Federal Republic of Brazil and another v Durant International Corporation and another
| Jurisdiction | UK Non-devolved |
| Judge | Lord Toulson |
| Judgment Date | 03 August 2015 |
| Neutral Citation | [2015] UKPC 35 |
| Date | 03 August 2015 |
| Docket Number | Appeal No 0069 of 2013 |
| Court | Privy Council |
[2015] UKPC 35
Lord Neuberger
Lord Mance
Lord Carnwath
Lord Toulson
Lord Hodge
Appeal No 0069 of 2013
Privy Council
From the Court of Appeal of Jersey
Appellants
David Lord QC Paul Nicholls
(Instructed by Blake Morgan LLP)
Respondents
Charles Dougherty QC Emma Jordan
(Instructed by Wragge Lawrence Graham & Co LLP)
Heard on 7 May 2015
This appeal concerns the doctrine of tracing. The effective plaintiff is the Municipality of Sao Paulo ("the municipality"). The Federal Republic of Brazil is nominally a plaintiff because its Constitution requires it to be a party to any action brought outside Brazil by a Brazilian public authority. The defendants ("Durant" and "Kildare") are companies registered in the British Virgin Islands. Kildare is a wholly owned subsidiary of Durant and both companies are or were at the relevant time under the practical control of Mr Paulo Maluf and/or his son Mr Flavio Maluf. From 1993 to 1996 Mr Maluf senior was mayor of the municipality.
Durant and Kildare appeal to the Board against a decision of the Court of Appeal of Jersey, which upheld a judgment of the Royal Court that the companies were liable to the municipality as constructive trustees of US$10,500,055.35 representing bribes to Mr Maluf senior in connection with a major public road building contract. The findings of fact by the Royal Court are no longer challenged, but the appellants contend that the total amount which can be properly traced to them from the bribes is limited to US$7,708,699.10.
The judge found that in early 1998 Mr Maluf senior, or others on his behalf, received 15 secret payments, and that funds equivalent to 13 of those payments were converted to US dollars and paid into an account under the control of Mr Maluf junior with the Safra International Bank of New York in the name of Chanani ("the Chanani account").
The 13 payments were itemised in a schedule (schedule 3) to the Order of Justice (or statement of claim) issued by the municipality in the Royal Court. They spanned a period from 9 January to 6 February 1998 and amounted in all to US$10,500,55.35. In their Amended Answer the companies asserted that the payments itemised in schedule 3 had nothing to do with Mr Maluf senior's position as a holder of political office, but represented legitimate brokerage commissions earned by him in connection with an agreement for the acquisition of a company, for introducing the parties, who were both well known to him, and assisting in their negotiations. This defence was rejected.
Over the period of ten days from 14 to 23 January 1998 there were six payments from the Chanani account to an account held by Durant with Deutsche Bank in Jersey ("the Durant account"). These payments were itemised in schedule 4 to the Order of Justice. They totalled US$13,120,000.00.
Over the period from 22 January to 23 February 1998 there were four payments from the Durant account to an account held by Kildare also with Deutsche Bank in Jersey ("the Kildare account"). These payments were itemised in schedule 5 to the Order of Justice. They totalled US$13,500,000.00.
The municipality claimed to trace the amount of the schedule 3 payments (US$10,500,055.35) to the Durant account and thence to the Kildare account. It asserted that the full amount of those bribes was paid from the Chanani account to the Durant account. It did not make any claim in respect of the excess of the amount paid from the Chanani account to the Durant account (or from the Durant account to the Kildare account) over the amount of the schedule 3 payments.
The companies' pleaded response to the municipality's allegation, in paragraph 21 of the Order of Justice, that the bribes itemised in schedule 3 were paid from the Chanani account to the Durant account was in the following terms:
"As to paragraph 21 of the Order of Justice, it is admitted that the commissions referred to in paragraph 20 hereinbefore [the schedule 3 payments] were paid from the Chanani account to the bank account of Durant held with Deutsche Morgan Grenfell (CI) Limited as particularised in schedule 4 of the Order of Justice. Specifically, it is denied that the said sums so particularised … amount to bribes and/or secret commissions relating to, and/or the proceeds of, the alleged or any fraud."
The appellants' case that their liability as constructive trustees is in round figures for US$7.7m, and not for US$10.5m, has two limbs.
