Mr Justice Warren:
Introduction
- In this case, the Claimants seek, principally, damages for fraudulent misrepresentation and conspiracy against the first to fourth Defendants and damages for breach of contract against the third and fourth Defendants. I shall refer to the first Claimant as DGI. Since a number of parties to this action are members of the Dadourian family and share that surname, I shall refer to them all simply by their first names; the second and third Claimants are Alex and Haig. The claims of DGI, Alex and Haig relate to an underlying dispute between DGI, a company incorporated under the law of the State of New York, and an English company, Charlton Corporation plc which I shall refer to as Charlton. That essentially contractual dispute, concerning an option in respect of certain hospital bed manufacturing equipment, was the subject of an arbitration which commenced in 1999. DGI was successful in that arbitration both in (i) defending Charlton's contractual claims and claims based on alleged fraudulent misrepresentation by DGI through Alex and Haig and (ii) in its counterclaim asserting breach of contract by Charlton and fraudulent misrepresentations by it through one or more of the first to fourth Defendants. I shall refer to the first Defendant as Mr Simms, to the second Defendant as Mr Rahman and to the third and fourth Defendants as Jack and Helga.
- DGI, Alex and Haig seek to recover against Jack and Helga the contractual damages awarded against Charlton in the arbitration, on the basis that Charlton and various other entities are in reality a sham, a façade for Jack and Helga. They also seek against all four Defendants the substantial costs of the arbitration which they have been unable to recover from Charlton due to its lack of assets. They also seek damages which they allege to have been suffered as a result of the inability of DGI to sell the equipment during the currency of the option to which I have just referred. They submit that I am bound, in this claim by the Claimants against Jack, Helga and Mr Simms at least, by the findings of the arbitrator on the basis that those Defendants are privies of Charlton in relation to whom a res judicata arises. Those findings included findings of fraudulent misrepresentation by those Defendants.
- Mr Simms was, at material times, senior partner in the firm of solicitors, Bower Cotton. He was also chairman of Charlton. The fifth to eleventh Defendants were his partners at the material times. It was sought to make them liable, in that capacity, for the alleged defaults of Mr Simms himself. Shortly before the commencement of the trial, the Claimants reached a settlement with those Defendants (the terms of which are unknown to me, save that those Defendants agreed to assist the Claimants with the provision of information of relevance to the claims against the first to fourth Defendants, particularly Mr Simms). The thirteenth to sixteenth Defendants are corporate bodies concerned in the family financial arrangements of Jack and Helga. They have taken no part in the trial following a direction of Sir Donald Rattee (sitting as a judge of this Division) who was of the view that their involvement would only be necessary, should the Claimants succeed in their claims, at a later stage when it comes to enforcement of any award of damages. Mr Rahman was, at material times, a director of Charlton.
- Mr Clive Freedman QC and Mr Charles Samek appear for the Claimants. Mr Simms appears in person. Mr Michael Ashe QC and Mr Stuart Cakebread appear for Jack and Helga. Mr Rahman did not appear as a party, although he did give evidence on behalf of Mr Simms and Jack and Helga. Judgment had already been entered against him in default of defence. I understand that he could not afford legal representation and that, for one reason or another, could not represent himself.
- As Mr Freedman says, this is an unusual case and the facts are exceptional. On his case, it involves the use of corporate and trust structures in way calculated to deceive third parties including creditors, contracting parties and members of the same family. Without going into any detail at this stage, I should say more about the background than the very briefest of sketches which I have given above and of how Mr Freedman, in his opening, put the Claimants' claims.
The background
- As I have said, the claim arises out of an option agreement ("the Option Agreement") entered into in September 1997 by DGI and Charlton. Under the Option Agreement, DGI provided Charlton with an option to purchase tooling and other equipment intended to be used for the manufacture of hospital beds and related equipment. Charlton exercised the option. The Option Agreement required Charlton, at an appropriate time, to open a letter of credit to purchase the tooling and equipment. The Claimants alleged before the arbitrator and before me that the failure of Charlton to do so, which failure is admitted, was a breach of the terms of the Option Agreement. The first to fourth Defendants say that the obligation to open a letter of credit did not arise. It only arose, according to them, once DGI had acquired the totality of the equipment which it had contracted, following the exercise of the option, to sell, something which it never did. Accordingly, when DGI terminated the contract on 18 September 1998, purportedly on the basis of a repudiatory breach by Charlton, they say that it was itself in repudiatory breach.
- The consequence of the termination was that in November 1998 Charlton instituted court proceedings in New York alleging that DGI had unlawfully terminated the Option Agreement, and further that DGI together with its directors Alex and Haig had fraudulently induced Charlton to enter into the Option Agreement by representing that at the time of the agreement DGI owned and possessed everything which was to be sold under it. It is common ground that DGI in fact owned the specialist tooling necessary for the manufacture of the hospital beds but did not own the general equipment (said by DGI to be readily available) necessary to produce, together with the tooling, a complete production line; it is also common ground that DGI was to provide a complete production line and not just the tooling.
- The New York action was stayed for arbitration pursuant to an arbitration clause in the Option Agreement but on terms that Alex and Haig submitted to arbitration in respect of the claims of fraudulent misrepresentation. In April 1999, the arbitration commenced. In the arbitration, Charlton repeated its claims and DGI counterclaimed damages for breach of contract and for fraudulent misrepresentation.
- The arbitrator heard the case over a long period of time. He heard from many witnesses and received a considerable volume of evidence, both documentary and live. On 4 July 2002, the arbitrator dismissed Charlton's claims because of its failure to comply with peremptory orders including the payment of security and costs. He also went on to conclude the determination of the counterclaim. On 13 June 2003, the arbitrator issued a Final Award part 1 in which he found that:
a. Charlton had been and was unable to open a letter of credit, and that it was in consequence in breach of contract;
b. DGI was entitled to treat the contract as repudiated, and was entitled to damages for breach of contract;
c. DGI had been induced to enter into the Option Agreement by reason of fraudulent misrepresentations by Charlton and its directors Mr Simms and Mr Rahman to the effect that:
i. each of Mr Simms and Mr Rahman owned major shareholdings in Charlton; and
ii. Charlton was (a) a sound trading company (b) which was creditworthy and (c) capable of performing its financial obligations under the Option Agreement; and
iii. Charlton was a company experienced in manufacturing various products in Third World countries which could not be manufactured profitably in the West.
d. The Claimants had not misrepresented what DGI had in its ownership and possession, and that Charlton knew at the time of the Option Agreement, and in any event before exercising the option, that equipment which became known as the General Equipment was to be acquired at a later date.
- In concluding that Charlton had that foregoing knowledge, the arbitrator found that Jack had such knowledge and that such knowledge was to be imputed to Charlton. He reached such conclusion because of what he regarded as clear and compelling evidence that Jack (with Helga) was at all material times the party in control of and directing Charlton, to whom Mr Simms and Mr Rahman turned for instructions.
- In finding that Charlton was unable to open a letter of credit, the arbitrator found that (a) Mr Simms and Mr Rahman had deliberately made false statements to potential funders, (b) there was a deliberate failure to provide basic information relating to Charlton to potential funders required as a pre-condition of a letter of credit, and (c) Charlton and Mr Simms had suppressed a document of NatWest which had suggested that it was necessary to refer Charlton to the bank's internal fraud office. I should add here that reference to this office does not necessarily, or even ordinarily, indicate that there is some indication of fraud.
- The arbitrator held that the Claimants were entitled to recover substantial damages from Charlton which were set out in a series of awards in 2003 and early 2004.
- Charlton has no assets. The Claimants have sought in these proceedings to recover the amounts awarded to them by the arbitrator from Jack and Helga for whom, they say, Charlton was a façade and from Mr Simms and Mr Rahman who, they say, combined with Jack and Helga.
- Mr Freedman says that the expression façade is not used lightly. It reflects, he says,
"an extraordinary combination of circumstances resulting from (a) a modus operandi of [Jack and Helga] to conceal assets from existing and future creditors and to conduct fraudulent business behind corporate façades, (b) their concealment from [the Claimants] of the true facts about their own involvement in a contract which as far as [the Claimants] were concerned was being negotiated by [Jack and Helga] for them with a third party at arm's length and not with themselves, and (c) their concealment of their involvement in circumstances where they knew that the Claimants would not countenance entering into a commercial contract with a company in which [Jack and Helga] had an or any involvement."
- Mr Freedman also submits that the corporate veil of Charlton should be lifted. The consequence of doing so is, he submits, that Jack and Helga should be jointly liable with Charlton for the awards of the arbitrator.
- There are also claims for fraudulent misrepresentation and conspiracy against Jack and Helga. The claim in deceit is among other things that they represented that they were mere intermediaries, indeed representing the interests of the Claimants, whereas the truth was that they owned and controlled Charlton. By this falsity, they obtained for themselves the benefit of a contract which they had represented to the Claimants they were negotiating on behalf of Claimants.
- There are also claims in fraudulent misrepresentation against Mr Simms and Mr Rahman, the directors of Charlton. Mr Freedman says that the directors appeared to be reputable, and clothed the deal with respectability and honesty. Mr Simms was at the time the senior partner of a well known firm of commercial lawyers in the City of London, Bower Cotton. Mr Rahman was held out as having had considerable experience as a merchant banker. They represented, according to the Claimants and as found by the arbitrator (although this is denied by Mr Simms and Mr Rahman), that they were each major shareholders in Charlton. It is also alleged that they made other misrepresentations about Charlton and its financial ability and business record.
- Mr Freedman submits that Mr Simms and Mr Rahman knew about the façade of Charlton, about how there was a pretence to the Claimants that Jack and Helga were mere intermediaries, and they acted out that lie. In truth, he says that they were Jack and Helga's confederates, and by their actions, they facilitated the transaction.
- Accordingly, a claim for conspiracy is asserted against the first to fourth Defendants using the fraud in an unlawful combination. The effect of the fraud and/or the conspiracy was, it is said, the Claimants' unwitting entry into a commercial relationship with Charlton and the litigation/arbitration initiated by Charlton against them. The claims brought against the Claimants in the arbitration were dishonest claims and were known to be so by the first to fourth Defendants. Further, the fraud in relation to the representations and in relation to the ability to open a letter of credit, was perpetuated by fraudulently making the claims and assertions in the litigation/arbitration.
- This is said to give rise to claims in conspiracy against the first to fourth Defendants by themselves and/or with Charlton in relation to the litigation/arbitration.
- The Defendants deny that these alleged misrepresentations were made. Mr Ashe describes the claims as "extravagant" and as "fairly extraordinary even by the standards of these claimants". He complains that much of the 6 weeks of the trial has been taken up with minute examination of the nature and extent of Helga's trust arrangements saying this in his closing written submissions:
"Whilst that exercise may have had some relevance in an asset chasing context it is difficult if not impossible to discern its part in the substantive action. Although therefore we have addressed below at some length the issue of "sham" it is important to have in mind that it is of only the most peripheral relevance to the issues in the case."
- Mr Simms, for his part, has also complained about the time spent on trust issues and the corporate structure underneath the trust. He sees the issue simply as a contractual dispute between DGI and Charlton and whilst appreciating the allegations made against him in terms of fraudulent misrepresentation, he says that it is completely unsubstantiated on the facts.
- Both Mr Ashe and Mr Simms reject Mr Freedman's argument based on res judicata. They submit that the Defendants are not bound by the findings of the arbitrator and Mr Simms submits that, on the evidence before me, I should reach different conclusions of fact. As to res judicata, it might be thought that the simple, and appropriate, way for this action to be dealt with would be for me to decide whether Mr Freedman's arguments alleging that Jack, Helga and Mr Simms are privies of Charlton and bound by the arbitral award are correct; if they are, there would be no need for me to make fresh findings of fact since I would be bound by the arbitrator's findings. That is a superficially attractive approach but it is one which I cannot adopt. I cannot do so, at least in relation to Mr Simms, because in order to show that Mr Simms is a privy to the arbitration award, it will be necessary in practice to show that he himself is guilty of some fraudulent misrepresentation or involved in some conspiracy. It is not logically possible, I think, to rely on the arbitrator's own findings on those issues to establish that Mr Simms is a privy to the arbitrator's decision. If I were to find that Mr Simms made no misrepresentation and was involved in no conspiracy, then it is unlikely – I put it no higher at present – that he could be a privy to the arbitration award; in which case, he would not be bound by the findings of the arbitrator and I do not then see that a contrary finding by the arbitrator can deprive Mr Simms of the rights which he would otherwise have.
The Dadourian family
- The Dadourian family is Armenian in origin. Alex and Haig are brothers. Their father, Dadour, and Jack's father were brothers. Jack's father had rescued his brother and there is no doubt that he, the brother, considered that he owed his life to Jack's father. This had a profound effect on how he viewed his relationship with Jack over the years.
- By the time of the arbitration, there was, justifiably or not, animosity on the part of Alex and Haig towards Jack and Helga. That animosity has increased ever more as the litigation has continued. The litigation has been pursued relentlessly by the Claimants at what must be huge expense, expense incurred largely, the Claimants would contend, as a result of subterfuge by Jack and Helga in relation to the non-disclosure of assets and a failure, on the part of all of the first to fourth Defendants, properly to observe the most basic of their obligations of disclosure. I have, nonetheless, asked myself from time to time whether this litigation is proportionate to the sums at stake. Haig was seriously ill when giving evidence to me by video link and has since died. Further, the two cousins, Alex and Jack, are both old. Jack too is a seriously ill man approaching the end of his life. I am therefore saddened to see this bitter family feud being pursued through the court.
The witnesses
- Before turning to the facts, I should say something about each of the witnesses and their various family and professional relationships.
- For the Claimants, Alex and Haig each gave evidence as did Mr Nicholas Gallo and Ms Denise Darmanian, partners in the firm of US attorneys, Gallo & Darmanian, acting for the Claimants. As well as having witness statements from each of them prepared for this hearing, I have been taken to transcripts of part of their evidence before the arbitrator.
- Alex's memory of events many years ago was, in many respects dim and confused, unsurprisingly not only because of the distance in time but also because in the intervening period Alex, too has suffered serious illness. There are significant inconsistencies in what he has said from time to time and, whilst I do not think he is deliberately telling anything other than the truth as he sees it, I do think that some of his evidence has been developed with the benefit of hindsight.
- Haig gave evidence by video-link; he did so against the advice of his doctors, wishing me to have the benefit of his live evidence. The comparatively short periods of cross-examination were clearly exhausting for him. He was doing his best to help and, with one small exception which I will deal with in due course, I accept what he said.
- Mr Gallo appears to have a close interest in this case. He was in court for much of the hearing. He has not in all respects and at all times acted in an entirely straightforward way. Mr Freedman has wasted no opportunity to criticise the Defendants, and Mr Simms in particular, for misleading not only the Claimants but also third parties in correspondence. Mr Gallo has, on occasions, himself been disingenuous in the terms in which he has corresponded with Mr Simms. His evidence in relation to DGI's attempts to prevent an arbitration in London (which I deal with later) was untrue. His approach to the interpretation of the Option Agreement, although less extreme than that of Ms Darmanian, owes as much, I think, to his clients' interests as it does to an objective assessment of its true meaning.. However, on the central issues on which he was able to give first hand evidence in this case, I broadly accept what he has to say as will appear.
- Ms Darmanian struck me as a defensive and guarded witness. She was responsible on behalf of the Claimants for the drafting of the Option Agreement. I am bound to say that I found some of answers about what she thought the Option Agreement meant as startling. She appeared to me to take a stance which owed everything to the interests of her clients and to the protection of her own position rather than to the words of the Option Agreement which are, at best from her point of view, ambiguous. I fear that she has become so identified with her clients' case that, without deliberately misleading the court, she is unable to distinguish in all respects that which was said from that which she thinks must have been said and from that which she wishes had been said.
- Mr Simms, Mr Rahman, Jack and Helga gave evidence against the Claimants' case.
- Mr Simms starts with the disadvantage of having had his evidence in other cases disbelieved. Mr Freedman missed no opportunity to remind me of that. Mr Simms also has the disadvantage of having been struck off the Roll of Solicitors. I do not need to rehearse here the details of his previous proceedings, including the appeal to the Court from the Solicitors' Disciplinary Panel which struck him off. He has been found to be dishonest in the past in relation to other matters and the evidence which he has given. The relevant findings can be found in the judgments which are publicly available in a number of cases, and most recently the decision of Lawrence Collins J in Conlon, a decision which Mr Simms is seeking to appeal. It does not follow from previous decisions concerning Mr Simms' veracity that he is not being honest in other cases. Indeed, I myself found his evidence to be truthful in the ongoing saga of litigation being pursued by Mr El Ajou against Mr William Stern and various companies with which Mr Stern is or was associated. I do, however, bear history in mind in assessing Mr Simms' evidence overall. My assessment of his honesty is inevitably also affected by the approach which has been adopted by him in relation to disclosure (being careful not to associate him with the failings of Jack and Helga in relation to the asset chasing exercise which has been carried on against them). And I take into account, of course, the occasions in the correspondence where he has been less than straightforward with the Claimants and third parties.
- Mr Rahman, in spite of his engaging manner, the attractive way in which he presented his evidence to the court and his frank admissions, in certain respects, of deceptive and dishonest behaviour, is a witness to whose evidence I can attach little weight save where it is corroborated by other evidence, written or oral.
- Jack was not well enough to attend court for cross-examination. He did attend the first few days of the trial, but it was obvious even to me seeing him only sitting (or sometimes lying across the bench) at the back of the court that he was not fit to be there. It was unsurprising that he stopped attending and unsurprising that he was unfit to be cross-examined in court. In the event, I heard evidence from him in his home in Knightsbridge in short sessions. He was quite clearly in discomfort and unable to concentrate or to reply coherently after an hour or so. Mr Freedman remarks, however, that Jack was quite capable, all the same, of playing to the gallery and making forceful observations when it suited his case to do so. I bear all of Mr Freedman's observations in mind in assessing Jack's evidence. He has so clearly lied on a number of occasions, that I cannot rely on his evidence where it conflicts with that of the Claimant's witnesses.
- Helga was cross-examined at some length. She was on medication for treatment for stress no doubt induced, at least in part, by this litigation. I make some allowance for that in assessing her evidence which was, from time to time, confused. However, even making that allowance, it is quite clear to me that on some aspects of the case, she was being less than frank and that she failed to answer questions with straight answers not because she was confused as a result of medication but because the truth would have been damaging. As will become apparent later in the judgment, she has been dishonest both in relation to knowledge of the arbitration and in this hearing in certain respects. I approach her evidence with a great deal of caution.
The evidence
- As well as the evidence of the witnesses whom I have identified, I had over 50 bundles of documents (including a considerable amount of duplication) relating to the making of the Option Agreement, the exercise of the option, events in Bangladesh (where the first to fourth Defendants were envisaging the production line which they were purchasing being set up), the attempts by Charlton to open a letter of credit and the arbitration. It is not possible for me to review in this judgment this vast mass of evidence and much of it is, in any event, peripheral or goes only to the credit of the witnesses. I will refer to the important aspects of it. I have, however, taken it all into account in forming my view of the witnesses and in deciding the central issues of fact on which the results of this dispute hinge. My findings of fact and discussion of the evidence appear in the paragraphs commencing with paragraph 44 below. In addition to that material, I received opening written submissions and closing submissions which, together, amount to well over 300 pages. I will, I hope, be forgiven if I do not deal with every detailed submission which is made.
- However, in order to understand what facts are important and why, I need to identify some of the persons, individual and corporate, involved and to identify what Mr Freedman describes as the various layers – five in number although overlapping to some extent – of apparent removal of Jack and Helga from Charlton designed, as he would say, to conceal the truth of their control of Charlton.
Dramatis personae
- I gratefully adopt and adapt the document provided by Mr Freedman and Mr Samek in their opening. As well as the parties, Mr Gallo and Ms Darmanian, all of whom I have already mentioned, the following are relevant:
Subsidiary or associated companies of Charlton
Charlton International Ltd. Gibraltar company
Charlton International (Bangladesh) Ltd. Bangladesh company
Charlton-Royale Sales Corporation Delaware company
Trust or nominee companies
Wildhorse Anstalt (now Brinton) 13th Defendant: a Liechtenstein anstalt /establishment
Azuri Ltd. 12th Defendant, an English company owning indirectly the Paris home of Jack and Helga; officers are Mr Simms and "Citilegal" companies
Libourne Investments Ltd. 14th Defendant, a Gibraltar company, owning front basement flat 14 Lennox Gardens, Knightsbridge
Ardales Investments Ltd. 15th Defendant, a Gibraltar company, owning flat 3, 39 Lennox Gardens, Knightsbridge, London home of Jack and Helga
Republic Investment Company Ltd. 16th Defendant, a BVI company, said by the first to fourth Defendants to be a company beneath Brinton and between it and other companies identified above.
Ancon Inc. A Panamanian corporation, owning shares in Charlton Corporation plc
Others
"Eastcastle" According to the Claimants, it is not apparent whether the company involved is a Panamanian company or a BVI company. The first to fourth Defendants claim it refers to a BVI company represented by one Pauline Alianza and one Reno Ammerman
Citilegal group of companies Mr Simms' vehicles for practising as a lawyer after intervention by Law Society in Bower Cotton; owned by Cline Limited, a Gibraltar company owned by D1's trust, Taurus Trust and officers of what the Claimants say are Jack and Helga's nominee companies eg. Azuri Limited
Elite Engineering Company Ltd. Gibraltar company identified in the context of references to Eastcastle
Jean-Paul Croisier Geneva lawyer, claimed by Jack and Helga to be lawyer to "the trust" and to hold Azuri's shares for Brinton
Martin Sturman Jack and Helga's Los Angeles tax lawyer
Dr Marxer Lichtenstein lawyer and director of Brinton.
The five layers of separation alleged by the Claimants
- The Claimants seek to identify five layers of separation or removal. The layers are not mutually exclusive of each other. There is overlap, and frequently, they say, a single piece of evidence relates to several layers. The layers are as follows: (1) the Trust layer, (2) the Ancon layer, (3) the "mere lender" layer, (4) the "no shareholder" layer and (5) the "no control" layer. The layers can be summarised according to the Claimants as follows (which I take from Mr Freedman's and Mr Samek's written closing):
a. The Trust layer, namely that Jack and Helga do not own or control any assets. Thus the first to fourth Defendants assert that all assets, including any shares in Charlton and any monies made available to Charlton, were or are (ultimately) held by an arm's length and independent discretionary trust, Brinton, in which Helga, not Jack, has only a discretionary beneficial interest. All decisions about such assets are taken by the independent directors of the Trust based in Liechtenstein. Helga has no power other than to make non-binding recommendations to the directors for Maitre Croisier, acts in a non-executive administrative capacity.
b. The Ancon layer, namely that Charlton's sole and later minority shareholder was Ancon, a Panamanian company, which was an entity owned, directly or indirectly, by Brinton. Jack and Helga say that the registration of shares (to which I will come in due course) in Ancon's name supports their case that the Trust owned/owns wholly and later in part Charlton. In any case, according to them, they had no knowledge that Ancon was a shareholder until Mr Simms told them much later on.
c. The "mere lender" layer, namely that, other than their role as honest brokers, the extent of Jack and Helga's involvement, an indirect involvement at that, was the loan by the Trust of some 30,000 – 40,000 (pounds or dollars) to Charlton/Mr Rahman as in effect "seed capital". The fact that D1 apparently caused the Trust to advance larger sums was done without their knowledge or permission.
d. The "no shareholder" layer, namely that Jack and Helga were not legal or beneficial shareholders of Charlton.
e. The "no control" layer, namely that Jack and Helga exercised no control or direction over Mr Simms and Mr Rahman or over the affairs of Charlton. By their communications to Jack and Helga, Mr Simms and Mr Rahman. were doing no more than keeping them informed as a courtesy.
- Jack and Helga were not in fact parties to the arbitration but the Claimants say they knew of it and were involved. The Claimants say that concealment is endemic in the way not only that the first to fourth Defendants approached the Option Agreement and the arbitration but also in the way they have approached this litigation. It has extended, they say, to the withholding of documents and the persistent failure to disclose information. They identify three categories, about which I will need to say more later, but which can be described briefly now.
a. A number of highly relevant documents which only emerged in the course of the trial and as a result of fortuitous discoveries by the Claimants (in part from the former partners of Mr Simms who cooperated after the settlement with them but who, I would note, should themselves have disclosed the relevant documents as part of their own disclosure exercise). These included Bower Cotton files in relation to Jack & Helga and to Ancon.
b. Documents which were, according to the Claimants, deliberately suppressed and, they say, remain suppressed, namely (at least) similar files relating to Republic and Brinton (possibly under its previous name, Wildhorse).
c. Many other documents which, according to the Claimants, it is to be inferred, exist, but which have, intentionally, not been produced.
- So serious has been the concealment, according to the Claimants, that it has undermined the fairness of the trial process. This would found a basis for a strike out of the defences on the ground of abuse of process. The Court ought, it is submitted, to deal with these matters (i) by drawing inferences and conclusions against the Defendants, and in particular (ii) by being slow to accept any propositions of the first to fourth Defendant which ought to or might have been supported by documents available to them, and (iii) by drawing inferences and conclusions in favour of the Claimants where documents or other evidence which it might be supposed would have supported the Claimants, have been withheld. There is considerable force in that submission. Without applying that approach rigidly, I certainly view with circumspection the evidence of the first to fourth Defendants and, in assessing it, take account of the factors which Mr Freedman has identified.
- I need to make one very important point at this stage; it is a point which needs constantly to be borne in mind. It is that the defences of Jack, Helga, Mr Simms and Mr Rahman do not necessarily stand or fall together. This is not a case where breach of contract by any of them is alleged (although issues do arise whether any of them are bound by the findings of the arbitrator and whether Jack and Helga can be made liable for Charlton's breaches of contract): the contractual issues arose between DGI and Charlton and were dealt with, as between DGI and Charlton, in the arbitration. The present case is concerned with, amongst other claims such as conspiracy, alleged fraudulent misrepresentation and, to succeed against a particular defendant under that head the Claimants need to establish misrepresentation made by that defendant.
The family business
- The Dadourian family business was founded well over 70 years ago. It operated principally through a company called Dadourian Export Corporation. It was engaged in shipping clothing and textiles from the United States to markets in the Far and Middle East and Africa. In the mid-1970s the enterprise purchased a manufacturing organisation called InterRoyal and engaged in the manufacture of hospital and nursing home beds, over-bed tables and industrial steel shelving. InterRoyal ceased trading in the early 1990s. InterRoyal went into Chapter 7 (ie bankruptcy) in 1992. The production line was one for the manufacture of hospital beds and was acquired by DGI or a company within the group for a nominal sum. The specialist tooling equipment was stored in a warehouse in Connecticut and the intellectual property for the production line, such as drawing and routing sheets, was retained by DGI or the relevant group company. However, much of the general equipment which was necessary to constitute, with the specialist tooling, a full production line was sold, although it has not been made clear to me what, if any, part of the general equipment was retained. I shall refer to these component parts respectively as "the Tooling" (used to include tooling and dies) and "the General Equipment" using the latter expression to encompass such general equipment as was necessary to constitute, with the Tooling, the production line rather than a reference simply to the actual general equipment which DGI in fact acquired from InterRoyal.
- Before coming to the introduction of Charlton to DGI and the events leading up to the Option Agreement, it is necessary to say something about Jack's history and about the relationship between Alex and Haig, on the one hand, and Jack (and to some extent Helga) on the other.
Previous involvement of Jack with the Courts
- Jack is not a stranger to the courts of England or the United States. In 1978, he was involved in litigation against him and companies owned or controlled by him by Westland Helicopters in which Parker J held that Jack had deceived Westland into purchasing spare parts which were not Bell Textron manufactured. The judge considered that Jack had little regard for the truth. A significant judgment, for over £240,000, was obtained against him and his company. Jack's solicitors in that action were Bower Cotton, acting through Mr Simms. Following that, there was litigation in the United States in 1980 between Textron Inc and Jack, together with companies owned or controlled by him, arising out of the same subject matter, namely sale of helicopter parts. The judge considered that Jack had intentionally and fraudulently certified parts as Bell Textron. He awarded damages of over $40 million; and also held that Jack was the alter ego of the companies concerned, any separateness being a sham. Jack was subsequently bankrupted in England and according to the Claimants, in the United States also, although Jack denies that. Nothing turns on whether he was bankrupted.
- On 15 November 1982, Jack admitted three counts of bank fraud in the Pennsylvania courts and was sentenced to 5 years probation. In connection with the criminal proceedings, Jack received financial assistance from Dadour. I am satisfied on the evidence which I have received about this that the assistance was by way of outright gift at Dadour's instance (although whether the actual funds came from Dadour personally or from assets of one of the family companies is not clear). Alex and Haig have, on various occasions since Dadour's death and in particular during the course of these proceedings, claimed that the financial provision was merely a loan and have sought to rely on this, and the fact of non-repayment, as further material to impugn Jack's motives and honesty. They are, in my judgment, wrong to have done so.
- Moving on to 1994, the Claimants' written opening contains the following:
"Jack continued his fraudulent business schemes including a scheme whereby he procured the payment of many millions of dollars from a government agency of the newly formed government of Uzbekistan (Uzagroimpex/Uzagro) in return for defective wheat. In remarkable echoes of this litigation, Jack purported to be a mere consultant to a company known as Lotus Commodities Limited, a Gibraltar company."
- Uzagro commenced proceedings against Jack in March 1994 and obtained a freezing order from Mance J. In April 1994 Jack sought, unsuccessfully, to set aside service and to discharge the freezing order. In August 1994, following an application by Lotus to stay the action, Uzagro commenced arbitration proceedings. These were heard by a three-man Tribunal which held that it could place no reliance on Jack's evidence, stating that he was prepared to make false representation at any stage to achieve his ends and recording certain evidence about a visit to Tashkent as a tissue of lies.
- I find myself in some difficulty about the status of the Tribunal's findings. I have not seen the evidence on which they relied. And although it is indeed the case that a money award was obtained, Uzagro apparently never sought to enforce the award because, according to Jack, such fraud as there was emanated from those in Uzbekistan rather than from Jack and Uzagro had come to realise that this was so. I simply do not know where the truth lies and take no account of this matter.
- On or about 21 February 1994, Brinton (then known as Wildhorse) was either set up or acquired. Brinton is the entity which has commonly been referred to as the "trust" in these proceedings. It is not, of course, a trust as understood in English law. But as those familiar with private client work will know, an anstalt such as this is commonly used as the holding vehicle for family assets and performs much the same functions as a trust set up in an off-shore tax haven in a jurisdiction recognising trusts. Those functions can, of course, vary. They may, at one end of the scale, be wholly innocent, to make use of the structure in a transparent way not to keep anything secret but to take legitimate advantage of tax provision in order to minimise a settlor's worldwide tax liabilities. In contrast, they may, at the other end of the scale, be used as instruments of fraud, to shelter, secretly, the proceeds of crime and to assist money-laundering and illegal tax evasion. And, somewhere in the middle of that scale, assets acquired perfectly legitimately, may be placed within such structures, sometimes secretly with a view to tax evasion but no further criminal purpose, or sometimes innocently, honestly and legitimately, but nonetheless secretly. Helga originally claimed to have set up Brinton in order to provide for her family in the event of her death and to have transferred her asset to it (either directly or indirectly though corporate structures). The Claimants say there is no evidence of this happening until 2000; this is another matter to which I will need to return later.
- In relation to the setting up of Brinton in 1994, Mr Simms says the Helga had been considering the taxation position of herself and Jack on her death and that it was those considerations that had led to
"….the establishment of Brinton in 1994 with Maitre Crosier in Geneva. Before the establishment of Brinton, Maitre Crosier had looked after various matters for [Helga] since the early 1980s and he administered several companies…….I am not sure whether these companies were in turn owned by a trust or held in some other way."
I have no reason to doubt what Mr Simms says there about Maitre Crosier's involvement with Helga's affairs is correct. I would add that it clear from the evidence that Mr Simms regularly used Maitre Crosier and his firm in relation to affairs where input from a Swiss lawyer was required. It is not surprising to find a solicitor, such as Mr Simms, with a busy commercial/private client practice having the need of such involvement.
- Very soon after proceedings were commenced by Uzagro against Jack, Ancon was formed in Panama. Helga says that it was formed in 1994 for the purpose of the trust investing in various projects. The Claimants say that it was simply part of a structure which was a façade to hide the involvement of Jack and Helga. It is, unfortunately for me, entirely unclear who the shareholders in Ancon were at material times. It is said by the Defendants always to have been within the Brinton structure.
- In order to lay the ground for the submission that the Claimants, had they known of Jack's involvement in Charlton, would never allowed DGI to enter into the Option Agreement, Mr Freedman relies on a letter dated 5 December 1991 from Alex to Jack, saying that Jack and Helga's conduct was so deplorable over the years that at latest by then the Claimants had decided that they would not conduct business with Jack.
"After considering all the facts, we have decided not to conduct business with you or your associates. Weighing heavily in our decision was the desperate steps you proposed to take in supplying less than acceptable quality goods. In addition, your unacceptable actions of the past have not been resolved. You still owe D.E.C. 180,000 USD of principal for an unpaid loan of over ten years. There is still the unresolved action you took in the sale of medical goods to Oger. You decided to dump InterRoyal Hospital Supply and go on in partnership with Gazie Braish. Jack our business principles differ: and remember, those open matters must be resolved.
- There are a number of things which need to be said about the letter and the reliance which is placed on it.
a. First, Alex suggested in his oral evidence that the reference to substandard items was to the consignment of wheat concerned in the Uzbek deal. But that cannot be right, because the timing is such that no dealings had occurred with Uzbeks by the time of the letter. It is suggested that Alex is prepared to say anything against Jack to paint him in a bad light.
b. Secondly, Alex took a high moral tone against what he says he saw as Jack's improper business practices. This did not stop him and his brother subsequently allowing Jack to act, as they thought, as an introducer and middle-man, and to deal to some extent with third parties in relation to possible disposal of the Tooling. Alex seeks to draw a distinction between getting involved in deals with Jack and simply using him as some sort of go-between. It is easy for him to assert that distinction after the event in circumstances where he is now suing Jack. I will need to examine the totality of the evidence carefully and critically if I am to accept this distinction as having a material bearing on whether the Claimants would have refused to enter into the Option Agreement if it was to be made with Jack.
c. Thirdly, it would not be right to take this letter in isolation. It is necessary to review the history of the relationship to see how it stood at the critical time in the weeks leading up to the Option Agreement. This will appear from my subsequent review of the documentation and events leading up to the conclusion of the Option Agreement and thereafter.
Tooling for sale
- From about 1995, Jack was on the look-out for potential purchasers for the Tooling, whether with or without the General Equipment. A few avenues were pursued; for instance there were discussion with one Herman Bal to whom Jack wrote a letter or fax on 4 July 1995. It is headed "Re: Tooling, Dies and Drawings of InterRoyal" and includes the following :
"You must also point out [to some proposed investors] another fact and that is in regard to the suggested machinery that will be required by the investors. These are listed in the back of the brochure in three pages. Alex D. believes that all this equipment should be available at approximately $60 to $75,000. Of course he is talking about good reconditioned slightly used equipment readily available in the market place."
What this clearly shows is that Jack knew, in relation to the discussions with Herman Bal, that the General Equipment would need to be acquired to put together a complete production line and that the package for sale was only the Tooling, (including the dies) and drawings. One needs, therefore, to view with some circumspection the suggestion that Jack (in contrast with Mr Simms and Mr Rahman) believed that the Option Agreement was intended to relate not only to the General Equipment but to General Equipment actually in the ownership of DGI at the time of the Option Agreement.
- I have, however, seen nothing which, save for the Option Agreement, suggests that an actual sale was anywhere near at any time. Finding a purchaser was clearly not the major focus of any of Jack, Alex or Haig.
Formation of the Option Agreement
- Mr Rahman became managing director of Charlton following the collapse of the Powerhouse deal (which I describe below). He met with Jack and Helga in Paris at the end of July 1997 to discuss a number of possible ventures. Jack raised the subject of the Tooling which gave rise to the idea of Charlton acquiring it. That lead to a phone call between Jack (at which Helga and Mr Rahman were present in Paris) and Alex (and possibly Haig) in New York on 31 July 1997 on which occasion Jack introduced Mr Rahman to Alex for the first time.
- On 1 August 1997, Alex received an email sent by Jack. It is not clear whether this was sent before or after the phone call which I have just mentioned, but nothing turns on that. It is an important email which I should refer to in some detail.
- It is headed "TOOLING". Jack wrote:
"I believe that we have finally hit the jackpot. A friend of mine (Bangladeshi) has fallen in love with the package and he envisions he and his family will really make much money from the WHOLE deal.
He has a banker friend [in London] with whom I spoke on the phone from Paris yesterday while Selim was here. I have given the package to him but certain things are not there which we had when we submitted to the people in Latvia or Estonia, I forget which. What I need is the total list of hospitals all over the world that we have been involved in. You prepared this list so it is somewhere in your office. You also sent additional information as to what other machinery and other items would be necessary. I need you to gather all this together. Please send the above mentioned items and also if possible the brochures in color.
…….
The proposition is that they are going to raise official bank financing for about $5,000,000 to cover the cost of setting up a new factory [in Bangladesh] and getting into production. They like the idea of buy back and I think I have sold them on the fact that I could persuade DGI to take on the marketing on a world wide basis as you have the experience and know how and they will not need to set up a sales organisation.
Now I can only give you meager information. In about a week I will be able to give you much more facts and numbers. Right now please try and give me some idea if first you have or know someone who can go to Bangladesh for a week or two to prepare a feasibility study…..Maybe you could do it? Or do you think best a professional type who has a reputation and the qualifications?
I told them about the buy back and the way the deal is being structured is that the American company is moving the plant from America to Bangladesh because of the labour cost.
Send the package by courier to London. He is a client of Paul so he said to send it there. {Then follows Mr Rahman's name and Bower Cotton's address.}
……I do not need the brochure nor does he. He needs the color brochure of the beds, Electric and Manual. The FRED beds and any other beds that can be manufactured by this tooling. We may also be able to work out a deal whereby you could arrange for a specialist to manage the operation, for which DGI would be compensated….."
- There are a number of observations to make about this email:
a. The only Bangladeshi friend of Jack who has featured in this case is Mr Rahman. The impression is given that it is Mr Rahman and his family who hope to make a great deal of money from the whole project ie the setting up of a new factory using the production line acquired from DGI.
b. The reference to such "other machinery and other items" necessary makes it clear, consistently with the proposals put to Herman Bal which I have mentioned, that Jack knew that DGI did not have in its possession the General Equipment, or at least not all of it, necessary to put together a production line using the Tooling (including the dies). That is consistent with the last reference to tooling.
c. It is clear, however, that the proposal was that the investors would be setting up a new factory in Bangladesh with the aid of official bank financing.
d. It is clear that buy back arrangements were mentioned at this early stage. What Jack did not say in this email is, as was in fact the case, that it was the investors in Bangladesh who needed to see a buy back arrangement in order to have certain guaranteed purchases of the output of the new factory, without which financing would not be available.
e. There is no indication at all about who the potential investors might be or, indeed, would not be (although it would, I think, have been very surprising if, following that email, it had transpired that Jack himself was personally proposing to purchase the Tooling).
- It is, most unfortunately, not clear what action was taken on behalf of DGI in relation to the request at the end of the email. Jack says that the brochures (by which I think he meant the brochure explaining what was for sale by DGI) are not needed but that the colour brochures of the beds themselves are (by which I think he meant the catalogues of products which the production line would manufacture). It seems that something was sent to Mr Rahman in early August, but precisely what is not clear. There is, however, absolutely nothing to suggest that Mr Rahman was sent, whether as part of a larger package or by itself, extracts from the brochure which eventually became schedules to the Option Agreement. I find as a fact that no such separate extracts were sent to him.
- On 5 August 1997, Mr Simms wrote to Jack and Helga. He had, over the previous weekend, met with Mr Rahman and discussed a number of business possibilities. In his letter he listed five, which appeared to him to be the most interesting, the first of which was the following:
"InterRoyal – As I understand it the equipment has been "mothballed" but is available for purchase at US$1.5 – US$2m and Selim explained the scheme to me whereby a Bangladeshi corporation with international funding would acquire the equipment and set up the venture in Bangladesh. In view of the indecision of Alex Dadourian in the past I think that it would be necessary to have a legally binding agreement that if the funding could be put together within a certain timescale the equipment would be sold for an agreed figure so that there cannot be a great deal of work carried out only to find that Alex has changed his mind.
An essential feature of the scheme, as I understand it, was a buy back of finished products. Bearing in mind that Alex and his management was not exactly successful, you would need to establish a new distribution network in the USA……"
The letter was headed, I should note, "ANCON/CHARLTON COPORATION PLC".
- Unless this letter was cynically laid as part of a paper-trail to use later should the genuineness of the proposed transaction be challenged (a proposition which I reject), it is clear from this letter that at this stage Mr Simms had in mind a real transaction under which the production line would be acquired by a Bangladeshi corporation with international funding (I beg for the moment the question of who would own this corporation) to be operated in Bangladesh. Mr Simms appears to have doubts about Alex's capability of making up his mind and so wanted to attain a legally binding contract before much work was done.
- Mr Simms explained his own understanding that a buy back of finished products was an "essential feature" although he does not state why but, as is now clear, it was because without it, the necessary finance would not be made available by Bangladeshi banks and financiers. Mr Simms remarks "Bearing in mind that Alex and his management was not exactly successful, you would need to establish a new distribution network in the USA". The words in bold lend support to Mr Freedman's line of submissions to the effect that this was really Jack and Helga's project. It is also apparent that Mr Rahman would be investigating the finance potential in the next week to see if the equipment could be financed. Mr Simms states that Mr Rahman would need confirmation that a realistic assessment of the equipment could put its value at $7.5 million or thereabouts. Presumably Mr Simms had been told by Mr Rahman of this requirement during the discussion the previous weekend. It is the figure which Mr Simms says he was told by Mr Rahman that the tooling was worth.
- Clearly the second-hand value of the Tooling (even with the General Equipment and with a commitment to provide expertise in setting up the production line) could not have been anything like $7.5 million. Certainly Alex and Haig, who ought to have had the best assessment of value, did not believe it was worth anything like that or they would not have entered into the Option Agreement providing for a price of only $1.5 million even if that was a price for a quick sale to be rid of it. Quite what Mr Simms or Mr Rahman knew of the value at this stage is not clear.
- The letter also identified other possible ventures:
a. A business in bank guarantees which "would have to be transacted through [Charlton] or something similar" and which would involve "transferring funds over and above the US$500,000 which were put together for the Ancon bid". I will say something more about the "Ancon bid" later.
b. Hotels/employment agency: Mr Simms wrote that he would be meeting with Tony Fitzsimons the next day. Mr Fitzimons was an employee or consultant to Charlton able to advise in relation to these opportunities.
c. Power and other projects: Mr Simms states that he had told Mr Rahman that he was working on arranging large scale long term funding for such projects. Charlton would be able to take a role in the implementation of the projects as well as a percentage shareholding in the projects.
d. Powerhouse: I deal with this project in a moment.
- I should set out the final two substantive paragraphs of Mr Simms' letter which show that what was contemplated at that time was not just the InterRoyal/Bangladesh proposal but the other projects too, out of which Mr Rahman would be paid.
"Provided that Selim is prepared to put in the necessary time and effort I think that there are excellent opportunities and that he has business skills which can made them profitable. He also has extensive contacts both in Bangladesh and in the banking community.
I would suggest that we start now and see what he can do on the basis that you would be expecting overheads to be covered with a month or two from his day to day activities and that you would be looking for the larger profits from the projects and the InterRoyal deal."
- One can see, therefore, that the Bangladesh hospital beds project was only one of a number of business ventures regarded as possibilities. It is clear, in my judgment, that these business opportunities were ones being considered by Jack and Helga as projects in which they would invest either their own money or monies of the "trust". It is clear that Mr Simms was consulting them on these matters. And, as will be seen from the trial documentation, it is unrealistic to think that any of these projects would have proceeded without Jack and Helga's agreement.
- What is not at all clear is the financial commitment which was to come from Jack and Helga or the trust. Helga's case, in relation to the hospital bed project, was that only the seed capital would be provided, enough to cover start up expenses and get to the stage where outside finance would be provided in time to cover any substantial expenditure. But one can see from the reference to "funds over and above the US$500,000" in relation to the bank guarantees business that not all of the projects could be based on provision only of seed capital; and, again as the trial documentation shows, the hotel/employment agency proposals (which did not proceed) would have involved the provision of significant sums.
- To understand the background to this letter, it is necessary to understand what Mr Simms says was Helga's interest in these various business ventures might be. His evidence is to the following effect:
a. Although Helga had (according to Mr Simms) settled her funds into Brinton (then known as the Wildhorse Establishment), Mr Simms was aware that she was able to make recommendations to the trustees regarding potential investments. By early 1997, he understood that Helga was interested in having referred to her any investment, not exceeding US$1 – 2 million which could produce above average returns and which would provide an interest beyond passive investment to Helga. He thought that she wanted to influence the trustees to acquire a business in which she might play the role of a passive shareholder, taking a greater interest in the investment than would be the case if the trust were simply investing in normal stock exchange securities.
b. It was in this context that Mr Simms approached Helga in the spring of 1997 and asked her whether there might be any interest in a company which had a number of joint ventures in China for small power stations. A certain amount had been invested by the company, which was an American company called Powerhouse Resources Inc ("Powerhouse") which was quoted on Nasdaq. Powerhouse had raised certain funds in 1996 for a rights issue but the monies had not been used for the development of the power projects. The Board had been changed in the autumn of 1996 and a Mr Anil Kumar was the managing director. However, he appeared to be reluctant to commit his family's monies to the ventures.
c. There appeared to be some interest in Powerhouse. Mr Rahman was then an officer of Powerhouse and he assisted in what was intended to be a purchase of Powerhouse where he would become the managing director and the existing Board would be changed. Having considered the company and its commercial interests and the various risks involved in doing business in China, Mr Simms was instructed by Helga and Maitre Croisier that a potential investment of up to US$500,000 was acceptable if this was sufficient to purchase a controlling interest in Powerhouse. In order to show that there were funds available for the purchase, Maitre Croisier sent to Mr Simms' firm in the summer of 1997 a sum of, Mr Simms believes, US$250,000.00 from the trust account – or at least from an account which Mr Simms says he believes was a trust account - in Geneva and also sent a further $250,000.00 from an account of Ancon so that Bower Cotton would have US$500,000.00 in their client account. As Ancon was a Panamanian company with Panamanian directors, and Powerhouse was a Nasdaq company, Mr Simms suggested the use of a UK company for the acquisition. An off-the-shelf Plc originally called "Bowcot Plc" was utilized and its name changed to "Charlton Corporation Plc" (ie Charlton). It was a dormant company which had transacted no business. It was used as a vehicle for making the offer but the offer was rejected and the transaction with Powerhouse did not proceed.
d. This therefore meant that Bower Cotton had in their client account for Ancon/the trust a sum of US$500,000.00. The fees of Bower Cotton in relation to the abortive Powerhouse transaction were debited to the funds leaving something in excess of US$450,000.00. But for the events which then took place in relation to DGI, Bower Cotton would, Mr Simms says, have returned the funds to Maitre Croisier "for the trust" by which I understand Mr Simms to mean Brinton.
e. The result of the abortive negotiations on Powerhouse had the result of terminating the employment of Mr Rahman with Powerhouse. He had too closely associated himself with the bid for the company and when it failed, he was asked to resign. He was therefore out of a job.
- Mr Simms goes on to explain as follows:
a. Mr Rahman had gone to Paris at the end of July 1997. On his return from Paris, he contacted Mr Simms and asked for a meeting: such a meeting took place on Sunday 3 August 1997. Mr Rahman told Mr Simms that Jack had raised with him in Paris the question of whether there might be any interest in acquiring the "mothballed" production line of Interroyal for hospital beds and over-bed tables. According to Mr Rahman, the production line was available for purchase in the region of US$1.5 – US$2 million. He indicated to Mr Simms that what was proposed was that the production line would be sold on to a Bangladeshi company at full market value, which he was told was of the order of US$7.5 million. The difference between the purchase cost and the sale price would then be employed in the enterprise in the creation of a factory in Bangladesh, the employment of personnel, the sourcing of materials and the capitalisation of the proposed buyback. I note that it is not explained why assets with a "full market value of $7.5 million" are available for acquisition at $1.5 million nor of what "full market value" means in this context.
b. Mr Simms says that he understood from Mr Rahman that he needed to enquire in Bangladesh whether it would be possible to finance second hand equipment and tooling at a value of around US$7.5 million, without which the scheme was not viable.
c. It also appeared that Mr Rahman had suggested to Helga that, whether or not the DGI transaction went ahead, Charlton could be used to conduct certain "bread and butter" business relating to banking where Mr Rahman's professional qualifications lay. Another possibility discussed was one of an acquisition of a hotel and an employment agency in the UK which had been introduced by Mr Tony Fitzsimons who had considerable expertise in the hotel and finance business. It was for this reason that he was subsequently invited onto the Board of Charlton. There were other possibilities mentioned (set out in the letter discussed above).
d. Mr Simms says that he knew that the trustees would never, of their own accord, invest in any of this type of venture because it was far too risky. Mr Simms' position, of course, is that it would be the trustees who would make the decision, albeit that he himself did not have direct dealings with the officers of Brinton but dealt only with Maitre Crosier. However, he considered that if its principal beneficiary (Helga) was supportive and wanted the trustees to go ahead then there was a reasonable expectation that the trust would agree to support the venture.
- Mr Simms says that, clearly, he had no authority to debit the funds of Ancon at Bower Cotton unless there was agreement to this course. He says he believes that an agreement was given at a meeting which took place in his office on 13 August 1997 at which were present in person Mr Simms, Mr Rahman, Jack and Helga. Given that neither Maitre Crosier nor any representative of the trustees was present, it is not clear to me how Mr Simms thought that the necessary authority could result from the meeting unless he regarded Helga (or Jack and Helga jointly) as having such authority by virtue of Helga being regarded as the principal beneficiary of Brinton or because he understood that in practice – whatever the apparent legal structure in place – Helga (or Jack and Helga together) "called the shots" to use the expression which has been used a number of times throughout the hearing.
- Nor is it clear from this explanation – or indeed any other explanation given during the trial – how the transaction was intended to work vis a vis the Bangladeshi investors. It seems that a new Bangladeshi company was to be set up in which Charlton would have a shareholding. Charlton (or an associated company) would receive $7.5 million for the production line; and even though it might itself re-invest a considerable proportion of the difference between $7.5 million and $1.5 million in the project - there was no evidence that the whole of the difference would be invested - the worst that could happen would be for the project to fail still leaving Charlton (or its associated companies) with a healthy profit in any event. It was, of course, up to investors to satisfy themselves about the value of what they were purchasing. It may be that some, perhaps a considerable part of the balance, would need to be invested in the buy-back arrangements: but there is nothing to suggest that that enterprise would form a subsidiary of the Bangladeshi company or be owned by the same investors as the Bangladeshi company. Mr Freedman, however, says, relying on this aspect of the case and other evidence, that the whole transaction was redolent with dishonesty
- Mr Simms says that, as far he was concerned, nothing much occurred from the 5 August until the meeting which took place in his office in the afternoon of the 13 August. Before dealing with that, I mention two emails and a board meeting.
- On 8 August 1997, Jack sent two emails to Alex, both with the word TOOLING as the subject heading.
- In one, Jack refers to a visit to London on the next Monday and Tuesday by one of "the principal Bangladeshi players….but I do not know who he is at this time". If such a meeting ever took place, it is not dealt with in the evidence and the identity of that player was never revealed to Alex and Haig. Jack states that "so far it appears that I will be able to negotiate a price no less than $1.5 million for the tooling and drawings and all the technical and manufacturing rights and whatever else you can tell me comes with the package". Jack tells Alex there are a number of things he needs to attend to including:
a. "Provide some sort of valuation from some kind of official or recognised source. The object is to show the replacement value of about $10 or $15 million today. And a valuation of $7.5 million for usd [sic] reconditioned tooling. Of course you are correct that the $7.5 million will include technical knowledge and engineering and anything else you can think of."
b. "Who will be the seller of the tooling? Will it be DGI or another entity? Remember the discussion we had. I can arrange for them to open two L/Cs, one to the seller and one to you personally in an offshore company. I think this is the best way after all you are the motivating factor and doing all the work mentally and creatively. You can also tell them later that from the sum received (officially in NY) you need to pay JD something for his efforts. Alex I am looking at it impartially and that is the way I see it. Of course it is up to you to decide and determine what you want to do."
c. "You will need to give an option on the Tooling package for a minimum of 12 months. The reasons are obvious. They will need two real feasability [sic] studies and reports. They will also need time to get official approvals from Bangladeshi officials for the land and construction of this new plant."
d. "The Bangladeshis are also forming a consortium of about 4 very rich and powerful people to be the JV partner of Charlton Corporation Plc of the UK. On Monday the finance director of Charlton will bring with him a VP of a very prominent international banking institution who is to be the lead lender for this project if all the pieces fit together. It is too complicated for me and all I want to see is that you get $1.5 million."
e. "The other important matter is the buy back deal. This is really one of the most important features of the deal…..The important thing is to give the Bangladeshis an assurance or something stronger about how many electrical and how many manual beds you could sell in your market in a year……"
- In the other email, Jack refers to the brochures which he had received saying how wonderful he thought they were and that "All the information one needs is included in there". He also refers to another matter which was "the costing of the list of Machinery needed for the operation of the factory. Can you manage to get some quotes for used rebuilt machinery as specified……If I remember correctly there is a weekly or monthly publication of used machinery……". Jack also queries whether the price of the tooling includes the cost of a technician or engineer to go to Bangladesh to take charge of the installation.
- It is quite clear to me, and I so find in spite of suggestions to the contrary by Jack in his evidence, that he was fully aware that, in order to provide a complete production line to Charlton, it would be necessary to purchase the General Equipment included as Machinery in this list in the brochure. He knew that DGI did not have the necessary General Equipment of an adequate standard in its ownership.
- There is a minute of a board meeting of Charlton dated 12 August 1997 at which Mr Simms and Mr Rahman are recorded as being present. Mr Simms says that the signature on the minute is his and that he imagines that he dictated it. It records that Ancon had applied for 50,000 shares in Charlton and that it was resolved to accept such application and issue 50,000 ordinary shares to Ancon. It was also resolved that Charlton open an account at Midland Bank plc. and to accept a loan of $450,000 from Ancon on terms that Charlton would be permitted to use the sum in the development of its business on terms to profit participation and/or interest on the part of Ancon to be agreed. Jack and Helga claim to have been unaware that Ancon was a shareholder until the commencement of these proceedings. As will become apparent, it was a matter of complete indifference to Jack and Helga who the shareholders were.
13 August 1997 meeting and conference call
- Returning to the events of 13 August 1997, a meeting took place at the offices of Bower Cotton attended by Mr Simms, Mr Rahman, Jack and Helga. Let me set out what Mr Simms says:
"This [meeting] took place in the basement conference room where Selim Rahman set out his views on whether there was likely to be sufficient interest in Bangladesh in going forward and whether he thought in principle the project would be viable. He had, by the time of the meeting, resolved that the funding of second hand plant and equipment to the value of US$7.5 million was in principle possible in Bangladesh. He believed that with employment costs being less than 10% of those in the US that it was possible for the project to be viable. However, the project would have to be 90 – 100% export orientated because there was not sufficient demand in Bangladesh and Bangladesh hospitals would, in general, not buy hospital beds of the sophistication of Interroyal. It seemed clear to me that there was no possibility of Charlton entering into a purchase contract for the production line and that, if the matter was to proceed, it could only proceed by way of an option if this was acceptable to DGI."
I accept that as an accurate account..
- Charlton, it will be remembered, although originally acquired off-the-shelf by Bower Cotton, was viewed as the vehicle through which Jack and Helga, or the trust, would make investments into projects such as those discussed in Paris with Mr Rahman and referred to in Mr Simms' letter dated 5 August 1997 to Jack and Helga. Whatever its actual shareholding at the time in question, there was never any possibility that anyone other than Brinton (directly or indirectly) or Jack and Helga (directly or indirectly) would own Charlton. Thus, had Mr Simms said at any stage that Bower Cotton nominees held Charlton as a company for their own benefit or for the benefit of the firm, there would have been outrage and he could not possibility have maintained that position vis a vis his clients.
- Following discussions between the four persons present, a conference call then took place. Jack and Helga were present with Mr Rahman and Mr Simms in London and Alex and Haig were present in New York. Mr Simms maintains that this was the first conversation which he had with Alex. I will review the evidence on that in due course but, jumping ahead, I accept Mr Simms' evidence on that point. There is a dispute whether Alex and Haig knew that Jack or Helga were present at the other end of the conference call. Alex and Haig say that they were not aware; those at the London end say that Jack and Helga said "hello" but acknowledge that they did not take part in the conversation. The relevance of this is that, according to Mr Freedman, the failure to make their presence known is another aspect of the secrecy and non-disclosure of the fact that Jack and Helga had any part to play in the transaction other than as intermediaries.
- Mr Simms says that the first topic of conversation which he took up with Alex was whether DGI was prepared to grant an option preferably for 12 months at a reasonable price. He and Mr Rahman explained to Alex that until detailed discussions had taken place in Bangladesh to see whether the initial interest which had been shown on the telephone to Mr Rahman could be translated into real financial support, it was impossible to enter into a purchase contract. Alex was not opposed in principle. Alex appeared, he says, to accept that Bangladesh was the type of third world country that might be able to make a successful venture of the hospital beds and over-bed tables and Mr Simms assumed, as the production line was mothballed, that there were not any other takers at that time.
- According to Mr Simms, both he and Mr Rahman explained to Alex that they wanted DGI's assurance that everything that was necessary for the production line was there, that they would advise technically on the layout of the factory, assist in the reassembly of the production line in the factory when built and send technical people to Bangladesh to commission and assist in the running of the operation in the initial period until local people were fully trained. Alex responded, according to Mr Simms, by saying that this presented no problem to DGI and he appeared interested on behalf of DGI in being involved in the potential marketing of the finished products in America. He believed that InterRoyal products would have a market in the United States provided that they were competitively priced. Mr Simms states categorically in his witness statement, and has consistently maintained, that Alex specifically confirmed that the total production line was in DGI's ownership and available for the price of US$1.5 million and that DGI would be happy to advise on the factory layout, the installation and commissioning as well as assisting in the initial production.
- There was, Mr Simms explains, not really a discussion on price. He says this:
"Jack had told me and Selim before the conference call that a figure of US$1.5 million had been agreed of which US$1 million was going for the production line and US$500,000.00 was being divided between Alex Dadourian and himself as a commission on the deal. As we understood that the market value of the production line was likely to be of the order of US$7.5 million, we did not think it appropriate to negotiate the price further. We did discuss whether the name "InterRoyal" was available as a trademark and Alex agreed to look into that. It became clear during the conversation that there would be a need for an Option Agreement to be drawn up and I was anxious therefore to learn from Alex and Haig Dadourian as to what exactly was available so that I could refer to it correctly in the agreement that I was to draft. I understood from Alex Dadourian that what was on offer was the machinery and equipment, tooling, know-how and technology by way of equipment drawings and layout drawings, trademarks and trade names and the right to produce the products formerly manufactured by InterRoyal namely Fred 1 and Fred 2 beds, the Royal Manual beds and a range of over bed tables. I understood that Alex Dadourian had sent to Selim an InterRoyal brochure where the products were set out although I had not myself seen it. It was agreed at the end of the telephone conversation that I would make the first draft of the agreement and send it to the parties. I did that around the 15th August and the draft appears in the documents. The agreement reflects my clear understanding of what I had been told by Alex and Haig Dadourian. Most of the talking in the conversation had been by Alex Dadourian although there had been one or two comments made by Haig from time to time."
- Mr Simms evidence goes on to this effect.
a. In the conference call on the 13th August, neither Alex nor Haig asked any questions whatsoever about the shareholding structure of Charlton nor about the existing activities of Charlton and its financial competence.
b. Had Alex and Haig Dadourian asked, he says that they would had been told that it was a relatively new shell company which has been allocated as a vehicle for the purpose of this project. Clearly, it had no financial capability and it had no other activities.
c. Mr Simms' impression from the conversation from Alex and Haig was that they were pleased to have found, after apparently many years of being unable to sell the production line, a potentially interested party. He was not aware then that DGI had only spent US$1 on the purchase of the tooling.
d. Certainly DGI through Alex and Haig were aware that the reason for negotiating an option rather than a purchase contract was that Charlton did not have the funds to purchase the equipment. Charlton would not have done so in any event without carrying a viability study in Bangladesh to see how much it was likely to cost to produce each of the beds and over bed tables and to judge from that whether it would be a viable project. Over and above that there was a need to find investors for the project.
