IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HON MR JUSTICE MANCE
(Now The Rt Hon Lord Justice Mance)
Royal Courts of Justice
Strand, London, WC2A 2LL
Thursday 2nd November 2000
B e f o r e :
LORD JUSTICE ROBERT WALKER
LORD JUSTICE TUCKEY
SIR MURRAY STUART SMITH
– – – – – – – – – – – – – – – – – – – – –
KHALED NASER HAMOUD AL-SABAH
JUAN JOSE FOLCHI BONAFONTE
GRUPO TORRAS SA
– – – – – – – – – – – – – – – – – – – –
Michael Lyndon-Stanford, QC and Oliver Michell (instructed by Messrs Cartier & Co.for Sheikh Khaled)
John Davies (instructed by Messrs Georgiou Nicholas for Mr. Folchi)
Andrew Popplewell, QC and Paul Wright (instructed by Messrs Baker & Mc Kenzie for Grupo Torras SA)
– – – – – – – – – – – – – – – – – – – – –
As Approved by the Court
- This is the judgment of the court to which each member has contributed. We have heard consecutively two appeals by different defendants from orders made by Mance LJ in July 1999 at the end of the trial of a consolidated action. The action had, as he said at the beginning of his judgment, occupied much time in the Commercial Court and on appeal over the previous five years.
- The claimants in the action were a Spanish company originally called Torras Hostench SA but renamed in June 1989 as Grupo Torras SA (“GT”) and its wholly-owned subsidiary, an English company called Torras Hostench London Ltd (“THL”). These companies were ultimately owned and controlled by the Kuwait Investment Authority (“KIA”), a body established in Kuwait in 1982. The companies were more directly controlled by the Kuwait Investment Office (“KIO”) in London. The KIO had been in existence since soon after Kuwait gained independence in 1961, but in 1982 it came under the control of the KIA, and the Judge heard some evidence about the uneasy relations which often existed between officials of the KIA in Kuwait and officials of the KIO in London.
- In the mid-1980’s the KIO became interested in investing in Spain, which was seen as offering attractive opportunities for growth. GT was acquired as an investment vehicle to exploit such opportunities. THL was incorporated outside Spain in order to enable loan capital to be raised in a tax-efficient way. During the course of the trial the Judge heard much evidence and argument about Spanish business practices, especially as regards ‘complementary payments’ to off-shore entities.
- The claimants’ claims arose out of a series of large-scale frauds which were carried out against them between 1988 and 1992. The fraudulent transactions were referred to at trial as Croesus (May 1988), Oakthorn 1 (July 1989), Oakthorn 2 (June 1990), Pincinco (October 1990) and Wardbase (May 1992). Pincinco occurred during the period of the Iraqi invasion and occupation of Kuwait (the invasion was on 2 August 1990 and the occupation continued until late February 1991). The impact of these events on the operations of the KIO was another matter on which the Judge heard much evidence and argument.
- There were in all 56 defendants joined in the consolidated action at different times. They were a disparate aggregation of individuals and corporate entities in different parts of the world. Some were alleged to have been active conspirators; others to have given dishonest assistance in breach of fiduciary duty; and others to have been in knowing receipt of the proceeds of misappropriated assets. The proceedings against some of the defendants were discontinued, and others played little or no active part in the proceedings.
- Mance LJ’s reserved judgment was handed down on 24 June 1999 (subject to supplementation and revision in some minor respects). It is an impressively thorough judgment running to over 350 pages. Neither of the appellants challenges the Judge’s central findings as to the large-scale frauds which were carried out. Each challenges the Judge’s findings in relation to his complicity in one or more of the frauds. In these circumstances it is not necessary to set out all the facts as comprehensively as the Judge has done, nor is it necessary to identify more than a few of the large number of persons who were involved in the matter in one way or another. For the purposes of these appeals it is sufficient to begin by identifying the two appellants and three other individuals of central importance to the case.
- The first appeal was that of Sheikh Khaled Naser Hamoud Al-Sabah, the 53rd defendant (“Sheikh Khaled”). He joined the KIO as a young man and worked there from 1983 to 1993, acquiring increasingly heavy responsibilities during that time. The second appeal was that of Senor Juan Jose Folchi Bonafonte, the ninth defendant (“Mr Folchi”). He is a Spanish lawyer who in 1986 began to act for the KIO in respect of its Spanish interests. The other individuals calling for immediate mention are Sheikh Fahad Mohammed Al-Sabah, the first defendant (“Sheikh Fahad”), Mr Fouad Khaled Jaffar, the third defendant (“Mr Jaffar”) and Senor Francisco Javier de la Rosa Marti the fifth defendant (“Mr de la Rosa”).
- We gratefully adopt the Judge’s summaries as to these five men, noting that Mr Betts and Mr Ball were very senior officials at the KIO; Koolmees and Kokmeeuw were Netherlands companies (themselves held by Netherlands Antilles companies) through which the KIO controlled GT; and Quail was a company controlled by Mr de la Rosa which in 1986 entered into a five-year contract to manage GT.
Sheikh Fahad, a member of the Kuwaiti royal family of Al-Sabah, was chairman of the KIO from July 1984 until 8th April 1992, although ceasing to play an active role in the KIO after the end of 1991. From April 1990 he also held the office of general manager previously held by Mr Jaffar. Sheikh Fahad was a director of Koolmees and Kokmeeuw, and a director and chairman of the board of GT from June 1986 until 1992 …….. Sheikh Fahad’s early career involved four years in England from 1956 learning the language and attending courses on accounting and local government. He returned to Kuwait to work in the Ministry of Finance until 1964. He joined the KIO in 1964 as an administrative manager, becoming general manager for the first time in 1967.
Mr Jaffar was deputy chairman and general manager of the KIO from 1st July 1984 until 21st April 1990. Although formally he resigned, he did so because the KIA had decided that he should be recalled to Kuwait, in the context (according to evidence of the KIA’s then managing director, Dr Al-Rashed) of its desire to gain greater control over the KIO. Mr Jaffar was also a director of Koolmees and Kokmeeuw until 15th March 1990, and a director and Vice President of GT from June 1986. Formally, he retained his positions in GT until 26th May 1992. It is in issue whether this was with his consent and whether he had any further involvement with GT after ceasing to be deputy chairman and general manager of the KIO. During the Iraqi occupation of Kuwait, which began on 4th August 1990, the KIO in London, by reason of its position and control over very substantial Kuwaiti assets, acquired central importance in the efforts to recover Kuwait. During that period and in that context, Mr Jaffar returned to the offices of the KIO to assist on a voluntary part-time basis which he described to me as advisory rather than executive.
Sheikh Khaled is a younger member of the Al-Sabah family. He was born in 1955, came to England to take his “O” and “A” levels, and attended Warwick University where he read economics and international relations. After starting a master’s degree in London, he devoted himself full-time to training and then working with the KIO. From 1983/4 he was an analyst in its Japanese department. In 1987 he was promoted to assistant general manager, reporting to Mr. Jaffar. In December 1989 he became Deputy General Manager, the previous holder, Mr Bruce Dawson, having reached retirement age and become a consultant. When in April 1990 Mr Jaffar ceased to be general manager, Sheikh Khaled moved into his office on the same floor as Sheikh Fahad. Sheikh Fahad held out to him the prospect that he would succeed Mr Jaffar as general manager, but the Finance Minister of Kuwait, who chaired the KIA, would not agree, and Sheikh Fahad himself re-assumed the office. Sheikh Khaled became a director of GT in 1987 and a director of Koolmees and Kokmeeuw in 1990.
Mr de la Rosa was by background a banker, who during the 1980s rapidly acquired a reputation as a formidably successful entrepreneur. In addition to his role in Quail, as GT’s appointed manager, he was a director and deputy chairman of GT from 15th September 1986 until 26th May 1992 …….. He visited London regularly, where, according to Mr Betts, he would on each visit meet Mr Ball who took a particular interest in Spain.
Mr Folchi was born in 1948. He read economics with law at the University of Barcelona, and after graduating became the youngest professor of law there. In 1974 he qualified as a lawyer, practising as a government lawyer and teaching thereafter. From 1976 he also became involved in politics, and was finance minister of the Catalonian government from 1977 until 1980. That year he added to his activities his own legal practice. In 1986 Mr Folchi acquired the KIO and subsidiaries including GT as major clients, for which he thereafter frequently acted under powers of attorney. After acquiring them as major clients, Mr Folchi’s law firm grew rapidly. By 1992-3 Mr Folchi and his partners had some 60 professional staff. Neither Mr Betts nor Mr Black …….. experienced or heard of any respect in which Mr Folchi’s services, conduct or co-operation gave rise to concern.
- At trial Sheikh Fahad, Mr Jaffar and Mr de la Rosa were assailed as the chief conspirators. Sheikh Fahad and Mr Jaffar were represented by leading and junior counsel until the fourth week of the trial when they ceased to be represented and indicated that they would take no further part in the trial. The Judge said that the cause of their withdrawals was, without doubt, material produced by a Swiss investigating judge, Juge Tappolet, in criminal proceedings based on complaints which the claimants made against a Swiss banker, Mr Yves Byrde, in respect of Pincinco and the other frauds. Mr de la Rosa was (on the ground of contempt of court) debarred from defending the action on certain issues, and in the event he did not appear at the trial. It seems that he was at the time in custody in Spain. He was offered the opportunity of giving evidence by video-link but he did not take up the offer. So in the event the Judge did not hear any evidence from Sheikh Fahad, Mr Jaffar or Mr de la Rosa. Sheikh Khaled did give evidence at the trial, at which he was represented by junior counsel. Mr Folchi also gave evidence. He appeared in person. In this court both appellants have been represented by counsel.
- The Judge gave judgment for GT against Sheikh Fahad, Mr Jaffar and Mr de la Rosa for damages for conspiracy in respect of all or most of the five fraudulent transactions. It is not necessary to go into the detail of his findings and orders against them, but (in briefest summary) the Judge found the main allegations against them, as the chief conspirators, proved to the necessary high standard of proof.