One is that the last three payments into the Chanani account identified as proceeds of bribery were made on dates between 26 January and 6 February 1998, and so came after the final payment from the Chanani account to the Durant account. It is submitted that those three payments into the Chanani account cannot be traced to the appellants because there is no sound doctrinal basis for "backwards tracing".
The other limb of the appellants' argument is that the Chanani account was a mixed account; and that where a claimant's money is mixed with other money, and drawings are made on the account which reduce the balance at any time to less than the amount which can be said to represent the claimant's money, the amount which the claimant can thereafter recover is limited to the maximum that can be regarded as representing his money ("the lowest intermediate balance rule"). In this case it is said that on two occasions (20 and 23 January 1998) payments were made from the Chanani account to the Durant account of sums which exceeded the maximum that could be said to have come from the earlier bribes itemised in schedule 3 and must therefore have come from other sources.
The parties agreed at the trial, as a matter of arithmetic, that if either limb of the argument was correct, the effect would be to limit the traceable amount to the same figure of US$7.7m.
The Royal Court (HWB Page QC, Commissioner and Jurats Kerley and Marett-Crosby) rejected the appellants' arguments. After a thoughtful and thorough review of the authorities and academic writings, the court concluded that the law was uncertain, that at a conceptual level the subject seemed incapable of wholly satisfactory solution and that at the level of policy it was unlikely to be settled in English Law below the Supreme Court. Its own view was that Jersey law should not set its face against accepting that "backward tracing" may be legitimate. It said that, at least where the account remained in credit during the relevant period, so there was no question of possible insolvency and prejudice to unsecured creditors, and where there was no suggestion of an intervening bona fide purchaser for value, the question should be whether there was sufficient evidence to establish a clear link between credits and debits to an account. If such a link were established, the court did not consider that there was cause to diminish its effect by introducing the concept of "a lowest intermediate balance rule". It considered that, as a matter of judicial policy, this approach would accord most closely with considerations of justice and practicality. It observed that otherwise any sophisticated fraudster would be able to defeat an otherwise effective tracing claim simply by manipulating the sequence in which credits and debits were made to his account.
The judgment continued:
"Take, for example, a situation in which a debit on one day and a credit a few days later are each accompanied by a bank notification advice unequivocally indicating that they relate to one and the same transaction. Is it to be said in such circumstances that the later credit cannot be traced into the earlier debit simply because of the order in which the two items appear on the bank statement or because at some point between the two the balance on the account fell, say, to zero before being replenished with new funds? As Professor Andrew Burrows observes in his treatise on The Law of Restitution, 3rd ed (2011), p 142:
'Indeed it would seem that 'backward tracing' must be accepted if one is to explain tracing into and through 'in credit' bank accounts. This is because if one is tracing funds into a bank account, the account is often credited before the bank has received the relevant funds. In other words, the debt owed by the bank to the customer, which is treated as a substitute for the funds, exists in advance of the funds being received.'"
On the question whether there was the necessary link, the court observed that it was the appellants' own pleaded case that the relevant payments into the Durant account were linked with one another, allegedly as commission earned in a particular transaction, as well as with the payments into the Chanani account, and it concluded that the link between the payments listed in schedule 3 and schedule 4 could not be plainer.
The Court of Appeal (James McNeill, QC, President, Jonathan Crow, QC and Sir David Calvert-Smith) upheld the reasoning and conclusions of the Royal Court.
The appellants' twin arguments have a common and simple logical parentage. The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. If it has ceased to exist, it cannot metamorphose into a later property interest. Ex nihilo nihil fit: nothing comes from nothing. If the money in a bank account has dwindled from £1,000 to £1, only the remaining £1 is capable of being substituted by something else; the £999 has ceased to exist. This explains "the lowest intermediate balance" principle. Similarly, a property interest cannot turn into (or provide a substitute for) something...
To continue reading
Request your trial
-
Ahmad Hamad Algosaibi and Brothers Company (“AHAB”) v Saad Investments Company Ltd (in Official Liquidation) (“SICL”) and Others
...beneficiaries will not in our view withstand scrutiny.” 2113 1082 Annex M1/6 {A2/46/2}. 2114 1083 [2015] 1 BCLC 14 {R1/46/1}. 2115 1084 [2015] 3 WLR 599 {R1/50/1}, on appeal from the Court of Appeal of 2116 1085 Boscawen v Bajwa [1996] 1 WLR 328, 334D {R1/25/7}, per Millett LJ (Court of Ap......
