MORISON J:
- This judgment gives the reasons for the decision which I gave orally at the end of a hearing on Friday 28 January 2005. I indicated that the claim advanced by the individual should be struck out, as the Defendants were asking.
- The background to this case may be shortly stated. Mr Diamantides is a wealthy Greek shipowner who is dissatisfied with the banking services rendered for his benefit by the Defendant bank. Mr Diamantides, through two companies [first Ursa Navigation Inc and then Pollux Holding Limited] purchased investments from Chase including instruments in or relating to emerging markets. Specifically, in 1997 and 1998 Pollux purchased a number of GKO-linked Notes which were securities issued by Chase linked to underlying Russian Government bonds [GKOs]. The value of the investment depended upon the value of the underlying bonds. Regrettably for those who had bought these instruments, in 1998 the Russian Government suspended trading in GKOs and at that time Pollux had four outstanding GKO linked notes with a face value of US$40 millions.
- Essentially, the complaint is that the Notes were purchased on the advice of Chase, principally by their employee Mr Justin Atkinson, and that Chase acted negligently and in breach of contract and breach of fiduciary duty. Complaint is also made about the steps Chase took to put the account into order, in particular the service of a default notice on Pollux and the valuation and settlement of Pollux's portfolio.
- Although the underlying instruments are probably complicated, the claim itself should be capable of being shortly and succinctly stated. The real issues are likely to be what was said by Chase to Mr Diamantides about the investments and perhaps some expert evidence about the advice. The conversations all took place a long time ago but I am told that there are mechanical records of them which are likely to be of assistance at the trial.
- For reasons best known to themselves, Pollux started proceedings against Chase in the US District Court for the Southern District of New York by a Complaint dated 7 December 1999. That Complaint asserted that Pollux was organised under the laws of Liberia and maintains its principal place of business at Piraeus, Greece.
"At all times relevant, Pollux acted solely as fiduciary for its principal, an individual, and was utilized by its principal exclusively for making personal investments. As such, at all relevant times Pollux was a "private investor" within the meaning of the laws of England, including the Financial Services Act of 1986 and all applicable rules and regulations promulgated thereunder."
- In a section of the Complaint headed "The Banking Relationship between Pollux and [Chase]" the contention is advanced that Pollux was a customer of Chase and that the Bank was serving as its financial adviser and agent and that Mr Atkinson had been introduced "for the purpose of giving them investment advice." The Complaint sets out the advice which was given to Pollux and asserts that Pollux always relied on the recommendations and advice. It was asserted that at all material times the Bank were "obligated to conduct themselves in Pollux's best interest". "In reliance on the representations and recommendations of Atkinson, Pollux agreed to invest in what it erroneously understood were GKOs". It is pleaded that Pollux purchased each of the four notes and entered into individual repurchase agreements. The Complaint avers that the Bank owed Pollux a duty of care and a fiduciary duty; that Chase repeatedly represented to Pollux that its investments were risk free because of hedging arrangements that were in place. The relief sought was numerous. It included a declaration that Pollux was under no obligations under the repurchase agreements; damages for breach of the banking relationship between Chase and Pollux; an award for punitive damages as Chase had conducted itself wilfully with intention to injure Pollux or with a conscious disregard of Pollux's rights; damages for negligent misrepresentations which have damaged Pollux; damages for misrepresentation or rescission of the repurchase agreements; damages for conversion; damages for breach of fiduciary duty; negligent supervision of the account; breach of statutory duty by recommending to Pollux unsuitable investments in contravention of English Law, and specifically Rule 5-31 of the Conduct of Business Rules promulgated by the SFA.
- Chase challenged the jurisdiction of the Court and its objection was upheld by the District Court and the District Court's decision was upheld on appeal. The final appeal was dismissed in January 2004. I was told of a possible attempt to appeal to the Supreme Court.