- The Judge summarised the claims against Sheikh Khaled as being made in respect of Pincinco alone, for conspiracy, dishonest assistance, breach of director’s duty (as a director of GT) and knowing receipt of $20m. The Judge found the allegations of conspiracy proved to the requisite high standard, and gave judgment for GT against Sheikh Khaled for three sums, $294,720,761, Ptas 2,375,000,000 and $6,144,000 (or their sterling equivalents at the time of payment). The significance of those three sums is explained below. Sheikh Khaled was also ordered to pay interest on those sums, and costs on an indemnity basis.
- The Judge summarised the claims against Mr Folchi as claims for conspiracy and dishonest assistance in respect of all the transactions except Croesus, claims for breach of duty (as a director of THL) in respect of Pincinco, and claims for money had and received and/or knowing receipt of $2.165m in respect of Oakthorn 1 and 2 and of $5.567m in respect of Pincinco. The Judge did not find Mr Folchi to have been a conspirator but he found him liable for rendering dishonest assistance for losses arising from all the transactions other than Croesus. He was ordered to pay sums of (i) $54,291,968 (Oakthorn 1) (ii) $41,856,173 (Oakthorn 2) (iii) $294,720,761, Ptas 2,375,000,000 and $6,144,000 (Pincinco) and (iv) Ptas 1,976,768,433 (Wardbase) (or their sterling equivalents at the time of payment). Mr Folchi was also ordered to pay interest and costs on the standard basis.
The Undisputed Facts on These Appeals.
- Croesus involved the misappropriation of US$27.4m in May 1988. The money ended up in a Swiss bank account belonging to Mr. de la Rosa and his wife. Its misappropriation was concealed behind a facade of paper transactions culminating the following year in a loan by THL to Croesus, a shell company. This loan was written off in GT’s 1990 accounts. The Judge found that Mr. de la Rosa had benefited from this misappropriation which had been made with the knowledge and consent of Sheikh Fahad and Mr. Jaffar. A claim against Mr. Folchi in respect of Croesus was not pursued at trial.
- Oakthorn 1 involved the misappropriation of US$55m in July 1989. The money was paid by THL under a loan agreement to Oakthorn, a Jersey company effectively controlled by Mr. Folchi, ostensibly to enable Oakthorn to acquire an English shelf company, Wardbase, which was to earn commission on the sale of GT’s investments out of which the loan was to be repaid. Mr. Folchi was intimately involved in setting up this structure. There was, as the Judge held, “nothing” in it “except a desire to find some cloak to ‘repay’ a ‘loan’ from GT to Oakthorn which it was never contemplated could or would be repaid”. Upon receipt of the money into Oakthorn’s account US$50m was paid away to three Swiss banks on the instructions of Mr Folchi’s assistant, Mrs. Parker. US$45m was divided equally between accounts belonging to Sheikh Fahad at Lombard Odier (“Attention Thierry Lombard”) and Mr Jaffar, although Mr Folchi was unaware at the time that they were the recipients. US$5m was paid to Bankers Trust, Geneva (Mr. Byrde), where, on the instructions of Mr. Folchi it was paid into account “Stuart” which Mr. Folchi knew had recently been opened by Mr de la Rosa. At the same time Mr. Folchi opened account “Falcon” for himself. In due course US$0·775m was paid into this account from the balance of the money paid to Oakthorn.
- Oakthorn 2 involved the misappropriation of US$50m in June 1990 in much the same way as Oakthorn 1. The ‘loan’ by THL to Oakthorn was paid away on Mrs. Parker’s instructions, counter-signed by Mr. Folchi. US$32.5m went to bank accounts in the names of Sheikh Fahad (in London) and Mr Jaffar (at Rud Blass Bank, Zurich). At Mr. de la Rosa’s request Mr. Folchi arranged for US$15·49m to be paid indirectly (via a British Virgin Islands company, Allsports) into account Stuart. US$1.39m was then paid from account Stuart to account Falcon.
- Pincinco involved the misappropriation of US$300m in October 1990. The money misappropriated was part of a loan of US$400m (Ptas. 40 billion) made by the KIO through Koolmees to GT because their credit standing in Spain had fallen as a result of the occupation of Kuwait. This loan followed a loan of US$800m (Ptas. 80 billion) made several weeks earlier. It was accepted that this earlier loan and the balance of the US$400m loan were properly used for GT’s purposes. On the 2nd October 1990 Mr Folchi and others went to Geneva where they opened an account for THL (of which Mr. Folchi had been appointed a director the previous day) with Bankers Trust. The US$300m was deposited in this account and pledged as security for a loan of the same amount which the bank agreed to make to Pincinco, a Jersey company effectively controlled by Mr Folchi who had earlier advised on setting up this structure. By letter of 2nd October counter signed by Mr Folchi the bank were instructed that upon receipt of the loan into Pincinco’s account various payments should be made including US$75m to Lombard Odier – “Attention Thierry Lombard” (Sheikh Fahad), US$4m to Rud Blass Bank, Zurich (Mr. Jaffar), US$100m to account Stuart, US$80m (as it transpired) to a Spaniard who claimed that Mr de la Rosa owed him this money and US$15m to a numbered account with UBS Geneva “REF. PAD”.
- PAD was Mr Paul Dawson, Sheikh Khaled’s friend and financial adviser in Switzerland. The UBS account was that of Mr Oberson, a Swiss tax lawyer. Mr Dawson and Mr Oberson had advised Sheikh Khaled earlier in the year about ways in which his and his family’s money could be invested through them in Switzerland in a tax efficient and confidential way. Mr Dawson had passed Mr Oberson’s account number to Sheikh Khaled by fax on the 17th September 1990. In fact the money was not paid from Pincinco to Mr Oberson’s account in accordance with the instructions contained in the letter but US$2m was paid on October 5th and the balance by 13 twice weekly instalments of US$1m each. There is no record of how the instructions given in the letter came to be varied to reflect the way in which the money was actually paid. In addition to the US$15m a further US$5m was paid in two instalments into Mr. Oberson’s account for Sheikh Khaled from account Stuart in early 1991. The monies received for Sheikh Khaled were paid on his instructions to a Jersey trust which managed some of his family’s assets (US$9m) because he and his family needed this money to meet expenditure, to two Panamanian companies which had been formed as part of the off-shore structure set up by Mr. Dawson and Mr. Oberson (about US$4.5m each) and to Mr. Dawson as a fee (US$2m).
- In July 1991 when THL’s auditors asked for confirmation of the deposit of US$300m from Bankers Trust they were not told of the loan to Pincinco. Mr. Folchi signed THL’s accounts which showed the deposit as cash at bank or in hand. At the same time an elaborate scheme was being devised by Mr. Coll, an accountant with English and Spanish qualifications, to deal with the outstanding loan. The deposit and the loan to Pincinco were replaced by loans from THL to Coggia, a shelf company. Repayment of these loans was notionally effected by a transaction in which GT issued shares at par to another shelf company which were passed to Coggia and then reacquired by GT from Coggia at seventeen times par. The sums in which the Judge gave judgment against Sheikh Khaled and Mr. Folchi in respect of Pincinco reflect GT’s total losses at the conclusion of these transactions. Mr. Folchi received a total of US$5.567m from Pincinco money and was paid over US$4m in fees for the transaction..
- Wardbase involved the misappropriation of US$20m in May 1992. A payment of this amount was made to Wardbase ostensibly as a fee for managing an engineering project in Belgium in which GT had an interest. In fact Wardbase was not capable of and did not provide any such services. The Judge found that a forged agreement purporting to be made in September 1989 had been created in early 1992 to justify Wardbase’s entitlement to the fee. A copy of this agreement was found on Mr. Folchi’s files. By letter of 30th March 1992 Mrs. Parker, signing on behalf of Wardbase, demanded payment of the fee under this agreement and followed this up with a Wardbase invoice. In May another firm of Spanish lawyers demanded payment on behalf of Wardbase and the money was paid to Wardbase by THL the day before Mr. de la Rosa resigned from GT. Upon receipt of the money about US$19m was paid away from Wardbase in a way designed to conceal its destination on Mrs. Parker’s instructions. Those instructions had come from Mr. Folchi who in turn had received them from Mr. de la Rosa. The Judge found that Mr. de la Rosa had conspired with others (who were not defendants) to defraud GT in this transaction and that Mr. Folchi or his firm would at some point have taken fees out of the remaining US$1m if it had not been frozen by the Claimants.
- During late 1991 and early 1992 the KIA became increasingly concerned about the extent of the KIO’s exposure to GT and GT’s parlous financial state. Lawyers and accountants were instructed to investigate.
- In October 1992 the Ruler of Kuwait sent his finance minister to London to put to Sheikh Fahad and Mr. de la Rosa the allegation that they had embezzled the KIO’s money. A meeting was arranged at Mr. Jaffar’s house. At the meeting, which was attended by Sheikh Fahad, Sheikh Khaled. and Mr. Folchi in place of Mr. de la Rosa, the allegation was denied. However, Mr. Folchi took the opportunity of asking Sheikh Fahad to contribute to the legal costs of his involvement in the investigation. Shortly after the meeting Sheikh Fahad and Mr. Jaffar each paid Mr Folchi US$2m. In December 1992 Mr. Folchi received another US$2m paid by Sheikh Khaled through off-shore entities. In January 1993 by the same means Sheikh Khaled paid Mr. de la Rosa US$2m in the form of a loan.
- In November 1992 Mr. Folchi attended meetings with representatives of the Attorney General of Kuwait following which he submitted a memorandum to the Attorney General giving his understanding of the transactions in question. Omissions from the memorandum and inconsistencies between what it said and his evidence at trial featured prominently in the case against him.
- The proceedings were started in April 1993. At this stage the claimants were unaware that Sheikh Khaled had received any money from Pincinco and he was not made a defendant. In late 1994 the claimants obtained Pincinco’s bank statements which showed that US$2m (the last two of the thirteen instalments) had been paid to Mr. Oberson’s account. Mr. Oberson was joined as a defendant to the proceedings and the claimants then discovered from documents supplied by him that Sheikh Khaled was the intended recipient of the US$2m and a further US$18m. This resulted in Sheikh Khaled being joined as a defendant in March 1995.
- In the meantime however, in December 1994 Mr. Dawson told Sheikh Khaled that the claimants had been asking Mr. Oberson about the US$2m. Sheikh Khaled paid US$2m to Mr. Oberson to enable him to repay it to the claimants but Mr. Oberson’s solicitors advised him not to do so. In addition to the US$2m Sheikh Khaled paid Mr. Oberson US$500,000 for the work he had done and to cover his legal fees in London.