- Alex's witness statement in the present claim deals with a telephone call sometime August 1997. Although he cannot place the date precisely as 13 August, it is possible that the call to which he is referring is that same conference call. It is of some importance whether that is so and I will need to deal with it later.
- Alex makes a number of points about the understanding he had after that conversation. According to him:
a. During that call, Mr Simms proposed an arrangement under which DGI would sell the tooling, dies and drawings for the manufacture of the beds and also provide technical assistance in establishing a factory in Bangladesh.
b. Mr Simms told him that he and Rahman each owned what he described as "major" shareholdings in Charlton. He did not say that he and Rahman were the only shareholders of Charlton but he did say he and Rahman were major shareholders.
c. Mr Simms' status as an English solicitor in a well-respected firm and the fact that he told Alex that he and Mr Rahman were major shareholders in Charlton were the primary considerations in his continuing discussions with Charlton and in causing DGI to enter into the option agreement with it.
d. Mr Simms also told Alex in that conversation that Charlton was a sound trading company and that it was creditworthy and capable of performing its financial obligations under what would be the Option Agreement. He refers to the 1 August 1997 e-mail from Jack in which Jack stated: "The proposition is that they are going to raise official bank financing for about $5,000,000 to cover the cost of setting up a new factory [in Bangladesh] and getting into production." Alex says "I understood the "they" to refer to the potential purchaser, as it turned out, Charlton. This is all information that I would have wanted to know. I have been in business for approximately 50 years and for me information of this nature is basic".
e. He claims to remember that Mr Simms also told him in either that telephone call or a later one, but in any case still in the first half of August 1997 that Charlton was involved in manufacturing various products in Third World countries which could not be economically manufactured any longer in the West. He says "I seem to recall that Simms may have said this more than once. Again, this was the sort of information that I would have wanted to hear. All this served to confirm in my own mind that Charlton was a company that DGI could do business with. Put another way, if I had not been told this then DGI would not have continued discussions with Charlton or have entered into the option agreement with it."
- One sees there articulated what is, in effect, one of the central issues in this case. Did Mr Simms and Mr Rahman make the representations alleged in this case concerning shareholdings in Charlton and about Charlton's credit-worthiness and manufacturing experience? I do not propose to answer that question here: it is important to say much more about the evidence generally and the parties' credibility before stating my conclusion. However, there is one point I do make now: if by what I have recorded in a. in the immediately preceding paragraph Alex is saying that the General Equipment was not to be included in any agreement, I would reject such a suggestion. What is abundantly clear that Mr Simms and Mr Rahman at all times prior to the conclusion of the Option Agreement believed that what Charlton was purchasing was a complete production line (ignoring whether the General Equipment was already in DGI's ownership or needed to be acquired for the purposes of completing any agreement). I do not believe that either Alex or Haig ever had any intention other than to provide the complete production line, even if the General Equipment did need to be acquired. Indeed, to be fair to Alex, he accepted in cross-examination that an entire production line was to be delivered; that the Option Agreement may have indicated that the General Equipment was already owned was an error ("mea culpa" he said) but that by the time the option came to be exercised the mistake had been pointed out to Charlton which nonetheless decided to proceed with the contract. I labour the point only because Ms Darmanian has taken the line that a sale of the General Equipment was not included in the Option Agreement as signed.
- Further, the evidence is clear, and I so find, that Haig only heard of the representations concerning the shareholdings which Alex alleges from Alex. He did not hear them from any of the first to fourth Defendants. This means either that those representations were not made during the conference call on 13 August or that Haig did not hear them if they were made. It is not suggested that Haig was not present during the entirety of the conversation; and if it was of the importance which Alex now alleges that these major shareholdings existed, one might expect it to have been something which Haig, too, would have wanted to know before committing DGI to the Option Agreement.
- It does appear to be correct that, following the conference call, Mr Simms produced, well before the end of August, the first draft of the Option Agreement which was sent to Alex/DGI. It will be seen in the first draft in clause 2.5 that DGI was to warrant and confirm to Charlton that the assets to be sold were in the unencumbered legal and beneficial ownership of DGI, comprised all the assets and know-how necessary to create a fully functioning production line for the products without the need for the purchase of other plant, equipment and tooling and that the plant and equipment would be capable of manufacturing 20,000.00 beds per annum. Mr Simms says that these were all matters discussed in the conference call: I accept that they were discussed and that the drafting reflects Mr Simms' understanding of the discussion. In other words, Mr Simms, who had no technical expertise, understood that Charlton would be purchasing an entire production line and did not himself have any reason to think other than that DGI has in its ownership everything necessary. The fact that Jack knew otherwise (as I have already said he did) does not mean that Mr Simms or Mr Rahman knew.
- The assets to be sold were those referred to in clause 2.1 and included Trade Marks, the copyright in certain drawings, the "Know-How", the "Plant and Equipment" and the right to manufacture and sell the Products. The "Know-How" was defined as "the know and technology of DGI relating to the assembly and operation of the Plant and Equipment and to the manufacture and production of the Products". And the "Plant and Equipment" was defined as meaning the "plant, equipment and trading" specified in Schedule 1 (although, unfortunately, as will be seen, Schedule 1 was never completed). The word "trading" is used, clearly in error, instead of "tooling", an error corrected in later drafts. Mr Simms says that he had no idea what would be in schedule 1 when he prepared that draft but assumed that DGI would be able to supply a full list of what was being sold.
- It should be noted that the price specified in the first draft, in the event of the option being exercised, was $1 million. This was in spite of the fact that the understanding had always been that the price would be $1.5 million. This probably has something to do with the commission arrangements which Jack was putting forward. This is hinted at in the first email from Jack on 8 August which I have mentioned. It does seem as though Jack was suggesting that a significant part of the price should pass to Alex who would in turn give him something. But Alex would have nothing to do with that. What Mr Simms said in cross-examination was this:
"I understood on 13th August that DGI were prepared to grant an option and we asked for 12 months and I do not think we had a clear answer one way or another at that time. What happened was that after that meeting and before I finalised this draft, I was telephoned by Jack Dadourian who said that he had agreed with Alex Dadourian that this was to be part of the deal and, therefore, in drafting the option agreement instead of putting 1.5 million I put 1 million and drafted this letter. Well, this is confirming an agreement with Alex. My understanding was that he had an agreement with Alex on the sharing of the commission.
- The letter he refers to is a draft which accompanied the first draft of the Option Agreement. It deals with the balance of $500,000 which is to be payable to Alex rather than to DGI.
- On 2 September 1997, Mr Simms received a letter from Midland Bank, Poultry & Princes Street Branch in the City of London, informing him that the formalities for opening Charlton's business account were completed.
- Mr Simms' evidence, which again I accept on this aspect, is to the following effect. After preparing the initial draft and sending it to Alex towards the end of August 1997, Mr Simms' evidence is that he received a telephone call from Alex. Alex told Mr Simms that the whole of the consideration would have to be paid to DGI. He also told Mr Simms that the option period he had put in the draft of 12 months was too long and that they would only agree to 50% of that period. Following discussion with Jack about the commission and with Mr Rahman on various other points raised by Alex, Mr Simms drafted another version of the Option Agreement which he sent to Alex on 2 September 1997 with a covering letter. That letter makes clear that, if the Option Agreement was signed, within a few weeks the go ahead would be given for the technical feasibility study and a report on viability. The letter included the following:
"It is vital and a precondition of the managing director's visit to Bangladesh and the fulfilment of his appointments with ministers, industrialists and others regarding this project that the option agreement has already been signed. I would therefore hope that with the amendments which have now been made that it would be possible for you to sign it before your departure on holiday."
The option price was increased to $1,500,000 and the option period restated as 6 months.
- According to Mr Simms, on about 3 September, he received a telephone call from Alex, who had Haig with him. He went through the agreement with Mr Simms. Alex did not appear to Mr Simms to be wanting to retain any lawyers and was making drafting points over the telephone. The amendments included, he said
a. Correcting the typo of "trading" for "tooling".
b. Changing the definition of the Equipment Drawings and the Trademarks.
c. Correcting typos in clause 2.2 and the inconsistency between the price of US$1.5 million stated in the first line of that subclause and the US$1 million stated in the final line of that subclause.
d. Various amendments were made to clause 2.3. Alex also corrected clause 4.1 where the option agreement was still stated as 12 and not 6 months. He also wanted clause 5.2 changed which provided for the proper law of the agreement to be the law of England. He said that he was not familiar with English law and as he was negotiating for DGI, he wanted the law adopted to be that of the State of New York.
e. No amendment was suggested to the provisions of the Option Agreement relating to ownership of the assets being sold or to the warranties to be given.
I accept this part of Mr Simms' evidence too.
- The first draft and all subsequent drafts of the Option Agreement provided for the price following exercise of the option to be paid by "irrevocable letter of credit confirmed by a European or USA bank….permitting part shipment with the Price being paid pro-rata to the shipments. There was no request on the part of DGI for the letter of credit to be opened at any particular time or for it to be divisible or transferable. Nothing express was said about those matters in any draft or in the final Option Agreement itself.
- Mr Simms' position is this. His discussions had been on the basis of a sale of an entire production line which he understood to be in the ownership of DGI. He did not know then that Jack knew that this was not the case. The payment provisions in the draft Option Agreement were consistent with that understanding and, had DGI wanted a letter of credit opened immediately on exercise of the option with it being transferable and divisible, then he would have questioned the basis of the deal. As far as Mr Simms was concerned, Jack had introduced Mr Rahman to Alex, and Mr Rahman had introduced Charlton to DGI. He, Mr Simms, then conducted negotiations direct with the two directors of DGI. He had discussed with them what they owned and what they were prepared to sell and on what terms. He says that he did not consult Jack in relation to the day to day discussions with Alex although, out of courtesy, he telephoned Jack and Helga during the first week of September to tell them what progress was being made and informed them on the 8 September, when he himself was first was told, that DGI had decided to instruct lawyers to represent them.
- It seems likely that Mr Simms made further revisions to the second draft and that there were discussion on the revisions, probably on 5 September 1997, with Alex and Haig. On 8 September Mr Simms heard from Haig asking Mr Simms to phone him to finalise the Option Agreement. He spoke with Haig and thought that that the document had been agreed. However, later on that day, 8 September, out of UK office hours, a fax (in manuscript) was sent by Haig informing him that Ms Darmanian would be contacting him shortly regarding changes that DGI wanted to make to the Option Agreement. He expressed the hope that we would be able to resolve everything that day. Mr Simms was surprised by this last minute instruction of lawyers by DGI.
- On 9 September 1997, Mr Simms and Ms Darmanian spoke (for the first time) on the phone. Before I turn to that conversation, I mention an email of the same date (sent by Jack to a number of email addresses in order to ensure receipt by Alex and Haig). It is headed "TOOLING/BANGLADESH/CHARLTON". It includes the following:
a. "This is the best opportunity we have had to make a real sale of this tooling and then participate in the program after they start producing these beds."
b. "…..The Bangladeshis are serious and they are committed to have the factory and production going as soon as possible".
c. "Secondly, they need the valuation [todays values] of the entire package, the tooling, the cost of engineering to designing the tooling, the engineering drawing and so on and so forth, like the "know how". You need to reach a value of about $9,000,000. We need to try and get an outside recognized or qualified source to corroborate and or concur with our estimation".
d. All this information was requested as a matter of urgency before Mr Rahman went to Bangladesh, planned for 11 September.
- So, there is Jack putting pressure on Alex and Haig not to lose the opportunity to make this deal. Alex and Haig would have been able to see from this email, if they did not know already, that the Bangladeshis would be proceeding on the basis of a valuation of some $9,000,000 of the items set out by Jack. The Option Agreement was in fact signed. The fact that a valuation of $9,000,000 was being presented to the Bangladeshis did not cause Alex or Haig to say either (i) that the $1.5 million sale price was wildly out of order or (ii) that they could not possibly be involved in a transaction which involved that way of presenting matters.
Phone call 9 September 1997 between Mr Simms and Ms Darmanian
- On 9 September 1997, Mr Simms received a phone call from Ms Darmanian. They had a discussion about some proposed amendments which she told him were required by her client. Ms Darmanian, it seems, was working on the draft dated 2 September 1997 which she says (and I accept) was faxed to her by her client on 8 September 1997. The amendments discussed included the amendments which Mr Simms says had previously been discussed with Alex and/or Haig. It was agreed that she would send Mr Simms a marked-up draft to show the changes she required. Accordingly, she sent to Mr Simms, under cover of a fax dated 9 September 1997 but received overnight by Mr Simms in London on 10 September 1997, the "draft agreement which, in accordance with your request, we have revised to reflect the changes discussed". She expressly recorded that the changes were subject to review by her client. Mr Simms regarded these amendments as insubstantial. I do not need to go into the details of the changes which are set out in paragraph 32 of Mr Simms witness statement.
- Mr Simms says that Charlton was a little upset by these later amendments at a time when Mr Rahman was preparing to leave for Bangladesh. He thought that everything had been agreed on 8 September. Mr Simms sent a copy of the draft to Mr Rahman and to Jack and Helga. He produced a fair copy including most of Ms Darmanian's proposed amendments and, on 10 September 1997, faxed it back to her, assuming that this was the final agreement in a form ready for signature.
- However, late on 10 September 1997, Ms Darmanian communicated further proposed amendments to the draft. She wrote:-
"Since receiving your communication, I have become appraised of two important facts relating to the arrangements which I trust your client is now aware of as well:
1) trademarks and tradenames will not be made part of the arrangement, and
(2) a period of not less than 180 days will be required from the exercise of the option to delivery of the goods for shipment to allow DGI adequate opportunity to source some of the equipment required."
- Mr Simms discussed these amendments briefly with Mr Rahman. They agreed to accept them. In his response to Ms Darmanian on 11th September 1997, Mr Simms expressed disappointment that Ms Darmanian's clients were constantly changing their position and added this:
"Our clients are prepared to proceed with the omission of trademarks and tradenames and to agree the 180 day period although it is not quite clear what equipment your [sic] are sourcing in view of the fact that DGI is selling "as is"".
- Now, there may have been – and indeed it appears that there was – a misunderstanding between Mr Simms and Ms Darmanian. She, for reasons which I will come to in a moment, thought (correctly as it turns out) that there was a need to source the General Equipment or some of it at least. But Mr Simms understood that Charlton was acquiring a complete production line and he (in contrast with Jack) had not been told and did not know that the General Equipment had to be acquired. He had drafted the contract on the basis, so he thought, that a complete production line was being sold and had inserted express warranties to the effect, so he thought, that that production line was in the unencumbered beneficial ownership of DGI. Whatever else may be the position in relation to other aspects of Mr Simms' evidence, I am entirely satisfied that he personally had no idea that the entire production line was not in the ownership of DGI. The arbitrator has held (and I agree with this conclusion) that Jack did know of the need to acquire the General Equipment. He has also held that Jack's knowledge was to be imputed to Charlton but I am not concerned with that aspect of his decision. What he has not held is that Mr Simms or Mr Rahman personally knew that the General Equipment had to be acquired.
- The only indication that DGI might need to source something is found in Ms Darmanian's fax dated 10 September. But she failed to identify what needed to be sourced – it could have been something quite trivial and there is certainly no suggestion that the entirety of the equipment necessary to produce a functioning production line other than the Tooling needed to be acquired. Nor did she suggest any amendments to the draft agreement. Some amendment would clearly be necessary if there really was a need to source any significant amount of the General Equipment: changes would have been needed at least to the warranties in Clause 2.5 (to which I will come in a moment).
- At this stage, Mr Simms says that he had still not seen the InterRoyal brochure. The draft Option Agreement still defined Plant and Equipment by reference to a (blank) Schedule 1. His position is that Schedule 1 was clearly intended to include a full list of the General Equipment as well as the Tooling and that even if he had had the brochure, it would have been impossible for him to put together the schedule and know that it was correct. I accept that it was Mr Simms' understanding that Schedule would list all the assets to be sold and that he himself, without help from others (whether Alex, Haig or Jack) would not have known what was needed for the entire production line.
- On 11 September 1997, a final draft was prepared by Mr Simms. It was signed by Mr Rahman on behalf of Charlton. Mr Rahman had a conversation (in the evening, New York time) with Alex on that day as a result of which Alex inserted in manuscript an additional Clause 10 to the Option Agreement. Alex signed on behalf of DGI and the signed edition was faxed back to Mr Rahman. This faxed copy, dated 11th September, is the only version of the agreement ever signed by DGI and sent to Charlton. Mr Simms had not been consulted about this additional clause. I will explain its contents when reviewing the provisions of this signed edition of the Option but, put briefly, it gave DGI a first refusal to take up worldwide distribution rights.
- Mr Simms says that when he saw this amendment he was not keen on it because of his reservations of the sales and marketing ability of DGI. Mr Rahman was most anxious to have the Option Agreement before he left for Bangladesh. Mr Rahman was prepared to negotiate with Alex and Haig a suitable distribution agreement in due course and therefore he and Mr Simms did not object. I accept this part of Mr Simms' evidence.
- By a fax bearing the date 12 September 1997 but apparently faxed on 15 September, Mr Rahman wrote to Alex thanking him for his fax and the signed copy of the Option Agreement saying "and we have also spoken since". He wrote "As discussed, it should be possible to included reference to some form of marketing and distribution arrangement by a DGI/Charlton joint venture….However, you will appreciate that this would need further consideration on our part…." and went on to set out a suggested wording although that wording was significantly different from Clause 10 of the Option Agreement as amended by Alex in manuscript. In his fax, Mr Rahman asked Alex to send by courier two or three copies of brochures which had been sent to Mr Rahman earlier: that was never done.
- On 13 September 1997, Jack sent an email to Alex. After flattering Alex ("Seems you have charmed Mr Selim Rahman." and "I am very happy you are now in direct contact with Rahman and Paul on this matter. It takes a load of the pressure off my back. You are doing a great PR job.") Jack asked what happened about the buy back clause saying that they [Charlton/Simms/Rahman] "had told me all along that this was absolutely necessary to show that DGI had a continuing interest and could be of material assistance in selling the product". That email was forwarded by Jack to Mr Simms. In the forwarded message, Jack said that it appeared that the buy-back package had not been strongly worded in favour of Charlton and complained that Mr Rahman was trying to be very obliging instead of insisting on firm terms and firm commitment by DGI. He considered that the point should be reviewed in order to get back to the original proposal under which DGI undertook to take about 4000 beds per annum. He ended by saying "Alex is already trying to by pass me completely which is OK and very good. I will keep you copied with all E-mails between him and me."
- On 16 September, Jack sent another email to Alex including the following:
"…please give them the info as required. I am trying to have them have direct contact with DGI in order to eliminate any delay of time and also eliminate any chance of misunderstandings. Meanwhile I feel my neck is in the noose as they feel I have a personal responsibility to them as I brought the deal to them. Paul has explained that although I am related to you and know all about InterRoyal, I really am only acting as consultant for DGI."
That email was copied to Mr Simms. Jack wrote:
"Let me know if I am doing the correct thing by playing this game. I do not want to overdo it because he is a very suspicious character so will appreciate your comments."
- These two forwarded emails are the first emails in the court bundles which appear as having been forwarded to Mr Simms or in which an email address ["BowerCottonPaul Simms [email protected]"] is revealed. Mr Simms has always maintained that he did not receive the earlier emails from Jack to Alex nor was he copied them by fax or hard copy and only saw them later, after the conclusion of the Option Agreement. He explains in his closing submissions – although I do not recollect and have been unable to find any evidence to this effect – that he was unable to receive emails at Bower Cotton at that time (August 1997) since the firm's old mainframe system did not provide a personal email system. There is no suggestion that the system was changed between early August and mid-September. If he did not receive the earlier emails it could only be, I think, because Jack chose not to send them. Whether he did receive, or see, them before the conclusion of the Option Agreement is a matter to which I will turn again later.
- The four emails which I have just mentioned were not disclosed in the arbitration nor were they disclosed before the commencement of the trial in this action. They came to light only because of the assiduity with which the Claimants' advisers have constantly pursued the Defendants for disclosure of documents which they were sure existed but had not been disclosed. The way in which a considerable amount of extra documentation was disclosed during the course of the trial was this. The Law Society had taken into its possession, as a result of intervention in the Bower Cotton partnership business, Bower Cotton's client files. These included a number of files to do with Jack and Helga, Ancon, Charlton and others. Before returning these files to Bower Cotton, it took copies in the form of pdf files on disc. Shortly before the trial, the Claimant reached a settlement with some of the defendants, namely Mr Simms' ex-partners in Bower Cotton. The existence of the discs was revealed and the Law Society produced them in court pursuant to a witness summons. There was a dispute about whether these documents should be disclosed. I myself reviewed a number of the files which had titles indicating that they might well be relevant in the present litigation and, having done so, ordered that some of them be disclosed. As it happens, Mr Simms already had copies of those discs in his possession. He says that he did not review them in the course of discovery: he had, by then, obtained from his ex-partners, the relevant hard-copy files and had carried out the disclosure exercise by reference to them. All the documents which existed should he says, have been in the hard-copy files. The fact is that a number of documents which had not previously been disclosed were disclosed as a result of the production by the Law Society of the discs. There was clearly a failure by the defendants to have made full and proper disclosure.
- Mr Freedman complains bitterly about the lack of proper disclosure, inviting me to make adverse inferences against the defendants whenever facts are in dispute. He also attaches a huge importance to Jack's email to Mr Simms dated 16 September 1997, focussing on the phrase "playing the game" which, he says, summarises perfectly what Jack and Mr Simms were up to – that is to say deceiving DGI and leading it, and Alex and Haig, along a path which, had they known the truth of Jack's true role, they would never have embarked upon.
The Option Agreement
- I deal now with the terms of the Option Agreement in the form signed by Mr Rahman and Alex and containing the manuscript amendment made by Alex which I have mentioned.
a. Recital (A) records that DGI "is the owner of certain plant and equipment, know-how and technology".
b. Recital (B) records that Charlton has chosen a potential location for the creation of a factory to manufacture hospital beds etc in Bangladesh "together with local investors for this purpose".
c. Recital (C) records that the parties have agreed that Charlton should have an option to purchase the items referred to in (A) "in order that Charlton shall be protected whilst it progresses the formation of the company in Bangladesh and the construction of suitable factory premises. From this it can be seen that Charlton itself was not going to be the vehicle for the exploitation of the equipment but that a new company was to be formed in which local persons would be investors.
d. Definitions includes:
i. "Plant and Equipment": the plant equipment and tooling specified in Schedule 1 hereto. As I have already mentioned, no Schedule 1 was in fact attached nor had its contents even been expressly identified. Clearly, if one were to take this definition by itself, the definition shows that plant and equipment were something different from tooling.
ii. "the Know-How": the know and technology of DGI relating to the assembly and operation of the Plant and Equipment and to the manufacture and production of the Products (ie certain ranges of beds and overbed tables).
e. Clause 2 is headed "Sale and Purchase Option". Although the space for insertion of the option price was left blank, it is common ground that the option was to be granted for $10,000, and amount which was in fact paid by Charlton and accepted by DGI. By Clause 2.1, the option was to acquire:
"(a) [certain drawings];
(b) the Know-How;
(c) the Plant and Equipment;
(d) all rights to manufacture and sell the Products to the exclusion of all other parties"
f. Clause 2.2 provides for the price to be $1,500,000 FOB East Coast port USA. The option is exercisable any time from the date of the agreement for a period of 6 months. The option is to acquire the items specified in Clause 2.1 and which I have just listed.
g. Clause 2.3 provides that, on exercise of the Option, Charlton is to notify DGI of the date upon which it requires the items to be physically shipped, a date not less than 180 days from the date of the notice. The price
"shall be paid by irrevocable letter of credit confirmed by a European or USA bank rated "AA" or better by Moody's or Standard and Poor's. On the payment of such letter of credit the title in all of the assets in Clause 2.1 above shall pass to Charlton and DGI shall deliver the [drawings] to Charlton. Risk in the Plant and Equipment shall pass when the Plant and Equipment is stowed on board the ship intended to deliver the Plant and Equipment to Bangladesh".
h. By Clause 2.4, it is provided that, at the "time of shipment of the Plant and Equipment" DGI is to provide technical support: engineers are to be sent to Bangladesh "to supervise the assembly and commissioning of the Plant and Equipment" in accordance with a timetable set out in Schedule 3. It is clear beyond any doubt that that timetable envisages the installation and commencement of operation of a full production line; there is not hint anywhere that in addition to what it was buying from DGI, it would need to source any of the General Equipment itself.
i. By Clause 2.5, DGI give certain warranties including ones that "the assets to be sold":
i. Are sold "as is" by DGI as beneficial owner free from all encumbrances whatsoever;
ii. Are in the unencumbered legal and beneficial ownership by DGI pursuant to Clause 2.1 of DGI.
j. By Clause 2.6, DGI confirms to Charlton:
i. That the assets to be sold comprise "all the primary assets and know how necessary to create a production line for the manufacture of all of the Products [ie beds and overbed tables] without the need for the purchase of other plant equipment and tooling but excepting incidental items such as carts, hand tools, work benches and the like".
ii. "That to the best of DGI's knowledge and belief, the Plant and Equipment are technically capable of manufacturing 20,000 beds per annum and DGI will submit a report from an independent agency approved by both parties confirming this fact."
iii. "That to the best of DGI's knowledge and belief the Plant and Equipment potentially have a minimum useful life of 12-15 years which fact must also be confirmed by a suitable independent agency appointed by both the parties."
k. By Clause 6.2 it is provided that the proper law of the Agreement is the law of the State of New York.
l. Clause 7.0 is an arbitration provision.
m. Clause 10, added in manuscript by Alex, gives DGI "the right of first refusal for exclusive distribution rights to the Products in all countries worldwide. The parties are to negotiate in good faith for distribution agreement on a country by country basis with a view to establishing where feasible a joint venture between them".
- In my judgment, notwithstanding the omission of a Schedule 1 identifying the Plant and Equipment, it is clear as a matter of construction that what is being sold are assets which are capable of producing beds, in other words an entire production line. Any other view would make a nonsense of several provisions of the Agreement:
a. Clause 2.4 and Schedule 3 clearly envisage the installation of a production line with the assets sold;
b. Clause 2.6(a) states expressly that the assets to be sold comprise all the assets necessary to create a production line without the need for the purchase of any other assets.
c. Clause 2.6(b) expressly states that (to the best of DGI's knowledge and belief) the Plant and Equipment are capable of manufacturing 20,000 beds per annum: it necessarily follows that the Plant and Equipment are capable, together with any other assets sold, of constituting a production line capable of that level of production. Since no physical assets apart from drawings are included in the assets sold listed in Clause 2.1, it follows that the Plant and Equipment includes not only the Tooling but also the General Equipment – unless some other provision of the Option Agreement can be construed as effecting a sale of the General Equipment or unless there is an implied term to that effect.
d. Clause 10: one might ask how there could possibly be a right of first refusal unless there was a fully operative factory, the existence of which would require, of course a complete production line. The answer is that everyone understood that a complete production line was being sold.
- It may be that, by 11 September 1997, Ms Darmanian knew that the entirety of the General Equipment needed to be sourced (although I have formed the view that Ms Darmanian had no understanding of what assets in fact needed to be sourced and was not aware that without it the production line could not be assembled). But, for reasons which will become apparent as my review of the facts continues, Mr Simms did not appreciate at that time (certainly up to 11 September 1997) that the General Equipment needed to be sourced. And even if he had, I have no doubt at all that he would never have allowed Charlton to sign an option agreement which did not oblige DGI, if the option were exercised, to provide the General Equipment at all even if he would have accepted an agreement which excluded the warranty as to current ownership in relation to the assets which did need to be sourced. It may also be that the absence of Schedule 1 and 2 to the agreement signed on 11 September 1997 or any subsequent agreement meant that there was no complete contract at all – although that was not a view which found favour with the arbitrator and was not argued before me.
The brochure
- I have mentioned the brochure which had been produced by DGI or one of the other group companies. This was produced at some time in the past in connection with the marketing of the Tooling. It has taken on some significance because it is part of DGI's case that Schedules 1 and 2 to the Option Agreement were always intended, by both parties, to reflect the contents of the brochure; and that reference to the brochure will show that Schedule 1 was only ever intended to include Tooling.
- The brochure contains a number of sections. These are listed on the Contents page which contains the following headings: Products, List of Tooling, List of Drawings, Factory and Marketing/International Representative Installations. The List of Tooling runs to 41 pages of items. The non-expert reader (and perhaps even the expert) would have no idea from reading the list what the equipment was capable of being used for or, even knowing that it was tooling for bed manufacture, its capacity or what other equipment might be necessary to produce a production line. The list of required machinery runs to 3 pages. At the end of the list appears the following:
"The machinery listed above indicates the major equipment and machines used by InterRoyal to manufacture the FRED 1 & II hospital beds and the Nursing Home Bed. Not included in this list are the universal and disposable machines and tools, basic machine shop equipment, test and inspection equipment, material handling equipment, and hand tools."
The final sub-heading under Factory appears on the Contents page as "Ocean Freight Information". The actual heading of the section in the body of the brochure is "Ocean Freight for Tools and Dies".
- This brochure was, as I understand it, produced a considerable time prior to the events in question (August 1997 onwards). The brochure itself would appear to be designed for the marketing of the tools and dies, together with the drawings, as well as indicating what the requirements for factory space and design and for other equipment would be. The fact that the heading Ocean Freight relates only to Tools and Dies suggests that that was the purpose of the brochure. The reader would think, however, reading the brochure as a whole, that if he acquired the Tooling and the equipment listed under Required Machinery (subject always to the caveat in the passage just quoted) that he would have everything necessary for a complete production line. However, it would always be open to DGI and a potential purchaser to agree that DGI should source all the necessary additional equipment for the purchaser and to sell the whole as a single lot. Further, such a purchaser would have no way of knowing, unless he asked and were told, whether DGI in fact already owned the other machinery necessary. It is not suggested in any way to the reader of the brochure that the seller of the Tooling does not already own the necessary other machinery: he is simply told what is needed. It would be entirely unsurprising to find that a seller of Tooling also already owned the other necessary equipment although whether he wanted to sell it or not might be a different issue.
- I am satisfied on the evidence that Mr Simms believed, when he produced the first draft of the Option Agreement, that Charlton was acquiring an entire production line including the General Equipment. Indeed, I am perfectly satisfied, in spite of what Ms Darmanian has to say, to which I will turn in a moment, that both DGI and Charlton at all times intended that the assets to be sold upon exercise of the option contained in the Option Agreement were those necessary to constitute the production line and not just the tooling and dies (although whether a warranty as to ownership was intended by DGI is another matter). The fact that the Tooling and the other equipment were listed separately in the brochure and the fact that the other equipment was simply described as being needed does not, in my judgment, detract from that conclusion. Nor, importantly, do the contents of the brochure assist in determining whether Mr Simms understood that the General Equipment was not already in the ownership of DGI. Even if he had received and read the brochure, its contents are wholly consistent with a contract which provides for an option to acquire assets which include both the Tooling and the General Equipment and wholly consistent, also, with the General Equipment in fact being in the ownership of DGI.
September – October 1997
- Before turning to the evidence on behalf of the Claimants in relation to the events leading up to the Option Agreement, I need to complete some narrative up to the end of September or early October 1997.
- On 5 September 1997 there was a meeting of the board of Charlton (Mr Simms and Mr Rahman). The minute records Mr Rahman reporting about the Bangladesh proposal at a price of $1.5million plus the option price of $10,000. It was stated that DGI was keen to be involved in future sales of beds (ie the buy back and distribution arrangements). Mr Rahman reported that he believed the plant and equipment to be acquired could be sold to the Bangladesh company at its full going concern value namely $9 million. Mr Simms is recorded as saying that it was essential that no inadvertent misrepresentation should occur in respect of the transaction concerning the plant and equipment. Any request by DGI concerning the onward sale price must be refused and equally any request by the local partners or banks concerning Charlton's acquisition cost must be refused.
- Mr Rahman went to Bangladesh as planned. Mr Simms, in his capacity as Chairman of Charlton, followed his chief executive, Mr Rahman, after about a week, that is to say on about 18 September 1997. During his visit, which lasted about a week, Mr Simms met a number of civil servants, politicians and businessmen. He had meeting with banks - Banque Indosuez, ANZ Grindlays Bank, the International Finance Corporation and the Sonali Bank – and he also met prospective local shareholders in Bangladesh and was particularly impressed by one family (which I do not need to name) which had significant funds to invest and had a successful business enterprise and a good reputation.
- On his return, he prepared a report (formally for the board of Charlton) of his trip. He referred to local contacts by way of politicians, the secretary of the Ministry of Industries and a meeting with Ambassador Kabir who might be a suitable chairman of the Bangladeshi company. An important feature of the visit was discussions with SAA Consultants who were prepared to conduct a feasibility study and appeared to be a good, efficient and sensible enterprise. He also referred to the fact that the project was very well received in Bangladesh because of the buyback arrangements. He made clear that if there was to be a sales corporation created by DGI and Charlton, it would certainly need to be capitalized at least to the extent of US$500,000.00 and would need to have network of distributors in place or ready to be put in place. He emphasized the need for further research on the world market. His report concluded with a view that the DGI representative would need only to come to Bangladesh for one week and not two weeks to assist in the preparation of the feasibility study. Everything therefore depended, Mr Simms now submits, on the feasibility study since, if the feasibility showed the likelihood of a successful venture there was sufficient local support to get the project up and running. I agree.
- As to that, Mr Simms points out that the cost of the production line itself was only a fraction of the total cost. He says this:
"The site had to be leased or purchased. A factory had to be constructed and utilities supplied to it. A skilled workforce with good local management had to be employed and proper research carried out on the most cost effective way of sourcing the raw materials and components. On my visit to Dhaka I met with the country manager of Banque Indosuez, a Mr Francis Dubus who was interested in being a consortium member for the finance. I met Mr Shahed Noman, the chief manager of Credit of ANZ Grindlays Bank on two occasions. I also met with Mr Haque, the chief manager of retail banking at ANZ of Bangladesh. They appeared to be keen and were anxious to be leaders of the consortium. Selim and I also met on two occasions Mr Hafeezuddin Ahmed, the country coordinator of International Finance Corporation and he also indicated that IFC would want to be the lead lender and bring in other parties, particularly other governmental agencies, rather than commercial banks. Although IFC would have been a prestigious shareholder lender, I was concerned that the procedures of IFC would be likely to be quite slow. We also met with the chairman of Sonali Bank, the largest Bangladeshi state owned bank, a Mr Mohammed Asaf Dowla who indicated that his bank would support the project if the feasibility study was attractive. He indicated that his bank would wish to lend either with other Bangladeshi banks or together with ANZ and Banque Indosuez.
Because the local venture needed equity finance, since not all of the project finance could come from banks or other lending institutions, I was keen to see whether it was realistic that shareholder support was available. There was sufficient local interest and the most important was from [name provided]…….. We met with the chairman and his brother and they appeared to be keen to participate even though they would only be able to take a minority interest which, apparently, they normally would not do. Everybody was now waiting for the feasibility study."
I accept that evidence.
- On 22 September 1997, Jack and Helga wrote to Mr Simms and Mr Rahman in Bangladesh. They were giving their input into the proposed Bangladesh project. This appears to be something rather different from the help and advice which Jack and Helga say was being given; rather, the letter appears to be expressing the views of persons who are personally interested in and concerned with the outcome of the project. Jack and Helga stressed the importance of getting the Charlton/Bangladesh joint venture in place with the financing; and they set out what DGI's future marketing involvement should be. Mr Simms and Mr Rahman were advised against allowing Alex to "sweet talk" them into other long-range programmes but to obtain a commitment to the buy-back arrangements (ie a commitment to acquire a large percentage of the output of the new factory). Jack and Helga conclude:
"In any event the final decisions or guidance needs to come from Selim and you who are on the spot and actually negotiating with the JV and finance people. Moreover, Selim understand better the mentality of his people so he is the one to guide us in the right direction."
It is, I consider, highly relevant that Jack and Helga regard Mr Rahman as "guiding us in the right direction": he says "us" because this is, in reality, a project in which they, either personally or through the family trust, have a significant interest (in the non-legal sense at least). On the other hand, this is not immediately apparent as the letter of a man exercising such dominion and control over the affairs of a company which is merely his alter ego.
- On or about 23 September 1997, Mr Simms sent a fax to Alex. He explained that Mr Rahman had made excellent progress (in Bangladesh) and that he was confident, subject to three matters which he set out, that it would be possible sign a Memorandum of Understanding with local partners. The three issues were:
a. The buy-back arrangement so that the project will be given priority as export oriented. Arrangements were proposed for the setting up of a joint venture company for marketing and selling. The DGI side of the joint venture would be responsible for sales in North America and Charlton for sales in the rest of the world.
b. Specification by DGI of raw materials/parts to make products so that investigation could start into local sourcing.
c. Itemised costs from DGI of "the items to be purchased showing the replacement or new cost of all the equipment and tooling. The tooling cost should make due allowance for engineering design".
- Ms Darmanian' response (23 September 1997) which Mr Simms saw on his return from Bangladesh at the end of the month, to that was that points b. and c. were acceptable. Point a. was not; and she suggested reversion to the right of first refusal proposed by Alex on 11 September 1997, that is to say the provisions of the additional Clause 10 which he had inserted in manuscript as I have previously explained. In making no objection to point c, she must surely have realised, had she thought about it, that the "items to be purchased" were precisely the "equipment and tooling" the replacement or new cost of which was sought. She recorded that she looked forward to receiving "an executed copy of the final Agreement and the transfer contemplated therein".
- On 24 September 1997, Jack emailed Alex in relation to the fax from Mr Simms which Alex had copied to him. Jack stated that he considered the proposed joint venture a good deal for DGI and explained that the joint venture agreement appeared to be mandatory to get the fast-track funding and tax breaks in Bangladesh available to export businesses. He wrote:
"So as I see it, the whole thing is that the only way DGI will get the one and a half million is if Charlton and their JV Bangladesh partners are able to swing the finance…..
……Paul has sent me a handwritten 2 page fax from his hotel to bring me up to date and to please contact you personally to get the vital information to them today. They will then have tomorrow morning and be able to have an offer in principle for the loan finance……
The way I see it, we get money for the complete package, tooling, dies, machinery, and then get paid for setting up the operation, then make profits from the sale of the finished project."
- Mr Freedman relies on that fax as showing Jack's duplicity: here he is pretending to represent DGI's interests – "we" get money etc – when really it is Charlton, which according to Mr Freedman is a front for Jack and Helga, which is going to cream off the real profit from an onward sale of the Tooling. I will be dealing with that aspect of the case in due course. But in the present context, that email shows two things: first, it is a clear indication, very early on, that the fact that Charlton did not have the finance for the project in place was made known to DGI; and secondly, that as Jack saw it, a complete package including machinery was being acquired. As to the first of those, there was no complaint from the DGI side that there had been any sort of representation to Alex or Haig or, indeed, to Ms Darmanian, that the finance was already in place. As to the second, there was no suggestion that a complete package was not being provided.
- On 24 September 1997, Alex sent to Mr Simms to his hotel room in Bangladesh, a fax which (a) provided the replacement cost of all equipment and tooling and (b) set out a specification of materials and parts as had been requested. Alex ended the fax saying "I believe this information should be quite helpful". Item (a) was headed "Start-Up" and set out the "cost of complete development from the "idea" to manufacturing ready of the following" and there followed a list of 7 products. Underneath that appeared the following:
"Design and engineering $1,805,000
Pilot run of 100 units of each bed 928,000
Tooling 2,110,000
Machinery 2,320,000
$7,163,000"
Alex provided this information because he had been asked for it. He clearly understood from his communications with Mr Simms that this information was required in order to help persuade investors to become involved in the project on the basis of his assessment of what start-up costs would be if the investors had to start from scratch.
- On 29 September 1997, Mr Simms sent to Jack and Helga a note and two supplemental notes on his visit with Mr Rahman to Bangladesh. He identified three difficult aspects namely (a) the buy-back arrangements and how they are to be presented (b) having a successful inspection valuation of the equipment in the US and (c) organising a speedy trip to Bangladesh by DGI. He asked Jack and Helga to read the report and then discuss it.
- According to Mr Simms, the final print of the Option Agreement was not produced by his office until his return from Bangladesh at the end of September. This final version, which was a clearer version of what had already been agreed, omitted the manuscript amendment which Alex had added. It was signed by Mr Rahman on behalf of Charlton. Mr Simms asked Mr Rahman to supply him with a copy of schedule 1 and he supplied an extract from the brochure he had received from DGI. This was attached to the agreement. Schedule 2 was also attached which was also supplied to Mr Simms by Mr Rahman being copies of details of the hospital beds and over bed tables which were to be produced by the production line. Charlton's original was sent by letter of 30th September to Denise Darmanian with a banker's draft of $10,000.00 being the option price.
- On 30 September 1997, Mr Simms sent a banker's draft for $10,000 to Ms Darmanian – this was the agreed price for the grant of the option under the Option Agreement. He stated that he did not have a spare set of brochures "to add as a schedule to the original agreement". He enclosed "an original agreement signed by Mr Rahman". It is quite clear that what he sent did not include any schedules.
- There is in the bundle, following that letter, a version of the Option Agreement which appears to have been bound in a spiral binder. It is in the same form as the version signed on 11 September 1997 and itself bears that date. It includes the figure of $10,000 in Clause 2.1 which had appeared in the earlier signed version but omits the manuscript Clause 10 added by Alex. There is a page headed "Schedule 1" which is followed by a copy of that part of the brochure listing the Tooling. I do not know who prepared the spiral binder or who inserted the Schedules into it.
- It is necessary at this point to see what Ms Darmanian and Mr Gallo have to say about what happened during the period leading up to the faxed exchange of the Option Agreement on 11 September 1997. She says that she was first instructed in this matter on 8 September 1997 by Alex. She says that she was asked to act "as attorney for DGI in a supervisory role in the discussions and negotiations that were already ongoing".
- It is clear that a draft of the Option Agreement was faxed to her by DGI on 8 September 1887. I find as a fact that that was in the form of Mr Simms' draft dated 2 September 1997 without any manuscript amendments on it. The fax is timed 14.46 (which I take to be New York time). It is clear also that she had a discussion with either Alex or Haig before her conversation with Mr Simms: it was on that basis that she was able to discuss with him the changes which her client wished to see made to the draft. She said in cross-examination – although again this does not appear in her witness statement - this: "Later that evening, I received from Alex Dadourian personally the brochure, along with the first schedule, schedule 1". She repeated that she received an extract from the brochure that was described to her as schedule 1. Schedule 1 was, according to her, the list of tooling which is found in the brochure.
- Ms Darmanian gave evidence - again not in her witness statement - about her communication on 8 September 1997 with her partner, Mr Gallo, who was then in Paris. He knew nothing of this client or of this transaction. Ms Darmanian says that, having received the faxed copy of the contract and the personal delivery of the brochure and schedule, she took instructions from Alex on the telephone, an hour or two later (that is to say, an hour or two after receiving the brochure which itself was received later in the evening after receipt of the faxed draft contract at shortly before 3.00pm). Following her instructions, she says that she sent a fax to Mr Gallo attaching the draft contract and schedule 1.
- Mr Gallo for his part says that he received a fax containing the draft contract, a list of tooling and some drawings. The list, he said, was "what eventually became a schedule to the contract. It did not become one then". He said that he did not focus on the terms of the contract but instead looked at the list. He says that he told Ms Darmanian a number of times that it was not possible to manufacture anything using only what was listed in the attachment.
- Mr Gallo was not involved in the negotiation for the Option Agreement apart from his conversation from Paris with Ms Darmanian. There is nothing to suggest that he had any input into, or even considered, the appropriate governing law or where any arbitration might take place. Nonetheless, he was willing to say in a Certification to the New York court that he was one of the counsel involved in the negotiation of the Option and Agreement and had personal knowledge of the facts stated in the Certification. Those facts included details about what he and his client considered a reference to "Institute of Arbitrators" to be. I find that he had no such involvement in the negotiations and that he had not addressed the matter of arbitration at all at any time before the Option Agreement had been concluded. His Certification was untrue in relation to his involvement in the negotiations and the Court was being misled.
- Having spoken to Mr Gallo, Ms Darmanian spoke to Mr Simms on 9 September 1997: this is the conversation I have already mentioned. There is a dispute about the length of the conversation, Ms Darmanian saying it lasted 1.5 hours and Mr Simms saying it was about 15 minutes. Ms Darmanian says they touched on almost every paragraph in the contract, and on all of the schedules. She also says that Mr Simms said on two occasions that he had schedules 1 and 2 to the contract in plastic folders supplied by Alex, as well as the complete brochure. Mr Simms says that only schedule 3 was discussed and points out that since Ms Darmanian was suggesting changes to a contract which he thought had been agreed, she should put her changes in writing which is precisely what she did do. But in so doing, she made no comment on the schedules, not even identifying what was in them. She took no account of Mr Gallo's observation that the tooling contained in the list which he had seen was inadequate by itself for manufacturing anything and she made no amendment whatsoever to the provisions in Mr Simms' first draft concerning the warranty as to ownership or the warranty that a complete production line was being sold.
- Ms Darmanian emphasises, in dealing with how matters were progressing, the great sense of urgency: Mr Simms said everything had to be done within 24 to 48 hours as Mr Rahman had to go to Bangladesh. That there was a desire, or even need, expressed by Mr Simms to have the agreement signed by the time Mr Rahman went to Bangladesh may be true. But the urgency, as perceived by Ms Darmanian, was as a result of Alex and Haig deciding to instruct her when they had, until then, been negotiating the contract themselves and Mr Simms thought that its terms had been agreed on 8 September 1997. That Ms Darmanian may have felt under pressure cannot affect the meaning of the Option Agreement which was the end product of her advice. She seems to recognise that the Option Agreement, for which she was responsible from her client's end, did not make clear what she now wishes it had made clear namely that the General Equipment was not owned by DGI at that time but would have to be procured. She has, I am bound to say, taken a very defensive attitude in her evidence to the progress of the negotiation and has, accordingly, taken some positions about its meaning which, to my mind, are very odd. I see her taking those positions both to protect her own position and to produce the best result for her client.
- More importantly, for present purposes, she has, I am afraid, persuaded herself that some of the things which she wished she had raised with Mr Simms, and which did become points of discussion later on, were raised when, in my judgment, they were not raised. Whilst I reject Mr Simms' suggestion to both Ms Darmanian and Mr Gallo that the conversation between them whilst he was in Paris was a fiction, I do not accept that Mr Gallo said any more in substance than that the tooling list with which he had been supplied did not constitute a functional production line. The list was not identified to him by her as schedule 1 to the contract and, in any case, it would not appear that Mr Gallo focused at all on the contract itself. I do not accept that the tooling list was identified in the conversation between Ms Darmanian and Mr Simms as what would appear as schedule 1. In spite of her conversation with Mr Gallo, I do not think that Ms Darmanian had really begun to appreciate what was needed for the production line; nor do I think that Mr Simms had any understanding of what was, in totality, required. At that stage, on 9 September 1997, both Ms Darmanian and Mr Simms thought that an entire production line was being sold; and Mr Simms, and possibly Ms Darmanian, believed, in my judgment, that DGI possessed all the equipment necessary for that production line. Now it may be that Mr Gallo appreciated that the tooling by itself was not sufficient; he says he told Ms Darmanian as much. But that she did not pass this on to Mr Simms shows that she did not understand the significance of what she was being told. If she had understood that, and if she had intended that schedule 1 should be a list only of tooling, then she would have been bound to make substantial further amendments to the draft contract and, equally significantly, would not have written in the way she did on 10 September 1997: instead of saying that a period of 180 days was needed from exercise of option to date of shipment to provide an opportunity to source some of the equipment, she would have identified a major deficiency in the drafting.
- In particular, in her witness statement, Ms Darmanian says that she stipulated a period of not less than 180 days from the exercise of the option by Charlton to the date of delivery "in order that DGI should have enough time to purchase the general equipment". The implication of that, and I am sure that this is the impression which she wished to give, is that she knew that the distinction between the Tooling and the General Equipment and that she knew that the entirety of the General Equipment needed to be sourced. I reject both of those implications. Nor do I believe that the schedules to the Option Agreement, if they were discussed at all, were considered in the detail which she suggests. She may have had in front of her a list of tooling taken from the brochure and may have thought in her own mind that that list was to form schedule 1; but if that was so, it was at a time when she did not appreciate that the list in front of her did not comprise an entire production line and when Mr Simms had no reason to think that what he was negotiating was anything other than the purchase of an entire production line. Mr Simms did not, as I find, have that list in front of him let alone accept that it should comprise schedule 1.
- Ms Darmanian says that it was agreed between her and Mr Simms that he should be responsible for preparing schedule 1 and 2 and that she would prepare schedule 3. His position is that he never agreed any such thing. I think it highly unlikely that the responsibility for preparing a schedule which listed the equipment, be it Tooling or General Equipment, would have been his responsibility. It was not he, or Mr Rahman, who was in a position to know what was for sale let alone to make a technical judgment about whether it was adequate to form a production line. It was DGI which knew what it had for sale and able to list it; and it was precisely because Charlton did not know through its own technical verification whether the equipment was capable of forming a production line that Mr Simms inserted appropriate warranties in the Option Agreement.
- I must be careful, here, to explain why the evidence of these negotiations in important. It is not because they can affect the meaning of the Option Agreement: negotiations are, at least under English law, inadmissible in construing the contract and I have not been shown anything to suggest that New York law is different. Rather, it is because they show what Mr Simms believed he was negotiating on behalf of Charlton: since he is being accused of fraudulent misrepresentation and conspiracy in relation to the way the contract was subsequently dealt with and sought to be enforced, it is important to ascertain his own state of mind. In my judgment, on 9 September 1997, Mr Simms believed that Charlton would be acquiring a complete production line and that DGI already owed everything necessary to constitute that production line. Moreover, he continued to hold that belief through the next two days and held that belief in relation to the Option Agreement as signed and exchanged on 11 September 1997. It makes no difference to that conclusion that Jack knew that DGI did not own the General Equipment even though Jack's knowledge might be imputed to Charlton.
- In order to explain away the defects in the Option Agreement from her client's perspective, Ms Darmanian adopted, in her evidence what is, to my mind, an extraordinary approach to the meaning of the Option Agreement. She accepted before me that she understood the phrase Plant and Equipment in clause 2.4 of the first draft of the agreement (in relevant respects in the same terms as the signed agreement) to mean "the entire operation" as Mr Simms put it to her. She accepted that, at that time, the only provision that sold or transferred anything was Clause 2.1 containing the option to purchase and that the warranties in Clause 2.5 related to everything which was to be sold. And she accepted that the other provisions of the draft agreement referring to Plant and Equipment included everything necessary for the whole operation. This was all on 8 September 1997.
- She goes on to say that, having learned from her client that some assets needed to be sourced and were not already in its ownership, she then understood Plant and Equipment to mean, in the latest draft and the final agreement, only the Tooling. I shall come to that in a moment. But I note here that, in front of the arbitrator, her evidence was that Clause 2.1, at least according to her understanding, did not include the General Equipment. And her basis for saying that was that she had been told, either on 8 or 9 September 1997, that some assets needed to be sourced.
- She said to me that that evidence was given not by reference to any draft contract, but by reference to the final signed Option Agreement (by which I think she meant a version signed after the apparently final version signed on 11 September 1997 and to which I will come later). However, it is clear if one refers to the transcript that that is not so and that her answers to the arbitrator were in fact given in relation to a draft which had manuscript amendments on it made by her and not to a final version. It seems to me, therefore, that there is a real inconsistency in her evidence before the arbitrator and her evidence before me. In any case, she went as far as to say that there was no provision in the Option Agreement at all which contractually bound DGI to provide the General Equipment at all and, in answer to Mr Simms question in the arbitration that "somehow or other you believed that it was the intention of the parties that your clients would throw in the general machinery, totally unspecified, for nothing" her answer was "That is not what I believe. That is what is the case, Mr Simms".
- Now, it may be a matter for argument that there was such a misunderstanding between Charlton and DGI – or at least between Mr Simms and Ms Darmanian – that no contract at all came into existence. However, that is not the position which the parties took before the arbitrator and he himself decided that there was a binding contract. But, assuming that there was a contract, it seems to me to be quite impossible to contend, as Ms Darmanian does, that DGI was not bound to provide an entire production line if one looks at the contract as exchanged on 11 September 1997. There is a warranty that the assets sold comprise all that is necessary and, in the absence of the attachment of an agreed schedule 1 which did not include the General Equipment, the contract must surely relate to an entire production line. I add that, if it did not, then DGI would clearly have been in breach of that warranty. I also find it difficult to see how Ms Darmanian can hold the view which she expresses given that her own fax of 10 September 1997 recorded that there was a need to source some of the equipment; that could only be relevant if there was an obligation on DGI to supply that equipment to Charlton. The suggestion by Ms Darmanian that DGI would simply supply that equipment voluntarily for no consideration seems to me to be fanciful.
- Ms Darmanian also says that during the course of the phone conversation on 9 September 1997 with Mr Simms, he told her that the necessary funding was in place and that upon Haig's return from a prospective visit to Bangladesh in September, the funding commitment would be engaged. Mr Simms denies that funding was ever discussed and asserts that Ms Darmanian is making all this up. Ms Darmanian accepted in cross-examination that it had not been determined by DGI at the time of the discussion who would go to Bangladesh. She also accepted that there was not any discussion about who might go. When Mr Simms asked her how it could then be that he could have said that the funding would be engaged when Haig returned, she said it was because there was a high likelihood that Haig would be going: "his name" she said "was the first one which was mentioned, although it was not yet confirmed that he would be the one to go".
- There was, of course, no funding commitment at all in place on 9 September 1997. Funding was precisely one of the matters which Mr Rahman was going to Bangladesh to discuss and attempt to set up. Mr Simms pointed out that, as was clear from the first draft of the Option Agreement, someone would go from DGI to provide assistance in the preparation of a feasibility study. He asked Ms Darmanian what she meant by saying that "the funding commitment would be engaged" and whether she was saying that Charlton had given a commitment that it was going to exercise its option or that it was going to pay for the equipment or something else. Her response was this: "They were not only going to exercise the option, as I understood it, but be in a position to open the letter of credit". Now, that, so far as I am aware, was the first occasion, whether in the arbitration or in this litigation, that Ms Darmanian went as far as to say that Charlton would, on her understanding, be in a position to open the letter of credit, an understanding which she could only have gleaned from Mr Simms if she had it at all.
- I am not sure that it is necessary for me to do so, but I find as a fact that Mr Simms made no representation to Ms Darmanian that funding was in place in the manner which she suggests it was represented. She is either mistaken in her recollection or making it up to assist her clients' case.
- On 3 October 1997, Mr Rahman sent his own report to Alex. His letter indicated that the most pressing matter was the production of a feasibility report. He also indicated that financing for the project would be through a combination of debt and equity probably on a 50:50 basis and that discussions with selected banks had taken place and that he believed that finance would be available in due course.
- Alex responded on 9th October 1997. He indicated that the issue of distribution was one that DGI was not considering in the manner which Charlton was currently presenting. He indicated that DGI could arrange to act as marketing advisors for a specific time and could sell in specific areas on a commission basis. Mr Rahman found the fax surprising in light of the manuscript amendment which Alex had made to the Option Agreement when he signed it. He had specifically added words which required Charlton to grant DGI the right of first refusal for exclusive distribution rights to the products in all countries world wide. Now Alex appeared to be saying that they did not want to be fully involved in relation to the distribution.
- Mr Simms says that he was not particularly keen on DGI being responsible for marketing and distribution but that Jack had constantly pushed DGI as being a suitable party and Mr Rahman had been relying upon their apparent eagerness to participate. Jack, however, told Mr Rahman at this time that he had spoken to Alex following Alex's fax and that the matter of the distribution and the buyback was still on course. As a result, there was a meeting between Mr Simms and Mr Rahman as the Board of Charlton on the 14 October 1997. It was agreed that Bower Cotton would draft a buyback agreement and a joint venture agreement for consideration with DGI. The go ahead for a feasibility study at a price of around $4,500 was approved. It was also noted that the option price of $10,000.00 had been paid and that that price should be taken as paying up pro tanto a further instalment in respect of Charlton's initial share capital of £50,000.00
- Mr Rahman was anxious for the technical trip by representatives of DGI to Bangladesh to take place. DGI decided to send Haig. Through no fault of Charlton, there was some delay in his visit. It was not until 6 November 1997 that he arrived in Bangladesh, Mr Rahman having travelled to Bangladesh on the 27 October to be available for the visit and to prepare for it.
- In the meantime, on the 4 November 1997, Mr Simms had sent to Alex by fax the first draft of the Buyback Agreement between the proposed Bangladesh subsidiary of Charlton and a proposed new Delaware company called DGI – Charlton Sales Corporation to be a joint venture between DGI and Charlton.
- On Haig's return, he wrote, towards the end of November, a report about his visit to Bangladesh. The report noted that certain information was required as part of the feasibility study in order to obtain loan approval for the project. On page 2 of the report, Haig wrote:
"It appears that Charlton, through the personal efforts of Selim Rahman, has the ability to raise the necessary capital to fund the project. The feasibility study is a necessary part of convincing not only Charlton's board of directors but also the lenders of the viability of the project".
At latest by that time, DGI was accordingly well aware that the finance for the project depended on lenders coming on board and that no finance was already in place let alone that any letter of credit was immediately available. It was clear that one purpose of the feasibility study was to assist in the raising of finance. Nobody believed or understood that the finance for the project, including the package of equipment and tooling had already been arranged. The importance of the marketing aspect was also recognised, Haig observing that "the whole topic should be further discussed with Charlton in order to arrive at a better understanding as to what to expect from the marketing report". It seems therefore, that at least by this stage DGI had not made any decision to have nothing to do with participation in buy-back arrangements.
- Haig also wrote:
"Charlton has no manufacturing expertise on [sic] staff that can be used to set up the operation. Therefore, it appears to be completely dependent on DGI for this as well as also the marketing area. Charlton's expertise seems to be in finance and they appear to have the financing portion of this project under control".
No adverse comment is made in the report about this state of affairs. Haig did not, for instance, preface what he wrote with words to the effect "Contrary to what we have been lead to believe". There is no record of any conversation between Alex and Haig suggesting that this state of affairs came as a surprise to them or that, even if it did, it was of any importance to them. Nothing was said by either of them to any of Mr Simms, Mr Rahman, Jack and Helga complaining that they had been misinformed let alone misled. On the contrary, DGI continued, at that stage, to treat the Option Agreement as subsisting.
- The report noted that the proposed joint venture marketing company was proposed as a 50:50 participation with a capitalization of between US$500,000 and US$1 million and that the company would be doing business with back to back letters of credit in order to minimize the need for the capital. Haig noted that Mr Rahman wished to have the entire feasibility study, to include technical, marketing and finance, to be ready for the presentation to the lenders by the end of November.
- On 23 November 1997, Mr Simms received a copy of a note which Mr Rahman had prepared and addressed to him and to Jack and Helga in Paris. In paragraph 1.1 of that note it is recorded that Alex had informed Mr Rahman that Haig had given him a very positive report about Haig's visit to Bangladesh and that they were keen to bring matters to a fruition at an early date. If he did not know then, it is clear that Alex appreciated at latest on receipt of Haig's written report of his visit, that, although the finance was progressing well, it was not in place and also that Charlton had no expertise in manufacturing. It can also be seen from this note that DGI was still considering the Buyback Agreement, the draft of which Alex had received. The delay in response was not because DGI had lost interest and did not wish to proceed but because Ms Darmanian had been unavailable to advise as she was getting married. The note also records that Alex had agreed with him that it was extremely important to "dress up" the joint venture balance sheet and that it would be best to see it capitalized at US$1 million. The note also reported on other commercial prospects that Mr Rahman was pursuing. Although he was doing so on behalf of Charlton, it is clear that these projects would need a go-ahead from Jack and Helga (whether on their own behalves or on behalf of the trust).
- Mr Simms has this to say (and I see no reason to doubt it) in relation to feasibility:
"By 24 November 1997, a pre feasibility financial analysis had been prepared. This included a calculation of the unit cost of products. The Fred one bed was to cost $893.21 which with a 31.55% mark-up would produce a selling price FOB of $1,175.00. The Fred 2 would be sold FOB at US$775.00 and the Royal Manual at US$215.00. The earnings forecast was showing in year one a net revenue of $11.2 million with a net profit of $1.1 million, rising at year 5 to net revenue of $15.133 million and a net profit of $2.147 million. In looking at these figures, it has to be remembered that this was a feasibility study in relation to the Bangladesh factory. The products were to have a fixed mark-up on cost. There would therefore be a reasonable profit for distribution to the shareholders in the Bangladesh subsidiary. The UK company would then make a significant profit by marking up the price at which they were purchasing with Charlton Bangladesh in relation to the eventual sales price to distributors and users."
