Overview

The decision of the High Court in Bank of Tokyo- Mitsubishi UFJ Ltd. and another v. Baskan Gida Sanayi Ve Pazarlama AS and others [2009] EWHC 1276 (Ch.) highlights the difficulty of establishing liability in the tort of conspiracy to injure by unlawful means. The case is likely to be topical in the current economic climate where a primary defendant in a fraud case is insolvent and there follows the inevitable hunt for deep-pocketed third parties. In such circumstances, the list of key targets is often extended through the use of accessory liability torts, such as dishonest assistance or knowing receipt, which are dependent on establishing a breach of trust or fiduciary duty on the part of the primary defendant. Where such a breach cannot be established because the defendant is not in the position of a fiduciary, seeking to demonstrate a conspiracy may be the only route open to the claimant.

Establishing liability against alleged co-conspirators can, however, be extremely difficult, as is demonstrated by this case. Although “unlawful means conspiracy”, as it is known, can be relatively straightforward to establish where there is evidence that co-conspirators have designed and implemented a common cause from the outset, problems arise for the claimant where a core defendant designs the fraud and engages a third party to assist with its implementation. The third party can quickly become mired in the intricacies of the fraud, but unless it knew of the fraud and intended to harm the claimant, bringing a successful case against the third party will be challenging; indeed, if the third party did not know of the fraud and/or intend to harm the claimant bringing a successful claim will be impossible, as this case demonstrates.

Whilst the judge in this case provided a thorough and legally sound analysis, the decision shows that cases of unlawful means conspiracy can lead to apparently unfair results for defrauded creditors who are often faced with a bankrupt fraudster and have nowhere to turn to satisfy the claim. The judgment is extremely lengthy and detailed; this short article concentrates only on the court’s analysis of the law relating to unlawful means conspiracy.

Facts

The claimant banks had advanced rolling trade finance to the lead defendant (“Baskan”), a Turkish nut exporter. Baskan undertook to repay the finance by way of assignment of monies due from one of the principal purchasers of its nuts, the Ferrero group (“Ferrero”). After drawing down funds in the sum of €22.8 million, Baskan transferred the entirety of its assets, business, premises and employees to a separate company. Baskan then ceased trading and defaulted on its repayment obligation to the banks. It had at that stage repaid around €1.4million to the banks, leaving a net shortfall of around €21.4 million.

The banks contended (and the judge noted that this was “not seriously in dispute between the active participants in this litigation”) that they were the victims of a premeditated fraud by Baskan and its controlling family.

The claimants sought to recover the sums from Ferrero, on several grounds. This article concerns the allegation of unlawful means conspiracy for Ferrero’s alleged role in Baskan’s fraud against the banks. Although the banks were successful in part on their other heads of liability, their claim based on unlawful means conspiracy failed.  

Decision

In a thorough and detailed judgment, Mr. Justice Briggs outlined the ingredients of the tort of unlawful means conspiracy. The starting point in such a case is the requirement to demonstrate that the defendant had an intention to injure the claimant by unlawful means. In other words, the banks would need to prove that Ferrero shared a common objective with the primary fraudster, Baskan, to injure the banks. It would also need to be shown that Ferrero knew that this harm would be achieved by the unlawful means intended to injure the banks.  

Intention to injure

The judge analysed the leading authority on intention to injure, OBG Ltd. v. Allan [2007] UKHL 21, which contains the following comment by Lord Nicholls:

“A high degree of blameworthiness is called for, because intention serves as the factor which justifies imposing liability on the defendant for loss caused by a wrong otherwise not actionable by the claimant against the defendant. The defendant’s conduct in relation to the loss must be deliberate. In particular, a defendant’s foresight that his unlawful conduct may or will probably damage the claimant cannot be equated with intention for this purpose. The defendant must intend to injure the claimant.”

OBG related to the torts of inducing breach of contract and causing loss by unlawful means, whose components closely mirror those of unlawful means conspiracy, and were therefore accepted by the Court of Appeal in Meretz Investments NV v. ACP Ltd. [2008] Ch. 244 as fully applicable to the case of conspiracy to injure by unlawful means.

In OBG Lord Nicholls commented that a defendant might seek to harm the claimant’s business either as an end in itself (where, for example, he had a personal grudge against the claimant) or as a means to an end (for example, to promote his own business interests). In each of these situations the intentional harm inflicted on the claimant would satisfy the “intention” of the tort, even if the harm was inflicted simply because the defendant would have preferred the claimant not to be standing in his way.

