Riyad Bank v Ahli United Bank (UK) Plc
| Jurisdiction | England & Wales |
| Judge | Buxton,Longmore,Neuberger L JJ |
| Judgment Date | 13 June 2006 |
| Date | 13 June 2006 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Buxton, Longmore and Neuberger L JJ.
M Brindle QC and S Colton (instructed by Slaughter & May) for the claimants.
M Howard QC, M Lyndon-Stanford QC, D Jowell and D Chambers (instructed by Lovells) for the defendant.
The following cases were referred to in the judgments:
Albazero, TheELR [1977] AC 774.
Caparo Industries plc v DickmanELR [1990] 2 AC 605.
Hedley Byrne & Co Ltd v Heller & Partners LtdELR [1964] AC 465.
Henderson v Merrett Syndicates Ltd [1994] CLC 918; [1995] 2 AC 145.
Maynard v West Midlands Regional Health AuthorityWLR [1984] 1 WLR 634.
Merivale Moore plc v Strutt & ParkerUNK [1999] 2 EGLR 171.
Pacific Associates v BaxterELR [1990] 1 QB 993.
Simaan General Contracting Co v Pilkington Glass LtdELR [1988] QB 758.
Smith v Eric S Bush (a firm)ELR [1990] 1 AC 831.
Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank LtdELR [1986] AC 80.
White v JonesELR [1995] 2 AC 207.
Williams v Natural Life Health Foods LtdWLR [1998] 1 WLR 830.
Banking — Contract — Negligence — Investment advice — Sharia-compliant investment fund set up between banks — Contractual arrangements between claimant bank and defendant and claimant bank and fund — Fund invested in leases of equipment — Lease values overestimated and fund suspended Defendant Bank Owed Duty Of Care Directly To Fund Despite Contractual Structure — No Principle Of Law That Such Contractual Structure Excluded Assumption Of Responsibility — No Error By Judge In Determining Principles Of Valuation Of Leases Relating To Estimated Residual Values, Discount Rates And Permissible Range Of Non-negligent Valuation.
This was an appeal by the defendant bank, Ahli United Bank (UK) plc, formerly known as the United Bank of Kuwait plc (UBK), against a judgment of Moore-Bick J [2005] EWHC 279 (Comm) that UBK owed a duty of care to the claimant bank, Riyad.
In 1994 UBK had established through its Islamic Investment Banking Unit (IIBU) an income fund whose assets were invested in operating leases of equipment. Most of the leases in which the fund invested related to equipment used by large commercial organisations in the US.
Riyad and its English subsidiary, RBE, were interested in developing a similar Sharia-compliant investment product and UBK suggested that RBE should set up its own fund on the same lines as the UBK fund using IIBU as its technical adviser. In 1997 RBE and UBK entered into a technical services agreement (TSA) which defined in some detail the services which UBK was to render in connection with the operation of the fund. The fund's structure was in all respects closely modelled on that of the UBK fund. A company was then acquired to embody the fund itself which was an open-ended investment fund. The fund entered into an investment advisory agreement (IAA) with RBE under which RBE agreed to act as its general investment adviser. The fund's leases were acquired from three leasing companies in the US, referred to as asset managers. There were discussions between RBE and UBK about possible leases which could be purchased and a technical services proposal was formulated setting out the nature of the equipment, the number of rental payments, any assumed renewal and the estimated renewal value (ERV) of the equipment at the end of the rental period. The main source of advice about the leases was the person primarily responsible for the day to day operation of the UBK Fund.
The fund ran into difficulties in 2000 and UBK informed RBE that some of the leases in the UBK fund had not performed as well as had been expected and that as a result the value of the fund might now be overestimated. A valuation of the RBE fund suggested that its value might be over-stated by as much as 20 per cent and the directors then suspended the fund. To maintain investor relations Riyad purchased all the shares in the fund at their par value.
The fund, which had suffered the loss, never made a claim under the IAA against RBE which had agreed to act as the fund's general investment adviser. Accordingly the claimants, Riyad, RBE and the fund, asserted that UBK owed a duty of care in tort directly to the fund. UBK submitted that no duty of care could arise because the contractual structure was inconsistent with any such duty. The judge held that a duty was owed and that UBK was in breach and he answered several questions relevant to the calculation of damages for breach of duty. UBK appealed. In holding that there was a duty not to be negligent in the giving of advice on the value of the leased assets, of the kind held to exist in Hedley Byrne & Co Ltd v Heller & Partners LtdELR [1964] AC 465 and Henderson v Merrett Syndicates Ltd [1994] CLC 918; [1995] 2 AC 145, the judge approached the matter in two stages asking first whether there was in the circumstances a duty on UBK apart from any contractual considerations and then asking whether the contractual structure adopted by the parties militated against the imposition of a duty of care.