- Between then and the end of November, work continued on the feasibility study which Mr Rahman was at the end of the month, trying to finalise with Mr Siddique Ahmed of SAA Consultants.
- On 25 November 1997, Mr Rahman sent an email to Jack and Helga, copied to Mr Simms, reporting on the Bangladesh project. This email is part of a larger correspondence, which I do not refer to in detail, under which Mr Rahman reports on developments to Jack and Helga with a view, or so it seems to me, to obtaining their approval to what he has been doing on behalf of Charlton. Consistently with that view, Mr Rahman wrote this:
"I did also speak to Haig on the JV and buy back agreement, but only in passing. He said he was convinced on this matter and that he had made his views known to Alex who is handling it. I do not think that Alex has sent his response to Paul's draft of 4 November and, if you agree, I would like to speak to him on the subject…….
There are several other matters both in respect of the project and others which I need to liaise and discuss with you and I will do so in a later message."
- On 26 November 1997, Mr Rahman wrote again to Jack and Helga (copied to Mr Simms) reporting further on the Bangladesh project. In it he said:
"I have spoken to Paul last night re clarifying certain matters with Alex relating to the JV and buy back agreements. We must have this in place as soon as possible to move forward with the financing plan and you will appreciate that this is now the most important "missing link" in our planning and, particularly, in our ability to move forward rapidly. I will greatly appreciate your 'behind the scene' assistance."
The message also refers to discussions with Mr Simms when everyone would be in London.
- The use of the phrase 'behind the scene' strongly suggests, in its context, that Jack's involvement in discussions with Mr Rahman and Mr Simms was (as indeed was the case) secret from Alex and Haig. Jack was, in effect, being asked to assist Charlton to conclude a deal on the joint venture and buy back arrangements no doubt by making suggestions to Alex and Haig and generally urging them on without revealing his significant involvement in discussions with Mr Rahman and Mr Simms or the interest, on Jack's own case, of Helga's family trust in the project.
- Jack and Helga's close involvement is also reflected in a letter from Mr Rahman to Mr Simms dated 30 November 1997 where he wrote:
"Given the fact of their [Jack and Helga's] imminent absence to the US for the next few months, we must sort out and resolve all outstanding issues, principally, Charlton plc's corporate profile, directorship, funds availability, Sonali Bank, DGI-Charlton JV & buy back etc. These matters are crucial for presentation to the Bangladesh banks and (apart from the issue of Sonali Bank) would have to be included in the final feasibility report."
- On the 2 December 1997, Mr Simms sent a fax to Alex. He referred to the joint venture and buy back and mentioned that Mr Rahman had suggested that a meeting might take place on 12 December in New York in order that outstanding matters might be resolved once and for all and the project then proceed with all speed. A shareholders and joint venture agreement was prepared by Mr Simms at the beginning of December and sent to Alex.
- On the 5 December 1997 there was a conference call between Mr Simms, Ms Darmanian, Haig and Alex relating to the Joint Venture and Buyback. Alex and Haig's position was that they would provide their know-how and expertise rather than a capital contribution and that that would be sufficient for the purposes of the venture. Subsequently, on 9 December 1997, Mr Simms received a memo from Alex which proceeded on the basis that their know-how and expertise would be their contribution. Mr Simms discussed this memo with Mr Rahman and also with Jack. Both told him that DGI was very keen to be involved in the buyback arrangements and that the memo was a negotiating position.
- From Alex's perspective, however, the drive for involving him and Haig in any buyback arrangements came from Jack. Further, buyback arrangements of some sort were essential in order for the necessary finance to be obtained by Charlton. There is no indication in the evidence of any alternative buyback arrangements under consideration at that time which Charlton could implement if negotiations with Alex came to nothing. At this stage, of course, the option had not been exercised, so Charlton was not yet committed to anything. But agreement of buyback arrangements was a matter of importance.
- In the second week of December 1997, Mr Simms and Mr Rahman went to New York. On 12 December 1997 they met with Alex, Haig, Mr Gallo and Ms Darmanian. Mr Simms puts his perspective of the meetings in this way:
"The DGI position was somewhat odd. They stated that no buyback had been contained in the September Agreement. That was true, although Alex had added a provision reserving a right of first refusal on exclusive world distribution rights. DGI said that if they had known [presumably that they had to supply an entire production line rather than the Tooling alone] they would have added to the cost of the equipment. Presumably, they would have added the amount of their proposed capital contribution to the price. They told us for the first time that they needed to purchase most of the machinery and equipment. They said the tools and dies were in place. They kept stressing their knowledge and expertise in the market and that that would be far more valuable than a capital contribution. Selim and I were asking for the company to be capitalized at a $1 million with a capital contribution of $500,000.00 on each side. As the negotiations progressed, we were prepared to take note of the experience and know-how and reduce the contribution of DGI to $250,000.00. However, we seemed to be making no headway. I took the position that it was simply not going to be satisfactory to have no capital contribution. It was not so much the amount of money but the significance of making an investment. Alex and Haig were saying that they wanted to deal with the distribution on the basis of being paid for marketing and selling and also receiving commission. With only an upside and no downside, this was completely unsatisfactory. Alex and Haig had not made a success of InterRoyal and there was no reason why I should think that this will be a good arrangement for Charlton.
On the 13th December, we were supposed to have another meeting. However, Alex Dadourian was attending some meetings of the Armenian Church. I spoke to him at some length but it appeared that the reflection overnight on the matter had not changed his attitude. I wanted to know whether the answer was no, in which case we would need to look in other directions or whether he wanted further time to consider the matter. He stated that he would like time to consider it as Christmas was coming that he would give a response by the end of December. This was confirmed in a fax by Alex Dadourian to Selim Rahman on 17th December. At the meeting in New York there had been no detailed discussion in relation to shareholdings in Charlton. With little likelihood of an agreement regarding a joint venture, we had told DGI that details of the shareholding of the company were really not relevant to the discussions about the buyback and joint venture."
- Mr Gallo deals in his witness statement with the meeting on 12 December 1997. He says that, although the proposition was of no interest to DGI, the purpose of the meeting was to listen to Charlton's proposals regarding a marketing joint venture and buy-back. Mr Gallo does not suggest that this was communicated to Mr Simms and Mr Rahman even if it was what he had been told by Alex and Haig. I find as a fact that this attitude was not communicated in the meeting and that, consistently with what Alex had inserted in manuscript in the Option Agreement, he was continuing to keep DGI's options open on this issue. Mr Gallo explains that the discussion took place because Jack was insisting that DGI should be involved. Be that as it may, Mr Simms and Mr Rahman did not know, and were not told, that Alex and Haig were not in fact willing to contemplate a joint venture.
- Mr Gallo says that, during the course of the meeting Ms Darmanian asked Mr Simms and Mr Rahman who were the other shareholders of Charlton. He uses the word "other" because it is part of DGI's case in these proceedings that Mr Simms and Mr Rahman had previously indicated that they were major shareholders in Charlton. Indeed, Mr Gallo says this in his witness statement:
"Alex told me in a discussion I had with him before the option agreement was entered into that he had understood from Simms and Rahman that they were major shareholders in Charlton, that it was a sound trading company and that it was creditworthy and capable of performing its financial obligations under what would be the option agreement."
He corrected this in his examination in chief by inserting the word "that" between "him" and "before" and deleting the word "that" before "he had understood". That, of course, changes the sense in an important way and leaves one not knowing when Mr Gallo was himself told this by Alex.
- Mr Simms and Mr Rahman deny that they ever made such a representation. They do, however, acknowledge that they were asked, in the 12 December meeting, who the shareholders in Charlton were (not, as the witnesses for the Claimants contend who the "other" shareholders were), but declined to answer. Mr Gallo says that either Mr Simms or Mr Rahman asked why DGI needed to know to which he says he responded that, since there were discussions about a potential marketing joint venture with Charlton, it was right that DGI should meet all of those behind Charlton and not just Mr Simms and Mr Rahman. Mr Gallo also says that he then asked what was the capitalisation of Charlton to which either Mr Simms or Mr Rahman said that DGI did not need to know that either.
- Ms Darmanian, in her witness statement, confines herself to agreeing with Mr Gallo's witness statement in relation to this meeting; she was, however, herself cross-examined about this aspect of the meeting. She agrees that requests for information were met with a refusal to provide it.
- Mr Gallo also says this in his witness statement:
"Alex has referred in his statement to the fact that Simms wanted DGI, independently of any marketing joint venture, to inject $500,000 into the company which was intended to be formed in Delaware called Charlton-Royale Sales Corporation. Simms said that Charlton-Royale would commit to buying 10 years production from Charlton Bangladesh. Simms said that he wanted the $500,000 to be paid into Charlton Royale at the year end, only for it to be repaid out to DGI immediately thereafter in the New Year. Jack had in fact e-mailed the same proposal in advance of the meeting. This was "relay accounting" and to my mind dishonest. DGI had nothing to do with this."
Although nothing turns on this, Mr Freedman does rely on it in support of his submissions concerning what he says it the thorough-going dishonesty of Jack, Helga, Mr Simms and Mr Rahman.
- Ms Darmanian was taken by Mr Simms to her cross examination in the arbitration. She said there that Alex had told her who the minority shareholders of Charlton were and that, more specifically, he had indicated that each of Mr Simms and Mr Rahman had a small [her word] percentage of the shares which together did not amount to very much. She had said that she learned of this in the context of the 12 December 1997 meeting. This did not, she had said, take place at the meeting in the presence of Mr Simms and Mr Rahman, but shortly before it. Later in her cross-examination before the arbitrator, after being taken to evidence from Alex that that was not what Alex was saying, she says that her understanding was that Mr Simms and Mr Rahman owned between them 42% or something along those lines. In the cross-examination before me, Mr Simms, hardly surprisingly, found these answers difficult to reconcile. He put this to her in summary on this aspect:
"Q. And the only information that you say you were given seems a little confusing, that you say you were told firstly that they had a percentage of the shares of the corporation which together did not amount to very much, and when confronted with what your client's evidence was it suddenly grew to 42 per cent.
A. Yes."
Q. Is that still your evidence?
A. Yes, it is.
Before moving on from this topic, I should note that Ms Darmanian agrees that she herself did not hear any reference to these percentages either in the conversation of 5 December 1997 nor the meeting on 12 December 1997.
- Meanwhile, on 12 December 1997, Jack emailed Alex in what I read as increasingly desperate attempts to keep the transaction alive. Included in that email was the following:
"Secondly, the price you and I agreed upon for DGI was $1,000,000 for the package. The $500,000 added on was for you and me to split. Then you decided that there should be one invoicing and the price should be shown as $1,500,000. I have always counted on receiving $250,000 for putting this whole deal together. I have made a commitment of a very substantial part of my share to another party. Without the active cooperation of this other party, this deal with Charlton would not have progressed the way it has.
Now I can tell you that you have been sending different signals to Charlton and different ones to me. The result is that you have undermined my solid efforts and confused Charlton as to who and what is DGI and exactly what is their advantage to be a JV partner in the marketing and sales of the finished product. You have dragged out the matter and in the meantime they have had some very serious offers from other sources in the states that are more than willing to make the investment necessary for the marketing and sales of the finished product."
This is an astonishing mixtures of lies, fantasy and misrepresentation. There is nothing which supports Jack's suggestion that Alex ever agreed to an add-on of $500,000 which would be split or that Jack would receive a commission of $250,000. Indeed, the evidence is that Alex rejected as soon as it had been made Jack's idea of having $500,000 dealt with separately. It is clear, also, to me that Alex never agreed to pay Jack a commission let alone one as high as $250,000. There is not a shred of evidence to support Jack's suggestion that there was a third party with whom he had agreed a split of his own commission nor, even, anything to identify a person whose active cooperation had be instrumental in progressing the transaction. And it is manifestly incorrect, and was known by Jack to be incorrect, that there was an investor in the US such as he described. It is a huge irony of this letter that all the time it was Jack who was, it appears to me, not only misleading Alex and Haig but also being less than frank with Mr Simms and Mr Rahman about his dealings with Alex and Haig; it was Jack, if anyone, who was sending different signals to different parties.
- There is a minute of a board meeting of Charlton held on 18 December 1997 at which Mr Simms and Mr Rahman are recorded as being present. Item 6 noted that "the shareholders had indicated that financial support would be available for a subscription for a controlling interest in the Bangladesh company to the extent of approximately $3 million". The shareholders are not identified; Mr Simms was cross-examined about it. He was forced to concede, in the end, that the person who had given the go-ahead was Helga. Whilst maintaining that she was never a shareholder, the practicalities were, he said, that (as with many other trusts which he had been involved with in his career) the trustees would always consult the person who was the settlor and principal beneficiary before making an investment of this nature. Further, the strict position was that Ancon was the shareholder and that Ancon's support was evidenced, for practical purposes, by Helga's support. Mr Simms' answers provided some explanation but showed clearly that, whatever the legal structure, her agreement was a prerequisite to the investment because of her own interest (in a non-legal sense) as settlor and principal beneficiary.
- Mr Freedman also tackled Mr Simms on the absence of reference, in this minute, to the General Equipment. He suggested that, if the need to source the General Equipment had been of the importance which Mr Simms maintains it was, the minute would have been bound to mention it. It is easy to make that submission in the light of the way events subsequently turned out. But at the time, the need to source the General Equipment might not have appeared to be a matter of great moment: Mr Simms would have had no reason to think that DGI would not in fact acquire the General Equipment and might well not have appreciated the importance which he now ascribes to the issue in the context of the opening of the letter of credit.
- In the latter part of December 1997, Haig was investigating the sourcing of the General Equipment. On 30 December 1997, he faxed a possible supplier enclosing a list of machinery that "we wish to purchase for a turn-key project overseas", adding that payment "will be made to us by letter of credit so I don't think we will have a problem in that respect". He could not have been wider of the mark in that respect since the opening of a letter of credit by Charlton became a major issue between the parties. We do see here at a comparatively early stage that Haig was linking the procurement of the General Equipment to the opening of a letter of credit by Charlton. The Option Agreement made no such link: indeed, the Option Agreement did not envisage a need to procure any such equipment.
- At this stage in the chronological bundle one finds Charlton's balance sheet (presumably prepared much later) at 31 December 1997, stating that the company was dormant throughout the accounting period ending on that date.
- Towards the end of 1997, Mr Rahman was staying in Bangladesh to further negotiations with prospective interested lenders and equity investors. Mr Simms understood from Mr Rahman that Sonali Bank was prepared to put up a loan of $2.25 million. It was clear, however, that there would be a need to be an indication from banking sources that Charlton in the UK was financially capable of putting up its share of the equity and funding. Mr Simms spoke to, among others, CIBC in Switzerland. Mr Wiederkehr was the head of the department and Mr Moser was his deputy. According to Mr Simms, they indicated that they would be able to help, and Mr Moser also indicated that as a company or companies owned by the Trust were also banking with CIBC that, with the trust approval, they would be able to give a reference above and beyond simply what was in Charlton's own account. The bank also had a letter of credit department. They were keen and helpful and therefore it seemed a good idea to Mr Simms to consider moving the substance of the company's banking operations to Zurich.
- As a result, account opening documentation was completed in early January 1998 and a board resolution was passed on 7 January 1998 giving Mr Simms individual signatory power. When a bank account is opened in any Swiss bank, it is obligatory and an essential requirement that a form known as "Form A" is completed. In effect, Form A must disclose the beneficial ownership of the funds. In particular, where an offshore company is ultimately owned by a trust, the beneficiaries, or at least the principal beneficiary, of the trust need to be identified. The Form A for Charlton would, according to Mr Simms, probably have identified Helga since she would have been regarded as the principal beneficiary. Accordingly, if the bank required a consent of any kind relating to the accounts of such companies, they would go to Helga as the party named on Form A.
- Mr Simms indicated to CIBC on 24 December 1997 that he would expect to transfer $450,000 to CIBC as soon as he had notification from Mr Moser (ie that Charlton's account had been opened). On 8 January 1998, Mr Moser provided a form of reference which he said CIBC was ready to issue "once original account documentation is on hand and complete…..the account is regularly opened….deposit of US$450'000 has been received". On the same day, Mr Simms wrote to Mr Moser under the heading "Charlton". He wrote:
"I have left with your secretary details of Helga's telephone number in Florida and she will be grateful if you could telephone her….today.
I have heard from Bangladesh that the consortium of banks….believe that the letter of comfort should come from CIBC to Charlton rather than to any one of their number.
This may mean slightly altering the way that the letter is expressed.
When you have spoken to Helga, perhaps you can send me a draft of what you would propose."
This is another demonstration of Helga's close involvement in the project and its progress. She accepts that Mr Moser did indeed 'phone her in Florida but that he did not discuss the letter of reference with her. She says that she recalls him talking about the weather and little else. I do not believe that the letter of reference was not discussed and I regard Helga's description of what was said as unreliable, either because she does not remember or because she is spinning a tale.
- Similarly, one sees on the next day, 9 January, Mr Rahman writing to Jack and Helga with a draft to Haig concerning the joint venture and the buy back saying "Please let me have your comments and I will only forward it to Haig after your approval. I will also mention there that a copy has been sent to you and Paul".
- Also on 9 January, Mr Simms wrote to Mr Moser in relation to the draft sent on 8 January asking whether it would be possible to refer to "the latter to be considered as good for a proposed commitment in the region of US$3m". Mr Rahman emphasised the importance of the letter from CIBC in his letter dated 11 January to Mr Simms: "…the letter from CIBC is extremely important. The letter should be addressed to Charlton plc and must be unambiguous, as to the availability of up- to US$3.5m for investment in [Charlton Bangladesh]….". But on 12 January, Mr Moser replied to Mr Simms telling him that the bank's due diligence standards did not allow the use of any figures. Mr Simms appears to have accepted that, and wrote to Mr Eigenmann at the bank on 14 January 1998 saying this:
"I would trust…..the instructions having been given for the transfer of funds, that we will not have to wait for the receipt of those funds at your bank before the reference letter is given bearing in mind your bank's involvement with the shareholders of Charlton."
That reference to shareholders can only be to Helga and is another example of the way in which Mr Simms perceived the realities of the situation.
- On 15 January 1998, CIBC provided the reference letter. It is headed "Bank Reference: Charlton Corporation plc" and its material parts read as follows:
"We confirm that subject currently maintains an account relationship with our bank. The controlling party has been known to us for some years and we respect its high standing, morality and wealth, the latter to be considered as good for an important seven figure digit amount in US-Dollars as a minimum. To the best of out knowledge, it enjoys an excellent reputation, and we do not believe that it would enter into any commitment it ultimately could not fulfil. A business relationship can be recommended."
The reference to the "controlling party" is obscure. Mr Simms says that it is a reference to the trust. But Mr Freedman says it is a reference to Helga and reflects the fact that she was in reality the controlling force behind Charlton. He accused Mr Simms of being disingenuous (at best) when he says that "it" is the trust rather than Helga. It is curious, to put it no higher, that, if the controlling party referred to was Helga, the bank should refer to her as "it" rather than "she". That the bank referred to Helga before giving the reference is, in my view, established. The fact that they did so might be explicable because Helga, as settlor and principal beneficiary, was the person regarded by the bank as beneficial owner; but that would be odd since, on this hypothesis, the bank's customer would be the trust/trustees (in fact, in the present case, the corporate entity Brinton Establishment) and one would expect the bank at least to consult its customer. Unfortunately, there is no evidence before the court about who the bank's customer actually was in the context of the controlling party having been known to the bank for some years. Jumping ahead, it will be seen that the assets effectively vested in Brinton were very limited so that it cannot have been the trust which was known to the bank as being good for a seven digit dollar figure. It may be that Maitre Crosier (of whom more anon) held funds in his client account which were regarded as part of the trust even if not properly vested in Brinton itself: but whether those funds were held with CIBC I have no idea. In the end, I do not think that it is necessary to resolve this point since, whether or not Helga was the beneficial owner of Charlton, she was clearly concerned in decisions concerning Charlton's involvement in the Bangladesh project.
- For my part, I wonder if the debate about this, turning as it does on who or what "it" is referring to is not beside the point. The bank might well have regarded Helga as the controlling shareholder. The reference, however, is given in relation to Charlton, and I rather suspect that "it" throughout the reference is referring to Charlton rather than the controlling party, the bank feeling able to give the reference because of the status of the controlling shareholder.
- Notwithstanding what Alex now says about his attitude to investment in the proposed buyback venture, Jack continued to convey the message to Mr Simms that he, Alex, remained interested. Mr Simms wrote to Alex on the 9 January 1998, copied to Jack, informing him that Mr Rahman was still in Bangladesh, that he would be there for another two weeks and that matters were progressing well and fast; and that if there was to be a buyback agreement then it would need to be disclosed and it would need to be finalised ahead of any March closing (when the latest date for exercise of the option would pass). At the same time, in the second week in January 1998, Mr Rahman was dealing with the formation of Charlton Industries Bangladesh Ltd in Bangladesh.
- On 14 or 15 January, Mr Simms received a copy of a fax dated 14 January from Jack to Alex which stated that Alex had confirmed that DGI did not want anything to do with the buy back or joint venture agreements. Jack asked Alex to inform Charlton of the decision which "should then enable Charlton to follow their alternate plans". The fax also referred to the need for Charlton to have a valuation on the tooling and machinery.
- Mr Simms wrote to Alex on the 15th January reminding him that he had still not come back to Charlton over the position of DGI following the meeting in New York. Since the proposed lenders for the Bangladesh product wished to inspect the assets being purchased, Mr Simms also said that it would be very helpful to know the location of the tooling and the equipment and where it could be inspected; and to have a list of the additional plant which DGI would be acquiring in order to provide a complete package.
- On the same day, Mr Simms wrote to Jack and Helga. Saying that he understood from Mr Rahman that Alex and Haig had determined they did not want to get involved in the joint venture or buy back, he wrote
"In those circumstances, we must go ahead at once with the alternative. Can we clear later today the proposed name so that I can go ahead and have the company formed in America. Selim believes that it might be advantageous to suggest that the reasoning behind the switch is to keep more profit in the venture for the partners, namely Charlton and the [name of family] and to invite them to take a shareholding.
In order to have credibility with the bankers who were expecting DGI involvement, we will have to say that the capitalisation is going to be not less than $1m……
Can I have your views?"
- This letter shows two things. First, it indicates yet again Jack and Helga's involvement in the decision making process – Mr Simms was not writing to them simply out of politeness to keep them informed. Secondly, it shows that, at least at that stage, there was an alternative plan which Mr Simms felt able to progress during the remaining period left before a decision had to be made on exercising the option. The fact that this alternative plan existed did not mean, as we shall see, that Charlton did not continue to press DGI to become involved.
- On 16 January 1998, Mr Rahman received a fax from DGI formally rejecting investment in the proposed joint venture. Alex set out his perspective of how the parties had arrived at where they were. That contains one slightly disingenuous, to put it kindly, statement: "This [talk of DGI's financial involvement] is after we had put discussions with other perspective [sic] buyers on the back burner". I do not know if Alex wrote this in order to provide ammunition in some future battle which he (correctly as it turns out) anticipated, but I am bound to say that I have seen and heard nothing whatsoever which suggests that there was any other prospective buyer on the scene, Herman Bal having long since disappeared. Alex then stated DGI's position as follows:
a. If the option were exercised, DGI would fulfil its contractual obligations.
b. For a fee, DGI would set up a distribution and marketing organisation consisting of independent contractors to advise and identify markets.
c. DGI would provide Charlton with a letter stating the DGI is considering creating a subsidiary that will purchase the products for sale in markets that will be identified,
- I find that this was the first occasion on which DGI formally communicated its decision that it would not invest in the joint venture and buyback arrangements and, whatever the internal discussions had been within DGI and with its advisers, Mr Simms and Mr Rahman were genuinely proceeding until then on the basis that such an investment might be forthcoming.
- On the 19th January 1998, Mr Rahman gave Mr Simms an update on progress on financing. It appeared that Sonali bank was keen to do the whole of the financing. Mr Asaf Dowla, the chairman, had planned a visit to London at the end of January (in connection, apparently, with the establishment of UK subsidiary for Sonali Bank). Sonali Bank were even talking about fast tracking the project and having it all approved by the bank within a few weeks. Mr Rahman indicated that he had not yet informed anyone in Bangladesh of DGI's decision not to be involved in the buy-back arrangements which, to be fair to Mr Rahman, he had only learned of a few days earlier.
- The techno-economic feasibility study of SAA emerged in January 1998. It was also confirmed by the associates of Ernst & Young in Bangladesh who had reviewed the report. Essentially, it gave a favourable assessment.
- The SAA report related to the Bangladesh company which was to sell the whole of its production on a costs plus basis. The report was prepared on the basis of the involvement of DGI. Mr Simms says that this was because SAA had been instructed on that basis when DGI's involvement was still anticipated and that was the case until shortly before the report was finalised. Mr Freedman suggests that the failure by Mr Simms and Mr Rahman to correct the position enabled them to use the report in discussions with investors to show that the project was viable when, in fact, there was no buyback arrangement in place or even on the horizon. This, according to him, is yet another manifestation of the dishonest approach of Mr Simms to this whole transaction. I only observe at this stage that the report, on the basis of DGI's involvement, showed that the project was viable.
- Mr Simms then went ahead with the formation of a Delaware company called Charlton-Royale Sales Corporation as the prospective buyback company in the United States. As he puts it:
"Although things were moving quickly in Bangladesh, I was concerned that we might not have everything signed up by the 10th March, when the option needed to be exercised, and I drafted a letter extending the option period to the 30th June. I understood from Selim who was talking to Haig from time to time that this would not be a problem. However, I wanted to see it in writing".
- Charlton-Royale Sales Corporation was formed on the 26 January 1998. Shortly thereafter, in the second week of February 1998, Charlton (International) Limited was established in Gibraltar: Mr Simms describes this as a supply company, the idea being that it would be a supplier of components and raw materials from America and Europe to the Bangladesh subsidiary. This company was also to receive, in some indirect way, the consideration – several million dollars – at which the onward transfer from Charlton of the Tooling and General Equipment would be effected. In a letter dated 30 January 1998, Mr Simms instructed the formation agent in Gibraltar that this company would be a subsidiary of Ancon and a sister company to Charlton.
- On 3 February 1998, Mr Rahman sent an urgent fax to Mr Simms. He reported that Jack and Helga had done very substantial home work on obtaining information of prospective US distributors and that the leads needed to be followed up and stating "It is extremely important for the buy back arrangements to have adequate teeth". There followed this significant paragraph:
"Alex is coming here unexpectedly this afternoon and Jack feels that he should not know that I am here with them now. He had telephoned the office in London and Sue told him that I was out of the country, she didn't know where, and that I would be back in London on the 12th. He seems fairly desperate to contact me and has also left a message to this effect on Jack's answering machine."
Mr Freedman relies on this fax to demonstrate once again the way in which the Charlton side were hiding Jack's involvement and interest in the transaction aware of the impact that knowledge of that involvement and interest would have, that is to say a reaction from Alex and Haig that they would never have entered into the Option Agreement if they had known that Jack was interested other than as an introducer.
- On the 4 February 1998, a fax was sent, pp'd from Mr Rahman, from Charlton's London office to Alex. It reported with pride the success which Charlton had had in obtaining government approvals and financing. He pointed out that the financial commitment was conditional upon a few conditions precedent, the most significant of which was the buy back arrangement. Mr Rahman expressed disappointment at DGI's decision not to be involved. He stated that it was quite certain that, had the buy back been in place while Mr Rahman was still in Bangladesh, the letter of credit in favour of DGI for $1.5 million could have been opened by the third week of February. It is seen, therefore, that Charlton's ability to open a letter of credit was seen by Mr Rahman as linked to a satisfactory financing of the project by the Bangladeshi financiers. Mr Rahman ended his fax by saying that the delays were such that a 90 day extension of the option period was needed.
- There was a response from Alex on 9 February. This is Mr Simms' analysis of that response and the position at that time:
"Alex again referred to the project not being originally presented as a buyback. That was technically correct but he himself had written manuscript on the contract when he signed it of his instance of DGI being given the right of first refusal on the marketing and selling operations. Alex Dadourian was taking issue with the reference to the project as a "relocation". He was also indicating that the production line replacement valuation was less than $8 million and that they would supply a copy of the valuation under separate cover at the appropriate time. Alex then referred to the definition of "plant and equipment" and claimed that they were not selling a plant but that they were selling the tooling and equipment from the plant. That was not technically true because the plant, equipment and tooling was to be certified as being the entire production line for the hospital bed and over bed tables without the need for any further equipment. Alex was making a 90 day extension conditional upon Haig Dadourian's expenses being paid."
That seems to me to be a correct analysis of the position.
- Mr Simms says, and I accept, that information on two prospective candidates for CEO for the Charlton-Royale Sales Corporation were discussed, namely Richard Williams and Steven Sturman. He believes that Mr Rahman met one or more of them in Florida whilst he was there and one of them also came to the UK subsequently to discuss progress. Further, he says, which again I accept, that it was proposed that Mr Rahman and he should return to Bangladesh at the end of February 1998 to try and finalise matters with certain prospective investors. Further, in relation to Charlton-Royale the idea was to appoint a number of suitable and active distributors throughout the United States and elsewhere with Charlton Royale being the coordinating company. Although nothing turns on this detail, I mention it to show that the Charlton side was progressing as best it could the setting up of the structure necessary to obtain the finance for the manufacturing venture in Bangladesh: I am certain that Mr Simms and Mr Rahman were not then simply pretending to progress matters with a view to perpetrating some sort of fraud on DGI.
- On 12 February 1998, one sees Haig questioning Mr Rahman about who might be used as international certification agency as required by the Option Agreement. It seems that Mr Rahman proposed either SGS or Bureau Veritas. It is apparent that, in the event, DGI decided that it would use Bureau Veritas which had a US office at Stamford Connecticut. As will become apparent, although approaches were made to Bureau Veritas, they were never formally instructed to carry out the exercise which the Option Agreement envisaged.
- On 26 February 1997, Mr Rahman faxed Haig, with copies to Mr Simms and Jack, asking for confirmation, as discussed, that the option period would be extended to 30 June. On the next day, Mr Simms wrote to Helga. His letter included the following:
"I have been told by Selim that it is vital that I go to Bangladesh again at this time to ensure that the buy back arrangements are accepted as they stand and also to finalise with IDPC, Sonali bank and the [named family]. I hope he is right, because it is not at all convenient to travel at this time. I will do my best to try and ensure we are moving towards an identified financial closure date……
If the buy back is accepted, then the only remaining hurdle is the valuation. If we can get the SGS people from Bangladesh to come and do the valuation that would be the best thing and I believe IPDC are prepared to accept a reasonable figure attributable to the transfer of technology since tools and jigs may have a very low intrinsic value."
This seems to me to be the letter of a man who was proceeding in the expectation – certainly more than a mere hope – that the financing for the project in Bangladesh would soon be in place with the alternative buy back arrangement (ie arrangements not involving DGI) and satisfactory valuations obtained. If he had thought at that time that there was a real risk that the project would fail because of inadequate buy back arrangements or valuations, I am sure that he would have said as much to Jack and Helga.
- At the beginning of March 1998, Mr Simms was in Bangladesh; he and Mr Rahman met with Mr Mollah, the assistant general manager of IPDC and others regarding their prospective investment. At this meeting Mr Simms says he made clear to Mr Mollah that Charlton was being capitalized for the purpose of the hospital beds project and was a special purpose vehicle for this purpose. Mr Mollah wrote after the meeting asking details regarding Charlton and its corporate structure, corporate brochures, descriptions of associates, financial statements for the last two to three years of the companies and/or individuals with whom Charlton was entering into agreements as set out in the letter. I accept this.
- In early March 1998, Haig approached Bureau Veritas with a view to their becoming involved in the provision of the technical report required under the Option Agreement. Mr Simms says, and I see no reason to doubt, that he was not aware at that time that Haig was communicating with Bureau Veritas. He points out that, in Haig's fax dated 4 March 1998 to Bureau Veritas, he referred to the project as a turnkey project where DGI would be providing all the necessary technology to start up an operation in a third world country that will manufacture metal hospital beds. It was to include all necessary machinery and equipment, tools and dies and the required engineering assistance. That is not, it seems to me, wholly consistent with the description given at various times by Alex, Haig and Mr Gallo of DGI's involvement, although it does accurately reflect what Mr Simms says was always his understanding of the deal. It is difficult to see what possible motive Alex would have in misdescribing his understanding of the deal to Bureau Veritas.
- Mr Rahman wrote to Haig again on 5 March 1998 about extension of the option period and various other matters. From Haig's response, dated 6 March, it is clear that DGI did not agree to extend the option period. As a result, Mr Simms and Mr Rahman, who were then in Bangladesh, prepared a letter dated 6 March exercising the option and stipulating 25 September 1998 as the date for shipment. The notice exercising the option was delivered by hand to the office of DGI in New York on that day. I shall refer to this as the Option Notice.
- The Option Notice clearly purported to exercise the option: there is no other possible reading of the second paragraph which provided:
"…I am now able to give notice on behalf of [Charlton] exercising the option granted to the company by Clause 2.1 of the Option Agreement in accordance with Clause 2.2 of the Option Agreement."
The Option Notice specified 25 September 1998 as the date for shipment in accordance with Clause 2.3.
- By this time, Charlton (and Mr Simms himself) knew that the General Equipment or at least some of it had to be acquired. The Option Notice referred to the warranty and the fact that Charlton had been informed since the giving of the warranty of the need to acquire some equipment. Mr Rahman wrote, in that context:
"If we are to give instructions regarding a letter of credit we will need to have a complete and detailed list of all items which are acquired and details of the date upon which these can be inspected prior to shipment."
Given the warranty, that seems to me to be a not unreasonable request although whether Charlton was able to insist, as a matter of contract, on that position is another matter.
- Alex, as I have mentioned already, acknowledged that the error (as he would regard it) in the Option Agreement about ownership of the General Equipment was due to DGI's own negligence; but he has consistently attempted to defend DGI's position by pointing out that the error was well known by the time the option came to be exercised and that Charlton was given the opportunity to walk away from the contract. I would like, at this point, to say something about Alex's approach.
- First, the exercise of the option gave rise to a binding contract to sell the assets which were subject to the option. If, as I consider to be correct, those assets included the General Equipment, then there was a breach of warranty that the entirety of the assets sold were in the beneficial ownership of DGI. If, contrary to my view, the General Equipment was not included, then there was a breach of the warranty that the assets sold were adequate to constitute an entire production line. No doubt, by exercising the option with knowledge of the need to acquire the General Equipment, Charlton would be unable thereafter to rescind the contract on the basis of the breach of warranty. But it would still retain the right to sue for damages based on the breach of warranty.
- Secondly, and perhaps more importantly, its own obligations under the Option Agreement fall, in my judgment, to be established by reference to its obligations had the warranty been correct. In particular, its obligation to produce the letter of credit required by the Option Agreement should be the same – and no more onerous – than if the warranties had been correct. As will become apparent, there was before the arbitrator, and there is before me, a large dispute about whether Charlton was obliged to open a letter of credit and, if it was obliged to do so, whether it was in fact able to do so. There was and is also a dispute about DGI's obligation to provide a list of the General Equipment to be sold. Those respective obligations seem to me to be critically affected by the warranties. This is yet another aspect I will need to return to after my review of the facts.
- The Option Notice also indicated that the reports from an independent inspection agency in accordance with clause 2.6 of the Option Agreement were still required and that their provision was being insisted on by the bankers and partners as a condition of the opening of the letter of credit (by which I understand Mr Rahman to be referring to the letter of credit pursuant to which Charlton would onward sell the Plant and Equipment rather than the letter of credit which Charlton itself would open in order to acquire the Plant and Equipment from DGI.
- The response from Haig was dated 9 March 1998. I am sure that Mr Simms is being restrained when he says that he found it very disappointing. The implication of the letter was the Option Notice was not regarded by DGI as an effective exercise of the option. It stated that there were only two days remaining before the expiration of the Option Agreement (which reflected the fact that DGI accepted the exchange of contracts as having taken place on 11 September 1997) and put forward the proposition that DGI would consider the option timely exercised if by 20 March it received a letter of credit divisible and assignable with specific conditions as stated in the Option Agreement. The letter indicated that DGI only had the tools, dyes and engineering data and that the original machinery and equipment had been sold which Haig stated had been said from the beginning.
- Pausing there, I make two observations. First, it is clear that it was not made clear from the beginning that the original machinery and equipment had been sold. Secondly, even if one accepts that the letter of credit had to be opened a reasonable time before shipment, there was certainly no requirement that it should be opened by 6 March 1998 and, in my judgment, no justification at all for Haig to have required a letter of credit to be opened as a condition of accepting a valid exercise of the option, let alone that it should be one which was divisible and assignable. It seems that, by this stage, DGI wanted to escape from the Option Agreement. Even after the long hearing before me, I still do not understand why it wished to do so. I understand why it did not wish to become involved in the joint venture and buy back arrangements but that provides no explanation about why it did not wish to sell the Tooling to Charlton. Perhaps it was because Alex and Haig realised that they would have to procure the General Equipment and did not wish to do so but as to that there can only be speculation.
- It is, I think, less speculative why the letter of credit should be assignable and divisible. One reason for this requirement might be so that DGI could use the letter of credit in its procurement of the General Equipment. Alex, however, says that funds were readily available to purchase that equipment without recourse to the letter of credit which was being sought, albeit that there might have been a financing cost. However, it seems to me that if the warranty as to ownership had been correct, there would have been no need whatsoever for an assignable and divisible letter of credit and the requirement for one would never have been stated.
- Shortly after service of the Option Notice, Mr Simms returned to England but Mr Rahman remained in Bangladesh where he continued his discussions with Sonali Bank, IPDC and the potential investor which I have mentioned. He wrote Mr Simms a memo on 11 March 1998, the contents of which I have no reason to doubt. It is of some significance as it indicates the points which were then causing problems. I therefore need to refer to it in a little detail:
a. Mr Rahman had met with officials (including a Mr Hossain) in the Industrial Credit Division of Sonali Bank. They were under extreme pressure from their chairman (Mr Doula) too have all documents ready for their board meeting on the next Friday. They had told Mr Rahman that the ball was entirely in Charlton's court and that there was nothing more they could do.
b. Mr Rahman had spoken with Mr Doula and another director of the bank and explained that Charlton was not yet ready with all the papers. He gave three reasons for the delay (which in retrospect might be regarded as simply a fobbing-off exercise).
c. Mr Doula had very reluctantly accepted Mr Rahman's request to drop the matter from the agenda for the next board meeting. But he had insisted that he had kept to his commitment to provide final approval by 15 March and that any delay which may occur would be entirely Charlton's responsibility.
d. Mr Doula had cancelled the leave of all officers of the ICD for the sake of this deal and said that Charlton owed it to them to expedite matters as his action may have caused personal inconvenience. He felt that Charlton would lose the goodwill it had built up unless it moved matters very fast.
e. Mr Rahman had therefore committed to Mr Doula to have all documents ready by 22 March ready for another board meeting on 24 March.
f. Sonali Bank was prepared to accept the buy back documentation as final subject to a number of conditions of which the most important would appear to be that Charlton Royale has a paid up capital of not less than $1.3 million. As to that, Mr Simms says, and I accept, that that would not present a problem since Charlton was expecting to capitalise its interest in the buyback company at $1 million and to invite the named family into that company by subscribing a further $300,000.00.
- On 12 March 1998, Mr Rahman sent a response to Haig's email of 9 March. This letter was a draft prepared by Mr Simms and had the approval of Jack and Helga. Charlton's position is made clear that it had exercised the Option and that there was no question of it having any obligation to open a letter of credit by the 20 March, there being a host of reasons which prevented that happening. Charlton required a definitive list of everything which was to be purchased pursuant to the letter of credit and the letter again referred to the inspection agency reports. Further, the letter made clear that, having nominated a shipment date of 25 September, it would be unreasonable for Charlton to be expected to tie up its funds so long ahead of shipment by immediately opening a letter of credit.
- On 12 March 1998, Charlton Industries Bangladesh Limited was formed in Bangladesh and a Certificate for the commencing of business had been issued.
- On the same day, Mr Mollah of IPDC acknowledged receipt of draft subscription and shareholder agreements which had been sent. He chased up the matters raised in his letter dated 3 March. This provoked a response from Mr Rahman in a letter bearing the same date from Mr Rahman to Mr Simms: "I am getting increasingly irritated by this man and if he keeps doing so I will have to tackle him in a proper fashion". Mr Freedman detects in that response concern being expressed by Mr Rahman that someone (ie Mr Mollah) is asking difficult question which cannot be satisfactorily answered and which, unanswered, could wreck the project.
- I note in passing a letter dated 15 March 1998 from Mr Simms to Mr Rahman where it says: "I understand your financial problems relating to expenses at both ends and will take this up with Jack and Helga". Why, one wonders (and certainly Mr Freedman wonders) would Jack and Helga have any input into such a matter, which is clearly one for the board of Charlton, unless in reality they were in control of the company.
- Mr Rahman's concerns are again articulated in his memo dated 15 March 1998 to Mr Simms which includes the following:
Mollah has also said that what they need most now is information on [Charlton], it financials, etc. In this regard, it is essential that I am able to give at least five names, with CVs, as directors of [Charlton]….This is extremely urgent.
As regards financial information, I have to provide something at least and the present capital structure of [Charlton] is not going to be of any great relevance. Do you think that we could include some reference to what BC Projects are doing in India, particularly in respect of the financing arrangements that are being made there.
With the above information, I will be able to write some "story" which, I believe, would pass immediate muster. If by the time that I do so, I am able also to show some evidence of an ability to raise/provide not less than $100 million to the [name of Group], then that would be extremely helpful.
I am now confident that IPDC and Mollan would be co-operative……The information that they require for their immediate purposes is fully justified and the more we delay in giving them these, they are bound to feel that we have something to "hide". You will agree that that would be a disaster and I shall be most grateful for your help and assistance in this matter."
The memo also indicated that Sonali Bank, at a recent board meeting, had given "in-principle approval to our loan subject to our providing all necessary information and documentation".
- On the 19 March 1998, Charlton, through Mr Rahman, submitted to the general manager of Sonali Bank in Dhaka a copy of the feasibility study and a draft of the joint venture agreement. He had sent earlier that day corporate documents on the Bangladeshi company and the buyback agreement with a view to pushing the project further forward. The statement about DGI's involvement in the buy-back arrangements remained uncorrected.
- On 22 March Mr Rahman sent two faxes to Mr Simms, the first of which enclosed a draft of a letter to IPDC. He was asked to review it overnight and approve it. Both Mr Simms and Mr Rahman say that he did not in fact do so but that Mr Rahman dispatched the letter nonetheless. I accept that evidence, notwithstanding that the letter as sent states expressly that it had been seen and approved by Mr Simms, notwithstanding Mr Freedman's admonition that I should not believe anything said by Mr Simms or Mr Rahman unless corroborated by documentation.
- The letter itself was designed to give to IPDC information about Charlton Industries Bangladesh Ltd and the individuals concerned with it.
- Mr Simms says this about the letter:
"The letter to IPDC was not well written and it did not sufficiently distinguish between the experience of the individuals and that of Charlton. The letter referred to Mr William Kirby as a director. That was technically correct but in my view there was no sense in putting it forward as Mr Kirby was likely shortly to leave the board and was playing no active role in the company at all. I had raised the question of the Earl of Inchcape joining the board but that had not been agreed and it was unlikely to take place until the finance was in place so again I would have not mentioned that. The reference to my professional contacts was not correct. I have never acted for Iberia, the national airlines of Spain but have for many years acted for Iberworld Airlines of Spain which is quite different. In the first two paragraphs on page 5 of the letter of 23rd March to IPDC, the references to me were correct and I believe the references for Mr Fitzsimmons were correct. The reference to Mr Peter Smith was not accurate in that he had held senior appointments within GEC but he was not an engineer by training. The letter referred to John Buckland and Robin Madill. [It in fact referred to them using these words "…we also have two very senior executives."] I had been introduced to them but they were only introduced as being available as consultants to the company and the letter appeared to indicate that they were rather more than that. On page 6 the information was given ["Charlton has been involved in a number of financial restructuring both as advisor and as arrangers and providers of finance"] about projects which Charlton had nothing to do with and the banks involved on those projects. Again, there was no involvement from Charlton."
- It is hard to conclude that Mr Rahman, when he sent this letter, did not know that it was materially inaccurate, particularly in relation to Charlton's own financing activities. I conclude that he did know and that this letter was designed to give false assurance to IPDC with a view to obtaining its commitment to the financing of project. Mr Simms knew that the letter had been sent soon afterwards. He took no steps to correct its material inaccuracies. He simply says this: "I did not think it vital to correct any misapprehensions since there was a long way to go and I had my concerns as to whether IPDC would be an appropriate shareholder because of the lengthy approval procedures they had indicated were necessary", an observation which, coming from the then senior partner of an apparently respectable firm of City solicitors, I find astonishing and disingenuous.
- On 27 March, Mr Rahman wrote to Alex reminding him of the exercise of the Option and the need to move forward as quickly as possible. 21 days had passed without any substantive response and Mr Rahman informed Alex that he wanted to arrange before he left Dhaka for the visit of himself and experts from Bangladesh to see the jigs and tooling and to review the details of the additional equipment. The letter made clear again that Charlton would not be opening a letter of credit until the information regarding all the equipment and tooling was available
- Because of the lack of response from DGI Mr Simms suggested to Mr Rahman on 1 April that he should write to Ms Darmanian asking why there was silence from the DGI side. Mr Rahman was in agreement particularly as he considered that matters had progressed far too far in Bangladesh to pull out without the most severe consequences, with commitment having been made which had to be honoured. Mr Simms therefore wrote to Ms Darmanian on 6 April. In that letter he made clear that Charlton needed a complete specification of the additional plant and equipment which had to be bought in and reminded her of the need for the two inspection agency reports. He told her that Mr Rahman had been unable to get any response to his letters to DGI and asked her whether she could assist.
- Eventually on 15 April Mr Rahman had a response from Alex stating that DGI was in the process of negotiating with the engineering groups which Mr Rahman had recommended and that this had been more complicated than they originally thought. DGI expected to conclude the process shortly. There is no evidence that such negotiations were taking place; I do not think that they were.
- Mr Simms had written on the same day (15 April) to Ms Darmanian noting that Charlton had still not heard from DGI. He stressed the timetable for the project and the fact that experts from Bangladesh wished to come during April to evaluate the tooling and the plant and equipment list. He asked for an immediate response from DGI failing which Charlton would have to consider instructing its American lawyers.
- On 16 April 1998, Ms Darmanian responded, stating that to be best of her knowledge DGI had already issued a status report to Charlton. That was not in fact the case. She repeated that the confirmations required from the independent agencies had been more complicated and time consuming than expected but that resolution was expected shortly. From the evidence which has been placed before me, there is no basis for Ms Darmanian to have been given the information by her client on which she based her letter.
- On 21 April 1998, Haig wrote to Mr Rahman. DGI was still maintaining the Charlton had not exercised the option because it had not "confirmed the appropriate letter of credit (divisible and assignable)".
- It is worth remarking here that it is now known that this stance was contrary to the advice of Gallo & Darmanian. It is, of course, always a client's right to ignore his attorney's advice. It is, however, surprising to see Charlton now being accused of acting with lack of bona fides in its dealings in relation to the Option Agreement when DGI itself was putting forward a case which its own lawyers had advised was incorrect and one which, so far as I can see, had absolutely no merit at all.
- Haig also stated that he did not regard it as part of DGI's obligations to give a final list of equipment, drawings and plant layout, saying that
"The equipment list would be provided shortly as soon as we have verified every operation with its corresponding machine and tool. As you may well appreciate, this is a very detailed task since there are thousands of separate operations involved and we want to make certain that we provide you with all machinery that is necessary, Bureau Veritas notwithstanding".
- So, it can been seen that DGI said it was carrying out a detailed exercise to identify the equipment necessary. In the arbitration, Haig gave evidence in that this work has been carried out by Mr John Polanski of Bureau Veritas on behalf of DGI. However, evidence of this in the form of instructions, work product report, invoice or payment was not produced at the arbitration and was not produced before me. Nor was any definitive list produced. I do not believe that any such detailed exercise was under way.
- Mr Simms and Mr Rahman worked together to produce a letter to Haig from Mr Rahman dated 23 April 1998. It explained why they had felt it necessary to instruct New York lawyers and set out what was immediately required to take the project forward. This included, among other things, an immediate and complete list of all the additional items not on the tooling list which needed to be bought in to complete the package and the report from Bureau Veritas. The letter concluded by saying that Charlton needed an immediate response to the above matters by no later than Wednesday 29 April if the shipment dates were to be kept to.
- On 28 April 1998, Mr Rahman wrote to Jack and Helga about the difficulties which he perceived DGI was making. He notes that it was absolutely right that the letter of credit could not be opened on the information then available. Now that may be right or it may be wrong. But this was an observation from an experienced banker who was anxious that the letter of credit should indeed be opened; and I am sure that he thought that the letter of credit could not, because of an insufficiency of information, be opened.
- A response from Haig came on 29 April. He wrote
"It seems to me that it would be best if we simply return to the original concept of the letter of credit conditioned on fulfilment of the requirements of paragraphs 2.6 b and c of the option agreement which pertains to the confirmation to be performed by Bureau Veritas. We would thereby expect the letter of credit to be issued now subject only to those contractual obligations."
- So, it can be seen DGI was insisting on an immediate opening of the letter of credit albeit one conditioned on the provision of the reports. That seems to me to be putting matters the wrong way round and that it is at least strongly arguable that the obligation to open the letter of credit in the first place was conditional upon provision of the reports rather that that drawdown on the letter of credit should be conditional.
- Haig did attach a machinery list but stated expressly that
"…..this list is only preliminary and subject to modification, if any, by Bureau Veritas. It should not be part of the letter of credit since the Bureau Veritas report will include the final machinery list".
- Haig also said this:
"At this moment, I feel that you have taken this project so far off the track, by unilaterally setting conditions, visitations, dates and deadlines, that I feel a meeting is in order between Charlton and DGI….
- Upon issuance of a letter of credit to DGI, we will be prepared to set up a meeting in London with you to clarify these points."
- I find this to be a curious attitude. By this time, DGI had made clear that it did not wish to be involved in the joint venture or buy back arrangements. Its only concern was, or should have been, to comply with its obligations under the Option Agreement albeit that, presented with the problems which Charlton explained that it was facing, a cooperative attitude to assist in resolving those problems would have been in DGI's own self-interest; in the absence of such cooperation, the Bangladesh venture might fail and, contractual obligation or not, Charlton could find itself unable to complete the purchase leaving DGI with a perhaps worthless claim in damages. One must not lose sight of what DGI's obligations included. They included provision by the date for shipment at the very latest of the General Equipment and the provision of the two reports referred to in Clause 2.6 of the Option Agreement. At this stage, April 1998, DGI was nowhere near the position where it could comply with the first of those and had taken no effective steps in relation to the second.
- Mr Simms explains his attitude to this response:
"We did not understand this firstly because InterRoyal was supposed to be the experts and should know what machinery they needed. Also, they had stated that they had carried out a painstaking exercise to determine what machinery was needed only in the previous month. Although the Option Agreement, which is not very detailed, does not specifically say that there was a right to inspect the tooling, we expected DGI as a collaborative partner in the venture to permit Charlton's prospective bankers to inspect the tooling. However, Haig Dadourian stated in his letter that this was not in the agreement and that it would take a 7 to 8 hour round trip car ride to a small 3,000 square foot warehouse on an offbeat country road in Connecticut to see the tools, dyes and welding fixtures which were in any event in a greasy state. The fact that Haig Dadourian was deliberately trying to ensure that no visit took place to see the tooling was worrying firstly because it was necessary from the banking point of view and also it seemed odd that they did not want the principal items being sold to be inspected. Although Haig Dadourian suggested a meeting in London, he made it clear that he was only proposing to attend it if the letter of credit was opened."
- Mr Rahman faxed Haig on 1 May with copies to Alex, Gallo & Darmanian, Jack Dadourian and Lacher, Lovell & Taylor. The fax took issue with Haig on DGI's position. He gave an ultimatum that Charlton would instruct its American lawyers to proceed against DGI without fail on Tuesday 5 May unless by close of business the previous day DGI had provided Charlton with the following:
a. Clear and specific responses to each and every point that had been raised in previous letters particularly those relating to the requirements of opening a letter of credit.
b. A detailed status report to which Ms Darmanian had referred in her letter dated 16 April.
c. A detailed report on DGI's discussions with Bureau Veritas.
d. DGI's definite timetable for an inspection visit by Charlton's engineers.
- On the 4 May, a response was received from Haig following a telephone conversation on 3 May between him and Mr Rahman. In relation to the equipment list, Haig stated that the detailed list would be forthcoming as soon as DGI had completed verifying every operation with its corresponding machine and tool and he referred to the preliminary list supplied on the 29 April. He also stated that Bureau Veritas had been instructed to fulfil the requirements of paragraph 2.6b and c of the Option Agreement. In fact, the evidence before me shows that such instructions were never given and that contact with Bureau Veritas was far more limited. There is no evidence, either, that DGI was in the process of verifying operations as Haig alleges: I do not believe that this task was under way.
- Charlton's position was that it did not have sufficient information concerning the assets to be provided to enable a letter of credit to be opened. Mr Rahman wrote to Haig on 5 May to that effect. He pointed out that the preliminary list previously supplied by Haig was inadequate for that purpose – and indeed Haig had expressly put a caveat that the list was not to be used for the purpose of opening a letter of credit.
- In a fax sent to Mr Rahman on 29 April 1998, Alex reiterated that DGI could only proceed "after the irrevocable letter of credit was issued as originally envisioned - a letter of credit (assignable) confirmed by European or USA bank rated AA or better by Moody's or Standard & Poors". Apart from the fact that the Option Agreement did not require the letter of credit to be assignable, there was nothing express in the Option Agreement which stated when the letter of credit had to be opened. For reasons which I will come to in due course, there was, in my judgment, no obligation, at this time, on Charlton to have opened it.
- On 8 May, Michael Lacher wrote to Ms Darmanian on behalf of Charlton making clear that there was no requirement in the Option Agreement for Charlton to open a letter of credit at that time. He said that Charlton could not open a letter of credit until DGI had specified what Charlton was purchasing. He said that before opening a letter of credit, there was a quantity of information to be supplied by DGI. And he said that DGI's continued refusal to fulfil its contractual obligations and its insistence on a premature letter of credit was damaging Charlton and may prevent the entire project going ahead. The letter invited Ms Darmanian to contact Michael Lacher to try and resolve the matter amicably.
- It was Mr Gallo who responded to that letter, by his own letter dated 11 May. The letter indicated that the fact that DGI did not have the general equipment sitting around should not surprise Charlton and stated that the letter of credit was now expected and that if the money was in the bank, Charlton could simply give proper instructions to its bankers. The letter queried whether Charlton did have the money in the bank and the letter concluded by stating that if Charlton wanted to discuss some other deal then DGI was willing to listen.
- As to that response, Mr Simms says this:
"Selim and I were simply baffled as to why DGI should think that our complaints against them resulted from lack of money on Charlton's part. We had insisted from the exercise of the Option onwards that we needed to know what we were buying. We also needed to know that DGI had bought it. Michael Lacher spoke to me about the response from Nicholas Gallo. I told Michael Lacher that he should discuss the matter with Nicholas Gallo since the problem seemed to be that DGI genuinely believed that Charlton did not have the money. If that was the problem then, although Charlton had no obligation to prove anything in relation to its finances, it seemed prudent to try and deal with the point. Michael Lacher did speak with Nicholas Gallo and I gathered from his report of that conversation that it certainly would help if Charlton could get its banker's to show a willingness to open a letter of credit."
- As a result, Mr Simms spoke with Max Eigenmann at CIBC in Zurich. He also spoke to Mr Eignemann's assistant Mr Brunner. On 12 May 1998, he wrote to Mr Eigenmann. His letter contains some significant passages. First, he wrote:
"…..it is our intention to ask your bank to issue a letter of credit in due course for US$1.5m in favour of Dadourian Group International Inc, an American company.
Although it bears the same name as the beneficial owner of Charlton, it is not connected with the account holder and the transaction is at arm's length."
- The reference to the beneficial owner in this context can only be to one or both of Jack and Helga. Mr Simms gives, of course, the same explanation as he gave in relation to the opening of Charlton's account with CIBC, namely that the settlor and principal beneficiary is identified, for Swiss banking purposes, as the beneficial owner in cases of trusts.
- Secondly, he wrote:
"[Charlton] has been asked to open a letter of credit and DGI….seems unable to understand….that is not possible to open a letter of credit without specifying each and every item which is being purchased. We have now reached an impasse and it appears that the problem is that DGI believes that Charlton is unable to open a letter of credit because of lack of financial ability.
I am therefore sending you separately by this fax a letter from Charlton asking you to confirm to [DGI] that you have been instructed to open a letter of credit in this matter but that you are unable to do so because we are unable to specify what is being purchased but that, without responsibility, you can confirm that Charlton has the financial ability to open the letter of credit as and when the acquired [sic] information is available."
- CIBC duly provided a letter of that date in the terms requested, including the erroneous use of the word "acquired" rather than "required". Mr Freedman is highly critical of this letter. He says that it cannot be relied on in any way, simply adopting, as it does, Mr Simms' wording. It was, in any case, materially incorrect since Charlton had not instructed CIBC (or indeed any other bank) to open a letter of credit. It was, he says, part of the continuing dishonest conduct of Mr Simms and Charlton to persuade DGI that matters were not as they in fact were.
- Mr Gallo wrote to CIBC on 12 May about the letter of credit. He sought to persuade the bank that it was not necessary for Charlton or the bank itself to know what equipment was being provided before a letter of credit could be opened. He said that he would be happy to meet up with CIBC in Zurich (where he was visiting) to discuss the matter.
- Although Mr Rahman was apparently anxious for Mr Simms to travel to Zurich to meet with CIBC and Mr Gallo, Mr Simms himself did not consider that a meeting between Charlton's bankers and Mr Gallo was a very good idea. His attitude, he says, was that Charlton had made its position clear that it needed to know that DGI had specified the general equipment that it was going to supply and this would then be referred to in the letter of credit. A meeting between Mr Gallo and CIBC would shed no light on this. He did not think it appropriate for the seller's lawyer to be meeting with Charlton's bankers and did not think it would be worth the expense for him to travel to Zurich for a meeting likely to be of no value.
- Accordingly, CIBC replied to Mr Gallo on 14 May, noting that its client (Charlton) had only been supplied with a very general list – that was, indeed, correct, the list which had been supplied expressly being stated as not for use in relation to a letter of credit. The bank wrote
"Even if that [list] were finalised, we could not open a letter of credit because the identity of the manufacturer, the specification of the equipment etc. is not known.
We also understand that the Bureau Veritas report has not been commissioned and certainly has not been delivered to our customer."
- The bank stated that it would be in a position to give a pre-advice of the letter of credit if these matters were attended to.
- Mr Gallo continued to press for a meeting, responding on that same day in a letter which contains the following:
"Bureau Veritas has been commissioned. Of course, the report has not been delivered. Everyone knows this is 4-6 weeks away. It will have the definitive list of equipment. What your client will purchase is what will be listed in that report and verified therein as adequate to produce the produce.
- The LOC is to be paid when whatever is listed in that report is delivered to the ships rail. That is the deal."
- It was in fact not the case that Bureau Veritas had been commissioned. There had been discussions, but no instructions. I do not know the basis on which Mr Gallo was able to say that everyone knew that the report was 4-6 weeks away. Indeed, Mr Simms sent him a fax on 14 May stating his understanding that Bureau Veritas had not been commissioned. In fact, there never was a report at all. Further, although Mr Gallo may have been proceeding on the basis that the deal was as he stated, he does not, at least in this letter even acknowledge the argument that Charlton was entitled to see a list of products before the obligation to open the letter of credit arose, although he does, sensibly, it seems to me say this "A 30 minute meeting would either resolve any issue or establish that no resolution is possible. Either way, we can all get on with life. Further letters are not likely to be productive". The fact that Charlton was not prepared to have such a meeting was bound to lead to suspicion that Charlton would not in any event be able to comply with its obligations.
- On the 13 May, Mr Rahman wrote to Alex referring to the CIBC letter to DGI and making clear his view that the general equipment list was not sufficient for Charlton or to enable Charlton to open a letter of credit. On the same day, he sent a memo to Mr Simms to report on matters in Bangladesh, Mr Doula had phoned Mr Rahman; Mr Doula was angry and extremely worried about the situation, even being concerned that he could be facing an official enquiry if things went wrong.
- At this stage, Haig made further contact with Bureau Veritas, in the shape of Mr Barry Philips. It refers to numerous conversations over the past months and encloses a copy of the Option Agreement, expressly identifying Clause 2.6 and the requirement for confirmations. The letter contains this:
"Please note that with respect to Paragraph 2.6(b) of the Agreement, since there is no functional plant involved, the confirmation is to be performed solely on a documentary or theoretical basis."
