Jersey Unreported Judgments

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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> 1999/216 - Mayo v Bank Cantrade and Touche Ross [1999] UR 216 (17 December 1999)
URL: http://www.bailii.org/je/cases/UR/1999/216.html
Cite as: [1999] UR 216

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Royal Court

(Samedi Division)

Judgment reserved: 16 September 1999

Reserved Judgment delivered: 17 December 1999

Before: Sir Godfray Le Quesne, QC, Commissioner

Action 94/6

Between:Mayo Associates SA

Troy Associates Ltd

TTS International SA

Plaintiffs

And:Anagram (Bermuda) Limited

Robert Young

Maureen Young

Defendants

And:Lionrock Limited

Edgefield Properties Limited

Box Limited

Starshield Limited

Cantrade Private Bank Switzerland (CI) Limited

TSB Bank Channel Islands Limited

Parties Cited

Action 94/254

Between:Mayo Associates SA

Troy Associates Limited

TTS International SA

Plaintiffs

And:Cantrade Private Bank Switzerland (CI) Limited

Touche Ross & Co

(Being the person listed in Exhibit A to the Order of Justice)

Defendants

And:Robert John Young

(joined at the instance of the First Defendant)

Anagram (Bermuda) Limited

(joined at the instance of the First Defendant)

Myles Tweedale Stott

(joined at the instance of the First Defendant)

Michael Gordon Marsh

(joined at the instance of the First Defendant)

Monica Gabrielli

(joined at the instance of the First Defendant)

Touche Ross & Co

(joined at the instance of the First Defendant)

Cantrade Private Bank Switzerland (C.I.) Limited

(joined at the instance of the Second Defendant)

Application by the first Defendant in Action 94/254 for leave to file re-amended answer in its current form

Applications by the Plaintiffs and the third to fifth Third Parties in Action 94/254 for an Order that the first Defendants:

Advocate P C Sinel for the Plaintiffs and the third to fifth Third Parties in Action 94/254

Advocate D R Wilson for the first Defendants

 

 

JUDGMENT

THE COMMISSIONER:

1. This action was started by Order of Justice in September 1994. Cantrade served their Answer on 23 December 1994 and the Plaintiffs served their Reply to this Answer on 1 June 1995. Cantrade served an amended Answer on 13 October 1995. In July 1996 the Plaintiffs told the Court of Appeal that they would 'shortly' be amending their Order of Justice. The amended Order of Justice thus predicted was in fact served on 22 February 1999.

2. On 23 June 1999 Cantrade issued a summons for leave to serve a re-amended Answer. Many of the amendments for which leave is thus sought are consequential upon the amendment of the Order of Justice. Many others are not, but arise, Cantrade say, from the extensive discovery which has taken place since the amendment of their Answer on 13 October 1995. The Plaintiffs object to many of the proposed amendments. In compliance with an order of the Court, they served a schedule of their objections, to which Cantrade replied in a written argument. On this basis Cantrade's application for leave to amend came before me on 16 and 17 September 1999. On the second day some revised amendments were put forward by Cantrade. I am grateful to counsel on both sides for their arguments. I have, however, found it necessary to go a good deal further into both the pleadings and the authorities in order to arrive at what in my judgment is the proper ground of decision.