- Meanwhile, in 2001, Chase, whilst the USA courts were engaged in a jurisdiction issue, commenced proceedings in this jurisdiction seeking negative declarations that they were under no liability to Pollux. The Points of Claim are dated 9 April 2001. In paragraph 44 Chase plead:
"In the New York Proceedings, Pollux alleged that [the Bank] owed a duty to use due care in the supervision and oversight of Mr Justin Atkinson. [The Bank] deny that in all the circumstances of the case such a duty was owed."
- Pollux filed a Defence which is undated. The only relevant paragraphs for present purposes are 43.1 which reads:
"Regarding paragraph 44
The first sentence is admitted. As set out in detail in the Points of Claim … Mr Diamantides and Pollux contend that [the Bank] … owed Mr Diamantides or Pollux a duty to exercise reasonable skill, care and diligence in supervising Mr Atkinson."
and paragraph 46.2 which asserts that Mr Diamantides and Pollux "contend that Mr Diamantides was a "private investor" and is therefore entitled to sue pursuant to section 62 of the 1986 Act."
- This English action was, by agreement between the parties, stayed until the outcome of the jurisdiction issues had been determined in the USA. Instead of Mr Diamantides and Pollux resurrecting the Action started by Chase, a new Action was started in this jurisdiction naming Mr Diamantides as the sole claimant. By a proposed amendment, for which permission is sought, it is proposed to add Pollux as a co-claimant. The way the draft amended claim is formulated is that the primary case is that Mr Diamantides was the (sole) customer of the Bank; but that if the primary case was not accepted then Pollux was the sole customer of the Bank. It is not alleged that they were both customers. For the purpose of considering the Bank's application to strike out the claim by the individual, it seems sensible to work from the draft amended claim. In purely case management terms I indicated in argument to those representing Mr Diamantides that I would not accede to the application for permission to amend whatever the outcome of the application to strike out because I regard the new pleadings as prolix, in breach of the rules of procedure and in radical need of a complete redraft. The draft Amended Particulars of Claim extends to 109 pages with 162 numbered paragraphs and many subparagraphs. The rule is that the Particulars of Claim must include "a concise statement of facts on which the claimant relies". In my judgment that rule has been offended. A concise statement of facts would not require 109 pages.
- The basis of the strike out application is that the 'primary case' is unfounded and is a lawyers' construct and there is no basis for an assertion that the Bank owed Mr Diamantides any duty or that he, as opposed to Pollux, has suffered loss.
- Although the Amended Particulars of Claim says that Mr Diamantides claim is the primary case this is in fact the only claim in the unamended version of the new action. The foundation of Mr Diamantides' claim is that he was the customer or client of the Bank and that duties were owed to him in his personal capacity, advice was given to him in his personal capacity and that he relied on that advice in his personal capacity. The secondary case which appears from the amended claim is that it was the companies [Ursa and Pollux] which were the customers of the Bank to whom duties were owed, advice given and reliance placed.
- It is not alleged that Mr Diamantides opened any accounts with the Bank in his personal capacity or himself purchased any investments from Chase. On the contrary it is pleaded that the accounts were opened and maintained by the companies and that investments were purchased by the companies. What is alleged is that Mr Diamantides caused Pollux to buy or enter into an agreement. The claims are variously brought in contract, tort and equity. The whole foundation of the claim is that Mr Diamantides was a customer in his personal capacity and that everyone concerned understood and agreed that he was the customer or client of the Bank. As was pointed out in argument these unspecific allegations are quite unsupported by any primary facts, such as account opening agreement and the like. What is relied upon is a letter from Chase to Mr Diamantides which said:
"Now that we have all returned from holidays (I know you don't take any holidays, but I am sure you squeezed a few days off here and there) I am writing to let you know how pleased I am that we have established a relationship with you. We have been trying for a long time to get you in the bank; we finally succeeded and I am delighted! I am confident that you will find the experience worthwhile. We look forward to an everlasting relationship for our mutual benefit.
I hope that we can have lunch in Piraeus the week of September 17 when I expect to be there with a senior executive from Chase."
And, secondly an assertion that Ursa, and its successor Pollux, was an offshore corporate vehicle used exclusively for Mr Diamantades investment interests that in substance its interests were his interests and that all of the profits or losses that were made or suffered in relation to the investments were enjoyed or suffered by him.
