistance in resolving this matter."

124. This was wrong in a number of respects. Octavia did not contract to acquire No. 58 until 7 September 2007 and the deposit on exchange was only £1,150,000. The completion date on which the balance of the purchase price of £23,000,000 would have to be paid was not until 24 January 2008.
125. On 3 September 2007, Jonathan Ashbridge wrote to Jenny Palmer relating to post completion matters, including the following reference to the draft First Supplemental Agreement:

"As you know, there is a draft supplemental letter to the Loan Agreement knocking around although I await hearing from my client's Relationship Manager as to whether the form of that is now approved."

126. Also on 3 September 2007 the Bank acquired an Investment Product, the "First Product", for £5,000,000 on behalf of the Defendants. This was a Dual Currency Deposit of one month's duration which matured on 5 October 2007. The acquisition was on behalf of the Defendants and paid for by a loan. The Bank debited the loan from Tranche A of the Facility Agreement.
127. Nasim Ahmad had been on a one week trip visiting clients in Africa, but returned to Dubai on 5 September 2007 and prepared for a trip to Pakistan.
128. On 4 September 2007, he received an email from Markus Rau enclosing email correspondence relating to the supplemental agreement. Markus Rau wrote that the supplemental agreement was not ready yet, "also due to the latest change suggested by you and agreed by Senator (additional 2 MGBP)."
129. Nasim Ahmad wrote to Markus Rau on 5 September 2007 to set out the documentation that he would want to take with him on his business trip to Pakistan. He said that he would go into his office on Friday, 7 September 2007 to pick the documents up.
130. Markus Rau responded on the same day stating that:

"The loan agreement is still with CRM for review. We hope it'll be fine and then André will forward it to you on Friday. Should CRM request further changes it'll be a tough call."

131. Nasim Ahmad visited his office shortly after lunch on Friday, 7 September 2007, but the First Supplemental Agreement had not yet arrived. It was sent by André Aemisegger to him at 18:41 (Dubai time) on 7 September 2007 and he did not collect it before flying out on Saturday morning.
132. The agreement had changed in a number of respects. It incorporated the agreement whereby the Khan Family were permitted to invest £10,000,000 of the retention (in addition to the Tranche A investment) provided they invested £2,000,000 equity in cash from their own funds. It also included an additional retention condition that the £10,000,000 could be used for the sole purpose of funding the apartment scheme development once planning permission had been obtained. There is no record of it being forwarded to Jenny Palmer.
133. Nasim Ahmad arrived in Lahore on Sunday, 9 September 2007, and checked into his hotel. He then went to the Khan Family's house for a social dinner.
134. The next day, Monday, 10 September 2007, Mr Ahmad and Rai-Rummaan Kharal attended the Khan Family's offices and discussed further investments. Senator Waqar Khan signed a number of documents presented to him by Mr Ahmad. These included management mandates; a letter of instruction to invest £8,500.000 less 10% in US$ in subject portfolios; the authorisation to open sub-accounts, and the letter instruction to invest £10,000,000 and send an additional £2,000,000.
135. Nasim Ahmad then went to lunch with the Khan Family before catching the 5pm flight to Islamabad later that afternoon.
136. There was a major issue between the parties as to whether the First Supplemental Agreement was physically present and signed at the Lahore meeting that day. This will be addressed below.
137. Mr Ahmad left Lahore on 10 September 2007.
138. Signed versions of the First Supplemental Agreement were faxed to Nasim Ahmad in Dubai on 12 September 2007. Nasim Ahmad emailed the faxed copies of the First Supplemental Agreement to Markus Rau on the same day.
139. Having arranged for the First Supplemental Agreement to be signed by the Khan Family, Senator Waqar Khan then instructed representatives of the Corporate Defendants to arrange for the Directors to do the same one month later on 19 October 2007. The First Supplemental Agreement was signed pursuant to a resolution from the Camden Directors on 22 October 2007.

Events following the First Supplemental Agreement; the purchase of the Second to Fifth Products

140. The Second Product was booked on 13 November 2007. It was a Principal Protected Note ("PPN") and acquired for US$ 10,000,000, all of which was financed by a loan from the Bank to the Khan Family.
141. The Khan Family took various steps towards attempting to progress the development of Dryades and No. 58 as apartments during the course of 2007 and 2008. In October 2007 Squire and Partners were asked for and provided a fee proposal for the redevelopment . Various other professionals were also asked to provide fee proposals for an apartment development at Dryades. The Khan Family also sought finance from RBS and on 28 November 2007 RBS circulated terms for proposed development financing over No. 58 and Dryades which had various conditions precedent, including one of a valuation on the basis of a proposed scheme for apartments.
142. Michael Burroughs was appointed planning consultant and on 11 January 2008 he made a presentation to the London Borough of Barnet to assess the prospect of planning permission for two apartment schemes at the two properties. The planners were resistant to the idea of replacing a single family house with flats.
143. The acquisition of No. 58 was completed on 25 January 2008 for £23,000,000 with the assistance of finance from Barclays of £18,750,000. Montagu Evans provided Barclays with a valuation of No. 58 on 16 January 2008 in which they opined that the site value with existing planning consent for building a single residence was £26,000,000. They also reported that the borrower (Octavia) intended to obtain planning consent for an apartment scheme which would increase the value of the property to £48,000,000, so that the market value was £33,000,000 reflecting an overall deduction in value of some 30% from the value of £48,000,000 with planning permission for an apartment scheme.
144. Various negotiations took place in early 2008 between the Khan Family and the Bank concerning funding of the acquisition of No. 58, release of the £10,000,000 retention, and funding development at Dryades. The Bank was not prepared to agree to any such arrangement.
145. Ultimately Octavia acquired No. 58 on 24 January 2008 with the assistance of finance from Barclays Bank.
146. On 11 March 2008 Camden requested and the Bank permitted an additional drawdown to Camden of US$ 2,010,200, the equivalent of £1,000,000, which took the drawdown up to some £23,650,000 odd from the £22,650,000 which had been made on 21 August 2007. Camden used that money to repay some US$ 2,000,000 of the US$ 10,000,000 loan taken out with the Bank by the Khan Family to acquire the Second Product.
147. By May 2008, if not before, it was apparent that the Khan Family (and Camden) were unlikely to pursue or obtain planning permission for the apartment scheme, so the enhanced value of Dryades of £54,000,000 envisaged by Montagu Evans as at 16 August 2007 was not going to be achieved. On 7 May 2008 the Defendants and the Bank entered into the Second Supplemental Agreement. This effected Camden's abandonment of the attempt to secure finance from the Bank against a value of Dryades of £45,000,000, and increased the drawdown to Camden by some £3,300,000. The rationale for this was that 75% of Montagu Evans' site valuation of £36,000,000 on 16 August 2007 without planning permission for the apartment scheme was £27,000,000. Therefore the drawdown could be increased up to the 75% limit from the £23,700,000 already drawn down by a further £3,300,000 being released. Of this sum, £396,390 was paid into the Family Account, and £3,000,000 was converted into US$ 6,000,000 which was paid to the order of Senator Ammar Khan.
148. The Second Supplemental Agreement also increased the amount of money that the Khan Family could borrow to acquire Investment Products and provided that if the Khan Family invested US$ 10,000,000 in such products the Bank would consider lending money on the security of No. 58.
149. The Fifth Product was executed by Senator Ammar Khan on 29 May 2008 after a visit to Lahore by Nasim Ahmad. It was a minor investment compared to the other four products. The Khan Family committed to a subscription agreement on which they could be required to invest up to £300,000 in a private equity fund. Various capital investment calls have been made by the fund, some of them have been met by the Bank and the sums treated as a loan to the Khan Family or part of an unauthorised overdraft to avoid losing the value of the investment. The fund is still in existence and has begun to pay out dividends. This product was not the fifth to be acquired, but the third, although it has always been referred to as the Fifth Product. It is the only product which has not been realised or matured, so it remains extant.
150. The Third Product was a further PPN purchased on 24 June 2008 for US$ 5,005,223 with the aid of a loan of US$ 4,000,000.
151. The Fourth Product was a PPN relating to underlying investments in Hedge Funds. It was acquired on 19 August 2008. The equity contribution required from the Khan Family was 30%, or US$ 1,500,000 out of the overall price of US$ 5,000,000. This gave rise to the need for a cash contribution from the Khan Family of some US$ 700,000 towards the acquisition of the product taking into account the existing balance and liabilities on the Family Account.

Events leading to the issue of proceedings

152. The first payment of interest on the original drawdown of £47,500,051 plus £1,000,000 plus £3,300,000 was due on 21 August 2008 in the sum of £6,000,000. The Khan Family did not pay that sum until they paid £5,500,000 on 1 September 2008 and £1,000,000 on 3 September 2008.
153. In response to the initial request for payment of the interest Senator Waqar Khan suggested by email to Markus Rau that he was expecting the Investment Products acquired thus far to have generated an income which could have been used towards meeting the interest payments. Markus Rau responded by explaining the basis of the amount of interest due, and the need to pay the extra US$ 700,000 relating to the contribution towards the Fourth Product taking into account other liabilities on the Family Account.
154. In September 2008 Markus Rau and Senator Waqar Khan were involved in detailed correspondence concerning matters such as the extra sums required for the Khan Family to meet their liabilities; whether, after the collapse of Lehman Brothers, the Khan Family were better off in US$ or GBP; and whether or not the Khan Family should sell the Fourth Product.
155. Nasim Ahmad saw Senator Waqar Khan in Dubai on 18 September 2008 and Senator Waqar Khan said that the Khan Family's financial circumstances had suffered. The Khan Family instructed the Claimant to sell the Fourth Product for US$ 4,600,000 on 10 October 2008, namely 92% of the purchase price at a loss of US$ 400,000. They also met the shortfall on the Family Account and agreed to meet their next interest payment on 1 December 2008.
156. Following the collapse of Lehman Brothers, CRM decided in October 2008 to have the security properties valued to check whether the obligation to retain a LTV ratio of 75% in clause 15 of the Facility Agreement had been complied with. On 23 October 2008 Nasim Ahmad informed the Khan Family of CRM's intention; he also visited the Khan Family in Lahore on 27 October 2008.
157. On 14 November 2008 Montagu Evans re-valued the Properties at:

(1) £32,000,000 for Dryades, a drop of some £4,000,000 from the 16 August 2007 site value of £36,000,000. Montagu Evans attributed no additional value to the previously mooted apartment scheme based on their assessment that any such scheme would not result in an increase in the Market Value of Dryades beyond that attributable to a development of the consented single dwelling;

(2) £31,350,000 for the Apartments, a drop from the 16 August 2007 valuation of £1,700,000.