3. I first summarise the case pleaded in the Order of Justice. The Second Plaintiffs, who are investment managers, 'offered' certain 'investment programmes', in which they acted as investment managers and the First Plaintiffs as trustees ‘in the sense in which that term is understood under Swiss law’. The Second Plaintiffs decided that funds managed under those programmes should be invested in foreign exchange dealings, and the Second and Third Plaintiffs deposited initially $3,750,000 with Cantrade in the Third Plaintiffs' name. The Third Plaintiffs and Cantrade agreed (by the Cantrade agreement) that Cantrade would give the Third Plaintiffs facilities for foreign exchange dealings and would accept instructions for those dealings only from Anagram Econometrics Ltd. (a company controlled by Dr. and Mrs. Young, which I call AEL). Before the Cantrade agreement was made, Dr. Young, unbeknown to the Plaintiffs, was an associate of Cantrade, and had an agreement with them to share their profit on any foreign exchange transaction conducted through Cantrade by AEL. Cantrade were under a legal duty to tell the Plaintiffs those facts, but did not tell them. The Plaintiffs and AEL agreed by the March agreement, of which Cantrade received a copy, that if AEL's trading resulted in losses of 10% of the trading base value (i.e. the original deposit of $3,750,000 as subsequently increased or decreased by mutual agreement), AEL would stop trading and await instructions; Cantrade would send dealing slips to AEL and AEL would give monthly account valuations to the First and Third Plaintiffs; and AEL would be entitled to receive monthly a fee of 10% of the net profit on foreign exchange transactions conducted by them. Until some time in 1988, Cantrade sent to the Third Plaintiffs all statements of the principal trading and collateral accounts and advice’s of debits and credits. In 1988, at the request of AEL and with the consent of the Third Plaintiffs, Cantrade stopped doing this and thereafter sent these documents and dealing slips to AEL only. Because of this, the Plaintiffs had no direct knowledge of the state of their accounts or the results of AEL’s trading. They relied instead on AEL's monthly reports to the First Plaintiffs and the fees charged monthly by AEL, which purported to be based on profits. In fact these reports were false and the fees were not due; AEL's trading was consistently unprofitable. Cantrade knew of all movements on the collateral and trading accounts. They owed the Plaintiffs, both in tort and under an implied term of the Cantrade agreement, a duty of care and a duty to warn them if trading continued in spite of infringement of the 10% downside limit. As bankers to the First and Third Plaintiffs, they also owed them a duty to warn them of the consistent losses on AEL'S trading, to ensure that the First and Third Plaintiffs received accurate information of the state of their investments and to tell them of any breach of the 10% downside limit. Cantrade failed in those duties by not telling the Plaintiffs the true value of their accounts or the results of AEL's trading.

4. I now turn to Cantrade's defence on the pleadings as they stand, i. e. to their defence stated in their amended Answer without any of the further amendments for which they are now asking leave. It suffices for present purposes to describe this defence in outline without going into details or noticing every point on which the allegations of the Order of Justice are challenged.

5. The following are Cantrade's principal contentions in their amended Answer. In consequence of the third party mandate given by TTSI in favour of AEL (acting by Dr. Young or Mrs. Young), Cantrade were obliged to accept instructions from AEL for foreign exchange dealings. TTSI did not accept Cantrade's advice that AEL's authority under the third party mandate should be limited, particularly in relation to the 10% downside limit. It was expressly agreed that Cantrade was to be under no obligation to enquire into the purpose for which the powers were exercised. Cantrade had not received notice of the terms of the March agreement. The request to Cantrade to send statements and other documents relating to the accounts to Dr. Young, not to TTSI, had not come from AEL but from Mr. Stott. Cantrade had not known about the 10% downside limit. They denied that the Plaintiffs had had no direct means of discovering when it had been broken. They admitted that it was their duty to provide banking services to TTSI with reasonable care and skill, but denied they had any duty to warn the Plaintiffs if the 10% downside limit were exceeded. Cantrade told the Plaintiffs by letters of the amount standing to the credit of the TTSI accounts, so the Plaintiffs were kept informed of this although they had asked for the account statements to be sent to AEL. They should have known that Dr. Young's valuations, purporting to show foreign exchange profits, were false, but they never made any enquiry of Cantrade of the results of the foreign exchange trading. The Plaintiffs had no right to rescind the Cantrade agreement or any other agreement or any foreign exchange transactions. Cantrade had not seen Dr. Young's valuations until they had been disclosed in these proceedings. If the Plaintiffs had relied exclusively on those valuations to control the investment of investors' funds, that had been wholly unreasonable. Cantrade did not admit when the Plaintiffs discovered 'the true position'. They had been told by Mr. Stoneman on 6 September 1993 that the credit balance on the Principal collateral account was minuscule; this was in accordance with Cantrade's many previous written notifications. Nevertheless, the Plaintiffs had continued to allow AEL to trade until 25 November 1993. Cantrade denied any breach of duty or negligence. Any loss suffered by the Plaintiffs had been due to their own negligence or breach of duty.

6. This amended Answer will necessarily be amended further in response to the re-re-re-amended Order of Justice. A number of the amendments now put forward are admitted by the Plaintiffs to be consequential, and they raise no objection to those; but the amendments proposed go a great deal further. They raise matters which are not raised in the antecedent pleadings, and make charges of dishonesty against the Plaintiffs, not made before. The reason for this is that since the amended Answer was filed on 13 October 1995, much material not previously known to Cantrade has been disclosed. Cantrade obtained the first part of this material in 1997. By then the Plaintiffs had already said they intended to make further amendments of the Order of Justices. In February 1998, this not having been done, Cantrade suggested that they should amend their Answer first. The Court ordered that the proper course was for the Plaintiffs to amend before Cantrade. The re-re-re-amended Order of Justice was ultimately served on Cantrade on 26 May 1999 and Cantrades summons for leave to re-amend the Answer was issued on the 23 June 1999. In these circumstances it cannot be said that Cantrade's application for leave to amend is made too late.