Although the court in OBG held that to satisfy the requirement of “intention” it was not enough that harm was one foreseeable consequence of the defendant’s actions, the “intention” could be the “obverse side of the coin” (as the court termed it) from the defendant’s conduct. Lord Hoffmann stated in OBG:

“Take a case where a defendant seeks to advance his own business by pursuing a course of conduct which he knows will, in the very nature of things, necessarily be injurious to the claimant. In other words, a case where loss to the claimant is the observe side of the coin from gain to the defendant. The defendant’s gain and the claimant’s loss are, to the defendant’s knowledge, inseparably linked. The defendant cannot obtain the one without bringing about the other. If the defendant goes ahead in such a case in order to obtain the gain he seeks, his state of mind will satisfy the mental ingredient of the unlawful interference tort.”

Unlawful means

Citing Meretz as authority, the judge in the current case therefore held that the defendant must know that the claimant’s loss would be caused by the unlawful means; a defendant will not be liable if he believes that he has a lawful right to do what he is doing. Accordingly, for Ferrero to be liable, the banks had to show that Ferrero and Baskan had a common intention to harm the banks by way of something unlawful – i.e. Baskan’s fraud. To prove this, the banks would have to show that Ferrero knew of Baskan’s fraud.

The need to show that the defendant knew that: (1) the conduct was unlawful; and (2) the unlawful aspect of the conduct would cause loss to the claimant, requires, the judge said, an analysis of both the quality and the extent of the defendant’s knowledge.

Considering first the quality of the knowledge, the judge held that the starting point was the judgment of the House of Lords in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2003] 1 AC 469. (Although given in a different context, the analysis in that case was approved by the Court of Appeal in Attorney General of Zambia v Meer Care & Desai [2008] EWCA Civ 875 as applying equally to the torts of dishonest assistance and unlawful means conspiracy.) Knowledge includes “blind eye” or “Nelsonian” knowledge which, the judge concluded, requires that the defendant believed it likely (rather than merely suspected) that the conduct was unlawful and would cause loss to the claimant, and refrained from inquiring in order to avoid confirming the truth.

Further, citing the Court of Appeal’s judgment in Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s LR 511, it was not sufficient that a reasonable person ought to have drawn the inference that it was likely the conduct was unlawful; it must be established that the defendant did indeed draw that inference.

As regards the extent of the knowledge, the question was how much of the principal fraudster’s scheme the defendant would need to know before incurring liability for the consequences of the fraud. The judge noted that there were issues “where primary fraudsters (here the Baskans) have invited others to assist them in their dishonest designs on a strict ‘need to know’ basis.” The judge noted apparently conflicting dicta in the authorities and stated that the answer lay “…in a painstaking analysis of the extent to which the particular defendant shared a common objective with the primary fraudsters, and the extent to which the achievement of that objective was to the particular defendant’s knowledge to be achieved by unlawful means intended to injure the claimant.”  

Analysis  

Undertaking such a “painstaking” analysis, the judge concluded that “none of those events, taken singly or together, justify or even support an inference of dishonest participation by Ferrero in a conspiracy to defraud the Banks”. In reaching this conclusion Briggs J carried out a careful analysis of the extent to which Ferrero shared a common objective with the primary fraudsters, and the extent to which that objective was, to Ferrero’s knowledge, to be achieved by unlawful means intended to injure the claimants. In doing so, the court took a wide range of circumstances into account, including Ferrero’s long-standing (and trouble free) relationship of trust with Baskan, and the lack of any motive for Ferrero to participate in such a fraud. The court found that Ferrero’s common objective with Baskan had not been the defeating of claims of Baskan’s creditors as a class, and as such, the conspiracy claim against Ferrero failed. The claimants had therefore not established the requisite “intention” on the part of Ferrero, as whilst Ferrero had been aware of certain facts relevant to the alleged fraud, they had not known the entirety of the facts relating to the planned fraud, particularly the aspects that caused much of the banks’ loss.  

Comment

The outcome of the case might appear harsh for a party who, through no failure of its own, is unable to recover from an insolvent fraudster or third parties engaged to assist with the fraud. When one considers, however, that such cases are seeking to establish that a party which has not itself committed fraud should nonetheless be held liable for its consequences, it is perhaps not surprising that the courts require an extensive analysis of the facts and a finding of a “high degree of blameworthiness” by that defendant.

Whilst this case does not establish new law, it does demonstrate, to quote the judge, how painstaking the factual analysis is required to be to establish liability on the part of an alleged conspirator. It also demonstrates how fastidious counterparties, such as banks, need to be with reviewing the audited accounts of borrowers: in this case, the judge commented that the banks’ failure to study the audited accounts properly “was seriously blameworthy”.

The only practical solution to dealing with any counterparty, such as a borrower, is to insist on and take into account regular audits of the borrower, and a regular rotation of auditors, to maximise the protection for the lender bank. Elementary though that may seem, it is surprising how relaxed the auditing regime in nonlisted companies can become. It is in the interests of any large lender to ensure it insists on auditing the borrower’s auditors, and ensuring that no comfort zone builds up between the borrower and its auditor.