158. Markus Rau wrote to Senator Ammar Khan on 21 November 2008 to inform him that the Khan Family needed to pay some £4,337,500 to bring themselves into compliance with the 75% LTV obligation in clause 15 of the Facility Agreement.
159. This gave rise to an exchange of correspondence followed by a meeting in Lahore on 24 December 2008 between Senator Ammar Khan, Nasim Ahmad, Imran Qayyum and Naweed Sharif of Deutsche Bank AG Lahore. The agreed minutes of 29 December 2008 reflect what was discussed, namely the Bank's requirement for the alleged security shortfall to be met and the Khan Family's proposals as to how to meet them.
160. There was a further meeting in Geneva on 7 January 2009 when Senator Ammar Khan visited and had two meetings with employees of the Bank to discuss the Khan Family's response to the alleged shortfall.
161. On 9 January 2009 the Bank wrote to the Khan Family setting out the Bank's requirement that a schedule of payments be met to eliminate the alleged shortfall by 30 January 2009.
162. On 29 December 2008 and on 13 January 2009 Senator Ammar Khan provided instructions to the Bank to sell the Second and Third Products, which were sold respectively for US$ 9,496,349.54 and US$ 4,759,091.53, namely at capital losses from their purchase prices of approximately US$ 500,000 and US$ 250,000 respectively. These sales released equity of £1,830,937.10 which was used to reduce the principal outstanding and brought the alleged security shortfall down to some £2,500,000.
163. On 22 January 2009 the Bank served margin call letters on the Khan Family and the Corporate Defendants seeking reduction of the alleged outstanding security shortfall of some £2,431,009.69.
164. Nasim Ahmad visited the Khan Family in Lahore who complained that the letter of 22 January 2009 was defamatory and gave rise to breaches of Swiss Banking secrecy. Thereafter correspondence and negotiations commenced with a view to the Khan Family attempting to reduce the alleged shortfall. Caroline Crawford of Crawford Solicitors corresponded on behalf of the Khan Family. Proposals included sales of the Third Floor Apartments and raising funds from land sales in Pakistan.
165. In March 2009 the Bank informed the Khan Family that it was considering appointing a receiver. Meetings ensued with prospective receivers, including Glentree Estates. The Khan Family were hostile to the appointment of a receiver and the Bank did not proceed with an appointment following various payment proposals from the Borrowers.
166. On 20 March 2009 Montagu Evans valued Dryades at £19,500,000 and the Apartments at £29,050,000.
167. Efforts were made to agree a compromise for meeting the alleged shortfall. An offer was made on 30 March 2009 which included a proposal to make 3 payments of US$ 1,000,000 and to meet the interest as it fell due monthly. The parties were unable to agree terms, including which party would have final approval on the sale price of any sales of the Third Floor Apartments, but the concept of substantial capital payments of US$ 1,000,000 at regular intervals and meeting monthly interest formed the basis of an exchange of offers, as shown by letters and emails of 1 April 2009, 9 April 2009, 10 April 2009, 26 April 2009.
168. During April and May 2009 various payments were received by the Bank totalling some US$ 2,000,000. On 7 May 2009 written instructions were given by the Khan Family to the Bank relating to the use of those funds. The Khan Family contend that these instructions were to use the funds to meet outstanding interest followed by interest as it fell due. The Bank applied it in reduction of the outstanding interest and Principal to reduce the alleged security shortfall.
169. Subsequently the Bank continued to chase the Khan Family for payments to meet the alleged outstanding shortfall and the interest. Various assurances were given to meet capital payments of US$ 1,000,0000 and the outstanding interest and explanations were given for delays.
170. At the same time the Bank pressed Crawford Solicitors for information concerning the efforts to sell the Third Floor Apartments and the Khan Family expressed optimism about the prices that could be achieved.
171. Savills valued Dryades at £20,000,000, an increase of £500,000 from the valuation of 20 March 2009. Knight Frank valued the Apartments at £28,600,000 on 10 August 2009, a slight fall of £450,000 from the valuation of 20 March 2009.
172. Some payments continued during June, July, and August 2009, and the final payment received during this period was US$ 99,951 on 14 September 2009.
173. Various efforts were made to sell the Third Floor Apartments and/or Dryades or to re-finance the entire indebtedness. These included refinancing proposals pursued by Savills Capital Advisory in late 2009/early 2010 with the Bank of China. During the course of 2010 the Khan Family's solicitors, Howard Kennedy, reported the existence of various proposed buyers for Dryades, but none of the transactions materialised. During this period regular valuations were obtained of Dryades and the Apartments.
174. The Bank obtained further valuations of the Properties. Strutt & Parker valued the Apartments at £27,650,000 on 23 December 2010 and Savills valued Dryades at £21,500,000 on 31 December 2010.
175. On 14 February 2011 the Bank served default notices on the Defendants alleging a security shortfall and default on payment of interest.
176. On 21 March 2011 a demand was made on Senator Gulzar Khan's guarantee.
177. On 31 March 2011 the proceedings were issued in the form of 7 sets of proceedings in the West London and Barnet County Court against the respective Corporate Defendants and a debt claim against the Individual Defendants.
178. The possession proceedings were served on 11 April 2011. Service was effected on Crawford Solicitors, who wrote on 20 April 2011 to confirm receipt by the Defendants of the proceedings, but that they were not instructed.
179. On 6 April 2011 the Bank's solicitors Osborne Clarke wrote to the Khan Family enclosing a copy of the debt proceedings (not by way of service) and informing them of the possession proceedings.
180. On 10 May 2011 the possession proceedings were heard in the West London County Court and adjourned to 29 July 2011; the Corporate Defendants were represented by Farooq Bajwa. The Corporate Defendants filed defences and evidence in the form of a statement of Farooq Bajwa on 7 June 2011. At that stage there were no counterclaims.
181. The debt claim was served with Amended Particulars of Claim on the Individual Defendants on 27 July 2011.
182. On 29 July 2011 the possession claims were adjourned for transfer to the Commercial Court and the Individual Defendants agreed to provide a defence to the debt claim by 16 September 2011.
183. The possession proceedings were transferred to the Commercial Court by consent pursuant to the order of Simon J on 5 September 2011.

The Detailed Issues

(1) The Facility Agreement

184. The Issues under this head are:

(1) By 21 August 2007, were all the conditions precedent in Appendix 3 of the Facility Agreement in fact satisfied under clause 12 of the Facility Agreement? Alternatively would they have been satisfied without a capricious/irrational/arbitrary exercise of discretion by the Bank?

(2) Under the Facility Agreement was the Bank obliged to advance the full facility on satisfaction of the conditions precedent as set out in Appendix 3 to the Agreement?

(3) Was the Bank in breach of the Facility Agreement on 21 August 2007 for advancing £22,650,000 under Tranche B instead of £33,700,000 ?

(4) Does the Bank's positive case (at the Reply paragraph 77(f)) that it waived the requirement for the entire Facility to be drawn down together mean that it waived any failure to meet the conditions precedent?

Discussion

185. Clause 12 of n the Facility Agreement provides that:

"The obligation of the Bank to make the Facility available hereunder is subject to the condition that prior to the date on which any Tranche of the Facility is to be drawn the Bank shall have received in form and substance satisfactory to it the documents listed in Appendix 3".

186. The document relevant in this case was listed under paragraph 2 of Appendix 3:

"A report on or valuation of each Property addressed to the Bank and signed by a chartered surveyor acceptable to the Bank and expressed to be for mortgage purposes".

187. Under clause 12 the Bank's obligation to make the facility available was accordingly made subject to a condition precedent.
188. This was a condition precedent of the kind described in Chitty on Contracts Vol 1 (31^st ed.) para. 12-028, namely where "the parties enter into an immediate binding contract, but subject to a condition which suspends all or some of the obligations of one or both parties pending fulfilment of the condition". In the present case the Bank's obligation to make the facility available was suspended pending fulfilment of the clause 12 condition precedent.
189. It was common ground between the parties that the Bank's decision whether the valuation report was satisfactory to it "in form and substance" was subject to a Socimer implied term to the effect that such a decision must not be made capriciously, perversely, irrationally or arbitrarily.
190. In Socimer Bank v Standard Bank [2008] Bus LR 1304 Rix LJ summarised the implication to be made as follows:

"It is plain from these authorities that a decision-maker's discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused." [66]

Implications of good faith and rationality, and of lack of arbitrariness or perversity, are standard, for they represent the very essence of business, and other, relationships." [106].

191. By "irrationality", Rix LJ was referring to the idea that a decision maker will not exercise his discretion in a way which no reasonable decision maker acting reasonably would do: [61, 62, 64]. Under the irrationality test, the decision always remains that of the decision maker:

"Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria: as for instance when there might be an implication of a term requiring the fixing of a reasonable price, or a reasonable time... Laws LJ in the course of argument put the matter accurately, if I may respectfully agree, when he said that pursuant to the Wednesbury rationality test, the decision remains that of the decision maker, whereas on entirely objective criteria of reasonableness the decision-maker becomes the court itself" [66].

192. There are clauses which may require the decision maker's decision to be made in accordance with objective criteria, such as where it has to be made "in a commercially reasonable manner" (Barclays v Unicredit [2012] EWHC 3655 (Comm)) or where consent "shall not be unreasonably withheld" (Porton Capital v 3M Holdings [2011] EWHC 2895). In the present cases there was no wording in clause 12 stating or setting out objective criteria or referring to reasonableness. On the contrary it depended on what was "satisfactory" to the Bank which indicates subjectivity rather than objectivity. Further, there is no necessity for any implication beyond that provided by the Socimer implied term.
193. It was the Defendants' case that:

(1) The Bank never made a decision under clause 12;

(2) If it did, its decision was capricious, perverse, irrational or arbitrary; and

(3) In any event, clause 12 was objectively satisfied.

194. As to (1), the Defendants emphasised that the Bank never referred to clause 12 at the time, whether in communications with the Defendants or internally. They contended that this was because the Bank erroneously considered that it was carrying out a final approval risk analysis of the kind which according to its usual processes would be carried out before contracts were entered into (step 4 of the Cheat Sheet). It ignored the fact that the Facility Agreement had already been made and that the only exercise remaining to be performed was the essentially administrative task of reviewing the listed documents.
195. The Defendants also pointed out that none of the key CRM decision makers had been called to give evidence and that the Bank was in possession of all the facts it needed to decide what exercise it was embarking upon. Instead of considering whether the clause 12 condition precedent had been satisfied it had undertaken an entirely different and unlawful process of deciding whether to give final credit approval. Having done so it was not open to the Bank to go back and re-create what it might have done but as a matter of fact did not do.
196. The Bank accepted that it had to show a link between its dissatisfaction and the valuation report but submitted that it was clear that it did decide that it was not satisfied with the final valuation. If so it did not matter that clause 12 or conditions precedent were not expressly referred to.
197. I find that the Bank made a decision that it was dissatisfied with the £45,000,000 valuation for Dryades provided in the final valuation report and that this was the basis of its decision not to allow full drawdown. Whilst it is correct that it did not question that Montagu Evans' market valuation was a reasonable opinion of market value as at the date of the report, it was dissatisfied with the risks to the Bank which it considered flowed from the hope value element of the market value assessment.
198. Whilst other concerns were expressed, such as that the loan was akin to a development loan, the key concern was hope value.
199. This was borne out by the evidence of Laurent Kuster, Paul Walker and George Hammon relating to the 17 August 2007 conference. Their main concern was whether to use £45,000,000 as the value against which 75% would be lent. Whilst Laurent Kuster and George Hammon showed some confusion in their evidence as to exactly what hope value means, what they were clear on was that the element of hope value beyond £36,000,000 was considered to have an uncertain and speculative element to it and the Bank was not prepared to lend on the strength of that.
200. It is also supported by the emails of Laurent Kuster and Markus Rau following the conference. Thus Laurent Kuster explained to Senator Waqar Khan that "a long time has been necessary to address all points raised by our risks managers on the market value of Dryades that includes a £9 million "hope value". Markus Rau's internal email reporting on his conversation with Senator Waqar Khan states that "I explained that the request had to do with the all-time value of the site and implied "hope value" etc".
201. It is confirmed by the Final Credit Report which highlighted the uncertainty of the hope value and the legal, market, project and borrower risks faced by the Bank during the period until planning consent was obtained, if indeed it ever was. It accordingly required that £10,000,000 be retained until planning consent had been obtained and decided to approve drawdown subject to that retention. That decision was based on concern about the strength of the valuation above £36,000,000.
202. The Bank accordingly decided that it was dissatisfied with the valuation in the final valuation report. Based on that dissatisfaction it resolved that it was not prepared to allow drawdown of the Camden tranche of the facility unless there was a £10,000,000 retention. In all the circumstances I find that a decision was made under clause 12 despite clause 12 not being expressly referred to. The substance of the matter involved a decision under clause 12 even if was not expressly so articulated.
203. As to (2), the Defendants submitted that prior to the Facility Agreement being entered into the Bank already knew that Dryades had a market value of £45,000,0000 which included a hope value of £9,000,000. The Bank could not exercise its discretion under clause 12 by reference to matters known to it before the contract was made. That would involve revisiting its decision to enter into the Agreement. The discretion must relate to new and significant information. To rely on matters already known to it would be capricious, perverse, irrational or arbitrary.
204. Whilst one can understand why the Borrower might be aggrieved if the Bank seeks to exercise its discretion on grounds that were or should have been known to it before it entered the Facility Agreement, that does not mean that so doing is capricious, perverse, irrational or arbitrary. The ground relied upon may be perfectly rational regardless of when it became known to the Bank. What matters is the nature of the ground relied upon, not when it became known to the Bank.
205. In any event, the position was not as black and white as the Defendants contend. Whilst it is correct that all the indications were that the valuation in the final report would be £45,000,000 and that some people within the Bank were aware of the hope value issue prior to the Facility Agreement, at the time the Agreement was made the final valuation report had yet to be produced and it was not going to be considered by CRM until it had been, as Senator Waqar Khan knew.
206. Further, what the CRM found to be significant when it came to consider the final report was not the mere fact that hope value was included in the market value figure arrived at, but the implications of that inclusion and the uncertainty created thereby. That was very much a judgmental matter and CRM was, and was understood to be, the relevant judgmental body.
207. The speculative and uncertain nature of the hope value element of the market valuation provided was, in my judgment, a reasoned ground for the Bank's decision and a ground which it was entitled to rely upon. It was not capricious, perverse, irrational or arbitrary.
208. Indeed, if relevant, I am satisfied that there were a number of grounds on which a reasonable bank could consider that it was not satisfied with the valuation. In particular, the final valuation stated, that the amount of hope value was "highly subjective" and would vary according to developers perceptions of and appetite for planning risk. As the planning situation crystallised the hope value might vary. Further, the hope value was a large element compared to the whole: £9,000,000 compared to £36,000,000 or £45,000,000. There was also a significant risk of erosion of the hope value because of, for example, movements in the market between the funding and any building out or the conduct of the borrowers in pursuing the planning permission.
209. As to (3), the Defendants submitted that the valuation report had to be satisfactory in substance because the substance of the report was precisely in accordance with what the Bank had commissioned and instructed, namely an open market valuation. That was all that was required. However, the "substance" of the report is not limited to the figures provided or the valuation basis used. It may include, as here, the elements which go to make up the value arrived at. In this case the Bank decided that the hope value element of the valuation did not provide sufficient security to justify lending against the full market valuation figure. That was a decision which it was open to the Bank to make. On the Defendants' case there would effectively be no judgment left for the Bank to make, but judgment is inherent in deciding whether the "substance" of a report is satisfactory.
210. I am accordingly satisfied and find that the Bank was entitled to and did decide that it was not satisfied with the final valuation and that a clause 12 condition precedent was not fulfilled. It follows that the Bank was not obliged to advance the £10,000,000, or indeed any amounts under the facility, because clause 12 operated as a condition precedent to the obligation to make the facility available.
211. The Bank did not, however, simply refuse to allow any drawdown. It went on to allow drawdown of the balance of the facility apart from the £10,000,000 pending negotiation of an agreement as to the release conditions for the retention, which later led to an agreement in the First Supplemental Agreement.
212. The Defendants submitted that the proper construction of the Facility Agreement, in particular clauses 4(a) and (c) when considered against the factual background, is that all tranches must be drawn down complete and together. Clause 4 provides:

"4. Drawing

(a) Each Tranche of the Facility may subject to the fulfilment by the respective Borrower of the conditions precedent referred to in Clause 12 be drawn in one amount only upon such Borrower giving in respect of each drawing not less than three Business Days' notice in writing to the Bank of the Borrower's intention to draw, such notice to be irrevocable each such drawing being a Loan and together The Loan;

(b) No drawing shall be made at any time after the expiry of a period of three calendar months from the date hereof and the Bank shall have no obligation under this Agreement to make available to any Borrower any facility after such date.