Case at Trial.
- Sheikh Khaled’s defence depended upon the credibility of his explanation for his receipt of the US$20m. He said that after his promotion at the end of 1989 Mr. de la Rosa began to pay more attention to him. He used to pop into his office for a five or ten minute chat. In the course of these conversations Mr. de la Rosa suggested various investments in Spain. Sheikh Khaled was interested because Mr. de la Rosa had the reputation for being a very successful entrepreneur with the “Midas touch”. He asked Sheikh Fahad and Bruce Dawson (Paul’s father) whether it was all right to deal with Mr. de la Rosa and they assured him of his integrity. Sheikh Khaled made two investments through Paul Dawson on this advice.
- In the course of these conversations Mr. de la Rosa mentioned another investment opportunity to Sheikh Khaled. He said he had put together a small consortium to invest in a management buy out of an arms and explosives business in Spain. The company was controlled by relatives of the founder who were unaware of its true value and wanted to sell out. The idea was that Mr. de la Rosa’s consortium would put up US$30-40m and borrow further money to enable the buy out to take place. The company would then be sold on at a very considerable profit. He had in mind a multi-national company with whose operations it would fit well. There were two other entities interested in the business: one a consortium put together by a Syrian living in Madrid and the other an Israeli group. Confidentiality was therefore paramount. Sheikh Khaled was interested and after discussing the investment in general terms with his family in June or July 1990 he told Mr. de la Rosa that he would join the consortium and put up US$2-3m. In late August Mr. de la Rosa told him that things were proceeding well with the buy out and that he would let him know if and when his money was needed. A week or so later Mr. de la Rosa said that the buy out had been concluded and had been enormously successful. He had been able to sell the company straight on so it was not necessary for Sheikh Khaled to come up with any money. However, he was entitled to his share of the profit which was US$20m. Two or three weeks later Mr. de la Rosa told him that he would be paid in instalments of US$1m because the profit had been invested in such a way that it was impossible to obtain it in one lump sum. In mid September Mr. de la Rosa asked him to provide details of the account into which the money should be paid and he supplied the details of Mr. Oberson’s account given to him by Mr. Dawson. Sheikh Khaled said that although he was surprised he did not question the profit which he had made since he was aware that substantial profits were possible from management buy outs at that time.
- When Kuwait was occupied by Iraq at the beginning of August 1990 Sheikh Fahad and Sheikh Khaled were given plenipotentiary powers over all Kuwait’s assets. The weeks which followed were hectic. He was involved in raising funds, releasing funds which had been frozen in a number of European countries and directing them to where they were needed for the war effort. He accepted that he was “probably” aware of the Ptas 120b advance to GT in the summer and autumn of 1990 and that he signed authorisations for some of the transactions which led to the advance of Ptas 80b. However, he knew nothing of Pincinco or that his US$20m had come from the monies advanced to GT. In the course of his evidence he volunteered that in April 1993 when questions were being asked about the US$300m he asked Mr. de la Rosa whether he was involved in this deal. Mr. de la Rosa’s dismissal of the idea gave him a sense of confidence because “he had a belief that he was not into such deals”.
- Sheikh Khaled explained that the payments of US$2m to Mr. Folchi and Mr. de la Rosa were loans which he had made reluctantly after he had been pestered by Mr. de la Rosa and at the request of Sheikh Fahad who said “They are our friends” and personally guaranteed repayment of the loans. When in December 1994 Mr. Dawson told him that it was being alleged that the US$2m paid into Mr. Oberson’s account was the KIO’s money, he was horrified and panic stricken. He paid the US$2.5m on Mr. Dawson’s advice and assurance that if he did he would not be involved in the litigation, which he dreaded and was desperate to avoid. Mr. Dawson also told him that Mr. Oberson agreed with this advice.
- After he had been joined in the proceedings Sheikh Khaled was required to explain his receipt of the US$20m. His first Affidavit said :
I received such monies in the genuine belief that it represented underwriting fees on an investment in a company, nothing to do with the plaintiffs.
He promised to explain further in a subsequent Affidavit which was sworn on 24 April 1995. It said:
Whilst I personally would like to explain the matter in detail the whole of the information required is not yet available to me and I am advised by my solicitors (Kingsley Napley) that it would be unwise at present to go on oath about the matter.
However, it went on to say :
The term ‘underwriting fees’ is how I viewed it in my mind but it might be that it was more properly a return on a capital investment or a potential capital investment.
- It is clear that before the trial Sheikh Khaled’s solicitors had made enquiries in Spain with a view to obtaining some confirmation of the existence of a deal of the kind Sheikh Khaled said Mr. de la Rosa had described. These enquiries were unsuccessful because, it is said, funds to continue with them ran out.
- Sheikh Khaled gave evidence that at the time when he is alleged to have joined the conspiracy all his efforts were devoted to saving Kuwait. Others working in the KIO gave evidence about their surprise at any suggestion that he should at the same time have diverted any funds to himself and of their disbelief that someone of his character should do so. Mr. Black and Mr. Betts went to work for Sheikh Khaled after he left the KIO. Mr. Betts and others described him as extremely trusting. Mr. Betts believed that Sheikh Khaled trusted Mr. de la Rosa and that he could have been persuaded to “enter a deal similar to that described in Sheikh Khaled’s witness statement”. Other impressive character witnesses attested to Sheikh Khaled’s integrity.
- The Judge set himself the task of assessing the credibility of Sheikh Khaled’s evidence by reference to a passage in the judgment of Robert Goff LJ in The Ocean Frost  1 LLR 1, 57. This required him to test the evidence given in the witness box against the objective facts, the overall probabilities and the motives of those involved. He described the character evidence as impressive and said :
it accentuated the burden on the plaintiffs which arises from the seriousness of the charges of dishonest conspiracy and dishonest breach of duty which they make against Sheikh Khaled.
He recorded his general impression of Sheikh Khaled’s abilities as follows:
From what I have seen and heard of Sheikh Khaled I am unable to view him as unsophisticated or unversed in the ways of business or finance …….. The general picture I have formed is not that of a naif. Nor did he come across as such in the witness box. There were occasions when his mastery of English and so of the questioning did not appear perfect. Apart from that, he appeared not only to be a person of intelligence, but to have a good grasp of affairs.
- The Judge then considered the probability of Sheikh Khaled’s account. He said:
Sheikh Khaled’s account of the origin of the US$20m represents, even on its face, a very strange story. This goes to two aspects – whether there was any such buy out in or about August 1990, and whether, assuming there was not, Mr. de la Rosa gulled Sheikh Khaled into believing that there was and paid him US$20m out of Pincinco on that basis. As to the first, Mr. de la Rosa’s Midas touch must clearly have excelled itself in the interests of himself and his favoured partners (and have done so at a time when GT was itself facing major financial pre-occupations), if so spectacular a transaction was really achieved. The overall profit, for the members of the syndicate from whom Mr. de la Rosa said that he was raising US$30-40m, must have been some US$200-400m and this must have been made not just in the face of competition from two other syndicates but with the shareholders all the while remaining ignorant of the true value of their company and with the multi-national end purchaser allowing itself, whether through ignorance or deliberately, to pay several hundred millions more than the shareholders were prepared to take. Further, to achieve the profits which he had originally anticipated, Mr. de la Rosa did not need either to manage the company for six months or to dispose of any peripheral business or even to call for any of the monies which it was the sole purpose of the syndicate to provide. The lack of any detailed information about the transaction or any single document referring to it, even after its overwhelming success, is striking. The explanation for the remission of the profit (viz. that Mr. de la Rosa had, for some unexplained reason and without consultation, placed it on deposit for fixed periods maturing in weekly or so instalments over a three month period) is hard to understand. Sheikh Khaled’s evidence did not dispel the strangeness of the account in any of these respects.
There is nothing making it absolutely impossible that such a transaction should occur. But there is neither evidence nor, on the material before me any likelihood that there was ever any actual transaction like that about which Sheikh Khaled says Mr. de la Rosa informed him in summer 1990 …….. the second aspect …….. is whether, although there was in fact no such transaction, Mr. de la Rosa led Sheikh Khaled to believe that there was and paid him US$20m out of Pincinco on the basis that there was. As a matter of general probability, and making all due allowance for the fact that Mr. de la Rosa had at the time an excellent reputation but was, underneath, dishonest as well as the fact that he was utilising someone else’s money, it is difficult to conceive that even Mr. de la Rosa would have acted in this way. Why would Mr. de la Rosa ( or any of his co-conspirators) decide to invent so remarkable a transaction, about which he or they would have to reckon that even the most trusting person might well wish to have further details, in order to make a gift to Sheikh Khaled of US$20m from the ill-gotten proceeds of their fraud? Sheikh Khaled acknowledged that this was the burning question.
The most obvious answer, and the actual answer according to the plaintiffs, is that the US$20m was a sweetener to Sheikh Khaled to ensure co-operation or silence in relation to the Pincinco fraud involving US$300m. I accept that it is improbable that Sheikh Khaled was a prime mover of the Pincinco fraud and that he appears to have had effectively no day to day involvement with Spain despite his directorship of GT. But it cannot be ignored that he was a close relative who Sheikh Fahad may well have been pleased to involve and to benefit. Further, Sheikh Khaled’s position within the KIO and his responsibilities, especially during the invasion, his awareness of the huge financial support (Ptas.120b) made available to GT through Koolmees in the summer and autumn 1990, and his signature of the relevant authorisation and instructions at Mr. Bett’s request, may well have meant that other conspirators would have felt that they either needed or should ensure his co-operation or agreement. Even during the crisis following the Iraqi invasion, I doubt whether Sheikh Khaled really regarded the financial support being afforded to GT with as little interest as his evidence tended to suggest, and the provision of such support was, as later events showed, capable of giving rise to controversy and objections within the KIO or KIA.
Mr. McGhee for Sheikh Khaled invited me to consider the possibility that Sheikh Khaled may have been given US$20m out of Pincinco, …… to secure a ‘hold’ over Sheikh Khaled (who could later himself be shown to have received money from a dubious source) in case anyone at any time (should) seem about to investigate or discover the Pincinco fraud……..