- This is, I consider, a very surprising approach given DGI's obligation to provide a production line and the fact that one purpose of the Bureau Veritas report was to demonstrate its functionality.
- Mr Gallo also wrote to Michael Lacher on 14 May. He stated expressly that DGI had no intention of purchasing any piece of general equipment for delivery under the contract until the letter of credit was opened. DGI therefore took a very different view of its obligations under the Option Agreement from that which Charlton took. Whether their view was right or wrong is not now of particular importance in the light of the result of the arbitration. What is of importance, however, is whether the view being put forward by Charlton was one which was arguable and genuinely put forward.
- By this stage, Mr Simms was becoming more and more concerned. He says this:
"I was becoming concerned with the situation firstly because of the delay to the project and the effect on the bankers and prospective shareholders in Bangladesh. Secondly, the attitude of Alex and Haig had considerably upset Jack and Helga Dadourian and they appeared to me to be wishing to disassociate themselves with the project. Whilst we expected to find other investors for the project, we had not yet finalised this. Although I had the mandate to spend the trust monies, if Helga was the principal beneficiary and she did not want the project to proceed further, there could be no ability for Charlton to complete the agreement. Bearing in mind that Charlton had exercised the Option, this was creating a very messy situation. It was extremely frustrating as there was no need for it. Charlton wanted the equipment and the tooling. All they wanted DGI to do was to make a definitive list of what was going to be supplied and allow engineers from Bangladesh at least to view the tooling."
- It is, I do not doubt, the fact that Mr Simms was becoming concerned for the reasons he gives. But I do not accept what he says in this passage about the source of funds, a matter I deal with in detail later. Mr Simms then says this:
"On the 15th May I wrote to Nicholas Gallo to set out the history of the matter since the Option was exercised. That letter stated that Charlton was very concerned because it was not until after the Option Agreement was signed that disclosure was made that DGI did not have all the plant and equipment. This was providing a major embarrassment in Bangladesh. Without knowing the exact equipment it could cause a problem with the design of the factory. I stressed that with a little cooperation on each side, none of this needed to be a problem. The letter was intended to be firm and consolatory. However, the response of 18th May appeared to show that we were getting nowhere. Mr Gallo again confirmed that Bureau Veritas had been commissioned although they had not".
Although that is only part of the picture, I see no reason to doubt it as far as it goes.
- On 19 May, Haig sent a fax to Mr Rahman setting out what they had concluded in a phone call the day before including the following:
a. A list of drawings and tooling had already been supplied in the package mailed the previous year.
b. The wording for a letter of credit would be helpful in determining exactly what information was necessary to open it. He enclosed a draft wording.
c. Haig would review the machinery list and add as much descriptive language as he could to facilitate matters.
- The draft wording for the letter of credit provided for it to be payable upon delivery of a number of items including the Bureau Veritas report , the general equipment set out the in that report "as necessary to employ the special Equipment [ie the Tooling] in the manner envisioned by paragraph 2.6 of [the Option Agreement]" and "any further general Equipment determined to be necessary by the Bureau Veritas in [the report]". The Bureau Veritas report did not, of course, exist nor had the General Equipment been adequately identified to be referred to in the report. This description did not, therefore, resolve between Charlton and DGI the chicken-and-egg (ie provision of letter of credit-and-identification of General Equipment) situation.
- On 22 May 1998 Haig sent to Mr Rahman an updated machinery list with more descriptive language trusting that it would satisfy Charlton's needs. It did not satisfy them, Charlton maintaining that it was insufficiently precise and also inadequate because there was no indication of the method of powering the equipment or of the make of equipment.
- On the 28 May 1998, Mr Simms wrote to Mr Eigenmann of CIBC authorising him to provide a reference for Charlton in respect of the opening of an account at Sonali Bank in London. Mr Simms also informed him that he was in the early stages of attempting to agree some wording for the proposed letter of credit to DGI and asked him to send him any standard wording which CIBC would expect to see on any letter of credit opened by the bank. A reference was provided on 3 June.
- In relation to technical matters, it seemed to Mr Simms to be a good idea to make some provision over and above that already contained in the Option Agreement about when visits would take place, who would go on those visits, how long they would be and how the payment of $100,000 would be scheduled. He accordingly prepared a draft of a technical cooperation agreement. Mr Rahman was still in Dhaka and had reported that matters were proceeding well with a hoped-for completion date around 27 July. Discussions were taking over the wording of the letters of credit to be issued in respect of the construction contract for the factory.
- On 9 June, Haig told Mr Rahman that he had had various conversations with Bureau Veritas and they were ready to proceed once the wording of the letter of credit had been agreed. Mr Rahman therefore sought clarification from Haig on 10 June. Haig responded on the same day saying that as soon as DGI and Charlton came to an agreement on the wording of the letter of credit was agreed, and the letter of credit was in fact in place [my emphasis] Bureau Veritas would be instructed to proceed. This would seem to be a recognition, contrary to what Mr Gallo and Haig had said previously, that Bureau Veritas had not, in fact, been instructed to proceed with preparation of the report. Mr Simms, in his witness statement says this:
"The problem with this approach was that there was no obligation on the part of Charlton to open a letter of credit until everything was ready for shipment. We knew everything was not remotely ready for shipment because DGI had not started to procure the equipment. We were concerned that they were unwilling to specify specific equipment or even to stand by their list as definitive. Charlton did not wish to open a letter of credit, have it divided and transferred and find that there was not a complete package to which Bureau Veritas would put its name."
- However, although that may have been Charlton's position at the time, that way of putting Charlton's case may go too far. It is not so much that the obligation to open the letter of credit did not arise until the package was ready for shipment, but that it did not do so until, at earliest, the relevant General Equipment had been clearly identified and possibly not until it had been sourced. It was, nonetheless, necessary to have the letter of credit opened a reasonable time before shipment.
- The situation was clouded further by Jack becoming involved in discussions, with Jack giving the clear impression to Alex and Haig that he was acting on behalf of DGI when discussing matters with the Charlton camp. As in the past, his communications refer to "we", meaning DGI and putting himself firmly in the DGI camp, and, in a fax dated 19 June, stating that "I have told him [Mr Rahman] that I am only acting as a consultant and that all final decisions will be made by DGI in New York with Charlton". Indeed, Jack was giving the impression to DGI that Charlton would not depend on DGI having procured the General Equipment, resulting in a fax from Haig dated 22 June expressing concern that he had not received draft wording for the letter of credit. Mr Rahman accordingly sent a draft on 23 June. The covering letter stated that Charlton would require a pro-forma invoice listing all drawings, machinery and jigs, dyes and tooling prior to the letter of credit being opened. The draft letter of credit itself provided that there were to be certificates of origin and the certificates from Bureau Veritas regarding their inspection.
- There was an immediate response from Haig. It again repeated that DGI could not yet provide Charlton with a definitive and final list of machinery because it was pending verification from Bureau Veritas: what DGI had supplied was "provisional and subject to possible modification" by Bureau Veritas. Haig asked for a letter of credit payable on sight not 60 or even 30 days after presentation.
- On 26 June, following a phone call earlier in the week, Haig wrote again to Mr Rahman. He said that his understanding was that no one was expecting him to demonstrate a working production line but that the engineers from Bangladesh wanted an explanation of how everything works and how to put it together. He referred to his earlier fax in May enclosing a form of words for the letter of credit which he still thought was adequate. But that form of wording specified the general equipment by reference to a report by Bureau Veritas which did not yet exist and had not even been commissioned.
- On the 29 June, after reference to Mr Simms and Jack and Helga, Mr Rahman replied making it clear that what was required were pro-forma invoices: he wrote:
- "A letter of credit always refers specifically item by item to everything that is being sold – hence the need for a pro-forma invoice. I have told you several months ago that our bankers could not open the LC when you had done no more that indicate the likely machinery and equipment to be supplied. It was for that reason that you subsequently provided us with a more detailed list."
- Further correspondence ensued. In a postscript to a fax dated 9 July 1998, Haig stated that "the date of shipment of material outlined in our agreement will be within 180 days after the opening of a letter of credit, terms and conditions of which must be agreed to by DGI". Thus Haig was still seeking 180 days to source the General Equipment, a process which had not begun, notwithstanding that the Option Agreement envisaged a period of 180 days from the exercise of the option. This reflects DGI's approach which was that its obligations to source the General Equipment did not arise until the letter of credit was opened and that there was to be a period of 180 days to allow it to do so.
- According to Mr Simms, in the light of the difficulties in making progress with DGI, Jack and Helga were losing enthusiasm for the project and were becoming somewhat exasperated with Mr Rahman who seemed to them to be unwilling to commit to signing up in Bangladesh. Funds to date are said by Mr Simms and by Helga to have come from the trust (although whether they in fact came from the trust or in reality from funds under the control of Jack and/or Helga is a matter which I will need to consider further). Mr Simms says he had become concerned that Helga would not wish to invest further in Charlton and the Bangladesh project. Indeed, he says that, at the beginning of June, he was told by Helga that she did not want her trust to be investing more monies into Charlton, pointing out, quite correctly, that it had never been the intention of the trust to provide all the financing for the project and that it was expected that Bangladeshi investors and other investors into the PLC were being found. Accordingly, Mr Simms approached Mrs Alianza and Mr Ammerman who, to cut another long story short, he says agreed to provide finance. I shall need to say more about them in due course.
- On 6 July 1998, a subscription and shareholders agreement was signed in respect of the subsidiary in Bangladesh. Charlton was to take a 51% interest, a number of Bangladeshi shareholders were to subscribe 32% and two "overseas investors" were to take 10%. The latter were Cline Ltd, a company which, according to Mr Simms, was controlled by a family trust set up by his mother, and Hatton Ltd, an Isle of Man company set up for Mr Rahman.
- On 7 July 1998, Haig wrote to Mr Rahman reviewing the history of the discussions. He stated the option "has not been perfected" and that in view of this "We do not feel bound by the exclusivity of the Option Agreement and feel we can pursue other clients if and when they appear". Mr Simms says that Charlton found this letter extraordinary – something which it is not difficult to accept and which I do accept – and that little progress seemed to be being made.
- At the same time, Mr Simms was progressing the finalisation of arrangements with Eastcastle; and if that were achieved, arrangements with CIBC would be no longer be needed. On 13 July (and again with a second copy on 14 July), Mr Simms sent to Mr Ammerman and Mrs Alianza a draft of the suggested subscription agreement for Eastcastle to take control of Charlton and its associate Gibraltar company Charlton Industries Ltd which, according to him, was to handle the procurement of raw materials and commodities when production started. In his covering letter, Mr Simms wrote "In this way you would take over the Bangladesh venture leaving the original shareholders with 7% equity for their £50,000 of share capital. No doubt they will be happy to sell it rather than retain such a small interest". This was a reference to Ancon.
- On 14 July 1998, Haig sent a fax to Mr Rahman. He noted a number of areas where, in the correspondence, Charlton had, he said, diverged significantly from the terms of the agreement. Some of these divergences related to the terms of the letter of credit put forward on behalf of Charlton:
- It proposed payment 60 days after presentation of all documents whereas, according to Haig, this was inconsistent with the Option Agreement and unacceptable to DGI. The letter of credit had to be payable on sight.
- It proposed certification be made that all items were of "USA origin", something which was not a requirement of the Option Agreement.
- It introduced a "one-shift" requirement for the production capability, something else which was not a requirement of the Option Agreement.
- Haig also added that, "Owing to the delay in our receipt of a letter of credit, as we have already mentioned, it will be necessary for us to discuss a modified date for shipment". Charlton's position, of course, was that because DGI had failed to list the General Assets and identify precisely what was being sold, the obligation to open the letter of credit had not arisen and that any delay was the fault of DGI not of Charlton. DGI's position is, in any case, slightly odd since it was still asserting at this stage that the option had not been exercised. If that was correct, it was irrelevant what the Option Agreement said: DGI would be entitled to lay down whatever conditions is wanted if it was to proceed – in other words, a new agreement would need to be made.
- On 15 July Mr Rahman sent from Dhaka to Haig a list of plant and machinery, tools, jigs dyes and engineering drawings to assist him in preparation of the pro-forma invoice. The list of plant and machinery was taken from the information provided by DGI earlier. Mr Rahman pointed out that the list was a tentative one and that specifications may change. He also pointed out yet again that without the definitive list, it would not be possible to open the letter of credit or even to obtain a pre-advice. To achieve that, a pro-forma invoice would he said, be essential and that had to list all the items to be supplied individually.
- Mr Simms was, meanwhile becoming more anxious. He faxed Mr Rahman on 17 July to inform him that he would be speaking to the Americans (ie Mrs Alianza and Mr Ammerman). He asked for suggestions to enable him "to demonstrate that Sonali Bank are ready to issue the LC if they put up the margin and the performance bond. Obviously they have not been involved in this matter previously. That is why I have been suggesting that they open the LC and they will do everything which is required….".
- Then, on 21 July, Haig chased Mr Rahman seeking a reply to his fax dated 14 July. On the same day Mr Simms wrote to Haig since communications with Mr Rahman in Bangladesh were encountering problems. Mr Simms enclosed an amended version of the technical cooperation agreement. He had made certain amendments which he described in his letter as having the purpose of more closely shadowing the Option Agreement. He said that it was now intended that there should be only a technical visit from a representative of Charlton Industries Bangladesh and the purpose of that visit was simply to understand from Haig or DGI's engineer more about the whole process and production line before the equipment reached Bangladesh. Mr Simms reiterated the need for the pro-forma invoices for the letter of credit. He suggested that a little leeway was required by the Bangladesh side, proposing that the letter of credit remained payable 30 days after shipment but that interest should also be payable during that period, enabling DGI to encash the letter of credit immediately.
- Mr Simms stated that the Bangladeshi requirements were that the letter of credit should be for shipment within 90 days and he expressed his hope that DGI were far advanced in being ready to order the necessary machinery and equipment not already in house and that 90 days could be accommodated. He ended his letter saying "For the purpose of arranging a pre-advice we are assuming that you have agreed the wording of the draft letter of credit already sent to you" – a forlorn hope as it turned out.
- On 22 July 1998, Mr Simms, in progressing financial arrangements with Eastcastle, sent a fax to Ms Alianza and Mr Ammerman. This clarified the amount outstanding (according to Mr Simms) by way of loan to Charlton from Ancon. At that time there was standing, for the benefit of Eastcastle, in a designated deposit in the name of Bower Cotton a sum of just over $2.16 million,. There was therefore adequate funding to open the letter of credit if Eastcastle agreed to come into the transaction in place of Ancon.
- On the same day, 22 July, Haig wrote to Mr Simms complaining that Charlton had not addressed DGI's requirement that the letter of credit be payable at sight. He sent a draft of the letter of credit wording and pro-forma invoice. He said that these were a pre-condition of DGI before proceeding further and gave an ultimatum that, if Charlton could not comply with these requirements by 5 August "we should go our separate ways". The letter of credit wording submitted included a 30 day period for payment after bill of lading. It was, however, to be payable on sight upon presentation of the documents listed. The pro-forma invoice for the general machinery did not contain a list of equipment; instead, it cross-referred to "the report of Bureau Veritas to be delivered at the time of shipment….", a report which did not then exist. Thus the "chicken-and-egg" dispute (list first? or letter of credit first?) between Charlton and DGI remained entirely unresolved.
- On 27 July, Haig wrote, observing that the parties obviously differed over what was necessary to open a letter of credit, expressing the view, on advice, that his drafts should satisfy all parties as well as the provisions of the Option Agreement. He stated that although DGI had been assured on several occasions that Charlton had sufficient resources to fund the project, it was becoming clear now that this was not so.
- Mr Simms responded to that on 3 August. He said that there was no financial problem in opening the letter of credit but that the terms of the supply had to be acceptable to the bankers in Bangladesh who were going to be financing the Bangladeshi company saying "In this respect they are only asking for compliance with what is standard practice in relation to the issuing of letters of credit". He said that all that was needed was for the pro-forma invoices sent by Mr Rahman to be reproduced and given a reference number and issued; they could then be referred to in the letter of credit. Mr Simms accepted that the letter of credit could be payable on sight, but this seems to have been conditional on the signing by DGI of the revised technical co-operation agreement (as to which it does not appear that Charlton had any contractual right to insist on such an agreement). With a shipment date, according to Charlton, of 25 September fast approaching, Mr Simms asked when DGI was going to be able to ship all the goods since the letter of credit did not permit partial shipments.
- On 3 August, Mr Simms wrote to the directors of Charlton attaching a notice of a board meeting to discuss recent developments. I should quote some of it.
"….We are at the stage of closing the Bangladesh transaction but, for this, the shareholders need to put up margin money and certain other working capital in order to accomplish this. The present shareholders have indicated their concerns and doubts about whether they wish to proceed on this basis. Since the basis is unalterable they either proceed or the deal could not go ahead. There is only a certain timescale left on this project and it either has to be completed or fail.
If directors have alternatives that may be pursued then these need to be discussed. I believe that another investor is available to take over the project but only on the basis of reimbursing Ancon Group Inc at cost for their loans and taking over the legal fess of my firm which have not yet been billed. There is really no scope for making a profit at this stage when a project is "abandoned" at the eleventh hour.
By the time of the board meeting the position with the existing shareholders should be clarified. The directors do have power to issue and allot new shares in the company"
- It seems to me that the human beings expressing concerns and whose position would be clarified before the next board meeting can only have been Jack and Helga. Whether or not they, or Helga's family trust, or Ancon itself, are strictly the shareholders, Mr Simms' discussions had clearly been with them and, importantly, the decisions whether Ancon was to go ahead as a participator really depended on what Jack and Helga had to say about it.
- But equally it seems to me to be clear from this letter that the other investor referred to by Mr Simms (which can only be a reference to whatever entity it was that Ms Alianza and Mr Ammerman represented) was unconnected with Jack and Helga unless, of course, this letter was itself a fraudulent piece of paper designed to mislead if ever anyone should find cause to investigate the transaction at a later date. I do not think that that is the case. I consider that the true position is that Jack and Helga were genuinely getting cold feet about the project and did not wish to see any more of their, or their family, assets being invested. Mr Simms, and even more so, perhaps, Mr Rahman, did not want to see the project fail each having invested an enormous amount of time and effort into the project which they still saw an being capable of being brought to fruition. Mr Simms then involved Ms Alianza and Mr Ammerman in the project.
- It has to be said that the position in relation to their involvement is most obscure and the evidence, both before me and before the arbitrator, unsatisfactory. The cross-examination of Ms Alianza at the arbitration showed that her understanding, not only of the transaction itself, but of how Eastcastle was owned and operated was very limited. It is conceivable that she and Mr Ammerman were in fact acting on the directions of an unidentified third party but if that is so, there is no indication of who that third party might be. I am sure that DGI and its advisers have left no stone unturned in investigating Ms Alianza and Mr Ammerman, as well as Eastcastle. No evidence at all has been presented to me linking Eastcastle in any way with Jack and Helga or their family trusts and companies. Indeed, it seems intrinsically unlikely to me that there is such a connection. If, as no doubt DGI would like to be able to establish, the assets of Eastcastle were capable of being made available at the direction of Jack and Helga, it is not easy to see why Mr Simms would, at this late stage in the transaction, have to involve Ms Alianza and Mr Ammerman and draft a shareholders agreement with Eastcastle rather than Jack and Helga simply directing that the necessary funds be made available to Ancon or Charlton by way of loan if all that was needed was to show to DGI that the necessary funding was available. Be that as it may, I am perfectly satisfied that funding through Eastcastle was in fact available whatever the ultimate source of that funding.
- At this stage, I will deal as a discrete matter, with Charlton's application to National Westminster Bank plc ("NatWest") to open a letter of credit. Charlton was not a customer of NatWest, but Bower Cotton were and the funds held by Bower Cotton for Eastcastle were held in their client account at NatWest. On 6 August, Mr Simms wrote to Jackie Roberts of NatWest enclosing an application form, making a number of points, in particular:
- The funds to secure the letter of credit were held by Bower Cotton on client account for the benefit of Eastcastle. He said that as soon as the letter of credit needs to be issued, Eastcastle would transfer $1.5 million to the client account of Charlton at Bower Cotton so that "the letter of credit will be fully cash collateralised".
- He referred to the Bureau Veritas report which he described as a vital document. Bureau Veritas, he said "have agreed to produce such a report….".
- Mr Simms noted that he did not yet have the pro-forma invoice referred to but attached the details of the machinery and equipment "which will be in the pro-forma invoice when issued…". He indicated that the wording of the letter of credit had not been agreed, but did not detail the serious differences of principle which existed between Charlton and DGI in that respect.
- The application itself showed Charlton as the applicant and DGI as the beneficiary. The letter of credit was to have an expiry date of 30 December 1998 and was to be payable on sight. There was a concise goods description of "machinery and equipment, jigs, tooling and dies, and drawings, all as per pro forma invoice of beneficiary dated [unspecified]". A list of required documents was attached including certificates and a report from Bureau Veritas. Mr Simms copied the application form to Mrs Alianza and Mr Ammerman on 7 August stating that, although he needed the pro-forma invoice, he knew the details of what should be on the invoice as he had the lists of everything in his files. A copy was also sent to John Law of NatWest who was Charlton's relationship manager. Mr Simms had spoken to Mr Law before submitting the form to Jackie Roberts; Mr Law had said that an application for this kind would go to their credit department which would determine what financial risk, if any, the bank was running in relation to opening the letter of credit.
- There appears to have been an internal meeting within NatWest in relation to Charlton's application. An internal note of NatWest of that meeting was made. There are two very slightly different versions of that note. The one with which I am concerned was copied to Mr Simms as an attachment to a fax from Mr Law dated 11 August 1998:
- It commenced by identifying a number of problem areas with the application form which I do not need to go into.
- It concluded with a heading "Other Areas" under which is found the following:
"
- What are the arrangements between Bower Cotton, East Castle Finance Limited and Charlton Corporation group of companies.
- How long have BC known these two parties?
- Who are the principals behind the companies?
- Why is a transaction between a Bangladeshi Company and a US Company in US dollars being made via UK?
- On what terms is the US$1/5m loan being made; is the supporting documentation available?
- We must refer this transaction to Fraud Office; They would be in a better position to assess money laundering if they have more information."
- In his fax, Mr Law offered to Mr Simms to make someone available to guide him through the points and to answer any questions. He also referred to NatWest's sanctioning procedure. The bank would need to "know the customer" and thus to have completed the normal account opening formalities, including Charlton's underlying finances and sources. The attached note is described as detailing "a few other aspects which would need answering to aid our understanding of matters".
- However, there is in the bundle, a photo-copy of the fax from Mr Law. It has a NatWest fax-header on it and is timed 15.45, 11 August 1998. This would appear to be a photo-copy of the document actually produced at the receiving fax machine in the offices of Bower Cotton. Behind that fax is a document which purports to be the attachment. However this document omits, altogether, the heading "Other Areas" and the text which followed it. Since Mr Law's fax refers to "a few other aspects…." and since the only note which appears to have been produced by NatWest included that heading and the text following it, there can, I consider, be no doubt that what Mr Law in fact sent was the entire Note and not just the extract contained in the purported attachment. That is at least consistent with the appearance of a straight black line across the page as if the note actually sent by Mr Law had been photocopied with a blank piece of paper covering the heading "Other Areas' and the text which followed it, although I do not base my conclusion on that.
- The purported attachment was disclosed by Charlton in the arbitration, an exercise in which Mr Simms was of course personally involved as a director of Charlton and as Charlton's lawyer (although not until a late state its advocate). DGI had pursued in the arbitration, as it has pursued in this litigation, Charlton for further disclosure considering that disclosure had been entirely inadequate (a view which was fully justified in the arbitration and has transpired to be equally justified in this litigation). It also took steps to acquire further documentation from third parties. In the course of the arbitration, it acquired from NatWest a copy of the Note. In the context of a dispute between Charlton and DGI about whether NatWest was ready willing and able to open a letter of credit, the concerns of NatWest listed under the heading "Other Areas" were clearly of significance and presented problems for Charlton, as did Mr Law's requirement that the "know your customer" requirements should be satisfied. They were of significance because Charlton's case in the arbitration was that it was ready, willing and able to open a letter of credit with NatWest, something which it was certainly not able to do at this time, August 1998.
- Mr Simms had no adequate explanation for the disclosure of the purported attachment (ie of the Note with part hidden) rather than the full Note. He had no explanation for the existence of that document. He had no explanation about why the full note was not in his own file. Having heard Mr Simms cross-examined on this aspect, and having heard what happened in the course of the arbitration about how the Note came to light, I conclude that Mr Simms, in the arbitration, deliberately concealed its existence with a view to avoiding the damage to Charlton's case which those documents would have engendered. There is no evidence, however, to suggest that he discussed this with anyone else, let alone with Jack and Helga.
- On 12 August, Mr Simms wrote to Mr Law attempting to answer the five questions raised under the heading "Other Areas" in the Note. He did not explain who the principals behind Charlton were (although he did state who the directors were); in relation to Eastcastle he stated "East Castle Finance Limited is controlled by Mrs Pauline Alianza and Mr Reno Ammerman, American citizens based in Phoenix, Arizona, known to this firm for approximately two years and held in good standing". That did not, one might think, really answer Mr Law's question. And, as it turns out, it was inaccurate since the evidence in the arbitration showed clearly that Mrs Alianza and Mr Ammerman did not control (and certainly did not own) Eastcastle although they may have had authority to commit funds to the Bangladesh project. They were not even the only directors: another director was a Swiss lawyer, Dr Meroni, who appears from that evidence to have had considerably more say in the day to day affairs of Eastcastle than Mrs Alianza and Mr Ammerman.
- In the final paragraph of his letter, Mr Simms stated that if there was any doubt that NatWest would be able to handle the transaction properly he should let Mr Simms know immediately so that he could make other arrangements. Mr Simms says that he did not understand that the bank had a problem over lack of knowledge of Charlton and that, since Charlton had already banked with CIBC since the beginning of the year and with HSBC for over a year, there would be no difficulty in simply transferring money from his client account to one or other bank. It is not easy to see how Mr Simms can say that he understood NatWest to have no problem when he knew that it required the usual "know your client" hoops to be gone though and that that had not been done.
- Mr Law responded on 13 August, a response which Mr Simms regards as "muddled". It is true that he had mis-stated Charlton's name, but he made a number of clear and unmuddled points including these:
a. The transaction was unusual and the bank would not normally entertain such a proposition were it not for the valued connection with Bower Cotton.
b. The bank knew nothing about Charlton or Eastcastle, nor about the principals, the objectives and purposes of the two companies nor about "their relationship with each other etc".
c. He asked for information about any bank accounts of Charlton and Eastcastle and whether statutory returns had been filed.
d. If the bank were to open a letter of credit, it would wish to proceed with its usual formalities on a step-by-step basis; short-cuts were not to be allowed, so that it would be necessary to provide "full background details to each of the Directors, their banking accounts and adequate proof of identity". Relevant application forms were enclosed.
e. The bank would need to be provided with a copy of any existing or proposed documentation in respect of the provision of loan finance from one of the companies to the other.
- "I trust" Mr Law wrote "that you will understand the Bank's need to complete these formalities in accordance with current Banking regulations."
- Somewhat surprisingly to my mind, given the high profile which the question of the letter of credit had taken as between himself and Haig, Mr Simms says this:
"As it was Selim's full time job to deal with Charlton I believe that I passed this letter and its enclosures to Selim Rahman to deal with. Having given Selim the letter, I, in subsequent correspondence with the bank forgot that they were still awaiting the account opening forms. I believe also that Selim went to see Nat West but as he did not give me a note of the meeting, I did not recall exactly what he had done which was intended to follow up on the account opening. As far as I was concerned, there was no problem in Charlton opening an account but if the bank was going to take ages over it, then we would not bother because we already had satisfactory banking relations with CIBC and HSBC. Both banks, because Charlton was a PLC, were not concerned with the shareholders of the company in any detail. They expected the company to be managed by the directors and were therefore interested in the details of the directors and their experience."
- One curious aspect of that explanation is this: not only did Charlton not in fact apply to open an account with NatWest, but also no steps seems to have been taken to attempt to open a letter of credit with either of the banks (CIBC and HSBC) with which Charlton did hold accounts.
- Jumping slightly ahead, Mr Rahman, in his capacity as a director of Charlton, had a meeting with NatWest on 28 August 1998. An attendance note from NatWest records that his main aim was to discuss the possibility of Charlton setting up a letter of credit. The note records that it "discussed the possibility, but stressed that no further action would be taken until account opening formalities for [Charlton] are complete (Directors personal bank details etc)." Six bullet points arose from the meeting including the facts
- East Castle Finance Ltd were principal shareholders of Charlton.
- Mr Rahman had no knowledge of East Castle's involvement.
- Charlton held $500,000 with CIBC Zurich.
Limited account opening forms were left with Mr Rahman but no further action in relation to the letter of credit would be looked into until all the account opening formalities were complete.
- In fact, Charlton never satisfied NatWest's requirements and no letter of credit was opened or commitment made by NatWest to do so.
- Returning to the narrative, on 7 August, Mr Simms faxed Haig again in relation to the 14 July fax. In it he responded in relation to Haig's 5 numbered paragraphs as follows:
1. He agreed that the letter of credit should be payable on sight.
2. He agreed that certification need not be "of USA origin".
3. He stated that the "one shift" requirement would be altered.
4. He stated that the technical co-operation agreement would reflect the Option Agreement.
5. He stated that the re-drafts no longer contained any referenced to "demonstration of all manufacturing processes".
- Mr Simms says that he conceded these points not because he was obliged to do so but because it seemed the only way of eliminating the logjam. The response of Haig was to say that Charlton had not complied with DGI's deadline of 5 August and that DGI therefore felt free to engage in discussions with others. The major difference remained the wording of the letter of credit and whether the assets being sold needed to be specified in detail. However, in relation to the "standard practice" referred to by Mr Simms in his fax dated 3 August, Haig made the point that, in his experience, "if the client has the money, the bank will issue a letter of credit using whatever language the client directs. The fact is, their approach does not work in this instance because it does not fit the deal. At some point you must come to grips with this fact".
- The problem with Haig's approach, however, is that it seems to be based on an assumption that both sides considered the deal in the same way. Unfortunately, they did not. For Charlton, the deal, so far as Mr Simms and Mr Rahman were concerned, was that Charlton had originally contracted for an option to purchase a complete production line already in the ownership of DGI; although it had become apparent that the General Equipment in fact needed to be acquired, the fundamental obligations on Charlton in relation to the letter of credit remained those which would have obtained had DGI in fact owned what it warranted in the Option Agreement that it did own. But for DGI, the deal was that it had contracted only to supply General Equipment which it would have by the time for delivery arose and that Charlton's obligation to open a letter of credit was not dependent on the prior acquisition of that General Equipment.
- Mr Simms responded on 10 August. He reiterated that Charlton had validly exercised the option and that DGI was not free to engage in discussions with others. He stated that the 5 August date had no relevance and that Charlton had been ready, able and willing to open a letter of credit for some time but had been frustrated by continuing problems in bringing the matter to a conclusion. The most critical issue appeared to be the timescale for the delivery of the machinery and equipment, expressing his own concern that a delay of 180 days would be viewed with considerable concern in Bangladesh and asking for cooperation in speeding things up.
- Haig responded to that on 11 August. The dispute about the wording of the letter of credit continued without any new points being made. DGI, unhelpfully, declined even to provide the name of their bank for a pre-advice. DGI's position is clearly stated:
"The process of sourcing the machinery is not going to start until the letter of credit is actually opened with language acceptable to us. That is why these points hold up the process. It is unlikely to take less than 180 days to source all the machinery. That's reality".
- It is, as I have said before, not for me to decide whether DGI were entitled to take that stance; that issue as between Charlton and DGI has effectively been concluded by the arbitration. What I find it hard to conclude is that Mr Simms, in rejecting that stance as correct, was propounding a case which was clearly incorrect and unarguable. The case which Mr Simms was propounding as a matter of construction of the Option Agreement, was clearly arguable and may, indeed, have been correct.
- On 11 August, Mr Simms told Haig, as was the case, that NatWest had indicated in relation to the letter of credit that it could not pre-advise without commitment and that the wording should be agreed first. He stated
- "They [NatWest] have agreed the wording with us and are able to issue the LC in the attached format. Clearly there needs to be a date and reference on the pro forma invoice that you would be issuing,….."
- This is a breath-taking misrepresentation of what NatWest had actually told Mr Simms. Had he been honest, he would have said that there was no agreed wording with the bank and, more importantly, that the prospect of opening a letter of credit in the near future was remote since he had not dealt with the bank's queries under the heading "Other Areas" in the Note.
- So far as the position between Charlton and DGI was concerned, Mr Simms does, however, appear to be accurate when he says this:
"So far as the wording of the letter of credit was concerned, we appeared to be going round in circles since DGI made no concession in relation to the identification of the general equipment. The position appeared to be that they would not themselves go firm on what the general equipment was. They would not instruct Bureau Veritas to do that either because they did not want to spend any money. There was no definitive list of actual equipment because they had not started the procurement process and there was still 180 days to go which had not even begun to run….."
- On 12 August, Haig sent two faxes to Mr Simms again objecting to the wording of the letter of credit and noting a couple of specific points which had not been dealt with in Mr Simms' draft. He sensibly suggested that a short meeting including the bank "would resolve all such things in no time". Mr Simms was, however, and always had been adamant in his refusal to permit a meeting with the bank, saying that it was in appropriate and that he had never heard of a buyer's bank meeting with the seller in similar circumstances. But whether of not that is correct, Mr Simms could not allow a meeting because it would have exposed the problems which he was in fact facing in opening a letter of credit with NatWest.
- Mr Simms wrote to Haig on the 12 August reiterating points which had been made before. He reminded Haig that the Option Agreement had provided that the assets to be sold were stated to comprise all the primary assets and know-how necessary to create a production line without the need to purchase anything else; the major problem was because that confirmation was not correct and because DGI did not seem to know precisely what plant and equipment it was supposed to supply.
- On 13 August, Haig sent a fax to Mr Simms indicating that DGI considered a meeting with the bank essential. Mr Simms says that
"this was neither possible nor practicable: the bank had to be told what was required by the customer. At Nat West there were three different departments to deal with, the local management, the trade credit department and the credit/compliance department. There would be no point in having a meeting with one without the others since it would not resolve the issues."
- That strikes me as a limp excuse for a refusal to agree to a meeting with the bank.
- Mr Simms responded on 13 August to suggest that it seemed sensible for Mr Rahman to go to New York to try and resolve matters there. The response on the same day from Haig welcomed the prospective visit but indicated the meeting must include the bank. It also indicated that neither he nor Alex were going to be in New York but that Mr Gallo, their lawyer, would be available to meet in Zurich on the 19 and 20 August.
- That provoked a lengthy response from Mr Simms on 14 August 1998. He explained that he would be in New York in any event the next week and therefore could not be in Zurich. He indicated that he did not think that DGI was focusing on the right issues, saying that the letter of credit could have been issued months ago:
"Provided that the bank has given instructions to issue a letter of credit which is workable there is no problem. We are nearly at that point."
- Given that the only bank which had been asked to open a letter of credit was NatWest and given the correspondence up to that time between Mr Simms and Mr Law (including the latter's fax dated 12 August) it is difficult to see how Mr Simms could say "We are nearly at that point".
- Mr Rahman sent to Haig a confirmation from NatWest that it held a sum in excess of US$1.5 million in a Bower Cotton client account on behalf of Charlton. He explained that these were funds "that we have segregated for the LC to be opened in your favour and for reasons of convenience, we have now arranged to do so through our London bank".
- On the 18 August 1998, Mr Simms says (and I accept) that he travelled to New York to meet Mrs Alianza and Mr Ammerman. The primary purpose was apparently to pursue an unconnected transaction; Mr Simms thought the opportunity could be taken for them to meet Alex and Haig. Mr Simms also wanted Mr Rahman to meet Mrs Alianza and Mr Ammerman. As a result, meetings took place between Mr Rahman, Mr Simms, Mrs Alianza and Mr Ammerman on the 20 August. No meeting with Alex and Haig was possible because neither was available during that week
- On Mr Simms' return to London, a board meeting of the directors of Charlton took place on 26 August 1998 to report on the visit to New York. The meeting was attended by Mr Simms Mr Rahman and Peter Smith. The minute of the meeting indicates that the board discussed the status of the project and the support of the new shareholders. It was noted that the fact that the company could now demonstrate its financial ability to open the letter of credit should put an end to DGI's suggestions that Charlton did not have the funds to proceed. It was noted that Mr Rahman would be travelling to New York on 1 September to meet with Mr Gallo, and that he should have authority to negotiate the best deal to resolve the impasse over the identification of the plant and equipment.
- Correspondence between Mr Simms and Mr Ammerman is instructive in showing what was really causing concern at the Charlton end. It appears that the technical assistance agreement had become another problem area. The Option Agreement did not provide for the making of any further technical assistance – DGI was obliged only to provide what the Option Agreement required and did not have to go further either in terms of what it provided or in terms of entering into a supplemental contract. Mr Ammerman wrote to Mr Simms on 27 August expressing concern that DGI would not sign a technical assistance agreement "thus causing Sonali Bank to back out". Mr Simms seems to have acknowledged that concern in his reply of the same date expressing the hope that that matter would be sorted out by Mr Rahman on his imminent trip to New York. It would then, he says, be "essential that we move quickly to have the LC opened. In that context, we would need to ensure that the LC was issued by Sonali Bank. A condition precedent to the issue of the Sonali Bank letter is not only the technical services agreement but the confirmation from the Dhaka Export Processing Zone that we have paid for the reservation of the site in Dhaka". So one sees here a number of interlocking aspects of the project with the Sonali Bank finance (by way of letter of credit) being necessary to get matters moving in Bangladesh, with that letter of credit being conditional on the signing of the technical services agreement and go ahead from the DEPZ. But DGI were, at the same time, unwilling to sign any technical assistance agreement until Charlton's own letter of credit was in place, as to which Mr Simms appears to have wanted to avoid providing it until matters were tied up in Bangladesh.
- A meeting took place between Mr Gallo and Mr Rahman on 1 September in New York. According to Mr Rahman, the meeting was partially successful: DGI agreed to instruct Bureau Veritas, the technical cooperation agreement was substantially agreed and a compromise looked like being reached in relation to the letter of credit. It does seem that Bureau Veritas were instructed as one sees from a fax dated 4 September 1998 from Barry Phillips to DGI, although it is clear from it also that further instructions would be needed before work began.
- But on 4 September, Mr Gallo wrote to Mr Rahman enclosing a new draft of the technical co-operation agreement. He wrote, pessimistically but realistically as it transpired:
"I expressed to DGI the same sentiment that I expressed to you yesterday ("I would not put my money in it….because of the bad feeling developed over the past 6 months"). They also agree. Selim, shouldn't we just call it off?"
- This is curious because, by this stage, there was no question of the Claimants putting any money into anything – the buy-back and distribution proposals had fallen away – and all that DGI had to do was to comply with its obligations to provide the Tooling and General Equipment against provision, at the proper time, of a letter of credit. To "call it off" would leave Charlton high and dry.
- On 7 September Mr Rahman faxed Mr Simms following his meeting with Mr Gallo. He enclosed the latest version of the technical cooperation agreement on which agreement had nearly been reached. So far as the letter of credit wording was concerned, it appeared that it was to have an expiry date which for shipment purposes would be 180 days from the date of opening. Mr Simms says that this reflected what he understood to be Mr Gallo's requirement on 180 day procurement. A pro-forma invoice in three parts relating to plant and machinery, tooling and drawings was to be provided and the alterations to the list already prepared by Charlton was to be supplied. A meeting in London had been arranged between Mr Rahman and Mr Gallo for 14 September to finalise all technical matters connected with the letter of credit wording.
- By 10 September, Mr Gallo, who was about to visit London, wrote to Mr Rahman that "A breakfast meeting is ok but the critical meeting is the later one with NatWest so we can know the LOC language, including all attachments, is absolutely final and agreed to by DGI, Charlton and NatWest…It's critical that the LOC be opened by the end of week 38 if there is to be a project".
- On 11 September 1998, Mr Simms wrote to Mrs Alianza and Mr Ammerman. He said that, if it was possible to resolve which bank would issue the letter of credit then "I can give you the exact wording which has now been agreed". In fact, it had not been agreed – at least, not in the sense that there was a document which DGI was committed to accept, which Charlton would agree to and on the basis of which NatWest (or any other bank) would open a letter of credit. He then wrote:
"I will be meeting with the lawyer to DGI in London together with Selim on Monday morning and we will need to give some indication of progress. They will be expecting a letter of credit to be opened immediately. We will need to "stall" this until such time as the Sonali Bank LC is in place. I am trying to bring this forward but until I remit the finds for the EPZ [Enterprise Processing Zone] registration, there will be a problem."
- At this stage at least, Mr Simms was still contemplating back-to-back letters of credit – one for DGI as beneficiary and one opened by Sonali Bank for the funding of the Bangladesh end of the operation. Hence Mr Simms needed to stall the opening of the letter of credit for DGI until he had the Bangladesh funding in place. Mr Simms attached to the letter a list of correspondent banks of Sonali Bank and which it would prefer to see used. It included HSBC and NatWest, but not CIBC.
- On 11 September 1998, Mr Simms wrote to Mr Gallo. This is a letter to which Mr Simms does not refer in his lengthy and almost exhaustive witness statement. In it he wrote:
"…..I wish to state that we have been ready, willing and able to open a LC for a very long period and DGI have had direct confirmation from our Swiss bank on this matter as long as four months ago. I again confirm that we have absolutely no problem in doing so at this time….I have already confirmed to you our acceptance of all the major clauses and it will be a matter for the bank which actually opens the LC to put its standard language within the framework of those terms and conditions…."
- That is, at best, disingenuous. Charlton had not been ready, willing and able to open a letter of credit for many months and, was not able to do so as of 11 September. It is clear that Mr Simms did not, and could not honestly, make that statement by reference to NatWest. The language of his letter indicates that he did so by reference to CIBC: but CIBC had not been asked to open a letter of credit; the customer(s) which was known to it, and by reference to which it had been willing to sign the letter (drafted by Mr Simms) expressing its willingness to open a letter of credit was Helga or Jack and Helga or Helga's family trust; and there is nothing to indicate that it would have expressed the same willingness in the context of an investment by Eastcastle about which, and about Mrs Alianza and Mr Ammerman, it is not suggested by anyone that it knew anything.
- Following an exchange of emails between Mr Gallo and Mr Rahman, Mr Rahman telephoned Mr Simms to ask whether he could be available for a meeting with Mr Gallo on the morning of Monday 14 September; Mr Simms confirmed that he could be. It appeared clear to Mr Simms from his discussion with Mr Rahman that the only way that matters would be able to move forward with DGI would be for Charlton to name a time for the opening of a letter of credit or to agree a timescale since there appeared to be no way of getting them to move otherwise. Mr Simms says, and I accept, that he spoke to Mrs Alianza and Mr Ammerman to see they would be happy for Mr Simms to commit the funds of Eastcastle loaned to Charlton to open a letter of credit without there being a definitive list of equipment to be procured. They agreed to this proposal provided that Charlton was involved in the process of certification with Bureau Veritas and could be involved in making sure that everything that was purchased was going to be satisfactory under clause 2.6 of the Option Agreement.
- There was a meeting with Mr Gallo on 14 September. A final draft of the technical cooperation agreement was agreed. Discussion then turned to the wording for the letter of credit. Charlton had always, rightly or wrongly, insisted that it was entitled to know and to have specified in pro-forma invoices as part of the letter of credit what it was buying. Charlton, according to Mr Simms, was by now prepared to move, as a compromise, to a situation where Charlton would itself have direct communication with Bureau Veritas and where Bureau Veritas itself would approve the procurement and the equipment list. The wording of the letter of credit would, as he envisaged it, refer to a pro-forma invoice which in turn would refer to the list attached to the confirmation of Bureau Veritas to be delivered prior to the time of shipment and verified by Bureau Veritas at or before the time of shipment. According to Mr Simms, after an hour or so of discussions an agreement was reached on the wording of the letter of credit. He told Mr Gallo that, since the parties had agreed the wording, it would be necessary for Charlton to submit it to NatWest. Mr Simms told Mr Gallo that Charlton needed to know the identity of DGI's bank which he had asked for some weeks earlier but had not been told.
- Mr Simms says, and I see no reason to doubt, that while Mr Gallo was in Bower Cotton's offices, the technical cooperation agreement was finalised; it was signed in duplicate on behalf of Charlton and handed to Mr Gallo. It was agreed with him that his firm would have the technical cooperation agreement signed by DGI and hold it in escrow to be released when the letter of credit was issued. Mr Simms says that he was therefore surprised to receive on 15 September an overnight fax dated 14 September from New York, not signed by anyone, purporting to come from Mr Gallo, who he understood was still in Europe, confirming that the technical cooperation agreement was being held in escrow. No copy of the agreement actually signed on behalf of DGI has come to light and I think it very doubtful that it ever was so signed. The second paragraph of the fax stated that the letter of credit must be opened by the end of the week, week 38, and that his authority expired at the close of business on Friday 18 September: "In the absence of LOC by then, the book will certainly be finally closed on this matter by DGI".
- On 16 September, Mr Simms sent a response to Mr Gallo. He took issue with the fax saying that he needed a letter confirming that the agreement had been signed by DGI. He said that Charlton would be sending the agreed letter of credit wording to the bank. He explained why the deadline set down by Mr Gallo was not realistic and expressed surprise that, after the cordial relations at the meeting an expressed desire on both sides to bring the matter through to a successful conclusion, an unrealistic deadline was set the very same evening.
- On 17 September 1998, Mr Choudhury from the Bangladesh office sent the final hard copies of the list of tooling and fixtures and list of drawings for attachment to the relevant pro-forma invoices.
- On the morning of the 17 September, Mr Simms received an overnight fax from Mr Gallo. He explained that his client had decided a month previously to take the assets off the market but had given Mr Gallo one month to see if he could achieve completion, which he had failed to achieve. Mr Gallo's letter concluded by saying that DGI had instructed him "to advise Charlton that DGI hereby terminates our discussions. The exercise of the option has not been perfected in a reasonable period of time, any right to do so is forfeited and the option is null and void".
- On the 17 September, Mr Simms discussed this letter with Mr Rahman. He also spoke to Mrs Alianza and Mr Ammerman to see what attitude they wanted to take. Everyone was in agreement that it should be made clear that the Charlton side did not accept that DGI had any entitlement to terminate the contract. Accordingly, on 18 September Mr Simms wrote to Mr Gallo to tell him that it was not accepted that DGI was in any position or had any entitlement to terminate the Option Agreement and that it was not accepted that the option was null and void and that Charlton was holding DGI to its contract. He made clear that arrangement would continue for opening the letter of credit and that in the event that Mr Gallo's clients failed to perform they would be on the receiving fund of a multi million dollar law suit. He emphasised that Charlton had spent a very considerable amount of money in taking this project this far and that commitments had been undertaken in Bangladesh for the land, to equip an office and employ staff.
- Mr Simms repeated that, after the cordial discussions on Monday, he would not have expected this type of correspondence from him again. Mr Simms also emphasised that the wording of the letter of credit was not even fully discussed and agreed until Monday: this is a somewhat surprising statement given that Mr Simms had been at pains in earlier correspondence to show that the wording had been agreed with the bank so that he would be able to assert that Charlton was ready willing and able to open a letter of credit.
- Mr Simms also stated in the letter that the wording had then been retyped and sent to the bank. Mr Simms says in his witness statement that "that was not strictly correct as it had been retyped but not at that stage sent to the bank in light of Nicholas Gallo's letter of the 16th". I am not sure why Mr Simms adds the word "strictly" to what he says; it was not only not strictly correct it was completely untrue and designed, in my view, to suggest to Mr Gallo that there was absolutely no difficulty in opening a letter of credit as his, Mr Simms', actions since the meeting would readily show. I am afraid that this is but one example of an occasion where Mr Simms has been all too willing to make untrue statements knowing that they are untrue and with the intention of achieving a result which would not be achieved if the recipient of the statements knew the truth.
- Mr Simms then explains his next moves in this way:
"In view of this serious situation and a clear indication from Mr Gallo that DGI were not going forward, there was no point in progressing the letter of credit until we were back on track. My attempts to put the matter back on track had failed and I spoke to Selim and also to Pauline and Reno of Eastcastle to suggest that we should instruct our New York lawyers, who had been involved earlier in the year to write to Mr Gallo. Michael Lacher wrote on 23rd September to Gallo setting out the legal position but also saying that there was no benefit to either party from a protracted litigation and invited Nicholas Gallo to contact him to discuss an amicable resolution to the matter. He said that if he did not hear that matters would have to proceed legally. I did not consult Jack or Helga Dadourian, since Jack had consistently misread the position with Alex from the beginning and because it was Eastcastle's money being used to progress any decision Charlton might make."
- It is surprising, to my mind at least, that Mr Simms considered that DGI's attitude led to putting the letter of credit on hold. Charlton's position was that the option had been validly exercised and that DGI was contractually bound to deliver the production line. If Charlton were to hold DGI to that contract, it would need to pay for the assets purchased and the letter of credit would be necessary. Even if the actually opening of the letter of credit was to be postponed (in order to avoid unnecessary transaction costs), one might have expected an issuing bank to be finally identified and wording agreed. I am left with the distinct impression that the decision to put the letter of credit on hold had little to do with DGI's position and a great deal to do with the difficulties which Charlton was experiencing in tying up the financial arrangements in Bangladesh although I do not forget that, according to Mr Simms, the difficulties being encountered in Bangladesh were closely tied up with the failure of DGI to provide a final list of equipment and to agree to inspection of the equipment on behalf of the Bangladeshi financiers.
- Meanwhile, Mr Simms copied Mr Lacher's letter to Mrs Alianza and Mr Ammerman, saying that Mr Rahman was working as if the determination had not occurred and was still aiming for an early closing date for the issue of the Sonali Bank letter of credit. To this end, he said that if it were possible to get matters back on track, it would be best to open the letter of credit (ie for DGI) with Republican Bank, although this would mean that Charlton would have to open an account with that bank.
- Mr Simms says, and I accept, that he spoke to Mrs Alianza and Mr Ammerman to ask them whether there were any proposals that they thought should be put forward to DGI to resolve the impasse. Their discussions resulted in a proposal put to Mr Gallo by Mr Lacher in a letter dated 29 September 1998:
a. Charlton would purchase all the equipment currently owned by DGI together with drawings.
b. Charlton would be responsible for procuring all additional equipment ie the General Equipment.
c. The purchase price of $1.5 million would be reduced to reflect the procurement price and costs.
d. The purchase price to be payable by an irrevocable letter of credit payable within 195 days after presentation of warehouse receipts.
e. Charlton would be responsible for shipment.
f. DGI would be responsible for making immediate arrangement with Bureau Veritas to issue a report and certificate as to the DGI equipment.
g. DGI would not be party to any technical services agreement.
h. DGI would have no further involvement.
- It looked for some time as though a settlement might be reached along these lines, with correspondence passing between Mr Gallo and Mr Lacher over the following weeks. I do not think I need to go into the details of it. It is enough to say that, in my view, both sides were pursuing a genuine dialogue aimed at achieving an alternative deal, although DGI's proposal, if it was serious, that Charlton should pay $1.5 million for the Tooling and drawings (when that price had previously included the General Equipment and technical assistance) might be seen as an unrealistic and even unreasonable negotiating position. This is especially so when one considers the advice which Charlton was then receiving, namely that the price of second-hand general equipment with a useful life of 1 to 15 years was likely to be in excess of $500,000 and possibly as much as $625,000.
- Notwithstanding that valuation advice Charlton put forward a compromise that the price of $1.5 million be reduced by $25,000.00 to reflect the time and cost of procuring the general equipment and a deduction of $300,000 in respect of the cost of obtaining the General Equipment. That offer was rejected. The negotiations then degenerated into a familiar dispute about the original Option Agreement and Charlton's ability or inability to open a letter of credit.
- On 12 November Adam Rader of Michael Lacher's firm spoke with Ms Darmanian regarding last minute possibility for settlement. As a result, Ms Darmanian wrote to Mr Rader on 13 November. The proposal she put forward was a final purchase price of US$1.35 million, the letter of credit would be agreed the following week and within 4 weeks afterwards the letter of credit would have to be opened. I do not feel that I need to recite any of the unpleasant open correspondence between Mr Rader and Ms Darmanian although I should say that Mr Gallo did his best to defuse what was becoming explosive.
- The negotiations between Mr Lacher and Mr Rader were carried out with Mr Simms' full knowledge. He, in turn, kept Mrs Alianza and Mr Ammerman informed and involved, not least because it was their company that was going to put up the necessary funding. They were not prepared to accept the final proposal set out in Ms Darmanian's letter because Charlton's advice, according to Mr Simms – and this is certainly what he told them – was that it would be likely to cost at least $500,000 to buy the general equipment and the reduction of the price of $150,000 was simply not adequate.
- Mr Simms also says that Mrs Alianza and Mr Ammerman also believed that there should be a "carrot and stick approach" and that, having threatened litigation, litigation should be commenced if no agreement was reached, although it is not clear to me whether that was their belief or was simply what they agreed on the basis of Mr Simms' advice. Be that as it may, on the 6 November 1998, a summons and complaint was issued by Charlton. The thinking of Charlton's advisers in doing this rather than proceeding to an arbitration was this: Charlton was aware of the arbitration clause in the Option Agreement but considered that the responsibility for the whole problem rested with Alex and Haig for telling Mr Simms and Mr Rahman that DGI already owned everything needed for the production line when it did not. If DGI had had the equipment none of the delays over the letter of credit would, according to Charlton, have occurred. It was therefore necessary to join Alex and Haig as parties to the legal process but, since they were not parties to the arbitration agreement contained in the Option Agreement, it was necessary to commence conventional litigation. As DGI, Alex and Haig were all in New York, it meant proceedings were commenced in that State.
- By the 26 November 1998, Mr Simms had a list of machinery from Bangladesh which needed to be procured second hand, and sent this to Mrs Alianza and Mr Ammerman. Mr Simms says that he thinks that they wanted to ask someone in the USA to price up the equipment in addition to the figures coming from Bangladesh.
- On 8 December Ms Darmanian wrote to Mr Rader noting there had been no response to the offer in her letter dated 13 November. She repeated the offer saying that, in the absence of a response, the offer would expire on 15 December. Mr Lacher responded on 9 December saying that, until there was a final and definitive costing of general equipment, Charlton's final position could not be put forward.
- Meanwhile, Collier Jacobs & Mills (DGI's litigation lawyers) had removed the complaint to the Federal Court and filed a motion to compel arbitration. Although Mr Lacher had proposed a standstill agreement in his letter dated 9 December, Collier Jacobs & Mills had already written, on 7 December, to the New York judge setting out their arguments in relation to their motion to compel arbitration.
- On 11 December, when Lacher, Lovell & Taylor heard of the letter to the judge, they wrote to him objecting to this procedure. It was suggested to the judge that there should be a standstill until 31 January to see if settlement could be agreed. That was agreed.
- On 25 January 1999, a final proposal was put forward, on Mr Simms' instructions, by Mr Lacher to Mr Gallo. It proposed a payment of $1 million to DGI secured by letter of credit. Before the closing of the agreement, Charlton was to be allowed to dispatch a technical advisor to the USA who would have full access from DGI to inspect the jigs and tooling. The inspection was for the technical advisor to understand the nature of the tooling, to confirm that the equipment would have a 12 to 15 year production life and to verify that all necessary tooling was present and ready to be supplied to Charlton. The sale would still be subject to DGI providing a Bureau Veritas report and certificate. To protect Charlton against DGI changing its mind and not going forward, a performance bond of $150,000 was required. The letter of credit would be opened after the inspection had taken place. DGI would provide proof that it had the right to sell the tooling and drawings. On 26 December, Mr Gallo came back seeking clarification of certain points which was given on 27 January, leading to a revised proposal on 27 January although its substance remained very much the same.
- The response from Mr Gallo came on 28th January:
a. He stated that the price of $1 million was not interesting and the price would have to be $1.35 million.
b. He put forward requirements concerning the date for payment under the letter of credit designed to protect DGI's position.
c. He said that DGI would provide normal warranties regarding ownership but that it was not practicable to go back more than 10 years to find invoices and cancelled cheques in respect of payment of them. In that regard, Mr Simms observes – and I am inclined to agree – that the question of invoices and cancelled cheques was a complete "red herring". DGI, as became apparent during the arbitration, had acquired the tooling and drawings from an associated company for $1.
d. He rejected a performance bond.
- Meanwhile, to add to the difficulties facing Charlton, Mr Rahman had been taken seriously ill. He had had two subarachnoid haemorrhages on 3 November and 17 November 1998. He was taken to Singapore where he arrived on 19 November for treatment and where he went into intensive care. He was quite incapable for exercising any of his functions as chief executive of Charlton and could not progress matters in Bangladesh.
- On 17 May 1999, Helga sent Mr Simms a letter saying that "we" (by which she must have meant Jack and herself) were changing their golf club membership and asking for a bank cheque for FF 100,000 made out to Societe Foncierer de Joyenval. Following that, Mr Simms, on 2 June, instructed Mr Eigenmann of CIBC to issue a bank cheque/draft for the sum of Ff110,000 to that account. The payment was to be drawn on the account of Charlton. Now, one might wonder why Charlton should be meeting the golf club subscription of Jack and Helga. It is explained by Mr Simms that, since Eastcastle had replaced Ancon as investor, the money which had derived from Helga's family trust was due for repayment. Accordingly, the payment was simply another distribution to Helga, as principal beneficiary of that trust. There is, however, no evidence at all that Mr Simms discussed this distribution with Maitre Crosier let alone that the trustees/directors of Brinton themselves authorised any such payment. Mr Freedman submits, a submission with considerable force, that this is just another example of Charlton being used as a money box for Jack and Helga and that, in reality, the assets allegedly held within the trust and corporate structure were at their free disposal.
- On 31 Jan 2000 Haig sent a letter to each of Jack, Helga, Mrs Alianza and Mr Ammerman about the dispute. He said that they could be bound by the arbitration and gave them the opportunity to join as parties. Jack and Helga say that they did not receive the letter. I do not believe them and am sure that they did receive it.
- That completes the narrative up to the time of the arbitration.
Brinton: its assets and its control
- Brinton was established (under the name Wildhorse) in 1994 by Maitre Crosier. It was made available by him to Helga as the vehicle by which she could settle her assets for the benefit of herself and her family. It is said by Mr Simms that, prior to this, there was another Helga family settlement created many years before the assets of which were transferred to Brinton. There is virtually no evidence before me about that earlier settlement (but see the discussion relating to Bergalim below) or what assets were comprised in it nor about what assets, if any, were transferred to Brinton from it, or how it was operated. I gain little assistance from what Mr Simms has to say about it in relation to the issues which I need to determine in this action.
- The Claimants have been presented with significant difficulties about finding out anything about Brinton itself. Maitre Crosier has given the following evidence (but he has not made himself available for cross-examination):
a. First, he made a witness statement on 16 November 2004 exhibiting a letter dated 15 July 2004 which he had written to Kingsley Napley & Co, the contents of which he confirmed. In it, he refers to an Establishment (which was, it is now known, a reference to Brinton although the name was redacted) created on 21 February 1994. He says that "certain assets which, as I understand it, had formerly been held in some other form of trust for Helga's family, was settled into [the Establishment]". He encloses with the letter the statutes of the Establishment which had been registered in January 2003 under a new name (ie as it transpires, Brinton) following a name change. He says that there were no beneficiaries with fixed entitlements to income or capital, all benefits being "at the discretion of the Board of the Establishment subject to the Founder's rights". The beneficiaries listed in the statutes include Helga and her issue, but do not include Jack. Maitre Croisier wrote this:
"Since its incorporation, the Establishment has maintained a bank account in Switzerland. Helga Dadourian has never been a signatory on that account and nor has her husband Jack Dadourian. When distributions are made to Helga Dadourian from the trust, they are made from the trust bank account following a decision of the trustees."
b. He made a further witness statement on 12 May 2005. In it, he explains that the Founder was Domar Fiduciary and Management Establishment ("Domar"). It was not until the making of the revised statues (which I infer took place in late 2002 or early 2003) that the current beneficiaries were specified in Brinton's statutes; however, prior to that, one can imagine that Domar did not regard itself as the beneficial owner of the assets (if any) transferred into Brinton by Helga or out of a pre-existing Helga family settlement. However, it is entirely unclear who, prior to the adoption of such articles, the real beneficiaries were and in particular whether they included or excluded Jack. It may be that Domar, at Helga's request, could have procured the adoption of statutes which included beneficiaries, including Jack in addition to those listed in the revised statutes or indeed to have procured that Helga alone should be the absolute beneficiary. I have no evidence about any of this and cannot conclude that prior to the adoption of the new articles, Jack was inevitably excluded from benefit.
c. Maitre Croisier explains that the Establishment is under the sole direction and control of its directors (all of whom have been based in Vaduz). He explains that, for convenience, a bank account was opened for Brinton in Switzerland and that he himself was appointed the signatory on that account adding that "….I do not make executive decisions on behalf of the Board and would implement the decisions of the Board of Directors of the Establishment from time to time".
d. In a letter exhibited to that witness statement, Maitre Croisier writes that
"In the exercise of their discretions the Board of Directors are presently paying a distribution of $25,000 per quarter to Helga Dadourian for her maintenance and support".