(c) Each drawdown of each Tranche of the Facility is conditional on all Tranches of the Facility being drawn simultaneously."

213. The Defendants submitted that it was not open to the Bank to proceed to partial drawdown either in respect of any particular tranche or in respect of the entire facility being drawn down at one time. The Bank could not unilaterally treat clauses 4(a) and (c) as being for its benefit so that it might allow partial or non-simultaneous drawdown without the agreement of all borrowers. The consequence is that allowing only partial drawdown was a breach of the Facility Agreement and that by allowing such drawdown the Bank was necessarily waiving any right to rely on the clause 12 condition precedent.
214. This is, however, to ignore the factual circumstances in which partial drawdown was allowed. Drawdown was allowed on the basis that £10,000,000 would be retained and that the terms of retention would be confirmed in a side letter or supplemental agreement. The Bank was entitled to refuse to allow any drawdown. If so, it was equally entitled to allow a partial drawdown on terms. The greater includes the lesser. Those terms did not have to be or involve variation of the Facility Agreement. It could be done on the basis that a partial drawdown would be allowed on terms to be set out in a side letter or supplemental agreement which would be finalised and agreed in due course, as indeed occurred.
215. As the Bank submitted, it decided that it would make available part of the original drawdown pending agreement of an addendum to the facility. In doing so it waived the conditions for its benefit that all tranches be drawn in one amount only, and simultaneously (clauses 4(a) and (c)). If the Bank chose not to exercise, or only partly to exercise, a right or remedy it did not thereby waive any other right or remedy (clause 23).

Conclusion

216. The answer to Issues (1) (3) and (4) is No. Issue (2) does not arise.

(2) Pre Facility Agreement Misrepresentations

217. At the start of the trial the Issues under this head were stated to be as follows:

(1) Did the Bank make express and/or implied oral representations to induce the Khan Family to open an account with the Bank and the Khan Family and the Corporate Defendants to enter into the Facility Agreement? In particular, did the Bank represent?

a. That the Bank was able and willing to and had resolved to provide an overall finance facility to cover all of the funding requirements of the Khan Family, and in particular to provide development financing in respect of Dryades and No. 58 (RRADCC 23(1)).

b. That the Bank was able to and had intended to and had resolved to provide funding of up to £66m for a term of five years at an interest rate of LIBOR plus 0.85%. The Bank understood the breakdown of use of funds intended by the Defendants (RRADCC 23(2)).

c. That the Bank was able to and intended to and had resolved to provide further lending over and above that provided pursuant to the Facility Agreement, up to a maximum Loan to Value of 75% on the security of No. 58 (RRADCC 23(3)).

d. That the Investment Products to be purchased with the sum of £8.5m would be principal protected notes which provided an annual return of 10-12% for the five year duration of the loan with 100% capital protection. This return would not only cover interest payable to the Bank on Tranche A but also significantly reduce the interest payable on the remainder of the lending within the Facility Agreement, such that, with rental income from some of the Properties that would be little if any need for interest payments to be made through external injection of funds (RRADCC 23(4)).

e. The Bank impliedly represented that they held reasonable grounds for their belief and understanding that (1) the Bank was willing to and intended to, and had resolved to, provide development finance in respect of Dryades, and (2) the Bank was able to and intended to provide and/or arrange investment products that had the characteristics described at paragraph 23(4) and (23A) RRADC.

(2) If so, were these representations false? (as set out at paras 145 to 145C RRADCC). The Bank admits that the representations set out in 23(4) (and repeated in 46E) of the RRADCC would have been incorrect if made.

(3) If so, did the Khan Family and the Corporate Defendants rely on those representations when opening the Family Account, entering into the Facility Agreement, extending secured borrowings, redeeming existing borrowings (including paying early redemption fee), acquiring the Investment Products and/or (via their company Octavia) exchange contracts to purchase No. 58?

Discussion

218. By the end of the trial the only representations being alleged were variants of (1)(b) and (d) and also 1(e).
219. The variant of 1(b) alleged was that the presentation of the final form of the Facility Agreement was an offer and thus a representation that the Bank was resolved to contract on the terms proposed.
220. This representation was false because the Bank entered into the Facility Agreement intending not to complete the loan under the terms of the Agreement but on the basis that it was entitled to re-assess the transaction. The Defendants relied in particular on an answer given by Laurent Kuster in evidence to the question "what issues would CRM be looking at for the purposes of giving that final agreement?" Mr Kuster said "They were looking at all aspects, all risk aspects of the transaction, which includes a final valuation report".
221. The Defendants submitted that, as is apparent from the intervention of Mr Lay, the Bank did not have a settled intention to lend on the terms proposed but rather it saw the terms as some kind of option agreement to which the Borrowers committed themselves but which the Bank was free to accept or reject as it later decided.
222. Assuming that this case is open to rhe Defendants, it fails on the facts. The presentation of the Facility Agreement did not involve any representation. It was merely an offer to contract on the terms there set out.
223. Even if it did involve any representation of intention it would be an intention to lend on the terms as the Bank understood them to be. The Bank understood that it was entitled to act as it subsequently did.
224. Further I have in any event found that the Bank acted in accordance with the terms of the Facility Agreement, so there could be no misrepresentation as alleged.
225. The variant of (1)(d) alleged was that it was the Defendants' case that the Bank represented that the Investment Products would yield an annual return of 10-12%. Although Senator Waqar Khan agreed in evidence that this was not a commitment, since it was the Bank's case that they never made such representations (whether they were commitments or not) because they believed that no such products existed, the Defendants submitted that it followed that if the representations were made then they were false.
226. Assuming that this case is open to the Defendants, it also fails on the facts. I find that none of the Bank's representatives made a representation that a specific return or range of return would be achieved on the Investment Products. Indeed the fact that there are no capital guaranteed investment products with the level of return allegedly represented highlights the inherent improbability of the representation being made.
227. In any event, there was no detailed discussion of financial products prior to entry into the Facility Agreement. The first discussion about products in any detail took place 8 days after signing of the Facility Agreement on 20 August 2007. No meaningful representation could be made about investment products before there was any identification of the type of products which would be involved.
228. In so far as the implied representations alleged in (1)(e) could survive the rejection of the Defendants' case on (1)(b) and (d) (and the abandonment of (1)(a)) I find that no such representations were made. Although the Bank was aware of the Defendants' intention to use part of the liquidity provided by the loan to develop Dryades, it did not agree to provide funds for that or any settled purpose. The funds were provided for "general liquidity purposes". It was up to the Defendants to decide on their use. The Bank did not need to have nor did it have any settled intention or resolution with regard thereto. Nor did it have any such intention in relation to the characteristics of investment products in respect of which no representation had in any event been made.

Conclusion

229. The alleged representations were not made and so the misrepresentation case fails.

(3) The 17 August Oral Agreement and the Undertaking

230. The Issues under this head are:

(1) Was there an oral agreement between Markus Rau for the Bank and Senator Waqar Khan on or around 17 August 2007 in the terms set out in paragraph 29G RADCC?; and, if there was an oral agreement:

(2) Was this oral agreement (save for term (4) therein) reduced to writing and/or reflected in the Undertaking of 19 August 2007?

(3) What was the effect (if any) of the oral agreement and/or Undertaking? In particular:

a. If the conditions precedent were already satisfied (the Defendants' case); or

b. If the conditions precedent were not satisfied (the Bank's case).

Discussion

231. It was not entirely clear by the end of the trial whether the allegation of an oral agreement on 17 August 2007 was being maintained in the light of the evidence. As already found, in evidence Senator Waqar Khan accepted that Markus Rau could not make an agreement and that it had to go to CRM.
232. This is supported by the fact that, as found, Markus Rau explained that he had not been involved in the discussions, did not have the documents with him and told Senator Waqar Khan that he should read Laurent Kuster's email. It is further borne out by Markus Rau's own email to Senator Waqar Khan of 17 August 2007 which refers both to CRM approval and the need for him to review Laurent Kuster's email.
233. I find that there was no oral agreement as alleged by the Defendants, although Senator Waqar Khan did state that he would not have any problem with the additional £10,000,000 being retained with the Bank.
234. In relation to the Undertaking, as already found, Senator Waqar Khan accepted in evidence that CRM would have to decide on any agreement and that Nasim Ahmad could not commit the Bank to anything. The Undertaking cannot therefore have been a binding agreement, or confirmation of any such agreement.
235. Senator Waqar Khan did suggest in evidence that CRM may have accepted the terms of the Undertaking by allowing the drawdown, but I am satisfied that it was mutually understood that the terms of the retention would have to be formalised and agreed. This is reflected in the Undertaking itself which was stated to be "pending signing of addendum to the Loan Agreement". It is also consistent with Nasim Ahmad's evidence that the Undertaking was merely a proposal, as is supported by his email of 19 August 2007 to Don Ventura.
236. I find that the 19 August 2007 Undertaking was one of two alternative proposals designed to ensure speedy drawdown of the reduced sum of £47,500,051. Either the Khan Family were to be paid down the retention sum subject to their Undertaking to keep it in their account, or, they (namely Camden) accept a lesser drawdown – in each eventuality with the terms of the retention to be documented. These alternatives are reflected in Nasim Ahmad's 19 August 2007 email.
237. In the event the alternative of the lower drawdown was proceeded with, as shown by the instructions given in relation to the £47,500,051 drawdown, as found above.

Conclusion

238. There was no oral agreement on 17 August 2007 or as reflected in the Undertaking.

(4) The First Supplemental Agreement

239. The Issues under this head are:

(1) Was an effective agreement reached in the terms set out in the First Supplemental Agreement? In particular:

a. Was an effective written agreement concluded?

b. What consideration was provided by the Bank for the Defendants' acceptance of the First Supplement Agreement?

(2) If so, was Senator Waqar Khan induced into signing the First Supplemental Agreement by the misrepresentations of the Bank. In particular:

a. Did the Bank make the representations set out at paragraphs 32AB, 32B and 32C of the RRADCC?

b. Were those representations false?

c. Were those misrepresentations made fraudulently or negligently?

d. Did Senator Waqar Khan enter into the First Supplemental Agreement in reliance upon the misrepresentations?

(3) Alternatively, did Senator Waqar Khan sign the First Supplemental Agreement under a unilateral mistake as to its terms?

(4) Additionally did the remaining Khan Family Defendants and the Corporate Defendants sign the First Supplemental Agreement induced by the misrepresentations referred to above? Or, alternatively, under a unilateral mistake as to its terms?

(5) Is the First Supplemental Agreement void for mistake or liable to be rescinded?

Discussion

240. In the light of my findings on the Facility Agreement these claims do not assist the Defendants. Even if the First Supplemental Agreement was set aside the Defendants would return to the situation where the Bank was entitled to refuse to allow the drawdown because of clause 12 of the Facility Agreement. Nevertheless, since these claims were addressed at length at trial I shall deal with them.
241. The main significance of these claims is that if the Defendants had succeeded in their Facility Agreement claims it would have been important for them to set aside the Supplemental Agreements since they provided an agreed basis of drawdown thereafter.
242. In relation to Issue (1), in the light of my finding that the Bank was entitled to impose the terms of the retention by reason of clause 12 of the Facility Agreement, consideration was clearly provided. Even if I had not so found, I would have held that there was sufficient consideration because there was as at 17 August 2007 an issue between the Bank and the Defendants as to whether the Bank was entitled to refuse to allow drawdown, with the Bank believing in good faith that it was not so obliged, and the First Supplemental Agreement amounted to a compromise of that difference between them.
243. In relation to Issue (2), the alleged representations were very specific in their terms and their context. They were alleged to be as follows:

"32A. In about September 2007, Mr Ahmad on behalf of the Claimant travelled to Pakistan and at his request attended a meeting in Lahore on or around 10 September 2007 with Senator Waqar Khan as representative of the Khan family and the person who was taking the lead in negotiating terms, on behalf of the Khan family and the Corporate borrowers, as between those persons and the Claimant bank, as Mr Ahmad knew/ during that meeting Mr Ahmad by oral misrepresentations induced Senator Waqar Khan to sign the execution page of what now appears to have been a draft of the First Supplemental Agreement and to circulate that execution page to other members of the Khan family for signature, which he did (though Mr Ahmad himself obtained the signatures from the female members of the family )and to pass on to the Khan family and representatives of the Corporate Borrowers his understanding of the effect of the First Supplemental Agreement as represented to him by Mr Ahmad as set out below.

