24 March 2009

International fraud and asset tracing litigation - Spring: Abu Dhabi Investment Co v. H Clarkson & Co Limited

Andrew Wass
Partner | UK

[2008] EWCA Civ. 699

Facts of the Case

The decision of the High Court of Mr Justice Tomlinson reported in 2007 was appealed by the Second and Third Claimants, Al Shira'a Marine Investment Company LLC (‘ASMIC') and Al Suffon Holding Company LLC (‘ASH').  Both were special purpose vehicles created by Abu Dhabi Investment Company (ADIC) in order to invest in a joint venture with Norasia Shipping Limited (‘Norasia') for the operation of ten innovative container ships.  ADIC was to provide $81.6M for its 51% shareholding in Abu Dhabi Container Lines (‘ADCL'), the company that was to acquire and operate the ships with the other 49% being owned by Norasia.  The chairman and 100% shareholder of Norasia, the Fifth Defendant and the managing director of Norasia, the Sixth Defendant made fraudulent misrepresentations concerning the performance and profitability of the ships to ADIC during the period 12 April 1999 to 19 October 1999 inducing it to enter into the joint venture.  At this time neither ASMIC or ASH had been incorporated.  The Judge held that these fraudulent misrepresentations continued until the last ship was transferred to ADCL in September 2000.  A memorandum of agreement between ADIC and Norasia of 22 November 1999 provided for ADIC to effect its equity contribution of $81.6M through a special purpose vehicle which would obtain a loan from Paribas.

ADIC established ASH, which was incorporated on 15 February 2000 so as to limit its liability in the joint venture and provided it with $6M to invest in ADCLASH was initially going to be the only special purpose vehicle shareholder though, due to technical complications arising under UAE law, it was unable to invest directly into the company.  ASMIC was subsequently incorporated so as to take over this responsibility.  Accordingly, ASH used the $6M it had received from ADIC to make a loan to ASMIC.  The Judge upheld the proposition that a cause of action in deceit may lie even where the misrepresentation was not made to the claimant directly.  A representation made to a third party with the intention that it would be passed on to the claimant to be acted on and relied on by him would suffice, if it is passed on and acted and relied on.  What must be shown is the actual intention to deceive the claimant.  The precise identity of the claimant need not be known when the false representation is made, provided that he belongs to a class of person within the contemplation of the defendant as likely and intended to be deceived by the misrepresentation.  The Court of Appeal approved this formulation of the law by Mr Justice Tomlinson. 

On 31 July 2000 Paribas provided the loan facility of $77.5M to ASMIC which would constitute the remainder of the $81.6M investment.  

Mr Justice Tomlinson held that ADIC was only entitled to its claim for the $6M (less amounts recovered in settlement with other Defendants) it had advanced to ASH, and that notwithstanding that the representations were false and fraudulent and continuing, ASH and ASMIC had no claim in deceit or negligence.  Mr Justice Tomlinson found that the Claimants had not demonstrated that the Defendants made their false representations to ADIC intending them to be passed on to others.  For ASH and ASMIC to succeed he held it would be necessary to conclude that it was intended that the fraudulent misrepresentations were to be passed on to any person whom ADIC might wish to interest in the joint venture.

ASMIC and ASH appealed.

The decision 

The appeal was allowed.  Lord Justice May giving the judgment of the Court held that Mr Justice Tomlinson was not correct to hold that the Fifth and Sixth Defendants (the chairman and managing director of Norasia) did not in the autumn of 1999 have any very clear idea of what, if any, precise role would have been played by an ADIC special purpose vehicle.  The Court of Appeal held that it was clear beyond argument that the Norasia defendants knew that ADIC intended to effect their initial investment, subject to the satisfactory completion of due diligence, by means of a special purpose vehicle; and that the special purpose vehicle would subscribe for shares in ADCL with money borrowed from Paribas.  ASH and ASMIC were, to the knowledge of the Norasia defendants specifically incorporated to implement ADIC's decision to invest.  What mattered was that the Norasia defendants knew that this was to be the structure and that they plainly intended, by their dishonest representations, to deceive the controlling minds of the special purpose vehicle to induce them to give effect to the proposed investment by means of the proposed structure.  

“It was only necessary to conclude… that the Norasia Defendants, knowing as they did the structure by means of which ADIC intended to, and did in fact, effect the investment, plainly intended that their representations should be passed on to those parts of the structure, that is ASH and ASMIC, which affected the investment”.  

In conclusion, Lord Justice May commented that:

“In fact, of course, those who controlled the special purpose vehicle were the same people who controlled ADIC, so that in reality the passing on of the representations is a lawyers' construct”.

Points of interest

The Court of Appeal was less concerned with the corporate structure than the reality, which was that without these fraudulent misrepresentations ADIC via its companies, ASH and ASMIC, would not have invested $81.6M in the joint venture with Norasia.  The fact that the Claimants had not been incorporated when the representations were made between April and October 1999 was not relevant:  Norasia knew that the investments would be carried out by a special purpose vehicle of ADIC and that was sufficient.

Category: Article