E D & F Man Capital Markets Ltd v Steven Kai Shing Kao

Hearing dates: 13 & 14 December 2022

Approved Judgment

This judgment was handed down remotely at 10.30am on [date] by circulation to the parties or their representatives by e-mail and by release to the National Archives.

The appellant in this case, Straits (Singapore) Pte Ltd (“Straits”), was party to a dishonest conspiracy to injure the respondent, ED&F Man Capital Markets Ltd (“MCM”), by unlawful means, the means in question being the provision of what purported to be (but were not) original warehouse receipts giving MCM the right to acquire title to and possession of quantities of nickel held in warehouses in (mainly) Singapore. MCM paid some US $284 million to acquire these warehouse receipts, which proved to be worthless. It sold them on to another company, ANZ Commodity Trading Pty Ltd (“ANZ”), for some US $291 million and, as a result, incurred a liability to ANZ.

In the event MCM was able to settle its liability to ANZ. The terms of the Settlement Agreement are complex and will need to be considered. However, the trial was conducted on the basis that they provide for payment of a sum which is less than the amount of US $291 million which ANZ had paid MCM, and less than the amount of US $284 million which MCM had paid to acquire the receipts. As I shall explain, that is an oversimplification, to the point of being misleading, but it has given rise to an issue as to the damages payable by Straits.

That issue is whether (as Mr Justice Calver held and as MCM contends) MCM is entitled to recover from Straits the US $284 million which it paid in order to acquire the worthless receipts, or whether (as Straits contends) the true measure of MCM's loss is the amount of its liability to ANZ, which Straits contends is the lesser sum which it says is payable under MCM's Settlement Agreement with ANZ.

Warehouse receipts and metal trading

The judge explained the nature of the trading in which the parties were involved, and the role of warehouse receipts in metal trading, which formed the background to the fraud committed in this case, at [7] to [19] of his judgment. I can summarise this as follows.

Nickel repo transactions are financing transactions whereby the owner of the nickel raises finance by selling it to a buyer and agreeing to repurchase it at some point in the future at a higher price. The difference between the two prices is akin to the interest that would accrue on the lending of funds for the period between the purchase and the sale.

The seller is therefore effectively in the position of a borrower and the buyer is in the position of a lender, with the metal acting as the collateral or security for the financing. Instead of delivering the metal itself to the buyer, the seller will provide a warehouse receipt issued by a metals warehouse certified by the London Metals Exchange, endorsed in favour of the buyer. The repurchase leg of a repo transaction may be contingent, in which case the “borrower” (i.e. the original seller) will be granted an option to purchase from the “lender” (i.e. the original buyer) metal of the same specification, brand, weight, shape and location as was originally sold under the purchase leg. If the call option in a contingent repo transaction is not exercised, the transaction takes effect as a straightforward sale contract. In that event, the buyer may take ownership of the metal by presenting the warrant to the warehouse, or may sell the metal on to another buyer, endorsing the warrant and providing it to that new buyer.

The warehouse receipt provided by the seller/borrower to the buyer/lender plays an essential role in such a transaction. Although not a document of title, it has a similar function in that it represents the metal stored at the warehouse. The original hard copy receipt is issued by the warehouse to the order of the party who deposited the metal in the warehouse in the first place (the first order party, i.e. the seller/borrower). The seller/borrower will then endorse and deliver the warehouse receipt to the buyer/lender in exchange for payment and the buyer/lender will hold the receipt as collateral for the funds advanced. There may be a chain of such endorsements. However, the first order party remains the owner/bailor of the metal until the endorsed original warehouse receipt is presented to the warehouse by the final endorsee. Until then, the warehouse will act on the instructions of the first order party, who will be shown in its records as the owner of the metal. When the final endorsee presents the receipt to the warehouse, it may either demand delivery of the metal or alternatively a new warehouse receipt will be issued to its order.

The facts in outline

Between May and October 2016 MCM entered into 12 purchase contracts with the first defendant, a company called Come Harvest Holdings Ltd (“CH”), and 16 purchase contracts with the second defendant, an associated company of CH called Mega Wealth International Trading Ltd (“MW”). (It is unnecessary to distinguish between these two companies in this judgment; I shall refer to them together as “CH/MW”). These were contracts for the purchase of nickel, to be performed by delivery of original warehouse receipts. They were in each case to constitute the first leg of a repo transaction, although in the event the option to repurchase was never exercised. MCM received a total of 92 purportedly genuine original warehouse receipts from CH/MW in purported fulfilment of the latter's obligations under these contracts.

Out of the 92 purported warehouse receipts which it received, and for which it paid a total of some US $284 million, MCM sold on 83 to ANZ for a total of some US $291 million. (The remaining seven were taken by MCM as collateral for margin calls and retained). Thus MCM would have made a profit of about US $7 million if all had gone well. The remaining nine receipts were retained by MCM as collateral for margin payments which had become due from CH/MW.

The way in which these contracts came to be concluded was explained in the unchallenged evidence of MCM's witness, Mr Nicholas Riley.

First, MCM would receive by email from CH/MW a PDF copy of a warehouse receipt, together with what was referred to at the trial as a “PMA Letter”. This was a letter from the warehouse keeper, Pacorini Metals (Asia) Pte Ltd (later renamed Access World), referring to the warehouse receipt and confirming that upon receipt of the original receipt duly endorsed, signed and dated by the order party, and subject to payment of its fees, the warehouse would release the nickel to the endorsee without further written instructions from the order party. On the first occasion when one of these PMA Letters was issued, it was initially addressed to MCM, but MCM requested a revised letter addressed to ANZ and, thereafter, all such letters were addressed to ANZ.

MCM would then email these documents to ANZ, with whom it would agree a price and conclude a contract. In this way it could ensure that its purchase contract with CH/MW and its sale contract with ANZ were concluded more or less simultaneously, on back to back terms, with MCM making a modest profit. The contracts themselves did not identify the particular warehouse receipts which were to be provided to the buyer, but it was implicit in the provision of the PMA Letter that the nickel to be sold by CH/MW to MCM and by MCM to ANZ was the same nickel, namely that which was represented by the warehouse receipt referred to in the PMA Letter.

MCM would then receive by courier what it believed to be the original warehouse receipt together with the original PMA Letter which, after endorsing the warehouse receipt, it would send on to ANZ.

Once ANZ was in possession of the warehouse receipt, it would pay MCM. MCM would then pay CH/MW.

Thus the transaction was structured by MCM so that, although contracting as a principal, it was in effect a middleman (which was how Mr Riley described MCM's role in his evidence), buying and selling the same metal on back to back terms, earning what it characterised as a brokerage fee, without being required to pay CH/MW until it had received funds from ANZ. Moreover, although CH/MW did not know the precise terms on which MCM had contracted with ANZ to sell on the nickel which CH/MW were selling to them, Mr Riley told CH/MW that it had done so. In any case this was apparent from the fact that MCM required the PMA Letter to be addressed to ANZ. Although these letters went no further than confirming the way in which the warehouse receipts worked, as described above, they were intended to and did provide additional reassurance, not only to MCM but also to ANZ, that by entering into the transaction ANZ would obtain the right to acquire title to and possession of the nickel represented by the warehouse receipt. Such letters would have been...