7. The following is a summary of the new matters raised by the proposed re-amended Answer.

(a) From 1988 to 1993 the Plaintiffs, in marketing their investment schemes, distributed to prospective and existing investors promotional literature containing representations which were false to the knowledge of the Plaintiffs and were made dishonestly (or, if not dishonestly, were made negligently). (Paras. 109-121).

(b) At the forum held in Bermuda in 1993, the Plaintiffs, Mr. Marsh and Mr. Stottmade, made representations which were false to their knowledge and made them dishonestly (or, if not dishonestly, made them negligently). (Paras. 132-144).

(c) The First and Second Plaintiffs owed fiduciary duties to the investors under Jersey law. (Paras. 18-25).

(d) When an investor completed and signed application form, a contract in the terms of the form arose between the investor and the First and Second Plaintiffs; the Plaintiffs did not act in accordance with the contracts, with due diligence or in good faith. (Paras. 26-27).

(e) Under the standard terms used between 1988 and 1993, the contract was between the First Plaintiffs as trustee, the Second Plaintiffs as investment manager and the investor; the Second Plaintiffs agreed to act as investment manager with absolute discretion to instruct the First Plaintiffs in foreign exchange dealings; the First Plaintiffs accepted appointment as trustee for the individual investor, and agreed to accept investment instructions from the Second Plaintiffs. (Para. 36).

(f) In appointing Dr. and Mrs. Young to trade on the Plaintiff’s behalf, the First and Second Plaintiffs acted in breach of duty to the investors, and without either due diligence or good faith. (Paras. 49, 50). The separate functions of the First and Second Plaintiffs described in the investor contracts were concentrated in Dr. and Mrs. Young. (Para. 60).

(g) The Plaintiffs agreed to pay to Dr. Young, and did pay, fees which were taken out of the investors' funds without the knowledge or authority of the investors; Dr. Young agreed to 'rebate' to the Second Plaintiffs part of the fees thus paid to him; the Plaintiffs thus acted dishonestly and in breach of their duties to the investors and without either due diligence or good faith. (Paras. 63-70).

(h) In 1990, Dr. Young agreed with the Second Plaintiffs, Mr. Marsh and Ms Gabrialli to pay to them half of the commission which he received from Cantrade on dealings on behalf of TTSI; the Second Plaintiffs thus acted in breach of duty to the investors and without either due diligence or good faith, and the Second Plaintiffs, Mr. Marsh and Ms Gabrialli acted dishonestly toward the investors; the First Plaintiffs should have investigated the agreement and receipts by the Second Plaintiffs, Mr. Marsh and Ms Gabrielli thereunder. (Paras. 76-81).

(j) The Plaintiffs are not entitled to rescission, nor to any equitable relief, because they do not claim with clean hands. (Para. 87(e)).

(k) Dr. Young would not have sent false valuations to the First Plaintiffs every month, and so claimed profit-related fees to which he was not entitled, unless he had known or expected that the Plaintiffs would not carry out properly their duty to supervise Dr. and Mrs. Young. (Para. 92). The Plaintiffs agreed in March, 1988 that all deal confirmations should go to Dr. Young. (Para. 33(a)). Mr. Stott relied exclusively on Dr. Young's monthly valuations for carrying out his functions as trustee and administrator, including that of ascertaining whether Dr. Young's trading had resulted in profits or losses. (Para. 93(b)).

(l) The First Plaintiffs acted dishonestly in producing their quarterly statements for investors; they knew, or ought to have known, that Dr. Young's trading was resulting in substantial losses, yet they took no steps to verify his monthly valuations; alternatively, this constituted breach of duty to the investors. (Paras, 95-100).

(m) The same allegations are made about certificates produced by the First Plaintiffs, which purported to 'verify' figures showing that Dr. Young's trading resulted in cumulative profits. (Paras. 101-108).

(n) The failure of the Plaintiffs to find out the true results of Dr. and Mrs. Young's trading was self-serving and dishonest, or alternatively negligent and in breach of contract. (Para. 156).

(o) The funds in the TTSI accounts belonged to the investors, and any loss was suffered by them; the Plaintiffs, Mr. Stott, Mr. Marsh and Ms Gabrielli profited from the false profit figures by way of fees which they paid to themselves out of the investors' money and sums received under the agreement set out in sub-para. (h) above. (Para. 215).