Held, dismissing the appeal:
(1) The judge was not wrong to adopt a two stage approach and if he had asked one composite question he would have answered it in the same way. The specific decision not to have any contractual relationship between the fund and UBK was a neutral factor because the reason for that was that Riyad, as a Saudi Arabian bank, did not want to be directly associated with a Kuwaiti investment fund. Likewise the fact that the directors of the fund were responsible for investment decisions as advised by the fund advisor did not prevent a duty of care arising. UBK's experience and dedication to the nature of the investment vehicle which it had created was not intended to evaporate when the fund scheme was set up, particularly since all relevant personnel knew that UBK had the relevant experience and professional expertise while RBE did not. Where discussions and representations were made directly to the party which, in the event, suffered loss, there was no general proposition that, just because a contractual chain existed, no responsibility for advice was ever assumed to a non-contractual party. In the circumstances the judge had been entitled to find on the facts that UBK did owe a duty of care to the fund in relation to the valuation of the leases it offered to RBE for the fund to buy. (Henderson v Merrett Syndicates Ltd[1994] CLC 918; [1995] 2 AC 145applied.)
2 UBK did not carry out any such evaluation or analysis as was necessary, if it were to exercise reasonable care to ensure that its advice to the fund was sound.
3 The judge had not erred on the valuation issues. No error of principle had been established in respect of the judge's decision to adopt orderly liquidation value in exchange (OLVIE) as the basis for valuing ERV. Nor had he erred in determining discount rates and the permissible range for a non-negligent valuation.
Longmore LJ:
1. The principles of Islam, from which Sharia law has derived, impose important restrictions on the circumstances in which money may be invested to produce a profit. These principles include the prohibition on usury which is contained in the Koran particularly in the books of Al-Baqara (ii.275–6), Al-Imran (iii.130) and Ar-Rum (xxx.39). Exodus (22.25) and Deuteronomy (23.19) contain similar injunctions. As a result, banks offering services to Islamic clients have developed types of investment vehicles structured in such a way that the income from such vehicles is consistent with Islamic principles. These vehicles are known as “Sharia-compliant” funds. This appeal concerns one such fund, assets of which were invested in operating leases of equipment which provided returns for investors in the form of rental payments together with the value of the leased equipment at the end of the rental period. It is said (and the judge has found) that many of the leases were acquired by the relevant fund at too great a value and the fund has, as a result, suffered serious losses. The first question that arises is whether the defendants in these proceedings owed any duty of care to the fund to exercise proper care in relation to the valuation of the leases. In his judgment [2005] EWHC 279 (Comm) Moore-Bick J has felicitously described the background facts in a way on which I could not improve and can only usefully repeat.
2. In 1994 the defendant Ahli United Bank (UK) plc, then known as the United Bank of Kuwait plc (and thus conveniently referred to as “UBK” hereafter), established through its Islamic Investment Banking Unit an income fund whose assets were invested in operating leases of equipment. Most of the leases in which the fund invested related to equipment used by large commercial organisations in the United States. The fund was known as the “IIBU II Fund” and was marketed to the bank's customers in Kuwait and elsewhere. It is convenient to call this fund the “UBK Fund”. The person primarily responsible for the day to day operation of the UBK Fund at the time in question was Mr Derek Weist subject to his superior Mr Duncan Smith.
3. The first claimant, Riyad Bank, is a major commercial bank based in Saudi Arabia. The second claimant, RBE London Ltd (“RBE”), is a wholly-owned subsidiary of Riyad Bank which was incorporated in England for the purposes of carrying on the private banking business of Riyad Bank, both in this country and elsewhere. From 1993 it began to develop products which were marketed through Riyad Bank's network of branches in Saudi Arabia. Its customers included many wealthy individuals and RBE was therefore particularly interested in developing Sharia-compliant investment products in order to meet their requirements. At the time of the events giving rise to this action Mr Keith Scott was managing director of RBE and chairman of its Product Development Committee. Ms Najwa Al-Tunisi was manager of the Investment Department.
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