- Dr Peter Marxer was, at all material times, and is a partner in the Vaduz firm of Marxer & Partner Rechstanwalte and a director of Brinton. On 3 October 2005 he swore an affidavit in which he confirmed the contents of a letter dated 26 September 2005 to Wallace LLP (the Claimants' solicitors) concerning the assets of Brinton. In that letter he writes:
"The only asset of [Brinton] is a bank account at Banque Privee Edmond de Rothschild SA in Geneva. From the respective statement of account you see that the account shows a balance of USD9514.52. [Brinton] does not own any further assets neither in Liechtenstein, nor in Switzerland or any other country of the world."
This is the same account as that referred to by Maitre Croisier.
- Dr Marxer confirmed this information in a further affidavit sworn (pursuant to a disclosure order made by the English court) on 18 November 2005. He gives information about the movement on the account, stating that all payments had been effected by Maitre Croisier. He does not suggest that Maitre Croisier acted without the authority of the Board and yet it is clear – or at least there is not a scrap of evidence to the contrary – that Maitre Croisier consulted none of the Board about the payments. I should add that the balance of the account on 9 January 2004 was less than $41,000 and that there were no receipts into the account after that date. There is no evidence before me about the state of the account before that date. But what is known is that Maitre Croisier paid substantial sums for Helga's benefit after January 2004 which clearly did not come out of this account (and thus, so far as the directors of Brinton were concerned, not out of assets of Brinton). Further, it is clear that Helga was not being paid, at least since January 2004, $25,000 per quarter out of this account; even if the payments to Maitre Croisier's firm and to Domar were for onward transmission to Helga, they do not amount to nearly enough to meet the suggested payments. Yet Maitre Croisier had said in his letter dated 15 July 2004 that when distributions were made to Helga from the trust, they were made out of the account following a decision of the trustees and in his letter dated 1 November 2004 that the directors, in exercise of their discretion, were paying Helga $25,000 per quarter, which consistently with his earlier letter can only have been out of this account. Maitre Croisier's evidence cannot therefore be correct and, indeed, Mr Freedman says he has lied to the court. Helga, in an affidavit sworn on 10 November 2005, deposes as to various payments which she says she has received from Brinton. It is clear, I think, that she received them from Maitre Croisier but that is a different matter.
- Also on 18 November 2005, Maitre Croisier made a further witness statement. He states that he had met with representatives of Dr Marxer's firm to discuss the legal position as they saw it following Dr Marxer's first affidavit. He explains that the name change to Brinton took place following a request from Helga (through Bower Cotton) made in 1999 to effect that change. He states that in November 1999, one Dr Thomas Feurstein of Dr Marxer's firm had been informed that Brinton was the beneficial owner of the total issued share capital of a BVI company called Republic Investment Company Ltd which in turn he says owned a number of other companies owning properties in France and the UK and other investments.
- Maitre Crosier then goes on to say that it appears that the normal procedure in Liechtenstein is that when new assets are put into an Establishment the contribution has to be accepted as a donation by a resolution of the board of directors. Dr Marxer says the same thing (and that may be the basis of Maitre Croisier's statement) adding that money-laundering procedures would need to be carried out before a donation was accepted. It is clear that no such resolution of the board of Brinton has been effected in relation to Republic or any other companies or assets other than the bank account already referred to. Maitre Crosier says, in relation to Republic, as follows:
"It appears that the reason for this was the following: A meeting took place in August 2000 between Dr Michael Grabher of Marxer & Partners and Mr and Mrs Dadourian where Mrs Dadourian said that she was the legal owner of the shares in Republic. To my knowledge, Marxer & Partner have tried unsuccessfully to clarify the situation."
I do not know what Maitre Croisier is referring to in the last sentence.
- Mr Simms submits that there is no expert evidence about Liechtenstein law in connection with the requirement about accepting donations. He says that "Certainly Maitre Croisier did not believe so and he organised the transfer of the assets from the old trust to the new trust and was aware of the activities which took place between 1997 to 2001 to put other assets into Brinton". Maitre Croisier gives no evidence about this himself nor did the Defendants take any steps to obtain even a preliminary view from an independent expert about whether Dr Marxer is correct, in marked contrast with Mr Simms' alacrity in obtaining the view of a US attorney about the practice in relation to the making of attendance notes.
- So far as Republic is concerned, this appears to have been incorporated in 1999, its shares being held by a nominee company called Intertrust Management (BVI) Ltd. There is a Declaration of Trust dated 1 September 2000 in which the parties are named as Intertrust and Brinton although only Intertrust has executed it. The recitals inform the reader that Intertrust has, at the request and on behalf of Brinton acquired 100 ordinary shares of $1 each in Republic out of funds provided by Brinton; and that Brinton has entered into the declaration of trust at the request of Brinton to record the terms upon which it has agreed to act. The operative parts of the declaration purport to declare Intertrust a trustee on behalf of Brinton absolutely and Brinton appoints Intertrust as its attorney in relation to the shares in Republic. There is no documentary evidence at all that the directors of Brinton authorised the acquisition of shares in Republic or that they know anything at all about this declaration of trust. In any case, Brinton has not executed the document. Nor is there any evidence as to where the subscription monies for the shares came from. It has not been suggested that they came out of the trust bank account although they could, I suppose, have come from Maitre Croisier's client account.
- Mr Simms says that, from the outset, Republic was incorporated as a company owned beneficially by Brinton. Below Republic were other offshore companies owning, in the case of Ardales Investments Ltd, Flat 3, 39 Lennox Gardens, in the case of Libourne Investments Ltd, the basement flat of 14 Lennox Gardens and in the case of Azuri Ltd, the total issued share capital of the French SCI in turn owning 18 Rue de la Tremoille. He says that the evidence in relation to the French apartment is reasonably clear and to the effect that Helga had purchased it with her own money: I agree with that. The apartment had been purchased for less than $300,000.00. It had become much more valuable due to a substantial increase in values in central Paris and a refurbishment of the apartment. It appears that the process of considering putting the French apartment into the trust commenced as early as 1996 but for various reasons, the whole procedure took many years. Eventually the SCI was created and the apartment was put into the SCI in exchange for shares. Those shares were transferred into Azuri Limited, an English company. Mr Simms says that those shares were held under a Declaration of Trust by Mr Sturman (Jack and Helga's US tax attorney) in favour of Republic and that, in January 2005, Mr Sturman, having retired as a lawyer in America, transferred the shares to Maitre Croisier who, according to Mr Simms, continues to hold them beneficially on the same terms. Maitre Crosier has given no evidence in relation to this.
- This summary by Mr Simms needs some further examination. Helga, in her third witness statement, gives a story consistent with what Mr Simms says. In her fifth statement, a rather more detailed explanation is given she says that the decision to put the French apartment into the trust was taken at a later stage (well after the time when the SCI had been formed – Helga says the apartment was put into the SCI in October 1997 - and its shares or at least some of them, for tax reasons, had been placed in a US corporation, Tracey Investments Inc). The shares in the SCI held by Tracey Investments Inc were transferred to Azuri and in September 2001 Helga exchanged her remaining shares in the SCI to Azuri in exchange for shares which she then transferred to Mr Sturman to hold as trustee for Brinton. Those shares were transferred to Maitre Croisier to hold as trustee for Brinton on Mr Sturman's retirement. I have seen no documentation which supports any of this; nor is there any suggestion that the directors of Brinton have accepted the beneficial interest in the shares in Azuri held by Maitre Croisier as a trust asset.
- This is to be contrasted with Azuri's defence and the documents attached to the defences of Libourne and Ardales, namely the declaration of trust to which I have already referred and another declaration of trusts dated 12 November 1999. This latter declaration names Mr Sturman and Republic as parties, although I have seen only a copy executed by Mr Sturman alone. In this document, it is recited that Mr Sturman has at the request and on behalf of Republic, acquired 1000 ordinary shares of £1 each in Azuri out of Republic's funds. Mr Sturman declares that he holds the shares in Azuri for Republic, not for Brinton. So, although the SCI is held by Azuri, it is unclear whether the shares in Azuri are held by Maitre Croisier – assuming that they have in fact been transferred to him – upon trust for Brinton or for Republic (ignoring for the moment the difficulty arising from the fact that Brinton has not accepted any property).
- I should note at this point one other piece of evidence concerning the Paris apartment. On 2 July 1999. Jack and Helga wrote to Mr Simms about the Paris apartment. His manuscript letter contained the following:
"Please try to have this finalized once & for all – and in a simple uncomplicated fashion – making certain that we have total 100% control. No share certificates outstanding to anyone!"
And in a letter dated 23 June 1999 to Mr Simms, Jack writes that certain arrangements concerning a blind trust are acceptable
"so long as it conforms to our wishes and gives us 100% assurance that the control of it rests with us".
- Mr Freedman, unsurprisingly, relies on these letters to show what he says is the reality behind the arrangements which Jack and Helga were making namely that they were to have total control over the apartment whatever the documentation might say. He says that either the property was not really in a trust at all or that, if it was, the trust was regarded as no more than a piece of paper whose provisions were to mean nothing.
- As to Libourne, it was not until 2000 that the basement flat at 14 Lennox Gardens was transferred to Libourne from Nimbo. Although Libourne may be a company under Republic, Nimbo was never within any trust structure and was owned by Helga. Similarly, Ardales, which owned Flat 3, 39 Lennox Gardens, was owned by Helga until 17 August 2000 on which date she executed a declaration of trust of her shares in favour of Republic.
- Accordingly, the Defendants say that, one way or another, the Paris and London properties are under the Brinton umbrella a fact which supports their proposition that their practice for many years has been to place all Helga's assets within the Brinton structure and thus to lend support to their case that Ancon and Charlton were not owned by, or creatures of, Jack and Helga but were within a genuine trusts structure where the trustees controlled events. The Claimants, in contrast, say that the properties were not under that umbrella, certainly before 1999/2000, and that this gives the lie to the Defendants' claim that other assets are not under the control of Jack and Helga.
- Although, as I have mentioned, it is the Defendants' case that Dr Feurstein was told of the declaration of trust of Republic in favour of Brinton, there is no evidence that he or anyone else was told of any declaration of trust or purported transfer of any other assets in favour of or to Brinton, in particular of Ancon or any alleged holding company of Ancon. It will be noted that Maitre Croisier says, in his statement dated 18 November 2005, that Republic held "other investments" as well as, indirectly, the London and Paris properties. That, at least, is how I read his evidence rather than that Brinton was the beneficial owner of those other assets. That reading is consistent with Mr Simms letter dated 19 November 1999 to Dr Feuerstein where he refers to Republic as owning a number of companies which hold various assets, and refers to the assets of the subsidiaries as comprising property in France, the UK and investments. There is no evidence of Republic owning any company holding investment other than the London and Paris properties and, given that Republic was not formed until 1999, if there had been a transfer of other assets to it or its subsidiaries, I would expect Mr Simms to know about it and to have said as much (since to say so would assist, rather than hinder, the case of the Defendants).
- Subject to one piece of evidence, none of the Defendants, nor Maitre Croisier, have suggested that any assets were settled into Brinton or its subsidiary companies apart from Republic by Helga other than the London and Paris properties. And even if they had done so, there is no evidence to suggest that that would be true. All that we have by way of evidence is an understanding by Maitre Croisier that there had been an earlier Helga family trust, the assets of which were settled into Brinton; and statements from Mr Simms to the same effect, although he was unable to give any detail about the assets concerned: whilst one would not expect him to remember the detail of investments, it is surprising that he can, if he is to be believed, give no indication at all of the value transferred into the Brinton structure. Mr Simms repeatedly referred to Maitre Croisier having transferred, or having been responsible for the transfer of, assets from the old trust to Brinton: if that is right, it is strange to find Maitre Croisier observing simply that he had an understanding that assets were settled into Brinton. Surely if he had been involved he would have been able to state of his own knowledge that it had been done and how it had been done?
- The one piece of contrary evidence is what Helga said in cross-examination. She stated that, at the time when the trust was created, certain of her funds and assets were under the control of Maitre Croisier on her behalf. She did not give the court any idea of their value. Helga said that some assets were transferred to the trust in 1994, but she did not recollect precisely what; and she said that she had never received any trust accounts. She went on in her cross examination to say this:
"However, those monies [ie put into the trust] included those funds which were later sent to Bower Cotton in 1997 for the Powerhouse transaction ie $500,000 which when it proved abortive were then I believe in a client account at Bower Cotton. It was from that account that Charlton received funds to cover initial expenses of about $30,000 for Mr Rahman….The remainder of this money went, I understand it, back to the trust."
- Mr Simms, in his cross-examination by Mr Freedman did give some evidence about Helga's assets. He said that by early 1997 he understood Helga to be interested in being told of investment opportunities around $1 million to $2 million. Adding that "I only knew at this time, I was aware that there were several million dollars potentially available" and "I know that in the period of 1994 to 1996 they must have had investments of the order of several million dollars". I think that that is likely to be true evidence and I accept it. And, notwithstanding that Helga has on a number of occasions said that all her assets were settled, it is clear that she does have assets which were not settled (and are not derived simply from subsequent distributions to her from property, or its income, originally settled), in particular Cooke investments and its significant bank balances.
- Unfortunately for Jack and Helga, there is absolutely no documentary evidence and no evidence from Maitre Crosier to support the proposition that assets already under his control were placed in the trust let alone the millions of dollars to which Mr Simms refers. Indeed, such a suggestion is contrary to the evidence which Maitre Croisier does give namely (a) that he understood assets to have been transferred from the old family trust (which would clearly not include assets held by him for Helga) without mentioning the transfer of assets held by him for Helga and (b) that, apart from the Banque Privee account on which he had signatory powers, it is the Board of Brinton alone who manage control and direct the trust. The monies in his client account were clearly under his control and he did not need to, and did not, ever consult Brinton about payments from it. If those were trust monies, he would have been bound to have mentioned that fact in his witness statements which are otherwise totally misleading. If those assets were put into trust, there is no reason, so far as I can see, why Maitre Croisier or Jack and Helga would have wished to conceal the fact.
- In any case, what we do know is that Maitre Croisier has expended the monies in his client account for Helga's benefit. Considerable sums have been so expended, including the payment of significant legal bills incurred by Jack and Helga. Helga says that the money she receives from Maitre Croisier is trust money; she has to say that consistently with her case that she has settled all of her assets. It is telling that Maitre Croisier himself has not given any evidence to that effect, evidence which I would have expected to see if it were true. Mr Simms says that he was not involved in the settling of assets save in respect of the extent of his involvement in creating the structure and the transfer of the London and Paris properties into trust and, as I have mentioned, says that this was Maitre Croisier's responsibility. There is no material before me on which I could possibly conclude that the significant sums paid out by Maitre Croisier for the benefit of Jack and Helga were assets of, or derived from assets of, Brinton or any of its subsidiaries even if I am to accept that Republic and Azuri are within the structure and even if I am also to accept that Bergenlim (as to which see below) was also in the structure. In any event, Helga's evidence is that the $500,000 paid to Ancon by Maitre Croisier was made out of funds which he had previously held for her and not, therefore, out of Republic assets, or Azuri assets or Bergenlim or other assets (if any existed) derived from the earlier family trust.
- In these circumstances, I conclude that the assets which Maitre Croisier held on behalf of Helga were not put into the trust structure and remained Helga's property. In particular, the monies in Maitre Croisier's client account were not trust monies but were Helga's. As to the other assets which had, according to Helga, been held by Maitre Croisier on her behalf prior to the acquisition of Brinton, those assets are certainly not part of the assets identified by Dr Marxer as within the trust; no evidence exists that Maitre Croisier took steps to ensure that they were settled (there is, for instance, nothing before the court similar to the declaration of trust in relation to Republic) and no indication whether Maitre Croisier continues to hold those assets or, if not, how they were disposed of. I do not need to say anything more about them save to observe that it appears that Helga is incorrect in her evidence when she says that all of her assets were settled into Brinton. Indeed, that assertion can also be shown to be untrue by reference to Cooke (which was regarded even by Mr Simms as owned by Helga and which held substantial bank balances) which Helga effectively used as her bank.
- Whether Helga herself fully understood this I am not sure. But what I do consider, taking all of the evidence together, is that she expected Maitre Croisier to comply with her wishes in relation to the property under his control including the balance on his client account. So far as Mr Simms is concerned, the position is, I think, rather different. I have no doubt that he viewed the Brinton structure as a sensible one for Helga to create as a shelter for her assets, particularly in relation to taxation. Whatever his view of how the structure would in fact operate and whether, in practice, Helga's instructions would always be complied with, I find that he intended the structure to have a proper legal form and that, so far as concerns the assets with which he was concerned in 1999-2000, namely Republic and Azuri, he thought that they had been effectively introduced into the trust. I accept that he thought that this was the case following his letter to Dr Feurstein and agree with him that it is surprising that, if there was any doubt about the effectiveness of what had been done, Dr Feurstein made no comment.
Ancon
- The position in relation to the ownership of Ancon is obscure. Although at the end of the day I do not think much turns on this, I should deal with it so that relevant findings are made. The Defendants say that Ancon is within the Brinton structure or, if it is not, that at least they always believed that it was, so that monies being made available to Charlton by Ancon were in effect trust monies or believed to be trust monies. On that basis, the Defendants' case is that Charlton was itself part of the trust structure and not owned by Jack and Helga. The Claimants' case would be weaker, according to the Defendants, if Ancon/Charlton were inside the trust structure than if they were outside it, so the question of ownership (quite separately from the central issue of control) of Ancon and Charlton is not without significance.
- In relation to Ancon, there is not a single document which has been provided which indicates any attempt to place shares in Ancon in Republic or any other company allegedly under Brinton, let alone directly into Brinton itself. It remained entirely obscure in my mind having read the skeleton arguments and witness statements, how Ancon was said to be within the Brinton structure. The answer, if there is one, started to become apparent in Mr Simms' cross-examination but ultimately the fog has descended again. Mr Simms said that his understanding at the time of the formation of Ancon (I understand in 1994) and until recently (although he does not go on to say how, if at all, that understanding has recently changed) was that Ancon was owned by a company called Bergenlim Investments Ltd ("Bergenlim") which he thought might well be a Panamanian company (like Ancon itself). Bergenlim was itself owned, he said, by the trust, that is to say Brinton. There is confusion here, at least in my mind, because it is not always clear whether "owned by" is being used in cross-examination as owned directly or owned indirectly. Mr Simms clarified in relation to Ancon that when he said the trust owned Ancon he meant that it was owned indirectly (ie through Bergenlim). But in relation to Bergenlim itself, I understood him to mean that it was directly owned by the trust. As to that, there is no evidence that Maitre Croisier ever did anything to ensure that Bergenlim came into the trust structure (in contrast with assets purportedly placed into Republic where there was at least a declaration of trust and the letter to Dr Feurstein in November 1999); Mr Simms' letter to Dr Feurstein makes no reference to any company, let alone Bergenlim, other than Republic being brought into Brinton itself and clearly Bergenlim was never in Republic (which was, in any event, only formed in 1999).
- Mr Simms said in cross-examination that Ancon was created as a subsidiary of Bergenlim and also that it was in Brinton. In other words, his evidence at that stage of his cross-examination was to the effect that Bergenlim had been placed by Maitre Croisier in the new trust, Brinton. That is something which we now know, from the evidence of Dr Marxer, was not effectively done, at least if his explanation of Liechtenstein law is correct. Since there is no evidence at all about what, if anything, Maitre Croisier did to transfer Bergenlim from the old trust to the new trust, it is impossible to conclude that there was an effective transfer, particularly as he says only that he understands that assets were transferred from one trust to the other rather than that he arranged for such a transfer.
- All that can be said about Bergenlim itself is that it was apparently an investment-holding company within a Helga family trust. There is a letter dated 30 April 1987 from Mr Simms relating, I think, to a mortgage application by Helga. Helga is there described as the principal beneficiary of a Liechtenstein Trust owning various companies, one of which was Bergenlim. Bergenlim was described as holding US dollar bonds through Credit Suisse with a value of $280,000 and it was stated that the trust also owned a small US manufacturing company with an outstanding loan to a Dutch company of some $329,000.
- Given that Bergenlim was in the old trust and given that there is no adequate evidence that it was transferred to Brinton, the logical consequence is that Bergenlim remained in the old trust – but what has become of that, I have no idea. It is probably believed by Maitre Croisier to have been wound up and from the evidence it is reasonable to conclude that its directors have ceased to act. In relation to Ancon, there is no evidence of Bergenlim having taken any decisions whatsoever or having had any part to play in its management at any time since Ancon's incorporation in 1994, something confirmed by Mr Simms in cross-examination. No doubt Helga was one of the beneficiaries, if not the principal beneficiary, of the old trust and one possibility could therefore be that its assets passed to Maitre Croisier as part of the assets which Helga acknowledges were held by him for her prior to the acquisition of Brinton. Bergenlim is of relevance in the present action only in the context of Ancon, Mr Simms' evidence (although he makes no reference to this issue in his closing submissions) being that Ancon was part of the trust structure because it was owned by Bergenlim. However, it is clear that Ancon has been managed without any reference to Bergenlim, or indeed to the Board of Brinton, and that the only individuals having any part to play in relation to it were Maitre Croisier, Mr Simms, Mr Rahman, Jack and Helga. There is, as I have said, not a single piece of documentary evidence to support the suggestion that Ancon was originally formed as a subsidiary of Bergenlim as Mr Simms said it was, raising the issue for the first time in his cross-examination. On the state of the evidence, I am entitled to infer, and do infer, that ownership of Ancon rested with those who controlled it, namely one or more of the individuals whom I have just named. Since there is no suggestion that Maitre Croisier, Mr Simms and Mr Rahman had any personal interest in Ancon, I conclude that Ancon was effectively owned by Jack and Helga.
- In further support of the inference that Ancon was being used consistently with its being a Jack and Helga company and inconsistently with it being owned by Brinton, I note and adopt the following evidence identified by Mr Freedman in his closing submissions:
a. Its money was held in a client account of Bower Cotton from July 1997 onwards – whilst this was initially for the Powerhouse project, it was not returned when it was apparent that there would be no investment in that project.
b. Its money remained in Charlton for years thereafter.
c. Its money was utilised not only for Charlton but also for Helga personally.
d. Its money was withdrawn at the request of Helga without reference to Maitre Croisier or a trustee or director of the trust.
e. Mr Simms said that he would seek instructions from Maitre Croisier and Helga, not Brinton's directors, in order to transfer money from Ancon.
f. The money transferred for the Powerhouse project was treated at all times by Helga not as trust money, but as money belonging to "us" meaning in context Jack and herself. Mr Simms had said that Helga and Maitre Croisier had authorized the use of the $450,000 originally allotted for Powerhouse for Charlton. Helga said that she believed the $450k stayed in "our client account". (emphasis added)
g. There were cheques which were issued by Helga drawn on Ancon's account which were largely honoured. No reference was made for authority to draw these cheques to Mr Simms, Maitre Crosier or Brinton.
h. Helga gave Mr Simms instructions as regards the operation of the account expecting the same to be honoured so that in particular money would be transferred from the Ancon account to other of her accounts. These instructions were followed without reference to the trustees of the trust or indeed Maitre Croisier. Further, there is nothing to the contrary in the Ancon file or in contemporaneous documents elsewhere supporting the contention that recommendations were made by Mr Simms to the trustees or to Maitre Croisier to be passed on to the trust. This then led to contradictory evidence from Helga as to how such recommendations were made: first, she indicated that there were written communications to Dr Marxer. However, later, when she was shown her November 2005 statement to the effect that she made oral recommendations only, she retracted that evidence.
i. The use by Helga of the Bower Cotton (Charlton) client account which was used to meet various personal outgoings of Jack and Helga and substantial payments to Cooke including, on 5 November 1999 a single payment of $150,000.
j. Payment for the Paris golf club subscription. The instruction was to pay out of Dunmurry (a company claimed by Helga to be part of the trust but as to which there is no evidence), but this was not adhered to, and the payment was made out of Charlton. Mr Freedman says that whether it was to be from Dunmurry, Charlton or Ancon, it all comes to the same thing: it was completely inconsistent with the existence of the trust for the instructions to come from Helga without the involvement of the trustees.
k. Evidence of Helga that she was "the client" in relation to the Ancon client account at Bower Cotton.
"Q. You were the client?
A: I was the client, yes.
Q: The client in relation to the Ancon Group account?
A: Yes".
l. Mr Rahman writing on Ancon notepaper and procuring his daughter to forge the signature of Snr Galindo, a director of Ancon. This showed that Ancon was being operated by Mr Simms and Mr Rahman, so far as concerned the Powerhouse projects, at the behest of Jack and Helga. (Mr Simms was copied in to the document and could see that it was a forgery but did nothing to recall it). Mr Freedman says that the evidence of Mr Rahman about the Galindo letter which he wrote and his daughter signed, and Mr Simms saw, is revealing:
"Q. It is a complete fiction that there were directors of this company in Panama other than on paper. The reality is that this company was not being directed in Panama or by its nominee directors. A. You may be quite right about that, I frankly do not know, but as I said you may be quite right. Q. You do know. A. No, I do not know. Q. You know perfectly well, because you did not refer to him in relation to this important document. On the contrary, you wrote it, pretending to be him. A. Yes, I did do that. Q And with no authority at all other than the people that you were acting on behalf of, Mr and Mrs Dadourian. A. Yes. You are right to that extent."
and
"Q And you would act on the instructions of Mr and Mrs Dadourian and, indeed, that is what you do in the letter, is it not? A.. Well, I was never put in that situation but I think what you are saying is not incorrect at all."
and
"Q … In other words, Ancon was Mr and Mrs Dadourian. A. Well, I knew they had something to do with it but, as I keep on saying, I do not know the structure. I do not know how it is done. I think I did not even know the name until I was given. Q. In other words, Ancon, as far as you were concerned, was Mr and Mrs Dadourian for all practical purposes. A. You have a point there. I am not denying. Q.. In other words you agree? A.. I do not agree but I am not disputing you either. I do not know how to put it, frankly. But ... Q. They were going to provide funding of $1.6 million, Mr and Mrs Dadourian, were they not? A. Yes, that is right."
and
"A…. I do not know how the money came in, but I knew that at the end of the day the decisions certainly lay with Mr and Mrs Dadourian. Q. It might be suggested that you were being evasive because it is your letter saying: "Following the meeting with Mr Rahman, Ancon made arrangements with its bankers for immediate transfer of US$600,000." A. Yes, I had a meeting. Q. So you must have had in mind Mr and Mrs Dadourian. A. Yes, I did, because I met nobody else apart from them. Q. Thank you. And the confirmation of this was made available to the board of directors of PRI on 10th July 1997 when it met formally to approve the transaction. Then if you go down to the next paragraph: "You will no doubt agree that during this short period of 20 days only between 21st June and 10th July Ancon had on their part acted with a sense of utmost urgency." In other words Mr and Mrs Dadourian, correct, when you say "Ancon"? A. Yes, but I also had a part to play there. Although I was not part of Ancon."
m. Mr Rahman's evidence where, in respect of a meeting with Nat West to open a letter of credit, it is identified in the attendance note that Charlton had $1/2 million, he said that that money had been provided by Jack and Helga through Ancon.
n. Mr Rahman said in answers to Mr Ashe in cross examination
"….I knew that in some form or other, you know, Jack was involved with Ancon, although I did not know the legal structure, the corporate structure or any such thing. I knew for the simple reason that although the money came from Ancon, I mean legally speaking, Jack and obviously Helga too were behind the people who instructed such funds to be remitted."
o. Mr Rahman, referring to a memo at to Jack and Helga about fairly small proposed computer expenditure (where he sought their comments and authorisation) said the following:
"Q. … In what capacity were you sending that memorandum to Mr and Mrs Dadourian? A. Well, at that time and even subsequently I knew of course, as I have indeed admitted several times, that whatever may be the company structure or the structure through which monies were coming in, at the end of the day it was Jack and Helga. So there is nothing to hide over there. I have admitted it in the past also. That at the end of the day it was Jack and Helga and therefore it was necessary to refer to them? A. At the end of the day, the money was coming from them. I again say I do not know and I am still not clear to this day what the legal structure was, but I did know that the money at the end of the day was essentially theirs."
p. The way in which the $500,000 allocated for the Powerhouse project and then for the Bangladesh project was dealt with. Brinton did not know or was not told that the this money had not been used in this way which suggests that Brinton cannot have been exercising any or any independent discretion in respect of the same, or more likely that Brinton never owned directly or indirectly the money. If Brinton had authorised the money to be invested, then it is incredible that thereafter they permitted the money to be used at the will and say-so of Helga.
- Moving on from there, the evidence shows that the principal, if not the only, transaction with which Ancon was concerned prior to its involvement with Charlton and the Bangladesh project, was the Powerhouse project. The funding for that, and of the expenses incurred, came from money injected into Ancon from Maitre Croisier's client account. For the reasons already given, that money, in my judgment, was Helga's money and not trust money. One of the documents disclosed at a very late stage during the course of the hearing was a memorandum prepared by Mr Rahman in anticipation of a meeting in Paris with Jack and Helga on 30 July 1997. In the memorandum he recorded the history of the Powerhouse projects. It is absolutely clear that Jack and Helga were involved from beginning to end of the project and, as we now know, the funding came from Maitre Croisier's client account. The memorandum records Ancon's willingness to participate in the projects, taking a 60% stake through a new company, Charlton. Ancon was stated to have made a financial commitment of $1.1 million of which $600,000 was made available in cash towards capitalisation of Charlton. It was this sum which eventually found its way to a Bower Cotton client account on behalf of Charlton, although the extent to which this was capitalised and when is a matter of obscurity. The memorandum then explains that the deal was rejected by the directors of Powerhouse. It sets out the purpose of memorandum, namely to consider a business plan for Charlton or for an altogether new company to be formed with a number of stated objectives expressed, I must say, in very general terms. Certain projects in the energy/power sector are identified, with investment up to $2.5 million.
- The memorandum then goes on to identify a number of other opportunities, including acquisitions of two hotels and an employment agency. The total cost of acquisition of the three projects was stated to be about £2.3 million, with banks being willing to provide finance of up to £1.7 million. A partner, Mr Fitzsimmons, appeared to be willing to inject about £250,000, leaving a shortfall of £300,000 which Charlton/Newco would provide. Finally on projects, Mr Rahman identified some other business which could usefully be discussed at the anticipated meeting. I have no doubt that many, if not most, investors in projects such as those identified by Mr Rahman would expect to do so through a corporate vehicle, especially where joint ventures were concerned. It is entirely unsurprising that Mr Rahman's proposals were for a business plan for Charlton/Newco and I would not expect individuals to enter into any of the projects under consideration in a personal capacity.
- The memorandum contained a section on corporate and management structure. Although referring to Newco, Mr Rahman points out that Charlton was already in existence and could itself be used as the vehicle for developing the businesses. It will be remembered that Charlton had been acquired as a Bower Cotton company. Whatever the strict legal position in relation to the shareholding in Charlton, it is absolutely clear to my mind that Charlton, at latest from the time it was appropriated to the Bangladesh project, became beneficially owned by some person in the Jack and Helga camp, whether that someone was Brinton, Ancon or Jack and Helga themselves. It is simply not possible to regard Mr Simms, or any of his partners, as the beneficial owners of Charlton notwithstanding that the registered shareholders may have been persons other than Ancon. In formal terms, it is reasonably clear that that someone was in fact Ancon, leaving aside the question whether Ancon was itself a creature of Jack and Helga. Certainly, the memorandum envisages Newco/Charlton being owned by Ancon, with the possibility of co-investors, such as Mr Fitzsimmons, coming in.
- One can see from this memorandum two things. First, it shows that Jack and Helga's involvement was central to Ancon's own involvement in the negotiations for the Powerhouse project. And secondly, it showed that, for the future, Jack and Helga were being consulted because Mr Rahman, at least, regarded their input as central to any further business of Ancon and Charlton/Newco. There is no suggestion in this memorandum that any third parties had been or would need to be consulted, for instance Maitre Croisier or the board of Brinton, and this may well be because Mr Rahman had no idea of their existence. What is clear is that Mr Rahman looked to Jack and Helga alone for consent and direction in relation to strategic plans; and that is consistent with how he explained their role, as he understood it, at a later stage in relation to the Bangladesh project.
- But even if it is wrong to conclude that Ancon was not within the trust structure and wrong that the substantial assets which had been under the control of Maitre Croisier - used to fund Ancon and Charlton, as well as to meet the substantial legal fees of Jack and Helga and various other outgoings – were also not within the trust structure, then it is said that, nonetheless, Brinton is, in reality, the creature of Jack and Helga. There are at least two strands to this. The first strand is that in spite of the apparent provisions of the statutes of Brinton, Helga was in fact the sole beneficiary and not simply the principal, discretionary, beneficiary. The second strand is that whatever the legal position, it was always intended (by whom I shall turn to in a moment) that Jack and Helga should be able to "call the shots" in relation to Brinton.
- So far as concerns the first strand, Mr Freedman points out that Jack gave evidence both before Mann J and in his cross-examination in this action to the effect that Helga was the sole beneficiary and that the word discretionary did not feature in his evidence. I would agree with the suggestion that Jack and Helga perceived Helga as the principal beneficiary in the sense that, during her lifetime, it was expected that Brinton's assets could be applied for her benefit and that they would be unlikely to be applied for anybody else's benefit. But whether Jack's evidence can be interpreted as accepting that his and Helga's understandings were that they (or she) would have absolute control over the assets, I rather doubt. Certainly, the formal documentation – the statutes of Brinton - is inconsistent with Helga being the only beneficiary; and there is nothing to suggest that the board of Brinton regarded that as the position. It follows that, assuming Brinton to be a genuine and not a sham entity, the statutes cannot be disregarded on the footing that the board of Brinton intended all along that they should be treated as having exercised their discretion to appoint Helga as sole beneficiary when, as a matter of legal form, they had not done so.
- Similarly, so far as concerns the second strand, the "sham" doctrine as applied to trusts requires that the trustees, as much as the settlor, be a party to the sham and the same goes, I think, for an entity such as an anstalt. I do not overlook the fact that Maitre Croisier was the signatory on that account and that he appears to have made distributions from it without reference to Brinton but this is not, I consider, enough to establish that the statutes do not reflect the real intention of the board. Accordingly, I do not consider that there is anything in the first or second strands so far as concerns Brinton and its directors.
- However, the position may be different in relation to Maitre Croisier vis a vis any assets (apart from the Geneva bank account) which might, contrary to my actual finding, be said to be within the trust and which were under his control, that is to say the monies in his client account which were, in the event, distributed by him to Ancon and to Jack and Helga (including distributions for her benefit to Cooke) and in the payment of Jack and Helga's legal fees. Assuming for the purposes of this argument that these assets were, as a matter of legal form, placed under the Brinton umbrella (eg as in the case of Republic by a declaration of trust if that was, contrary to Dr Marxer, effective), the structure was nonetheless one under which some assets came under and remained under the control of Maitre Croisier and never fell under the direct control of Brinton. I note, again, that how this state of affairs might have come about is entirely obscure since Maitre Croisier has not given evidence about any of this. But on this scenario I would be entitled to infer, and would so infer, on the totality of the evidence which I have seen that Maitre Croisier intended to produce a structure under which he could, and would, distribute assets to Jack and Helga or for their benefit without reference to Brinton.
- That is not to say that Brinton itself was in any sense a sham. Rather, it is to say that Maitre Croisier intended that he could and would deal with the relevant assets without reference to Brinton and that he would in practice do so at the request of Helga or Jack and Helga together. Accordingly, if it suggested that Mr Croisier was intended by himself and by Jack and Helga to hold the assets subject to Brinton's direction, I would reject that suggestion; and if it is suggested that he was himself to hold them subject to the same discretion, exercisable by him, which Brinton would have had if the assets were under its control, I would reject that suggestion too. If, as I say contrary to my primary finding, these assets were within the trust structure as a matter of legal form, I would be entitled to infer and would so infer, that the money in Maitre Croisier's client account was at Jack and Helga's disposition.
- In particular, the transfer of monies to Ancon for the purposes of the Powerhouse project was, I find, something which Jack and Helga were in practice able to and did procure. Further, when that project came to nothing, Mr Simms, Jack and Helga felt able to use the funds within Ancon to fund Charlton for the purpose of the Bangladesh project and, when that failed, to distribute, I hold, the balance of the funds derived from Maitre Croisier (via Ancon) to Helga or for her benefit (and not, contrary to what Helga says, back to Maitre Croisier on behalf of the trust). Mr Simms says that these transactions were effected only after discussion with Maitre Croisier, and that may well be true. But Maitre Croisier made no reference to the boards of Brinton or any of the other companies allegedly within the trust structure for authority to agree as Mr Simms says he did. It is interesting to note, in relation to distributions which were unquestionably made from funds within Charlton or Ancon to Helga or for her benefit, including to Cooke, that Mr Simms justified them as payment of funds which were no longer required for the original purpose (ie the Powerhouse project and then the Bangladesh project) and which had originally been applied for her benefit in the first place by paying them to Ancon and then onto Charlton. This must, in my view, mean that Helga and not the trust is to be treated as funding Ancon/Charlton even if the funds were, contrary to my finding, within the trust structure.
- I would add this in relation to the Brinton structure. It is commonplace, as both Mr Ashe and Mr Simms say, for wealthy individuals to set up trust structures in offshore jurisdictions with corporate structures beneath them. The reasons for doing so vary enormously, ranging from legitimate tax avoidance and legitimate desire to keep assets from public scrutiny, to dishonest tax avoidance and dishonest scams where secrecy about the real ownership is important. But whatever the reasons, if such structures are to withstand attack as shams or cloaks, or perhaps as merely irrelevant, it is vital, as a first step, for those who use such devices to ensure that the legal structure and vesting of property are dealt with properly. The problems facing Jack and Helga in the present case are not simply restricted to refuting the suggestions that Brinton is a sham and that the corporate veils of the various companies should be lifted; their problem comes at an earlier stage in showing that the relevant assets are in the trust structure in the first place. For if they are not in the Brinton trust structure, the inevitable inference is that they are owned by Jack and Helga personally save, perhaps, to the extent that they can be shown to remain in the earlier family trust. Moreover, I consider that it is incumbent on Jack and Helga to demonstrate the genuineness and effectiveness of the structure given (a) the doubts which have arisen about the effectiveness of the declaration of trust over Republic and the absence of any documentary evidence showing how Bergenlim was introduced into the Brinton structure and the formation of Ancon under Bergenlim and (b) the source of the monies distributed by Maitre Croisier which cannot, as I see it, be accounted for as representing, or being derived from, assets which are actually known about ie Republic and its subsidiaries and Bergenlim.
- This brings me next to the ownership and control of Charlton itself. Mr Freedman has made submissions to the effect, if I may summarise it, that Jack and Helga's use of various corporate entities some of which are and some of which are not said by them to be under Brinton, shows that these corporate entities are their creatures and used by them as they please. In particular, he points to the way in which the London and Paris properties are used without any reference to anyone else and he points to the requirement expressed by Jack in relation to the Paris apartment that "we" [Jack and Helga] should retain 100% control. Be that as it may, I must look at the alleged ownership and control of Charlton by Jack and Helga on the evidence before me. I do need to say that I derive little assistance in addressing the question whether it is appropriate to lift the corporate veil of Charlton by examining the position in other companies, albeit that a consistent result has obvious attractions. The Claimants want that veil to be lifted in order to make Jack and Helga liable to meet the arbitral award made against Charlton and to enable them to assert a misrepresentation claim based on alleged concealment of the fact that Charlton was owned and controlled by Jack and Helga: it is said that Charlton is a sham, a façade, a cloak for Jack and Helga's activities and that they must stand behind it and meet its liabilities. It is an essential part of the argument on lifting the veil that Jack and Helga have acted dishonestly vis a vis DGI so that it is not possible, I think, to address that question separately from the issues of fraudulent misrepresentation and conspiracy alleged against all the Defendants. Accordingly it is to the issues of fraudulent misrepresentation and conspiracy to which I now turn.
Fraudulent misrepresentation
- In considering the issues of misrepresentation, it is important to bear in mind the distinct positions of each of Mr Simms, Mr Rahman, Jack and Helga. Even if it is a fact that one of them has made a fraudulent representation it does not follow that any other of them has done so. Further, if it is correct that Jack's knowledge about the need to acquire the General Equipment is to be imputed to Charlton (as the arbitrator held that it was) it does not follow that Charlton's (imputed) knowledge is to be further imputed to Mr Simms or Mr Rahman. It should also be borne in mind that there is a distinction between misrepresentations made before, and those (including continuing representations first made before that time) made after, the making of the Option Agreement. It is only the former which could have been relied on by the Claimants in entering into the contract.
- It is also important to bear in mind that the cause of action relied on is the tort of deceit; this is not a case where it is sought to set aside the contract for misrepresentation. To establish liability in deceit, there must, in general, be a clear positive act or representation, mere silence, however morally wrong, not supporting an action in deceit. However, adopting the representation of a third party can be sufficient. As Lord Maugham puts it in Bradford Third Equitable Building Society v Borders [1941] 2 All ER 205 at p 211 in stating the requirement for deceit
"First, there must be a representation of fact made by words, or it may be, by conduct. The phrase will include a case where the defendant has manifestly approved and adopted a representation made by some third person. On the other hand, mere silence, however morally wrong, will not support an action of deceit…."
- The alleged misrepresentations are set out in paragraphs 8 to 8C of the Re-re-amended Particulars of Claim; subsequent further particulars have been given in answer to requests from the Defendants.
- The first set of misrepresentations set out in paragraph 8 are alleged to have been made by Mr Simms and/or Mr Rahman prior to 11 September 1997 expressly and orally. It might be thought to be slightly surprising that an allegation of fraud is said to be made by Mr Simms "and/or" Mr Rahman, which would indicate that there is some doubt which of the two it was. Be that as it may, the misrepresentations alleged were these:
a. Each of Mr Simms and Mr Rahman owned major shareholdings in Charlton.
b. Charlton was (i) a sound trading company (ii) which was creditworthy and (iii) capable of performing its financial obligations under the Option Agreement.
c. Charlton was a company experienced in manufacturing various products in Third World countries which could not be manufactured profitably in the West. It is alleged that this representation was made by Mr Simms to Alex in at least one phone call from London to New York in about August 1997.
- In relation to those misrepresentations, it is alleged that at all material times, (a) Mr Simms knew from his long association with Jack and Helga and (b) Jack and Helga themselves knew, that the Claimants would not have contemplated entering into the Option Agreement or being involved in any business with Charlton if they had known that Jack and Helga were involved other than as intermediaries. No similar allegation is made against Mr Rahman. Although, if established, that allegation is of great evidential and forensic advantage to the Claimants, it is another proposition which is of real importance, namely that DGI would not in fact have entered into the Option Agreement if it had known of Jack and Helga's involvement. It is not logically necessary, in order to establish that proposition, that Mr Simms, Jack or Helga knew that to be the case albeit that, if they did not know, then the Claimants might have a more difficult task in establishing all of the necessary components to found a claim in deceit.
- It is then said, in paragraph 8B, that, by representing that they were the major shareholders in Charlton and/or by actively concealing and continuing to conceal the fact that Charlton was owned and controlled by Jack and Helga, Mr Simms further represented that Jack and Helga had no involvement in Charlton nor with the intended transaction the subject of the Option Agreement other than as intermediaries between Charlton and the Claimants. No similar allegation is made against Mr Rahman. The representations in paragraphs 8 and 8B are referred to as "D1/D2 Representations" and I shall use the same expression: it is slightly inaccurate because, as I have just said, it is not alleged that Mr Rahman made the further representations in paragraph 8B quite possibly, one might think, because it was considered that his state of knowledge of the involvement of Jack and Helga was different from that of Mr Simms.
- Paragraph 8C contains a further or alternative allegation namely misrepresentations by Jack and Helga in about August 1997 (referred to as "D3/D4 Representations" and again I shall use the same expression) as follows:
a. Expressly to Alex that Charlton was a company experienced in manufacturing various products in Third World countries which could not be manufactured profitably in the West and
b. Expressly or impliedly or by conduct to the Claimants that they or either of them were mere intermediaries when in fact they owned and controlled Charlton. Reliance is placed on emails and correspondence referred to in a witness statement of a Mr Clarke dated 27 August 2004. Since some of that email and other correspondence post-dates August 1997, it is not easy to see how the entirety of it can be relied on as giving rise to an implied representation or a representation by conduct in August 1997.
- As to the D1/D2 Representations, there is no dispute that some of them, if made, would be incorrect. Thus Mr Simms and Mr Rahman did not own major shareholdings in Charlton, Charlton was not a sound trading company nor was it experienced in manufacturing. Mr Simms and Mr Rahman would clearly have known that such representations would have been incorrect. More open to dispute is whether Charlton was either creditworthy or capable of performing its financial obligations. The implication of paragraph 8B is that Charlton was in fact owned and controlled by Jack and Helga. The matter is, however, expressly dealt with in paragraph j of the particulars of falsity set out in paragraph 10(A): it is pleaded as follows:
"[Jack and Helga] were not intermediaries, but they owned, directed and controlled Charlton. They were using Charlton as a façade fraudulently to conceal their true involvement in the Option Agreement and in the matters the subject of it. They were involved in all executive acts of Charlton and whatever decisions-making process was embarked upon for the performance of such acts."
- However, paragraph a. of the same particulars states that Charlton's issued share capital was, on 11 September 1997, owned by Ancon. The apparent inconsistency between paragraphs a. and j. is partly explained in Further Information subsequently provided where it is stated that the involvement of Jack and Helga "was in the sense that they owned, directed and controlled Ancon which was the registered owner of Charlton" and states that Jack and Helga "as true owners and controllers of Charlton, were involved in all executive acts of Charlton…."; further reliance was there placed on the letter of 5 August 1997 on Bower Cotton notepaper to demonstrate the extent of the involvement which Jack and Helga were to have.
- Further, if, as is alleged, Mr Simms and Mr Rahman impliedly or indeed expressly alleged that Jack and Helga were mere intermediaries and nothing more, that would, in my judgment, clearly be wrong and would have been known to Mr Simms and Mr Rahman to be wrong, as will be seen. It is perhaps worth noting that Helga herself was probably not an intermediary or introducer at all: she had no involvement or input into that side of things and was concerned only with decision making in relation to the application of funds and some strategic input into the Bangladesh project.
- As to the D3/D4 Representations, it would certainly have been untrue to say that Charlton was experienced in manufacturing various products in the Third World and it would have been known by both Jack and Helga to be untrue. As to the representation that Jack and Helga were mere intermediaries, the Claimants rely on the particulars in paragraph j. which I have already referred to.
- Paragraph 11 of the Re-re-amended Particulars of Claim then set out an allegation that the Representations were made by the makers "fraudulently knowing the same to be false, or not caring whether they were true of false" and particulars of fraud are then set out.
- As to the D1/D2 Representations, it is said that Mr Simms and Mr Rahman knew or must be taken to have known that they were untrue. There can be little doubt, in my judgment, that if they were made, then they were known to be untrue save that there is room for doubt in the case of the representations concerning creditworthiness and capability of performing financial obligations. Similarly, if Mr Simms and Mr Rahman represented that they were major shareholders, they would have known that to be untrue. Moreover, if the claimants establish the representation as to shareholding "and/or" (as they put it) the concealment of Charlton's ownership and control by Jack and Helga and if it is correct to treat those matters (separately or cumulatively) as a representation that Jack and Helga had no involvement other than as intermediaries, Mr Simms and Mr Rahman would have known that that representation was wrong.
- Another aspect of the alleged fraud by Mr Simms and Mr Rahman is this. It is said that Ancon was controlled by the family trust which were bare trusts controlled by Jack and Helga; in contrast, and more helpfully from the Claimants' point of view, I have determined that Ancon was owned by Jack and Helga or least by Helga, so that there is no need to refer upwards to Brinton and to look at the control of Brinton. The particulars then go on to say this:
"Notwithstanding their knowledge that the Claimants would not have contemplated entering into the Option Agreement or being involved in any business with Charlton if they had known that [Jack and Helga] were involved other than as intermediaries, [Mr Simms and Mr Rahman] at no time disclosed to the Claimants [Jack and Helga's] true involvement nor their ownership, direction and control of Charlton nor the fact that at all material times Mr Simms and Mr Rahman acted when dealing with Charlton's affairs under [Jack and Helga's] control."
Then it is said that they represented that they owned major shareholdings in Charlton as a cover-up for the fact that the true ownership of Charlton was by Jack and Helga.
- As against Jack and Helga, it is alleged that they knew or must have known that Charlton had no manufacturing experience. I do not consider that that can seriously be challenged and I do not understand Mr Ashe to submit otherwise. What is disputed is that Jack said that Charlton was so experienced. It is, of course, the case that Jack and Helga both knew precisely what the actual involvement of each of them was and which in my judgment went beyond Jack being mere intermediary. Accordingly, if the representation was made as alleged, it was known to be incorrect. Again, I should say in relation to Helga that there is no evidence which would support a finding that Helga herself expressly represented that Jack was only an intermediary. I shall, in any case, be dealing with the "intermediary representation" in more detail later.
- It is then alleged that Mr Simms and Mr Rahman made the D1/D2 Representations and that Jack and Helga made the D3/D4 Representations in order to induce DGI to enter into the Option Agreement and that, induced thereby, DGI did so. It is also alleged that the Representations were continuing representations made up until at least DGI's termination of the Option Agreement on 18 September 1998 and were made by Mr Simms, Mr Rahman, Jack and Helga not only in order to induce DGI to enter into the Option Agreement but also to abstain from terminating the Option Agreement by continuing to make it believe in the truth of the Representations. That, of course, raises the question whether DGI would have been able to terminate the Option Agreement if the continuing representations had not been made.
- Those, then, are the pleaded claims in fraudulent misrepresentation. Before making a determination about which, if any, of the representations were made and if so by whom, I need to deal with the alleged ownership and control by Jack and Helga of Charlton.
- As to ownership, I have already decided that Ancon was owned by, and therefore under the control of, Jack and Helga or Helga alone. The funds which went into Charlton from Ancon came from Maitre Croisier and were, as I have also decided, Helga's monies. Ultimate control of Charlton was therefore vested in Jack and Helga or Helga alone since they or she were able to use their control of Ancon – through ownership of it - to control Charlton. It does not make any difference to the issue of control in that sense whether or not it is appropriate to go behind the corporate structure of Ancon, to lift the veil of incorporation.
- The allegation in relation to control (in the sense of actual direction of Charlton) is that Mr Simms and Mr Rahman acted under the control of or at the direction of Jack and/or Helga through the entire period from the inception of the negotiations for the Option Agreement through to the end of the arbitration. It is, accordingly, part of the allegation that Mr Simms took his instructions in relation to the arbitration from Jack and/or Helga. Mr Simms and Mr Rahman are therefore, it is pleaded, to be treated as the agents of Jack and/or Helga. Thirteen specific matters are pleaded in paragraph 17 of the Re-re-amended Particulars of Claim under the heading "Particulars of Control and Direction".
a. In paragraph (a), it is said that Mr Simms and Mr Rahman were directors of Charlton, whose sole shareholder was Ancon. Although the pleading is that Ancon was controlled by the family trust, I have decided – and this assists the Claimants more than their pleaded particular – that Jack and Helga or Helga alone owned Ancon
.
b. In paragraphs (b) to (m), reliance is placed on a number of the emails and letters which I have referred to in the narrative which I have given (letters dated 22 September 1997, 1 October 1997, 20 October 1997, faxes dated 25 November 1997, 11 January 1998, letters dated 15 January 1998, 27 February 1998, 11 March 1998, 15 March 1998 and 22 March 1998). I am entitled to, and do take account, of the entirety of the documentation including that which has come to light during the course of the trial and the oral evidence.
- Although Charlton started off as a Bower Cotton off-the-shelf company, it was, perfectly properly, identified as available for use by Jack and Helga or Helga's family trust and appropriated for that purpose. It was identified by Mr Simms and Mr Rahman as the vehicle through which Jack and Helga or the family trust could invest in a number of projects which were under consideration and which were discussed by Mr Rahman in Paris and identified in his memorandum prepared for his meeting in Paris with Jack and Helga in late July 1997. In relation to those projects, it was envisaged that there might be investment by others (eg Mr Fitzsimmons) who would take an equity stake in Charlton.
- The Bangladesh project was additionally identified and discussed between Jack, Helga and Mr Rahman in Paris. Mr Rahman reported the outcome of his meeting to Mr Simms. From Mr Simms' letter dated 5 August 1997 to Jack and Helga, it is apparent that, at that stage, the Bangladesh project was not the only project under consideration by him via "Ancon/Charlton" to use the heading of his letter. There were a number of potential projects in which investment might be made and in relation to which there is no reason to think that Charlton would be anything other than a perfectly proper and sensible corporate vehicle through which to carry them out.
- In fact, none of these other projects went forward, although investigations were made and, at least in relation to the possible hotel ventures, Helga took a close interest. So far as concerns the Bangladesh venture, it soon became clear, if it was not clear right from the beginning, that Charlton itself would not be involved in Bangladesh and that Bangladeshi investors would not take an equity stake in Charlton itself. Instead, a new Bangladeshi corporation would be established in which Charlton, along with other investors, would have a stake, the Tooling and General Equipment being sold on to that new company.
- The project would not, however, be able to get off the ground unless someone put effort into establishing the new company and obtaining finance for it. In turn, it was apparent that the desired funding was itself dependent on showing some sort of guaranteed market for the products manufactured and it was in that context that what has been referred to as the buy-back arrangements formed an essential part of the business plan. It was Mr Rahman's job to put together the Bangladeshi end of things: he did so in his capacity as managing director of Charlton. It was he, with some assistance from Mr Simms on occasions, who dealt on a day-to-day basis with that end of the project: I find that neither Jack nor Helga were involved in discussions with investors and bankers nor did they direct Mr Rahman or Mr Simms about the detail of their negotiations.
- Equally, the project could not proceed without the acquisition by Charlton of the Tooling and General Equipment. It was Mr Simms' function within Charlton, with some assistance from Mr Rahman, to negotiate the terms of the acquisition agreement (which in the event took the form of the Option Agreement) and to arrange the financing for that acquisition by means of a letter of credit as envisaged in the Option Agreement itself. Again, I find that neither Jack nor Helga were involved in discussions with bankers or in negotiating on behalf of Charlton a buy-back agreement which could be presented to the new Bangladeshi company. Mr Rahman's executive function was, indeed, identified at a very early state in Mr Simms' letter dated 5 August 1997 to Jack and Helga.
- That is not to say that Jack and Helga were not involved in the project. In my judgment, they clearly were as is shown by the correspondence which I have recited in the narrative and, in particular, in the material referred to in paragraph 17 of the Re-re-amended Particulars of Claim. It is to my mind perfectly clear that Charlton – or any other company which might have been the NewCo referred to in Mr Rahman's memorandum for the 30 July 1997 Paris meeting – would not have become involved in the Bangladesh project and would not have entered into the Option Agreement if Jack and Helga had not agreed that it should: there is to my mind no question that Mr Simms and Mr Rahman would have proceeded without Jack and Helga's express approval.
- Further, there can be no serious challenge to the proposition that Jack and Helga were kept fully informed about progress on all aspects of the project at least until Eastcastle purportedly became involved; they knew what was happening about finance in both Bangladesh and London and they knew the progress on the buy-back arrangements which, indeed, Jack was regularly mentioning to Alex and Haig. But more than that, I consider, and so find, that Jack and Helga were involved in all the strategic decisions; I believe that they were not only informed, but also consulted about the direction of the project. Although they were not involved in the day-to-day detail, this project could not have proceeded, unless the financial commitment from Jack and Helga (or as they would say, Helga's family trust) continued. I have no doubt, either, that Jack and Helga could, at any time, instruct Mr Simms and Mr Rahman that there could be no further expenditure of money which they (or according to them, Helga's family trust) had provided.
- However, I do not consider that Jack and Helga were in control of the direction of Charlton in the sense that Mr Simms and Mr Rahman had, in an unquestioning way, to obey their instructions. However, having said that, I do consider that, so long as Jack and Helga continued their financial commitment to Charlton, they were in ultimate control because they were in a position to replace Mr Simms and Mr Rahman as officers of Charlton.
- As to Jack and Helga's financial commitment, it is said – and Helga's evidence was to this effect – that she was only providing seed capital to get the project off the ground. In contrast, Mr Freedman suggest that the evidence shows, as it does, that Helga had substantial sums available for investment; and invites me to infer that a considerable sum was to be made available for the project.
- It does not seem to me to matter much which of those positions is correct. What is important is that it was envisaged that Charlton would be making a substantial profit on this transaction, both as a result of the onward sale of the Tooling and General Equipment to the Bangladesh company and, at least if the project was a genuine one intended to be profitable, by sharing in the profits of the Bangladesh company.
- Helga gave some astonishing evidence – which I totally reject – to the effect that she was not motivated by, or concerned with, any profit. She says that she agreed that funds should be made available as seed capital because she wanted to help the family by enabling the Tooling to be disposed of after all the years of moth-balling. If that were true, it is incredible that she did not make sure that Alex and Haig knew of her generous attitude. It is clear, to my mind, that she spun this unbelievable story in order to show that Jack and she had no financial interest in the project which needed to be disclosed to DGI. In my judgment, the reality is that both of them hoped to see large profits made for Charlton in which Jack and Helga (or, on her account, Helga's family trust) would participate.
- It is worth noting how this profit would arise.
- First, there is the profit on the onward sale of the Tooling and General Equipment at a large uplift in price to the Bangladesh company. It makes no difference to the principle that profit should be made that the actual purchase price on the onward sale was to pass to the Gibraltar company (also owned by Ancon) although one does wonder what motive there might be for having the price received other than by the vendor, Charlton. I appreciate that, at least on one account, a considerable investment in the Bangladesh company would be required; but I have seen nothing which suggests that Charlton was ever going to commit itself to an equity investment of much more than $3 million, leaving it with a large profit. Of course, Charlton would have to spend considerable sums in getting the project off the ground, so that it might be said that the total investment would be the combined total of the $3 million-odd equity investment plus those expenses. But as the manuscript sheet of figures in Jack's handwriting shows, there was, to put it at its lowest, an expectation that those expenses would, pro tanto, reduce the equity required. There was, accordingly, a large anticipated profit even if the Bangladesh company became massively insolvent with no return on capital at all.
- Secondly, it is part of the Defendants' case that the Bangladesh project was a genuine one. There was, accordingly, a hope and an expectation, of profit which would be distributed by way of dividend to Charlton or to the Gibraltar company.
- In these circumstances, it is clear, even on Jack and Helga's own case, that Charlton, and through it Ancon and Brinton, could hope for significant financial benefit as a result of Charlton's acquisition of the Tooling and General Equipment. And, on the facts as I have found them, namely that Jack and Helga or Helga alone owned Ancon, that benefit would in fact be theirs or hers.
- Manifestly, if I am right in those conclusions of fact, Jack and Helga were not mere intermediaries in relation to the acquisition of the Tooling and General Equipment; they (or Helga alone) had a personal interest, as indirect owners of Charlton through Ancon, in the acquisition. But even if Jack and Helga were correct that it was in fact Brinton that owned (indirectly) Charlton through Ancon and possibly Bergenlim, and even if it were true that Helga was only a discretionary beneficiary and Jack not a beneficiary at all, each of them had an actual involvement in the transaction in terms of direction and control which, as I have described it above, went far beyond those of a mere intermediary (and indeed beyond what it would be appropriate for a mere discretionary beneficiary to have).
- It would be quite wrong to say that Jack was only an intermediary whose sole concern was to see to it that a deal was brokered and possibly to earn a commission. If there had been an express representation by Jack or by Helga that Jack was a mere intermediary, that representation would, in my judgment, not only have been untrue but also would have been known by them to be untrue. Further, I also conclude that Mr Simms and Mr Rahman would have known it to be untrue. Mr Simms, even on his own case, knew that Helga was a discretionary beneficiary, he knew that the financial interests of Jack and Helga, totally converged and he knew that his own strategic decisions were taken only after consultation with them even if he did not feel obliged to follow their wishes in all respects. Moreover, he knew that if Jack and Helga did not wish to proceed with the project, Charlton would not do so unless it proved possible to obtain alternative finance and, in effect, to pass the project to a new investor. Mr Rahman may not have know anything about the alleged trust structure until much later on – possibly not until around the time of the arbitration – but he did know that it was Jack and Helga who "called the shots" and he himself regarded them as the persons to whom he was answerable. It is inconceivable to my mind that he regarded Jack as a mere intermediary between Charlton and DGI.
