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Cite as: [2023] ScotCS CSOH_26, [2023] CSOH 26, 2023 GWD 16-153

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OUTER HOUSE, COURT OF SESSION

[2023] CSOH 26

CA4/22

OPINION OF LORD BRAID

In the cause

LEANDER CB CONSULTANTS LIMITED T/A LEANDOR ADVISORS

Pursuer

against

(FIRST) BOGSIDE INVESTMENTS LIMITED AND (SECOND) ALAN CARSON McLEISH

Defenders

Pursuer: Ower; DAC Beachcroft Scotland LLP

Defender: Dean of Faculty KC; Paterson; Gilson Gray LLP

25 April 2023

Introduction

The Engagement Letter

[1]

The pursuer sues in this action for £150,000 which it maintains is the sum due to it by

the defenders for services rendered pursuant to an Engagement Letter signed by the second

defender (as a director of the first defender) on 8 March 2021. The defenders deny that any

such services were rendered. Further, they have lodged a counterclaim seeking

(a) reduction of the Engagement Letter on the basis that it was part of a series of transactions

induced by fraudulent (which failing, innocent) misrepresentations made by Philip Shute as

the purported executive chairman/managing partner of the pursuer and (b) payment to the

first defender of the sum of £175,000 already paid to the pursuer.

The Bogside action

[2]

Separately, the first defender has raised an action against Mr Shute, and one

Graeme Paterson (the Bogside action), seeking damages of just under £5m, said to be the loss

sustained by it as a result of the allegedly fraudulent misrepresentations. It is important to

acknowledge at this stage that although all parties accept that the defenders have been the

victims of a fraud, Mr Shute strenuously denies that he, or the pursuer, were party to that

fraud, his position being that he, as much as the defenders, was duped by the fraudster(s).

The fraud

[3]

The fraud surrounded the formation of a company called Obree Global which was

supposedly to receive the sum of $2.4 billion being held by a New York law firm, and to

which the defenders were prevailed upon to lend the sum of $7.5 million, which (it was

said) was required to secure the release of the $2.4 billion which had been earned from the

supply of personal protective equipment (PPE). In exchange, the second defender was to

receive a stake in Obree. The loan was advanced in January and February 2021. In

May 2021, it was discovered that the New York law firm knew nothing of the transaction

and did not hold, and had never held, the $2.4 billion in question.

The Shareholders Agreement (SHA) including the arbitration clause

[4]

In August 2021 (after the commission of the fraud had come to light) a Shareholders

Agreement (SHA) was entered into among the shareholders of Obree (being Mr Shute, one

Ryan Underwood and the second defender), and Obree. That replaced a previous SHA, the

purpose of the second SHA being to increase the second defender's shareholding in Obree.

The SHA included a dispute resolution clause (clause 25), referring any dispute "arising out

of or in connection with" the SHA to arbitration.

The debate the issues

[5]

The action called before me for a debate on the commercial roll on the following

issues:

(i)

Whether, standing clause 25 of the SHA, this court lacks jurisdiction such that

the counterclaim should be dismissed;

(ii)

Whether the defenders' averments of fraud on the part of Mr Shute are

sufficiently relevant and specific;

(iii)

Whether in any event the defenders have averred a substantive defence, such

as to entitle them to put the pursuer to proof of its averments;

(iv)

Whether the second defender has title to sue for the sum sought in the

counterclaim.

[6]

The Bogside action also called before me, on the motion of the first defender in that

action (Mr Shute) that it should be sisted in terms of section 10(1) of the Arbitration

(Scotland) Act 2010 in order that arbitration under clause 25 might run its course.

[7]

As to whether the counterclaim and the Bogside action should respectively be

dismissed and sisted, the defenders' position is that clause 25 has no application. For its

part, the pursuer says that the Obree fraud has no relevance to the Letter of Engagement.

[8]

I will return to these arguments, and to the issues, below. First it is necessary to say

something of the pleadings in this action, since ultimately I require to decide whether or not

to allow parties a proof of their averments, and if so, to what extent.

