In Royal Bank of Scotland plc v Highland Financial Partners LP ( EWCA Civ 328) the Court of Appeal took the unusual step of setting aside a judgment on the grounds that it was obtained by fraud.
Royal Bank of Scotland (RBS) and Highland Financial Partners entered into a collateralised debt obligation transaction in 2007, pursuant to which RBS provided funding. Highland used this funding to acquire a portfolio of loans through a special purpose vehicle. The loans were to be used as collateral for issuing securities to the market. The loans were to be acquired, and the securities issued, by a certain date (the closing date). The RBS funding was to be repaid by the closing date.
One of the key agreements between the parties was an interim servicing deed that provided the terms on which the loan portfolio would be liquidated should the transaction be terminated before the securities were issued. Clause 4.2 of this deed provided that in that event, Highland had a right to buy the loans, failing which RBS would sell the loans in a "commercially reasonable manner".
The financial markets collapsed before any securities were issued. On October 31 2008 RBS served notice on Highland, triggering the repayment provisions. RBS set up an auction to liquidate the 88 loans that it held as collateral. Before the auction, and without Highland's knowledge, RBS transferred 36 of the loans (which were identified as being of a low credit risk) from its trading book to its banking book, thereby increasing its total income for the relevant period by £1.442 billion. The values that were allegedly produced in the auction were in many cases significantly lower than the values RBS had attributed internally to the loans. It was subsequently held that the auction was a sham.
In March 2009 RBS issued High Court proceedings to recover the difference between the loans that it had provided and the value of the collateral realised under the auction. Highland disputed the amount that was credited as a result of RBS's liquidation process. Highland alleged that if RBS had properly complied with Clause 4.2 of the interim servicing deed, the value of the collateral realised would have been significantly higher, and there would not have been a shortfall for RBS.
RBS applied for summary judgment on the issue of liability.
The court can grant summary judgment, on either the whole or part of a claim, if it considers that:
- the claimant has no prospect of succeeding on a claim or the defendant has no real prospect of successfully defending the claim; and
- there is no other compelling reason why the case or issue should be disposed of at trial.
An applicant seeking summary judgment is required to state, and verify its statement by a statement of truth, that it knows of no other compelling reason why there should be a trial.
Where a party seeks an equitable remedy from the courts, it must come to court with 'clean hands'. A party that has acted improperly may be denied an equitable remedy. However, this maxim applies only where the misconduct is "inherently directed to the relief sought".(1)
A judgment that is shown to have been obtained by fraud must be set aside. To show that a judgment has been obtained by fraud, the following must be established:
- There must have been conscious and deliberate dishonesty in relation to the relevant evidence or action, which is relevant to the judgment.
- The relevant evidence, action, statement or concealment must be material.
- The dishonesty must be instrumental to the judgment obtained.
Materiality is assessed by reference to its impact on the judgment being challenged.
RBS's summary judgment application was supported by evidence from an RBS employee, Sam Griffiths, who had been directly involved with the liquidation process.
At the quantum hearing in December 2010, the judge held that RBS had acted in breach of its contractual obligations to Highland and its equitable obligations as mortgagee in possession. He described the auction process carried out by RBS as a "sham". He held that RBS was owed around £20 million, a much lower sum than was being claimed.
In May 2012 the judge heard RBS's application for an anti-suit injunction to prevent proceedings from being brought in Texas. RBS claimed that the proceedings were vexatious, oppressive and in breach of an English exclusive jurisdiction clause. At the same time, the judge heard Highland's application to set aside the original liability summary judgment on the basis that it had been obtained by fraud. Highland claimed that Griffiths had provided false evidence.
The judge found that Griffiths had lied during the proceedings and that, therefore, RBS had not come to equity with clean hands. In particular, he noted that RBS had not disclosed the truth in relation to the 36 loans that were transferred to RBS's banking book. The judge refused RBS's application for an anti-suit injunction, but refused to set aside the judgment on liability, on the grounds that Griffiths's lies would not have affected the outcome on liability and quantum.
RBS appealed to the Court of Appeal against the refusal to grant an anti-suit injunction. Highland cross-appealed against the High Court's refusal to set aside the judgments on liability and quantum.
The Court of Appeal unanimously allowed the cross-appeal, holding that RBS's fraud in the concealment and misrepresentation of facts by Griffiths meant that the summary judgment on liability had been obtained by fraud. The judgments on liability and quantum were therefore set aside. The Court of Appeal also dismissed RBS's appeal in relation to the anti-suit injunction, holding that Griffiths's misconduct was sufficiently proximate to the equitable relief being sought by RBS.
This ruling is understood to be the first domestic case in which a UK bank has had a judgment set aside on the grounds that it was obtained by fraud, and provides a good example of when a summary judgment may be set aside on these grounds. It highlights how a party seeking equitable relief – in this case, an anti-suit injunction – can be denied that relief on the grounds that it did not come to equity with clean hands.
The Court of Appeal's decision also reinforces the importance of making truthful disclosure to the court. In making an application for summary judgment, an applicant that fails to disclose relevant documents or facts which may afford a complete or partial defence to a claim does so at its peril.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
(1) Fiona Trust & Holding Corporation v Privalov  EWHC 1748 (Comm).
(2) Royal Bank of Scotland plc v Highland Financial Partners LP  EWCA Civ 809.
(3) Royal Bank of Scotland plc v Highland Financial Partners LP  EWHC 3119 (Comm).