32AA. The meeting took place shortly before lunch at the office of Senator Waqar Khan who was sitting at his desk while Mr Ahmad and a colleague of his sat on the other side. In the course of the meeting, Mr Ahmad produced from his briefcase or folder a pile of several documents which he said were formal banking documents, concerning mandates and the opening of accounts. Mr Ahmad took each document in turn, provided a brief description of its purpose or effect and passed it across the desk for Senator Waqar Khan to sign. In accordance with their normal way of conducting business, which reflected the trust that he had reposed in Mr Ahmad over many years. Senator Waqar Khan did not read any of these documents before signing them and instead relied exclusively on Mr Ahmad's description.

32AB. One of the documents that Mr Ahmad produced from the pile was a draft of the First Supplemental Agreement, as it came to be known. There then took place between Mr Ahmad and Senator Waqar Khan asked him what the document was:

Mr Ahmad "The bank has already disbursed the money and needs you to sign this to make the undertaking you guys signed part of the facility."

Senator Waqar Khan: "But we've already done this."

Mr Ahmad: "But the corporates did not sign the undertaking so you guys need to re-sign this and then get the corporates to sign it. "He also said the Bank had not signed the Undertaking and that it was not binding."

Senator Waqar Khan: "Have you read it? Is it fine? Shall I sign?"

Mr Ahmad: "I've read it. It's fine. It's OK to sign."

32AC. Mr Ahmad then passed the signature page across the desk, but not the rest of the document to Senator Waqar Khan for him to sign, which he did and handed it back. Mr Ahmad then moved on to the remaining documents in the pile and Senator Waqar Khan signed each of them as Mr Ahmad requested. Mr Ahmad then asked if Senators Gulzar Khan and Ammar Khan could also sign. Senator Waqar Khan called in one of his assistants and he was asked to take the signature pages to Senator Waqar Khan's father and brother, whom he then telephoned. He told them that their signatures were required on some Deutsche Bank documents being brought to them. They duly signed.

32AD. The signatures of the Second and Fifth Defendants were procured directly by Mr Ahmad later on the same day. They signed in the belief that the signatures on the document of the other three male Khan family Defendants had been properly procured.

32B. In the premises, during the meeting referred to above, and in circumstance where at that meeting Senator Waqar Khan was not provided with any part of the draft First Supplemental Agreement other than the execution page for the Khan family members, the following oral misrepresentations were made and /or were reasonably understood by Senator Waqar Khan to have been made by the Claimant through Mr Ahmad in order to induce him, the Khan family and the Corporate Borrowers to enter into the first Supplemental Agreement:

(1) That the agreement to which the said execution page belonged would upon execution have the effect, being its sole effect, of incorporating the Undertaking into the Facility Agreement.

(2) That the execution of the said agreement was merely a formality required as part of the Claimant's internal compliance process.

(3) That the Claimant had already disbursed the full facility, and intended to and was able to provide, funding in accordance with the Facility Agreement as originally executed, subject to the terms of the Undertaking.

32C. Further, in making the express representations pleaded above, Mr Ahmed (on behalf of the Claimant) impliedly represented to Senator Waqar Khan, and in the premises, the other Khan family members and the Corporate Borrowers that:

(1) nothing in the First Supplemental Agreement had the effect of varying the Facility Agreement or the Undertaking or otherwise varied the existing contractual relationship between the Claimant on the one hand and the Khan family and the Corporate Borrowers on the other hand;

(2) that the agreement to which the said execution page belonged and/or the Claimant's request or requirement that it be executed did no breach the fourth term of the oral agreement made between Senator Waqar Ahmed Khan and Mr Rau on behalf of the Claimant on 17 August 2007 (as set out in 29G(4) above)."

244. In addition, by an amendment made towards the end of the trial a further allegation of representation was made as follows:

"32A1. Furthermore, before the meeting in Lahore, in a telephone conversation between Mr Ahmad and Senator Waqar Khan sometime between 28 August 2007 and 2 September 2007, Mr Ahmad told Senator Waqar Khan that the £10m retention in relation to Tranche B had to be retained with the Claimant for either development of Dryades or for the purpose of getting planning permission. This reflected the Undertaking which Mr Ahmad had requested the Khan family to sign on 19 August 2007."

245. As already found, on 17 August 2007 Markus Rau did explain the proposed retention to Senator Waqar Khan in terms that it could be released either on the obtaining of planning consent or on funds being used for the refurbishment of Dryades.
246. Those alternative conditions were then reflected in the Undertaking signed on 19 August 2007.
247. As further found, at the end of August or early September 2007 when Nasim Ahmad was in South Africa he said to Senator Waqar Khan that the £10,000,000 would be retained by the Bank and would only be made available once planning consent had been obtained or for the development of Dryades as a house.
248. I therefore find that a statement was made by Nasim Ahmad to the effect alleged in the Defendants' recent amendment.
249. In relation to the representations alleged at the September 2007 meeting in Lahore the difficulty for the Defendants is that subsequent disclosure has shown that Nasim Ahmad cannot have had the First Supplemental Agreement at that meeting.
250. The disclosure given by the Bank shows that on 10 September 2007 Nasim Ahmad telephoned Don Ventura to confirm what products he was discussing with Senator Waqar Khan. He also told Don Ventura that he did not have the Supplemental Agreement. Don Ventura recorded the fact of this call in his email of 10 September 2007 timed at 10:48 (Geneva time, which was 13.48 in Lahore) to Andre Aemisegger and Markus Rau (copied to Nasim Ahmad). At the end of Don Ventura's email he wrote:

"Were we able to have the amended loan agreement sent to N?"

251. Andre Aemisegger responded on the same day at 11:27 (Geneva) to say, "Yes, sent it on Friday." It is apparent, however, that Mr Aemisegger was unaware that his email to Nasim Ahmad on 7 September 2007 had not arrived in time.
252. Don Ventura replied at 12:13 (Geneva) saying, "I spoke with Nasim this morning and he did not have the amended credit facility for the Senator to sign. Better check with him on his obtaining the document as he is in Lahore today and tom." The reference to "tom", meaning "tomorrow" was mistaken in the circumstances – Nasim Ahmad's itinerary involved leaving Lahore that day. However, Don Ventura's emails are clear, contemporaneous, documentary evidence that Nasim Ahmad did not have the Supplemental Agreement with him at that time.
253. Andre Aemisegger then sent two emails on 10 September 2007, each of which attached the Supplemental Agreement. The first was to Nasim Ahmad timed at 13:46 (Geneva) at Ahmadz@btinternet.com by which he forwarded his email of 7 September 2007 . He wrote: "Since Don told me that you do not have my mail from Friday, I am resending it to you via your new email address." This email attached a further copy of the Supplemental Agreement with tracked changes. The second was to Senator Waqar Khan timed at 17:06 (Geneva or 20.06 in Lahore) stating: "I am sending you this email on behalf of Mr. Nasim Ahmad. Can you please take a look at the agreement and sign it. For any questions, feel free to contact Mr. Ahmad." This enclosed a clean version of the Supplemental Agreement.
254. Although the Defendants challenged the authenticity of this email no evidence to substantiate any such challenge was put forward, whereas the Bank backed up its authenticity with expert evidence. The fact that Senator Waqar Khan has no record of its receipt is of little weight given that he has not retained emails from this period. There is also little in the point that there is no evidence from Andre Aemisegger as he is unlikely to have any clear recollection now of sending one email on one day in September 2007. I find that it was authentic and was sent. Since it was sent after Nasim Ahmad had left Lahore the First Supplemental Agreement cannot have been at the meeting that day.
255. I also find that the version of the First Supplemental Agreement which was signed and faxed back on 12 September 2007 was that sent by Andre Aemisegger to Senator Waqar Khan by email on 10 September 2007. Indeed this was the only means by which the Khan Family could have had a version of the First Supplemental Agreement to fax back. Nasim Ahmad did not have the Agreement with him during his visit to Lahore and could not and did not provide it to them. Although he referred in his email to Markus Rau of 12 September 2007 to "Originals are being sent by TNT", I find that he was referring to originals of the faxed copies of the signed First Supplemental Agreement which he was attaching, not originals of the First Supplemental Agreement itself.
256. It follows that the detailed exchanges set out in the pleadings and Senator Waqar Khan's witness statements and evidence concerning and prompted by the signing of the First Supplemental Agreement cannot have taken place as described.
257. The Defendants submitted that it is inherently unlikely that no discussion took place about the First Supplemental Agreement whether the document was physically there or not. They pointed out that the purpose of Nasim Ahmad's visit had been to take the Agreement to the Khan Family for execution. They further pointed out that the Agreement provided for the use of the retention sums for investment and the added in £2,000,000 which had been earlier discussed between Senator Waqar Khan and Nasim Ahmad, as both agreed. It was also common ground that in consequence the Khan Family were asked to sign and did sign an authority to the Bank to make investments on that basis.
258. I agree with the Defendants that it is inherently likely that there was some discussion of the First Supplemental Agreement at the Lahore meeting. The difficulty is that there is no evidence of what was said in any such discussion. The only evidence of specific representations being made is in the context of and by reference to the physical Agreement and its execution page. Whilst I accept that it is likely that there was some discussion I am unable to find what was said during it. Further, if anything was said, given that the Agreement was not there, it would probably have been in terms of what it was likely to include, rather than what it actually did include. Since it was not with them and Nasim Ahmad had not seen it, he would not have been in a position to make positive statements as to its contents, as would have been obvious.
259. I am therefore bound to conclude that it has not been proved that representations were made at the Lahore meeting as the Defendants allege.
260. That leaves the Defendants' case based on what Nasim Ahmad told Senator Waqar Khan in the telephone call from South Africa. I accept that a statement to that effect was made. However, that falls well short of amounting to the specific representations alleged in paragraphs 32AA-32AC, 32B and 32C. Those relate to the First Supplemental Agreement and its execution. At the time of the conversation the final version of the First Supplemental Agreement had not been produced and there were only drafts in existence. Any statement made can only have been as to what it was believed or expected the final Agreement would contain. As a statement of expectation or belief it would have been true.
261. I accordingly reject the Defendants' misrepresentation case. Whilst it may be that as a result of a combination of the 17 August 2007 conversation with Markus Rau, the Undertaking and the telephone conversation with Nasim Ahmad from South Africa, Senator Waqar Khan did believe that the Supplemental Agreement reflected the terms of the Undertaking, that was not as a result of the representations alleged in paragraphs 32AA-AC, 32B and 32C, which I find were not made. The same must equally apply to the remaining Khan Family Defendants and the Corporate Defendants who followed Senator Waqar Khan's lead.
262. I should also record that I reject the fraud case alleged against Nasim Ahmad on an alternative basis by late amendment. The case was not squarely put at trial and was not the Defendants' primary case. I find that at all material times Nasim Ahmad's understanding of what the terms of the First Supplemental Agreement were likely to be was as reflected in the telephone conversation from South Africa.
263. As to the unilateral mistake case, a mistake as to terms may affect the contract if known to the other party – see Chitty para. 5-075. Nasim Ahmad did not have the First Supplemental Agreement with him in Lahore, did not know its terms and was not present or in discussion with Senator Waqar Khan when it was signed. If Senator Waqar Khan was mistaken as to its terms, that was not known to Nasim Ahmad or the Bank.
264. As is discussed in Chitty at para. 5-076, although there is no clear authority, there are two English cases which suggest that a mistake as to terms may affect the contract if it ought to have been known to the other party – Centrovincial Estates Plc v Merchant Investors Assurance Co Ltd [1983] Com.L.R.158; O.T.Africa Line Ltd. V Vickers Plc [1996] 1 Lloyd's Rep. 700. If so, that is also not made out on the facts given, in particular, Nasim Ahmad's lack of involvement in the signing and execution of the First Supplemental Agreement.
265. The Defendants argued for a wider principle of unilateral mistake. Even if the mistake as to terms was neither known nor ought to have been known to the other party, it may still affect the contract if it has been induced by the other party. Further, they argued that inducement embraced merely contributing to or being partially responsible for the mistake.
266. In support of this principle they relied on Treitel on the Law of Contract (13^th ed.) para. 8-033; Foskett: the Law and Practice of Compromise (7^th ed.) at 4-22-25; Baskcomb v Beckwith (1869) L.R. 8 Eq. 100; Wilding v Sanderson (1897) 2 Ch 534; Jennings v Jennings [1898] 1 Ch 378; Scriven Bros. & Co v Hindley & Co [1913] 3 KB 564, and Halpern v Halpern (Nos 1 and 2) [2008] QB 195.
267. If there is such a generally applicable principle I would expect it to be clearly set out and explained as such, which it is not in the various cases relied upon. I would also expect it to be well established given its potentially very wide application, but it is not. It is to be noted that Chitty at para. 5-078 treats the Wilding v Sanderson line of cases as examples of cases where the court may refuse specific performance. It is also pointed out that most of the cases are old and contrary to the "modern tendency to cut down defences of unilateral mistake". Scriven v Hindley is treated by Chitty at para. 5-073 as a case involving mutual misunderstanding resulting in a lack of correspondence between offer and acceptance.
268. I am therefore doubtful whether there is a general principle of mistake as argued for by the Defendants, although it is not necessary to decide the point. If there is, I am not satisfied on the facts that Nasim Ahmad's statements and/or conduct was sufficiently causative. Not only was he not present or involved at the time of execution, but the last relevant proven statement by him was during a telephone conversation about two weeks before and at a time when there was no finalised First Supplemental Agreement. The Agreement itself was a short and relatively simple two page document, the contents of which would reasonably be expected to be read and understood. Even if it was not copied to Jenny Palmer, she was available to be consulted.
269. Finally, in relation to the Corporate Defendants, there is no evidence from those who executed the First Supplemental Agreement on their behalf of a positive belief as to the mistaken terms, and proof of a positive mistake is necessary – see Chitty para. 5-080.