- Mr Hapgood QC further submitted that:
(1) The letter did not bear the weight which would be required of it to support the claim. This was not a contractual document. A letter to the head of a substantial group of companies addressed to you is entirely natural and of no contractual significance.
(2) What is more telling is the complete absence of factual material to be expected in support of a claim that someone was a customer of a Bank. It is not alleged that Mr Diamantides wrote a letter or signed a contract or had a conversation with a bank official indicating that notwithstanding the use of corporate entities the true customer was him and not the companies.
(3) The primary facts are all to the opposite effect: the accounts were in the companies' name, the investments were made in the companies' name, all the investment agreements were with the companies. To suggest that the companies were not the customers but that the individual was is odd, especially against a background where the opposite case had been advanced in the USA. The case has moved from one where the companies were alleged to be the customers to one where, if the case can be understood at all, in the original defence to the Chase action, there were multiple relationships (both the individual and the company) to the latest case where only the individual was the customer.
- The reason for these variations is easy to understand. A private investor, that is a private customer of the Bank, within the meaning of section 62A of the Financial Services Act 1986 is entitled to more protection from poor investments than is a non-private investor. It appears that Mr Diamantides foresees, rightly or wrongly, more difficulty in proving his case against the Bank if Pollux were the true customer than if he himself could be regarded as the customer. Thus, there has been a development of the reasoning behind the various complaints and claims. In the USA proceedings, where Pollux was alone a complainant, the suggestion was that as Mr Diamantides was not an expert investor his company, Pollux (the complainant) should be treated as a private investor and thus entitled to protection as to suitability of investments and so on which Pollux otherwise would not have had. The next development was to say that both Mr Diamantides and Pollux were customers. But the obvious problem for Mr Diamantides for this scenario is that Pollux, the company, was the actual investor and, therefore was not a private investor, whereas Mr Diamantides was the alter ego of the company who actually provided Pollux with the necessary monies. A regulatory regime could not work if a Bank were entitled vis à vis the company to give certain recommendations but find itself in trouble if it gave such advice to the company's sole or principal shareholders. So the last theory was developed which involved a purely artificial allegation that Mr Diamantides alone was the customer.
- The pleading is impossibly vague as to the nature of the customer relationship said to exist with Mr Diamantides. If he ever became a customer when did that relationship start and what effect did the use of the corporate vehicles have on it? The artificiality of the primary case is demonstrated by the fact that Pollux, in the secondary case, asserts that it has rescinded the purchase of the GKO notes; whereas on the primary case no such assertion is made and there is a plea of loss. Paragraphs 118 – 160 relate to attempts made by the Bank to secure its position with regard to the transactions which had gone wrong. They made a margin call on Pollux in December 1998 and for a variety of different reasons it is alleged that by no later than December 1999 the Bank were legally unable to exercise any rights against Pollux. It is then pleaded that the Bank served a written demand on Pollux which is alleged by Pollux to be unlawful, as also was a default notice which was in breach of the Bank's obligations to Pollux. The pleading asserted that by liquidating the Notes and other securities the Bank was acting in breach of the Repurchase Agreement. There were further complaints about the accuracy of the Bank's accounting to Pollux and other similar complaints with the consequence that "Pollux has suffered loss and damage". These claims are not contingent on the primary case being rejected. It is difficult to see how, if Mr Diamantides were at all times the customer and Pollux was not, this aspect of the claim works. There can be no legitimate grounds to ignore Pollux's legal personality for the purpose of the pre-August 1998 claims but to assert and rely upon that personality for the purpose of the post-August 1998 claims.
