Jersey Unreported Judgments

[2004]JRC142

royal court

(Samedi Division)

 

13^th August 2004

 

 

 

 

 

Appeal from the refusal of the Master to strike out the Order of Justice as a whole; alternatively, to strike out the claim by the second Plaintiff; alternatively, to strike out the claim against the third Defendant.

Advocate D. R. Wilson for the Plaintiffs.

Advocate P. C. Sinel for the Defendants.

 

 

judgment

Deputy bailiff:

1.        This is an appeal from the refusal of the Master to strike out the order of justice as a whole; alternatively strike out the claim by the second plaintiff; alternatively strike out the claim against the third defendant.

Factual background

2.        The relevant factual background can be shortly stated.  Portree is a Liberian company.  The sole beneficial owner is the first plaintiff, Mrs Papadimitriou ("Mrs P").  There is one issued share.  The second defendant Nearco Administration Services Limited ("Nearco") is the registered shareholder.  It holds the share on bare trust for Mrs P.  Nearco is an associated company of the first defendant Quorum Management Limited ("Quorum").  Quorum provides the normal company administration services for the management and administration of Portree.  This includes the provision of directors.  The third defendant Mr Journeaux ("Mr Journeaux") is an employee and director of Quorum and is also a director of Portree. 

3.        The sole activity of Portree has been to buy a property in London.  In 2002 Mrs P decided that she would like Portree to sell the property.  The second plaintiff Lane & Partners ("Lane") is a firm of English solicitors practising in London and acted for Mrs P.  This included acting for her in connection with litigation concerning her brother's estate and in passing on instructions and requests from her to the directors of Portree and/or Nearco and/or Quorum.  In due course an offer of £1.1 million was accepted for the sale of the property.  On 30^th May Portree formally instructed Lane to act on its behalf in connection with the sale of the property.  Contracts were exchanged and completion was fixed for 20^th June 2002. 

4.        Prior to completion Mrs P decided that she wished to have the net proceeds of sale of the property paid to her and she gave instructions to Lane accordingly.  She also signed an authority addressed to the directors of Portree directing them to instruct Lane to deal with the proceeds of sale as she (Mrs P) might direct. 

5.        The directors of Portree refused to give such a direction.  On the contrary on 13^th June Mr Journeaux said that the directors were unable to provide the requested direction and instead instructed Lane to remit the net proceeds of sale to Portree's account in Jersey. 

6.        At this stage, the reasons for the directors' refusal to comply with Mrs P's request were unknown to Lane or Mrs P.  However those reasons have subsequently become clear.  It appears that Quorum used to administer another company for Mrs P called Houbie Limited ("Houbie").  Sometime in early 2002, following an intimation to Quorum by Lane of possible proceedings on her behalf in connection with Houbie (which had been dissolved in 1995) and of other matters, Mrs P decided to remove Portree from Quorum's management and transfer the management of the company to a Guernsey trust company.  An issue also arose over the level of fees.  On 9^th April 2002 Quorum was advised by its legal advisers that it should make a Suspicious Transaction Report ("STR") under the Proceeds of Crime (Jersey) Law 1999 ("the 1999 Law") in respect of Houbie.  The legal advice recorded that, from what was known, there was no reason to file an STR in respect of Portree.  Nevertheless, when making the STR in respect of Houbie, Quorum explained to the Jersey Financial Crimes Unit ("JFCU") that it had been asked to transfer the administration of Portree outside Jersey and sought advice from the JFCU as to whether it should proceed with that transfer.  Quorum convinced itself that it could not safely comply with Mrs P's request to transfer the administration of Portree unless the JFCU had given its consent.  It is alleged that that was the reason why the directors of Portree insisted that the sale proceeds of the property should be paid to Portree's account in Jersey rather than to Mrs P in England.  Quorum, Nearco and Mr Journeaux, it is said, were concerned to protect themselves against any suggestion of their having committed an offence under the 1999 Law and preferred their own interests in this respect over those of Mrs P.

7.        The first intimation that the anti-money laundering provisions of the 1999 Law might be what was motivating the directors of Portree came in a telephone conversation on 19^th June between Mr Journeaux and a partner of Lane when Mr Journeaux informed the partner that an STR had been made and that was why Portree was insisting that the funds should be paid to Jersey.