The pleadings

The summons

[9]

The pursuer avers that on 8 March 2021 it entered into an agreement with the

defenders, set out in an Engagement Letter of that date, whereby it would provide services

to the second defender in connection with his personal affairs and the so-called

"redomiciling" of his assets in relation to ongoing divorce proceedings. At considerable and

arguably unnecessary length, the summons sets out work said to have been undertaken by

Mr Shute. In terms of the Engagement Letter, the parties agreed that the fee payable by the

defenders would be £50,000 monthly paid in advance for an initial commitment period of

6 months (ie an initial commitment fee of £300,000 split between two payments of £150,000

each, 3 months in advance). It is averred that Obree paid the first tranche but that the

second tranche of £150,000 remains outstanding.

The defences

[10]

The defenders aver, in answer 2, that they were induced to enter the agreement

contained in the Engagement Letter as a result of Mr Shute's fraudulent misrepresentations.

As to what those misrepresentations were, reference is made to the counterclaim. They also

aver that no work was done by the pursuer in connection with any "redomiciling" of the

second defender's assets and that the focus of the work done by Mr Shute related to the

investment purportedly required to secure the release of the $2.4 billion commission.

The counterclaim

[11]

In statement 2 of the counterclaim, the defenders aver that the second defender was

introduced to Mr Paterson, Mr Underwood and Mr Shute in January 2021. He was advised

that they had a significant investment opportunity relative to a PPE transaction that a

contact of Mr Paterson's, Brent Fernandez, had entered into with the US Department of

Defense. Mr Paterson told the second defender that he had agreed with Mr Feranandez that

Mr Paterson would receive 50% commission of any proceeds of the deal, said to be worth

$2.4 billion. The total commission of $4.8 billion was said to be held by a named US law

firm. The second defender was told that funding was required to overcome US regulatory

issues so that the money could be released and transferred to a new company being

incorporated in Dubai (Obree). To that end, the second defender was asked to provide a

$7.5 million loan in return for which he would receive a 15% stake in Obree. Obree was also

to be engaged in other lucrative new contracts.

[12]

In statement 3, the defenders aver that Messrs Shute and Paterson repeatedly

advised the second defender that the money was held by the US law firm and constituted a

legitimate source of income. In particular, on a video call on 26 January 2021, attended by,

among others, the second defender, Shute and Paterson, Mr Paterson's lawyer confirmed

that Mr Paterson had advised him that the full proceeds of the PPE transactions were

currently held by the client account of that firm but were frozen, pending investigative

clearances. Once the funds were released, they would be transferred to Obree. Mr Shute

took an active role on that call and said that he and Mr Paterson's lawyer would liaise with

the law firm to obtain a letter of comfort confirming that they held the funds, which would

be released once certain steps had been taken. Thereafter the second defender was sent a

video by Mr Paterson, purporting to show a computer screen with an online statement for a

bank account with a frozen balance of $250 million. Mr Paterson said that this statement

showed the PPE commission held by the law firm. On 2 February 2021 at about 0700 hours

Mr Shute sent a WhatsApp message to the second defender stating that he and another

would be coordinating with the law firm throughout that day to deliver the remaining

documents to enable the transfer/transaction to be proceeded with on the following day. He

said he had been working through this overnight. On 2 February Mr Paterson sent a

message stating that he had received confirmation that the US law firm now held the funds.

On 4 February the second defender spoke with Mr Shute. Mr Shute told him that the firm

had received the funds. He then emailed the second defender's solicitors purportedly to

confirm that Mr Shute had been corresponding directly with the US law firm. The email

stated that the law firm had:

"...informed us that funds have been received from the US-based financial

institutions that were previously holding funds that were subject to regular way

AML review procedures. We anticipate that we will receive documentation in

support of these funds being received shortly and just as importantly we expect

those funds to be remitted out to the UAE to be received initially by Aldahabashi

Gray and then ultimately transferred into the new corporate entity (Obree Global)".

