The Court of Appeal has ordered the re-trial of a dishonest assistance claim by insolvent companies and their respective liquidators against a bank and its indirect subsidiary on the basis that the High Court failed to consider key evidence in reaching its findings, which were thrown into further doubt by the 19 months delay in the handing down of the lower court’s judgment: Natwest Markets plc & Anor v Bilta (UK) Ltd & Ors  EWCA Civ 680.
The Court of Appeal underlined that:
- when considering whether there has been dishonesty in the test for blind-eye knowledge, it was not enough that a defendant merely suspects something to be the case, or that he negligently refrains from making further inquiries.
- the tests for vicarious and dual liability are a highly fact sensitive exercise – such liability was usually imposed for policy reasons and was not concerned with fault or contractual liability.
This decision is noteworthy for financial institutions faced with claims alleging blind-eye knowledge on the part of a bank’s employees and/or vicarious liability in relation to a fraud because it highlights:
- the difficulties for claimants in establishing that there has been dishonesty where a defendant merely suspects something to be the case or if the defendant negligently refrains from making further queries.
- the risks for financial institutions, particularly a parent bank and any of its subsidiaries, faced with claims of vicarious liability; any contractual arrangements in place around the group to attribute the risk of vicarious liability are unlikely to assist.
We consider the Court of Appeal’s decision in more detail below.
In 2008, the first defendant bank, then known as the Royal Bank of Scotland (RBS), entered into a joint venture with an energy infrastructure company, which operated through a limited liability partnership (RBS Sempra). In 2009, pursuant to that joint venture, the second defendant (RBS SEEL), a subsidiary of RBS Sempra, traded carbon credits through its trading desk. The relevant arrangements were governed by a Commodities Trading Activities Master Agreement (the Agreement) to which RBS, RBS Sempra and a group of companies (including RBS SEEL) were parties. The trading desk was manned by two traders employed by RBS SEEL, but seconded to RBS under the terms of the Agreement.
In 2009 the claimant companies were used by their directors as vehicles for a fraud involving spot trades in certain carbon credits known as EU Allowances (EUA), through an intermediary known as CarbonDesk Limited (CarbonDesk). There was no direct contact between the claimant companies and the defendants. Each claimant company was left without assets, defaulted on its obligations to account to HMRC for VAT, and went into insolvent liquidation.
Subsequently, the claimant companies and their respective liquidators brought a claim against RBS and RBS SEEL alleging dishonest assistance and knowing participation in fraudulent trading claiming that:
- from 15 June 2009 and at all material times thereafter the traders should have been aware that the nature and pattern of RBS’s EUA trading with CarbonDesk was suspicious and such as to call for an inquiry “as to whether the trade was legitimate or whether there was a substantial chance that it was part of a VAT fraud“.
- In failing to raise the trading as a matter of concern and failing to seek a satisfactory explanation from CarbonDesk, the traders were wilfully shutting their eyes to the obvious which was “that there was no legitimate explanation for the trades and/or that they were connected with VAT fraud”.
RBS and RBS SEEL denied the claims stating that:
- neither of the traders fully understood the nature or extent of the risk of VAT fraud in the EUA market.
- the increase in volumes of EUAs had caused the traders no concerns except as regards CarbonDesk’s business model, which had been raised and satisfactorily explained.
- one of the traders spoke to the RBS SEEL compliance officer about the carbon credit trading at the end of June 2009.
High Court decision
The High Court held that RBS and RBS SEEL were both vicariously liable for dishonest assistance and knowingly being a party to fraudulent trading, by reason of the trading conducted by the traders employed by RBS SEEL. In reaching its conclusion, the High Court:
- noted that the traders caused RBS to enter into trades with CarbonDesk. These trades formed part of a chain of transactions linking the actions of the traders with the misappropriation or misapplication of the VAT monies by the directors of the claimant companies. The traders therefore provided the necessary “assistance” to the defaulting fiduciaries. The High Court acknowledged that the traders were separated from the frauds at the claimant companies by at least one buffer company (CarbonDesk – against which fraud was not alleged) and that the traders were therefore not as closely connected to the operation of a fraudulent scheme as might be the situation in other cases. However, the High Court said those were factors which went to the question of dishonesty, rather than assistance.