8.        According to Lane, it was faced with two conflicting sets of instructions, namely that from its client Mrs P directing that the net proceeds of sale should be paid to her and that from Portree directing that the proceeds should be paid to it in Jersey.  It therefore made application to the High Court in London under Part 8 of the Civil Procedure Rules for directions as to whom it should pay the proceeds.

9.        On 22^nd July (i.e. prior to the English hearing) Mrs P issued instructions to Nearco directing it to use its power as sole shareholder to remove the existing directors of Portree and replace them with three Greek lawyers nominated by Mrs P in their place.  Nearco refused to act upon those instructions.

10.      The Part 8 application was heard on 25^th and 26^th July before Hart J.  Lane was the claimant and Portree, Nearco, Quorum and Mr Journeaux were the defendants.  The judge was informed of the fact that an STR had been made.  Lane sought to convince the judge that he should hold that there was no reason to think that the sale proceeds were tainted and that the defendants had acted unreasonably in making an STR or in linking Portree with it.  The judge held that Part 8 proceedings were not a suitable forum for deciding such an issue and that Jersey was the appropriate forum for deciding whether the 1999 Law prevented the directors of Portree from acting on Mrs P's instructions concerning the proceeds of sale.  At a late stage in the proceedings Mrs P applied for leave to be joined as a co-claimant and to amend the claim to seek the assistance of the Court in enforcing the trust upon which Nearco was holding the share in Portree for Mrs P.  By this I understand the judge to have been referring to the instructions to Nearco to change the constitution of the board of directors.  The judge allowed Mrs P to be joined as a co-claimant but deferred consideration of whether she could amend the claim as she had requested.  He indicated that the matter should be deferred whilst the claimants decided whether they should pursue their remedy before the Royal Court.  In the meantime he directed Lane to retain the proceeds of sale.   In passing, the judge said at page 4 of his judgment:-

"The position so far as the legal and beneficial entitlement to the proceeds of sale is that as a matter of contract law it seems to me quite clear that Lane & Partners are prima facie obliged to account to Portree for those proceeds."  [Emphasis added]

11.      After he had given his decision Hart J was addressed on costs.  He ordered Lane to pay the costs of the three defendants and explained his reasoning as follows:-

"I think the defendants are entitled to all of their costs in their favour of these proceedings against Lane & Partners.  The proceedings as formulated were limited to the narrow issue as to what duties Lane & Partners owed in relation to the sums.  On that narrow issue it seems to me the First Defendant's position was impregnable that they were bound to account to the First Defendant for that sum.  Really that is the end of the matter.  The Part 8 procedure is designed to be directed to questions which do not involve a substantial dispute of fact.  The reasons I am urged to make no order is that it is suggested that for the reasons that I summarised in my judgment that the Defendants have been unreasonable form the word go and in particular in making the Suspicious Transaction Report, in dragging their feet about the transfer of the management of the companies earlier in the year and retaining Lane & Partners without disclosing the difficulties.

In ordering their costs of these proceedings thus far to be paid by Lane & Partners, I make no findings on any of those matters.  It may well prove to be the case that this liability for costs and other damage may have occurred as a result of a breach of duty by one or more defendants owed to and actionable by Mrs Papadimitriou.  If that is so, then it may be that she has a claim actionable somewhere to recover compensation for that and that could theoretically include any liability she has to indemnify Lane & Partners for the liability for costs which they will be under as a result of the order I am making against them.  All of that must be resolved somewhere else in some other proceedings at some other time."  [Emphasis added]

12.      Mrs P then brought a representation before this Court seeking an order that Nearco should comply with her direction that it should exercise its power as the shareholder of Portree to change the board of directors of Portree as she had directed.  By this time Nearco had received a letter from the JFSC in the light of which it accepted that there were no longer any grounds for refusing to act on Mrs P's instructions by reasons of concerns under the 1999 Law.  The Court granted the relief sought by Mrs P and ordered Nearco to pay the costs on the basis that Quorum/Nearco had been mistaken in thinking that the provisions of the relevant article of the 1999 Law had at any time prevented it from complying with Mrs P's instructions, given that their suspicion related to the affairs of Houbie, not Portree.

