Niru Battery Manufacturing Company v Milestone Trading Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Clarke,Lord Justice Sedley |
| Judgment Date | 23 October 2003 |
| Neutral Citation | [2003] EWCA Civ 1446 |
| Docket Number | Case No: A3/2002/1883/1900 |
| Court | Court of Appeal (Civil Division) |
| Date | 23 October 2003 |
[2003] EWCA Civ 1446
The President
Lord Justice Clarke and
Lord Justice Sedley
Case No: A3/2002/1883/1900
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Justice Moore-Bick
Royal Courts of Justice
Strand,
London, WC2A 2LL
Mr Michael Bloch QC and Miss Tiffany Scott (instructed by Clyde & Co) for the Fourth Appellant/Defendant
Miss Geraldine Andrews QC and Miss Zoe O'Sullivan (instructed by Ashurst Morris Crisp) for the Fifth Appellant/Defendant
Mr Ali Malek QC and Mr David Quest (instructed by Richards Butler) for the Respondents/Claimants
Introduction
There are two appeals before the court, brought by the fourth and fifth defendants respectively, against an order of Moore-Bick J dated 17 July 2002 made consequent upon a judgment dated 11 July 2002. In the judgment the third defendant ("Mr Mahdavi"), the fourth defendant ("CAI") and the fifth defendant ("SGS") were held jointly and severally liable to the first respondent ("Niru") and to the second respondent ("Bank Sepah"). By the order of 17 July judgment was given for the respondents jointly and severally against Mr Mahdavi, CAI and SGS, jointly and severally for US$5,712,762 together with interest from 22 December 1998 to 17 July 2002 of US$1,174,999 and costs. All questions of contribution were adjourned. On 19 July 2002 the judge gave CAI and SGS permission to appeal and on 20 September the judge refused Mr Mahdavi permission to appeal.
Although Niru and Bank Sepah played very different parts in the story, it was not suggested before the judge or before us that any distinction is to be drawn between them so far as the liability of any of the appellants is concerned. Their claim against Mr Mahdavi succeeded on several bases. The judge held that he was liable in the tort of deceit, as a constructive trustee of monies obtained from Bank Sepah by fraud and as an accessory to a breach of trust. In the event Mr Mahdavi has not proceeded with his application for permission to appeal. The claim against CAI failed in the tort of deceit but succeeded in restitution on the basis that the circumstances in which it paid money away did not afford it a defence to the respondents' claim. The claim against SGS succeeded on the basis that it was in breach of a duty of care.
In this appeal CAI appeals against that part of the judgment in which the judge found CAI liable to repay monies it had received from Bank Sepah and subsequently paid away to third parties on the instructions of Mr Mahdavi. SGS appeals against that part of the judgment in which the judge held that SGS was liable to the respondents for breach of a duty of care which he held it owed to Niru. These two appeals involve very different considerations. By respondent's notice, the respondents challenge the decision of the judge acquitting CAI of the tort of deceit. SGS also challenges the judge's conclusion on deceit, for reasons to which I return below.
The Facts
The facts are set out in admirable detail in the judgment of the judge. It is only necessary to refer to some of them for the purposes of resolving the issues which arise in this appeal. The facts set out below are for the most part taken from the judgment.
Niru entered into a contract with the first defendant ("Milestone") for the purchase of lead. Milestone was a subsidiary of Woralco Holdings Ltd ("Woralco"), which was an English company owned by a discretionary trust established for the benefit of Mr Mahdavi's family. Milestone was incorporated in the Republic of Ireland as a single purpose vehicle for entering into the contract with Niru. As the judge put it, it had no significant assets of any kind. The judge held that, although he was not a director of Milestone, Mr Mahdavi exercised effective control over the company as a de facto director.
The contract was on the terms of a pro forma invoice sent by Milestone to Niru on 2 February 1998 which provided for the sale by Milestone to Niru of 9,000 metric tons +/—15% of lead ingots of Canadian origin C&F Bandar Abbas at a premium of US$16 per metric ton over the LME price on a range of dates to be determined by Niru, basis FOB stowed. In the event, by the time the pricing period arrived the market price of lead had fallen and Niru was able to buy more lead than originally agreed with the foreign currency allocation which it had previously secured from the Central Bank of Iran. Milestone agreed to sell Niru a further 1,400 metric tons, with the result that the total contract quantity was 10,400 metric tons. The total contract price was US$5,837,480.