Conclusion

270. The answer to Issue (1) is Yes and the answer to all other Issues is No.

(5) The Second Supplemental Agreement

271. The Issues under this head are:

(1) Is the Second Supplemental Agreement of no legal effect because of the lack of consideration provided by the Bank?

(2) Alternatively, is the Second Supplemental Agreement void ab initio by reason of a unilateral mistake of law?

Discussion

272. There was consideration. The Defendants gained the advantage of an immediate addition to the drawdown of £3,300,000 instead of waiting for the retention of £10,000,000 under the First Supplemental Agreement, which was a binding and effective agreement.
273. The basis of the Defendants' mistake case was the fact that the First Supplemental Agreement was void. Since I have found that it was not, this parasitic case must also fail.
274. In any event, setting aside the Second Supplemental Agreement would only have assisted the Defendants if they had succeeded in their case on the Facility Agreement and the First Supplemental Agreement.

Conclusion

275. The answer to the Issues is No.

(6) The Investment Products

276. By the end of the trial the Issues under this head were limited to the following:

(1) Did the Bank fail properly to advise of the adverse consequences of the sale of the Second and Third Products prior to maturity and, if so, was it in breach of any duty as a result?

(2) If so, absent that breach of duty would the Second and Third Products have run their full term?

(3) Are the Khan Family contractually estopped from contending (whether for their claims at common law or for breaches of statutory duty) that they received or relied upon any representations or any investment advice from the Bank or Deutsche Bank AG when they acquired the Investment Products?

(4) Was there an agreement collateral to the Facility Agreement whereby the Bank warranted that, once the Facility agreement had been entered into, it would acquire such products which could carry a return of 10-12% per annum for five years?

(5) If so, was the Bank in breach of this agreement?

Discussion

277. Senator Ammar Khan's evidence was that he was not aware that the early liquidation of the Second and Third Products would result in a capital loss and that he was effectively forced to sell these Investment Products by the Bank or they would have repossessed the properties.
278. It was the Bank's case that something had to be done to cure the shortfall, that they would have preferred cash to be provided, that it was the Defendants' own proposal to use the sale of the Products to cure the shortfall and that they were aware of and were told that this would involve a loss.
279. I accept the Bank's case and evidence.
280. The Defendants were or ought to have been aware that sale prior to maturity might involve a loss as this is what had occurred on the sale of the Fourth Product in September 2008.
281. Further, it was the unchallenged evidence of Nasim Ahmad that he told Senator Ammar Khan both at the time that the letter of 29 December 2008 was sent and after the meeting of 7 January 2009 that if the Second and Third Products were sold then there would be a loss.
282. It was also the evidence of Markus Rau, which I accept, that he told Senator Ammar Khan at the meeting of 7 January 2009 that the Products were trading at below par - i.e. at a loss.
283. This was reflected in the instruction to sell letter of 13 January 2009 signed by Senator Ammar Khan which referred to the indicative market prices as being approximately 94.76% and 95.18%.
284. In the light of these findings the Bank does not need to rely on any contractual estoppel. In any event the alleged estoppel was addressed to representations and advice given when the Investment Products were acquired (which allegation was abandoned), not advice in relation to sale.
285. It was not clear that the allegation of collateral contract was being pursued by the end of the trial. In the light of Senator Waqar Khan's evidence that the alleged representation involved no commitment this case must be rejected. In any event, I have found that the representation upon which the allegation was based was not made.

Conclusion

286. The answer to Issue (1) and (4) is No. Issues (2) (3) and (5) accordingly do not arise.

(7) Interest Default

287. The Issues under this head are:

(1) Does an Event of Default under clauses 13(a) and 13(b)(i) of the Facility Agreement give rise to a right by the Claimant to claim interest at the rate and under the regime permitted in clause 9(d) of the Facility Agreement and, if so, what is the construction of clause 9(d)? (see para 73 RRADCC)

Discussion

288. The relevant clauses provide as follows:

"9. Payments

(d) In the event that a Borrower fails to pay any amount (whether or principal interest or otherwise) hereunder on the due date therefore, interest shall accrue from day to day upon the amount unpaid from the due date until the date of actual payment (as well after as before any judgment) at such per annum rate or rates as the Bank may from time to time certify to be equal to 3% (three per centum) above the Bank's cost of funding the amount unpaid in such manner and for such period or periods as the Bank shall consider appropriate….

….

13. Events of Default

(a) The occurrence of any one or more of the events listed in sub-clause (b) hereof shall constitute an Event of Default with the effect that the Bank's obligation to advance funds and to continue to make funds available to the Borrowers hereunder shall immediately terminate and the entire outstanding principal amount of the Facility together with all accrued interest thereon and all other sums payable hereunder shall become immediately due and payable without further notice oaf any kind and the Bank shall have the immediate right to enforce any of its rights under the Agreement and the Security Documents;

(b) A borrower shall fail to pay on the due date therefore any amount payable by the Borrower hereunder;…"

289. The first question which arises is whether the default rate of interest is payable only, as the Defendants contend, on the sums unpaid or, as the Bank contends, on the total principal and interest outstanding.
290. The Claimants' case is that on an event of default the entire facility and all interest become immediately due and payable under clause 13(a) without further notice and that the "amount unpaid" in clause 9(d) accordingly becomes the entire outstanding principal amount together with all accrued interest.
291. The Defendants submit that the natural construction of clause 9(d) is that "the amount unpaid" is referring back to the "amount" which the Borrower "fails to pay" in line 1. Interest is payable on that amount only. Equally, the subsequent phrase "until the date of actual payment" is referring to the date of the belated payment that was not made on the due date. They point out that the Bank's construction means that if the Borrower is more than 7 business days late with one interest payment then the whole facility plus outstanding interest becomes due with default interest payable thereon and moreover it remains so due at all times thereafter because there is no mechanism by which interest ends under clause 9(d).
292. The difficulty with the Defendants' construction is that clause 13(a) does provide in terms for the entire facility plus outstanding interest to become due without further notice on the occurrence of an event of default. If so, then if that sum is not paid it becomes an amount unpaid under the facility. These are general words and there is no warrant for reading them as applying to some sums owing under the facility but not others. Further, one would expect that the Bank would be entitled to claim default interest on termination of the facility following an event of default, but the Defendants' construction provides no apparent means for it to do so.
293. Whilst, as the Defendants point out, the operation of clause 13(a) may have extreme consequences the answer lies, as indeed happened, with the Bank's ability to waive its interest entitlement without waiving its rights generally (see clause 23). Thus in practice the Bank only levied default interest on the total amount outstanding during the currency of the alleged events of default.
294. The second question is whether "3% (three per centum) above the Bank's cost of funding" refers, as the Defendants contend, to 3% above the actual cost of funding the shortfall in question or, as the Bank contends, an interest rate of 3% above the interest rate paid as its cost of funding.
295. To illustrate the difference, if one assumes that the Borrower has failed to make a due payment of £1,000,000, and that the Bank's cost of funding that shortfall is 1.0%, i.e. £10,000 per annum then, if the default rate of interest had been specified and agreed as three percentage points above that cost of funding, the Borrower would have to pay 4.0% on the shortfall i.e. £40,000 per annum; but, if the default rate is set (as the Defendants contend) at only 3 per centum above the £10,000 per annum cost of funding, the Borrower would have to pay just £10,300 per annum.
296. In my judgment the purpose of clause 9(d) is to provide a default rate of interest rather than a specified sum payable on default. The reference to a "per annum rate or rates" is naturally to be read as referring to an interest rate. Clause 9(d)(i) also refers back to a "rate". This is further supported by clause 5(b) which defines the cost of funding as a "percentage rate per annum" and one would expect the cost of funding referred to in clause 9(d) to be the same. As is reflected by clause 5(b), "cost of funding" is a well known base rate for interest rate calculations and it reflects the lender's actual interest rate costs. By referring to a % above that cost clause 9(d) is referring to a percentage rate above that baseline.
297. Further, as the Bank points out, the consequence of the Defendants' construction is that the default rate of interest is actually less than the contractual rate of interest, an unlikely if not unprecedented result.

Conclusion

298. The answer to the Issues is that default rate interest is payable at 3% over the interest rate paid by the Bank as its cost of funding not only on the amount which has not been paid on the due date but also, to the extent claimed, on the whole principal and interest outstanding.

(8) Security Shortfall

299. The Issues under this head are:

November 2008 Valuations

(1) Was there a security shortfall of £4,337,500 on 9 January 2009 pursuant to clause 15 of the Facility Agreement which has not been cured? In particular:

a. Can the Claimant rely upon the valuations of November 2008?

i. Were the valuations compliant with clause 15(a)?

ii. In any event, can the Claimant rely on the valuations under clause 15(b)?

(2) If it is found that there was no security shortfall on 9 January 2009:

a. Was the Claimant in breach of mandate in failing to permit drawings by the Khan Family from the Family Account?

b. Did the Claimant cause the Khan Family to sell the Second and Third Investment Products on 13 January 2009 by negligent misstatement or misrepresentations for a substantial undervalue as set out in paragraphs 86 to 87 of the RRADCC?

December 2010 Valuations

(3) Was the Claimant entitled to rely upon valuations it obtained in December 2010 from Savills and Strutt & Parker in support of an allegation of shortfall:

(4) Were the valuations compliant with clause 15(a), in any event can the Claimant rely on clause 15 (b)?

300. These issues depend on the proper construction of clause 15 which provides that:

"15. Valuation

(a) The bank may at any time require a professional valuation of the open market value of the Properties to be carried out at the cost of the Borrowers and addressed to the Bank by an independent chartered surveyor approved by the Bank.

(b) Each Borrower shall ensure that all times the amount of the Net Loan together with any monies advanced to the Borrowers by the Bank shall not exceed the sum (the "Relevant Sum") which shall be equal to 75% of the aggregate open market value of the Properties as determined by the then latest valuation prepared pursuant to Clause 15(a) or by any other valuation which may have been obtained by the Bank at the cost of the Borrowers and the lending value of the Collateral s applied by the Bank and adjusted by the Bank for any Cross Currency Margin."

301. The Defendants contend that under clause 15(a) a valuer must have been appointed by the Borrower for the Bank to rely on the valuation. It was for the Borrower to select and appoint the valuer, having been required to do so by the Bank. They submit that this must follow from the inclusion of the words "addressed to the Bank" and "approved by the Bank". If the Bank was entitled to instruct its own valuer then the clause would not require the words "addressed to the Bank" because the report would necessarily be addressed to the Bank. Further, the clause would not require the words "approved by the Bank" because any valuer whom the Bank wish to instruct would again necessarily have their approval.
302. Under clause 15(a) the Bank may "require" a valuation to be carried out. I accept that under clause 15(a) the Bank may do so by requiring the Borrower to carry out and pay for a valuation. However, this does not mean that that is the only means by which a valuation may be carried out. The Bank may equally "require" a valuation to be carried out by giving instructions itself to a valuer.
303. The focus of the clause is the approval of the Bank not of the Borrower. It is the Bank whose interests the report is primarily designed to protect. If the approval or involvement of the Borrower was required it would put the person who might be most reluctant for the process to work in the best position to stymie it.
304. Even if that be wrong, I hold that the Bank would in any event be able to rely on the "any other valuation" provision in clause 15(b). I reject the Defendants' submission that these words must be treated as being of no effect because they are repugnant to clause 15(a). If clause 15(a) does have the meaning contended for by the Defendants then it provides one means of the Bank obtaining a valuation, but not the only means.
305. The outcome of Issue (2) depends on the construction issue. If, as I find to be the case, the Bank's case is upheld then these issues fall away.