The claim

13.      Mrs P and Lane have now issued an order of justice claiming damages totalling £115,827.63 from Quroum, Nearco and Mr Journeaux jointly and severally. This sum is made up as to £16,500 which Lane was ordered to pay the defendants (and Portree) in respect of the costs of the English Part 8 proceedings before Hart J and £99,327.63 in respect of the costs incurred by Mrs P and/or Lane on her behalf in connection with the English proceedings.  The order of justice is a lengthy document but in a nutshell what it alleges is that the defendants owed contractual, tortious and fiduciary duties to Mrs P and Lane; that they acted in breach of those duties by seeking to protect their own interests pursuant to the 1999 Law ahead of the interests of Mrs P and Lane and doing so in a manner which involved deceiving Mrs P and Lane as to the real reason why they would not comply with Mrs P's instructions as to the disposal to the proceeds of sale; and that the defendants were mistaken and negligent in concluding that there were any grounds under the 1999 Law for failing to comply with Mrs P's instructions as to the proceeds of sale.  It is contended that this led inevitably to a position whereby Lane was faced with two conflicting sets of instructions and had no alternative but to issue the Part 8 proceedings in the English court in order to resolve the position.  The costs incurred in so doing resulted from the breaches by the various defendants of their duties. 

14.      According to Mr Wilson, the case raises important and novel issues as to how a fiduciary may act when he has become suspicious of a transaction in terms of the possible commission of money laundering offences.  Can he - or is he obliged to - deceive his client to avoid tipping off?  Can he escape liability for loss thereby caused to his client merely because he acted in good faith or must his suspicion be reasonable?  Many other issues of law and practice are also said to arise. 

The legal test

15.      The test on striking out is well established whether the application is brought on the grounds that the proceedings disclose no cause of action or on one of the other grounds set out in Rule 6/13 of the Royal Court Rules 1992.   A claim may only be struck out in plain and obvious cases where it is obvious that the case cannot succeed.   So long as a claim discloses some cause of action or raises some issue fit to be decided by a judge, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out.    This is particularly so in an uncertain and developing field of law.   If a pleading is defective in setting out or particularising a cause of action, the claim as a whole should not be struck out if the defect is capable of remedy by filing particulars or an amended pleading.

The defendants' submissions

16.      Mr Sinel filed a lengthy and detailed skeleton argument but I consider that, during the course of the hearing, his submissions were distilled into three aspects:-

(i)        The alleged contractual, tortious and fiduciary duties did not exist and/or were not breached.

(ii)       The losses claimed were not caused by any breach of duty but by the erroneous and irrational decision of Lane to institute the Part 8 proceedings.

(iii)      The claim was res judicata because the issue of costs had been decided in the defendants' favour by Hart J in the English proceedings.

I will take each of these in turn.

(i)      The alleged duties and the breaches thereof

17.      I have considerable sympathy with Mr Sinel in his efforts to try and ascertain exactly what duties are alleged against each of the defendants and the nature of the alleged breach of duty by each defendant.  The Master, in the reasons for his decision, similarly said that he thought that Mr Sinel's criticisms of the pleadings had some justification.  The difficulty arises because, whilst sections 1-3 of the order of justice set out the factual background with reasonable clarity, section 4 (which is headed 'The defendants' duties and breaches thereof') is less than satisfactory.

18.      One must begin by reminding oneself that the three defendants were in a very different position vis a vis each of the plaintiffs.  Quorum was a company engaged in the provision of company management services which entered into a contract with Mrs P for the management and administration of Portree.  Nearco did not enter any such contract.  Its only obligation was to act as trustee of the share in Portree and hold that share upon trust for Mrs P absolutely.  Mr Journeaux had no contractual relationship with Mrs P; he was merely a director of Portree and of Quorum. 

19.      These facts only have to be stated for it to be seen that the duties owed by the three defendants cannot be identical.  They each owed different duties to Mrs P depending upon the nature of the activity which they had undertaken.  Any pleading must therefore set out with appropriate particularity the exact nature and extent of any duty owed by the relevant defendant to Mrs P and then go on to particularise the manner in which that defendant had breached its duty towards Mrs P.  Where it is alleged that the particular defendant owed more than one type of duty (e.g. a duty in contract, a duty in tort and/or a fiduciary duty) the pleading must set out the nature and extent of each of these duties and the facts and matters relied upon in support of each such duty. 