- Was the intermediary representation made? I am wholly satisfied that Jack and Helga deliberately withheld the fact of their involvement (other than Jack's involvement as an intermediary) from the Claimants. But that, of itself, is not enough to amount to a misrepresentation unless there was an obligation to disclose it and, by reason of the failure to do so, the representation was impliedly made. The real questions, therefore, are whether Jack or Helga were or came under a duty to reveal their real involvement; and whether an express or implied representation was in fact made.
- So far as Jack is concerned, I am satisfied that such a representation was made prior to the conclusion of the Option Agreement. I rely in particular on his emails to Alex dated 1 August 1997 and 9 August 1997. I have referred to these in detail in the narrative. It is to be noted that
a. In the first email, Jack gives the clear impression that it is his Bangladeshi friend and his associates who will be acquiring the package (which the banker has fallen in love with). The impression given here is that it will be the friend and his associates who will be acquiring the Tooling from DGI whereas the reality is that the friend (ie Mr Rahman) would have no equity interest at all but stood to make whatever money he would make from his position as managing director. Jack describes how "they" (the Bangladeshis) are going to raise finance and how "they" are attracted by the buy-back proposition. Now, lest it be said that whenever a person contracts in his own name when he is really an undisclosed agent, he is making a misrepresentation to the counter-party, namely that he is a principal, I should say that that would not be right: the agent is under no duty to disclose his agency or the identity of his principal and, provided that he says or does nothing more, there is no misrepresentation. In the present case, however, Jack went far beyond simply introducing Charlton as a potential purchaser, leaving all the negotiations to take place between the officers of Charlton and DGI, himself taking no further part in persuading DGI to go into the deal.
b. In the second email, Jack again gives the clear impression that it is the Bangladeshis who will be acquiring the Tooling from DGI for $1.5 million. He states that he will be going to London for meetings and will be able to negotiate, he anticipates, a sale at that price. In reality, although perhaps perfectly genuine negotiations were proceeding with the Bangladeshis, that was certainly not at a price of $1.5 million but as part of the larger deal for the construction of a factory and production line, included in which was the acquisition for the Tooling and General Equipment for $7.5 million. The $1.5 million figure was the price at which DGI would dispose of the Tooling and General Equipment to Charlton and for Jack to say, in all the circumstances, that he anticipated being able to negotiate a price, effectively with himself and Helga, is wholly misleading. Later in the email, he talks about obtaining a commission, to be split between himself and Alex, something Alex subsequently rejected again, the impression is that as an impartial go-between, this would all that Jack would be obtaining from the transaction.
c. The second email also contains the numbered paragraph 4, in which Jack says that the Bangladeshis are forming a joint venture partnership with Charlton. That, of course, was true, but Jack goes on to say "It is all too complicated for me and all I want to see is that you get $1.5 million". It seems to me that nothing could be much further from the truth: what Jack wanted to see was a successful onward sale to the Bangladesh company and, no doubt, to see that company succeed of that were possible. His motivation was to see a large profit for Charlton. Even on Jack's own case, Charlton belonged to Brinton, so that any profit to Charlton would accrue for the benefit of Helga and her family. In reality, as I have found, Ancon was owned by Jack and Helga or by Helga alone so that the profit of Charlton would accrue directly to them.
- This conclusion makes it unnecessary to decide whether Jack was, in any event, under an obligation, for instance because of the nature of the relationship between him and DGI, to disclose his interest in Charlton, the failure to do so amounting to an implied misrepresentation that he had no such interest.
- It is also alleged that Jack made a representation that Charlton was a company experienced in manufacturing various products in Third World countries which could not be manufactured profitably in the West. This is similar to misrepresentations allegedly made by Mr Simms and Mr Rahman. I think it best to examine this allegation in relation to all three of them at the same time, which I will do later.
- So far as Helga is concerned, no serious attempt has been made to draw a distinction between her position and Jack's position. However, Helga herself did not have communications with Alex or Haig; there is no evidence that she herself said anything to them before the making of the Option Agreement which could be treated as a representation that Jack was only an intermediary. Nor was there anything in her conduct prior to the conclusions of the Option Agreement which might have led Alex and Haig to think that Jack was only an intermediary. However, the evidence about their relationship both in the years before the conclusion of the Option Agreement and since then, leads me to conclude that it is most unlikely that Helga was not fully in the picture about what Jack was saying and doing in relation to the acquisition of the Tooling and General Equipment. In particular I conclude (a) that she was well aware that Jack had not told Alex and Haig that her family trust (let alone she herself, whether with or without Jack) had an interest in Charlton (b) that she knew that Jack was in regular communication with Alex and Haig and that he was presenting the proposal as one in which he was operating simply as a broker.
- Further, she herself was as much involved in the strategic decisions about investment in Ancon and then Charlton as was Jack. She, either alone or together with Jack, was able to procure the investment of what she described as the seed capital into Charlton and it is clear that she was able to bring the project to a halt at any time. Even if this is not a case where the corporate structure of Charlton is to be ignored – so that the corporate veil is not lifted – it is a case where Helga's interests are to be closely identified with those of Charlton. Helga, it seems to me, knew that Jack had misrepresented the position: she knew, or must be taken simply to have closed her eyes to the reality, that he was pretending to have no concern in the acquisition other than as an intermediary. She nonetheless failed to correct the misrepresentation in circumstances where, if the representation was material, she should have corrected it. Suppose that A contracts to purchase goods from B and that B enters into the contract pursuant to a fraudulent misrepresentation by C. Suppose that A knows of the misrepresentation prior to making the contract (even if it was actually made without his prior knowledge). It must surely be the case that A should correct the misrepresentation, or take steps to ensure that B cannot be taken to be relying on it, if he is to escape liability as if he himself had made the misrepresentation. In my judgment, Helga's position is really no different. As an indirect owner of Charlton through Ancon, her interest in the Option Agreement as such as to put her into such proximity with that Agreement as to render her liable for Jack's misrepresentations. I would reach the same conclusion even if Charlton had fallen under the Brinton structure, particular in the light of the fact the total absence of consultation with the directors of Brinton in relation to the affairs of the trust and its subsidiaries.
- So far as Mr Simms is concerned, the position is more difficult. The pleading in relation to the D1/D2 Representations seek to fix Mr Simms with intermediary representation by reference (i) to the alleged misrepresentation that he and Mr Rahman were major shareholders and/or (ii) to his concealment of Jack and Helga's true involvement (ie that they owned and controlled Charlton via Ancon).
- I observe here that, even if the major shareholder representation was made, on the Claimants' own case it was not now alleged that there was a representation that they were majority shareholders. It is clear that, at the 12 December 1997 meeting, Mr Simms and Mr Rahman refused to give information about shareholdings (although there is a dispute whether it was about other shareholdings or shareholdings simpliciter). The representation, if made, would be inconsistent with Jack and Helga being the sole shareholders. But it would not be inconsistent with their being majority shareholders nor with their exercising control and direction if the reality was that Ancon was the shareholder. Whilst I can understand the allegation that the major shareholder representation led Alex and Haig to believe that Charlton was owned in part by apparently respectable persons and they might have relied on that in entering into the Option Agreement, it does not seem to me, by itself, to prove the case in relation to the intermediary representation.
- However, before dealing with the intermediary representation in relation to Mr Simms, I turn to the D1/D2 Representations set out in paragraph 8 of the re-re-amended Particulars of Claim (ie the major shareholding representation, sound trading/creditworthiness representation and the experienced manufacturer representation) which I shall refer to as "the Paragraph 8 Representation".
- First, there is the representation that Charlton was a company experienced in manufacturing various products in Third World countries which could not be manufactured profitably in the West. It is alleged that this representation was made by Mr Simms to Alex in at least one phone call from London to New York in about August 1997.
- Mr Simms had known Jack and Helga, and they had been his clients, for many years. Although, according to his evidence, he did not know the extent of Helga's assets after about 1994, he was involved with her proposed investment through Ancon in the Powerhouse project and appears to have been able to discuss further investments, including the Bangladesh project, in July/August 1997. He was well aware of Jack's history in relation to Westland and the Uzbekistan litigation and his conviction in relation to bank fraud. He can have had no illusions about Jack's track record and ethics as a businessman.
- On the other hand, he had no reason to think that Jack's relations with his cousins Alex and Haig were other than cordial. He would have had no reason to think that Alex and Haig would, as a matter of policy, refuse to do business with him and did not know of the letter dating from 1991 where Alex has stated such a refusal. I accept his evidence on those aspects.
- The evidence that Mr Simms made the Paragraph 8 Representations comes principally from Alex. Haig's evidence (which I accept) is that the representations were not made to him but that he heard of them only indirectly from Alex and that was until about the time of the December 1997 meeting in New York. In re-examination, he said that he did not know Alex's source of information concerning the major shareholder representation, so he does not say that Alex told him that Mr Simms and Mr Rahman, rather than Jack, had made it. There is some suggestion that Mr Rahman mentioned, but only in passing, to Haig whilst he was in Bangladesh that Charlton had manufacturing experience, although I have to say that I find that a surprising suggestion given that Haig made clear in his report that there was no such experience. Mr Gallo, in his witness statement said this:
"Alex told me in a discussion I had with him before the option agreement was entered into that he had understood from Simms and Rahman that they were major shareholders in Charlton, that it was a sound trading company and that it was creditworthy and capable of performing its financial obligations under what would be the option agreement."
He corrected this when confirming the contents of his witness statement by adding the word "that" between "him" and "before" in the first line just quoted. That, of course, is to change in a very significant way the evidence which he was giving. The gist of the witness statement is that Mr Gallo was told, before the option agreement, of the representations, thus supporting, if his evidence were accepted, the conclusion that they must have been made before the option agreement. The gist of the correction is that Mr Gallo was told at some time (and as it now transpires on the evidence, fairly shortly before the 12 December 1997 New York meeting) of the representations, supporting only the conclusion that they were made by that time and not necessarily before the Option Agreement was concluded. It is difficult to see how the witness statement appears in the form which it does because of a drafting error. Although the correction gives the gist of the new evidence, it results in a fairly clumsy wording and leaves one asking when the discussion actually was. It seems to me more likely that, on reflection, Mr Gallo had identified an error of substance. Mr Simms submits that Mr Gallo was forced to change his story when other evidence came to light which showed that the representations could not have been made, if made at all, before the Option Agreement was concluded and that Mr Gallo is simply tailoring his evidence to support his clients' case.
- I have already set out what is alleged in the Re-re-amended Particulars of Claim about the Paragraph 8 Representations. Focusing for the moment on the major shareholders representation, there are a number of things that have been said about it by the Claimants in the course of time:
a. In the arbitration, at a time, as Mr Simms puts it, when these matters were fresher in the minds of all parties, further and better particulars identified as the occasion of the representations "telephone conversations between August 1 –15 1997", the gist of what Mr Simms said being that "at this stage of his career he only does deals in which he has an equity interest and that a few years ago he decided not to simply make others rich anymore". [In passing, I note that, in relation to Mr Rahman, it is alleged that he said that he had a "big piece of the equity".] In the same particulars, it was stated that Mr Simms and Mr Rahman "made no specific statements about particular percentages of equity or total share capital save that "in December 1997 Mr Simms said that he held 24% of the equity and Mr Rahman said that he held much more than that".
b. The same telephone conversations are the same occasions in which it alleged that the experienced manufacturer representation was made (Charlton was a company "with many activities involving the manufacturing of products in emerging nations and the sale of them in Western Europe").
c. The allegation in the arbitration was that the Paragraph 8 Representations (expressed in different language) had been made to both Alex and Haig. The same is repeated in this action at paragraph 8 of the Re-re-amended Particulars of Claim where it is said that they were made "to DGI (by its agents [Alex and Haig]".
- I attach considerable weight to what was said in the pleadings in the arbitration in relation to the dates when these representations were said to have been made.
- Mr Simms says that the first phone call in which he spoke to Alex and Haig appears to have been the call on 13 August 1997. He says that Alex did not dispute this. That is not a fair characterisation of Alex's evidence. In his witness statement in the arbitration Alex identified a phone call made by Mr Simms to him during the course of which the representations were made as "some days later", the reference to later being later than the date, 6 August 1997, when brochures had been sent to Mr Rahman. In his witness statement in this action Alex says that, on a date which he is unable to specify but during the first half of August, Mr Simms made the major shareholder representation. In cross-examination by Mr Simms in this action, Alex first accepted as "fairly accurate" a summary of all the conversations put to him by Mr Simms, which, so far as Mr Simms' involvement was concerned, started with the conversation on 13 August 1997 and a number of later conversations, which involved Haig as well as Alex. Alex also in his cross-examination, accepted as "very, very possible" that the first time that Mr Simms talked on the phone with Alex was on the occasion of the 13 August call. Immediately after that answer, Mr Simms asked him whether there was a conversation between them after 13 August and before the contract was sent to him. His response was that there was a series of conversations before 13 August up to the signing of the contract. So he is there declining to date the conversation at all accurately, saying only that there was a series of conversations from some time before 13 August up to the date of signing of the contract in September.
- What Alex said in his witnesses statements in both the arbitration and this action is that the major shareholder representation was made in a phone call in which Mr Simms proposed an arrangement under which DGI would sell the Tooling and General Equipment and also provide technical assistance in setting up a factory. A conversation of that nature would not have taken place after the 13 August call: this is because the 13 August call itself dealt with the proposal and, as a result of that conversation, Mr Simms went away to produce a draft agreement which he did later in the month. If he did have further calls with Alex, it was not to propose an arrangement. Further, the whole thrust of Alex's evidence in his witness statements is that the conversation which he refers to was the first conversation and that the major shareholder representation took place during the course of it.
- I note, also, the allegation that Mr Simms represented that, at this stage in his career, he only did deals in which he took an equity; Alex confirmed in his cross-examination, in answer to a question from me, that this was indeed said by Mr Simms in one of their conversations. It seems to me that if Mr Simms did say this, it would only have been as part of the major shareholder representation – to explain why he was a shareholder.
- I am satisfied that the Paragraph 8 Representations were not made, if they were made at all, during the course of the 13 August conversation. Haig confirmed that he had heard none of the Paragraph 8 Representations during this conversation and there is nothing to suggest that he was not present for the whole of it. It seems to me that each of the major shareholding representation, the sound trading/creditworthiness representation and the experienced manufacturer representation would each have taken more than a few moments to articulate (especially the first of those in the light of Mr Simms' alleged explanation that he only did deals where he took an equity stake): it is not possible to think that Haig would have failed to hear and take on board each and every one of those representations if they had been made. That conclusion also sits more comfortably with what Mr Simms is alleged in Alex's witness statement in the arbitration to have said, referring to himself "and a prominent Bangladeshi banker" as primary equity holders. The only candidate for that description was Mr Rahman: yet he was a participator in the 13 August conversation so that it would have been very odd for Mr Simms to refer to him in that way.
- In that context, I note the following:
a. First, that in his witness statement in the present action, the allegation has changed: instead of reference to a prominent banker there is reference to Mr Rahman by name and it is said that, partly in reliance on the involvement of Mr Rahman, Alex proceeded with the transaction.
b. Secondly, that in his cross examination by Mr Simms in the arbitration, he was asked about the major shareholder representation and said this:
"Now, your question is that – and I will read it from my statement – that Mr Simms represents that there is a prominent banker and that they were primary shareholders. That is what you said or maybe Saleem said that. It was one of the two of you I imagine indicated that." [my emphasis].
- It follows from the conclusion that the representations were not made in the course of the conversation on 13 August that, if there was one or more than one conversation between Mr Simms and Alex in which the Paragraph 8 Representations were made by Mr Simms, either (i) it took place before 13 August or (ii) Alex is mistaken in recalling the conversation in which they were made as being the same conversation as the one in which Mr Simms proposed arrangements for acquisition of the Tooling and General Equipment.
- As part of his case to show that the representations were not made, Mr Simms asked Haig about the discussions at the New York meeting on 12 December 1997 concerning shareholdings. Mr Simms asked a question which was premised on the basis that either Alex or Haig had, at that meeting, asked who the shareholders were (whereas the Claimants' case is that the question was who the other shareholders were) to which Haig responded "I remember that question being brought up: yes, who are the shareholders" and later he responded to Mr Simms' question "And you did not know before the meeting who the shareholders were, did you?" he responded "No, we did not". Now, that last answer might be regarded as not inconsistent with DGI knowing that Mr Simms and Mr Rahman were shareholders in the sense that DGI did not know who all the shareholders were. However, I do not think that would the proper interpretation of his evidence. If I am to accept the evidence of Alex and Mr Gallo that DGI knew (or at least believed because it had been told as much) that Mr Simms and Mr Rahman were major shareholders, I will need to reject this part of Haig's evidence.
- In the arbitration, Alex dealt with these representations by saying that "Mr Simms represented that he and a prominent Bangladeshi banker were the primary equity holders in such company" as to which I have already observed the oddity in the wording if this took place in a conversation in which Mr Rahman was a participant; and I have noted the contrast with how he puts it in his witness statement in the present action where he refers to Mr Rahman rather than a prominent banker. Mr Simms now observes, in his closing submissions, that Alex could not recall in the arbitration any of the representations or any of the phone calls. He emphasises Alex's lack of certainty by reference to questions concerning Charlton's financial capability. It is part of the Claimants' case that Charlton was, in effect, never in a position to fulfil its financial obligations under the Option Agreement and could never be expected to be in that position. And, to bolster their assertions against the first four Defendants, the Claimants have, at one stage or another, asserted that representations have been made concerning its financial ability and, in particular, whether finance was in place.
- In the arbitration, Alex was asked whether he had any idea, or had been told by Charlton, that it had its finance in place at the time of the conclusion of the Option Agreement. Alex responded that he "did not have too much conversation on that subject of capital but you could raise it so don't worry about, they will raise the capital. That was about it". That is hardly to be categorised as an understanding that the finance was in place. Lastly, Alex said that the "finance was almost in place….it was just a formality to come up with a feasibility study and present it to the various agencies that would lend you the money. That is a roundabout way of saying that I do not know if you had the money, but you were going to get the money fairly sure at the time". Again, this is a recognition that the financing was not in place but that various parties had expressed serious interest as was the case.
- Now, it was said by Alex in the witness box that he could not remember anything at the time of the arbitration. He had suffered a stroke 6 months earlier and his memory was not up to scratch. No medical evidence was put before me. Mr Simms says that medical evidence before the arbitrator was that the stroke had had no effect on his memory function but that he should not be subjected to undue stress in giving evidence. In the absence of evidence to the contrary, I do not consider that I should make any allowance for the fact that Alex might have been suffering from some memory lapse as a result of his stroke; and even if that is wrong, I have no evidence about how accurate his memory is likely to be following recovery from his stroke. Accordingly, in assessing his evidence in the present action, I take account of what he had to say in the arbitration and treat with some circumspection any suggestion that what he now says is to be preferred.
- Ms Darmanian gave evidence to the effect that Mr Simms made representations that the financing was in place adding that he said "as soon as Haig Dadourian returned from Bangladesh the funding commitment for the project would be engaged". Nobody else says that anything like this unqualified representation was made to them and, in respect of Ms Darmanian herself, it rests on a single conversation on 9 September 1997. This allegation was first raised in a supplemental witness statement from her in the arbitration and was repeated in her witness statement in the present action. I am afraid I think that this is one of those occasions when Ms Darmanian is wrong in her recollection. The identity of the persons who would travel to Bangladesh on behalf of DGI had not by then been ascertained, and there would have been no reason for Haig to have been identified as that person in a conversation between Mr Simms and Ms Darmanian. Further, the whole point of the visit to Bangladesh was to enable the feasibility study to take place and it is, if I may say so, quite obvious that finance would not be forthcoming if the project was not viable whether technically or financially.
- I have already mentioned Mr Gallo's evidence in his witness statement in the present proceedings and made observations about the correction of it. He says that Alex told him of the major shareholder representation and the sound trading/creditworthiness representation (which according to what Alex told him, had been made by Mr Simms) prior to – and it seems not long before – the 12 December 1997 meeting in New York. That, if true, provides support for the proposition that Alex himself must therefore have heard the Paragraph 8 Representations from Mr Simms: but that assumes, of course, that Alex was accurate in what he told Mr Gallo and tells us nothing about when Mr Simms made the representations.
- There is also evidence on this aspect from Ms Darmanian. In her oral testimony in the arbitration she confirmed that "there was no discussion in which shareholdings of any description belonging to Mr Simms and Mr Rahman in Charlton were discussed". It is common ground that there was a request to disclose who the shareholders, or other shareholders, were, which was refused. In her oral testimony at the arbitration, she said that she had been told by Alex prior 12 December about the shareholders and that "…he indicated that each of you [Mr Simms] and Mr Rahman had a small percentage of shares in the corporation which together did not amount to very much" something she had been told, she said, in the context of the 12 December meeting.
- In the arbitration it was put to her that Alex's position was that Mr Simms and Mr Rahman had controlling shareholdings to which she responded "No, that was not my understanding", and she was referred to the wording in DGI's counterclaim saying ….. "but my understanding was that the combined ownership of Mr Rahman and Mr Simms was slightly over 40%, perhaps it was 45 or something along those lines". Then, shortly after that exchange, she recalled that Alex had indicated to her that shareholdings gave a combined ownership of 42% and not majority interests. Alex himself had not given any evidence of ownership.
- In the present action, Mr Simms questioned her along the same lines and she confirmed that her understanding at least at the time of the arbitration was, as she had stated previously namely that each of Mr Rahman and Mr Simms had a small shareholding and she confirmed that she had not understood them to have a controlling shareholding. But she also said that she understood them to have a combined holding of 40 or 42%: for my part, I do not understand how this can at the same time be described as a small percentage not amounting to very much. As to DGI's further and better particulars in the arbitration which stated that Mr Simms said that he held 24% of the equity and Mr Rahman said that he held much more than that, Ms Darmanian was not able to assist: such representations had certainly not been made to her. Even Alex was confused about the actual percentages; he seemed to have a vague recollection about 40% or 42% but could not remember where the figures came from or when they were told to him or indeed by whom.
- I should say more about the parties' evidence concerning the 12 December 1997 meeting. In the arbitration, Alex gave evidence that questions were asked as to the people behind Charlton. He acknowledged that Mr Simms and Mr Rahman told them that "it was none of our business. We asked who the additional investors were and we were told that it was none of our business" and said further "Nevertheless, we were under the impression that Charlton was aware of manufacturing and that you and Rahman had interests in Charlton that were more than just passing interests". In this action, it was put to him that there was an open discussion and that the meeting was told that the shareholdings in Charlton Bangladesh were none of his business unless there was a commitment to the joint venture. Alex's response was that they knew who the shareholders were based on what Mr Simms had told them, "but you were not prepared to reveal it to us, at least to anyone else but me, because then I would not have proof and you were not willing to release the information of the shareholders at that time".
- I am quite satisfied that nothing was said at the 12 December 1997 meeting about the percentage holding of Mr Simms and Mr Rahman or even that they had shareholdings at all. The most that the Claimants can say on the basis of their own evidence, is that Mr Simms and Mr Rahman were asked who the other shareholders were.
- I need to return to the representation set out in the further and better particulars in the arbitration namely that in December 1997 Mr Simms said that he held 24% of the equity and Mr Rahman said that he held much more than that. As I read that, it gives the impression that there was a single conversation in which these representations were made, in other words, there was a conversation to which both Mr Simms and Mr Rahman were parties. Further, as Mr Simms points out, the representation can only mean that, between them, they had a controlling interest. Accordingly, if there was a representation in those terms, Alex knew perfectly well that they had a controlling interest and Mr Gallo, too, would have known that that was his clients' case. But if that is so, the reason given by the Claimants for asking, at the 12 December 1997 meeting, who the other shareholders were, makes no sense. The reason, they say, is because they wanted to know who the majority shareholders were: but, in this scenario, they already knew that.
- The Claimants do not now allege a controlling shareholding, but only a major shareholding, with Ms Darmanian maintaining the position that Alex told her before the meeting that Mr Simms and Mr Rahman had small shareholdings in total, and yet that between them they had 40 or 42%. On that footing, the particulars in the arbitration can only be regarded as erroneous in referring to Mr Simms having 24% and Mr Rahman considerably more than that.
- Further, Mr Simms asked Alex about Ms Darmanian's account and whether it was true that he had told her that Mr Simms and Mr Rahman held shares which together did not amount to very much. He replied "If that is what she said, that is what I told her". It is, of course, consistent with that answer that he told her something which was not correct; but in that case, he could equally well have told Mr Gallo something which was not correct when, according to Mr Gallo, he said that Mr Simms and Mr Rahman had major holdings.
- I have identified in the narrative a number of phone calls after 13 August 1997 and before 30 August which took place between Mr Simms (in some cases with Mr Rahman) on the one hand and Alex on the other hand. The evidence points very much to those conversations being about the drafting of the Option Agreement and Alex is unable to identify any of them as including the Paragraph 8 Representations. Further conversations, at least the only ones of which there was positive evidence, in September all involved Haig, and he is clear that he only heard of the Paragraph 8 Representations from Alex. Accordingly, it cannot have been in any of those conversations in which the representations were made.
- Further, in the arbitration, when being asked about conversations in September, Alex said that he did not remember the conversations he had with Mr Simms: although the questioning at that stage was in the context of the making of amendments to the draft Option Agreement, the answer appears to be perfectly general. In this action, Alex's uncertainty about when the alleged misrepresentation took place is reflected in Mr Freedman's own questioning of Mr Simms when he asked whether it was not perfectly consistent with the principal to principal conversation that the Paragraph 8 Representations took place in the conversation of 13 August, the implication being that that could be the case.
- There is another aspect of the representations which I need to mention. Haig made a report on his visit to Bangladesh in November 1997. He reported a number of matters including these two aspects: first, that the finance for the project had to be raised and that Charlton did not already have it; secondly that Charlton had no manufacturing experience and appeared to be totally dependent on DGI for this. If, as Alex says, he had been led to believe that the finance was in place and if the manufacturing experience representation (one of the Paragraph 8 Representations) was in fact made, I would expect to see two things. The first is that Alex would immediately have raised these matters with Haig; and secondly that a protest would have been made to Charlton and Mr Simms, especially in the light of the fact that the manufacturing experience representation is now said to have been a material representation relied on by DGI in entering into the contract.
- This aspect first arose in cross-examination of Alex by Mr Simms. So far as I can see, it did not feature in the arbitration, at least I have not been referred to any relevant material in that respect. Alex said that he was "absolutely astonished" when he read the report and told Haig as much. Mr Simms pointed out that he did not tell Charlton he was astonished to which Alex responded "No we had a discussion about…..Amongst ourselves…". There is no evidence that Mr Gallo or Ms Darmanian were parties to any such discussion so that Alex's reference to "ourselves" must be to himself and Haig. There is no evidence that they were ever told of this discussion. There is not even any evidence that Alex raised with them the contents of the report and expressed his concern (although I suppose that questions of waiver of privilege might have arisen in relation to that).
- I have to say that it is this evidence which I find astonishing. If it were true that there had been discussions, then Alex would necessarily have said to Haig that he had been told that Charlton did have manufacturing experience. But Haig has never suggested that he learned of this from Alex in the context of a discussion of his report. Moreover, Haig says that he learnt of the Paragraph 8 Representations from Alex only shortly before the 12 December meeting whereas the report was in November and Alex would have communicated his astonishment well before the 12 December meeting. Quite apart from that, I cannot understand why Alex would not have complained to Mr Simms about this at the time; and I find it extraordinary that he continued to fail to mention it at the 12 December 1997 meeting.
- Mr Simms draws attention to the letter dated 16 January 1998 from Alex finally indicating DGI's decision not to be involved in the joint venture on marketing and distribution. It makes reference to Charlton's reluctance to disclose the shareholdings and would, be submits, have been worded very differently if Alex already knew who the controlling, or even the major, shareholders were. It is a small point, but one which is certainly consistent with Mr Simms' own case.
- On the other hand, the arbitrator placed great reliance on Mr Rahman's letter dated 23 March 1998 to IPDC. He regarded many statements in the letter as false and misleading and contained many statements of questionable status. He noted that the letter stated that it had been seen and approved by Mr Simms (something which Mr Simms disputes) and concluded "I cannot understand how an experienced banker such as Mr Rahman and a City solicitor such as Mr Simms could despatch a letter containing so many false statements". With that observation (assuming the correctness of Mr Simms involvement) I entirely agree. And I agree with Mr Freedman when he criticises Mr Simms for saying nothing about the misleading nature of the letter when he did, as he admits he did, learn about it soon after it was sent. The arbitrator, indeed, found that this letter was part of a pattern of behaviour on the part of Charlton (dealt with at page 48ff of his award) to avoid providing any or correct information about itself. The arbitrator (in paragraph 49 of his award) determined the major shareholding representation issue in favour of DGI saying
"The reason for my decision is that it ties in with the issue immediately below, ie that Charlton falsely represented to DGI that it was a sound trading company. Included in that representation was the representation that Charlton was a company experienced in manufacturing various products in third world countries which could not be profitably manufactured in the West.…..The letter constituted incontrovertible evidence that Charlton made wrongful representations other matters hence I am satisfied that Charlton made wrong representations to DGI that Mr Simms and Mr Rahman each owned major shareholdings in Charlton because the evidence clearly and convincingly shows that the question of the ownership of Charlton was important to DGI."
- As to the sound trading company/creditworthiness representations, the arbitrator carried out an exhaustive review of the evidence to show that Charlton was neither a sound trading company nor experienced in manufacturing. There can be no doubting the conclusion that it was neither of those things. Before reviewing that evidence, the arbitrator simply says this:
"Although there is no corroborative evidence to confirm that Mr Simms and Mr Rahman made these representations to DGI, as they were allegedly made orally in telephone conversations [note the plural] with [Alex] I determine on the balance of probabilities that this item of DGI's claim succeeds".
- Unfortunately, he expressed no reason at all for that conclusion in this section of his award (ie under the heading "DGI's claim that Mr Simms and Mr Rahman falsely represented that it was sound trading company which was credit worthy and capable of performing its financial obligations under the Option Agreement and under the Purchase Agreement" which, I should point out, related to representations made to Alex and Haig prior to 11 September 1997). He does not appear to have dealt, either, with the experienced manufacturer representation which he had previously referred to in the context of the major shareholders representation.
- I now turn tothe evidence before me on sound trading company/creditworthiness. I agree with Mr Simms when he submits, as he does in his closing submissions, that the Claimants knew perfectly well during the period of negotiation of the Option Agreement that an option was required, rather than an outright purchase, because Charlton needed the opportunity to carry out a feasibility study. It is also clear, in my judgment, that the Claimants knew that the finance for the project would be dependent on the result of that study and that, if the project was not viable, the option would not be exercised. This was recognised, in the period after the conclusion of the Option Agreement, in Haig's report where he refers to Charlton, through the efforts of Mr Rahman, appearing to have the ability to raise the necessary capital for the project. He clearly knew, at that time, that Charlton did not in fact have the finance for the project in hand. By that stage, the option had not been exercised and Charlton had no subsisting obligation to provide a letter of credit for $1.5 million. This did not, I consider and contrary to what Alex says, come as a shock to the Claimants. It is unlikely, I consider, that the Claimants would have thought that Charlton was capable, at the time of the Option Agreement, of being able to meet the purchase price of the Tooling and Equipment; they could only have believed that it would be able to do so if and when the option was exercised, which would only be after a satisfactory feasibility study and if it seemed that funding for the whole project could be put in place. If the representation alleged was made, it can only have been understood in the sense that Charlton would be able to pay the option price (which it did) and that if the option were exercised, it would be able to meet its obligations, something which Charlton no doubt hoped would be the case even though matters turned out rather differently.
- As with the major shareholder representation, I find as a fact that the sound trading/creditworthiness/representation, if it was made at all, was not made in the 13 August 1997 phone conversation.
- Further, it is, as I have already said in relation to the experienced manufacturer representation, highly unlikely, in my view, that Alex would not have raised the issue of creditworthiness with Charlton upon receiving Haig's report or, if not then, at the 12 December 1997 meeting in New York. He would have seen that he was dealing with a company seeking to raise the cash for the project and not with one which had all the finance in hand already. There would have been no reason at any stage for the Claimants to think that, even if the finance for the complete project was not in place, nonetheless a letter of credit for $1.5 million for the Tooling and Equipment could be opened. I repeat that they could only have expected that to be an obligation of Charlton once the option had been exercised, and the exercise of the option would require Charlton to be confident that the project could proceed.
- As with the major shareholding representation, Haig did not hear the experienced manufacturer representation from Mr Simms or Mr Rahman but says that he heard it only from Alex. In the present action Alex's case is the same as in relation to the major shareholder representation, namely that it took place in some unspecified conversation prior to the conclusion of the Option Agreement. All the same observations which I have made about the possible time of such a representation apply here as well: the evidence is, in effect, the same except that Ms Darmanian's evidence is not of relevance since she does not say that this representation was repeated to her; likewise with Mr Gallo.
- As to the experienced manufacture representation, one must look first to see how this point was put in the arbitration. There was no separate allegation in the original claim. Rather, the allegation surfaced in Further and Better Particulars given of the allegation concerning Sound Trading. It was clearly pleaded that in the telephone conversations between 1 August and 15 August 1997, Charlton was described as a company with many activities involving the manufacturing of products in emerging nations and the sale of them in Western Europe (something which if said was, of course, manifestly untrue). In this action, the representation appears slightly differently, to the effect that Charlton was a company experienced in manufacturing various products in third world countries which could not be manufactured profitably in the west. Haig's report on his visit to Bangladesh stated, however, that Charlton had no manufacturing expertise or staff that could be used to set up the operation. It is clear on the evidence before me that no representation about manufacturing experience had been made to Haig by Mr Simms at any time or by Mr Rahman save for an alleged passing reference to Haig whilst on his visit to Bangladesh. And it is clear that, even if Mr Rahman did make such a representation on that visit, it was not accepted as correct by Haig who explained the position accurately in his report. I think it highly unlikely that Mr Rahman did in fact make that representation. In any case, as I have already said, I cannot understand why, if a misrepresentation had been made to Alex, he did not immediately challenge Charlton when he learned of it upon reading Haig's report.
- As to Alex, it was put to him, in the arbitration, that no manufacturing representation was made. He said that he stood by his statement where he had said that the representation took place between 1 and 15 August 1997. He then went on to say that, later in the conversation, "we" [ie someone on the DGI side] asked who the additional investors were: however, that was clearly something which took place only at the meeting on 12 December 1997. Alex cannot be right in identifying the occasion on which the representations were made as being the meeting of 12 December 1997. But at best, his evidence can be seen to be confused.
- Now, it appears from Haig's witness statement in this action that Alex told him (he does not say when) that Jack had told Alex in August 1997 that Charlton "was a company experienced in manufacturing various products in the third world which could not be manufactured profitably in the west". This wording is consistent with the pleaded case but Haig acknowledged that he could not remember the precise words used, although that was the gist. This went beyond what he had said in the arbitration. He also alleged that Mr Simms and Mr Rahman had made the same representation but it is clear that he had heard it only from Alex, rejecting as I do the suggestion that he heard it from Mr Rahman whilst on his visit to Bangladesh.
- Mr Simms' evidence is that he did not see the 1 August 1997 email and other emails which are relied on as showing Jack's fraud, until later, after the conclusion of the Option Agreement. I have already mentioned his explanation (unsupported by evidence) for non-receipt (see paragraph 116 above). Even taking into account Mr Freedman's many justified criticisms about the disclosure given by each of the first to fourth Defendants, I find that Mr Simms did not, prior to the conclusion of Option Agreement, receive copies of the emails dated 1 and 8 August relied on by the Claimants to establish the misrepresentations made by Jack. It is entirely unsurprising to my mind that Jack would have not have sent (or copied by fax) the first of those emails before he had even spoken to Mr Simms about the project. And I am equally unsurprised that he would not have sent (or copied by fax) the second of those before he had had his meeting with Mr Simms on 13 August and knew that the matter would proceed.
- Before reaching my conclusions on how all of this evidence fits into the claims based on fraudulent representation, I need to consider another aspect, namely whether or not any of the first to fourth Defendants thought that Alex and Haig would not do business with Jack.
Knowledge of first to fourth Defendants that Claimants would not deal with Jack
- It is submitted by Mr Freedman that the whole Bangladesh project was redolent with dishonesty. However, this action is not one which seeks relief in relation to fraud perpetrated on potential investors and financiers in Bangladesh. The pleadings do not go to such issues. That is not to say that the Claimants are not entitled to point to particular aspects of the behaviour of Mr Simms and Mr Rahman concerning the Bangladesh end of the transaction and to rely on them as part and parcel of what they would categorise as dishonest behaviour. There are two aspects in particular with which I need to mention namely (i) the information given for the preparation of the feasibility report and the use to which that report was put, in the attempt to obtain finance for the project in Bangladesh (ii) the letter to IPDC dated 22 March 1998.
- As to the information given for the preparation of the feasibility report, those preparing it were told of the proposed buy-back arrangements with DGI and prepared the report on the basis that such arrangement would be implemented. In fact, shortly before the report was delivered, DGI informed Charlton that it was not willing to enter into such arrangements. The report was nonetheless prepared without that being taken account of and nor were prospective investors informed of this important change of circumstance. The report, uncorrected, was used in the attempt to obtain the letter of credit from Sonali Bank. As to the letter of 22 March, there can be no doubt that it was designed by Mr Rahman to mislead; Mr Simms should have corrected it when he learned of it even if it did not have his prior approval.
- However, notwithstanding those aspects of the Bangladesh end of the transaction, I am not willing to conclude that the transaction as a whole was, from beginning to end, a dishonest one. In my judgment, when they embarked on this venture, all the individuals concerned at the Charlton end (Jack, Helga, Mr Simms and Mr Rahman) hoped that the manufacturing would be profitable. It may be, as Mr Freedman would say, that they saw a fortune being made on the huge turn which was being made on the onward sale of the Tooling and General Equipment (even after allowing for a total write-off of the $3 million odd equity investment which Charlton would make in the Bangladesh company) but they also hoped to see a profit on manufacturing and marketing. Mr Simms and Mr Rahman had no equity investment in Charlton. They hoped to make some money out of fees and remuneration, something which would require a viable business. They may have been optimistic, or, indeed over-optimistic, but I do not consider that they were dishonest or reckless in taking the view, at the inception of the project and at least up to the time of exercise of the option under the Option Agreement, the view that this was a genuine business prospect.
- The Claimants' case is that at all material times Mr Simms knew, from his association with Jack and Helga, and Jack and Helga themselves knew, that the Claimants would not have contemplated entering into the Option Agreement or being involved in any business with Charlton if they had known that Jack and Helga were involved other than as intermediaries.
- Although it is clear that Alex and Haig, on the one hand, and Jack and Helga on the other, had come, by the time of this trial, to have the very worst of relations, that has not always been so. Alex described the relationship with Jack as turbulent and one where you never knew where you were: it would come and go. That is probably correct. Alex even uses the words "an estranged member of the family" to describe Jack, but that pejorative description is not an accurate description of the relationship in August 1997 through at least to the time of the exercise of the Option Agreement. Jack clearly communicated with Alex and Haig about the possible sale of the Tooling at the beginning of August and a dialogue continued. There was no sense of estrangement at that stage and, indeed, the relationship appears to me to have been at one of its "ups" rather than "downs". Certainly from Jack's end there did not appear to be any sense of estrangement or even distance in the relationship, he regularly ending his communications with terms of endearment. And there is no doubt that there had been regular social contact and nothing to show that there had been any sort of falling out since that contact. I do not consider that the evidence goes anywhere near establishing that Mr Simms or Mr Rahman knew of the turbulence of the relationship or had any reason to think that Jack was on other than good terms with Alex and Haig. It is, of course, a different matter whether he had cause to think that Alex and Haig might be reluctant to do business with Jack.
- The Claimants rely heavily, in establishing that Jack knew they would not do business with him, on the letter dated 5 December 1991, quoted at paragraph 54 above. Alex, mistakenly in my judgment, has taken this in his evidence in the present action, as including a reference to Jack's supply of sub-standard wheat to the Uzbeks when that incident in fact, if it took place at all, was after the date of this letter. Jack also disputes that the sum alleged to be owing is, in fact, owing, being of the view that it was a gift from Dadour Dadourian, his uncle, with whom he appears to have been on excellent terms. The disputes about the justification for Alex's attitude as expressed in the letter do not seem to me to be material; what is important is the attitude itself which could not be expressed much more clearly.
- That letter was, however, written some years before the events in question in the present case. It is clear that since then Jack has not been uninvolved with Alex and Haig. I use the words "not uninvolved" deliberately since the such evidence as I have of his involvement has not been in relation to projects where Jack or his associates, or Helga, have been personally interested either directly or indirectly (through companies owned by him) but have been potential business ventures in which Jack as acted simply as a middleman or on behalf of DGI (as, indeed, he has given the impression of his role in relation to Charlton). That, say the Claimants, makes all the difference because, although willing to use him as an intermediary, they were not prepared to do business with him.
- There is one suggested exception to that which relates to a possible hospital project in Turkey in 1995. In a fax to Jack dated 10 September 1995, Alex described the project as being a "stepping stone for us all". Mr Simms relies on this fax. But I do not consider that it shows Jack or Helga doing business with the Claimants in any way: the business deal would be between DGI and the Bal family as counterparties. The same applies to another project, two hospitals in Malaysia, where the business deal would involve DGI and not Jack. It is appropriate to note, however, that Alex ends a letter to Jack dated 25 July 1997 with the words "OK Jack, do your stuff".
- It is also appropriate to note that in 1995 Jack was appointed, through Alex and Haig, as "Senior Consultant" to DGI or another group company, it does not make any difference which. This again goes to show that the relationship was then "rather good" as Mr Simms put it to Alex and he accepted.
- Mr Ashe, as well as Mr Simms, submit that the evidence does not establish that Alex and Haig would not have done business with Jack in spite of being willing to use him as an intermediary. There is some force in this in the light of what they were willing to do, namely to use Jack as an intermediary and, as the evidence shows, with a fair degree of autonomy both prior to and in the context of the Charlton transaction. Their position, that they would refuse to do business with Jack, was very much based on an unwillingness to enter into contractual relationships with someone whose business ethics were different from theirs, an opaque way of saying that they thought Jack to be dishonest and did not trust him. It does not say a great deal for their own sense of ethics, I think, that they were nonetheless prepared to allow him to act as a go-between and even as their representative, when, if dishonest, his dishonesty could itself have been harmful to them.
- I take account, of course, of the submission that it is all too easy for Alex and Haig to assert now, when it clearly suits them to do so, that they would not have entered into the Option Agreement had they known of Jack's involvement. And I do not lose sight of the fact that it would be all too easy for me to accept that assertion in the light of what has been revealed in the arbitration and this litigation which establishes beyond any possible doubt that they would not have been willing to enter in a business deal in, say, June 2003 immediately after the publication of the arbitration award.
- My conclusion, however, is that Alex and Haig would not have allowed DGI to enter into the Option Agreement if they had known of Jack and Helga's involvement in Ancon and their potential for control over its affairs and those of Charlton. It makes no difference to that conclusion whether Ancon was owned by Jack and Helga (as I have held) or whether it had been owned indirectly by Brinton. In the former case, Jack and Helga had, indirectly actual control, as of right, of Charlton. In the latter case, they would, even on the most favourable view of the evidence from the Defendants' perspective, have had in my judgment de facto control through their influence of Maitre Croisier. He, it is clear, never referred for instructions to the trustees and, in practice acted, if he was asked at all, at the request of Helga or Mr Simms on her behalf.
- I should mention, if only to reject, one further argument on this aspect put by Mr Ashe. The evidence established that Alex and Haig would probably have agreed to sell the Tooling and General Equipment to Jack on the basis of an immediate sale against a cleared cheque. In those circumstances, it is not at all surprising that a sale would be agreed. There would be no risk of non-payment and no risk of being locked into just the sort of business relationship which in Alex's and Haig's view would only lead to trouble. That is miles away from the actual situation even if one were to ignore the possibility of an ongoing relationship by way of the proposed joint venture and marketing and to focus only on the option itself.
- Whether any of Jack, Helga, Mr Simms and Mr Rahman knew or feared that Alex and Haig would not deal with Jack is a more difficult matter. On one view, it is not a question which would have crossed their minds. On their case, the Brinton structure was valid, questions of control of Charlton by Jack and Helga did not arise and the mere status of Helga as a discretionary beneficiary did not give rise to any concern that the Claimants would not have done business with Charlton even if they had known of that structure. However, I do not intend to spend more than a few moments on that scenario. The reality is, as I have held, that Jack and Helga owned Ancon; and even if that is wrong, it is clear that in terms of control by and consultation with the trustees, the trust structure was never intended to operate properly in practice. Nor was Maitre Croisier even envisaged as having a genuine role in decision making, to say yes or no to whether a transaction should go ahead.
- So far as Jack and Helga are concerned, I am satisfied that they knew that there was a real risk that Alex and Haig would not agree to enter into the Option Agreement with Charlton if they had known of Jack and Helga's interests and concerns in the matter. It may be that they did not know for sure that that was so, but they knew well enough that, if they disclosed their position, there would be a real risk that the agreement would not be made.
- This, I have little doubt, is one reason why they did not disclose their involvement. They say that the reason for such non-disclosure was because there was no obligation to disclose it (on the basis of the case of the genuineness of the trust structure with control vested in the trustees). But even if that is so, I have little doubt that they understood two advantages of non-disclosure, namely the elimination of two risks. The first risk was that of being made liable to account in equity for the large profits they were hoping to make, which would destroy the whole point of the project. The second risk was that Alex and Haig would refuse to enter into the Option Agreement: whilst Jack and Helga might not have been sure that Alex and Haig would refuse, I am sure that they appreciated that there was a real risk that Alex and Haig would not do so. Accordingly, in my judgment, Jack intended the intermediary representations to be relied on by Alex and Haig on behalf of DGI in deciding whether to enter into the Option Agreement
The effect of the intermediary representation on the DGI
- I will come to the position of Mr Simms and Mr Rahman in a moment. Before doing so, I want to look at the effect of the intermediary representation on Alex and Haig as the relevant minds of DGI. In that regard, the position I have reached is that Jack's communications (faxes, emails and conversations) with Alex and Haig are, objectively, to be taken as implied representations that he was only an intermediary. Further, the evidence establishes such representations were made in the knowledge that, had Alex and Haig known the true position, there was a real risk that they would refuse to enter into the Option Agreement.
- The intermediary representation was not, however, an express representation that Jack and Helga were not shareholders and had no interest in the transaction. Had such a representation been made, Alex and Haig would have had their attention drawn to the point and it would have been bound to have been taken into account. Either they would have entered into the Option Agreement nonetheless or they would not have done so. Nor was there even a clear express representation that Jack was only an intermediary (although I remind myself that he did say that all he wanted was for DGI to get its $1.5 million) which might have focused Alex and Haig's minds on the point that Jack was not otherwise interested.
- Instead, there were communications (faxes, emails and conversations) which failed to reveal Jack and Helga's true involvement and which give the impression that Jack was only an intermediary without saying so expressly. As to that, the evidence does, in my judgment, establish that Alex and Haig thought Jack was an intermediary and only an intermediary: had they been asked, at the time leading up to the conclusion of the Option Agreement, what Jack's role was, that is how they would have described it because that is how Jack himself has presented it. Further, if they had been asked whether Jack had any interest in the transaction, they would have said that he did not and would have been astonished to find that he in fact did.
- The ingredients of the tort of deceit as laid down in Derry v Peek (1889) 14 App Cas 337 are (a) a misrepresentation (b) made by a defendant (i) knowingly or (ii) made or without belief in its truth or (iii) made recklessly, careless whether it be true or false (c) an intention that it be acted on by the claimant and (d) influence on the claimant.
- In relation to Jack, my findings of fact establish (a) and (b)(i).
- As to (c), there is a rebuttable presumption that if a fraudulent misrepresentation is made (which is so in the present case so far as concerns Jack in the light of the immediately preceding paragraph) there is a rebuttable presumption that it is intended to be relied upon: Goose v Wilson Sandford [2001] Lloyds Rep PN 189 at pp 200 – 201. There is no evidence which comes anywhere near rebutting that presumption in the case of Jack. Indeed, I find on a balance of probabilities that Jack did intend Alex and Haig to understand that he, Jack, was a mere intermediary and to act on that basis.
- But the position in relation to (d) is less clear. It is a question of fact whether a claimant has been induced to act by a material misrepresentation intended by a defendant to be relied on by the claimant. At this stage, another rebuttable presumption come into play: if the misrepresentation is of such a nature that it would be likely to play a part in the decision of a reasonable person it will be presumed that it did so unless the representor satisfies the court to the contrary: Barton v County NatWest Ltd [1999] Lloyds Rep Bank 408 at p 421. As Morrit LJ said at para 58 of his judgment
"The effect of the presumption is to alter the burden of proof; the alteration remains unless and until the presumption is rebutted whether or not the representee gives evidence."
- It is also the case that the representation does not have to be the sole inducement for the representee to be able to rely on it to establish causation, as one can see from the decision of Morrit LJ at para 55 of his judgment in Barton. In this context, help can be found in the analysis of Stephenson LJ in JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All ER 583 at p 589: it is enough if the representation plays a real and substantial part, albeit not a decisive part, in inducing the representee to act; causation is then established.
- However, one needs to be careful about what Morritt LJ meant when he used the words "play a part". In one sense, a representation might play a part in a decision but only in a peripheral way. But in another sense, playing a part can be equated with reliance which itself can be equated with inducement (and here reference can again be made to Stephenson LJ in JEB Fasteners (supra)). It is in this sense, I think, that Morritt LJ was using the phrase.
- It is not inaccurate, therefore, to view the presumption, as Mr Freedman does, as a presumption concerning inducement rather than simply "playing a part" in a peripheral sense. He submits that to rebut that presumption of inducement, it must be shown that the relevant factor was not an inducing cause at all. Put that way, the submission really takes one no further because in this area of the law there are not varying degrees of inducement. If what he is saying is that the court must be satisfied that the representation must be shown to have had no impact at all on the decision, I would not agree. In my judgment, the court's function is simply to decide, on a balance of probabilities on the whole evidence, whether the representation did or did not induce the representee to act in a certain way, with the onus being on the representor to show that it did not. He does so not, in my judgment, by showing that the misrepresentation played no part at all but by showing that it did not play a real and substantial part in inducing the representee to act. How the representee would have acted if he had been told the truth is strictly irrelevant (see Downs v Chappell [1997] 1 WLR 426) although it may be of some assistance in testing whether there was inducement or not.
- I should add that inaction is as relevant as action. As Morritt LJ again points out, the misrepresentation may lead as much to a failure to take action (eg to terminate a contract when there would otherwise be right to do so) as to take positive action (eg to enter into a contract).
- It is sometimes said that the correct approach is to ask how the representee would have acted if the representation had not been made; and to say that, if he would have acted in exactly the same way, there is no inducement. In many cases, it may well be that that approach gives the correct answer. But that will not always be so. Let me give an example. Suppose that S is negotiating the sale to P of a quiet country residence belonging to him to P. P, after deliberation, has decided on balance to go ahead with a purchase. S then volunteers some information which he knows to be untrue in order to show P the wisdom of his decision to purchase. For instance, he explains how the neighbouring farmer is intending to create a wildlife haven in some adjoining woodland when he know that it is about to be chopped down and turned into a pig farm. P sues S, saying that he would never have purchased had be known the true position. S is forced to admit that he made a fraudulent misrepresentation but persuades the judge that, if he had not volunteered the untrue information, it would not have occurred to P to check out the farmer's intentions and that his purchase would have gone ahead in any case. It seems to me that that is not an answer to P's claim. By making the representation, S in fact brought into P's mind a factor which then became material to his decision and in relation to which the misrepresentation has misled him. It seems to me that S would need to go further and would need to show, at least, the possible use of the woodland having been brought to his attention, that P would not have made enquiries to establish the true position but would have gone ahead anyway. I raise this example because it might be said that if Jack had not said anything to suggest that he was only an intermediary, Alex and Haig would never have taken steps to ascertain whether he (with or without Helga) had any interest in the transaction, so that if no representation had been made, the contract would have gone ahead anyway.
- Mr Ashe and Mr Simms have both, as part of their cases in relation to causation, relied on the proposition that DGI would have entered into the Option Agreement even if they had known that Jack and Helga were involved. That is not to apply the correct test, as Downs v Chappell shows, although if the proposition were correct, it would be some evidence in support of a submission that the misrepresentation did not induce the Option Agreement. Indeed, if it were established that DGI would have entered into the Option Agreement even if it had known of Jack and Helga's involvement, it would be very difficult for it to argue that it was induced to enter into the Option Agreement by an implied representation that Jack was only an intermediary. I do not dwell any further on this point because I have already concluded that, had Alex and Haig actually known of Jack and Helga's involvement, they would not have entered into the Option Agreement.
- Mr Ashe submits that even if the representations were (contrary to Jack and Helga's primary case that they in fact were not interested in Charlton) made it is more probable than not that the Claimants would not have relied on them. He supports that submission by reference to the overarching concern of DGI to dispose of the Tooling for a decent sum of money, it making no difference, according to Mr Ashe, who the purchaser might be. That, it seems to me, is really a way of putting the case that the sale would have been made to Jack and Helga even if the truth had been known, a proposition I have already rejected.
- This brings me back to the point arising from the example which I gave in paragraph 551 above. Is it a defence to the claim against Jack that, if he had not made the representations which he did, then Alex and Haig would never have thought to ask whether he (with or without Helga) was interested in the transaction? Suppose that Jack had simply limited himself to saying to Alex that he had informed Mr Simms that the Tooling was for sale and that Alex could expect to hear from Mr Simms shortly; and that thereafter the only contact had been between Alex and Mr Simms. I think it more likely than not that it would not have occurred to Alex and Haig to obtain confirmation from Mr Simms that Jack had no interest in the transaction – there would have been no reason for them to think that he did.
- However, Jack did make the statements which are plain to see in the emails he sent before conclusion of the Option Agreement and which, in my judgment amount for the reasons already given to fraudulent misrepresentations. It is not enough, to escape liability, for Jack to show that, if he had not made the misrepresentations at all, Alex and Haig would never have asked about Jack's involvement. The fact is that he did make them and the possibility of Jack's involvement was, in one step, both brought to their attention and stated not to be the case. Unless Jack can show that Alex and Haig simply did not understand the emails to convey the message which I consider they clearly do convey (ie that Jack was only an intermediary), causation is made out. In my judgment, not only is the presumption of influence not displaced, I would conclude, even in the absence of such presumption, that Alex and Haig were in fact influenced by the intermediary representation to procure DGI to enter into the Option Agreement.
- The position is no different, as I see it, from that which would obtain if Jack had expressly represented that he was not a shareholder and had no interest in the transaction. Given my finding that had Alex and Haig known the truth they would not have allowed the Option Agreement to be concluded, it would be impossible, I think, to argue that there was no inducement. Jack could not be heard to say that, had he not made the misrepresentation, the contract would have gone ahead anyway because by making the representation, he would have alerted Alex and Haig's minds to the issue and they would have gone ahead only on the basis that Jack was not an interested party
- In my judgement, therefore, I conclude that the intermediary representation claim is made out against Jack.
- The positions of Helga and Mr Simms are both less straightforward. I turn to Mr Simms' position first. It is necessary, I think, to consider his position in relation to the intermediary representation, the major shareholder representation and Conspiracy I at the same time. Conspiracy I is alleged only as one aimed at DGI and is as follows:
"On a date or dates unknown to the Claimants but between about July and September 1997, the first to fourth Defendants (or any two or more together) wrongfully and (a) with the predominant purpose of injuring and/or causing loss to DGI and/or (b) with intent to injure DGI by unlawful means, conspired and combined together to injure or defraud DGI and to conceal the same from it".
Reliance is then placed on the same particulars as are set out in the Re-re-amended Particulars of Claim in relation to the alleged fraudulent misrepresentations.
- As I have pointed out already, Mr Simms had no reason to think that Jack and his cousins were not on perfectly friendly terms. I find as a fact that he had no reason to think that there was something in the family history which meant that a business transaction between Jack and Alex and Haig was out of the question.
- In any event, Mr Simms did not make the representations in the emails himself and his liability in deceit, if any, must arise out of either (i) his implied adoption of Jack's misrepresentations or (ii) his involvement in the transaction and the negotiations.
- It is at this stage that I must revert to the major shareholder representation since, so far as Mr Simms' liability is concerned, the two are closely connected. Thus it is said against him that the major shareholder representation was made as part and parcel of a deception to lead Alex and Haig to think that Jack had no involvement. In effect, Mr Simms himself is said to have made the intermediary representation because he made the major shareholder representation against the background of Jack's emails of which Mr Simms, it is alleged, had knowledge.
- I have discussed the major-shareholding representation at length. If it was made at all, I cannot conclude with any confidence that it was made before the conclusion of the Option Agreement. Of course, I accept Mr Freedman's submission that it is unreasonable to expect Alex to remember dates and details at this distance of time but equally I accept what Mr Simms says, namely, that there is more likely to be an accurate recollection when Alex prepared his witness statement for the arbitration and when the pleadings in it were prepared. It is clear that some of the propositions which have, from time to time, been put by the Claimants, have to be rejected. For instance, it is clear that the D1/D2 Representations did not take place in a conversation where Mr Simms and Mr Rahman refused to give details of the shareholders or other shareholders (depending on whose version is correct). However, I accept the evidence of Haig, Mr Gallo and Ms Darmanian that something was said to each of them prior to the 12 December 1997 meeting in new York by Alex which, if true, would indicate that representations had been made by Mr Simms. But their evidence does not assist at all in determining when such representations were made.
- Nor, of course, does it meet an objection that Alex was simply making it all up. However, I reject such an objection. I am satisfied, on a balance of probabilities, that at some stage one or other of Mr Simms and Mr Rahman stated that they were shareholders in Charlton, but I cannot with any confidence conclude whether it was said that they were controlling shareholders, major shareholders or simply had some shareholding nor indeed which of them said it. Indeed, in his cross-examination in the arbitration, Alex himself was not even sure whether it was Mr Simms, or Mr Rahman or both who had made the representation.
- Further, the different accounts of the representation and the time or times at which it took place are an entirely unsafe foundation on which to determine even on a balance of probabilities that it took place before the conclusion of the Option Agreement. I am not satisfied on the evidence that it did so.
- At this point, I remind myself that the pleaded case in paragraph 8B of the Re-re- amended Particulars of Claim against Mr Simms in relation to the intermediary misrepresentation (even in a further amended version which Mr Freedman puts at the end of his closing submissions) alleges only that "by representing that they were the major shareholders in Charlton and/or by actively concealing the fact that Charlton was owned and controlled by [Jack and Helga] [Mr Simms] further represented that [Jack and Helga] had no involvement…other than as intermediaries". It will be apparent from what I have just said that I do not regard the major-shareholding representation as something on which Alex and Haig can rely in the context of the formation of the Option Agreement. Further, whilst I can see that, had that representation been made prior to the contract, its combination with active concealment of Jack and Helga's involvement could be significant, the fact of such concealment, taken by itself, is not a representation at all unless it either renders an express representation incorrect or unless there was a duty on Mr Simms to disclose that involvement. I do not overlook that Jack and Helga were present with Mr Simms at the end of the telephone for the 13 August 1997 conference call and that either their presence was not made known or they just said "hello". That cannot, in my judgment, be taken as a positive representation that Jack and Helga were mere intermediaries.
- It is not pleaded in the section of the pleading dealing with fraudulent misrepresentation that some express representation made by Mr Simms was rendered incorrect by his failure to disclose Jack and Helga's involvement and I do not see that any such allegation could be substantiated. It is not pleaded that Mr Simms adopted the intermediary representation made by Jack nor that Mr Simms was under a duty to disclose Jack and Helga's involvement. Such allegations would face significant difficulties. I do not address them further in the context of fraudulent misrepresentation.
- In any case, Alex and Haig had no reason to think, at the time, that Jack was representing anything on behalf of either Mr Simms or Mr Rahman (or indeed of Charlton): so far as they were concerned, Jack was a mere intermediary who was, if anything, on their side – indeed, it is precisely Jack's statement in his emails referring to "us/we" and "them/they" that the Claimants rely on to establish Jack's own misrepresentations. There was no conduct on the part of Mr Simms which led Alex and Haig to think that Mr Simms (or Mr Rahman or Charlton) had seen the emails giving rise to the intermediary representation (whether or not he or they had actually seen them) or to think that he or they had adopted them as their own. There was no evidence from Alex or Haig that they understood Mr Simms (or Mr Rahman or Charlton) to have done so.