Conclusion

306. The answer to Issues (1) (3) and (4) is Yes. Issue (2) accordingly does not arise.

Counterclaims Generally

307. The Issues under this head are:

(1) Can any counterclaims be defences:

a. Is set off of any of the counterclaims excluded by Clause 9(c)(ii) of the Facility Agreement?

b. Is Octavia's counterclaim a defence to any claim against a Corporate Defendant?

c. Are any of the counterclaims a defence to the claims for possession?

Discussion

308. As to (a), clause 9(c)(ii) is in general and unqualified terms. The Defendants submitted that it is not a general "no set-off" clause and that it is specifically targeted at the occasions on which a payment from a Borrower falls due and the Borrower fails to make the required payment and justifies it by saying that he has a set-off or counterclaim. He cannot do so by claiming a set-off. I reject the submission that the clause is somehow limited to assertions of rights of set off at the time of a required payment. It applies to "all payments" to be made. As long as a payment is due and remains owing no set off may be relied upon to resist payment.
309. The Defendants further submitted that the no set off provision applies only to "all payments to be made by each Borrower". It does not necessarily apply to payments to make up a security shortfall under clause 15(c) as in that situation, it is open to the Borrower not to pay himself but to "procure the repayment" by a third party of a proportion of the Loan. I reject this submission also. Once the Borrower becomes obliged to procure repayment that becomes a payment to be made by him under the agreement. Clause 9(c)(i) covers "all" such payments. Whether that obligation is carried out on his behalf by a third party is nothing to the point. It is the Borrower's obligation regardless of how it is discharged.
310. As to (b), on my findings Octavia has no counterclaim but in any event it is unclear on what legal basis its claim could ever provide a defence to a claim against the Corporate Defendants. Set off is a right of the contracting counterparty, not third parties.
311. As to (c), I accept the Bank's submission that the authorities clearly establish that an unliquidated damages claim giving rise to a right of equitable set off is no defence to a claim for possession – see National Westminster Bank Plc v Skelton (Note) [1983] 1 WLR 72; Ashley Guarantee Plc v Zacaria [1993] 1 WLR 62.

Conclusion

312. The answer to Issue (1) is No, the answer to Issue (1) a. is Yes and the answer to Issues (1) b. and (1) c. is No.

Guarantee

313. The Issue under this head is:

(1) Does Senator Gulzar Khan remain liable for the debts of all the Defendants on the terms of his personal guarantee or has it been discharged?

Discussion

314. The First Defendant, Senator Gulzar Khan, accepts that he entered into a Guarantee of the Borrowers' liabilities under the Facility Agreement. His case is that the Guarantee was discharged due to the breaches of the Facility Agreement for the following alternative reasons:

(1) Set-off (which is dependent on the principal Borrowers' entitlement to set-off);

(2) By reason of the Bank's breaches of the underlying contract;

(3) Material alteration of the terms of the principal contract without the consent of the surety - If the court accepts the Defendants' case that there were pre-Facility misrepresentations and/or the First and Second Supplemental Agreements were unenforceable this amounts to a material alteration sufficient to discharge the guarantee: see para. 9-022 onwards in Andrews & Millett, Law of Guarantees, 6^th Edition.

315. As to (1), as already held, there is no entitlement to set-off.
316. As to (2), the claims of breach of the Facility Agreement have been rejected. In any event any breach would have to go sufficiently to the root of the contract so as to discharge the guarantor – see Chitty para. 44-114.
317. As to (3), the Defendants' case on pre-Facility misrepresentations and that the First and Second Supplemental Agreements were unenforceable has been rejected.

Conclusion

318. The answer to the first part of this Issue is Yes. Senator Gulzar Khan remains liable for the debts of all the Defendants on the terms of his personal guarantee which has not been discharged.

Statutory Relief

319. The Issues under this head are:

Consumer Credit Act 1974 ("CCA")

(1) Is the Khan Family entitled to any relief pursuant to sections 140A-C of the CCA:

a. Whether the Facility Agreement is a "credit agreement" within the meaning of s.140C(1) CCA; if so

b. Whether the following are "related agreements" within the meaning of s.140C(4):

i. The securities listed at clause 11 of the Facility Agreement;

ii. The Family Account;

iii. The five Investment Products.

c. Whether the relationship between the Bank and the Khan Family is unfair within s.140A by reason of:

i. The allegedly onerous terms of the Facility Agreement, particularly clauses 9(c)(ii), 9(d), 12, and 15; and/or

ii. The way in which the Bank exercised and enforced its rights; and/or

iii. The pre-contract and other post-contract conduct of the Bank?

d. If so, whether the Khan Family are entitled to an order pursuant to s.140B for:

i. A reduction or discharge of any sum payable by the Khan Family by virtue of the Facility Agreement and the related agreements; and/or

ii. Repayment of any sum paid by the Khan Family by virtue of the Facility Agreement and the related agreements.

Unfair Contract Terms Act 1977 ("UCTA")

(2) Whether all or any of the clauses of 9(c)(ii), 9(d), 12, and 15 of the Facility Agreement are not binding on the Khan Family and the Corporate Defendants by virtue of s.3 of UCTA; namely:

a. Did UCTA apply?

b. Was UCTA dis-applied by s.27?

c. Where the Khan Family dealing as "consumers" for the purposes under s.12, or, were they dealing on the Bank's written standard terms of business?

d. If so, was the Bank, by reference to the above clauses, seeking to render contractual performance substantially different from that which was reasonably expected of it within s.3?

e. If so, are those clauses nevertheless reasonable within s.11?

Unfair Terms in Consumer Contracts Regulations 1999 ("UTCCR")

(3) Whether all or any of clauses 9(c)(ii), 9(d), 12, and 15 of the Facility Agreement are not binding on the Khan Family by virtue of Regulation 8(1) UTCCR, and if so, the consequence for the remainder of the Facility Agreement pursuant to Regulation 8(2); namely:

a. Were the Khan Family dealing as "consumers" for the purposes of Reg 4?

b. Are the above clauses unfair within Regulation 5, that is, does they cause a significant imbalance in the parties' rights and obligations to the detriment of the Khan Family contrary to the requirement of good faith?

Discussion

320. Before considering the issues under each statutory regime relied upon I propose (1) to make findings as to the course and nature of the parties' contract negotiations and (2) to address the Defendants' general case on the unreasonableness/unfairness of the four clauses sought to be impugned.
321. The clauses were part of a Facility Agreement which was negotiated over a period of time between the Bank and the Defendants, assisted by their lawyers. The Facility Agreement terms were set out in and developed during the various indicative Term Sheets provided in July 2007. Following the provision of the final Term Sheet negotiations continued on a lawyer to lawyer basis. During the negotiations changes were secured by the Defendants to both the commercial and the contractual terms and they were able to exercise considerable bargaining power. In particular:

(1) From the outset of discussions Senator Waqar Khan informed the Bank that competitor banks were keen to take on the transaction and he used the threat of taking the Khan Family's business elsewhere to put commercial pressure on the Bank both to rush the transaction through and to provide more favourable terms.

(2) Comments and amendments to the draft terms were provided not only by Senator Waqar Khan but from the Khan Family's property lawyer, Jenny Palmer, and changes were made to the terms in consequence.

(3) As Senator Waqar Khan accepted in evidence, Jenny Palmer negotiated the terms of the Term Sheet on his behalf and on his instructions; kept him up to speed with what she was doing in the negotiations; copied him into the emails she sent to the Bank; discussed the terms of a Term Sheet with him, and sought his instructions as to which terms he wanted to comment on.

(4) Successive redrafts of Term Sheets were prepared, resulting in improved terms. Indeed they involved a departure from the Bank's own internal thresholds. Thus, although the Bank's New Product Approval Process sets a maximum LTV of 70%, due to pressure from Senator Waqar Khan, a rate of 75% was offered in the Second Draft Term Sheet .

(5) Under the Bank's normal lending procedures, loan agreements are only prepared and external counsel is only instructed once conditional credit approval has first been obtained. However, in this case, such was the concern to meet the clients' demands for urgency that Mr Kuster in fact departed from this arrangement and instructed work to be commenced on the legal documentation before conditional credit approval, at a time when the property appraisal was still underway.

(6) When it came time to draft the formal legal terms both Jenny Palmer and the Bank's lawyers were involved.

(7) Throughout this process the Defendants had the opportunity to consider, comment upon and (if they wished) request amendments to any of the terms proposed by the Bank. Each of the terms now sought to be impugned in fact appeared within the original Term Sheet which was first provided to Senator Waqar Khan by Markus Rau "for discussion" on 25 June 2007 and subsequently formed the starting point for the negotiation of the terms. However, at no stage in this process did either the Khan Family or those acting for them in any way object to those terms.

322. The clauses sought to be impugned are:

(1) Clause 9(c)(ii) which purports to prohibit a set-off;

(2) Clause 9(d) which provides for an allegedly penal rate of interest on default;

(3) Clause 12 which refers to the conditions precedent at appendix 3;

(4) Clause 15 which deals with valuations of the Properties and maintaining a certain LTV ratio.

Clause 9(c)(ii)

323. Clause 9(c)(ii) is a conventional "no set-off" clause which provides, in essence, that the debtor must pay the sums due, without set-off, counterclaim or other deductions. It is striking that at no stage between the commencement of proceedings on 31 March 2011 and the first reading day of the trial on 14 January 2013, was it ever suggested that this provision was unfair.
324. The Defendants contended that this clause is so all embracing that it would exclude a defence based on fraud and that, in consequence, it must be seen as unfair. They rely in this regard on Stewart Gill v Horatio Myer [1992] 1 QB 600 at 606-609.
325. However, the parties at the time of contracting would have contemplated as remote the possibility that either would act fraudulently towards the other. Further, it is not intrinsically unfair or unreasonable to require a borrower to pay sums due without any deduction for what would, at that stage, be a mere claim, however arguable, even if for fraud or intentional wrongdoing.
326. The Stewart Gill case was considered and distinguished by Mance J in Skipskredittforeningen v Emperor Navigation [1997] C.L.C. 1151. The Stewart Gill case concerned a contract to supply and install a mechanical system at the defendants' business premises. The contract of sale was subject to the plaintiffs' general conditions of sale which included a stipulation that the defendants could not withhold payment under the contract by reason of "any payment, credit, set-off . . . or for any other reason whatsoever." The Emperor Navigation case concerned a loan agreement, as does this case. Mance J observed in comments equally applicable to this case (at p1164):

"The clause in Stewart Gill was also agreed in a different commercial context, where the attempted prohibition of set-off in respect of over-payments and admitted credits under other contracts could well have had a significance which in the present context would not exist".

327. In a loan agreement context Mance J made the following observations which are relevant in this case:

"[the clause was] a familiar type of provision, without exceptional characteristics and eminently understandable in the context of a loan facility…. It avoids arguments about whether there has been default under the loan, which contains detailed provisions in relation to default, interest and other matters which would be difficult to operate if a borrower could contend that he had met his financial obligations by setting off other claims—whether for alleged debts or, all the more so, for damages." (p.1164)

"Looking at the present clause in the context of the circumstances likely to have been in the parties' minds when they entered the loan contract, the possibility of fraud by the lender is unlikely to have played any significant part in either party's thinking. [...] The practical reality therefore is that the parties cannot be taken to have envisaged it as likely that there would be call to invoke cl. 12.01 in relation to fraud, save perhaps in the most rare; situations, and would have envisaged that in any such situations fraud would be strongly in issue. In these circumstances, I see no reason why businessmen should not agree to a clause preventing set-off in terms wide enough to cover fraud on the basis that, in the event that allegations of fraud by the lender were ever made, they would be highly contentious and would require to be sorted out separately in a manner which did not impinge on the performance of the loan in the meantime." (p.1165)

328. The Emperor Navigation case has been followed in subsequent cases which upheld no set-off clauses challenged under UCTA – see WRM Group Ltd v Wood & Ors [1998] C.L.C. 189 (CA); FG Wilson (Engineering) Ltd v John Holt & Co. [2012] 2 Lloyd's Rep 479.
329. Bearing in mind the guidance provided by the Emperor Navigation case I find that:

(1) The clause fulfils a legitimate commercial function by entitling the creditor to prompt payment of monies due and payable so that cross-claims (which may or may not have merit) cannot be used to withhold or delay payment. This is a perfectly sensible arrangement intended to protect the lender's liquidity/solvency by permitting it to know with confidence that sums due will be paid on the appointed day(s). It is understandable that in a loan contract, the lender, who is the party advancing the money and taking the risk, should wish to be protected in this way.

(2) The clause contains important limitations. In particular:

(a) The clause does not prevent the debtor from contesting whether the sums claimed are actually due. It only comes into play if the sums are either admitted or, if contested, have been proven to be due; and

(b) The clause does not dispossess the debtor of a cross-claim, it merely contemplates that they will fall to be resolved by subsequent negotiation or determination, rather than being used as a ground to withhold payment.