Under the contract payment was to be by letter of credit opened by Bank Sepah Iran against presentation of a FIATA multimodal transport bill (or bills) of lading and (among other documents) an inspection certificate issued by SGS certifying that
"the quality and packing of the goods loaded are strictly complying with specifications of the goods indicated in the relative proforma invoice and the terms of the L/C".
As appears further below, that wording was prescribed by Iranian import regulations.
On 14 March 1998 Niru applied to Bank Sepah for the opening of a letter of credit in favour of Milestone in the sum of US$5,838,000. The credit was opened the next day and was advised to Milestone through Bank Sepah's branch in London. The letter of credit called for the presentation of ocean bills of lading rather than FIATA bills, but Milestone immediately requested an amendment which was duly made.
Lead is regularly traded on the London Metal Exchange ("LME"), which operates a warrant system that is described in detail by the judge in paragraph 14 and following of his judgment. The lead is deposited by producers in LME approved warehouses in lots of 25 metric tons, each of which is individually identified and made the subject of a single warrant. The lead is traded by buying and selling the warrants, which are effectively documents of title. Physical delivery can only be obtained from the warehouse against presentation of the relevant warrant.
In order to perform the contract it was necessary for Milestone to identify suitable goods. There was no difficulty about the purity of the lead in LME warehouses because in order to qualify for delivery into a warehouse it was necessary for the lead to meet the standards of purity laid down by the LME. However, in order to obtain an SGS certificate in accordance with the terms of the contract, it was necessary for SGS to carry out a physical inspection and sampling of the goods and in order to allow SGS to do that it was necessary for Milestone to obtain possession of the warrants covering the lead it intended to ship.
Mr Mahdavi approached CAI with a request to finance the 'borrowing' of 336 LME warrants covering 8,400 tonnes of lead in an LME warehouse in Gothenburg to enable the lead to be inspected and sampled. The proposal was for the bank to obtain warrants from one of the LME brokers, use them to make the metal available to Woralco for inspection and sampling by SGS and then return the warrants to the broker. The bank would have to pay for the warrants when it obtained them but would be reimbursed when it returned them to the broker. As the judge put it, this proposal left open the question of how Milestone would finance the purchase of the metal when the time came to make delivery.
There were discussions between CAI and Mr Mahdavi as a result of which the bank agreed to retain the warrants and finance the purchase of the lead by Milestone which it would eventually deliver to Niru. However, CAI was only willing to support the transaction on the basis that it would continue to hold the warrants as security pending reimbursement of the price. Because of difficulties in obtaining payment in hard currency from Iranian banks in the past, CAI was not willing to accept an assignment of the proceeds of a letter of credit issued by Bank Sepah as security. Nor, it seemed to the judge, was it willing to allow the goods to be delivered to a carrier in exchange for a document of title. As a result of those discussions, by 26 October 1998 CAI had purchased at Woralco's request warrants covering 10,400 metric tons of lead held in LME warehouses in Gothenburg and Helsingborg.
As the judge put it in paragraph 17 of his judgment, CAI's insistence on retaining the warrants as security for its advance put Milestone (and I think Mr Mahdavi) in a difficult position. The only source of the funds to pay for the lead was the letter of credit but, in order to obtain payment under the letter of credit, Milestone had to present documents to Bank Sepah which included a FIATA bill of lading (sometimes called an 'FBL'). However, an FBL could not be issued until the goods had passed into the control of the carrier or forwarding agent and that could not occur until the warehouse had released the goods. Since the warehouses would not release the goods without production of the warrants and the bank would not produce the warrants until it had been paid, Mr Mahdavi and Milestone were faced with an apparent impasse.
Again as the judge put it, Mr Mahdavi's solution was simple. He calculated that, if the forwarding agent could be persuaded to issue a bill of lading before the goods had formally passed into its control, SGS...
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