20.      Furthermore, there are two plaintiffs.  They do not stand in the same legal position vis a vis the defendants.  For example Nearco does not hold the share in Portree upon trust for Lane, nor have any of the defendants entered into a contract with Lane.  The pleading must therefore set out the nature of any duty (whether said to be in contract, tort or equity) owed to Lane and the facts and matters relied upon in support thereof. 

21.      The paragraph in the order of justice which sets out the duties of the defendants is paragraph 59.  The difficulty is that it makes no distinction between any of the defendants.  They are all lumped together.  Thus paragraph 59(1) (omitting immaterial wording for these purposes) states:-

"Each of the defendants has ............. been under a duty to Mrs P, both as a fiduciary and as a matter of contract, generally to act reasonably, responsibly and in good faith towards Mrs P and any agents acting on her behalf............"

22.      Mr Wilson accepted that Mr Journeaux could not owe a contractual duty towards Mrs P, yet this is what is pleaded.  Furthermore one would have thought that the duty owed by Quorum as a company management agent could not possibly be identical to the fiduciary duty owed by Nearco as a bare trustee of the share in Portree; although these could be similar aspects e.g.  a duty to act with due care and attention in carrying out the particular  obligations which the relevant defendant had undertaken; but none of this emerges from the pleading.

23.      Para 59(2) of the order of justice states:-

"Each of the defendants has at all material times been under a duty to act with that degree of proper professional competence and ability to be expected of professional trust and company managers holding themselves out (as each of the defendants does) as experts in the field of offshore company management."

This allegation does not state whether the alleged duty arises in contract or in tort.  On any view the nature and extent of the duty must be related to the role which each defendant is undertaking.  As mentioned above, these roles were all different.

24.      Para 59(3) reads:-

"Further, each of the defendants has at all material times owed to Mrs P, and both directly and through Mrs P to Lane as her solicitors and agents, a duty as a fiduciary, a duty pursuant to the agreement pleaded at paragraph 5 above, and a duty of care that he or it would ......................"

Again the allegation does not distinguish between the defendants.  Furthermore it alleges a duty in tort, contract and as a fiduciary against each of the three defendants, that duty being owed both to Mrs P and to Lane.  The contract referred to is that set out paragraph 5 of the order of justice which is an allegation that Quorum and Mr Journeaux are under an obligation to act in the same way as Nearco i.e. as a nominee for Mrs P.  This itself is very hard to understand given their different roles.  But on any view, Mr Journeaux cannot owe a duty in contract as no contract is alleged between either of the plaintiffs and Mr Journeaux.  In relation to whether Mr Journeaux owed a tortious duty by reason of his being a director of Quorum or Portree, the leading authority of Williams -v- Natural Life Health Foods Limited (1998) 2 All ER 577 makes it clear that a director of a limited company can only be personally liable to a plaintiff for loss if the director had assumed personal responsibility and the plaintiff had relied upon that assumption of responsibility.  The order of justice is completely silent on this aspect and does not plead any facts or matters which are said to give rise to such an assumption and reliance.

25.      Mr Sinel also submitted that the claim of Lane could not succeed.  They were merely the solicitors acting for Mrs P.  As expressly pleaded in paragraph 7 of the order of justice, Mrs P was under a duty to indemnify Lane in respect of all costs etc which they might incur in representing her interests.  If that were so, it was impossible for Lane to have suffered any loss; the only loss could have been suffered by Mrs P. 

26.      In summary Mr Sinel submitted that no proper causes of action were pleaded and that the claim as a whole should be struck out. 

27.      I agree that the order of justice does not fulfil the requirements for pleading in a complex case such as this.  I was informed during the hearing that the order of justice had been drafted by one of the partners in Lane.  I do not know whether that partner is experienced in drafting pleadings but, in any event, it seems undesirable for the client to draft the pleadings; he is likely to be too close to the matter.  It is the responsibility of a Jersey advocate to ensure that pleadings filed in the Royal Court are such that the facts and matters relied upon and the nature of the plaintiff's case are set out in a proper and satisfactory manner.  An advocate may of course delegate the task and it is often useful to instruct junior counsel from the English Bar to draft pleadings in a complex case because of counsel's greater experience.  But the pleading remains the responsibility of the advocate and he must check that it is satisfactory before allowing it to be filed.  I have no hesitation in concluding that this order of justice is unsatisfactory.  It simply fails to differentiate between very different defendants and it fails entirely to make clear the nature and basis of the claim against each defendant.   Although an answer has been filed, I consider that the trial judge will be left in real difficulty in trying to work out what the plaintiffs' case really is. 