- Finally it was argued by Mr Hapgood QC that there was no loss pleaded by Mr Diamantides. Paragraph 116 of the amended claim simply asserts that the individual has suffered loss and damage in respect of which he is entitled to compensation but which cannot be particularised "not least because it may be affected by the recoveries made by Pollux pursuant to its claims" in respect of post-August events. The pleading indicates that reliance will be placed on certain matters, including in relation to the making of the investments, cash amounts advanced by Mr Diamantides to Pollux, losses which Pollux has sustained as a result of making those investments and wrongful disposal of Pollux's assets. "If and to the extent that the [Bank] are liable to Pollux in respect of wrongdoing which is equivalent to the wrongdoing for which the [Bank] are liable to Mr Diamantides … Mr Diamantides will not claim damages which are merely a reflection of the losses which Pollux is entitled to recover in accordance with the principles discussed in Johnson v Gore Wood & Co [2002] 2AC 1."
- Mr Hapgood QC submits that of the five sub-paragraphs in paragraph 116 only one mentions Mr Diamantides, the remaining subparagraphs refer to Pollux and losses caused to it. He is mentioned in the context of having put up money to Pollux but there is nothing to indicate that the loss is his as opposed to that of Pollux itself. In paragraph 20.1 it is pleaded that:
"In accordance with common practice within the Greek shipping community, Ursa was an offshore corporate vehicle which was used exclusively for Mr Diamantides's investment interests. In substance its interests were Mr Diamantides's interests: it was wholly owned and controlled by him and had no separate interests of its own. Mr Diamantides was Ursa's sole source of funding and all the funds that were invested in the Portfolio came from him; all the investment decisions were made by him; all of the profits or losses that were made, or suffered, in relation to the investments were enjoyed, or suffered, by him."
- It is pleaded that during 1996 the portfolio in Ursa's name was transferred to Pollux and the arrangements with Pollux were the same as previously pleaded in paragraphs including paragraph 20.1.
- On this basis, the loss sustained by Mr Diamantides would never be a loss separate and distinct from that of his company Pollux; his claim is, by his own definition, a reflection of the loss sustained by the company and any such loss is recoverable only by the company and not by the shareholder: see Lord Millett's speech in Johnson at page 66. This is not a principle simply against double recovery; rather it is a principle which reflects the separate legal personality which a company has: see Day v Cook [2001] EWCA Civ 592 [The company's claim if it exists will always trump that of the shareholder..]
- For Mr Diamantides and Pollux, Mr Michael Briggs QC submitted:
The Claimants primary case is that there was an 'advisory relationship' between the Bank and Mr Diamantides whereas there was a transactional relationship between the Bank and Pollux. The losses sustained by Mr Diamantides are reflective of the loss suffered by Pollux but the principle of law against reflective loss is not offended unless the Bank can demonstrate that the company has a cause of action to recover that loss which would succeed on the facts. There is no reflective loss where the Bank has a better defence to Pollux's claim than to Mr Diamantides claim; for example Pollux may not succeed on a claim where a contract it has entered into contains an exemption clause.
- The court should only strike out a claim in a plain and obvious case, assuming all the facts in the particulars are true. If the claim is fact sensitive or the legal viability of the claim is unclear then the claim should not be struck out: X (Minors) v Bedfordshire County Council [1995] 2AC 633 at 694A. This is not an application which will avoid a trial since the only attack is on the case advanced by Mr Diamantides.
- So far as possible pleadings are required to be concise and the need for extensive pleadings is reduced by the requirement that witness statements are exchanged: see McPhilemy v Times Newspapers Ltd [1999] 3 AER 775 at 792-3.
- The relevant facts are that the Bank wanted Mr Diamantides as their client and the letter of 28 August 1990 expressed pleasure at having established a relationship with him; relevant advice was given to him; for the purposes of this advice Mr Diamantides and Chase regarded him as the Bank's client and he was told that he was a very important client of the Bank. The relevant investments were made by companies owned by Mr Diamantides and he procured them to make the investments. Mr Diamantides has a potential regulatory claim as Chase's advisory client. There are no inconsistencies between claims by Pollux and claims by Mr Diamantides since the pleading reflects the difference in personality between the individual and the company. The way the claim is pleaded in paragraph 116 does not justify a strike out. The loss suffered by Mr Diamantides cannot be quantified until one knows what sums will be recovered by Pollux. He has suffered a substantial loss and if the approach in this pleading is unsatisfactory the claim should not be struck out, rather there should be an opportunity for the claim to be reformulated otherwise it "would represent a triumph of formality over common sense and justice". Reference is made to part of Lord Millett's speech in the Johnson case where he said:
"…although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company's net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact."