As to the suggested aim of acquiring a ‘hold’ over Sheikh Khaled in case a risk appeared that fraud on GT or THL might be discovered, that appears to postulate that Mr. de la Rosa would have been prepared to invest US$20m in Sheikh Khaled on the speculation that, although Sheikh Khaled was not involved in the Pincinco transaction and had received the US$20m innocently, he would have been prepared to suppress any investigation of the Pincinco transaction, and presumably to retain the US$20m once its origin was pointed out to him, for fear of being (wrongly) implicated in the Pincinco transaction. It is true that Sheikh Khaled cannot be expected to produce anything positive to support any such plot, assuming that there was one, and that the onus of proof of his dishonesty remains on the plaintiffs. But I have to say that the idea of a plot of this extreme nature appears to me far-fetched. The simpler explanation, that Sheikh Khaled was himself knowingly involved, is in my view more probable.
- The Judge then went on to consider Sheikh Khaled’s subsequent conduct which he said “lent significant support to the claimants’ case that he was dishonestly involved”. He described the payment of US$4m to Mr. Folchi and Mr. de la Rosa as “a substantial act of generosity” but made no specific findings adverse to Sheikh Khaled in relation to this. He described Sheikh Khaled’s evidence about his conversation with Mr. de la Rosa in April 1993 as “curious” because Sheikh Khaled must have known whether or not he was involved in such deals. The Judge found that the offer of payment to Mr. Oberson was made in the hope of obtaining the withdrawal of the claim against Mr. Oberson and preventing the claimants discovering about his own receipt of US$20m. Of Sheikh Khaled’s reasons for making the payment to Mr. Oberson he said:
I accept that Sheikh Khaled may well be generally nervous about privacy and about involvement in litigation. All the same, I find this a most unlikely explanation for the voluntary payment of US$2.5m, if Sheikh Khaled is being truthful about the circumstances in which he originally received the US$20m.
- Having considered Sheikh Khaled’s evidence, which he described as “marked by vagueness and some inconsistency”, and his original explanation for the receipt of the money which “one could have expected to be more forthcoming”, and was “difficult to reconcile” with his present account, the Judge said :
Finally, so far as concerns the impression which Sheikh Khaled made in the witness box, this is not a case where it can be said that Sheikh Khaled collapsed, or was lost for answers on critical points, or was clearly demonstrated under cross-examination to be a liar. On the other hand, I did not regard either the way he gave his evidence or its content as lending a real patina of conviction, innocence or truthfulness to an inherently improbable account, or to subsequent conduct which fits more consistently with the plaintiffs’ case than Sheikh Khaled’s. It is however, of course, for the plaintiffs to prove the serious charge which they make.
- The Judge concluded by saying :
Viewing the whole range of the material before me and the overall probabilities in the manner mentioned by Robert Goff LJ in The Ocean Frost, I reject without real hesitation Sheikh Khaled’s account of the basis upon which he received US$20m out of the Pincinco transaction. I accept that he is unlikely to have been a prime initiator and that the actual assistance which he lent in signing authorisations and instructions was limited. But there were reasons why those who were prime movers would have been quite likely to wish to involve Sheikh Khaled, not simply in order to ensure that such authorisations and instructions went unquestioned, but also to secure their positions generally and, in the case of Sheikh Fahad, very possibly also to benefit Sheikh Khaled as a junior family member. However that may be, in my judgment, Sheikh Khaled received the US$20m not on the basis he has described, but as the price of his agreement to and, so far as required, involvement in and silence about the transaction.
- Sheikh Khaled contends that the Judge was wrong to find that he was party to the dishonest conspiracy in respect of Pincinco. It is common ground that the Judge’s finding of dishonest assistance stands or falls with the finding of conspiracy. In a Respondent’s Notice the claimants contended that if Sheikh Khaled was not dishonest he was nevertheless liable on the basis of knowing receipt, but this was not pursued. They have however pursued a claim that as a director of GT Sheikh Khaled was liable for the fraud of his co-directors under Spanish company law.
- Mr. Lyndon-Stanford QC, who now appears for Sheikh Khaled, made a number of criticisms of the way the Judge applied the burden and standard of proof in reaching his conclusions about Sheikh Khaled. He also complained that in some respects the Judge had given insufficient reasons for his decision. It is convenient to deal with these points first and then to remind ourselves of the proper approach of the Court of Appeal in cases such as this.
- The Judge directed himself on the burden and standard of proof in accordance with the speech of Lord Nicholls in Re H [Minors]  AC 563, 586-7. In rejecting the argument for a standard higher than the balance of probability in civil cases where serious allegations were made Lord Nicholls said :
When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and hence the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence …….. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established
Mr. Lyndon-Stanford accepts that this is the law but says that in making the critical findings against Sheikh Khaled the Judge did not make it clear that he was applying it. We do not agree. Twice in the passages which we have cited the Judge referred to the burden being upon the claimants to prove the serious charges which they made. He cannot have overlooked what he had said earlier in his judgment about the standard of proof. In any event he said that even if the standard required was the criminal standard it would not affect the findings which he made.
- Mr. Lyndon-Stanford’s criticism of the sufficiency of the Judge’s reasons very much overlaps with his criticism of the reasons themselves. We do not think there is any basis for saying that the Judge should have given further or fuller reasons. It is precisely because he did give full reasons for his conclusions that Sheikh Khaled has been able to attack them.
- This court’s approach to appeals on questions of fact is well known. The burden of showing that the trial judge was wrong lies on the appellant. In cases where the judge has had to decide questions of credibility Lord Reid in Benmax -v- Austin Motor Co. Ltd.  AC 370, 375-6 cited with approval the following passage from an earlier case:
I. Where a question of fact has been tried by a judge without a jury, and there is no question of misdirection of himself by the judge, an appellate court which is disposed to come to a different conclusion on the printed evidence, should not do so unless it is satisfied that any advantage enjoyed by the trial judge by reason of having seen and heard the witnesses, could not be sufficient to explain or justify the trial judge’s conclusion;
II. The appellate court may take the view that, without having seen or heard the witnesses, it is not in a position to come to any satisfactory conclusion on the printed evidence;
III. The appellate court, either because the reasons given by the trial judge are not satisfactory, or because it unmistakably so appears from the evidence, may be satisfied that he has not taken proper advantage of his having seen and heard the witnesses, and the matter will then become at large for the appellate court. It is obvious that the value and importance of having seen and heard the witnesses will vary according to the class of case, and, it may be, the individual case in question.
- Mr. Lyndon-Stanford contends that in a number of respects the Judge got the facts wrong. Generally we reject this criticism but there is one point of some importance and that relates to the transfer of the Ptas 40b which went to fund Pincinco. The Judge appears to have thought that Sheikh Khaled “gave the relevant authorisation” for this transfer by the KIO through Koolmees to GT. In the concluding part of his judgment (quoted at paragraph 36) he refers to the actual assistance which Sheikh Khaled lent to the conspiracy “in signing authorisations and instructions”. In fact there was no evidence that Sheikh Khaled had signed any authorisation or instruction in respect of the Ptas 40b. There is a KIO document dated October 2nd 1990 confirming Mr. Folchi’s instruction to Koolmees’ bankers in Madrid which has Sheikh Khaled’s name typed on it. But this document was not put to Sheikh Khaled at the trial and is not signed by him. Other authorisations in the same form which we have seen have been signed by him. None of the other documents instructing the payment of the money down to THL in Geneva was signed by Sheikh Khaled.
- Mr. Popplewell, QC, Counsel for the Respondents, argued that we should conclude that Sheikh Khaled did authorise and/or was aware of the transfer of Ptas 40b. Only he or Sheikh Fahad could have authorised the transfer and there was no evidence that Sheikh Fahad did.
- As we have already said, Sheikh Khaled accepted that he was generally aware of the transfer of Ptas 120b to GT, but we do not think that there is any basis for concluding that he specifically signed authorisations or gave instructions in respect of the Ptas 40b. This is significant because if he was involved one would expect his fellow conspirators to require him to sign the authorisation; otherwise he would have done nothing to facilitate the fraud. As it was the only overt act involving Sheikh Khaled in the conspiracy is his receipt of US$20m to which we now turn.
- At the heart of the Judge’s reasoning in the passages quoted in paragraph 33 is his rejection of any credible reason why Sheikh Khaled should have been paid US$20m unless he was involved in the conspiracy. Thus, having concluded that there was never in fact any transaction of the kind which Sheikh Khaled says Mr. de la Rosa told him about, the Judge found it “difficult to conceive” why Mr. de la Rosa should have invented such a transaction in order to make him a gift of US$20m from the proceeds of the fraud. The “most obvious answer” was that the money was a sweetener to ensure his co-operation or silence. The suggestion that the money was paid to secure a hold over Sheikh Khaled was a plot of “an extreme nature” which the Judge thought was “far fetched”. The simpler explanation that Sheikh Khaled was himself “knowingly involved” was considerably more probable.
- Mr. Lyndon-Stanford submits that it was more probable that the money was paid to secure a hold over Sheikh Khaled than as his share of the fraud as a fellow conspirator. Attempting to involve Sheikh Khaled in the conspiracy ran the risk that he would refuse and start asking questions which would reveal the earlier frauds in which he had played no part whatsoever. The Judge did not consider this or properly consider whether it was probable that the conspirators would want Sheikh Khaled to join them at this stage. Having dismissed the suggestion that the money had been paid to get a hold over Sheikh Khaled, the Judge concluded in effect that he must have been a conspirator without considering the probability that he was. Having regard to the amounts paid to Sheikh Fahad and Mr. de la Rosa from the proceeds of this massive fraud, payment to Sheikh Khaled of only US$20m by instalments was inconsistent with his involvement in the conspiracy.
- Mr. Popplewell submits that the Judge was right to dismiss the suggestion that the money was paid to get a hold over Sheikh Khaled. The suggestion was not put forward by Sheikh Khaled but by his lawyers. It presupposes that Sheikh Khaled was an honest man. Why should the conspirators assume that once he discovered where the money he had received came from he would keep quiet? An honest man could be expected to expose the fraud whenever he discovered it. If Mr. de la Rosa’s motive had been to get a hold over Sheikh Khaled why did he say that Sheikh Khaled was not involved when he was asked about it in April 1993? If there was a plan to set Sheikh Khaled up it must have been made before Pincinco was conceived, since the opportunity to commit a fraud on that scale only arose after the occupation of Kuwait. What reason did the conspirators have for doing this? US$20m was too great a price to pay for getting a hold over Sheikh Khaled given the risk that it might not work. The point about the improbability of Sheikh Khaled being asked to join the conspiracy is unrealistic. People can be sounded out and drawn into a conspiracy by degrees without revealing the true purpose of the approach. These conspirators were clever men.