- determined that the traders were not fundamentally dishonest men. At the start of the trading with CarbonDesk, the traders were motivated by making good money and proving themselves to their employers. However, by mid-2009 the traders were making significant sums of money from increased and sustained trading with CarbonDesk with no information as to where CarbonDesk was obtaining its large volume of EUAs – the traders decided not to report their suspicions or ask questions in case doing so would lead them to ceasing such profitable trading – this was dishonest behaviour.
- although the traders were recognisable as employees of RBS SEEL by whom they were legally employed, paid and supervised, they had the power and authority to commit RBS to trading contracts as agents for RBS; at all times they had to operate within the guidelines and restrictions imposed by RBS and were subject to directions that might be given by RBS and the trading activity they were conducting was that of RBS, so they were operating in the RBS and RBS SEEL spheres of operations. The High Court therefore considered it appropriate to regard the traders as employees of RBS as well as RBS SEEL and found that both RBS and RBS SEEL were vicariously liable for the acts of the traders, commenting that this was a “paradigm case for the imposition of dual vicarious liability”.
RBS and RBS SEEL appealed against the High Court’s findings on dishonest assistance, knowingly being a party to fraudulent trading, and vicarious liability. The claimants cross-appealed that the High Court ought to have found that the dishonest assistance occurred over a longer period.
Court of Appeal decision
The Court of Appeal allowed the appeal by RBS and RBS SEEL on the dishonest assistance and knowingly being a party to fraudulent trading issues. The Court of Appeal commented that it was not satisfied that the High Court’s finding and conclusions were right in light of: (i) the failure of the High Court to consider key documents or evidence in making its finding of dishonesty – they could have made a difference to the outcome and could not therefore be treated as immaterial; and (ii) the 19 months delay in handing down the judgment. A re-trial was ordered. In light of the above, the Court of Appeal said it was unnecessary to address the claimant’s cross-appeal.
However, the Court of Appeal dismissed RBS SEEL’s appeal on the vicarious liability issue.
We consider below some of the key issues which are likely to be of broader interest to financial institutions.
The Court of Appeal said it was not necessary to address the claimants’ cross appeal (insofar as it was based on the submission that the test for dishonest assistance was satisfied earlier than the High Court had found) as the re-trial meant that all issues of fact, including the critical question of whether and if so when, the traders satisfied the test for blind-eye knowledge in Manifest Shipping v Polaris  UKHL 1 would be a matter for the new trial judge to determine.
However the Court of Appeal noted that it was not persuaded by the claimants’ alternative argument that all the claimants needed to do in order to prove dishonesty for the purposes of establishing that the traders dishonestly assisted in the perpetration of a VAT fraud by CarbonDesk’s clients was to establish that one of the traders in question had “questions and concerns” about the trading with CarbonDesk which he knew or believed he ought to have brought to the attention of RBS SEEL’s compliance officer.
The Court of Appeal highlighted the following key principles relating to the tests for dishonest assistance and blind-eye knowledge:
- Dishonest assistance. Per Ivey v Genting Casinos (UK) Limited  UKSC 67, where dishonesty is alleged, the fact-finding tribunal must ascertain: (i) the defendant’s actual state of knowledge or belief as to the facts; and (ii) whether, in the light of that state of mind, their conduct was honest or dishonest, applying the objective standards of ordinary decent people.
- Blind-eye knowledge. Per Group Seven Ltd and another v Nasir and others  EWCA Civ 614), when applying the Ivey v Genting test in the context of a claim for dishonest assistance in a breach of trust, at stage 1 of the Ivey test “knowledge” includes blind-eye knowledge, but in principle “belief” may include suspicion which in and of itself falls short of blind-eye knowledge. However, it is not enough that the defendant merely suspects something to be the case, or that he negligently refrains from making further inquiries. The state of a person’s mind is a question of fact, and suspicions of all types and degrees of probability may form part of it, and thus form part of the overall picture to which the objective standard of dishonesty is to be applied.