-
Ahmad Hamad Algosaibi and Brothers Company v Saad Investments Company Ltd, Al Sanea and Others
...123 SJ 688, considered. (12) Brazil (Fed. Rep.) v. Durant Intl. Corp., 2012 (2) JLR 356; on appeal, 2013 (1) JLR 273; on appeal, 2015 (2) JLR 1, considered. (13) Brown v. Bennett, [1998] EWCA Civ 1881; [1999] 1 BCLC 649; [1999] BCC 525, referred to. (14) Central Bank of Ecuador ......
-
[1] Nissan Motor Company, Ltd [2] Nissan Middle East Fze v [1] Carlos Ghosn [2] Carole Nahas Ghosn [3] Beauty Yachts Pty Ltd
...v Investment Trust Companies (in liquidation) [2017] UKSC 29; [2018] AC 275, at [63]–[66]. 87 [2014] EWCA Civ 360; [2015] 1 BCLC 14. 88 [2015] UKPC 35; [2016] AC 297. 89 Also cross-referencing Amended Reply, [47A.1]. 90 [2003] EWCA Civ 1048; [2004] 1 BCLC 131. 91 [2013] EWHC 3147 (Comm......
-
Nissan Motor Company, Ltd v Carlos Ghosn
...v Investment Trust Companies (in liquidation) [2017] UKSC 29; [2018] AC 275, at [63]–[66]. 87 [2014] EWCA Civ 360; [2015] 1 BCLC 14. 88 [2015] UKPC 35; [2016] AC 297. 89 Also cross-referencing Amended Reply, [47A.1]. 90 [2003] EWCA Civ 1048; [2004] 1 BCLC 131. 91 [2013] EWHC 3147 (Comm......
-
Cyber fraud: Assessing options for asset recovery
...that the deposit would reimburse that payment out. In the leading case, Federal Republic of Brazil v. Durant International Corporation [2015] UKPC 35, the Privy Council "The development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits......
-
The Judicial Committee Of The Privy Council Confirms The Existence Of 'Backwards Tracing'
...in The Federal Republic of Brazil and another (Respondents) -v- Durant International Corporation and another (Appellants) (Jersey) [2015] UKPC35, in which Advocate Paul Nicholls of Walkers appeared for the Appellants. The Privy Council confirmed that it is possible for a claimant to rely on......
-
Dispute Resolution Review Chapter 8th Edition
...IN REVIEW i Federal Republic of Brazil and another (Respondents) v. Durant International Corporation and another (Appellants) (Jersey) [2015] UKPC35 The Privy Council has confirmed that it is possible in Jersey law to rely on the principle of 'backwards tracing' in order to identify and rec......
-
Substance over form in equitable tracing for victims of fraud Privy Council
...property - has not been permitted. A road to nowhere? In Federal Republic of Brazil v Durant International Corporation (Jersey) [2015] UKPC 35, the former mayor of Sao Paulo had received US$10.5 million in bribes in connection with a major road building contract in Brazil. He sought to laun......
-
Table of cases
...150 DLR (3d) 768, [1983] OJ No 3343 (CA) ........................... 135 Federal Republic of Brazil v Durant International Corporation, [2015] UKPC 35 ................................................................................... 493, 633 Table of Cases 805 Feduk v Bank of Montreal (19......
-
UNJUST ENRICHMENT, PROPRIETARY SUBROGATION AND UNSATISFACTORY EXPLANATIONS
...El Ajou v Dollar Land Holdings plc[1993] 3 All ER 717; Foskett v McKeown[2001] 1 AC 102 at 127–128. 70Federal Republic of Brazil v Durant[2015] UKPC 35. 71 Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66 at [38]. 72 Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66 at [33]. 73 Tatiana Cutts, ......
-
Competitions Among Secured Parties
...The Privy Council cited the approach taken in Pettyjohn with approval in Federal Republic of Brazil v Durant International Corporation, [2015] UKPC 35. See Chapter 11, Section B(3)(e), above in this chapter, for a discussion of “backwards tracing.” PER SONAL PROPERTY SECURITY LAW 494 even t......
-
Following and Tracing into New Forms of Collateral
...why the statutory 76 Above note 21. 77 The court referred to backwards tracing as “tracing by subrogation” at paras 63 and 66. 78 [2015] UKPC 35. 79 See James Penner, “‘Sort of’ Backwards Tracing” in P Davies & J Penner, eds, Equity, Trusts and Commerce (Oxford: Hart Publishing, 2017) 123. ......