[13]

In statement 4, the defenders aver that Messrs Shute and Paterson either knew that

the representations were untrue or that the representations were made recklessly, there

being no proper basis for belief in their truth. The representations caused the defenders to

enter into a series of transactions and lend sums to Obree. In particular, in terms of a loan

agreement dated 29 January 2021 the first defender agreed to lend $7.5 million to

Mr Underwood for use by Obree, which had not by then been incorporated. The funds were

advanced in two tranches, £400,000 on 29 January 2021 and £5,074,000 on 10 February 2021.

Those funds were placed into an escrow account, pursuant to an escrow agreement about

which the defenders make detailed averments, including Mr Shute's involvement therein.

There then follows an averment that after the calls on 26 and 27 January Messrs Shute

and Paterson were applying pressure to the second defender to release the loan funds,

representing that another investor was interested, that the second defender might lose out

on the deal and that he would double his money in a matter of weeks if he transferred the

loan funds.

[14]

In statement 5, the defenders aver that an English solicitor was instructed by the

second defender to verify the PPE transaction and to compile a transaction bible. As that

work was going on, the second defender entered a series of agreements with entities

associated with Mr Shute, and Obree's other shareholders, including the Engagement Letter.

Mr Shute's role, as the second defender understood it, was to act as an investment advisor to

Obree and its shareholders. The Engagement Letter was "part and parcel" of the

arrangements regarding the anticipated PPE transaction. But for that transaction, the

Engagement Letter would not have been agreed to by either defender, there being no

purpose thereto.

[15]

In statement 6, the defenders aver that the second defender discovered the fraud in

May 2021, when it became known that the US law firm did not hold the funds and knew

nothing about the alleged funds. At that time it was represented that Mr Fernandez had

duped everyone, including Mr Paterson. Thereafter, in an attempt to recoup losses, the

second defender agreed to accept an increase in his Obree shareholding.

[16]

In statement 7, the defenders aver that the first tranche of £150,000 paid to the

pursuer was instructed by Mr Shute, out of the Escrow Account, on 25 April 2021 (that is,

out of funds advanced by the first defender).

[17]

In statement 8 the defenders aver that the representations of Messrs Shute and

Paterson were fraudulent, and if they were not fraudulent because Mr Shute was honestly

unaware of the true position, they remained material and operative, though innocent

misrepresentations which induced the entering into of the Engagement Letter. On either

basis, the Letter of Engagement falls to be reduced and the first defender is entitled to

repetition of the sum already paid to the pursuer of £175,00, being the first tranche

of £150,000 plus purported expenses incurred by Mr Shute of £25,000.

Answers to the counterclaim

[18]

In its answers to the counterclaim, the pursuer refers to the arbitration clause in the

SHA. It avers that that clause excludes the jurisdiction of this or any other court. The

answers contain copious averments designed to show that Mr Shute was unaware of the

fraud. In particular, the averments made by the defenders about the allegedly fraudulent

misrepresentations are answered in detail. There is an averment in answer 2 that any

representations made by Mr Shute in relation to Obree were made on the basis of

information provided to him by Mr Paterson and that Mr Shute repeated what he

understood from Mr Paterson, believing what he had been told by Mr Paterson to be true.

The answers seek dismissal of the counterclaim.

The SHA

[19]

As already mentioned, the parties to the SHA were the second defender,

Mr Underwood, Mr Shute and Obree. Preamble D states:

"This Agreement regulates the relationship between the Parties in respect of the

operation, management and development of the proposed business of the Company,

and the governance of its corporate affairs..."

[20]

Clause 25.1 provides that the Agreement is governed by and shall be construed in

accordance with the laws of England and Wales (there are no averments as to English law,

which is therefore assumed to be the same as Scots law; since the approach to interpretation

was not in dispute, nothing turns on this). Clause 25.2. to which reference has already been

made, provides:

"In the event of a dispute arising out of or relating to this Agreement, including any

question regarding its existence, validity or termination (a Dispute), any party to the

dispute (each a Disputing Party) may serve a Notice of Dispute...on all the other

Disputing Parties..."

[21]

There then follows a series of "waterfall" provisions, regulating how the Disputing

Parties are to attempt to resolve the dispute, culminating in clause 25.9:

"If the Dispute is not settled by mediation...the Dispute may be exclusively

referred to and finally resolved by ad hoc arbitration under the Arbitration Law

of the DIFC..."