- The rule relating to reflective loss in Johnson:
(1) only applies where the company also has a cause of action in respect of the relevant loss: Lord Bingham's second proposition.
"Where the company suffers a loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding… Since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder."
(2) on a strike out application a close scrutiny of the pleadings is required in order to determine whether the claim is sustainable in principle.
(3) "The court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation".
(4) It must be shown by a defendant that the company's claim would have succeeded on the facts and reference was made to a decision of the Court of Appeal in Shaker v Al-Bedrawi [2002] EWCA Civ 1452
"As the Prudential principle is an exclusionary rule denying a claimant what would otherwise be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right bar the claimant's action unless the defendants can establish not merely that the company has a claim to recover a loss reflected by the profit but that such a claim is available on the facts."
(5) What was said by Arden LJ in the Day case that the principle of reflective loss applies even if there is some defence to the claim is contentious and as a matter of law if there is a complete defence to the company's claim then it would seem that the analysis in Johnson and Shaker would apply.
- Since Mr Diamantides alone has an advisory claim, Pollux does not have an action to recover damages for the relevant loss. And the Bank must prove the contrary.
Decision
- I accept the general principles which govern the exercise of the court's discretion to strike a claim out as formulated by Mr Briggs QC. It seems to me that we have moved away from the days where hopeless and unmeritorious claims had to be allowed to wend their weary way to the trial. This is a fanciful claim in my judgment; without factual basis and would be doomed to fail. I take a much more simple view of the case than Mr Briggs QC. The question is whether Mr Diamantides has a claim at all. That depends upon a credible case being advanced that Chase and he were in a contractual relationship: banker and customer. The facts pleaded show clearly that at all times Pollux was the customer and Mr Diamantides, the principal behind the company and sole shareholder and controller was the voice for and asset provider to the company. Had Mr Diamantides wanted to trade in his own name and had, which I doubt, the Bank been willing to accept him as a private investor for trading in risky emerging market instruments, then he would have bought and sold instruments in his own name. Instead, and possibly necessarily, the Bank dealt with all transactions for and on behalf of the company, Pollux. Because Pollux is a company which carried on the business of investing for its sole shareholder's benefit, it did not have the protection afforded by the statutory scheme then in force to a 'private investor'. The discussion in Johnson as to reflective loss is not pertinent, in my judgment. Pollux has a cause of action against the Bank; if that claim fails because of some exclusionary clauses in contractual documents then that does not give Mr Diamantides a good claim against the Bank. If Pollux succeeds then Mr Diamantides own losses will be reflective of the losses for which Pollux is making its claims; if Pollux fails then the shareholder will bear the loss. And that reflects the reality of the position. As was pleaded in paragraph 20 of the Amended pleading, what Pollux gained, Mr Diamantides gained and conversely what it lost he lost.
- I accept Mr Hapgood QC's submissions. In particular I think he rightly submitted this is an unprincipled attempt by an individual, who chose to invest through a corporate vehicle, to pierce the veil of his own company. That is not in law permissible: see Trustor AB v Smallbone [2001] 1 WLR 1177. The beginning and end of this case is that Pollux was the customer; Mr Diamantides was not. As Pollux's voice, the advice was given to him on behalf of Pollux and he caused Pollux to act on it. There is no commercial sense in a split between advisory and transactional activities. It is, frankly, meaningless and would make the regulatory regime impossible. I regard the amended pleading as a construct designed to avoid the consequence of Pollux not being a private investor, whatever the consequence may be. Inventing a factual case to achieve that objective has produced a pleading which is confused and wrong-headed. I have no hesitation in acceding to Mr Hapgood QC's submission that the claim by the individual should be struck out.
- I will hear the parties on the form of the order if they are unable to agree it.
