Winnetka Trading Corporation v Julius Baer International Ltd and Another
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE ROTH,Mr Justice Roth |
| Judgment Date | 29 July 2011 |
| Neutral Citation | [2011] EWHC 2030 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC08C02033 |
| Date | 29 July 2011 |
[2011] EWHC 2030 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon Mr Justice Roth
Case No: HC08C02033
Michael Ashe QC and Timothy Carlisle (instructed by Park Law) for the Claimant
Bankim Thanki QC and Adam Sher (instructed by Freshfields Bruckhaus Deringer LLP) for the Defendants
Hearing dates: 24-25 March, 28-31 March, 1 April, 4-5 April and 11 April 2011
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Roth:
Introduction
In this action, the claimant ("Winnetka") seeks damages for breach of contract and/or negligence on the basis that the defendants failed properly to comply with two sets of instructions issued in late December 2006 to purchase shares in Inyx Inc ("Inyx"), an American pharmaceuticals company listed on the NASDAQ exchange. Pursuant to the 1 st instruction, $650,000 was paid out on Winnetka's account. Pursuant to the 2 nd instruction, $8.8 million was paid out on Winnetka's account. Instead of the anticipated shareholdings of well over 4 million shares in Inyx, only 1,008,000 shares were received. Winnetka had planned to acquire this shareholding in anticipation of an imminent management buy-out of Inyx, whereupon it would have resold the shares at a substantial premium.
The Inyx Group effectively collapsed in early July 2007 when two subsidiaries filed for Chapter 11 bankruptcy protection in the United States. The shares in Inyx then became worthless.
In summary, Winnetka contends that in paying away substantial sums of money on account of the purchases of Inyx shares, the defendants failed to arrange a secure method of ensuring that the shares would be delivered against payment. If, contrary to Winnetka's primary case, the defendants were correct in their interpretation of, in particular, the second instruction and thus in making the payments, then Winnetka alleges that they failed to warn it of the risk of carrying out the transaction in that manner, and that if it had received such a warning it would not have proceeded with the transaction.
The parties
Winnetka is a Panamanian company. It is a vehicle for holding the portfolio investment of its beneficiaries. It has three beneficial owners: Mr Jacob (Jack) Hazout owns 48.5% of the shares; Mr Jean-Marie Valicon owns 26.5%; and Mr Olivier Reglade owns the remaining 25%. Winnetka operates out of a small office which is currently in Brussels but which was in Paris at the time of the events with which this case is concerned. Mr Hazout is and was undoubtedly the driving force in Winnetka but he was emphatic that he was not in effective control of the company and that he shared decision-making with Mr Valicon. Mr Valicon was indeed present in court for part of the trial and was evidently assisting the legal team, and although it was challenged I see no reason to doubt Mr Hazout's account of how the company was run. However, after the signing of the initial mandates with the second defendant, Mr Hazout alone was involved in direct communications and meetings with the defendants.
Prior to the establishment of Winnetka, Mr Hazout and Messrs Valicon and Reglade had been involved in a Madagascar telecommunications company called Madacom. The capital in Winnetka available for investment came from the sale of their interests in Madacom. It appears (and the details are not important for the present case) that either their interest was held in the name of, or the proceeds of sale were paid into the name of, Mr Hazout when the stake in the Madacom was sold in late 2005. Their involvement with Madacom came about as a result of a computer company, known as ESDS, that Mr Hazout and the other two gentlemen, whom he referred to as his partners, used to operate. The investment in Madacom arose because ESDS had been engaged to provide software and equipment to Madacom at the time when it was established by investors from Hong Kong; and the consideration for this was provided partly in cash and partly through an equity stake. Mr Hazout said that he had been involved in this way with Madacom for almost ten years, and that over that time he and his partners invested additional monies in Madacom.