(3) Clauses of this sort are common. Just considering the disclosure in the present case it is to be noted that very similar provisions can be found in the other loan agreements with Barclays and Coutts.

Clause 9(d)

330. Clause 9(d) is a standard provision for default interest, which provides that if a payment is not made on the due date interest will accrue at 3% above the Bank's cost of funding the unpaid amount.
331. The function of default interest is not in terrorem but to compensate a lender for the costs associated with managing and monitoring default and the additional credit risk posed by a defaulting debtor. Indeed, the clause itself records an acknowledgment by the Defendants that "such rate is intended to compensate the Bank for any cost which may be incurred by reason of any failure by such Borrower to pay monies when due hereunder."
332. Further, provisions for default interest of this sort are common. Just considering disclosure in this case similar provisions are contained in the loan agreements with Barclays and Coutts.
333. I also accept the Bank's submission that the rate itself is far from exorbitant; it is in line with the rates charged in the competitor documents and cannot be said to be intrinsically unfair.

Clause 12

334. The suggestion that this clause might be unfair or unreasonable was not made until the Defendants' written Opening.
335. The Defendants accept that the clause "appears to be reasonable on its face" but submit that if the Bank's interpretation of the width of its discretion under clause 12 is accepted, it would be entitled not to perform at all any of its contractual obligations to provide a facility no matter how satisfactory the valuation report was in reality, and that the arbitrariness of its discretion confirms the unreasonableness of the term.
336. I agree with the Bank, however, that the Defendants' argument proceeds on a false premise. It is not part of the Bank's case that it would be able to exercise its powers under clause 12 in an arbitrary fashion. The purpose of clause 12, is to enable the Bank to satisfy itself concerning the conditions precedent, including the security. However, the Bank accepts that, as a matter of necessary implication, the exercise of this contractual power would be subject to honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity or irrationality, as set out in the Socimer case.
337. In those circumstances, it is difficult to see what objection there could be to the Bank having a right to satisfy itself that the conditions precedent have been satisfied. The clause serves an obvious and legitimate purpose. Under a loan agreement it is the lender, alone, that takes a credit risk; if the loan is secured the purpose of that security is to mitigate that risk. It is appropriate that the lender, being the party that has negotiated for the security and for whose sole benefit it is being provided, should be permitted to satisfy itself as to the form and substance of the security documentation.
338. Further, such clauses are common as borne out by the disclosure in this case. Thus both the Coutts and Barclays loan agreements contained comparable provisions.

Clause 15

339. Clause 15 does no more than permit the Bank to procure a professional valuation in order to confirm that the amount of the indebtedness does not exceed 75% of the properties' value and, if it does so, to require the reduction of the lending to conform to this threshold. There is nothing novel or oppressive about this. The lending is predicated upon a specified level of security and the clause is a legitimate and proportionate means for the Bank to supervise that security, confirm its value and ensure that its position is protected in the event that the security depreciates. The fact that clauses of this type are common is illustrated by the disclosure in this case and the clauses in the facility agreement with BPCI, which provide that the loan must not, at any time, exceed 75% of the most recent Market Value of the Property, that the Market Value is to be the value determined by the Valuer and that the Lender can at any time require a valuation.

Consumer Credit Act 1974 ("CCA")

Discussion

340. The core allegation made by the Khan Family is that their relationship between themselves and the Bank was unfair within the meaning of Section 140 of the CCA.
341. Sections 140A-D CCA (headed "Unfair relationships") were inserted into the CCA by the Consumer Credit Act 2006 in substitution for the regime that previously governed "extortionate credit bargains" (sections 137 to 140, now repealed). Unlike much of the CCA the Unfair relationships regime is not confined to agreements made with "consumers", nor is it limited to lending up to a specified monetary threshold. It is, however, restricted to credit agreements entered into with natural persons; this reservation is accomplished by section 140C which defines a "Credit Agreement" as meaning:

"any agreement between an individual (the 'debtor') and any other person (the 'creditor') by which the creditor provides the debtor with credit of any amount".

342. The core features of the Unfair relationships provisions are that section 140A provides that a Court may make an order under section 140B in connection with a Credit Agreement if it determines that the relationship between the creditor and the debtor arising out of the Credit Agreement (or the Credit Agreement taken together with any "related agreement") is "unfair" to the debtor because of one or more of the following:

(1) any of the terms of the agreement or of any related agreement;

(2) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement; or

(3) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).

343. The CCA does not prescribe the factors which the Court can or should take into account in making this determination, instead it simply directs the Court to "have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor)" (s.140A(2) CCA). Once a debtor alleges that the relationship is unfair, the burden lies on the creditor to prove the contrary: section 140B(9).
344. The consequences of a finding of unfairness are potentially draconian. The orders under section 140B may include discharging the debtor's indebtedness in whole or in part and/or requiring the creditor to repay some or all of the sums paid by the debtor under the Credit Agreement or any related agreement.
345. In considering the test of unfairness guidance is provided by the following authorities in particular: Maple Leaf Macro Volatility Master Fund & Aor v Rouvroy & Or [2009] EWHC 257 (Comm) ("Maple Leaf"); Paragon Mortgages Ltd v McEwan-Peters [2011] EWHC 2491 (Comm) ("Paragon Mortgages"); and Rahman & Ors v HSBC Bank Plc & Ors [2012] EWHC 11 (Ch) ("Rahman").
346. These authorities suggest that the matters likely to be of relevance include the following:

(1) In relation to the fairness of the terms themselves:

a. whether the term is commonplace and/or in the nature of the product in question (Rahman [277]);

b. whether there are sound commercial reasons for the term (Rahman [278]);

c. whether it represents a legitimate and proportionate attempt by the creditor to protect its position (Maple Leaf [288]);

d. to the extent that a term is solely for the benefit of the lender, whether it exists to protect him from a risk which the debtor does not face (Maple Leaf [289]);

e. the scale of the lending and whether it was commercial or quasi-commercial in nature (Rahman [275]) (a court is likely to be slower to find unfairness in high value lending arrangements between commercial parties than in credit agreements affecting consumers); and

f. the strength (or otherwise) of the debtors bargaining position (Rahman [275]);

g. whether the terms have been individually negotiated or are pro forma terms and, if so, whether they have been presented on a "take it or leave it" basis (Rahman [275]);

(2) In relation to the creditor's conduct before and at the time of formation:

a. whether the creditor applied any pressure on the borrowers to execute the agreement (if an agreement has been entered into with a sense of urgency it will be relevant to consider to what extent responsibility for this lay with the debtor, as distinct from the creditor) (Maple Leaf [274]);

b. whether the creditor understood and had reasonable grounds to believe that the borrower had experience of the relevant arrangements and had available to him the advice of solicitors (Maple Leaf [274]);

c. whether the creditor had any reason to think that the debtor had not read or understood the terms (Maple Leaf [274]); and

d. whether the debtor demurred at the time of formation over the terms he now suggests are unfair (this point has particular force if he did complain over other terms) (Maple Leaf [274]; Rahman [276]).

(3) In relation to the creditor's conduct following formation and leading up to enforcement:

a. whether any demand was prompted by an "improper motive" or was the consequence of an "arbitrary decision" (Paragon Mortgages [54(b)]);

b. whether the creditor has shown patience and, before leaping to enforcement, has taken steps in the hope of reaching some form of accommodation (for example by attending meetings, engaging in correspondence and/or inviting proposals) (Rahman [280-281]); and

c. whether the debtor has resisted attempts at accommodation by raising unfounded claims against the creditor (Rahman [280-281]).

347. I find as follows in relation to these considerations:

(1) In relation to the fairness of the terms themselves:

a. whether the term is commonplace and/or in the nature of the product in question – all the terms are commonplace in loan agreements;

b. whether there are sound commercial reasons for the term– for reasons already given there is a reasonable commercial rationale for all the terms

c. whether it represents a legitimate and proportionate attempt by the creditor to protect its position – the terms reflect reasonable attempts by the Bank to protect its position.

d. to the extent that a term is solely for the benefit of the lender, whether it exists to protect him from a risk which the debtor does not properly face – all the terms relate to risks which the Bank alone faced.

e. the scale of the lending and whether it was commercial or quasi-commercial in nature – the lending was quasi-commercial. It was for a very substantial sum secured against a portfolio of valuable properties held at least in part for investment purposes by a series of offshore special purpose vehicles.

f. the strength (or otherwise) of the debtor's bargaining position - the lending arrangements were negotiated with the benefit of legal advice and changes made at the request of the debtor and its lawyers;

g. whether the terms have been individually negotiated or are pro forma terms – although the Bank put forward the terms they were thereafter negotiated over a period of time; they were not presented on a "take it or leave it" basis.

(2) In relation to the creditor's conduct before and at the time of formation:

a. whether the creditor applied any pressure on the borrower to execute the agreement – no pressure was applied to the borrower and any urgency was created by the borrower rather than the lender.

b. whether the creditor understood (and had reasonable grounds to believe) that the borrower had experience of the relevant arrangements and had available to him the advice of solicitors – the Bank could reasonably so understand given in particular the Defendants' prior borrowing arrangements, the Khan Family's business experience and the involvement of their lawyer, Jenny Palmer, and of alternative banks.

c. whether the creditor had any reason to think that the debtor had not read or understood the terms – the Bank had no reason so to think, especially given the protracted negotiations and the involvement of lawyers.

d. whether the debtor demurred at the time of formation over the terms he now suggests are unfair – they did so demur.

(3) In relation to the creditor's conduct following formation and leading up to enforcement:

a. whether any demand was prompted by an "improper motive" or was the consequence of an "arbitrary decision"- it was not.

b. whether the creditor has shown patience and, before leaping to enforcement, has taken steps in the hope of reaching some form of accommodation (for example by attending meetings, engaging in correspondence and/or inviting proposals) – the Bank showed patience and forbearance in enforcement.

c. whether the debtor has resisted attempts at accommodation by raising unfounded claims against the creditor – a large number of unfounded and subsequently abandoned claims have been raised.

348. A review of these factors point strongly in favour of the conclusion that the relationship was not unfair.
349. The principal points made by the Defendants were:

(1) If the court accepts the Bank's case that they were able to rely on clause 12 to claim that condition precedent (2) had not been satisfied when in reality it clearly had been, then, the clause is unfair.

(2) Sub-section 140A(1)(a) is engaged because of the unfairness of, inter alia, clause 12, at least in the way that it has been interpreted and applied by the Bank. It meant that in effect the Facility Agreement as entered into on 12 August 2007, was not a bilateral contract at all, contrary to appearances. That was because whereas the Khan Family and Corporate Defendants as at 13 August 2007 were on the hook at the very least for costs of up to £250,000, the Bank was not obliged to lend them a penny or to provide them with any other service, should it decide that it did not wish to do so.

(3) S 140A(1)(b) is engaged by the way in which the Bank has enforced its rights under clause 12. Retrospectively and because of a change of mind, the Bank deemed as unsatisfactory a perfectly proper and approved open market valuation, carried out in accordance with the Bank's instructions and standard professional criteria by a firm that the Bank appointed. As a result it claimed to have escaped liability to provide £10,000,000 of funding to the Borrowers.

(4) The Bank's failure to provide £10,000,000 of the promised facility also engages s. 140A(1)(c).

(5) In the light of the above unfairness - which would, if the Defendants' counterclaim is upheld, impose on the Bank a liability in damages – clause 9(c)(ii), the no- set-off clause, is also unfair under sub-clause (a).

350. As to (1), clause 12 was not "in reality" satisfied. If it had been the Bank would have been unable to rely on clause 12. However, I have held that it was so entitled and that it acted in good faith and on objectively reasonable grounds.
351. As to (2), this assumes that the Bank had an unfettered right to refuse to lend if it chose to do so. This is incorrect. It was only entitled so to do if a clause 12 condition precedent was not satisfied. Further the exercise of their discretion under that clause was subject to the Socimer implied term.
352. As to (3), whilst it might have appeared that the Bank was changing its mind, in fact, as Senator Waqar Khan knew, the relevant decision making body, the CRM, had yet finally to make up its mind. That would only occur when it considered the final valuation report, which had yet to be issued at the time of the Facility Agreement. Further, it is striking how limited the Defendants' protests at the time were. Whilst they were upset at a further condition being insisted upon by the Bank, their main concern at the time appears to have been delay and obtaining the £47,000,000 needed for liquidity purposes as soon as possible. Leaving a further £10,000,0000 with the Bank does not appear to have been a cause of particular concern. At that stage funds for developing Dryades were not likely to be needed for some time.
353. As to (4), the points made above are repeated. Any promise of the facility was subject to fulfilment of the stated conditions precedent. The decision that a condition precedent had not been fulfilled not only complied with the Socimer implied term but was made on objectively reasonable grounds.
354. As to (5), since there is no counterclaim this point does not arise. In any event there is no unfairness in enforcing a no-set off provision in a loan agreement such as this, for reasons already stated.

Conclusion

355. For all these reasons I conclude that there was no unfairness in the relationship between the Bank and the Khan Family. The answer to Issue (1)(c) is No. In those circumstances it is not necessary to resolve the other Issues which potentially arise under the CCA.