- That, however, is not an end of the story so far as misrepresentation is concerned. In his closing submissions, Mr Freedman says this when introducing his submissions in relation to Conspiracy I:
"The conspiracy closely relates with the section on Deceit. Where there is a concert, there is an alternative way of expressing the matter by reference to the primary liability of the tortfeasors for deceit where they each of them participate in a course of conduct of deceit. In this case, the Defendants 1-4 participated in a course of conduct designed to conceal from C at all times the involvement of D3D4 other than as intermediaries. Hence, in addition to a liability for the false representations made personally by each person, there is a liability in deceit because of a concerted action towards a common end: see Clerk & Lindsell 19th Ed. 4-04."
- The paragraph in Clerk & Lindsell referred to is concerned with ascertaining who are joint tortfeasors. It is not concerned with establishing when a person actually commits a tort. Nonetheless, some of the cases cited in that paragraph are concerned with establishing liability. Thus in Brooke v Bool [1928] 2 KB 578, one ground on which the plaintiff recovered was that the tortious act (damage to property) was done in pursuance of a concerted enterprise of the two persons concerned and was their joint tort. A more recent example is MCA Records Inc v Charly Records Ltd (No 5) [2002] FSR 26 where a director of a company was held liable together with the company for breach of copyright. The Court of Appeal held, at least in the field of intellectual property, that there can be liability where an individual acts with a company where he does "intend, procure and share a common design" that the infringement take place. It seems to me to be entirely correct in principle that, if A and B are involved in a common design to achieve some improper purpose but where it is A alone who commits the offending act (eg the damage to goods in Brooke v Bool or the copyright infringement in MCA Records), B is jointly liable for the tort represented by the offending act. It may be that this type of case is better dealt with under that part of the tort of conspiracy dealing with effecting unlawful acts or use of unlawful means. In this context I note the closing words of paragraph 25-120 of Clerk & Lindsell: "It would appear that the question whether a person is a party to a combination constituting a conspiracy is essentially the same as whether he is liable as a joint tortfeasor in procuring a wrong, by reason of a common design".
- In order to address Mr Simms' liability, I need to make some further findings of fact.
- Firstly, I am perfectly satisfied (without at this stage judging whether it was improper or not) that, before negotiations for the Option Agreement, Mr Simms, Mr Rahman, Jack and Helga had agreed between themselves not to reveal Jack and Helga's involvement. Although some of the evidence which supports that finding post-dates the conclusion of the Option Agreement, that evidence is highly relevant because it shows a course of conduct commencing at the beginning and following through for months and months until the truth came out in the context of the arbitration. The following selection of evidence is relevant:
a. Clear evidence of this came from Mr Rahman in cross-examination. Although much of his evidence was unreliable, there is no reason to disbelieve what he had to say about this. He regarded Alex and Haig as having no right to know about Jack and Helga's involvement and regarded the concealment as an ordinary part of business life. I find it hard to believe that this attitude was not discussed with the others.
b. Prior to the telephone conference call on 13 August 1997, there had been the meeting between Mr Simms, Mr Rahman, Jack and Helga, all four of them being at the conference call. They clearly discussed a great deal of detail about the proposed transaction and its financing in the pre-call meeting. If their presence in the call was made known to Alex and Haig, it was only a brief "hello". Their non-participation in the conversation is very surprising indeed unless there had been a agreement not to disclose their involvement – particularly in the case of Jack who, even in the bad state of health in which I saw him, came across as a forceful personality unlikely to hold his peace unless with very good reason.
c. Mr Rahman effectively accepted in cross-examination that Jack and Helga's involvement was not revealed because it "might have come out as if Jack was having a finger in every pie" and that the impression was given that Jack and Helga were just middlemen. However, I should point out that when Mr Freedman put to Mr Rahman that the purpose of their silence was to give the impression that it was Mr Simms and Mr Rahman who were interested in buying the equipment, he said "But that is what it was" then going on to say it was not Mr Simms and he but a company of which they were directors. Ultimately that exchange does not detract from his clear evidence that Jack and Helga's involvement, as he saw it, was hidden.
d. Similar hiding of Jack and Helga's involvement is found (after conclusion of the Option Agreement) in the 26 November 1997 memorandum referring to Jack "helping behind the scenes" in relation to which Mr Rahman accepted in cross-examination that Jack could not take front stage because his cover would then be blown.
e. The memorandum dated 3 February from Mr Rahman to Mr Simms shows Mr Rahman's concern at Alex unexpectedly being in Naples, Florida and Jack being concerned that Alex should not discover about Mr Rahman's presence with him and Helga. Mr Rahman, on being asked why this might be so, relied "Well that is obvious is it not? In that case, Alex would have thought, and perhaps correctly thought, that Jack and Helga had something to do with Charlton and we did not wish them to know".
- Secondly, I am also satisfied that Mr Simms was well aware from the very beginning that Jack was presenting himself to Alex and Haig as an intermediary and nothing more. Even if Mr Simms had not seen the early August emails from Jack to Alex prior to the conclusion of the Option Agreement, he knew that there were regular communications between Jack and Alex. Jack was also in communication with Mr Simms and discussing progress with Alex. So the position is that Mr Simms was (a) party to an agreement or understanding that Jack and Helga's involvement would not be revealed (b) knew that Jack was still conducting discussions apparently as a go-between and (c) knew that Jack and Helga were in fact centrally interested in the transaction. Although Mr Simms did not, according to my finding, know that Alex and Haig would not do business with Jack, he cannot possibly have believed that Jack had in fact told Alex about his and Helga's involvement.
- It would, in theory, have been possible for Jack to communicate with Alex in such a way that he did not impliedly represent that we was only an intermediary. It would have required the most carefully crafted communications to have taken place. I do not think that Mr Simms, if he had thought about it, could honestly have thought that Jack's communications with Alex were of that sort. It is much more likely that he would have realised that Jack would be likely to be giving the impression that he was only an intermediary, consistently with the understanding between all of the first to fourth Defendants, that Jack and Helga's involvement should not be revealed. It would, in my judgment, have been reckless of Mr Simms to think otherwise. Mr Simms is an able and clever lawyer: it is highly unlikely that he would in fact not have thought about what Jack was saying to Alex.
- Although Jack's emails to Alex on 13 and 16 September 1997 (copied to Mr Simms) and his "playing the game" email of 16 September to Mr Simms all post-dated the conclusion of the Option Agreement, they are a significant confirmation of the way in which Jack was operating and the way in which Mr Simms understood him to be operating. They show, I think, quite clearly that Jack was not only hiding his involvement but had been leading Alex to think that he was only an intermediary. None of this appears to have come as any surprise to Mr Simms; at least, there is no evidence at all to suggest that he was remotely surprised by the contents of the emails or that he disapproved of what Jack was doing.
- I conclude that Mr Simms was well aware before conclusion of the Option Agreement not just that nothing had been said about Jack and Helga's involvement (something which may not of itself give rise to any legal consequences) but also that Jack was giving the impression that there was no such involvement. I am also sure that he intended Alex and Haig (and DGI) to act in the belief that there was no such involvement. He continued to negotiate the Option Agreement on that basis and failed to correct the misrepresentation thus permitting DGI to enter into the Option Agreement in the belief that Jack was only an intermediary; in doing so, he both knew that DGI held that belief and that it was wrong.
- It is also to be noted that not only did Mr Simms know that Jack was in discussion with Alex and Haig but that Alex and Jack knew that Jack was in discussion with Mr Simms and Mr Rahman. As a result of Jack's misrepresentation, the Claimants thought he was nothing more than an intermediary; and in the light of the findings I have just made, Mr Simms must have appreciated that the Claimants were in fact labouring under that mistaken belief by virtue of Jack's misrepresentation.
- Returning to the four elements of deceit and applying them to Mr Simms the position therefore is as follows:
- Misrepresentation: Mr Simms did not expressly make the intermediary representation himself. However, he has, in my judgment, acted in concert with Mr Rahman, Jack and Helga who have, by a mutual agreement or understanding, hidden Jack and Helga's involvement. That by itself would not be enough to make Mr Simms liable for fraudulent misrepresentation. However, Mr Simms is nonetheless liable, in my judgment, as if he had made the intermediary representation himself. There are two separate reasons for this each of which is sufficient by itself:
a. First, the four defendants have acted in concert in relation to the tort of deceit committed by Jack. They intended, procured and shared a common design to deceive the Claimants not only by not disclosing Jack and Helga's involvement but also, in my judgement, by misleading the Claimants into thinking that they had no involvement other than as intermediaries. It is more likely than not, in my judgment, that they all knew and intended from the beginning that Jack would present himself to the Claimants in that way. But even if that is wrong, my findings of fact mean that Mr Simms must have known, well before the conclusion of the Option Agreement, that that was how Jack was in fact proceeding. Mr Simms nonetheless proceeded in concert with Jack and Helga to negotiate the Option Agreement without correcting the false impression.
b. In these circumstances, Mr Simms is, in my judgment, jointly liable with Jack for the tort of deceit which Jack has committed. It does not matter on this approach, I consider, that the Claimants did not take the representation as one made by Mr Simms.
c. Secondly, I have already concluded that Mr Simms must have known that the Claimants were acting in the mistaken belief that Jack was only an intermediary and were doing so because of Jack's own misrepresentation. Nonetheless Mr Simms did nothing to correct a representation about the company, Charlton, of which he was Chairman and on whose behalf he was negotiating, when a material misrepresentation had been made by Jack, namely that he and Helga had no interest in it (that being one effect of the intermediary misrepresentation). These circumstances are enough, in my judgment to render Mr Simms liable for having adopted Jack's misrepresentation.
d. Lest it be said by Mr Simms that this last point is not open to the Claimants on the pleadings, I should say that the facts relevant to this way of putting the claim are sufficiently pleaded, I consider that paragraph 8B read together with the factual allegations in the following paragraphs, are wide enough to permit this argument to be run. Certainly Mr Freedman makes the argument in his closing submission that Mr Simms is jointly liable with Jack because they have acted in concert (paragraph a) above; and the second way of putting it (paragraph c) is certainly, I consider, covered by paragraph 8B as well.
- Knowingly false: Mr Simms, like Jack, knew that Jack and Helga were interested in the transaction and, even if he believed the money to come from the trust and the shares in Ancon to be in the trust, he knew or must be taken to have known, on my findings of fact, that Jack was involved in ways far beyond involvement as an intermediary. Mr Simms would, accordingly, have made or adopted the misrepresentation (i) knowingly or (ii) without belief in its truth or (iii) recklessly, careless whether it be true or false
- Intention to be relied on: in my judgment, all of the Defendants including Mr Simms knew and intended that Jack and Helga's involvement was to be hidden from the Claimants and with the intention that it be acted on by the Claimants is established.
- Influence on the claimant: to the extent that Mr Simms' liability rests on joint tortfeasorship, the Claimants are to be treated as relying on Mr Simms as much as on Jack. On the alternative approach (that Mr Simms has adopted Jack's misrepresentation) the Claimants did, for reasons already given, act in reliance on the intermediary representation. They accordingly relied on Mr Simms' (implied) representation that Jack was only an intermediary as much as they relied on the same representation made by Jack himself.
- Helga's position is I think much the same. I do not doubt that she knew precisely what Jack was representing to Alex and Haig; she and Jack were, as they accept, very close and although Helga says (and I accept) that she knew nothing about technical matters to do with the equipment, she did know, I find, what Jack was saying about his involvement in Charlton. Mr Ashe has not really sought to separate their positions; and Mr Freedman has really proceeded on the basis of association by guilt. I conclude that Helga is liable for the first of the reasons which I have addressed for concluding that Mr Simms is liable (ie joint tortfeasorship and common purpose/concert). I do not, however, consider that Helga can be made liable on the basis that she has adopted Jack's representation so as to entitle the Claimants to rely on it as against her too.
- I turn now to the D1/D2 Representations and the D3/D4 Representations other than the intermediary representation.
- I have already considered the major shareholder representation in the context of the intermediary representation and need say no more about it.
- There are the three other representations to consider (sound trading/capable of performing obligations/creditworthiness/experienced manufacturer).
- Taking the experienced manufacturer first, I have already expressed my reservations about what Alex says he said to Haig when Haig reported on his visit to Bangladesh and on Haig's apparent lack of surprise (at least none is recorded anywhere). There is, in any case, uncertainty in my mind about who Alex can identify with any confidence as having made the representation. It is at least possible that it was only Jack.
- However, whether or not this representation was made, my judgment is that no reliance was placed on it by DGI in the decision to enter into the Option Agreement. The controlling minds of DGI were Alex and Haig. It is clear that Haig did not know of the representation by the time of the Option Agreement. Alex had not communicated it to him if indeed it had happened before then. The fact that he did not do so indicates to my mind that even if the representation had been made, it did not "influence" the decision in the way which is necessary to establish the tort of deceit. Moreover, for the same reasons as given in relation to the major shareholder representation, I have real uncertainty about whether this representation, if it was made, was made before the Option Agreement was concluded. I do not consider that the Claimants have satisfied the burden which lies on them to establish that it was in fact made before the conclusion of the Option Agreement.
- Accordingly, I reject the Claimants' claim based on the experienced manufacturer representation.
- I take the sound trader representation, the creditworthiness representation and the capable of performing its obligations representation together since they are all part and parcel of the same issue and are said to have been made in the same conversation(s). For the same reasons which I have given in relation to the major shareholder representation, I have significant uncertainty about when these representation were made although, again for the same reasons, I think that they probably were made by one or more of Mr Simms, Mr Rahman and Jack. But, as with the major shareholder representation and the experienced manufacturer representation just discussed, I have real uncertainty about the timing of this representation.
- Again, as with the experienced manufacturer representation, my judgment is that no reliance was placed on it by DGI in the decision to enter into the Option Agreement. Again I find the absence of any communication by Alex to Haig prior to the conclusion of the Option Agreement to be significant; clearly Haig was not influenced by the representation since he did not know about it until much later. I attach no importance to Alex's statement that these "were just the sorts of thing" he would want to know in the light of his years experience in the business (although quite how often he had sold a production line I do not know). I fear that this is embellishment which does not reflect his actual thinking at the time when under pressure of other work, he allowed the Option Agreement to be signed containing matters which, had he thought about it, he would never have allowed.
- In any event, except in terms of credibility of witnesses, it does not seem to me to matter much whether or not these representations were made since the ability of the Claimants to rely on the intermediary representation means that these other representations add nothing to their case.
- Mr Freedman further submits that all of the representations were continuing representations which were relied on by DGI with the result that it did not terminate the Option Agreement at an earlier state when it could have done. So far as concerns the intermediary misrepresentation which I have held was made, I do not think that anything at all is added to the Claimants' case by this allegation: all the loss and damage which might flow from a continuing representation flows from the original misrepresentation leading to the making of the Option Agreement. So far as concerns the other representations, the same reasons as given in relation to reliance on them originally, I do not consider that they were relied on subsequently.
Conspiracy I
- I have set out the allegation of Conspiracy I at 558 above. In the light of the way in which I have dealt with the issue of fraudulent misrepresentation Conspiracy I, so it seems to me, adds nothing once liability for fraudulent misrepresentation is established. However, in case I am wrong in my analysis of fraudulent misrepresentation, I do need to deal with it if only briefly.
- My findings of fact so far establish that there was a common design by the first four Defendants to conceal the true involvement of Jack and Helga. Further, it was part of that common design, if not at its inception, certainly well before the conclusion of the Option Agreement, to do so by permitting Jack to make the intermediary representation.
- Conspiracy consists in the agreement of two or more to do an unlawful act or to do a lawful act which aims at an unlawful end. The tort can be divided into two categories: conspiracy to use unlawful means and "conspiracy to injure" ie using lawful mans to achieve an object which is in the result unlawful. There is a risk of terminological confusion because one can use unlawful means to achieve an unlawful end in order to injure the claimant, but that is conventionally categorised under the unlawful act category rather than the "conspiracy to injure" category. Conspiracy to injure requires a predominant purpose to injure to be established; conspiracy to use unlawful means does not.
- However, even in the case of a conspiracy to use unlawful means, Mr Ashe submits that there nonetheless needs to be some intent to injure although this need not be the predominant purpose: he relies on Lonrho plc v Fayed [1992] 1 AC 448 at 468G – 469B per Lord Bridge of Harwich. However, Lord Bridge does not say that an intent to injure is necessary; he merely says that a predominant intention to injure is unnecessary and that a pleading which did not allege predominate purpose could stand.
- The Court of Appeal in Douglas v Hello! Ltd [2006] QB 125 at paras [178] to [225] conducted an exhaustive survey of the authorities in relation to intention in the context of economic torts, in particular unlawful interference and unlawful means conspiracy. At para [221] the Court said this:
"Professor Weir and most other writers, including Hazel Carty and Messrs Salees and Satilitz, are of the view that the gist of all the economic torts is the intentional infliction of economic harm. We consider that this is a fair and satisfactory conclusion to draw from the authorities, difficult as some of these are to reconcile. Intention to inflict harm on a claimant is not the same as a wish to harm him. It is however, very different from knowledge that economic harm will follow as a result of incidental consequences of conduct, when those consequences are not necessary steps in achieving the object of the conduct and are unsought."
- That, together with a study of the full judgment drives one to the conclusion, I consider, that one necessary ingredient of the tort of conspiracy to use unlawful means is not present unless the defendant has as one of his intentions, the intention to injure the claimant at whom his conduct is directed. In a case where the conduct does not necessarily (or even probably) lead to damage to the claimant, and where there is, objectively, a reason for the conduct other than to damage the claimant, there will be no liability. The test of foreseeablilty, adumbrated by Woolf as the touchstone for identifying the mental element necessary was explicitly rejected in paragraph [218].
- Had the Defendants restricted themselves to an agreement not to reveal Jack and Helga's involvement, a conspiracy could not begin to be shown. Thus, suppose that Jack had simply phoned Alex to say that Mr Simms would be contacting him about the Tooling, and that Jack had taken absolutely no part at all after that, the mere fact that the Defendants agreed not to tell Alex of Jack and Helga's involvement would be legally unobjectionable provided that no misrepresentation (express or implied) was subsequently made by Mr Simms in the course of his negotiations unless the predominate purpose of the combination could be shown to be to damage DGI.
- However, the present case is different because, on my findings, there was a combination, or a concerted course of action, pursuant to which not only was Jack and Helga's involvement to be hidden, but it was to be done so by playing on Jack's role as an introducer and leading Alex and Haig to think that he was nothing more than that. That, so it seems to me, is a conspiracy to do an unlawful act, namely to make or procure to be made a fraudulent misrepresentation. The pleading alleges, however, in addition or in the alternative, a predominant purpose to injure DGI.
- In that context, it is important to consider what the first to fourth Defendants were trying to achieve prior to the Option Agreement and why Jack made the intermediary representation. It is, perhaps, obvious why the intermediary representation was made: it was to hide Jack and Helga's involvement. Jack and Helga, as I have explained, are to be taken as wishing to keep Jack's involvement secret for two reasons : first, because they knew there would be a real risk that DGI would not then sell the Tooling to Charlton and secondly, because they would not want to be made liable to account for any profit which they might make. Mr Simms' and Mr Rahman's reasons for wanting Jack and Helga's involvement kept secret did not, on my findings, include the first of those since they had no reason to think that Alex and Haig would refuse to deal with Jack. However, they must, I think, have appreciated the second reason and have appreciated that, if a deal were to be done, DGI might build in a right to a share of any profit.
- But none of them, it seems to me, set out on this venture with a view to injuring DGI. Indeed, even the intermediary representation was not made by Jack with a view to injuring DGI. Rather, it was made with a view to procuring the purchase of the Tooling and General Equipment. Since the price of $1.5 million was one which DGI was happy with - and there was no sort of misrepresentation by the Defendants which procured a sale at that price rather than at any other price – it is not easy to see how the conspiracy can be said to have been made with one of its purposes, let alone its predominate purpose, being to injure DGI.
- Now, the Claimants say that the whole transaction was a fraud from its beginnings in New York where the Tooling was to be found to its supposed end in Bangladesh where a new factory was to be built. For my part, however, I think it is clear that Charlton did intend to acquire the Tooling and General Equipment: at all times up to the conclusion of the Option Agreement, all of the first four Defendants were, in my judgment, concerned with the technical and financial feasibility of the project and entered into an option precisely so that they could have time (6 months) in which to assess the position before deciding on whether or not to exercise the option. Even if (which, for reasons already given, at paragraphs 524 -526 above, I am not prepared to accept for the purposes of this action) a fraud was to be perpetrated on investors in Bangladesh, there was a genuine intention to acquire the Tooling and the General Equipment and there was no way in which Charlton would have obtained shipment of those assets without the letter of credit (or hard cash) being in place. It does not, in any event, make any sense for the Claimants to have embarked on the transaction if their intention was for Charlton to breach its contract with DGI: completion of that contract was a sine qua non for everything else and why any of the individuals concerned would have permitted the Option Agreement to be signed if, at that time, they thought the transaction would not proceed, I do not understand. And the idea that they allowed it to go ahead with a view to causing damage to DGI is, I think, nonsense. In my judgment, therefore, up to the time of the Option Agreement, there was a combination to misrepresent but no conspiracy to cause injury to DGI.
- That means that that part of Conspiracy I which depends on the predominant purpose of injuring DGI must fail, that is to say a conspiracy to injure.
- The other part of Conspiracy I which is alleged is an intention by the first to fourth Defendants to injure, that is to say a conspiracy using unlawful means. It follows, from my findings that at all times before the conclusion of the Option Agreement, it formed no part of the first to fourth Defendants' intentions to injure DGI.
- The Claimants claims in relation to Conspiracy I therefore fail.
Conspiracy II
- Conspiracy II: it is alleged by the Claimants that
"between 1998 and 2001, the first to fourth Defendants (or any two or more of them together) and in the knowledge pleaded in paragraph 20 above, wrongfully and (a) with the predominant purpose of injuring or causing loss to DGI and/or the Second and Third Claimants or (b) with the intent to injure DGI and/or the Second and Third Claimants by unlawful means, conspired and combined together to injure or defraud DGI and/or the Second and Third Claimants and to conceal the same from it/them"
- Paragraph 20 is an allegation that Charlton and the first to fourth Defendants knew at all material times that DGI did not own or have in its possession the whole production line of Products the subject of the Option Agreement, in particular the General Equipment. I have already addressed this factual issue. My conclusions are:
a. Jack knew right from the beginning that general equipment needed to be acquired.
b. Mr Simms and Mr Rahman learned of that fact at latest at the meeting in New York on 12 December 1997.
c. I have not dealt with this before, but I doubt that Helga has ever had the first idea about what equipment was and was not available: I do not think she has ever had a sufficient understanding of the technical requirements. She no doubt had a general idea about this by the time of the arbitration, but I cannot conclude that she knew about it at any time before that.
- A number of matters which are relied upon in relation to Conspiracy II are then set out in the Particulars under paragraph 24 all of which "were carried out not in purported vindication of Charlton's alleged rights under the Option Agreement but for an ulterior purpose designed to intimidate or harm the Claimants or all or any of them.".
- These are:
a. On or about 6 November 1998, Charlton commenced the New York proceedings against DGI for breach of the Option Agreement and against all of the Claimants for fraudulent misrepresentation. It is alleged that the basis for these claims was false and dishonest. That basis was that the Claimants had falsely and fraudulently represented that DGI owned and had in its possession the entire production line. Reference is made, to establish that the Defendants knew this to be untrue, to paragraph 18 of the Re-re-amended Particulars of Claim, but I think this is a mistake for paragraph 20 the contents of which I have just described.
b. The same false and dishonest claims were made in the arbitration which commenced in April 1999.
c. Charlton and Mr Simms continued "to prosecute and press its said false and dishonest claims, including the failure to disclose all relevant documents and the giving of false evidence by [Mr Simms]".
d. "In or about December 2001, Charlton commenced proceedings under section 24 Arbitration Act 1996…..to remove the arbitrator. The said proceedings were dismissed following Charlton's failure to provide security for the Claimants' costs in the sum of £75,000".
- Conspiracy II is effectively put, in the Re-re-amended Particulars of Claim in the alternative as a claim for malicious prosecution. Mr Freedman's closing submissions, however, accept that English law does not currently recognise a tort of malicious prosecution in civil proceedings (save in respect of a few cases of abuse of civil legal process which do not apply here). However, other rights are available and conspiracy is one of them: see Gregory v Portsmouth City Council [2000] 1 AC 419 at pp 431H-432A and pp 432F – 433A per Lord Steyn.
- I have dealt at length already with the true construction of the Option Agreement and have concluded that, as a matter of construction, an entire production line was to be provided (something not disputed by the Claimants) and, what is more, that DGI warranted in the agreement that it owned the entire production line. Not only did it not own the General Equipment, it may in fact be the case that the Tooling was vested legally in another group company although I do not think that anything turns on that. If, as Charlton was alleging, there was a fraudulent misrepresentation concerning the General Equipment at the beginning of the negotiations, it had not been corrected by the time that the Option Agreement was entered into. Its subsequent correction (at latest by 12 December 1997) does not retrospectively alter the nature of a representation which was fraudulent when made.
- I appreciate, of course, that Jack knew the true position before the Option Agreement was concluded and that the arbitrator has held that his knowledge is to be imputed to Charlton. I do not see, however, how his knowledge can possibly be imputed to Mr Simms even if I were to regard Charlton as a façade and a sham and even if there was a conspiracy between the first to fourth Defendants directed at the Claimants. If the arbitrator was correct in attributing Jack's knowledge to Charlton, that, of course, provides a defence to DGI when it is asserted by Charlton that it relied on a representation to the effect that DGI owned the entire production line. It may also be the case that Mr Simms cannot be heard to say that in fact DGI did not own the entire production line. But what cannot be said, I think, is that Mr Simms cannot say that he personally believed that DGI did own the entire production line and that his personal liability is to be assessed as if he did know the true position. I reject the suggestion to the contrary (as set out in paragraph 19 of the Re-re-amended Particulars of Claim).
- When Mr Simms acted for Charlton in relation to the arbitration, he was not to know that the arbitrator would reach the conclusions which he did. So far as he was concerned, the effect of what he alleged to be the Claimants' own misrepresentation was continuing. Charlton was committed to a contract where the vendor (DGI) did not have the equipment which it had contracted to sell and which it had warranted it had. Its contractual obligation – the warranty – did not disappear simply because, when Charlton exercised the option, everyone knew that the General Equipment had to be procured. Charlton was in extra difficulty, on Charlton's case, because of the absence of the General Equipment: it meant that there were increased problems in obtaining the letter of credit for Charlton Bangladesh in Bangladesh with repercussions for obtaining the Charlton letter of credit (for the DGI contract) in the West. This all resulted, Charlton could say, from the Claimants' own (fraudulent) misrepresentations.
- In this context, one should not overlook the fact that the Claimants did make the representation (indeed, DGI gave a warranty) which was known to the Claimants to be false, although they say it was all a mistake which was put right and not fraudulent in that there was no intention to mislead. Whether that is right or wrong, it is clearly the case that there was a breach of warranty in respect of which, apart from the matters to which I now turn, Charlton was entitled to seek damages.
- Mr Freedman put his case succinctly in his closing submissions:
1. Pursuant to Conspiracy II and in order to continue to conceal the frauds and in order to obtain money not in vindication of a legal right but from a claim which was known to be false and dishonest, Charlton and D1-D4 brought claims for breach of contract and fraudulent misrepresentations against Cs.
2. The dishonest claims were pressed in whatever most advantaged Charlton's prosecution of them, including the deliberate withholding of all relevant documents such as the Nat West letter to D1 in which they stated that the matter was to be referred to their Fraud Office, and by the giving of false evidence by D1 and D2. [I note here that a reference to the Fraud Office does not necessarily indicate fraud: it is the office which deals with money-laundering issues generally.]
3. At the very heart of the case was the dishonest claim that Charlton was able to open a letter of credit and that the only matter that stood in its way was the conduct of C. To this end Charlton dishonestly contended that Cs had misrepresented that they had the general equipment when the Option Agreement was entered into and its absence prevented Charlton from opening a letter of credit.
4. The truth set out above is that Charlton was never in a position to open a letter of credit.
5. This is not a case where the allegation of predominant purpose conspiracy can be defeated by D1,D3,D4 arguing that they were acting in the genuine belief that they were promoting their own legitimate commercial ends – there was nothing legitimate about anything they did and they were simply seeking to extract money to which they knew they had no legitimate entitlement.
6. As regards the alternative way of putting it, namely conspiracy by unlawful means, the unlawful means included (a) breach of contract by the prosecution pursuant to an arbitration clause of a dishonest and fraudulent claim (the arbitration clause only being for genuine disputes even if misconceived), and / or (b) an abuse of the arbitral process by the making of a false claim, and / or (c) perjury by the giving of false evidence and / or (d) making a claim not in purported vindication of Charlton's existing rights but for an ulterior purpose designed to intimidate or harm C.
- There can be little doubt that in the arbitration Mr Simms painted a picture which distanced Jack and Helga from Charlton, just as they all have done in the present case. For reasons which I have given, I have concluded that they in fact had a very close connection and were always centrally concerned in the outcome of the Bangladesh project. It is also clear that there has been a lamentable inadequacy in disclosure by Jack and Helga and by Mr Simms both in the arbitration and in this action - some important documents only came to light during the course of the trial. It is clear that there has been serious lying by Jack and Helga. For instance, both in the arbitration and in this litigation, they said that they had not been served with various proceedings and documents when, in one case, it was left with the concierge at their apartment and was clearly received by them; and on another occasion, service at their golf club, which they denied, was clearly shown on a video recording.
- However, neither of those factors by themselves shows that the claim in arbitration by Charlton, or its defence, was dishonest, although they must of course be taken into account in the overall picture. The fact that A has procured a contract between himself and B on the one hand and C on the other hand by making a fraudulent misrepresentation to C (known to B) does not necessarily mean that when A and B pursues C for breach of that contract they are being dishonest even if they continues to hide the representation which initially procured it. However, if A and B combine together to present false evidence knowing, that without it, their claim will fail, the position is different. Knowing what we now know, it can be seen that Jack and Helga were interested in Charlton indirectly through Ancon. The issues in the arbitration, however, concerned (a) construction of the contract (b) the representations by Charlton (through Mr Simms and Mr Rahman) about the major shareholdings, the sound trading status of Charlton (c) the ability of Charlton to open the letter of credit (which was a central issue in the breach of contract claim) and (d) the representations by DGI that it was the owner of the entire production line. Charlton was entitled to have those issues determined unless there was no bona fide belief on its part (which, in practice, means on behalf of Mr Simms) that it had genuine claims and defences.
- It will be apparent from my review of the Option Agreement in the course of the narrative that Charlton had, in my judgment, genuine arguments on the construction of the contract. It was faced with a vendor, DGI, which was, on a perfectly arguable and indeed I think correct construction in breach of its warranty. Moreover, DGI strenuously maintained that the option had not been validly exercised: Alex (and possibly Haig) took that notwithstanding, as we now know, that their own lawyers considered that the option had been exercised. Not only that, but they were advised that Charlton was not obliged to open the letter of credit just as soon as the option had been exercised. For my part I cannot begin to see the argument that the option had not been validly exercised, and if one needs to find a lack of bona fides, I think that one can find it here. Further, it was quite wrong of DGI to insist that the exercise of the option resulted in Charlton immediately becoming obliged to open the letter of credit. I make these points because it must not be assumed that sharp practice in this case is confined to the Defendants.
- Moreover, as I believe a careful reading of the correspondence and other documentation in the court file to show, Mr Simms was conducting a legal argument with the Claimants and their lawyers which, even if it was wrong in the final analysis, had considerable merit. Putting aside for the moment the argument (which I accept is very important indeed and to which I will come in a moment) concerning Charlton's inability to open a letter of credit, Mr Simms' argument was that the requirement to open the letter of credit had not yet arisen and yet DGI was doing nothing at all to procure the general equipment. Mr Simms may have been right, he may have been wrong; but if it is suggested that the argument was so obviously wrong that it could not have been presented as a bona fide argument, I would reject the suggestion.
- For my own part, I think that, as a matter of construction of the contract, that argument had considerable merit. The Option Agreement contained a warranty that the entire production line was already in the ownership of DGI. If it had been, it would have been the simplest task in world for DGI to have specified the equipment which is what Mr Simms' was saying (rightly or wrongly) he needed before he could agree the wording for a letter of credit. It is, at least arguable (which is enough for present purposes) that it is no answer to that for DGI to say that, when the option was exercised, Charlton already knew that the General Equipment had to be procured. The exercise of the option brought a contract for sale and purchase into being: it did not detract from the effect of the warranty. Of course, Charlton, having exercised the option, would not have been able thereafter to rescind the contract on the basis of misrepresentation: but to the extent that it might suffer damage as a result of breach of warranty, the right might well survive. More importantly, Charlton should not have to suffer the exposure, risk or difficulty which might arise in putting in place the letter of credit as a result of DGI not owning the General Equipment.
- As to the letter of credit itself, there are two aspects of the failure to open it. The first was that, commercially, Charlton did not want to open the letter of credit and have the assets shipped unless and until the Bangladesh letter of credit was opened. As Mr Rahman said, he did want the production line floating around on the High Seas with nowhere to go. That could explain a desire to delay the opening of the letter of credit. The absence of the General Equipment may then have offered an excuse for delay, Mr Simms asserting that he could not open a letter of credit whilst the General Equipment remained unprocured or at least unidentified.
- The second aspect is the alleged inability of Charlton to open a letter of credit even if the wording had been agreed. It seems clear that Charlton was never in a position to open a letter of credit with NatWest not simply because of the absence of an agreed wording but because it did not have a bank account with NatWest. It seems that Mr Simms was unwilling to provide the bank with the necessary information concerning Charlton and its shareholders to enable the bank to comply with the then current money-laundering requirements. Notwithstanding that fact, Mr Simms, untruthfully, told DGI that Charlton had applied for a letter of credit and, in effect, that all that was standing in the way was the absence of a sufficient identification of the General Equipment to enable a wording to be agreed. He told Mr Gallo in September 1998 that the agreed letter of credit wording had been re-typed and sent to NatWest: that was false. He also provided inadequate disclosure in the arbitration about this, the NatWest correspondence and the full note of meeting (which had been sent to Mr Simms at the time and which revealed the true attitude of the bank) only came to light through the co-operation of NatWest.
- Mr Simms knew, or must be taken to have known, that Charlton would not be able to open a letter of credit through NatWest.
- Mr Simms says that this does not mean that a letter of credit could not be opened at all. As he points out, Charlton did have accounts with CIBC and with Midland Bank. He points out that CIBC had given an indication that it would, indeed, be prepared to open a letter of credit. However, I note that that was given because a known customer of that bank (ie Helga) was well-known to it: but on Mr Simms' own case, Charlton's connection through Ancon came to an end when Charlton was replaced by Eastcastle as the investor. He says that a letter of credit could have been opened with either CIBC or Midland, but there is not a shred of evidence to suggest that he ever set in train the procedures for opening the letter of credit with them although it is fair to point out that Mr Simms did ask NatWest to inform him if it could not handle the transaction so that he could make other arrangements, showing that Mr Simms was ever the optimist in his hopes for obtaining it from NatWest who had made their position clear much earlier.
- In riposte to that, Mr Simms says that it is a preposterous suggestion that Midland, or some other bank, would not have been prepared to open a letter of credit when cash collateral had already been provided by Eastcastle and was available. He points out that the wording for a letter of credit had been agreed with Mr Gallo and that, going forward with that, he would have been able to open a letter of credit with one bank or another. But without being given a reasonable time to do so, DGI terminated the contract. It is wholly unsurprising that Mr Simms did not, after that, take any steps to open a letter of credit. DGI took the step of terminating the agreement because, on its view, Charlton had already had a more than reasonable time to open the letter of credit. That, of course, depends on one's view of the meaning and effect of the contract and, as I have said more than once, whether Mr Simms was right or wrong on the case he was putting, Charlton had perfectly respectable arguments which it was entitled to put on that issue.
- If one accepts, as I do, that Mr Simms' arguments concerning the meaning and effect of the Option Agreement were arguable, it follows that, if those arguments were in fact correct, DGI would have been entitled to terminate the contract when it did on the basis of Charlton's inability to open a letter of credit only if Charlton was in anticipatory repudiatory breach: in other words, DGI would have needed to show that Charlton could not, and would not in the future, be able to open a letter of credit. Of course, on DGI's case, Charlton was already in (repudiatory) breach by having failed to open the letter of credit and whether it might, even in the foreseeable future, be able to do so would be irrelevant. However, in its claim before me, DGI is asserting conspiracy in relation to the bringing by Charlton of its claim in the arbitration, claims which, it alleges, were false and dishonest claims. Accordingly, I need to be satisfied, if the Claimants' claim is to succeed, that Mr Simms did not have a bona fide belief when conducting the arbitration that it was even arguable that Charlton could, within a reasonable time of his last discussion with Mr Gallo in September 1998, have opened a letter of credit. This, it will be remembered, was at a time when Bower Cotton held, in their client account, over $1.5 million on behalf of Eastcastle and which was, at that time, available as collateral for the letter of credit.
- The arbitrator in his award, commenting on the possibility of opening a letter of credit with another bank observed that
"..it is probable that Charlton would still have had to disclose to whatever bank was selected details of the provenance of the funds and the terms on which they were advanced. I am not satisfied that Charlton would have made the necessary disclosures legitimately required of any bank as it is evidence that Mr Simms did not wish to disclose any information about Eastcastle Finance."
- The arbitrator then carried out an exhaustive review of the evidence before him relating to Eastcastle (in relation to which I have been told no more than what was revealed to him). Eastcastle's ownership is unknown and the role of Mrs Alianza and Mr Ammerman a matter of obscurity. Mr Simms, if he is to be believed, knows little about it and was misleading everyone when he said to the arbitrator that Mrs Alianza and Mr Ammerman controlled Eastcastle. It appears that, in fact, a Dr Meroni in Switzerland may be the controlling mind, but it is not suggested that even he owns it. Mr Freedman goes as far as to say that Eastcastle is really simply another emanation of Jack and Helga and that, in the absence of any real evidence about ownership, it is to be assumed that no-one other than Jack and Helga would become involved in this project.
- The arbitrator identified a number of areas where Mr Simms had been less than straightforward in what he had said to various persons (the Claimants, the banks, Mr Gallo). He was critical of Charlton for not bringing any banking evidence from HSBC and CIBC to show that the relevant money-laundering requirements had been complied with before Charlton's accounts were opened. I do not make the same criticism even though, by the time of this action, the significance of the ability or otherwise of Charlton to open a letter of credit was well-appreciated. Even if Mr Simms' evidence is to be treated with a great deal of caution and even if he is, indeed, untruthful in some respects, the ordinary inference must surely be that large and respectable banks have indeed complied with the law and with their own internal procedures: the onus must surely be, on this aspect, for a person who asserts that the requirements have not been observed to demonstrate that. I therefore conclude that the bank accounts were properly opened in accordance with the money-laundering requirements.
- It follows that further money-laundering enquiries would not need to be made in relation to Charlton when it come to opening the letter of credit. However, such enquiries might need to be carried out in relation to Eastcastle as the provider of funds on which the bank would rely as collateral. I have not received any banking evidence nor if there is any in the bundles, have I been referred to any. What I have read is what the arbitrator had to say about this in the long section of his award dealing with Charlton's ability to open a letter of credit (at paragraphs 104 to 180 of his award especially paragraphs 168 to 178). There are one or two points on which he relied to which I should refer.
- In paragraph 173, he states that in view of the money-laundering regulations, he is satisfied the CIBC and HSBC would have asked the same sort of questions as NatWest which would have led to enquiries about Eastcastle as to the source of its funds and, given Charlton's response in declining to give information to NatWest, the arbitrator concluded that relevant information about Eastcastle would not have been supplied to other banks. He concluded that these banks would have refused to sanction the letter of credit, a conclusion for which he gained support from the fact that Mr Rahman did not approach them but continued to attempt to persuade NatWest to provide the facility.
- He refers, in paragraph 175, to the evidence of a Mr Wickens who said that banks do not normally interfere with the actual flow of money other than where absolutely essential to clarify that the subject funds represented a properly authorised transfer. Instead, the matter would be left to NCIS and left to them. Hence it could be concluded that Charlton would have been able to open the letter of credit irrespective of the bank's concerns. He rejected that as a compelling argument in Charlton's favour because the present case was different, as he saw it: Mr Wickens was talking about a situation where the bank had identified the source of funds but had concerns about it, whereas in the present case Charlton had not disclosed the source of the funds because of the lack of transparency concerning Eastcastle. He concluded that, on a balance of probabilities, Charlton would have continued with its pattern of nondisclosure. In that case, a bank would not be able to complete its "know your customer" procedures. He then finds, again on a balance of probabilities that the bank would not sanction the letter of credit because the bank would itself be at risk in having authorised a transaction without an adequate understanding.
- The arbitrator placed some weight on Charlton's failure to provide any evidence about Eastcastle from any reliable source. He thought that Eastcastle's auditors or lawyers could have done so in a way which did not breach confidence.
- The arbitrator then said at paragraph 179 that, on the basis of his analysis, "there is clear and convincing evidence that Charlton would not have been able to procure on usual terms (or at all) the issue of the letter of credit….". This was based on
"i. Charlton's lack of credibility generally as evidenced inter alia by
a. The wrongful information contained in Mr Rahman's letter of 23 March 1998 to IPDC which was approved by Mr Simms
b. The consistent failure of Charlton to give details about itself and/or its principal shareholder to [various parties involved including DGI]
c. Charlton's lack of management and administrative support.
ii. The inability of Charlton to open a letter of credit as evidenced, inter alia, by:
a. Charlton's failure to supply NatWest with essential information needed by that bank before it would be willing to approve the opening of a letter of credit.
b. Concerns with NatWest about transactions initiated by Mr Simms and/or Bower Cotton.
c. Charlton's failure to supply details of Eastcastle Finance to this tribunal.
d. The admitted ignorance of Mrs Alianza abut important aspects of the financial status of Eastcastle Finance.
e. Charlton's failure to supply adequate evidence that CIBC Zurich or HSBC would have been prepared to sanction the opening of the letter of credit."
- The arbitrator concluded in paragraph 180 that he is "satisfied therefore that Charlton's representations to DGI as to its ability to open a letter of credit were fraudulent. Accordingly, DGI's counterclaim on this issue succeeds".
- This is a slightly odd conclusion. DGI's claim in relation to this issue was set out in paragraph 17.10 of its pleading: DGI claimed that between 11 September 1997 and 16 September 1998, Charlton was unable to procure on usual business terms (or at all) the issue of the letter of credit…The failure to provide the required letter of credit in a timely manner was material breach of the [Option Agreement], thereby excusing DGI from further performance". The counter-claim in the arbitration did not (at least as recorded by the arbitrator) raise the statements by Charlton of its ability to open a letter of credit as fraudulent representations giving rise to a liability in deceit.
- In any case, the arbitrator's conclusion strikes me as surprising given his analysis and his reference to the balance of probabilities which I have already identified. I do not see how he reaches the conclusion that the representation was fraudulent without even addressing the question whether Mr Simms knew, believed or was reckless as to whether it was untrue. I take his conclusion as being no more than a finding in favour of DGI that between 11 September 1997 and 16 September 1998, Charlton was unable to open a letter of credit. It may possibly go further to the effect that certain representations to the contrary were fraudulent.
- Be that as it may, even if the finding is properly to be read as one of fraudulent representation, it only relates to the ability to open the letter of credit within the period just identified. It is true that the analysis of the arbitrator in relation to Charlton's future ability to open a letter of credit would indicate that, had he made a finding on it, he would have decided that it could not have been opened. But whether he regarded that as so clear that Mr Simms would be being dishonest if he had asserted at the time that he genuinely hoped and expected to be able to open a letter of credit, I simply do not know.
- I have spent some time on the arbitrator's decision on this aspect because he, unlike me, received some banking evidence. Ultimately, however, it is for me in the present case to decide whether any of the Defendants are liable for the conspiracy which the Claimants assert.
- Mr Freedman says that Mr Simms' arguments in the arbitration were based on, and solely based on, a number of false premises:
a. CIBC had been instructed to open a letter of credit by May 1998.
b. NatWest was willing to open a letter of credit.
c. A letter of credit would be forthcoming.
- As to the first of those, it is true that CIBC had not been instructed to open a letter of credit even though Mr Simms procured CIBC to issue a letter to that effect. It is also the case that with the arrival of Eastcastle, reliance could no longer be placed by Mr Simms on the involvement of Helga with CIBC as supporting CIBC's willingness to provide a letter of credit. Nonetheless, in a dispute between Charlton and DGI, it is reasonable to point to the CIBC letter as indicating a willingness of CIBC to open a letter of credit as of the time it was written. The person signing the letter knew the true position after all. That does not detract from the point, however, that Charlton was in fact unable to open a letter with CIBC by the time the contract was terminated by DGI and it is at the time when one must judge whether Charlton was in breach of contract justifying termination.
- As to the second of those, it is clear, in my judgment, that NatWest was not willing to open a letter of credit. It required various hoops to be gone through and Mr Simms had decided that he was not going to provide the information necessary for that to happen.
- As to the third, it was not true that a letter of credit would be forthcoming at that time or in the immediate future. I should refer to Mr Freedman's submissions in more detail.
- First, he says that Mr Simms was fraudulent in his representations to the Claimants that Charlton could open a letter of credit. Thus on 10 August 1998, at a time when it was apparent that CIBC would not provide a letter of credit, and when a letter of credit had not been provided by NatWest, Mr Simms wrote in the following terms:
"we have been ready, able and willing to issue a LC, as bankers have confirmed months ago but have been frustrated by continuing problems in bringing this matter to a conclusion because the dialogue between our companies does not appear to be clear. Hopefully we have now got over that…."
- Mr Freedman submits that Mr Simms' letter was a gross distortion of the position. He says that Mr Simms and Mr Rahman have continued to persist in a web of lies about how the letter of credit was ready to be opened, continuously concealing the fact that Charlton was never in a position to open one because it could and would never have satisfied any bank as to the "know your customer" requirements. The web of lies included the following communications.
a. 11 August 1998 Mr Simms to the Claimants
"The bank has indicated that it cannot pre-advise without commitment and that we should get our wording agreed first. They have agreed the wording with us and are able to issue the LC in the attached format."
b. 14 August 1998 Mr Simms to the Claimants stating that the letter of credit could have been issued months ago and "can be issued"
c. 20 August 1998 Mr Rahman to the Claimants, enclosing copy of deposit amount of $1.5m at NatWest and that the letter of credit now to be opened "through reasons of convenience" with London bank
d. 8 September 1998 Mr Rahman to Mr. Gallo "I feel that we were able to clear most of the areas which were holding up progress."
e. 16 September 1998 Mr Simms to Mr. Gallo, "all agreed and no reason why not proceed to speedy conclusion", no reason for deadlines.
f. 18 September 1998 Mr Simms to Mr. Gallo "wording [of LC] was then retyped and sent to the bank, the bank … will then proceed to open the LC subject to any minor banking points that it might conceivably raise."
- Thus, Mr Freedman submits, the decision of the arbitrator about the inability to open a letter of credit was clearly correct in that
a. CIBC had not been instructed to provide and had not provided a letter of credit;
b. NatWest was not prepared to open a letter of credit absent basic information about Charlton and those said to be behind it;
c. Similarly, no other bank would have been prepared to have issued a letter of credit without such basic matters being addressed.
- The unavailability of the letter of credit by the time of termination demonstrates clearly, he submits, that no letter of credit would ever be forthcoming. DGI had already allowed more than a reasonable time to lapse. No amount of lies could in the end conceal the true position.
- Further, he goes on, it is apparent that throughout the foregoing communications to the Claimants, Mr Simms and Mr Rahman persisted in the representation that Charlton was able to discharge its obligation under the Option Agreement and in particular to open a letter of credit. There were continuing communications until the time when the Option Agreement was terminated on 18 September 1998, and thereafter this falsity was perpetuated as a part of the case against the Claimants.
- In all of the above circumstances, Charlton was, he submits, in repudiatory breach of contract for being unable to open a letter of credit within a reasonable time before shipment or at all. DGI was entitled to accept the repudiation and terminate the Option Agreement for breach.
- I agree with everything which Mr Freedman says except for one; and that is that no other bank would have been prepared to have issued a letter of credit without such basic matters (ie basic information about Charlton and those said to be behind it) being addressed; or, if that is not correct, that in the final analysis Mr Simms would have continued in his refusal to address them.
- Let me now address what Mr Simms has to say about all of this.
- He makes lengthy submissions about the effect of the Option Agreement, many of which I have dealt with already and where I have identified Charlton as having an arguable case (whether or not it is in fact correct). On the basis of his arguments, Mr Simms places the blame for slippage in the time-table fairly and squarely on DGI for (a) wrongly rejecting the option as properly exercised (b) the failure to provide a list (which although not in the contract one might think should have been provided in the absence of the General Equipment which DGI had warranted that it owned) and (c) failing to instruct Bureau Veritas to carry out the necessary task (something which Alex falsely said had been done when in fact it had not, only preliminary approaches having been made to it). That does not excuse Mr Simms making misrepresentations about the developing situation in relation to the letter of credit, but it does explain why he might reasonably have thought that the obligation to open it had not arisen.
- In this context, a dispute arose in front of the arbitrator which has also been aired before me about the time needed for DGI to procure the General Equipment. I really have no evidence about that except Haig's own assertions. What is clear is that DGI wanted 180 days and that their case now is that it wanted that time to ensure that the best deal could be achieved rather than because the equipment might be unavailable at any price. Haig suggested that it could be procured very quickly provided that the price was paid. Mr Barry Phillips (of Bureau Veritas) considered that 180 days was a sensible period and Charlton was led to believe that it was the necessary period. Given that there was a warranty that DGI owned the equipment already, it is not an attractive argument on its part that the procurement of the equipment could be left to the last moment but that the letter of credit would have to be opened a reasonable time before shipment even though the equipment had not been procured. If there was a risk that the opening of the letter of credit would be made more difficult because of the absence of the General Equipment, it would not be right to impose a greater burden on Charlton. Rather, DGI should make good its default in the most sensible way namely by procuring the General Equipment. That, at least, is the argument and one which has some force.
- Moreover, by 18 September 1998, when the contract was terminated, DGI had not taken a single step to procure the General Equipment. And yet shipment was strictly due then. With one side saying that it would not procure equipment until a letter of credit was in place and the other saying that it would not put a letter of credit in place until the equipment was fully specified, it is not entirely surprising that litigation ensued. Who is right on those contractual points is not, however, the issue which I am addressing. The issue I am addressing is whether the first to fourth Defendants are guilty of any of the unlawful conspiracies alleged by the Claimants which throws us back to the question whether Charlton was putting forward bona fide claims even if ultimately claims which are properly to be rejected.
- Mr Simms also says this:
"It is not disputed by the Claimants that they insisted from March 9 to September 18 1998 on a divisible and assignable letter of credit. Although Mr Gallo suggested that asking for a divisible and assignable letter of credit was "a throw away" or of no consequence, clearly the fact that the Claimants had not asked for a divisible and assignable letter of the credit in the Agreement is supportive and indicative of the fact that the contract was intended to apply to an existing production line. The only purpose for the Claimants asking for a divisible and assignable letter of credit was to be able to divide and transfer the letter of credit to various suppliers of equipment. In other words, the Claimants wished to use the letter of credit (to be opened by Charlton) to procure the general equipment. The Claimants were not prepared to spend their own money to buy the equipment notwithstanding that the contract obliged them to own the equipment at the time of the Agreement.
- There is considerable force in that submission and I accept it.
- Next he submits that it was also the case that from the earliest time that the wording of the letter of credit was discussed, ie May 1998, there was a fundamental difference between the requirements of Charlton and those of DGI. Charlton required that a detailed list of the equipment to be supplied should be provided by DGI and that that list would be referred to in the letter of credit. Mr Simms submits that this is the normal way in which a letter of credit is opened so that it is possible for the bank processing the letter of credit to determine, from the invoices supplied with the bills of lading that the goods contracted for have indeed been supplied.
- He goes on that DGI, in bad faith, insisted that the obligation on the part of Claimants was simply to provide equipment as specified by Bureau Veritas and, as they were not prepared to pay for Bureau Veritas to verify or certify a list of equipment until the letter of credit was opened, this meant an insistence on the part of the Claimants that the letter of credit must refer to an aggregation of equipment which was to be specified (subsequent to the opening of the letter of credit) by Bureau Veritas. Mr Simms submits that is not what the contract provided. The only involvement of Bureau Veritas anticipated in the contract is that set out in Clause 2.6 (b) and (c) which related to the capacity of the production line to produce 20,000 beds per annum and the anticipated useful life of the production line of at least 12-15 years. There was no requirement in the Agreement that Bureau Veritas be involved in selecting the list and specifying the equipment. Charlton expected capability on the part of DGI to specify a list of each and every item that needed to be supplied with sufficient information, as to the method of power (i.e. electricity, diesel or gas) and other performance specifications to make the list of equipment meaningful. This never occurred. Accordingly Mr Simms submits that the position taken by Charlton of requiring a list of equipment to be referred to in the letter of credit was an appropriate position under the Option Agreement and that DGI's insistence that they would not specify the equipment, would require Bureau Veritas to verify their list of equipment and would not ask Bureau Veritas to attempt such verification until after a letter of credit has been opened which was divisible and assignable, was a requirement in breach of the Agreement.
- I do not need to decide whether Mr Simms' approach to the contract is correct. What I can, and do say, is that it was an arguable one and that, by alleging it, he is not acting with a lack of bona fides. Accordingly, the issue returns again and again to the Mr Simms' perception of the ability of Charlton to open a letter of credit.
- On that, he takes issue to some extent with the conclusions of the arbitrator and almost totally with the submissions of Mr Freedman.
- Like Mr Freedman, Mr Simms regards the correspondence with CIBC in May 1998 as important because it demonstrates that Charlton had good banking relations with CIBC and that CIBC were prepared to open a letter of credit in the terms of the Agreement. Mr Simms submits that although not entitled to receive any evidence of capability of Charlton as of May 1998, the Claimants did in fact receive such evidence and had no justification for not performing its obligations under the Agreement. He does not dispute (he hardly could) that the letter of CIBC of 12 May was requested by him. I would add that it cannot be disputed that it was drafted by him. It is also not disputed that CIBC were not then being asked actually to open the letter of credit (Mr Simms would say because Charlton considered that they must first receive a detailed list of equipment). However, CIBC would not, he says, have written the letter if the underlying facts had not been true. The letter is quite clearly headed "Proposed Letter of Credit in your favour for $1.5 Million for Account of Charlton Corporation plc London England". The letter quite clearly sets out "without our responsibility, however, we can confirm that Charlton has the financial ability to open such a documentary credit with us and we can do so if the acquired information is available". There was then an indication that if the detailed list was supplied that CIBC would be prepared to pre-advise the letter of credit in favour of the Claimants.
- The purpose of the CIBC letter in May 1998 was to demonstrate capability since Mr Gallo was suggesting that Charlton did not have the financial capability. Charlton procured the letter from CIBC to put the fears of DGI at rest so that it would get on with the responsibilities of procurement and the instruction of Bureau Veritas which should have been implemented in March 1998. At this time, Mr Gallo suggested to CIBC that the definitive list of equipment that they and their customer were awaiting was in course of preparation. That was untrue and whether or not Mr Gallo knew it was untrue, his client certainly did.
- As to the "know your customer", I have already expressed the view that it is for the Claimants to show that they were not satisfied in relation to the bank accounts actually opened by Charlton rather than for Charlton to adduce evidence that they were. To be fair to the Claimants, I do not think that they assert that those requirements were not satisfied, but the arbitrator appears to have attached importance to it. Midland Bank in fact did receive further funding from Eastcastle in the context of the arbitration and opened bank guarantees in favour of the Claimants for two amounts of £60,000 in relation to security for the costs. Midland Bank on 21 October 1997 wrote a letter of introduction of Charlton to HSBC in Bangladesh and stated "Charlton Corporation plc is a properly constituted, unquoted public limited company, considered respectable and trustworthy and suitable to operate accounts in Bangladesh". Mr Simms says that there is therefore no doubt that Charlton was in good standing with CIBC and Midland Bank and that there is no conceivable banking reason why either bank should not have opened a letter of credit in favour of C1 if so instructed. If $1.5 million had been transferred from Bower Cotton's client account at NatWest to either CIBC or Midland Bank in the autumn of 1998 the recipient bank would have been concerned in the normal way to identify the source of funding. If it came from a respectable bank (NatWest) from the client account of a solicitors' firm and was funding already made available to the customer of the bank by its prospective majority shareholder, there would, Mr Simms says, have been no conceivable basis for CIBC or Midland Bank not to receive the funds. He suggests that each bank has a slightly different approach to wording and procedure: for example, it became clear in August 1998 that NatWest would not pre-advise a letter of credit whereas CIBC were happy to do so. There would be no "know your customer" requirement in relation to the opening of the letter of credit. There was no banking basis for so suggesting. That is what Mr Simms says.
- Mr Simms conducts, in his closing submissions, a lengthy review of the discussions concerning the letter of credit with Mr Gallo during August and September 1998. I do not think that I need to go into that because what it shows is a remaining difference of approach to the letter of credit (about which reasonable minds might differ as a matter of contractual obligation) and do not show one way or the other whether Charlton would be able to open a letter of credit once its wording was agreed. That Mr Simms conceded points does not show that they were wrong, only that he wanted to break the log-jam. Given those fundamental differences, it is not, in my judgment, correct for the Claimants to suggest that Charlton would, if it had really been able to do so, have opened the letter of credit in 1997. I do not overlook the fact, which Mr Simms draws to my attention, that following the discussion with Mr Gallo on 14 September 998 and the apparent agreement of the wording of a letter of credit, a meeting at which there was no attempt to make time of the essence, Mr Gallo, on instructions, only two days later terminated the Option Agreement. He did so not on the basis that Charlton was in fundamental breach of contract in failing to open the letter of credit or in anticipatory breach in being unable ever to open it (or at least within a reasonable time-frame) but because "The exercise of the option has not been perfected in a reasonable period of time, any right to do so now is forfeited and the option is null and void". This appears to me to be applying the strict approach applicable to time limits in the exercise of an option to the termination of a contract where there has been delay in one party carrying out its obligations. It even seems to suggest that the option had not in fact been properly exercised, a view which Mr Gallo says he did not share and advised his clients was incorrect.
- The following interchange between Mr Simms in cross-examination of Mr Gallo is interesting:
Q) Mr Gallo, you told the Court earlier today, and you said it in the arbitration, that the time for opening the letter of credit was a reasonable time before the goods go to the pier. The letter of credit, although we have not seen it yet, agreed on 14th [September] provided for 195 days, did it not?
A) Yes. Yes
Q) You accept that now. Therefore, we were not a reasonable time, were we, from the shipment of the goods to the pier of the East Coast port? You were six months away from such an event.
A) Mr Simms, the letter of credit in our view and my view, should have been opened three months before 25 September. That is my legal opinion under New York Law. Independent of what was said on 14th [September]".
- Mr Gallo clearly accepted that as of 14 September there was no question of DGI being able to deliver anything to the pier on 25 September. Mr Gallo explained his position as follows:
A) "It was our view, it was my view, second opinion view, that Charlton had an obligation to open this letter of credit three months before 25 September. Independent of what happened after 25 September. That is retrospective. That is, was my position, is my position and was a second opinion.
Q) So it is an obligation fixed to a date which is no longer relevant?
A) That is exactly right".
- As Mr Simms correctly observes, Mr Gallo was articulating the view that, although he accepted that a reasonable time before shipment was the obligation to open a letter of credit, he was fixing that date relative to 25 September whether or not 25 September was a date which could be achieved. Clearly with 180 days for procurement, it would not have been capable of achievement as a shipment date after the end of March 1998 if procurement had not commenced. The view articulated by Mr Gallo, according to Mr Simms, therefore makes no commercial or legal sense.
- I am bound to say that, had it been contractually agreed on 14 September, that shipment would be 195 days later, there would, in the absence of an express obligation to this effect, be no obligation on Charlton to open a letter of credit immediately. It was not, apparently, contractually agreed: but Mr Simms went from the 14 September discussion obviously thinking that the log-jam had been broken, that procurement would get under way and that he would have time to put the letter of credit in place, its wording having been agreed.
- The conclusions which I consider can be drawn from the evidence, in the light of the rival submissions, are these:
a. First, Charlton was in fact unable to open a letter of credit at any time up to 14 September 1998.
b. It was well arguable that Charlton was not in fact obliged to open a letter of credit before 14 September 1998.
c. Subject tonot one very important point, Mr Simms was able, reasonably, to hold the view that it was DGI and not Charlton which was in breach of contract (whether that view is correct I do not need to decide): it was a possible bona fide view.
d. Indeed, subject to that same point, it was a reasonable view to consider that DGI was in fundamental breach of contract by purporting to terminate the contract when it had no right to do so.
e. Those conclusions are not invalidated by the misrepresentations made by Mr Simms and Mr Rahman during the course of 1998.