- So the critical question we have to answer is was the Judge right to dismiss as he did the suggestion that the money had been paid to get a hold over Sheikh Khaled? Whilst the answer to this question obviously played a very important part in the Judge’s assessment of Sheikh Khaled’s credibility, it does not depend upon credibility as such but upon evaluation of inherent probability. This is a task which this court can and should perform without much inhibition. Moreover, in this case the inherent probabilities depend to a considerable extent on the understanding and motives of Mr. de la Rosa in particular and Sheikh Fahad, neither of whom the Judge saw, although of course he was in a better position to form a view of their characters than we are.
- By mid 1990 Mr. Jaffar had left the KIO and Sheikh Khaled had moved into his office in the hope that he would become the general manager. To Sheikh Fahad and Mr. de la Rosa, who had been involved in previous frauds, the risk of Sheikh Khaled, with a reputation for integrity, preventing or discovering future or even past frauds must have been apparent. One obvious way of avoiding this was to get him to join them. But this was risky and the possibility of compromising him could well have been considered as a feasible alternative. Mr. de la Rosa was well qualified to set Sheikh Khaled up. The Judge broadly accepted Mr. Folchi’s description of him as being charismatic and able to sell everything to everybody, obsessed with obtaining information without giving it but (as the Judge held) with a capacity for obfuscation and deception even of close friends and colleagues. Mr. de la Rosa would obviously have been capable of selling an apparently implausible story to Sheikh Khaled as to why he was to receive US$20m. The more implausible the story the more difficult it would be for Sheikh Khaled later to explain his receipt of such a large sum of money. If and when he discovered where it had come from or any other frauds the conspirators would be in a position to point out to him that he had already been compromised.
- When he was asked in cross-examination what reason Mr. de la Rosa could have had for paying him US$20m from a non-existent transaction or the proceeds of his fraud Sheikh Khaled replied “That is the burning question” and “I do not know why he has put me in this position”. These answers are consistent with innocence and certainly do not preclude the suggestion that he was set up which was made on his behalf. US$20m was a large sum to pay but Sheikh Khaled and his family were wealthy (he admitted that the money increased their liquid overseas assets by about 50%) and the sum to be paid had to be large enough to compromise him. It can be argued with equal force that US$20m is inconsistent with participation in the conspiracy because it was too little.
- We think the Judge was wrong to conclude that the suggestion that the money was paid to Sheikh Khaled to gain a hold over him was far-fetched. It was a possible or probable explanation which had to be considered and evaluated against the other possible or probable explanation that the money was his reward for participating in the fraud. The fact that the Judge did not do this means that his reasoning is flawed. This point was, as we have said, at the heart of his reasons for rejecting Sheikh Khaled’s evidence. We are not therefore satisfied that if the Judge had approached the matter in the way we have indicated, he would inevitably have reached the same conclusion. But it does not follow that the Judge’s decision was wrong. The matter is at large and it is for us to decide whether the Judge’s conclusion that Sheikh Khaled was dishonest can stand.
- It is obvious that no transaction of the kind Sheikh Khaled said Mr. de la Rosa told him about ever took place. With the benefit of hindsight Sheikh Khaled’s account of what he was told is, as the Judge said, a very strange story. He did not ask a number of obvious questions about the proposed investment and the others involved and his commitment to it was not precisely defined. The supposed profit came immediately without the need to put up any money and was enormous. But the question is not whether it was a strange story, but whether it was an invented story. If it was, one might have expected Sheikh Khaled to have come up with something better. It was not suggested to Sheikh Khaled that he and Mr. de la Rosa had concocted this story as a cover to explain receipt of the money if it was discovered. The claimants’ case was that it was simply untrue and there was absolutely no evidence to support it. With this in mind, on the hearing of this appeal we admitted for what it was worth a report from Spanish enquiry agents who were instructed on behalf of Sheikh Khaled after judgment. Their report suggests that at the relevant time in 1990 unsuccessful attempts were made by a Syrian arms dealer and an Israeli group to acquire a successful Spanish company manufacturing arms and explosives and that in some way Mr. de la Rosa was also involved. The information contained in the report is qualified and largely hearsay although it confirms that in Spain there is an “unwritten rule of silence” and “the greatest privacy” relating to information about sales and purchases in the arms and explosives business. However, despite these qualifications, this report does lend some credence to Sheikh Khaled’s story. It at least makes it likely that Sheikh Khaled was given some information about a transaction involving a Spanish arms and explosives company and that the likely source of this information was Mr. de la Rosa. Sheikh Khaled does not speak Spanish and had no other real involvement with Spain.
- As we have already said, if the intention was to compromise Sheikh Khaled the more implausible the story he accepted the more effective the hold would be over him. If Sheikh Khaled had asked more questions Mr. de la Rosa was well able to come up with plausible answers supported, if necessary, by forged documents. As it was, on Sheikh Khaled’s account, Mr. de la Rosa had succeeded in imparting as little information as possible backed up by saying that confidentiality was paramount. In assessing Sheikh Khaled’s account, we think Mr. Betts’ evidence that Sheikh Khaled trusted Mr. de la Rosa and could have been persuaded to enter into a deal of the kind described, is important. It is also worth noting that it is this court’s experience that Arab business men do tend to be more trusting than their western counterparts, do not necessarily ask for documents and do not ask the same questions as English lawyers might do about any particular transaction.
- Mr. Lyndon-Stanford contended that the fact that the money was paid by instalments supports Sheikh Khaled’s case because that is what he was told would happen by Mr. de la Rosa who was obviously behind the last minute change in instructions to the bank when he realised that they had been instructed to pay US$15m straight away. We think, as with many points which were made to us, that the fact that the money was paid by instalments is neutral. On what Sheikh Khaled says he was told by Mr. de la Rosa there was no reason to pay instalments. The profit had already been realised. If Sheikh Khaled had been part of the conspiracy he might have been anxious to conceal receipt of a large lump sum. Instalments suggesting monies coming off deposit elsewhere might look less suspicious. There was no reason to pay by instalments if the intention was to compromise Sheikh Khaled.
- The Judge did not attach any particular significance to the payments of US$2m to Mr. de la Rosa and Mr. Folchi following the meeting at Sheikh Fahad’s house in October 1992. Mr. Popplewell argues that in reality these were not loans but payments to persuade Mr. de la Rosa and Mr. Folchi not to spill the beans. This is certainly an inference which could be drawn. On the other hand Sheikh Khaled says that he only made the payments at the request of Sheikh Fahad, his older and respected relative whom he addressed as “Your Excellency” or “Sheikh Fahad”. On his account he had received US$20m from Mr. de la Rosa and the request to help Mr. Folchi came only from Mr. de la Rosa. If he was involved in the conspiracy he is most unlikely to have lent or given any money to Mr. de la Rosa, who received five times more than he did from Pincinco.
- We attach little significance to Sheikh Khaled’s conversation with Mr. de la Rosa after April 1993. By that time proceedings had been started which Sheikh Khaled had been following and he knew that it was being alleged that Mr. de la Rosa was party to the misappropriation of US$300m at about the time when he had received US$20m from him. In these circumstances we do not think there is anything curious about Sheikh Khaled asking whether, in effect, the two were connected. Indeed, Mr. Lyndon-Stanford argues that this was the act of an innocent man since if he knew of the connection he would have had no need to ask the question.
- The Judge did not accept Sheikh Khaled’s explanation for paying US$2.5m to Mr. Oberson in early 1995. He concluded, rightly in our view, that Sheikh Khaled made this payment partly in the hope that it would prevent the claimants from discovering his receipt of US$20m. By this time he knew that the US$2m which the claimants were claiming from Mr. Oberson had come from his US$20m and was therefore alleged to be part of the proceeds of the Pincinco fraud. Mr. Popplewell submits that if Sheikh Khaled was an honest man this was the moment for him to volunteer his receipt of the money to the KIO rather than pay a large sum of money to try and thwart the claimants’ attempts to trace and recover their money. Sheikh Khaled was asked questions about this by the Judge at the end of the first day of his cross-examination. Sheikh Khaled said :
I wanted to tell somebody but there is a legal confidentiality of the US$20m.
The court then adjourned and Sheikh Khaled was not asked any further questions about this. We think this is unfortunate because it appears from the context that what Sheikh Khaled was saying was that he wanted to tell someone about the US$20m but had been advised not to do so by Paul Dawson who had told him that Mr. Oberson agreed with this advice. So what he was saying was that he received legal advice not to disclose his receipt of US$20m. That is at least consistent with his evidence that he was advised that if he paid the US$2.5m to Mr. Oberson this would keep him out of the proceedings. Nevertheless the payment to Mr. Oberson is a matter which tells against Sheikh Khaled. However, it can be argued that this and Sheikh Khaled’s other subsequent conduct relied upon by the Judge were motivated by Sheikh Khaled’s realisation that his explanation for the receipt of the money sounded implausible.
- We agree with the Judge that after the proceedings were started against him, Sheikh Khaled’s original explanation for the receipt of the money could have been more forthcoming, but he said at the time that this was on legal advice and we must accept this. His first description of the transaction that “it represented underwriting fees on an investment”, was difficult to reconcile with his later account. But in this respect Mr. Betts, an experienced financial man, described the transaction referred to in Sheikh Khaled’s witness statement, as “underwriting”, so there is not much in this point.
- The Judge obviously attached some importance to his view that Sheikh Fahad might have wanted to involve Sheikh Khaled in the conspiracy to benefit him as a junior family member. No such suggestion was pleaded or put to Sheikh Khaled in cross-examination. We were informed that if asked Sheikh Khaled would have had a number of things to say which would have indicated that the Judge’s view was incorrect. This is not therefore a matter which we take into account.