Unfair Contract Terms Act 1977 ("UCTA")

356. There is a threshold question as to whether UCTA applies.
357. Section 27 UCTA provides as follows:

"Where the law applicable to a contract is the law of any part of the United Kingdom only by choice of the parties (and apart from that choice would be the law of some country outside the United Kingdom) sections 2 to 7 and 16 to 21 of this Act do not operate as part of the law applicable to the contract".

358. The Facility Agreement contains a choice of law clause for English law: clause 26. But for this agreement the presumptively applicable law would have been Swiss, not English law because:

(1) The Facility Agreement was concluded on 12 August 2007 and, as a consequence, the Rome Convention applies (as implemented in the UK by the Contracts (Applicable Law) Act 1990);

(2) By Article 4(1) of the Rome Convention to the extent that a choice of law has not been made, a contract is to be governed by the law of the country with which it is most closely connected;

(3) By Article 4(2):

"Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration. However, if the contract is entered into in the course of that party's trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated."

(4) The Bank, as creditor, was the characteristic performer under the Facility Agreement. The Bank's central administration and place of business is Geneva and the applicable law is presumptively Swiss law.

359. Article 4(5) permits the presumption in Article 4(2) to be displaced if it appears from the circumstances as a whole that the contract is more closely associated with another country.
360. The presumption exists to satisfy the general requirement of foreseeability and legal certainty – see Intercontainer Interfrigo SC (ICF) v Balkenende Oosthuizen BV Case C-133/08 [2009] ECR I-9687 at [62]. For it to be displaced it will generally be necessary to show circumstances which clearly demonstrate existence of connecting factors justifying the disregarding of the presumption – see Intercontainer Interfrigo at [64]; Samcrete Egypt Engineers and Contractors SAE v Land Rover Exports Ltd [2002] EWCA Civ 2019 at [41] and [45].
361. In the present case the Bank submitted that this cannot be demonstrated. It relied in particular on the following considerations:

(1) The lender is a Swiss company, whose central operations and sole place of business is Switzerland;

(2) The non-corporate borrowers were all citizens and residents of Pakistan;

(3) Of the seven corporate borrowers five were companies incorporated in the Commonwealth of the Bahamas; two in the British Virgin Islands; and

(4) The security was, in part, immovable property situated in England, but also included: a guarantee granted by a Pakistani national (Gulzar Khan) to a Swiss bank; and a pledge over the assets, securities and other investments held by those borrowers with the Bank in Switzerland: clause 11.

362. The Defendants contended that the presumption is rebutted and that the country most closely connected with the contract is the UK, not Switzerland for the following reasons:

(1) The five Khan Family members entered into the agreement i.e. accepted the Bank's offer and confirmed their acceptance by signature in England on 12 August 2007.

(2) All five Khan Family members have and had (in August 2007) residences in England as recorded by the Facility Agreement.

(3) The 12^th August 2007 contractual offer of the Facility, the acceptance of which by the Borrowers formed the Agreement, was issued by the Bank but no place of residence or address of the Bank is stated on the offer document.

(4) The key representative and negotiator of the Bank in dealing with the Khan Family, Nasim Ahmad, had and still has a residence in England, as he confirmed under cross-examination, and was in England at the time.

(5) The primary security for the loan is provided by seven different real estate holdings, valued together at more than the size of the loan – and all these real estate holdings are in London. The importance of these securities is evidenced by their prominence in the Appendix 3 list of Conditions Precedent.

(6) The currency of the loan is pounds sterling.

(7) The relevant cost of funding, which fixes the Borrowers' interest rate, is determined in London.

(8) The language of the contract is English and the pre-contractual negotiations, by email or orally, were conducted in English.

(9) The chosen law is English and the jurisdiction for resolving disputes is England.

(10) The time at which the Borrowers have to make the stipulated payments is 11 am UK time on the due date.

(11) All the solicitors and legal advisers were, and were envisaged by the terms of the contract (see reference to VAT) as being, in England.

363. The fact that the offer may have been accepted by the Khan Family in England is largely happenstance. They are resident in Pakistan, which is where, for example, the First Supplemental Agreement was signed. In any event the Corporate Defendants did not accept the offer in England.
364. The fact that the Khan Family have residences in England does not alter the fact that they are resident in Pakistan.
365. The fact that Nasim Ahmad has a residence in England is little to the point. He is resident in Dubai. The other bank representatives who dealt with the Defendants were all based in Switzerland.
366. The fact that the contract is in English and negotiations were in English is neutral. English is the most commonly used international language.
367. The English jurisdiction clause would normally be a powerful factor pointing towards English law. However, that is on the basis of implied choice and the premise of section 27 would appear to be the applicable law based on considerations other than the parties' choice.
368. The fact that the loan is in sterling, that there are provisions relating to payment and cost of funding linked to London/the UK and that it was negotiated through lawyers in England are pointers towards England. However, in my judgment the most significant factor is that the loan is secured on properties in England.
369. On balance, however, I am not persuaded that it is clear from the circumstances as a whole that the contract is more closely connected with the UK. The connection with Switzerland is a real one. Switzerland is where the Bank and its administration is based. Its legal, operational and business base is Switzerland. None of the counterparties are English. Whilst the Khan Family have English connections, they are resident in Pakistan. The Corporate Borrowers have no connection to England. For all the reasons set out above, and those given by the Bank, I conclude that UCTA does not apply.
370. If that be wrong I would in any event have concluded that the impugned terms were reasonable within the meaning of section 11 of UCTA for the reasons set out when addressing the reasonableness of the clauses, in particular at paragraphs 323-339 and 347(1) above.

Conclusion

371. I conclude that the answers to Issues (2)(b) and (e) are Yes. In those circumstances it is not necessary to resolve the other Issues raised.

Unfair Terms in Consumer Contracts Regulations 1999 ("UTCCR")

372. The Khan Family contend that contrary to the requirements of good faith the impugned terms caused a significant imbalance in the parties' rights and obligations to the detriment of the Khan Family and are therefore unfair within the meaning of Regulation 5 and consequently not binding upon them.
373. The UTCCRs are narrower in scope than sections 140A-D CCA: they are concerned with the fairness of terms, not with the fairness of relationships. Nevertheless, at the heart of the test of fairness under Regulation 5 is an assessment of whether the term in question was unfairly imposed. This requires consideration of the seller/supplier's conduct in the formation of the agreement to the extent that it is relevant to the unfair terms in question.
374. A term is unfair if:

"contrary to the requirement of good faith it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer" (Reg. 5(1)).

375. Schedule 2 to the UTCCRs provides an indicative and non-exhaustive list of terms which may (but will not necessarily) be regarded as unfair for the purposes of the UTCCRs (Reg 5(5)).
376. The core fairness protections granted by the UTCCRs extend only to:

(1) terms which are not individually negotiated; and

(2) terms in contracts with "a consumer", defined as being "any natural person who, in contracts governed by these Regulations, is acting for purposes which are outside his trade, business or profession" (Reg. 3).

377. The effect of a finding of unfairness is that the terms in question are not binding upon the consumer. However, the UTCCRs specifically provide that the remaining terms continue to bind the parties to the extent that they are capable of existing without the unfair term (Reg. 8).
378. The fairness test under the UTCCRs is not simply whether the terms create a "significant imbalance" but whether any such imbalance is created "contrary to the requirement of good faith". This latter concept was authoritatively explained in Director General of Fair Trading v First National Bank Plc [2001] UKHL 52; [2002] 1 AC 481 by Lord Bingham (with whom Lords Steyn, Hope, Millett and Rodger agreed) at [17]:

"The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer's necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Schedule 2 to the Regulations."

379. If a breach of good faith is not established then the relevant terms cannot be found to be unfair – see Bryen & Langley Ltd v Boston [2005] EWCA 973.
380. In considering whether there was a departure from the requirements of good faith and fair dealing it is relevant to have regard to the findings already made as to the course and conduct of contract negotiations. They show that the Khan Family were legally advised, that negotiations took place over an extensive period of time, that they were conducted assertively on the Khan Family's behalf and that significant changes in the Bank's usual terms were procured by them. Further, the impugned terms were expressed fully, clearly and legibly; there were no concealed pitfalls or traps and the terms were given appropriate prominence within a document which, in view both of its subject matter and importance, was relatively concise. I further accept that there can be no question of the Bank having taken advantage of the Khan Family's "necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract [or] weak bargaining position". The Khan Family were not "in need". They were familiar with real estate financing; they had real estate business interests in the UK and Pakistan; they were independently wealthy and experienced in business; they were said to have other banks competing for their business and they adopted an assertive approach to the negotiations. I am satisfied and find that there was no departure from the requirements of good faith in the dealings between the parties.
381. In relation to whether the impugned terms created a "significant imbalance to the detriment of [the Khan Family]", I conclude that they do not for the reasons set out when addressing the reasonableness of the clauses, in particular at paragraphs 323-339 and 347(1) above. Further, I accept the Bank's general submission that rights may be incommensurate without being unbalanced. A creditor and debtor stand in different positions and have different risks and interests engaged in a credit agreement. The terms of that agreement may be expected to reflect that, and this does not make them unbalanced.

Conclusion

382. I conclude that the answer to Issue (3)(b) is No. In those circumstances it is not necessary to resolve the other Issues raised.

Breach of Confidence

383. The Issues under this head are:

(1) Did the Bank owe the Khan Family and the Corporate Defendants a duty not to disclose confidential information relating to their relationship as lender and borrower or as banker and customer?

(2) Did the Bank breach its duty to the Khan Family and the Corporate Defendants by disclosing information as set out in paragraphs 152 and 153 of the RRADCC?

Discussion.

384. In relation to Issue (1), the Bank did owe such a duty save where the interests of the Bank require disclosure – see Tournier v. National Provincial and Union Bank of England [1924] 1 KB 461, at p473 per Bankes LJ. So, for example, disclosure in a bank's interests made pursuant to the enforcement of its rights under a charge would not be a breach of the duty of confidence – see Kaupthing Singer & Friedlander v. Coomber and Burrus [2011] EWCH 3589 (Ch) per Arnold J at [52].
385. In relation to Issue (2), the Defendants contended that the Bank acted in breach of its duty in approaching Glentree Estates in March 2009 concerning the possible conduct of a receivership. They stressed in particular that: (1) the Bank knew that Glentree had previously been appointed selling agents by the Defendants in relation to Dryades; (2) Glentree was the pre-eminent estate agent operating in the Bishops Avenue area; (3) Glentree does not act as an LPA receiver as could and should have been established by the Bank before any approach was made.
386. In relation to the last point it was the Bank's evidence that its lawyer had identified that Glentree had a consultant surveyor, Mo Nimba, who had the requisite experience to act as a receiver before any approach was made, which was confirmed when the Bank's representatives met him.
387. In relation to the second point, it was considered that there might be some advantage in selecting a receiver who was affiliated to one of the leading Bishops Avenue estate agents if in due course the receiver was to market the property.
388. In relation to the first point, this meant that the Bank should have considered the position carefully before approaching Glentree, but if it concluded, as it did, that it was in its best interests to do so then it was entitled to serve those interests.
389. I conclude that the Bank was entitled to approach Glentree concerning the possible conduct of a receivership in pursuit of its own interests in protecting its security.
390. The Defendants also contended that the Bank made inappropriate disclosures of their financial difficulties when instructing valuers and specifically Savills.
391. They relied in particular on the evidence of Mr Yaqoob who acted for Savills Capital at the time. He said that he had been told by a colleague, David Wood, that Paul Walker had told him that the Defendants were in default. This double hearsay evidence was denied by Paul Walker. His evidence, which I accept, was that he at no time disclosed that there was a problem with the facility. I further find that the fact of default was not disclosed by Mr Mahdi at a meeting with Savills Capital on 16 October 2009 upon which reliance was placed. I consider that the likelihood is that problems with the facility was inferred by Savills Capital from the inquiries made of them by the Bank but not from any statement made by or on behalf of the Bank to that effect.
392. The Bank was entitled to instruct valuers in pursuit of its interest in valuing and protecting its security. In doing so I find that no inappropriate disclosures were made.
393. The claims for breach of confidence accordingly fail.

Conclusion

394. The answer to Issue (1) is Yes subject to the Tournier exception. The answer to Issue (2) is No.

Conclusion

395. This case started off as a simple debt and possession action. The Defendants have fought those claims tooth and nail. A myriad of defences and claims have been raised to resist them. Many of them were abandoned before or during the course of the trial. At the trial itself the defence focused on the allegations of breach of the Facility Agreement and the claim that the First Supplemental Agreement should be set aside or was void. Those issues were pursued on the Defendants' behalf at trial with considerable skill. I have, however, concluded that those defences/claims fail and that the case is in reality a simple debt and possession claim enforceable in accordance with the terms of the parties' written contracts.
396. I have addressed all the main issues in the final agreed list of issues but have not attempted to deal with the financial consequences of the various rulings made. It is to be hoped that they can be agreed but, if not, they can be dealt with at a hearing following hand down of this judgment.