28.      During the hearing I asked Mr Wilson to summarise for me exactly what was the case against each defendant.  Did the claim of Mrs P lie in contract, tort or as result of fiduciary relationship against that defendant?    Furthermore what was the basis if Lane's claim against that defendant?  That exercise was undertaken separately in relation to each defendant.   Mr Sinel has asked that the case be struck out as a whole.  But this is a developing area and the interaction of anti-money laundering legislation with the duties and obligations of persons in the position of the defendants who have developed a suspicion that they may be dealing with tainted funds is as yet untested.  I am satisfied that, subject to the point on loss, with which I will deal with shortly, Mrs P has an arguable claim against each defendant such that it would not be right for me to prevent her from bringing it.  As to whether Lane has a claim, Mr Sinel's submission is, on the face of it, a powerful one.  If Mrs P is under a duty to indemnify Lane as pleaded, she will have to be responsible both for the costs which Lane has been ordered to pay the defendants and for the costs incurred by Lane itself in respect of the English proceedings.  Lane will therefore have suffered no loss.  However Mr Wilson submitted that this might not necessarily be the case.  It might be that a court would hold that Lane had been wrong to take the English action and should not be indemnified by Mrs P.  He therefore wished Lane to be a claimant in the alternative.  Not without hesitation, I agree that Lane should be allowed to remain as a plaintiff; but the alternative nature of the claim will need to be made clear.

29.      Indeed the case of both plaintiffs must be clarified, as must the nature of the claim of each of them (which is not on an identical legal basis) against each defendant.  I will revert to this at the end of this judgment. 

(ii)    The loss was not caused by the defendants

This is Mr Sinel's strongest point.  He submitted that, even assuming that the defendants were in breach of duties owed towards Mrs P and Lane because they caused Portree to give inflicting instructions to those given by Mrs P, they could not be liable for the costs incurred in connection with the English Part 8 proceedings because those costs were not a reasonably foreseeable or natural consequence of such breach.  Lane was bound to follow the instructions of the board of Portree, which was the owner of the proceeds of sale.   The defendants could not be liable for an irrational act on the part of Lane; it could not have been reasonably foreseeable that any competent firm of solicitors would be in any doubt that they had to follow the instructions of the board of Portree rather than the instructions of the beneficial owner.  Although he submitted that no authority was needed for such an obvious proposition, support was to be found in the emphasised passages of Hart J set out at paragraph 10 of this judgment. 

30.      He also referred to a passage in the judgment of this Court of 6^th August, 2002 at paragraph 6:-

"As a result of this impasse Lane and Partners made an application to the High Court for directions as to whom it should pay the money.  In law the position was clear.  The money belonged to [Portree} and Lane and Partners therefore had to account for the money as instructed by the directors of [Portree].  The representor [Mrs P] had no legal standing in relation to the company."

31.      The order of justice pleads that it was 'inevitable' that, faced with conflicting instructions from the directors of Portree and the beneficial owner of Portree in circumstances where the beneficial owner was also a client of Lane, the firm would have to seek directions from the High Court as to how it should resolve the matter.  Mr Wilson repeated those submissions in his skeleton argument.  He elaborated by saying that, of course, he did not have to go so far.  He only had to show that it was arguable that such a course of action was a reasonably foreseeable consequence of the breach of duty on the part of the defendants.  He submitted that the plaintiffs had to be given the opportunity of bringing evidence to seek to justify the decision of Lane in this particular case.  For example, it was relevant that Lane believed the instructions from the directors of Portree to be plainly in breach of the fiduciary duty owed by those directors to Mrs P.  If Lane had ignored Mrs P's instructions and gone along with the directors' instructions, this might have led Lane to be liable to Mrs P for assisting a breach of fiduciary duty by the directors. 