(p) In respect of loss allegedly suffered by the Plaintiffs, they are barred from proceeding by their own wrongdoing and dishonesty and because ex turpi causa non oritur actio. (Paras. 216/7).

8. Comparison of para. 5 above with para. 7 shows what kind of new material it is which Cantrade wish to introduce. The amended Answer sets out Cantrade's version of the course of business between them and the Plaintiffs. The proposed re-amended Answer goes beyond this into the dealings between the Plaintiffs and the investors and the dealings of the Plaintiffs among themselves and with Dr. Young concerning the investors' affairs. It alleges that in these dealings the Plaintiffs, and Mr. Marsh, M/s Gabrielli and Mr. Stott individually, broke the contracts between the First and Second Plaintiffs and the investors and acted negligently and dishonestly. The word 'criminal' is not used in the draft pleading, but some of the acts alleged, if they took place, must have constituted offences.

9. It is also illuminating to compare para. 7 with the summary of the Order of Justice in para. 3 above. This comparison shows that the Plaintiffs concentrate on part of the story while Cantrade seek to consider the whole. The Plaintiffs begin with their decision to invest in foreign exchange dealings, in their own name, funds managed by them on the terms of the TTS programme, and the consequent deposit with Cantrade of $3,750,000. The rest of the pleading against Cantrade is limited to the handling by Cantrade and Dr. Young of funds placed by the Plaintiffs with Cantrade, and the consistency or inconsistency of that handling with Cantrade's legal duty to the Plaintiffs. Cantrade's draft, by contrast, extends also to the circumstances in which the investors' money came into the Plaintiffs' hands and the question whether the arrangements for that money made by the Plaintiffs among themselves and with Cantrade and Dr. Young were honest and consistent with the plaintiffs' obligations to the investors.

10. Whether Cantrade should be allowed to adopt this wider approach is a question of law, and because the approach is wider it does not necessarily follow that it is within the rules of pleading. The Plaintiffs contend that it is not. They argue that their claim is based simply on the contracts between them and Cantrade, The defence of illegality would arise, they submit, only if those contracts were shown to be illegal, but Cantrade do not plead there was anything illegal or dishonest about them. Cantrade's allegations of dishonesty and breach of contract all relate to the contracts between the Plaintiffs and the investors and the Plaintiffs' respect, or disregard, of their duties thereunder. These allegations, the Plaintiffs say, are irrelevant to a claim on a different contract in an action to which the investors are not parties. They also object to any allegation against Mr. Marsh, M/s Gabrielli or Mr. Stott, because none of these individuals is party to the action.

11. Consideration of this argument must begin with a review of the whole account of the Plaintiffs' enterprise set out in the draft re-amended Answer. This alleges that the Plaintiffs made fraudulent misrepresentations to prospective and existing investors, in order to attract new investors among the former and to retain the latter and get further money from them. In this the Plaintiffs were successful, (This is the plain meaning of the words, 'on which investors relied; in their contexts in paras 111 and 121.) They deposited some of the money obtained from investors with Cantrade. The Second Plaintiffs, the supposed 'investment managers', did no management but handed it over completely to Dr. Young, in breach of their duty to the investors. The First Plaintiffs, the supposed 'trustee', neglected their duty to look after the money obtained from the investors, told Cantrade not to send them statements of the accounts in which that money was held, and did nothing to check Dr. Young's monthly reports of the results of his trading. The Plaintiffs knew, or ought to have known, that the profits which he reported were fictitious. Being entitled under their contracts with the investors to profit-related fees, they took fees based on these fictitious profits. They paid fees to Dr. Young out of the investors' funds without the investors' authority, and, in breach of their duty to the investors, arranged with Dr. Young to share commission paid to him by Cantrade on business which he introduced.

12. If these allegations were to be established, it would be possible - for present purposes I need go no further - for the Court to conclude that each of them formed part of a single scheme to defraud the investors. It would also be possible for the Court to conclude that in the course of the scheme two illegalities were committed. The first was the obtaining, at least by the Second Plaintiffs, of the investors' money by deception. The second was conduct, at least on the part of the First and Second Plaintiffs, contrary to art. 12 of the Depositors and Investors (Prevention of Fraud) (Jersey)Law, 1967. Their conduct would have been similar to that for which Dr. Young has been convicted.

13. In this situation (at present, I emphasise, a hypothetical situation), the law would be very defective if it allowed the Plaintiffs to isolate the contracts made by them with Cantrade, in which no illegality is alleged, and enforce them although they were made for the purposes of a single scheme of which other component transactions were illegal. The modern law of ex turpi causa non oritur actio, however, extends to this sort of situation.

