Application to set aside - Contract - Contractual term - Jurisdiction

Royal Bank of Scotland PLC v Highland Financial Partners LP and others: QBD (Comm) (Mr Justice Burton): 24 May 2012

The claimant bank (RBS) brought proceedings against the defendants (collectively H) in which it claimed that the second and third defendants, two members of the H group of companies, were liable to it under a series of agreements involving the advancing, by RBS, of some €240m in respect of a proposed collaterised debt obligation transaction (CDO) involving the H Group.

The fifth defendant (Scott Law) was the assignee of claims by the first and third defendants, which were being brought in Texas (the Texas proceedings) against RBS and others. Under the CDO, the defendant had borrowed from RBS, via a special purpose vehicle, funds for the purpose of acquiring a portfolio of loans, with a view to issuing, to subscribing third parties, securities, for which those loans would be collateral. There was to be a closing date by which the loans would be acquired, the securities issued and RBS's advances would be repaid, at the latest, by the agreed termination date, with interest. The original termination date had been twice extended.

However, H was a casualty of the market collapse of 2008 to 2009, and there never was a closing date, no securities were ever issued. RBS sought repayment of the loans and served notice pursuant to a mandate letter and an interim servicing deed (the ISD), triggering the repayment provisions of the ISD. Thereafter, RBS purported to operate those provisions so as to liquidate the existing loans, in part by selling them to third parties and in part by purchasing them itself, and to set them off against the outstanding balance of advances by the claimant. The claimant had devised a process known as a bids wanted in competition (BWIC) quasi-auction to set the value of those loans which it bought.

As part of that process, 88 loans which had not been issued to the public were advertised at auction. However, 36 loans were purchased by the claimant, although that fact was not disclosed at auction, and 29 were sold to a third party. The remaining 23, on which there was no third-party bid, were repurchased by RBS at prices calculated by reference to an 'average bid side quote'. Clause 4.2 of the ISD was the centre of the dispute between the parties. It was headed 'no closing date' and stipulated how the acquired loans should be sold in the event that no closing date occurred on or before the termination date. RBS was granted judgment in the UK (the liability judgment) against H for a sum quantified by a further judgment on quantum (the quantum judgment) as approximately €21m in 2009 (the 2009 proceedings) (see [2010] EWHC 194 (Comm); [2010] All ER (D) 88 (Dec)).

Following the liability and the quantum judgment, there were further hearings in which two additional witnesses of fact for RBS and four for H gave evidence, and a substantial number of additional documents were disclosed. The new evidence showed possible misconduct by an RBS employee, G, in respect of the loans. In particular, his statement before the quantum trial that the relevant loans 'were excluded from reclassification in early November because Mr Gulliver and I were becoming increasingly concerned about the risk of these loans becoming impaired' was shown to be incorrect.

The new evidence further made clear matters in respect of the instructions to the salesforce, in particular, that, in fact, there had been instructions for the salesforce of a much more general nature, which made it clear that (although no particular loans were identified) all/most/many of the loans were not for sale, thus inhibiting or discouraging salesmanship.

An issue arose as to an alleged suppressed fact, namely that it had not been disclosed that 36 loans had been transferred by RBS from its trading book onto its banking book. In the light of the new evidence, the court reconsidered its findings. RBS sought an injunction to restrain the Texas proceedings as being vexatious and/or an abuse of process. It sought enforcement of a jurisdiction clause in one of the relevant agreements, which stated, inter alia: 'The courts of England shall have jurisdiction to hear and determine any suit, action or proceedings, and to settle any disputes, which may arise out of or in connection with this deed.' H counterclaimed that, in the light of the material non-disclosures, the liability judgment should be set aside. Scott Law contended, by way of defence to RBS's reliance on the judgment, that it was procured by fraud, namely concealment by G.

The issues for determination were, inter alia: (i) whether there had been sufficiently serious improper conduct by RBS so as to require the setting aside of the liability or quantum judgment; and (ii) whether the injunctive relief ought to be granted to restrain the Texas proceedings. Consideration was given to Henderson v Henderson [1843-60] All ER Rep 378.

The court ruled: (1) It was settled law that, in respect of the requirement of fraud, there had to be conscious and deliberate dishonesty, namely deliberate, dishonest concealment of a suppressed fact. In respect of causation, the relevant test was to look to the impugned judgment which it was alleged was obtained by fraud. The jurisdiction of setting aside judgments was limited to circumstances in which it could plainly be demonstrated that the successful party had dishonestly obtained the fruits of victory. The fraud had to be such as to at least to put the validity of the judgment in doubt before it could so taint the judgment as to justify setting it aside (see [106]-[108], [110] of the judgment).

In the instant case, there had been, up to and including the last hearing, serious improper conduct by RBS through G. No part of the misconduct related to the existence of the jurisdiction clause, its construction or its enforceability. It was clear that H did not know the suppressed fact at the time of the liability judgment, and not until the opening submissions at, and/or shortly before the commencement of the quantum hearing.

However, the court was not persuaded that at the stage of the part 24 application, there had been dishonest concealment by G. In all the circumstances, and despite the fraudulent concealment, the outcome would not have changed. It would be pointless to set aside the judgment since, if the case were retried, the same result would follow, so far as liability and quantum was concerned. The fact that a summary application had taken place at the stage prior to disclosure meant that such simple failure to disclose would not automatically lead to a conclusion that there had been a misleading or deliberately false picture presented at the summary judgment stage.

By reference to the facts that had been before the court at the quantum trial, which had not materially changed as a result of the considerable further disclosure before the instant court, the result in the quantum judgment was correct and reflected the true position, including the previously suppressed fact. Further, even if there had been dishonest concealment, the judgment on liability should not be set aside (see [113], [115] [127]-[129], [188], [189], [195] of the judgment). H's application to set aside the liability judgment and dismiss Scott Law's defence would be dismissed (see [196] of the judgment).

(2) Whether a clause provided for exclusive jurisdiction or not was a question of construction and the express word 'exclusive' did not need to be used. A conclusion could be reached by the court that any previous misconduct was and could be explained or exonerated, if not persisted in. It was settled law that the court, in exercising its discretion, could take into account not only the gravity and nature of the impropriety, but other matters, such as hardship to the parties (see [137], [182] of the judgment).

In the instant case, the jurisdiction clause c
learly showed that the intention of the parties was that the courts in England were to be the exclusive jurisdiction.

Consideration had to be given to whether and to what extent there would be hardship to RBS if injunctive relief was refused. In the instant case, RBS would face the Texas proceedings. There appeared to be two potential matters of hardship to be considered: the first and most significant was the fact that in Texas, unlike in the instant jurisdiction, there was a jurisdiction to grant 'multiple, special, punitive and/or exemplary damages', in addition to 'compensatory, consequential and/or monetary damages'. The other concern was that the defendants were and ought to be precluded from bringing the Texas proceedings because of the principles of res judicata and/or issue estoppel and/or Henderson v Henderson abuse.

Having considered the questions of hardship, and in the light of the findings as to unclean hands, there were strong reasons why an injunction enforcing the exclusive jurisdiction clause in favour of RBS should not be granted (see [138], [184], [194] of the judgment). RBS's applications for injunctive relief would be dismissed (see 194] of the judgment).

John Nicholls QC and Louise Hutton (instructed by Linklaters) for RBS; Stephen Auld QC, Ben Strong and Laurence Emmett (instructed by Cooke, Young & Keidan) for the first to third defendants; Graham Dunning QC and Philla Hopkins (instructed by DaySparkes) for Scott Law.