32.      I must confess that my mind has waivered on this point and at one stage I was minded to accede to Mr Sinel's submissions.  It is trite law that the assets of a limited company belong to that company, not to its shareholder.  The persons authorised to give instructions on behalf of the company are the directors, not the shareholder.   If the directors say one thing and the shareholder says another, the firm of solicitors acting for the company must act in accordance with the instructions of the board.  However I have just been persuaded that it would be wrong to deprive Mrs P and Lane of the opportunity of calling evidence and seeking to convince the Court that, on the particular facts of this case, it was not wholly unreasonable for Lane, faced with the conflicting instructions and its concern about a breach of duty by the directors, to take the safe course of seeking the directions of the English court and to allow them to argue that, assuming a breach of duty on the part of the defendants, this was a loss which was reasonably foreseeable and which flowed naturally from the breach of duty, so that the defendants should be held liable for the costs incurred as a result.  I also have in mind that allegations are made of breach of fiduciary duty as well as of breach of contract and tortious liability.  The test for remoteness of damage in each of these cases is not identical.  I am persuaded that, whilst there are undoubtedly difficulties in the way of the plaintiffs, this is not a case which is so doomed to failure that it should be struck out.

Res judicata

33.      Mr Sinel's final point was that the doctrine of res judicata operates to prohibit the plaintiffs from bringing a claim in respect of the costs of the English proceedings.  He submits that that is a matter which was fully determined by a court of competent jurisdiction.  After argument, Hart J ordered Lane to pay the defendants' costs; it was implicit in that order that the defendants were therefore not liable to pay Lane's costs.  The order of justice effectively asked this Court to reverse the decision of the English High Court; that was not permissible and this claim was bound to fail.

34.      I do not accept Mr Sinel's submissions.  In my judgment it is arguable - and it has to be no more than that for the purposes of this application - that the doctrine of res judicata does not prevent the plaintiffs from seeking the damages which they claim in this action, notwithstanding that such damages relate to the costs of the English proceedings.  I so hold for two reasons:-

(i)        Although she was joined to the English proceedings at the last moment, Mrs P was not a party at the time that the costs were incurred and it is therefore arguable that she is not bound by the order of Hart J.  The order was not made against her, yet she is the primary claimant in these proceedings.

(ii)       More significantly, the judge himself envisaged that his order was in the narrow context of the Part 8 application and did not prohibit an eventual reallocation of the liability for the costs incurred in making that application.  I refer to the second paragraph of the passage quoted at paragraph 11 above.

Summary

35.      For the reasons which I have given, I decline to strike out the order of justice as a whole.  Nor do I agree that the claims by the second plaintiff should be struck out or the claims of both plaintiffs against the third defendant.  The plaintiffs' case is sufficient to allow it to go before a court for trial.

36.      However, I do not consider that the order of justice is in a fit state to allow the real issues to be focused on both by the parties and by the Court.  I consider that a fair and efficient trial of the matter would be inhibited if the order the justice were to remain in its present form.  It is simply not possible to ascertain with clarity what the nature of the plaintiffs' case against each defendant is.  I will hear the parties on the exact form of any order but I have in mind to direct that the plaintiffs should file an amended order of justice within a specified period setting out in a proper and satisfactory manner the facts and matters relied on and the nature of each plaintiff's case against each of the defendants.  The amended pleading will need to explain the circumstances in which Lane makes a claim as well as Mrs P and the grounds upon which that is made.  The pleading will also need to set out with clarity the exact nature of each duty (distinguishing between those owed in tort, contract or as a result of a fiduciary obligation) said to be owed by each defendant to Mrs P or Lane.  It must then go on to set out any facts and matters relied upon to support the existence of that duty in the normal way.  It must then move on in a logical manner to set out the respects in which it is alleged that each defendant has breached the duty owed by it or him to one or more of the plaintiffs.  As I have said earlier, responsibility for preparing an adequate pleading rests ultimately upon the advocates for the plaintiff.  They may well find it more satisfactory if they (or any counsel instructed on their behalf) start completely afresh rather than try and patch amendments on to the existing pleading. 

37.      I will hear the parties on the exact form of any order in respect of amendment and on costs.

Authorities.

Williams -v- Natural Life Health Foods Limited (1998) 2 All ER 577.

Representation of DP; Nearco joined (6^th August, 2002) Jersey Unreported; [2002/146].