- The important point just referred to is this. If, as a matter of fact, Charlton was not only then unable, but could not within a reasonable period, open a letter of credit and if, as a matter of fact, Mr Simms knew perfectly well that that would be possible, then the Claimants have very strong arguments that he would not have been acting bona fide in conducting Charlton's case in the arbitration. Different minds might take different views on what was the relevant period. It might, on one view, take one to the reasonable time before the expiry of the 195 day period ie the reasonable period before shipment within which a letter of credit ought to be opened in the ordinary course. On any view, that would be some months away. On another view, it could be simply such reasonable time after 14 September as might ordinarily be expected as the time needed to open a letter of credit, a matter of a few weeks at most.
- In my judgment, whatever the difficulties facing Charlton and even though it may well have been unable to open a letter of credit at the time of termination of the contract, it is not the case that Mr Simms knew, or must be taken to have known, that it was quite out of the question that a letter of credit could be opened. I do not consider that Charlton brought its claim against DGI maliciously. If one ignores the misrepresentation which procured the Option Agreement in the first place, what one sees, in my judgment, is a contractual dispute giving rise to proceedings which Charlton and Mr Simms considered that Charlton was entitled to bring. He may have been wrong in his assessment of the strength of its case, but in my judgment it was not brought maliciously or other than bona fide.
- It is then said that the first to fourth Defendants conducted the arbitration fraudulently even if it cannot be said that the bringing of the claim was not malicious. As to that, to the extent that there was inadequate discovery and untruthful testimony, I do not consider that there is sufficient evidence to establish that those were the result a conspiracy between any of the first to fourth Defendants and I decline to accept Mr Freedman's invitation that I should draw such strong adverse inferences against them in the light of the similar failings in this litigation however extreme those failings may be regarded. Even if one adopts the stance which Mr Freedman adopts that Jack and Helga were really behind Eastcastle and knew perfectly well what was going on the arbitration, I do think that, by the time of the arbitration, they were genuinely attempting to distance themselves from Charlton and were leaving it to Mr Simms to take decisions. I think it is unlikely that they had a significant input into the manner in which the arbitration was conducted and think it unlikely that they conspired with Mr Simms to hide documents and to procure untruths to be told.
- Accordingly, I reject Conspiracy II.
Procuring breach of contract
- DGI asserts another claim against the first to fourth Defendants, namely procuring Charlton's breach of the Option Agreement. This allegation is based on the proposition that Charlton's failure to open the letter of credit was procured by them. That is a startling proposition and is the very antithesis of the main claim which is that Charlton was unable to open a letter of credit so that no amount of attempted procurement by the first to fourth Defendants would ever have resulted in one being opened. The arbitrator's finding of fact was that, at least up to the time of the termination of the contract, Charlton was unable to open a letter of credit. He may very well have been right. Whether he was right or wrong, it is clear, I consider, that Charlton was having a great deal of difficulty in opening a letter of credit and that was not because the first to fourth Defendants were deliberately making life difficult for Charlton. In my judgment, there is nothing in this allegation.
Negligent mis-statement
- The Claimants also raise an issue of negligent misrepresentation in relation to the making of the Option Agreement. In the light of my findings in relation to fraudulent misrepresentation, I do not need to say anything more about this, although I would express serious doubt that any duty of care was owned by any of the Defendants, including Mr Simms notwithstanding that he was a practising solicitor, to any of the Claimants.
Summary
- In summary, therefore, the position is that I hold each of the first to fourth Defendants liable to DGI for fraudulent misrepresentation in respect of the intermediary representation but reject all of the other claims against them.
Limitation; Statute of Fraud (Amendment) Act 1828
- Defences have been raised to certain of the Claimants' claims based on limitation and the Statute of Frauds (Amendment) Act 1828.
- The issue of limitation now arises, following my conclusions, only in relation to fraudulent misrepresentation. The answer to it is that the limitation period does not begin until the Claimants had discovered the fraud or concealment concerned or could with reasonable diligence have discovered it. Jack and Helga assert, as I understand it, that the Claimants should have understood from the meeting in New York on 12 December 1997 that Mr Simms and Mr Rahman were making no representations at all about who the shareholders of Charlton were, refusing to answer questions from Mr Gallo and Ms Darmanian about the shareholding. But that, it seems to me, gets the Defendants nowhere on limitation. Even if the question had been "who are the shareholders" rather than "who are the other shareholders" the refusal to give any information would not have put the Claimants on notice that the intermediary representation was untrue – a refusal to reveal the shareholders does not tell the questioner that Jack and Helga have no interest.
- Since I have rejected the misrepresentation claims based on Charlton's creditworthiness and other financial representations, the issue under the 1828 Act does not arise.
Jack and Helga's liability for the arbitrator's awards against Charlton
- I turn now to the claim that Jack and Helga should be liable to the Claimants for the arbitrator's awards against Charlton, alternatively liable for all losses sustained by them caused by Charlton, on the footing that Charlton was a façade and sham designed to conceal the involvement of Jack and Helga and as a vehicle for fraud. Mr Freedman submits that this is a case where the corporate veil should be pierced. This would, of course, make Jack and Helga liable for the loss-of-bargain damages which were awarded against Charlton for breach of contract, although there could not be double counting: the Claimants could not recover the same damages twice, once for breach of contract and once for misrepresentation since any recovery of contractual damages would reduce the loss flowing from the misrepresentation. That could be significant in the distribution of the ultimate burden as between Mr Simms and Mr Rahman on the one hand and Jack and Helga on the other.
- Ownership and control of a company are in themselves insufficient to dislodge the principle of separate corporate identity. In order to justify lifting the veil of incorporation, "special circumstances (must) exist indicating that (the company) is a mere façade concealing the true facts": see Woolfson v Strathclyde Regional Council [1978] SC (HL) 90 at 96 a formulation apparently approved by the Court of Appeal in Adams v Cape Industries [1990] Ch 433 at 539.
- Applications of the principle include Gilford Motor Co. Ltd. v Horne [1933] Ch 935 a company had been used by the ex-employee as a "device, stratagem or mask" to the effective carrying on of business by him. The Court lifted the veil of incorporation. It did so, too, in Jones v Lipman [1962] 1 WLR 832 where the company was used by the individual as "a device and a sham, a mask which he holds before his face in an attempt to avoid recognition in the eye of equity": an order for specific performance was made against the company for the sale of a property which the first defendant had transferred to it between contract and completion and where the company was the creature of the first defendant.
- In Trustor AB v Smallbone [2001] 1 WLR 1177, Sir Andrew Morritt V-C rejected as too broad the proposition that the corporate veil can be pierced in any case where it is necessary to do so in the interests of justice and no third party is involved, following the Court of Appeal in Adams. He also rejected the proposition that the veil could be pierced whether the company was involved in some impropriety unless that proposition was applied in the context of another proposition viz that the veil will be pierced where the company was shown to be a façade or sham, with no unconnected third party involved. At paragraph 23 of his judgment, the Vice-Chancellor said this:
"In my judgement the court is entitled to "pierce the corporate veil" and recognise the receipt of the company as that of the individual(s) in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individuals."
The Judge reached this conclusion in a case where a company (held to be a sham and façade, the creature of the first defendant) had received money of the claimant by virtue of the first defendant's breach of duty as a director of the claimant.
- In all of the cases where the court has been willing to pierce the corporate veil, it has been necessary or convenient to do so to provide the claimant with an effective remedy to deal with the wrong which has been done to him and where the interposition of a company would, if effective, deprive him of that remedy against him. It seems to me that the veil, if it is to be lifted at all, is to be lifted for the purposes of the relevant transaction. It must surely be doubtful at least that the ex-employee in Gilford Motor Co v Horne would have been liable for the company's electricity bill simply because he was using the company as device and sham to avoid a covenant binding on him personally; and the same goes for the vendor of the property in Jones v Lipman.
- It is not permissible to lift the veil simply because a company has been involved in wrong-doing, in particular simply because it is in breach of contract. And whilst it is clear that the veil can be lifted where the company is a sham or façade or, to use different language, where it is a mask to conceal the true facts, it is, in my judgement, correct to do so only in order to provide a remedy for the wrong which those controlling the company have done. Charlton was not being used to conceal the purchase of the Tooling and General Equipment; what it was being used for was to hide Jack and Helga's involvement in that purchase.
- However, Mr Freedman submits that it no answer to a claim that the corporate veil should be lifted that there are concurrent liabilities or remedies in tort and that DGI must proceed by the tortious route. He relies on Trustor where he says that the court proceeded on the basis of lifting the veil but could have proceeded on a restitutionary basis. I am not sure that the position in relation to a restitutionary claim is as clear as Mr Freedman suggests. But even if it were, there would be no overlap between the two claims and to put forward different ways of recovering the same compensation/loss/property is perfectly acceptable. It seems to me, in contrast, that whilst a person committing the tort of deceit should be liable for all the loss which flows from his misrepresentation, it would be unprincipled to impose a liability on him for the loss of bargain suffered by a misrepresentee in respect of a contract with a third party with whom he had been induced to contract by the misrepresentation.
- In relation to that point, Mr Freedman says that it is no answer to say that the loss of bargain damages claimed are by reference to a bargain which was not desired – an innocent party entering into a contract owing to a fraud is not restricted to a claim for reliance loss. Now, it may well be that where A contracts with B as a result of B's fraudulent misrepresentation and the contract has been completed (so that questions of rescission and adoption of the contract with knowledge of the fraud to do not arise), A is able to claim (a) damages for loss of bargain as a result of B's breach of contract and (b) reliance loss, although he could not obtain double recovery. It does not follow that B should be liable for contractual damages to A where the contract which he procured was one between A and C, even where C is the creature of B. To put the point another way, where in that example the principle of corporate separation exemplified in Salamon v A Salamon & Co Ltd [1897] AC 22 would apply absent a misrepresentation by the person controlling the company, there is no need, and it would be inappropriate, to lift the veil in order to provide A with a contractual remedy against B; A recovers all his loss arising as a result of the misrepresentation by his tortious claim in deceit.
- If that is correct, the question arises whether it is necessary in the present case to lift the veil of Charlton and perhaps Ancon as well in order to provide the Claimants with the remedy to which they are entitled. In my judgment, it is not. Charlton, if it was being used as a device at all, was being used to hide the involvement of Jack and Helga and, if that concealment had not taken place, the Option Agreement would not have been entered into. The Claimants have their remedy against Jack and Helga in the form of an action for fraudulent misrepresentation. There is simply no need, in order to give the Claimants redress for that misrepresentation, to lift the veil at all: indeed, to do so would achieve nothing in relation to that wrong.
- If it had been unnecessary to hide Jack and Helga's involvement (because counter-factually, DGI would have been willing to sell to them) it could not, I think, be suggested that the veil should be lifted so as to make them contractually liable for Charlton's breach of contract. It is certainly not the case, and I so hold, that Jack and Helga would have purchased the Tooling and General Equipment themselves rather than through a company, if it had been unnecessary to hide their involvement. In my judgement, even if Charlton can properly be described as a façade or sham or device, it is not appropriate to lift the veil to make Jack and Helga contractually liable for a contract which they would never have entered into themselves.
- In case I am wrong in that approach (so that in principle the veil could be lifted to provide the Claimants with the equivalent of a contractual remedy against Jack and Helga for loss of bargain), I should address the evidence further to determine whether this is an appropriate case, on the facts, for lifting the veil. I have already identified the matter referred to in paragraph 17 of the Re-re-amended Particulars of Claim: see paragraph 453 above. In addition, reliance is placed on a number of Answers (specified in paragraph 30 of the Re-re-amended Particulars of Claim) to a Request for Further Information dated 9 December 2004. Many of those answers do not actually really add anything; and many of them go to show Jack and Helga's effective control of other companies within the Brinton structure designed to show that, in fact, Jack and Helga owned and controlled Charlton/Ancon.
- I have already concluded that Jack and Helga did, either directly or indirectly through Ancon, own and control Charlton. I also conclude that they were closely involved in the decision to acquire the Tooling and General Equipment and that they were involved in strategic decisions concerning the negotiation for and implementation of the Option Agreement until its termination. They were also, in my judgement, strategically involved in Charlton's action after termination of the Option Agreement, at least up until Eastcastle came on the scene. Jack was also clearly involved in discussions with Alex and Haig about the possible buy-back and distribution agreements and I have no doubt that Jack, and probably Helga, discussed these matters with Mr Simms and that Charlton would not have proceeded with any such agreements without the sanction of Jack and Helga. This is so, in my judgment, even assuming that Mr Simms is being truthful when he says that he, personally, was not keen on DGI's continuing involvement in any buy-back or distribution arrangements but that Jack was pressing these with his cousins.
- However, having seen Mr Simms give oral testimony, and having read and re-read his statements, I do not see him as a man who would be dictated to by Jack and Helga. He would, in the end, no doubt comply with their instructions since they could ultimately "call the shots": the money was their money (or on their case, money of the Helga family trust) and not Mr Simms' money. He, however, was the chairman of Charlton carrying out negotiations as he saw fit on behalf of Charlton: he was not simply the agent of Jack and Helga in doing so, still less their lackey to do their bidding.
- It is also clear that Mr Rahman, when in Bangladesh and in dealing with the Bangladeshis, was acting as he saw fit and not in any way, on a day to day basis, at the direction of Jack and Helga. It was he alone who knew, and had contact with, the potential financiers and backers and he who dealt with the Bangladeshi banks. As managing director of Charlton, he took the day to day decisions about how to get the Bangladesh deal off the ground. Again, I have no doubt that Jack and Helga were kept fully informed and had input into decisions and could, ultimately, as I say, "call the shots": nonetheless, so far as concerns the Bangladesh end of the transaction, Charlton was, so it seems to me, a genuine company which was not being used, vis a vis the Bangladeshis, as a sham or façade at all.
- Mr Freedman submits, among other things, as follows:
"Charlton was used as a façade and D3,D4's ownership and control was concealed because Ds knew that DGI would not deal with D3,D4 or a company in which they were involved"
I accept that Charlton was used to hide Jack and Helga's involvement. Simpliciter. The fraud, however, was the misrepresentation not the use of a company. Mr Freedman goes on:
"This active concealment from C was a part of modus operandi of D3,D4 to carry out their unlawful purposes to avoiding recognition from creditors and commercial counterparties and tricking people into trading with their corporate creatures."
That forensic flourish is an extreme submission which I do not accept. It may be true that, in some cases, Jack and Helga have deliberately kept from view their (as they would say indirect) involvement in investments. To suggest that everything which they have done in their business lives is dishonest could not sensibly be done; and I have no evidence at all that anyone has been tricked into trading with Jack and Helga's corporate structure other than the Charlton transaction.
- In my judgment, this is not a case where it would be appropriate to lift the veil for the purposes of making Jack and Helga liable for the contractual obligations of Charlton.
- For completeness I should mention briefly two points (which I do not address in any detail because they do not, in the light of my previous findings, strictly arise for decision):
a. First, I accept Mr Freedman's submissions that, in relation to the "lifting the veil" point, both Jack and Helga would be liable if, contrary to my view, the veil should be lifted all.
b. Secondly, I consider that there is a great deal of force in his submission that the arrival on the scene of Eastcastle would not enable Jack and Helga to escape liability if the veil were not to be lifted. If the veil is to be lifted at all, it is by virtue of Jack and Helga's involvement in Charlton coupled with their fraudulent misrepresentations, in the time leading up to the Option Agreement. They effectively made themselves liable under Charlton's contract at the time of its conclusion in September 1997. They cannot escape liability by divesting themselves, even assuming that they did so, of their interest in Charlton. That assumption, I note, cannot in any case be substantiated: it is clear that Ancon was to retain a substantial interest in Charlton even after Eastcastle had injected funds.
Mr Simms' defence and counterclaim based on the Claimants' misrepresentations
- Mr Simms contends that fraudulent misrepresentations were made to him about the ownership of the General Equipment. He says, by way of defence, that Charlton would not have entered into the Option Agreement on the terms which it did if had known of the falsity of the representation: I take that as an allegation of inducement. Further, he says, by way of counterclaim, that he has been deprived, as a result of the Claimants' conduct, of the opportunity to act as chairman of Charlton and to obtain substantial chairman's fees and to each a success fee on the contract. He also claims that the Claimants were guilty of a conspiracy against him in relation to those representations and the Option Agreement and in relation to the litigation/arbitration.
- Mr Simms says that the representation was made on a number of occasions:
a. By Alex in the presence of Haig to Mr Rahman in a phone call on 31 July or 1 August 1997.
b. By Alex in the 13 August 1997 conference call.
c. By Alex in the presence of Haig in a number of phone calls relating to the drafting of the Option Agreement.
- As one can see from the Option Agreement, DGI gave a warranty that it had the entire production line. I have already held that Mr Simms understood that to be the position certainly up to the time when Ms Darmanian told him that some items needed to be acquired (who, nonetheless, took no steps to re-draft the relevant warranties). It seems reasonably clear that Jack had, early on, informed Mr Simms that an entire production line was for sale; Jack did not tell Mr Simms that the General Equipment needed to be procured even though, as I have held, he knew that to be the case. It is at least possible, therefore, that Mr Simms could have included the warranties not because he had been told by Alex that DGI had an entire production line but because he had been told it by Jack.
- However, Mr Simms was a party to a number of conversations with Alex, starting with the 13 August 1997 conference call and continuing with further calls about the drafting of the contract. This was not a drafting exercise which, on DGI's side, had been left to lawyers: Alex and Haig took responsibility for the drafting themselves and, indeed, Mr Simms was surprised and irritated to find that a draft which he thought had been agreed had at the last moment been sent to Ms Darmanian for her to review. It seems to me to be highly unlikely that something as important as the assets for sale was not discussed in those drafting meetings. If Mr Simms had been told that the General Equipment had to be procured then, assuming that Charlton would have wanted to go ahead anyway, he would have drafted the contract differently. I would certainly reject any suggestion that, from his first draft onwards, he fraudulently included the warranties knowing all along that DGI did not have the whole production line.
- It is extremely difficult to see how anyone reading the draft Option Agreement could have thought that DGI would need to procure anything further. At the very least, Alex continued to deal with Mr Simms on the basis of a draft agreement which contained warranties which were consistent only with DGI in fact owning the entire production line. He now says that he was very busy and that he allowed some things to go into the contract which he never should have. However, the error seems to have been identified prior to conclusion of the Option Agreement. Ms Darmanian contacted Mr Simms shortly before that conclusion to say that there was a need "to source some of the equipment required". There seems little doubt that Ms Darmanian communicated to Mr Simms as much as she had been told, which was not very much. Given that there was no attempt to re-draft the contract or remove the warranties vis a vis General Equipment, that statement can hardly be taken as a correction of any representation (if one had been made) that a complete production line was owned.
- I think it more likely than not that, in the course of his conversations with Mr Simms, Alex did leave Mr Simms with the understanding that an entire production line was for sale. Whether he did it by words, by conduct or by a failure to correct what was contained in the draft contract which he was discussing and which he can therefore have been taken to be adopting, there was, in my judgment, a representation by Alex that DGI was selling an entire production line. It was a representation which he knew to be untrue. It was a representation on the basis of which Mr Simms proceeded to draft the contract himself to allow Charlton to enter into the Option Agreement.
- Dealing first with Mr Simms' defence, Mr Simms can argue that, had the representation not been made, Charlton would not have entered into the Option Agreement. That argument would give rise to interesting arguments (not debated before me) about the effect of a contract entered into between A and B as a result of mutual misrepresentations. A could say that induced by B's fraudulent representation he entered into a contract which he would not otherwise have entered into as a result of which he has suffered loss and damage. But B could defend that by saying that he, B, would not himself have entered into the contract if had not been for A's fraudulent misrepresentation so that A has in fact caused his own loss. I would incline to the view that, in a case such as that, A and B have no claim against each other. Mr Simms can therefore argue that Charlton has a defence to DGI's claim based on misrepresentation and breach of contract and that, if Charlton is not liable, nor is he (or Jack and Helga).
- The position in the present case is not, however, the same. Critically, Charlton, and the first to fourth Defendants were informed well before exercise of the option that the General Equipment needed to be acquired. They chose, nonetheless, to exercise it and to bring about a binding contract. They thereby affirmed the Option Agreement with knowledge of the misrepresentation and would not thereafter be able to rely on it (in contrast with Charlton being able to rely on the warranty) to justify rescission of the contract although any right to damage suffered prior to that time would be preserved. But given that Charlton did not have to exercise the option, it does not seem to me that it could thereafter rely on Alex' misrepresentation to defend the Claimants' own claim based on misrepresentation; having affirmed the contract by exercising the option, the Claimants are then left with their own remedies in relation to a subsisting contract arising from the misrepresentations made by the first to fourth Defendants. Indeed, one can see that, in a sense, by exercising the option and affirming the contract, Charlton was re-asserting the validity of the contract and thus the misrepresentation. I see nothing incongruous in the effect of affirming the contract being to remove a defence which Charlton might otherwise have had.
- Quite apart from that, Mr Simms' defence on this ground has to meet the fact that the arbitrator has held that Alex did not make the misrepresentation. That is a finding which is binding on Charlton whether or not it is binding on Mr Simms. As between the Claimants and Charlton, it has been established that Charlton has no such defence as Mr Simms now needs to rely on in his own defence. In order to succeed in his defence, Mr Simms has to succeed, in my judgment, in showing that Charlton has a defence to the claim against it: but that is something which, as a matter of fact, has already been decided against Charlton by the arbitrator. This is not a determination that Mr Simms is bound by any issue estoppels arising out of the arbitrator's decision; it is simply a recognition that it had been established that Charlton in fact has no such defence as Mr Simms needs to rely on. Accordingly, on this additional ground, I hold that Mr Simms has no defence.
- Turning now to Mr Simms' counterclaim, my finding that Alex did make a representation concerning ownership of the General Equipment does not necessarily mean that Alex is liable to Mr Simms in the way Mr Simms alleges.
- The first problem for Mr Simms is to show that the representation was made to him with the intention that he should act on it. In my judgment, this was a representation made to Charlton alone. Alex was negotiating the sale of assets to Charlton, not to Mr Simms. Subject to one important point, he would not have expected any person other than Charlton itself to act in reliance on his representations. The important point just mentioned is this: it is the Claimants' case that Mr Simms had represented that he was a major shareholder: any representation to him would be made not only qua lawyer to Charlton, but to him personally to persuade him to procure Charlton to enter into the Option Agreement. However, Mr Simms' position is that the major shareholder representation was not made, and I have held that, if it was made, I cannot safely conclude that it was made before the conclusion of the Option Agreement. In these circumstances, I conclude that any representation made about ownership of the production line was not made with the intention that Mr Simms (or indeed Mr Rahman) should be induced by it to do, or refrain from doing, something which they might not otherwise do or refrain from doing. In other words, there is lacking the third ingredient of the tort of deceit laid down in Derry v Peek namely an intention that the representee should act on the representation.
- The second problem for Mr Simms arises from a consideration of the warranty. It would be difficult for Charlton to say that it relied on Alex's representation when it obtained a warranty from DGI about ownership. Charlton itself was protected by that warranty and did not enter into the Option Agreement induced to do so by any representation about ownership of the General Equipment. In the events which have happened, the Option Agreement has been terminated. Even if, contrary to the arbitrator's decision (which is, of course, binding on Charlton whether or not it is not binding on Mr Simms) Charlton was not in breach of contract and had a substantial damages claim against DGI, that would not give Mr Simms a direct claim against any of the Claimants in respect of his loss of opportunity as a result of the wrongful termination of his contract.
- The third problem for Mr Simms arises from consideration of what would have happened if the misrepresentation had not been made to Mr Simms. He would either have walked away from Charlton (in which case he would have no claim for fees) or he would have continued with his involvement (in which case, he would have no claim for fees because, in fact, the contract was, rightly or wrongly, terminated). It might, I suppose, be said that, if the representation had not been made to Mr Simms, it would not have been made to Charlton either. But then what would have happened? One possibility is that there would have been no contract at all, in which case Mr Simms has not lost the opportunity to earn fees from Charlton. Another possibility is that an Option Agreement would have proceeded in rather different terms; but that is far too speculative a basis on which to proceed. In any case, to award Mr Simms damages for deceit based on what Charlton might have done in different circumstances would not seem to me to be a correct approach. Moreover, the arbitrator has held that Charlton did in fact know the true position since Jack's knowledge was to be imputed to it. Whatever the position in relation to Mr Simms being bound by the decision of the arbitrator, that decision governs the position as between DGI and Charlton. It does not seem to me that, on any footing, Mr Simms can say that the actual position as between DGI and Charlton is other than that which the arbitrator has found. The actual position is that the contract is at an end through Charlton's default so that, again, Mr Simms can have no claim based on Alex's representation.
- Mr Simms' claims in relation to conspiracy concerning the conduct of the arbitration mirror those of the Claimants against the first to fourth Defendants. I reject them.
- It is, of course, the case that DGI's counterclaims in the arbitration were brought with the active involvement of Alex and Haig and no doubt they "combined" together to do so. It is also the case, of course, that they did so in order to recover substantial damages/compensation from Charlton. In so doing, they would say that far from seeking to injure Charlton, they were simply seeking redress for a wrong done to DGI. Mr Simms can succeed only if he is able to show that the Claimants had no belief in the case which they were presenting to the arbitrator concerning the misrepresentations allegedly made by Mr Simms, Mr Rahman, Jack and Helga. It must be remembered that those were not the only issues in the arbitration. Those are the major shareholding, financial and experienced manufacturer representations. I do not accept that any of those allegations were brought other than bona fide. Indeed, the arbitrator found them all to have been made out; and although, in the light of the evidence before me, I have reached some different conclusions, it seems to me that the claims before me based on those representations were also brought bona fide.
- Dealing with each of them in turn:
a. I have dealt with the major-shareholding representation by holding that I cannot safely conclude that, if it was made at all, it was made prior to the conclusion of the Option Agreement so as to give rise to a misrepresentation inducing the contract. That is not to say that it was not made, and, unless I reject the evidence of Haig, Mr Gallo and Ms Darmanian that they were told of it by Alex (or unless I conclude that Alex was lying when he told them) then it seems that the representation was made at some time. That the evidence failed to persuade me to the necessary standard that a representation was before the conclusion of the Option Agreement does not mean that this case is to be taken out of the ordinary run of cases where the evidence is insufficient to persuade the judge or where one side's evidence is rejected in favour of the other.
b. Precisely the same observations apply to the financial representations.
c. There is perhaps more scope for complaint in relation to the experienced manufacturer representation which, even if it was made, is one which I find hard to believe would have been relied on, particularly given that no complaint was made once the true position was known, even on their own case, to the Claimants (ie as a result of Haig's report on his visit to Bangladesh). But even here, I consider that there was a bona fide dispute to raise before the arbitrator (and indeed one which he resolved in favour of DGI). It was not a case based on evidence which Alex knew to be untrue.
- The fourth problem facing Mr Simms relates to some of the heads of damage. He claims his legal costs in this action on an indemnity basis. There is no need for this claim to be made at all. Had I found the claims based on the representations just discussed to be without any foundation and a "put-up" job on the part of the Claimants, no doubt that would be reflected in the costs order which I make. But I have not found that to be the case and, in any case, the costs of this action must reflect the overall result and conduct of this action: it would not be correct to carve-out certain issues to deal with not as part of an overall costs exercise but as a damages claim.
- Mr Simms claims his own costs in the arbitration. I can see that, had the factual basis for his claim existed, he might have had a claim for his own costs in resisting being joined in those proceedings. But I do not see how he can recover any other costs. He claims wasted management time for himself. I am not sure whether that is management time of Bower Cotton representing his own time spent on behalf of the firm or whether it is management time of Charlton representing his own time spent on behalf of Charlton as its chairman. In neither case is the amount recoverable, in my judgment, as damages suffered by Mr Simms himself.
- Mr Freedman put forward a number of other reasons why Mr Simms's claims in misrepresentation and conspiracy should fail including:
a. The allegation that he is a privy to and bound by necessary and fundamental findings of the arbitrator both as to the General Equipment and as to the rejection of the assertions of Charlton in the arbitration. This is a topic I will come to.
b. There is no contemporaneous evidence to support the existence of the success fee to him or of an intended consultancy for Charlton. On the contrary, the evidence that his involvement was as part of the ordinary course of the business of Bower Cotton. As to that:
i. The loss of fees e.g. consultancy fees of £75,000 pa would have been fees payable to him, but for which he as a partner would have to account to the firm of Bower Cotton: the fees for legal and incidental costs of the action were the fees of Bower Cotton.
ii. The action for the fees was one which could not properly be brought in the name of Mr Simms because it required the firm name and/or those of Mr Simms together with his partners. It could not be brought without the consent of the other partners, and, in the event, that their consent was not forthcoming, it would require an effective indemnity against costs.
iii. There is no evidence that any request for consent was ever made, or that an effective indemnity could be provided. In the context of proceedings having been brought between Mr Simms and Mr Conlon (the fifth Defendant), Mr Freedman invites the Court to treat the counterclaim as one being brought against the express wishes of at least one of the other partners.
iv. Director's/chairman's fees would start to become payable only in the event that the goods were delivered to Bangladesh, which in turn depended upon the letter of credit having been opened. The same applies to the alleged success fee of 1%, namely $15,000. Since Charlton was unable to open a letter of credit, the directors' fees and the success fee would never have been payable. This is one of the points which arises in relation to damages for fraudulent representation which I have already dealt with.
I do not propose to say anything more about that aspect.
c. There was no possibility of Charlton succeeding in a legitimate way. The onus must be on Mr Simms to prove the contrary. As Mr Simms accepted in his evidence, this in turn depended upon there being a bona fide project in Bangladesh: Mr Freedman submits that Mr Simms is unable in all the circumstances to establish that there was such a bona fide project. For reasons already given, I am not prepared, in this action, to proceed on that basis and I would reject that ground.
Privies
- This brings me to the question of privies to the arbitration. The Claimants say that the arbitration gives rise to issue estoppels not only as between the parties but also as between the parties and Mr Simms, Jack and Helga. Unfortunately for me, having reached different conclusions in some respects from the arbitrator, being conclusions which might impact on the relief claimed in this litigation, I need to decide whether I am indeed bound in the way that Mr Freedman suggests and therefore unable to apply my own findings. It might be asked why I did not, in the first instance, decide whether I so found thus making unnecessary many of the findings which I have made. The answer to that, as I explained early in this judgment, is because, in order to decide whether any of those Defendants are privies, many of the underlying issues have to be decided in particular the extent to which Ancon/Charlton was owned and controlled by Jack and Helga.
- It is not only parties to litigation who can be bound by the determinations made in it. The findings, if they are necessary and fundamental, are binding on those identified as a privy of one of the other parties in the litigation. It is said that res judicata estoppels operate for, or against, not only the parties, but those who are privy to them in blood, title or interest: see Carl Zeiss Stiftung (No 2) [1967] 1 AC 853 at 909-10. Privies include any person who succeeds to the rights or liabilities of the party upon death or insolvency or who is otherwise identified in estate or interest (see Spencer Bower op cit at paragraph 231). But what does "interest" mean in these descriptions? The test is described by Megarry V-C in Gleeson v Whippell [1977] 1 WLR 510 at 515
"I do not say that one must be the alter ego of the other: but it does seem to me that, having due regard to the subject matter of dispute, there must be a sufficient degree of identification between the two to make it just to hold that the decision to which one was a party should be binding in proceedings to which the other is party. It is in that sense that I would regard the phrase "privity of interest"."
- Although this has been criticised as being circuitous and not helpful in identifying when the necessary degree of identification is present, Lord Bingham of Cornhill, when dealing, in Johnson v Gore-Wood [2002] 1 AC 1, with the rule in Henderson v Henderson identified, at p 32, the correct approach as that formulated in Gleeson. He noted that the company "was the corporate embodiment of Mr Johnson. If he had wished to include his personal claim in the company's action, or to issue proceedings in tandem with those of the company, he had power to do so". The same passage was referred to and relied on by Morritt V-C in Special Effects Ltd v L'Oreal SA [2006] EWHC 481 (Ch), [2006] All ER (D) 27 (Mar) at para [27].
- Mr Simms has produced detailed written submissions on this issue. He relies on a number of Commonwealth authorities in an attempt to derive a number of propositions which would get him home in his defence. To the extent that those authorities apply a different test from English law, they are, of course, not particularly helpful. He relies on Carl Zeiss (No 2) to show that a solicitor to a company does not thereby become a privy of the company (although contrast the position in Guay v Dennehy (1994) 93 Man R (2d) (Manitoba Queen's Bench) where a lawyer who was involved in the business of the company and the earlier proceedings and who was also a director and secretary-treasure of the client was liable as a privy). Therefore, he says, simply because he was Charlton's solicitor and advocate does not make him Charlton's privy. Then he relies on two Australian cases, Shears v Chisholm [1994] 2 VR 525 and Effem Foods Pty Ltd v Trawl Industries of Australia Pty Ltd (1993) 43 FCR 510 to establish that shareholders and directors of a company are not, as such, privies of the company. The conclusion, therefore, is said to be that he is not a privy of Charlton.
- Some caution must be used in applying authorities which either (or both) (i) pre-date Gleeson (ii) come from a different jurisdiction which might apply a different test. Thus, in Effem, one sees at p 521 reference to Ramsay v Pigim (1968) 118 CLR 271 and identification of the test there set out namely that the privy must claim under or through the person the person of whom he is said to be a privy. That is certainly different from the Gleeson test. Further, at pp 540-541, reference is made to the New Zealand decision in Shiels v Blakeley [1968] 2 NZLR 262 which expressly followed Gleeson but in respect of which the Court in Effem said that decisions binding it have required that the privity which raises an issue estoppel or res judicata "to pass the test of a finer sieve that that". Applying the Ramsay test there was no privity; but it is far from clear that the decision would have been the same way had the Gleeson test found favour.
- Shears is an example of a case where, on the totality of the facts, the court held that there was no privity. But clearly the court had in mind the Gleeson test. It goes no further than to establish that merely because a person is a director and shareholder that therefore he is a privy of the company.
- It is certainly not the case in English law that, in the cases of a company and its directors/shareholders, it is necessary to show that the company is the alter ego of the alleged privy, contrary to what Mr Simms submits. Mr Simms goes even further to assert that even where it is a case of alter ego, the controlling director/shareholder must participate in the proceedings claimed to create an issue estoppel. In that context, he relies on the New Zealand case of Laughland v Stephenson [1995] 2 NZLR 474 and the Canadian case (in the Alberta Court of Appeal) of BC Ltd v Bank of Montreal (1995) 128 DLR (4th) 488. I cannot see the relevance of the former to that submission. The latter, applying Gleeson, is an example of a case where the company was the alter ego of the individuals and where it was held there was privity. That does not mean that alter ego is a necessary (or even sufficient) condition.
- This all goes to illustrate that the question whether one person is privy of another is highly fact-dependent. The fact that a particular relationship (eg solicitor/client or director/company) exists in one case, where the circumstances are such that there is no privity, does not mean that, judged against the facts of another case, that same relationship might not be a very important factor in establishing that there is privity. Mr Simms draws these conclusions from the cases:
a. A shareholder and/or a director and/or officer of a company involved in the previous proceedings is not a privy of the company or a privy to the previous proceedings unless the previous proceedings were pursued on behalf of such shareholder/director/officer. The arbitration was not pursued on behalf of the Mr Simms.
b. A party having no interest in the outcome of the previous proceedings is not a privy to a party in those proceedings or to the proceedings.
c. A witness in the previous proceedings is not a privy to any party in the previous proceedings or to the previous proceedings.
d. A solicitor representing a party in the previous proceedings is not a privy to that party or to the proceedings.
e. The determination of an issue of corporate responsibility is a different issue than that of personal responsibility even if the same facts are involved in determining corporate and personal responsibility. The issue of personal responsibility was never before the arbitration.
f. A shareholder/controlling director of a company which is his alter ego can have a privity of interest with the company. However, to be a privy to the previous proceedings, the shareholder/controlling director must have sufficient interest in the previous proceedings and to have been deeply involved in the previous proceedings
g. An agent is not a privy of his principal since the responsibility of agent and principal are different and the agent has no sufficient interest in the outcome of the previous proceedings involving his principal.
h. A decision against an alleged joint-tortfeasor does not make the alleged joint-tortfeasor who was not a party to the previous proceedings, his privy.
i. Where various defendants to new litigation are clearly not privies to the previous proceedings, no defendant to the new litigation (other than an actual party to the previous proceedings) should be estopped as a privy.
- As to the first of those conclusions, the proposition is not correct. There is no rule that a director/shareholder cannot be a privy unless the proceedings were pursued as suggested. No doubt if they were pursued in that way, it would be strong evidence of privity. As to the second, third, fourth, seventh and eighth of those conclusions, I agree that none of those factors, taken by themselves and divorced from the factual matrix, is enough to establish privity: but that is a conclusion which is not of great assistance in deciding whether, on the facts of a particular case, there is privity. The sixth conclusion is directed at the case of alter ego. In referring to "interest" Mr Simms seems to be searching for some sort of beneficial or legal interest. However, Gleeson tells us what it is we have to look for in identifying whether there relationship of "privy in interest": there is no further "interest" with which the search is concerned. The ninth conclusion ought to be uncontroversial – if a person is not a privy he cannot be estopped.
- The task for me, however, is now established: I must apply the Gleeson test, for all its uncertainty, as best I can.
- I have not considered the fifth of Mr Simms' conclusions. It is very important and is part of a larger issue, to which I now turn, which is the extent to which the present proceedings deal with the same issues as the arbitration.
- Spencer Bower (op cit) states at paragraph 182 that an earlier decision "may be invoked as determining, as an essential step in its reasoning, some issue in the second [proceedings]. Issue estoppel covers fundamental issues determined in an earlier proceeding, which formed the basis of the judgment" and at paragraph 198 that "It is a necessary condition for an estoppel that a question in the second proceedings is the same as that decided or covered by the first". The issue determined in the earlier proceedings can be an issue of fact. The Claimants quite clearly raise this aspect of their case as an issue estoppel or res judicata in relation to the findings of the arbitrator. Questions of identity of subject matter are not to the point and I do not accept Mr Simms' submission that the Claimants allege that there is an identity of subject matter and gain no assistance from his citation of Barakot Ltd v Epiette Ltd [1998] 1 BCLC 283. What they do assert is that there are fundamental findings of fact by the arbitrator which would clearly give rise to an issue estoppel in relation to any other litigation between DGI and Charlton and that Mr Simms is bound because he is a privy to Charlton.
- It must, however, be noted that the claims against Mr Simms in this litigation are significantly different from those which were made against Charlton in the arbitration. Thus, as it seems to me, the major issue before me has been the intermediary representation, one which was not made at all in the arbitration. In putting forward the intermediary representation against Mr Simms, the Claimants rely, as pleaded in paragraph 8B of the Re-re-amended Particular of Claim, on the major shareholder representation and/or the concealment of Jack and Helga's involvement. It is not immediately apparent that Mr Simms (assuming he is a privy) should be estopped, in an attempt to defend the intermediary representation, from asserting that he did not, in fact, make the major-shareholder representation or to argue that, if it was made at all, it was made after the Option Agreement had been concluded and/or that it was not intended to induce the making of the Option Agreement. I am concerned by this point and return to it later.
- It is helpful, I think, to consider at this stage precisely what elements of the arbitrator's decision are likely to cause any difficulty. Mr Freedman, at my request, produced a document identifying the elements of the arbitrator's award which the Claimants say should bind Mr Simms, Jack and Helga on the privy argument. I summarise them as follows:
a. Misrepresentation
i. Mr Simms and Mr Rahman falsely represented to DGI that each owned major shareholdings in Charlton such representation being made knowing the same to be false and being false, and was relied upon by DGI.
ii. Mr Simms and Mr Rahman falsely represented to DGI that Charlton was a sound trading company which was creditworthy and capable of performing its financial obligations under the Option Agreement such representation being made knowingly and being false, and was relied upon by DGI.
iii. Charlton represented that Charlton was a company experienced in manufacturing various products in Third World countries which could not be manufactured profitably in the West, and was relied upon by DGI.
iv. The representations were continuing representations during the period of the Option Agreement which induced DGI not to terminate or cancel the agreement at an earlier time.
b. Breach of Contract
i. Charlton was unable to procure between 11 November 1997 and 16 November 1998 the issue of a letter of credit on usual business terms or at all for $1.5 million.
ii. Charlton would not have been able to procure the same.
iii. HCharlton's representations that it was able to open a letter of credit were fraudulent.
iv. The failure by Charlton to open the required letter of credit was a material breach of the Option Agreement which excused DGI from further performance of the contract, whereupon DGI was entitled to damages for non-acceptance or repudiation and to incidental damages.
c. Jack and Helga controlling managing and directing Charlton
i. Jack was aware for some time that DGI owned only the tooling plus the know how and the drawings, from his previous attempts to sell the equipment.
ii. Such knowledge was to be imputed to Charlton because Jack played a significant directorial role for Charlton during and after the period leading up to the Option Agreement. The instances therein set out demonstrated conclusively that Jack and Helga Dadourian acted in a controlling and at times a managerial capacity in relation to Charlton.
d. No misrepresentation by DGI/Alex and Haig
DGI did not misrepresent the position to Charlton as to what it owned.
- I do not think it is necessary to consider the Breach of Contract factors further: even accepting the arbitrator's conclusions, the question for me is whether Mr Simms was conducting the arbitration bona fide or whether Charlton's case concerning the letter of credit was so utterly hopeless, and known to Mr Simms to be so utterly hopeless, that he should not have run it. I have concluded that he was acting bona fide. In any event, the arbitrator's finding does not, as I have said, amount to a finding that Charlton would be unable to open a letter of credit at any reasonable time in the future, but only up to September 1998; nor does he find that Mr Simms was fraudulent but only that Charlton was and since in reaching that conclusion he relied on factors involving Mr Rahman, it is not possible to say that Mr Simms was himself fraudulent, however likely one might think it to be that the arbitrator would have reached that conclusion.
- Quite apart from that, it makes no difference to the liability for misrepresentation of Jack, Helga and Mr Simms whether the arbitrator was right in his conclusions on breach of contract. My findings on the intermediary representation mean that they are liable to DGI for all the loss flowing from its having entered into the Option Agreement. DGI has in fact incurred costs in an arbitration in which it succeeded and (subject to a point I will make when considering damages) it is no answer to that to say that the arbitrator got it wrong. Again, Jack, Helga and Mr Simms are bound by the arbitrator's findings not in the legal sense that there is an issue estoppel but in the practical sense that the contract has been terminated. Similarly, I do not think that the arbitrator's findings on breach of contract impact on the Claimants' conspiracy claims; I have in any event rejected those on grounds which do not turn on reliance on findings of fact inconsistent with those of the arbitrator.
- The findings of the arbitrator in respect of breach of contract might have made a difference if I had decided that this was an appropriate case for lifting the corporate veil. In those circumstances, Jack and Helga would be liable for the damages awards made against Charlton. I am bound to say, however, that if I had decided otherwise, and had been prepared to lift the veil, it would almost inevitably follow that Jack and Helga were privies of Charlton and therefore bound by the arbitrator's findings.
- I am in agreement with the arbitrator on issue c.i, so no difficulty arises on that. Whether the arbitrator was correct to impute Jack's knowledge concerning the need to acquire further equipment to Charlton, is not, in the light of my findings on other matters, of significance. As already explained, everyone knew, at latest by December 1997, that DGI needed to acquire the General Equipment. Nonetheless, Charlton continued with the contract and exercised the option. The arbitrator's finding is really, then, only of relevance in this litigation to the extent that it impinges on possible defences to the Claimants claims and on Mr Simms' counterclaim. Since I have rejected those defences and that counterclaim on grounds which have nothing to do with the arbitrator's imputation to Charlton of Jack's knowledge, his finding is not relevant. For the same reason, issue d. is not of relevance to my decision.
- That leaves for consideration the arbitrator's findings under issues a.i. to iv. These relate, so far as the present proceedings are concerned, only to Mr Simms since it is not sought to make Mr Rahman a privy. Jack and Helga, of course, have no personal liability for Mr Simms' misrepresentations save in respect of conspiracy claims, which I have rejected. In practical terms, these findings add nothing, I think, to the intermediary representation even in relation to Mr Simms. My findings on the intermediary representation are enough for the Claimants to succeed without needing to rely on these other misrepresentation and those other misrepresentations would not carry a right to damages which is not carried by the intermediary misrepresentations. This in turn makes the privy argument pretty academic.
- As to a.i., the concerns which I have expressed above lead me to conclude that Mr Simms is not bound by the major-shareholder finding. In being able to meet an entirely new factual case – namely that he made the intermediary representation – he is entitled, in my judgment, to rely on all the evidence which is available and should not be estopped by the finding of the arbitrator that the major-shareholding representation was made. The contrary view would cause me, as the judge in this case, considerable difficulty. I would be bound to proceed on the basis that the representation was made without knowing precisely when or in what conversation it was made. It would be impossible, I think, properly to assess its impact on whether the intermediary representation was made or whether it was relied on. Accordingly, there is not, in my judgment, as issue estoppel in relation to this misrepresentation.
- As to a.ii, it is notable that most of the paragraphs on which Mr Freedman relies (paragraph 51-56 of the decision) were directed at establishing Charlton's financial position rather than representations about that position. The arbitrator's decision is actually found in a short passage in paragraph 51 alone:
"Although there is no corroborative evidence to confirm that Mr Simms and Mr Rahman made these representations to DGI, as they were allegedly made orally in telephone conversations with [Alex], I determine on the balance of probabilities that this item of DGI's claim succeeds."
That is not a satisfactory basis on which to determine that an issue estoppel concerning Mr Simms arises. The arbitrator does not identify precisely what was said or when, merely giving the gist in the heading to the relevant section of his decision and in paragraph 51 of it. More significantly, his determination is to be read, I think, as a conclusion that Charlton made the representation, a conclusion which is reflected in paragraph 189 and 190. There is not, in my judgment, a sufficiently precise finding to give rise to an issue estoppel that Mr Simms (rather than Charlton through Mr Rahman) made this representation which was relied on by DGI.
- As to a.iii, all that the arbitrator holds is that Charlton made the representation. I have not found, but may have missed, any other finding to the effect that these representations were made anywhere in the decision. I cannot say whether it was Mr Simms or Mr Rahman or indeed Jack (as appears possible on the evidence before me) who made the representation. I do not consider that there is a finding which is capable of giving rise to an issue estoppel.
- Accordingly, no relevant issue estoppel arises. It is therefore strictly unnecessary to consider whether any of Jack, Helga and Mr Simms are privies of Charlton so as to be bound by any issues decided by the arbitrator. I should, however, briefly express my view in respect of Mr Simms.
- Mr Freedman makes the following submissions:
a. Mr Simms made fraudulent misrepresentations to cause DGI to enter into the Option Agreement in his capacity as (i) an officer of Charlton and (ii) lawyer and advocate for Charlton. He was a joint tortfeasor with Charlton. Further, in the above capacities, he masterminded and facilitated the claims and even represented Charlton and gave evidence. It is, Mr Freedman says, a remarkable combination, which must be almost without precedent.
b. Jack and Helga owned Charlton and used it as their alter ego. They did so in circumstances where they used Charlton as a façade or a device to conceal the true facts, namely their ownership of Charlton in circumstances where it was known to them that DGI would have refused to deal with Charlton had it been known that it was owned or controlled them
c. It would be remarkable in such circumstances if Jack. Helga and Mr Simms could stand back and say "Not my claim and defence, but Charlton's". In these circumstances, all three of them were sufficiently identified with the arbitration to be bound by the proceedings as if they were parties thereto. To put at its lowest, there is a sufficient degree of identification to make it just for them not to be permitted to contend in subsequent litigation (as they do here) that they are not bound by the decision and the necessary and fundamental findings. It is submitted that it would offend against a sense of justice that they should be able to run a case as if they were strangers to the earlier dispute.
d. A further relevant feature is that Jack, Helga and Mr Simms had the opportunity to be a party to the arbitration, but chose not to be a party since they were not parties to the arbitration agreement. Where a party has the opportunity to be a party to the first set of proceedings, but chooses not to take part in circumstances where he would be expected to take part in order that all disputes can be dealt with at once, that may be relevant to the decision as to whether such person is or is not a privy: reliance is place on House of Spring Gardens v Waite [1991] 1 QB 241 at 252-255.
e. It is also to be noted that in these proceedings, Mr Simms has made a counterclaim in these proceedings pursuant to a conspiracy and a malicious abuse of process, whereby he suffered loss. The counterclaim shows how directly affected he was (on his own case) by the arbitration and how closely identified with the claim of Charlton and the defence to counterclaim of Charlton. It follows that there was no sensible reason for him not to take the opportunity to join in the arbitration. In the arbitration, he could have defended the claim against him, which he now faces in this action, and made the claim, which he now makes by way of counterclaim in these proceedings. There was no sensible reason for him not to take that course. It follows that Mr Simms is to be treated as the privy of Charlton.
- Notwithstanding those powerful submissions, I conclude, on balance, that Mr Simms is not a privy of Charlton. His involvement was as solicitor and chairman, having a close involvement in the direction and management of the company. Importantly, he had no financial interest in the company other than as a partner in the firm receiving legal fees (and hoped-for success and director's fees). Indeed, it is one of the strange facts surrounding this case that Mr Simms, contrary to what he is said to have told Alex, had no shareholding and no expectation of sharing the large profit which it was hoped would be made.
- Further, Mr Simms perceived the arbitration as being essentially a contractual dispute between DGI and Charlton (indeed, that is how he would like to have seen the present litigation). It does not seem unreasonable to me that he should have wished to avoid being a party to a long and expensive arbitration raising difficult contractual issues for which he, personally, would not be liable in any event.
- Moreover, Mr Simms was not party to the arbitration agreement (ie the agreement to arbitrate contained in the Option Agreement). It is one thing to impose on persons who own and control a company and whom in combination with other facts, are privies of the company, the same obligations vis a vis an arbitration as litigation. It is quite another to treat a third party – even one as closely concerned as Mr Simms with the affairs of Charlton and the conduct of the arbitration – in the same way.
- In this context, Mr Freedman submits that the doctrine of privity is applicable to arbitrations as much as it is to litigation. He relies on a statement to that effect in Spencer Bower, Turner and Handley on Res Judicata (3rd ed) at paragraph 208 which in turn relies on Fidelitas Shipping Co Ltd v V/O Export Chleb [1966] 1 QB 630. That is not quite what the case decides. What Diplock LJ says is this:
"Issue estoppel applies to arbitration as it does to litigation. The parties having chosen the tribunal to determine the disputes between them as to their legal rights and duties are bound by the determination of that tribunal of any issue which is relevant to the decision of any dispute referred to that tribunal…."
- No issue of privity arose in that case. Although the doctrine of privity is an aspect of issue estoppel, it does not necessarily follow that all of the rules which have been developed in relation to issue estoppel between the same parties is applicable in the case of privies. Thus, arbitration is at root based on agreement: the parties have to agree to submit their dispute to arbitration (an agreement in the present case to be found in the Option Agreement itself).
- It is not immediately apparent, to me at least, why a non-party to the agreement should, in effect, be bound by the consequences of that agreement so as to make him personally liable for something which he wishes to dispute, although I notice that Hillyer J in Laughland v Stevenson [1995] 2 NZLR 474 (one of the authorities referred to by Mr Simms) addressed the question of privity (he held, on the facts, that there was no privity) on the basis that the doctrine could come into play in relation to an issue estoppel arising out of an arbitration. This point has not been argued before me and I have not thought it necessary to ask the parties for further argument.
- However, even if it is correct that an arbitration (pursuant to an arbitration agreement between A and B) can in principle give rise to an issue estoppel binding on C if he is a privy in interest to A or B, the fact that the arbitration agreement is not one to which C is a party is a factor, in my judgement, which needs to be brought into account.
- I therefore reach the conclusion, very much on balance as I have said, that Mr Simms is not a privy to Charlton in respect of the issues dealt with in the arbitration and in the context of that arbitration.
- I expressed concern during the hearing that the law on privies may be incompatible with Article 6 ECHR entitling every person to a fair and public hearing in the determination of his civil rights and obligations. My concerns have been allayed by the fact that this issue was considered and dealt with by Morritt V-C in Special Effects Ltd v L'Oreal SA [2006] EWHC 481 (Ch), [2006] All ER (D) 27 (Mar) by Morritt V.C (reported after the end of the hearing before me). At paragraph 51 he said:
"as Lord Millett recognised in Johnson v Gore-Wood….., there can be no objection founded on Article 6 ECHR in the case of a rule of substantive law arising from earlier proceedings determined on their merits"
and then went on, at paragraph 56:
"As I have already pointed out (paragraph 51 above) there is no objection to a rule of substantive law precluding re-litigation by a privy. Not only is the privy estopped where it is just that he should be but this is a necessary consequence of the right of the other party to the original proceedings to the effective enforcement of the judgment in his favour. I can see no reason why Article 6 ECHR should preclude a cause of action or issue estoppel against one properly identified as a privy of the other party to the first set of proceedings."
Damages
- The only cause of action on which I have held the Claimants entitled to rely on is deceit by reference to the intermediary representation. This is a claim by DGI alone. The claims asserted by Alex and Haig personally relate to other causes of action which I have rejected.
- The measure of damage in the intentional torts of deceit has been considered at length by the Appellate Committee in Smith New Court Securities v Scrimgeour Vickers [1997] AC 254. Lord Steyn said this at p 281:
"The logic of the decision in Doyle v Olby (Ironmongers) Ltd justifies the following propositions. (1) The plaintiff in an action for deceit is not entitled to be compensated in accordance with the contractual measure of damage, i.e. the benefit of the bargain measure. He is not entitled to be protected in respect of his positive interest in the bargain. (2) The plaintiff in an action for deceit is, however, entitled to be compensated in respect of his negative interest. The aim is to put the plaintiff into the position he would have been in if no false representation had been made"
and later
"The legal measure is to compare the position of the plaintiff as it was before the fraudulent statement was made to him with his position as it became as a result of his reliance on the fraudulent statement".
- One must approach that proposition with care in the present case. If Jack had revealed his and Helga's involvement, there would have been no contract. But if all of the first to fourth Defendants had been assiduously careful not to mislead the Claimants and had confined themselves simply to saying nothing, the position might be different. In practical terms, it would, I think, have been virtually impossible for Jack not to mislead unless he had simply put Mr Simms in touch with Alex and taken no further part in any discussions or correspondence with Alex and Haig. I attach little or no weight to that possibility and regard DGI as being entitled to damages on the basis that, absent the misrepresentation, there would have been no contract.
- Dealing with the measure of damages and remoteness, the cases, he says,
"make clear that the victim of the fraud is entitled to compensation for all the actual loss directly flowing from the transaction induced by the wrongdoer. That includes heads of consequential loss. …….The legal measure is to compare the position of the plaintiff as it was before the fraudulent statement was made to him with his position as it became as a result of his reliance on the fraudulent statement"
- Lord Steyn then turns to consider the question of causation and the limiting principles which, even in a case of deceit, serve to keep wrongdoers' liability within practical and sensible limits. The three concepts are causation, remoteness and mitigation. After referring to the shortcomings of the "but for" test, he notes that
"has led judges to apply the pragmatic test whether the condition in question was a substantial factor in producing the result. On other occasions judges assert that the guiding criterion is whether in common sense terms there is a sufficient causal connection:….While acknowledging that this hardly amounts to an intellectually satisfying theory of causation, that is how I must approach the question of causation".
- A similar approach is reflected in Downs v Chappell [1997] 1 WLR 426 at 437, where Hobhouse LJ refers to the causative effect of the representation being exhausted when the claimants were not longer acting under its influence.
- In respect of the intermediary misrepresentation, DGI claims a number of heads of damages set out in paragraph 32 of the Re-re-amended Particulars of Claim. I take them in turn.
- Loss of profits from being deprived of entering into a sale agreement with some other purchaser. In principle, this seems to me to be a good head of claim. However, it supposes that there would have been another purchaser in the market and the claim must take account of any duty to mitigate. As a matter of fact, it appears that DGI took the decision to scrap the Tooling receiving a nominal sum for it. It did so, on the evidence, not because the Tooling was considered worthless but because Alex and Haig could not, at that stage of their lives, contemplate the work necessary to market and sell. In my judgment, this shows a complete failure to attempt to mitigate.
- In any case, I received no reliable evidence that, had there not been a contract with Charlton, there would have been a sale to someone else. That seems unlikely. The Tooling had been mothballed for a number of years; Jack, at least, had made attempts to find a buyer but nothing materialised in spite of interest from Herman Bal. There is nothing to suggest that Alex or Haig would have made any more attempts themselves to find a buyer than they had done over the previous years. I consider that it is more likely than not that no sale would have been effected by DGI in the period starting when Charlton first expressed interest in August 1997 and when the contract was terminated (at which stage, DGI could have attempted to find an alternative buyer but did not do so). Indeed, I do not consider that DGI would in fact have achieved a sale at any time even if the Option Agreement had not been entered into.
- Further, there is no evidence at all about the value at which the Tooling would have been sold to some third party. It should be remembered that, in August 1997, DGI was happy with a price of $1.5 million including the General Equipment which needed to be procured. If the Tooling was worth something over $1 million at that time, I would take a great deal of persuading that its value had fallen to the scrap value by the time it was scrapped let alone by the time when the contract was terminated, after which time DGI should have attempted to mitigate its loss. There is no evidence before me to establish that this is so.
- In conclusion, I do not consider that DGI is entitled to recover anything under this head of damage.
- Legal and other incidental costs and expenses incurred in and about (i) defending Charlton's claims in (a) the New York action and (b) the Arbitration (ii) prosecuting counterclaim in the Arbitration and (c) resisting Charlton's application to remove the arbitrator. The misrepresentations were made in order to hide Jack and Helga's involvement to bring about a contract which would not otherwise have been made. The reason why Alex and Haig did not want DGI to enter into business with Jack was, according to Alex, when you do business with Jack you end up in this sort of dispute. It was precisely the sort of costs which DGI incurred which would have led DGI to refuse to enter into the contract. Mr Ashe says this in his closing submissions:
"In one sense the fact that C1 entered into the Option agreement could be said to be a cause of its ultimate legal expenses etc in the sense that they would not have been incurred if the contract had not been made because there would have been no subject matter upon which to bring them. By parity of reasoning if an employee of Charlton had been injured flying to Bangladesh to inspect a factory site he also could claim that without Ds' alleged deceit he would not have been flying there and therefore there was a causal link. However in neither case would either of Lord Steyn's two tests of causation i.e. "but for" and substantial factor/sufficient causal connection yield a result in the claimant's favour.
Even if DGI could establish a sufficient causal link "it must still be shown that the entire loss suffered by [C] is a direct consequence of the fraudulently induced transaction". [a reference to another passage in Lord Steyn's judgment concerning remoteness.] In fact this head of loss is very indirect and is dependent upon subsequent and quite separate decisions by C1 and Charlton to engage in a contractual dispute."
- I am not sure why the "but for" test would not produce that result although the fact that it might do so in the flying accident example shows that it would be the wrong test. But even applying the alternative tests of substantial factor or sufficient causal connection, I reject Mr Ashe's submission that none of these costs are recoverable.
- The relevant costs have been incurred by DGI as a direct result of being embroiled in a dispute which would never have arisen if DGI had not acted in reliance on the misrepresentation. Leaving aside for the moment the costs of the application in the New York litigation to prevent an arbitration in London, all of the costs of DGI in the litigation and the arbitration were incurred in fighting claims (either as claimant or defendant) on which it was wholly successful before the arbitrator. DGI was faced with a claim against it: it had no option but to defend it and quite properly made its counterclaim. I say quite properly because it was successful which, retrospectively, shows that DGI's case was a proper one to defend and bring. DGI had no option but to defend the claim against it since to have capitulated would have resulted in a large damages claim against it. The counterclaim was really the other side of the coin of the defence. Further, as DGI claims, the counterclaim was a reasonable attempt to recover from Charlton and would, had Charlton had any assets, have been an effective mitigation of any loss flowing from the misrepresentations. In those circumstances, the costs, in my judgment, are in principle recoverable as damages. The same goes for the costs of the unsuccessful attempt to remove the arbitrator.
- However, the costs of the unsuccessful application in the litigation concerning the venue for the arbitration fall into a different category. DGI made that application for its own benefit: it was not necessary for it to make the application and, indeed, it was unsuccessful. The application did not, in my view, result from the misrepresentation; it resulted from an independent decision of DGI to take a tactical step in a commercial battle with Charlton which had nothing to do with the misrepresentation. Causation is not established.
Conclusion
- Accordingly, DGI succeeds on its claim in deceit to the extent indicated. I will hear further submissions on the actual figures. The other claims of DGI and the second and third Claimants are dismissed.