(Kerr, L. J. in Euro - Diam, Ltd v Bathurst (1990)

1 Q. B. 1, 36).

If Cantrade's allegations were to be established, it would be arguable - again, for present purposes I need go no further - that the principle stated by Kerr, L-J. applied to the position. (Cf. also Saunders -v- Edwards (1987), 1 W.L.R. 1116, 1127, 1131/2, 1134.)

14. I, therefore, conclude that the draft re-amended Answer raises, as a matter of pleading, a proper defence of illegality. I reject the Plaintiffs' submission that allegations relating to their contracts with the investors are irrelevant to their claim against Cantrade. I also reject two other contentions which appear prominently in the Plaintiffs' argument. The first is that allegations made against Mr. Marsh, Ms Gabrialli or Mr. Stott personally are irrelevant because it is conduct of the Plaintiffs which is in issue, not their conduct. Those three persons were not identical with the plaintiff companies, but they controlled the companies and it was through them that the companies acted. What they did in relation to the investors and to Cantrade cannot be ignored when one is deciding what the companies did and what was the character of the companies' conduct. The second contention which I reject is that it is irrelevant to plead how the Plaintiffs held themselves out, or the three persons held themselves out or held out the Plaintiffs, to anyone other than Cantrade. This rejection must follow from the other conclusions stated in this paragraph.

15. The other objection raised by the Plaintiffs is that many paragraphs of the draft re-amended Answer are 'so inadequately particularised as to be embarrassing'. Unfortunately, it is only in very few instances that the Plaintiffs give any hint of what the particulars are which they say should have been given. Their objections are, therefore, difficult to follow, and the difficulty becomes all the greater when the general words which I have quoted are applied to a group of paragraphs extending over several pages.

16. I have considered one by one all the paragraphs to which the Plaintiffs apply this objection, but I do not think it is necessary to refer to each one in this judgment. In the following instances I find the objection to be valid:

para. 43: the 'correspondence with investors' should be specified;

para. 49: the parts of the pleading to which the words ‘see below’ refer in sub-paras. (a), (b) and (c) should be specified;

para. 111: para. 121: under each of these paragraphs Cantrade should give the best particulars they can of the investors who relied on the representations;

para. 212: as is conceded in Cantrade's response to the objections, the words ‘or at all’ should be added to sub-para. (a);

para. 220: Cantrade should specify the parts of the pleading to which it refers by the words, ‘Cantrade’ repeats its above pleading as appropriate.

In all other instances I dismiss the objection.

17. There is one further point to which I should refer. The Plaintiffs contend that some of the allegations in paras. 18-25 (which paragraphs are entirely new)

There is no material before me to support the existence of any collateral purpose. I accept the submissions made in Cantrade's response about the relevance to the Plaintiffs claim of the allegation of fiduciary duty. Paras, 18-25 deal with fiduciary duty, and the relevance of the topic is sufficient to explain why those paragraphs have been introduced.

18. I give leave to Cantrade to file its re-amended Answer, with the revisions submitted on 17 September 1999. In para. 16 above, I have held that certain of the proposed amendments are insufficiently particularised. I do not consider that leave to make those amendments should for that reason be refused, but the leave to file the re-amended Answer is granted on condition that Cantrade supply within 21 days of the delivery of this judgment the particulars specified in para. 16. I make no separate order on the Plaintiffs' summons of the 3rd September, 1999.

19. I will sit on a date to be arranged to deal with costs and any other applications which may arise from this judgment.

Authorities

Depositors and Investors (Prevention of Fraud) (Jersey) Law, 1967, Article 12.

Euro - Diam, Ltd -v- Bathurst (1990) 1 QB 1, 36.

Saunders -v- Edwards (1987) 1WLR 1116, 1127, 1131/2, 1134.

Lonrho -v- Fayed (No.5.) [1993] 1 WLR 1489, at 1502

Holman -v- Johnson (1775) 1 Cowp, 341, at 343

Tinsley -v- Milligan [1993] 3 All ER 65, HL

Haigh -v- Kaye (1872) LR7, Ch App 469

E.M. Lane, M.S. Lane, and Warren-Gash -v- R.R. Lane 1985-86 JLR p:48.

Ex-parte Ivar Fox Strongways Viscount Wimbourne 1983 JJ p:17.

Williams & Humbert v W & H Trade Marks [1986] 1 AC 368

British & Commonwealth Holdings plc -v- Quadres [1989] 1 QB 842