- We, of course, have not seen or heard Sheikh Khaled give evidence. But the Judge noted that his credibility had not been destroyed in the witness box. Conversely, the Judge said that the way he gave evidence had not persuaded him that his inherently improbable account was true. So the outcome of the case did not depend crucially upon how Sheikh Khaled performed in the witness box and the Judge did not have to choose between his and the evidence of other witnesses. He rejected Sheikh Khaled’s evidence because it was inherently improbable.
- We do not agree that Sheikh Khaled’s evidence was inherently improbable for the reasons we have already given. One explanation was that the money was paid to compromise him. Another was that it was his share of the proceeds of the fraud in which he was involved. Unless we are satisfied that Sheikh Khaled’s account is untrue and so the money was not paid to compromise him, the finding of dishonesty against him cannot stand. We must be satisfied on the balance of probability, bearing in mind that the charge against Sheikh Khaled is dishonesty and also involves treachery since he is alleged to have misappropriated his country’s assets when they were most needed and it was his duty to preserve them. At the end of the day this is a jury question. Having regard to everything we have said in this judgment, we are not satisfied that Sheikh Khaled‘s explanation is untrue. It follows that we allow his appeal against the Judge’s finding that he was liable to the claimants for conspiracy and dishonest assistance.
The Respondents’ Notice – Spanish Company Law.
62. By paragraph (4) in the Respondents’ Notice, it is contended as follows:
If the court concludes the learned judge’s finding that the Appellant was dishonest is wrong, the Respondents will contend that he is liable to the first Respondent for damages in the amounts of US $294,720,761.11 Ptas 2,375.000,US $6,144.000 and interest thereon under Article 133 of the Spanish Companies Law Act 1989:
(1) As the learned judge correctly concluded (and which is not challenged by the Appellant) as a matter of Spanish law a director is liable for the misconduct of another director (and the loss thereby) unless the former can discharge the onus on him of proving that the misconduct occurred despite his exercise of due diligence.
(2) The Appellant cannot discharge the onus since in his evidence he maintained that he did practically nothing in his capacity as a director of the first Respondent.
(3) Accordingly, he is liable under Article 133 for the losses caused by the fraudulent acts of Sheikh Fahad, Jaffar and de la Rosa in the Pincinco transaction.
63. Article 133 of the 1989 Act provides as follows:-
1. The directors will be liable to the company, the shareholders and the company’s creditors for the damages they may cause through acts contrary to the Law, the Articles of Association or those undertaken without the diligence with which they should discharge their duties.
2. All members of the administrative body [or ‘governing body’] that undertook the action or adopted the damaging resolution will be severally liable, except those who prove that they did not intervene in the adoption or implementation, or were unaware of its existence or, being aware, did everything possible to avoid the damages or, at least, expressly opposed it [the action or resolution].
3. The fact that the damaging action or resolution has been adopted, authorised or ratified by the General Shareholders Meeting will on no account exonerate from liability.
64. Article 127 of the 1989 Act, lays down the standard of diligence required of directors as meaning “the diligence of a responsible business man and a loyal representative”.
65. Before the Judge there was a conflict of view between the Spanish Law experts as to the precise effect of Article 133(2). In the light of the Judge’s finding that Sheikh Khaled was a conspirator, it was unnecessary to resolve this conflict. On any basis Sheikh Khaled was in breach of Article 133(1) and could not establish a defence under Article 133(2). The judge however resolved the issue of Spanish law in the Respondents’ favour, accepting evidence of their expert Professor Villaverde in preference to that of Sheikh Khaled’s expert, Mr Diaz-Bastien, and Sheikh Fahad’s expert, Professor Cortes. However, the judge made no finding of fact as to whether Sheikh Khaled, in the event that he was not a dishonest conspirator, was in breach of his duty, nor did he consider the question whether any alleged breaches of duty would have been actionable in English law.
66. On behalf of Sheikh Khaled, a number of matters are raised in answer to the Respondents’ Notice; these we now consider.
67. Before we address the substantial answer to the Respondents’ contention we should deal shortly with two points raised by Mr Lyndon-Stanford:
(1) that at the material time Sheikh Khaled was not a director of GT. We cannot accept this. Even if it was his intention to resign in February 1990, it does not appear that he did so. He continued to receive substantial directors fees; he attended at least two board meetings; and, most importantly, it was admitted in his defence that he remained a director until 26 May 1992.
(2) that the Judge erred in his findings as to the effect of Spanish Law. We do not propose to take time discussing this matter. Although the evidence of the Spanish Law experts is not always easy to follow, we are satisfied that the Judge did not misunderstand it and that he was entitled to prefer the evidence of Professor Villaverde.
68. Mr Lyndon-Stanford’s first objection is that the case under Article 133(2) was never pleaded. This is correct. Paragraph 118 of the Points of Claim (which was re-amended many times) was as follows:-
Further or alternatively in breach of their duties owed as Directors of GT Sheikh Fahad, Jaffar, de la Rosa, de Mir and Nunez and Sheikh Khaled participated in the Pincinco transaction set out in paragraphs 89 to 94 above and/or acted as more particularly set out in paragraphs 96, 96.1, 98, 100 and 101 and 108.4 above with the states of mind therein set out.
Paragraph 108.4 relates to Sheikh Khaled and sets out the particulars in support of the allegation in paragraph 95 that he was a party to a fraudulent conspiracy to carry out the Pincinco transaction. In paragraph 108(8) and 108(9) it is clear that the state of mind alleged is knowledge or recklessness, in other words dishonesty. There is no plea of Article 133 of the 1989 Act and no allegation of lack of due diligence.
69. In the course of the trial Mance J. on a number of occasions drew counsel’s attention to the importance of the pleadings. On Day 2 he said ‘…..I am……to deal with the issues pleaded, and I shall certainly look at the pleadings to see what the issues are at the end of the day’.
70. Mr Popplewell sought to answer this objection by submitting that the matter was sufficiently pleaded: it is not necessary, he submitted, to plead Spanish Law and the alternative case is sufficiently covered. We do not agree. Even if it was not necessary to rely on Article 133 in terms, the pleading, as we have pointed out, identifies only the dishonest participation in the conspiracy as amounting to the breach of duty. More to the point he relied upon Counsel’s opening statement on behalf of the Claimants. Paragraphs 205-211 deal with Directors’ Duties. Article 133 is referred to. Paragraph 206 is clearly a reference to Article 133(1) and relates to liability of a director for his own acts. Paragraph 207 refers to disagreement between the experts as to “the circumstances in which a director can be liable when he did not perform and/or was not aware of the damaging act”. In paragraph 208 Professor Villaverde’s view is set out that :
a non-executive director is liable to the company unless he can demonstrate that he exercised due diligence in accordance with one of the exonerating provisions of Article 133.2. It is not sufficient for the director to allege that he was unaware of the damaging act if the unawareness was the result of a failure properly to supervise the activities of the executive director, for the law clearly requires non-executive directors actively to supervise the management of the company.
There is then specific reference to a passage in Professor Villaverde’s report in which he expresses the view that Sheikh Fahad did not exercise due diligence. There is no similar reference to Sheikh Khaled in Professor Villaverde’s report. There is a reference in para 208(3) to Mr Diaz-Bastien’s opinion that Sheikh Khaled could exonerate himself.
71. Professor Villaverde’s report is voluminous and amounts almost to a treatise on Spanish Company Law. In the course of it he expresses the views summarised in the Claimants’ opening in relation to Article 133(2); but there is no specific reference to Sheikh Khaled in this connection, as opposed to Sheikh Fahad.
72. While it is true that the experts deal with the effect of Article 133(2) in their reports, it does not appear that Mr McGhee, who appeared for Sheikh Khaled, appreciated that a separate case was being made against him, independently of participation in the conspiracy, and this is so, notwithstanding the Claimant’s opening statement. In his opening statement Mr McGhee said:
There is a lively debate between the Spanish law experts as to the extent of the duties of a director and in particular as to whether a non-executive director has a specific duty of supervision. There are different views upon this matter expressed by various Spanish textbook writers. However, it is unlikely that the resolution of this debate will be either necessary or determinative of the matter. The case against Khaled for breach of directors’ duties rests on his participation in the Pincinco transaction. Whatever the scope of his duty as a director he will be in breach of duty if he was a party to a conspiracy designed to defraud GT. It is no part of the Plaintiffs’ case that Khaled is liable as a director because he failed diligently to enquire into GT’s affairs.
We are told that there was no response to this.
73. In his Witness Statement Sheikh Khaled does not specifically address the question of lack of due diligence. His case was that he did not know of the expropriation of the US $300m from GT’s account, though he made it plain that he was very little involved in the affairs of GT and, particularly during the invasion of Kuwait when the expropriation took place, he was intensely busy with other duties placed upon him by the KIO. Moreover in our view it is plain that the thrust of the cross-examination was to show that Sheikh Khaled was a conspirator. We can find little or nothing in the transcript of his cross-examination which suggests that the case of failure to exercise due diligence was being pursued. In the course of argument the Court asked Mr Popplewell what action he suggested that Sheikh Khaled should have taken which would have constituted due diligence in relation to the abstraction by the conspirators of the $300m. Mr Popplewell said that he should have asked what GT needed the money for and what happened to it. If that is so, it seems to us that this matter should have been specifically put to Sheikh Khaled; but it was not. The nearest one gets to it is at transcript 10.12.98 p.19:
Q Am I correct in understanding that although you were a director of GT, you never, in fact, took any interest in the business or the management of the company?
A Yes, my Lord.
Q That is correct?
A I was involved in the …….. aware of the general policy of GT.
Q But would it be correct to describe you as a director in name only, in the sense that you did not actually play any part in the business of the company?
A The policy and the execution was with, I understand, my Lord, Sheikh Fahad, and it was originally Bruce Dawson working with Javier de la Rosa. When Bruce Dawson retired – – sorry, it was taken over by Fouad Jaffar, the relationship with Xavier de la Rosa, when Fouad Jaffar was transferred to Kuwait – – Xavier de la Rosa with Sheikh Fahad and Trevor Ball, as I understood it.
Q So it was something which was dealt with by Mr Jaffar up until the time he left, by Sheikh Fahad and Trevor Ball up to the time he died, between them and Mr de la Rosa? Is that right? It was not something with which you concerned yourself?
A No, no. I had other areas.
Q So you never, for example, asked questions at such board meetings of Grupo Torras as you did attend; is that right?
A I cannot recall, my Lord.
Q And you never discussed the management of the company with, for example, Mr de la Rosa?