Submissions

[22]

Counsel for the pursuer submitted that the defenders' pleadings lacked the necessary

high level of specificity where fraud was alleged. The alleged false statement must have

been relied on and formed the reason for the party complaining of fraud entering into the

transaction complained of: McLellan v Gibson (1843) 5 D. 1032, per the Lord Justice Clerk

at 1034. The representation complained of must have been made knowing that it was false,

and must also have been the cause of the contract: A. W. Gamage Limited v Charlesworth's

Trustee 1910 S.C. 257, Lord Kinnear at 264. Specific averments, setting out the acts or

representations complained of, the occasions on which such acts or representations were

made, and how they were causative of the relevant party entering into the agreement were

required: The Royal Bank of Scotland plc v Holmes 1999 SLT 563 per Lord Macfadyen at

569-570. The level of specificity required was high: Gillespie v Russet (1856) 18 D 677, per

Lord President (Colonsay) at 684. That an action is on the commercial roll does not mean

that the foregoing requirements may be departed from: Marine & Offshore (Scotland) Ltd v

Hill 2018 S.L.T. 239 per Lord President (Carloway) delivering the opinion of the First

Division, at paragraph 16. Finally, under reference to Howe v City of Glasgow Bank

(1879) 6 R. 1194, per Lord President (Robertson) at 1203, the purported fraud must have been

committed in respect of the act complained of, not be a fraud on a different occasion nor for

a different purpose. When measured against these requirements, the pursuer and the court

were left entirely in the dark as to what the alleged fraudulent misrepresentation was, how

it induced the Letter of Engagement agreement, how it was relied upon and how it caused

the defenders to enter that agreement. There were no sufficiently specific averments as to

what, precisely, was the inducement made by the pursuer which caused the defenders to

enter into the contract, nor what materially influenced the defenders in that decision

(cf Kidd v Paull Williamsons LLP 2018 SC 193 per Lord Tyre at [33] to [34]). Further, there was

no substantive defence: the defenders had failed to engage with the pursuer's detailed

averments. Further, the first defender had no title to sue for sums paid by Obree. Finally,

the arbitration clause in the SHA was wide enough to cover the dispute raised, and the

action should therefore be dismissed.

[23]

In reply for the defenders, the Dean of Faculty did not take issue with the degree of

specification required when averring fraud, but submitted that the averments in the

counterclaim gave ample notice of the matters complained of by the pursuer. The answers

to counterclaim demonstrated that Mr Shute well understood what representations he was

said to have made, and when he was said to have made them. The defenders had pled a

relevant substantive defence and in the circumstances were entitled to put the pursuer to

proof of its averments. The title to sue point was misconceived. The defenders did not

accept that the first tranche had been paid by Obree but averred that it had been paid out of

money held on the first defender's behalf. The arbitration clause did not and could not

apply.

Decision

Title to sue

[24]

It was not clear whether counsel for the pursuer ultimately insisted in the no title to

sue point - certainly, not strenuously - but in any event, it can be swiftly disposed of. The

defenders plainly aver that the sum of £175,000 was paid by the first defender, not by Obree.

Whether that was so or not remains to be established at proof, but the defenders have

relevantly averred title to sue on the part of the first defender for payment of the sum

of £175,000.

Arbitration

[25]

This point, too, may be swiftly disposed of. Neither the pursuer nor the first

defender was party to the SHA. Neither is bound by the terms of clause 25. The pursuer,

not being party to the arbitration agreement, cannot avail itself of that clause. Further, for

the reasons given in my refusal of the motion to sist the Bogside action, the clause does not

comprehend the dispute which is the subject matter of the counterclaim. Further, even had

clause 25 applied, it would not have ousted the jurisdiction of the court such that the action

would fall to be dismissed: Fraserburgh Harbour Commissioners v McLaughlin & Harvey