Both defendants are part of the well-known Swiss banking group, Julius Baer, and are wholly-owned subsidiaries of Julius Baer Group Ltd. The second defendant is a Swiss company which carries on banking business in various jurisdictions. Its branch in Guernsey is known as Julius Baer Guernsey ("JBG"), and is regulated by the Guernsey Financial Services Commission. It provides banking, investment, custody and credit services. The first defendant ("JBI") is an English company, which carries on business as an investment firm based in London. It is authorised and regulated by the Financial Services Authority ("FSA") and the scope of its authorisation includes advising on investments, arranging (bringing about) deals in investments, and "arranging [the] safeguarding and administration of assets."
Prior to 2000, Julius Baer operated a banking service in London and the second defendant held a banking licence in the United Kingdom; but that year it ceased to operate as a bank in London and the group concentrated its operations here on wealth management through JBI. As it is put in the defendants' skeleton argument, "as a result, clients of JBI became clients of a branch of BJB off-shore—Guernsey, Zurich or Geneva—in order to have access to those services." JBI concentrates on high net worth individuals, described in the evidence as individuals with more than £ 1/2 million to invest. However, many of those individuals choose to hold their investments in private companies, often offshore. Winnetka fell into that category. Where it is unnecessary to distinguish between the two defendants, I shall refer to them together, and to the banking group as a whole, as "Julius Baer" or "the Bank". The head office of the group is in Zurich, from which office any securities trading on behalf of Julius Baer's clients is conducted.
Winnetka's relations with Julius Baer
Mr Hazout was introduced to Julius Baer in late 2005 by his brother-in-law, Mr Benchetrit, at a time when the proceeds of sale of the Madacom shareholding were becoming available for investment. Mr Hazout initially opened a bank account mandate and investment advisory and dealing services mandate in his own name in mid-October 2005, but they are not significant for the purpose of the present proceedings. It was in late December 2005 that Winnetka signed a bank account mandate ("Banking Mandate") with JBG. An investment advisory and dealing services mandate ("Investment Mandate") was signed shortly afterwards but was superseded by a further copy of the Investment Mandate signed by Mr Hazout on behalf of Winnetka on 1 May 2006.
Under the Banking Mandate, JBG agreed to honour payment instructions and other orders duly authorised by Winnetka. The mandate expressly incorporates JBG's General Banking Conditions. Those conditions include the following:
"5. The Account Holder requests the Bank to provide custodial services and acknowledges that such services will be provided in accordance with the terms set out in attached Terms and Conditions forming an integral part of this Mandate.
…
11.…The Account Holder acknowledges and agrees that neither the Bank nor its officers or employees shall be liable to the Account Holder for any loss, damage, expense or liability suffered by the Account Holder in connection with the operation of the Account Holder's account(s) or the performance of any other services under this Mandate other than loss damage expense or liability arising from the gross negligence fraud or wilful default of the Bank, its officers or employees.
…
16. The Bank undertakes to execute correctly signed orders placed with it during business hours with requisite care.…"
The Terms and Conditions of Custody Services, referred to in the above clause 5, provide at paragraph 1:
"…Delivery or payment by the other party to any transaction shall be at the Account Holder's risk and the Bank's obligation to account to the Account Holder for any investment shall be conditional upon receipt by the Bank of the relevant documents or sale proceeds from the other party."
Under the Investment Mandate, Winnetka engaged JBG to provide an "active advisory plus dealing service". That is defined as being a service "where the Adviser will regularly contact the Client with advice on investments and will effect transactions in investments when requested by the Client". Winnetka opted for the investment objective of "capital appreciation and income" and specified that the base currency for reporting was the euro. The Terms and Conditions set out in part 2 of the Investment Mandate include at clause 10 an extensive provision concerning "the Bank's liability". That provides, insofar as material:
"10.1 The Bank will act in good faith and due diligence but, subject thereto, neither the Bank nor any Associate (the Bank contracting as trustee for such Associate for such purposes) shall be liable
…
(ii) for any loss or expense suffered by the Client under or in connection with this Agreement (including, without limitation, any occasioned by the insolvency or other default of any Counterparty) unless such loss or expense arises from its or their respective negligence, wilful default or fraud….
10.2 The Bank shall use its best endeavours to provide advice to the Client in a timely manner. The Bank shall...
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