A No, I discussed policy, but can you explain “management”, do you mean executives and ……..
Q Yes, let me put a more specific question to you: did you ever ask Mr de la Rosa, or anyone else who was responsible for the management of Grupo Torras, why the group was apparently consuming so much money during 1990?
A My Lord, in August …….. between August 1990 and end of 1990, I think I was busy in other areas, because of the invasion. If he came and …….. probably we discussed the situation, and he would have explained to me that the banks are running for cover because of the general recession, and also the situation of the invasion of Kuwait. That is the …….. .
The questioning goes off on another matter in relation to money derived from previous transactions.
74. Mr Popplewell relies in part on the oral evidence of Professor Villaverde. Although there was nothing in his Report criticising Sheikh Khaled, he was asked in examination-in-chief by Mr Boswood, QC (Counsel for the Respondents at trial) to consider paragraph 47 of Sheikh Khaled’s witness statement (in which he dealt with his duties as a director of GT) and the passage in Sheikh Khaled’s cross-examination which we have quoted in the last paragraph. He was asked (Transcript 2.2.99 p 14) having regard to those passages what his opinion was as to whether a director in that position would discharge the burden of proof under Article 133.2. He replied (at p 15) that para 47 was not detailed enough; but of the transcript of evidence :
There the statements made are very definite, very clear-cut, and from them you can deduce that he has not participated in the management tasks, consequently he does not fulfil the basic commitment, obligation, that managers have, which is to take part in management.
It is not clear whether this is simply intended to relate to non-participation in and unawareness of the acts which caused damage, or as we suspect and Mr Popplewell contends, it was intended to be an expression of opinion on due diligence. But whichever it is, it is very general and lacks specificity and does not focus upon the action which Mr Popplewell says should have been taken.
75. Mr Lyndon-Stanford further submits that as a result of the matter not being properly pleaded Sheikh Khaled has not been able to claim contribution from other directors of whom there appear to have been over 20, who would appear to be in a like position to Sheikh Khaled. While it may be true that contribution proceedings could still be brought – though we know nothing of Spanish law of limitation on the point – it is obviously a grave disadvantage not to have been able to involve fellow directors in the proceedings, so that they are bound by the Judge’s findings of fact.
76. As we have said, the Judge made no finding as to whether Sheikh Khaled, if not a conspirator, could avail himself of the defence under Article 133(2). In the light of his finding of dishonesty, there was no need for him to do so. But in any event we do not think he can be criticised. Moreover we very much doubt whether, having regard to the way in which the case was presented against Sheikh Khaled, it would have been proper, on the meagre evidence available, for him to have made a finding adverse to him. Had he done so, we think Sheikh Khaled might well have had a justified ground of complaint that he had not directed his case or his evidence to meeting a separate and distinct claim based on lack of due diligence.
77. In these circumstances we do not think that it would be right for this Court to make a finding against Sheikh Khaled on Article 133(2).
78. Furthermore neither the Judge nor this Court has been addressed on the question whether, assuming Sheikh Khaled was not a conspirator, he could be liable in England in an action for breach of his duties as a director. This is a necessary step to establishing liability. We are by no means satisfied on the material available that the English Court would necessarily hold that there had been negligence, default, breach of duty or trust on the part of Sheikh Khaled. Moreover under Companies Act 1985 S727(1) the Court has power to relieve a defaulting director in whole or in part of his liability, “if he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust”. Having regard to the quite exceptional duties imposed on him during the Gulf War, we think that had this matter been in issue and investigated, the Court might well have taken a lenient view. If Sheikh Khaled was not a conspirator, he acted honestly and the court might have taken the view that he acted reasonably.
Grounds of Appeal.
- The judge held that Mr Folchi had rendered dishonest assistance to the conspirators in each of the Oakthorn 1, Oakthorn 2, Pincinco and Wardbase transactions, and that he was liable to account as a constructive trustee for the large sums mentioned earlier in this judgment. The judge stated that conclusion very shortly at the end of section V.3(a) of his judgment, but it was based on his lengthy analysis and findings of fact in section IV.3(g) as to Mr Folchi’s part in the matter, and on his analysis of the law earlier in section V.3(a).
- Mr John Davies who now appears for Mr Folchi, has in his written and oral submissions attacked the judge’s conclusions on several fronts. The notice of appeal contains fifteen paragraphs of grounds, of which the first three are concerned with issues of conflict of laws. These are considered separately at the end of this judgment. All the other paragraphs are concerned with different aspects of the judge’s conclusion that Mr Folchi rendered dishonest assistance in a series of breaches of fiduciary duties, and was liable for loss caused by those breaches. Paragraphs 4 to 14 raise issues which can be roughly identified as follows, although there is a degree of overlap, since they all relate to the essential “jury question” of honesty or dishonesty: (1) whether the judge misunderstood Royal Brunei Airlines -v- Tan  2AC 378 and applied the wrong test of knowledge of a breach of trust (paras 4 to 6); (2) whether he erred in applying an objective rather than a subjective test, especially in view of Heinl -v- Jyske Bank  LLR 511, the Spanish business culture, and his decision not to find that Mr Folchi was a conspirator (paras 7 to 11); (3) whether he erred on the standard of proof (para 12); (4) whether he erred on causation (paras 13 and 14); and (5) whether his conclusion on dishonesty was against the weight of the evidence (para 15, with cross-references back to paras 9, 10 and 11).
- Apart from paragraph 15 the grounds of appeal are put forward wholly or mainly as issues of law rather than as attacks on the judge’s findings of primary fact. Mr Davies realistically recognises that he would, on well established principles, be unlikely to persuade the court to overturn such findings, especially in relation to Mr Folchi’s memorandum to the Attorney General of Kuwait. However, he has submitted that in making findings adverse to Mr. Folchi the Judge failed to give sufficient weight to a number of important background facts. The Respondents contend that the Judge should have found that Mr. Folchi was a conspirator. So it is necessary to refer to the Judge’s findings about Mr Folchi in order to be able to assess any of the grounds of appeal and deal, if necessary, with the Respondent’s notice.
The Judge’s Findings.
- The judge devoted a significant part of his judgment (section IV.3(g), which runs to nearly 50 pages) to an examination of Mr Folchi’s part in the Oakthorn 1, Oakthorn 2, Pincinco and Wardbase transactions. He tested Mr Folchi’s various accounts of the matter against each other and against the documentary evidence (some of which was admittedly forged, probably by Mr de la Rosa), the evidence of other witnesses (including Mrs Parker) and the inherent probabilities. The Judge rightly attached importance to the very different accounts which Mr Folchi had given at different times, that is in his memorandum to the Attorney General of Kuwait (19 November 1992), his first witness statement (11 December 1997) and his much longer supplementary witness statement (produced very shortly before Mr Folchi gave evidence at the trial, his oral evidence being given on 11, 12 and 13 January 1999, with a very short recall on 18 January).
- The Judge’s conclusions about Mr Folchi’s conduct are set out at the end of section IV.3(g) of the judgment. He concluded that Mr Folchi was dishonest in all four transactions on which claims were maintained against him. At that point in his judgment the Judge had not yet discussed the law at length (he dealt with the English law as to dishonest assistance in section V.3(a) and with conflict of laws issues in section V.3(b)). But he had anticipated his discussion of Royal Brunei and other authorities in a passage (relating to Mr Coll) in section IV.3(f) where he said :
……..Dishonesty depends on what a person actually knew, and is, for the most part but not in every respect, to be equated in this context with conscious impropriety. The law to that extent imposes an objective standard . (original emphasis).
This shows what the judge had in mind in his later reference to objective dishonesty.
- The Judge concluded that Mr Folchi was dishonest in relation to Oakthorn 1 especially because of his actual knowledge that US$5m was paid into account Stuart at Banker’s Trust, Geneva which Mr de la Rosa had opened shortly before. He said :
I consider that his conduct was objectively dishonest. …….. I put the matter in this way because of its relevance in the context of the claim for dishonest assistance. No honest Spanish lawyer in his position with his experience and knowledge would have implemented the instructions he received and acted as he did without a fuller understanding and assurances as to the position. Mr Folchi’s activity in Oakthorn 1, as in subsequent transactions, was characterised by willingness to make and assist in arrangements of an obviously questionable nature, without at any stage raising any questions. This went beyond any ordinary trust in and compliance with client instructions.
- The judge reached the same conclusion, but more readily, about Mr Folchi’s part in Oakthorn 2. He said
The instructions which Mr Folchi received in respect of Oakthorn 2 were, on any view, extraordinary. This is so, even if, contrary to my view, Mr Folchi was justified in viewing the instructions to pay $5m to Mr de la Rosa in Oakthorn 1 as an understandable and regular matter which he could implement. The payments in Oakthorn 2 were of a quite different order of magnitude. They were to go to accounts in the personal names of Sheikh Fahad, in his case in London, to Mr Jaffar in Switzerland, and, indirectly for the obvious purpose of obscuring the source or trail, to Mr de la Rosa’s Stuart account. All that Mr Folchi had was a very general explanation that these were complementary payments relating to the Ebro/Agricolas merger. He had no coherent understanding what was going on, and took no step to seek any.
The Judge discounted Mr Folchi’s reliance on the standing of the recipients, pointing out that Mr Folchi later suppressed their names rather than relying on them. He concluded:
In my judgment no honest lawyer would have implemented the instructions which Mr. Folchi recounts in this transaction unquestioningly and uncomprehendingly in the manner which Mr. Folchi did. There can be no question about Mr. Folchi’s competence. An honest lawyer in his position would, to safeguard himself and his clients, have insisted on obtaining a proper understanding and assurances regarding the situation (quite possibly in writing despite the supposed confidentiality of what was occurring). If his clients would not give him this, he would have refused to become involved. I do not on the material before me conclude that Mr. Folchi became knowingly party to the scheme to injure GT or THL. But I do conclude that Mr. Folchi received and complied with instructions which conflicted on their face and in the most obvious way, with the most fundamental duties, to keep private and corporate affairs and monies separate. Despite any confidence Mr Folchi may have had in his clients and the distinction of the officers whose accounts were in question and despite the prevalence of complementary payments, I cannot view it as honest conduct for any lawyer to facilitate indirect payments from one’s client company’s accounts to unknown accounts in the names of the client company’s directors, without any clear understanding why this should be necessary or appropriate. Any other conclusion would be an invitation to fraud. Directors of previously impeccable reputation can succumb to the temptations of their stewardship. Any lawyer in Mr Folchi’s position must be taken to be aware of this risk, and I have no doubt that Mr Folchi was aware of it.