Ltd 2022 SC 84. Finally, as pointed out by the Dean, it is difficult to see how the pursuer

could circumvent the terms of section 10(1)(d)(i) of the 2010 Act, which provides that the

mandatory sist does not apply if the applicant has taken any step in the legal proceedings to

answer any substantive claim against it. The pursuer has substantively engaged with the

counterclaim and it is now too late for it to invoke the arbitration clause. Counsel for the

pursuer sought to circumvent this difficulty by saying that she did not rely on section 10

since she was not seeking a sist, but dismissal. That is correct insofar as it goes, but since, as

she acknowledged, dismissal is a greater remedy than sist, and is precluded by

Fraserburgh Harbour, that argument takes the pursuer nowhere. There is no basis for

dismissing the counterclaim on the strength of the arbitration clause.

Averments of fraud

[26]

As the authorities relied upon by the pursuer make clear, for a case of fraudulent

representation to be relevant, the party making the case, here the defenders, must aver: that

the alleged false statement was relied on in entering the transaction in question (McLellan v

Gibson); and that the representation was made knowing that it was false (A. W. Gamage

Limited v Charlesworth's Trustee). As regards specification, the defenders must make specific

averments setting out the acts or representations complained of, the occasions on which

such acts or representations were made, and how they caused the defenders to enter into the

transaction: The Royal Bank of Scotland plc v Holmes. The defenders meet all of these

requirements. The defenders adequately and amply aver when, and by whom, the

misrepresentations about the $2.4 billion were made; that Mr Shute was aware that the

representations were false; that the defenders relied upon those representations in

advancing the loan and entering a series of transactions; and that the Engagement Letter was

one of those transactions. That is all that is required.

[27]

It is necessary to say something about two of the authorities mentioned by counsel

for the pursuer. First, Howe v City of Glasgow Bank, which was the basis for her submission

that the purported fraud must have been committed in respect of the act complained of, not

be a fraud on a different occasion nor for a different purpose. That is correct insofar as it

goes, but the question being addressed in the passage referred to was whether a company

could be held responsible for a fraud previously committed by a person acting as agent, at a

time when he was not acting as agent, and the dictum must be understood in that context. In

any event, the defenders have adequate averments linking the Engagement Letter with the

PPE fraud, and the latter cannot be said, on those averments, to be a different fraud

committed on a different occasion for a different purpose.

[28]

Insofar as Kidd v Paull Williamsons LLP is concerned, the facts there were materially

different from those here. The pursuer in that case had not averred, and therefore did not

offer to prove, that the representation claimed to be fraudulent was made with the intention

of inducing him to enter a particular transaction, nor had he averred that the representation

materially influenced his decision to enter the transaction. Here the defenders do make such

averments, insofar as they aver that the misrepresentation induced not only the loan, but

also a series of transactions of which the Engagement Letter was one.

[29]

Whether or not the defenders will be able to prove their averments is a question for

another day but I consider that they have pled a relevant case of fraud, with a sufficient

degree of specification, as to entitle them to a proof before answer.

Substantive Defence

[30]

It cannot be maintained that the defenders have not pled a substantive defence, such

that decree should be granted without any further procedure. The defenders have

relevantly and fully pled a case that the Engagement Letter was induced by a fraudulent,

failing which an innocent, misrepresentation, such that it ought to be reduced. That is a

defence to the action. It is true that the defenders' response to the work which the pursuer

claims to have done is not as full as it might be, although as the Dean pointed out, the

pursuer has no alternative unjust enrichment claim, and if the defence is successful, as the

pursuer's case is currently pled, the extent of the work done will be of no consequence.

Whether the pursuer should be put to the expense of proving what work was done (as

opposed to why it was done) is a matter which can be dealt with by the court's case

management powers when a proof is fixed. It may be that consideration will also require to

be given to whether there would be merit in fixing a proof on the discrete issues of whether

Mr Shute was party to any fraud, and whether any misrepresentation, be it fraudulent or

innocent, induced the defenders to enter into the Engagement Letter, as they aver. Those are

questions for another day. In the meantime, defenders' averments are sufficient to entitle it

to a proof before answer.

Disposal

As counsel agreed was appropriate, I shall put the case out by order, to discuss what orders

should be made in light of this opinion and to fix further procedure.