The Court of Appeal then commented that when the matter was re-tried that it would be a matter for the judge to determine whether the traders’ trading with CarbonDesk had been dishonest, in the light of all relevant circumstances, including the unprecedently high volumes of transactions and the traders’ states of mind, specifically their knowledge (actual or imputed), beliefs, and conduct (including, but not limited to their dealings with the RBS SEEL compliance officer).
Vicarious and Dual Liability
RBS SEEL submitted that the High Court’s conclusion that this was a paradigm case for imposing dual liability was wrong, because despite nominally remaining its employees, all responsibility for the traders had been transferred to RBS, which should be solely responsible for their tortious acts. RBS SEEL contended that the High Court’s finding in relation to supervision stemmed from its mistaken and erroneous construction of certain sections of the Agreement.
The Court of Appeal stated that the High Court’s decision on this issue could not be impugned. The High Court was entitled to decide that the traders were so much a part of the work, business and organisation of both RBS and RBS SEEL that it was just to make both employers liable, and commented that the circumstances in which such a complete shift from the actual employer to the organisation to which the employee is loaned will arise must be very rare.
Vicarious and dual liability principles
The Court of Appeal noted that the principles which underpin the imposition of vicarious liability for tort had been considered by the Supreme Court in Various Claimants v Catholic Child Welfare Society  AC 1 (also known as the Christian Brothers case) and more recently in Barclays Bank plc v Various Claimants  UKSC 13. The Court of Appeal then highlighted the following key principles:
- Two stage test for vicarious liability. The test requires a synthesis of two stages: (i) to consider the relationship of D1 and D2 to see whether it is one that is capable of giving rise to vicarious liability; (ii) an examination of the connection that links the relationship between D1 and D2 and the act or omission of D1. In the vast majority of cases the relationship which gives rise to vicarious liability is that of employer and employee under a contract of employment; the employer will be vicariously liable when the employee commits a tort in the course of his employment. There were a number of policy reasons that usually made it fair, just and reasonable to impose vicarious liability when certain criteria are satisfied.
- Transfer of vicarious liability. A heavy burden of proof lay on an employer to shift responsibility for the negligence of its employees; liability is incurred without fault because the employer is treated by the law as picking up the burden of an organisational or business relationship which he has undertaken for his own benefit (such as the utilisation of secondees from a parent or subsidiary company as part of its usual business activities).
- Allocation of the risk of vicarious liability in a contract. The question of vicarious liability was not to be determined by the terms of any agreement between the two employers under which they may have declared whose “servant” the employee was to be at any particular time. Although contractual provisions might apportion liability between them, the question of vicarious liability turns on all the circumstances of the case (as per Mersey Docks & Harbour Board v Coggins & Griffiths (Liverpool) Ltd  UKHL 1). Such liability was imposed as a matter of public policy and was not concerned with fault or with contractual liability. It was not possible to avoid the imposition of vicarious liability by a contractual arrangement with the body to which an employee is loaned; to determine liability it is necessary to take all the actual circumstances into account and consider what happened on the ground.
- Dual vicarious liability. It was possible to have dual vicarious liability where an employee was loaned to or hired by another organisation. Where two defendants are potentially vicariously liable for the act of a tortfeasor it is necessary to give independent consideration to the relationship of the tortfeasor with each defendant in order to decide whether that defendant is vicariously liable. If the employee is so much a part of the work, business or organisation of both employers it may be just to make both employers liable for his negligence. One is therefore looking for practical and structural considerations (as per Christian Brothers and Viasystems (Tyneside) v Thermal Transfer (Northern) Ltd  EWCA Civ 1151).
- Fact sensitive exercise. The imposition of vicarious liability is a highly fact sensitive exercise. It is all the more so in the circumstances in which an employee has been loaned or hired out or seconded to another organisation (as per Group Seven).
Accordingly, for the reasons given above, the Court of Appeal dismissed RBS SEEL’s appeal on the vicarious liability issue.