- In relation to Pincinco the Judge took account of the exceptional circumstances of the invasion of Kuwait, and of secret war payments as a real possibility. But the size and destination of the Pincinco payments (which Mr Folchi played a major part in arranging, although he said that it was coincidence that he happened to be available in Geneva on 2 October 1990) cried out for inquiry and explanation. As the Judge said (p.250):
The Pincinco operation was also structured in a quite different, and even more opaque, manner compared to any previous operation, a change for which Mr Folchi appears to have received no explanation. After the Oakthorn 2 operation, and with knowledge of Mr de la Rosa’s involvement in the Stuart accounts and of Mr Jaffar’s account at Rud Blass, an honest lawyer in Mr Folchi’s position, and all the more a responsible director of THL, would in my judgment have insisted on a better understanding and assurances regarding such an operation before becoming involved. Recollection that the Oakthorn 1 transaction had also involved an anonymous payment to Lombard Odier, attention Thierry Lombard, would have underlined the concern of an honest lawyer in this situation. Mr Folchi did not act in this way.
The Judge also referred to Mr Folchi’s part, as he found it, in a thoroughly misleading certificate given to THL’s auditors in July 1991, which was intended to keep from them, and did keep from them, the true facts as to what had happened to the US$300m. He found that, despite his obvious intelligence and perspicacity, Mr. Folchi was much too dependent on and close to the major clients on whose business his whole firm and income had been built. The Judge thought that :
Mr. Folchi’s lack of interest in what was occurring and his unthinking and automatic implementation of extraordinary instructions were conditioned by his dependence, in every sense, on Mr. de la Rosa and the business he could yield.
- In relation to Wardbase the judge reached the most forthright conclusion of all. He said :
In respect of the Wardbase operation Mr Folchi did in my view act dishonestly both in the sense that no honest lawyer would have acted on whatever instructions he received, and in the sense that he appreciated, at the lowest, that he was being asked to lend his assistance to an operation, which was to be executed, on Mr Folchi’s own account, by Mr de la Rosa (who was about to leave GT) in communication with Sheikh Fahad (who had already been removed as chairman of the KIO). Mr Folchi’s changing accounts at subsequent stages reflect his wish to disassociate himself as far as possible from the operation, once the plaintiffs had discovered that the documents dating from 1989 were forgeries and shams …….. The explanation of his conduct must, it seems to me, be found in a willingness to service the requirements of Mr. de la Rosa, without apparent discrimination or limit. Once again, the evidence does not, I think, justify a positive conclusion that Mr. Folchi became knowingly party to the dishonest scheme contrived by Mr. de la Rosa and others in the Wardbase transaction, although it comes close to doing so. But Mr. Folchi was prepared to and did assist Mr. de la Rosa in it in a way which an honest lawyer in his position would not have done.
- As we have already said, Mr Davies has realistically not made any frontal assault on the Judge’s findings of primary fact against Mr Folchi. Those findings were based in part on the Judge’s assessment of Mr Folchi’s evidence as being inconsistent, vague or unconvincing on many points; on several points the Judge flatly rejected Mr Folchi’s oral evidence. The findings were also based on numerous undisputed acts or omissions by Mr Folchi which amounted to the suppression of material facts, the failure to make obvious inquiries, and the conscious participation in sham or deception. The Judge singled out some of the most significant of these:
Mr Folchi’s conduct, as I find it to have been, indicates a considerable willingness on his part to assist himself and/or others by misleading statements and by suppression of relevant information. That applies in particular to his conduct (as I find it) in respect of the Pincinco deposit audit confirmation form in July 1991, his suppression of his knowledge about the destinations or recipients of relevant payments in November 1992, the interposition of Allsports at Mr de la Rosa’s request, his general suppression of his knowledge about and involvement with the Stuart and Falcon accounts and his changes of account regarding the Wardbase transaction. In the light of such conduct, Mr Folchi’s own reaction to the instructions which he received in the various transactions cannot be any reliable guide to honest conduct.
- Mr. Davies however, submits that the Judge drew inferences against Mr. Folchi too readily and without giving enough weight to the relevant background. This included the fact that Mr. Folchi was a highly respected and successful Spanish lawyer who had undertaken an enormous volume of work for the KIO about which there was no criticism. There was nothing exceptional about the size of the four transactions in question which were not significant in the context of GT’s business as a whole. The way the KIO worked was anachronistic, autocratic and secretive. They managed both public and private funds and made extensive use of off-shore companies and external accounts. They were prepared to make complementary payments as a way of doing business in Spain where evasion of tax and exchange control was widely tolerated as part of the business culture and they used GT to make war payments after the occupation of Kuwait. A Spanish lawyer was entitled to rely on his instructions and the doctrine of “los proprios actos” applied. The Judge should have attached great importance to the fact that the claim against Mr. Folchi in respect of Croesus was not pursued. As none of the other professionals involved was found liable for dishonest assistance the Judge gave them greater latitude than he gave Mr. Folchi.
- We do not accept these criticisms. The Judge was well aware of these matters and took account of them in his judgment. This is illustrated by the passages from his judgment which we have quoted. He refers in detail to Mr. Folchi’s earlier career and must have had in mind the serious consequences for Mr. Folchi of any finding of dishonesty against him. He carefully considered whether the deception and suppression which Mr. Folchi participated in could be explained on the basis of complementary or war payments which, however irregular, did not amount to a fraud on KIO. But in every case he rejected that explanation and did so on adequate grounds. As to the doctrine of “los proprios actos” the expert evidence was that it always depends on the circumstances whether a third party can assume that his instructions come from someone acting within his powers and for the benefit of the company. A lawyer’s right and duty to act on his client’s instructions could be accepted as a general position or starting point, but could not be maintained as an unqualified rule, either on the expert evidence of Spanish law or as a matter of common sense. In these respects the Judge found that there was no real difference between the duties and responsibilities of a lawyer under Spanish and English law. Mr. Folchi was involved in Croesus but not in the instructions which led to the payment away of the money so there is an obvious reason why the claim against him was not pursued. The Judge’s conclusion, with which we agree, that Mr. Folchi “gained closer insight than anyone else outside the circle of conspirators into what was actually happening” explains why Mr. Folchi’s position was different from that of the other professionals .
- Looking at the Judge’s findings of primary facts as a whole, we accept them as fair, rational and, if anything, more favourable to Mr. Folchi than they might have been.
- But there is one important aspect of the Judge’s findings which has given rise to controversy on Mr. Folchi’s appeal. In summarising his conclusions the Judge said :
(15) None of Mr. Soler [GT’s general manager with a background in banking] Mr. Coll, Mr. Folchi, Mrs. Parker and Mr. Moukarzel [a director of THL with a background in investment analysis] is shown to have been party to any of the conspiracies. Each of Mr. Soler, Mr. Coll, Mr. Folchi and Mr. Moukarzel was knowingly party to misconduct in one respect or another, particularly in contriving schemes and documents to conceal THL’s and/or GT’s operations from the eyes of the Spanish authorities and/or the public and/or to mislead THL’s or GT’s auditors. But they did this in the belief that the operations had been undertaken in the interest of THL and/or GT and/or the KIO and they were not party to any conspiracy against THL or GT.
This conclusion obviously refers back to the section V.1 (d) of the judgment where the Judge dealt with the claims for conspiracy against these Defendants. He referred to the conclusions he had reached earlier in his judgment that “a number of Defendants” had not knowingly been party to any dishonest scheme to abstract monies from GT, but had been involved to a greater or lesser extent in producing false documentation and other improper conduct and then said :
It may be suggested that defendants, who participated in dishonest and improper conduct of this nature, were on this basis alone party to conspiracy and should answer for GT’s actual loss from the frauds practised on GT, even though, as far as such defendants knew, the transactions were in GT’s or its shareholders’ interests, and so far as they crystallized loss in GT, or transferred loss from THL to GT related to prior expenditure legitmately made in the interests of GT or its shareholders, the burden of which was anyway indirectly borne by GT as sole owner of THL.
However, it does not seem to me that any concerted action of this nature can be viewed as aimed or directed at GT or THL. Even assuming that this could be, there is a further objection of causation or remoteness to any attempt to establish liability against other defendants on such a basis. They were themselves deceived into thinking that what was occurring was in GT’s or its shareholders’ interests. They did not realise that the whole transactions involved fraud by Sheikh Fahad, Mr. Jaffar and Mr. de la Rosa …….. To the extent that the Plaintiffs’ case seeks to hold other defendants liable on this basis therefore, I would reject it.”
A little later in the judgment when considering whether the conspiracy claim was actionable in Spain, the Judge said that the transactions had to be viewed in the light of his conclusions that Sheikh Fahad, Mr. Jaffar and Mr. de la Rosa were involved in misappropriation of others’ monies but that :
other defendants have not been shown to have been party to such frauds but were themselves deceived into assisting in one way or another in their commission or covering up.
- Mr. Davies submits that in these passages the Judge has made a positive finding that Mr. Folchi was deceived into believing that the four transactions were in the interests of GT or its shareholders. Mr. Popplewell submits that such a conclusion is inconsistent with the specific findings which the Judge made against Mr. Folchi to which we have referred and that these passages only refer to the Judge’s conclusion that participation in improper conduct of the kind described by the Judge did not of itself make these Defendants liable for conspiracy.
- We cannot accept Mr. Popplewell’s submissions. From their context it is clear that the passages relied on by Mr. Davies refer to all the Defendants other than the conspirators and therefore include Mr. Folchi. The Judge acquitted Mr. Folchi of involvement in the conspiracy on the basis that he had not knowingly become party to the scheme to defraud GT although, particularly in relation to Wardbase, it is clear that Mr. Folchi got perilously close to having such a finding made against him. As to the other Defendants the Judge made positive findings that Mr. Soler, Mr. Coll and Mr. Moukarzel believed that they were acting in the interests of GT and in the case of Mrs. Parker that she simply acted on the instructions of Mr. Folchi whom she had no reason to distrust. No such positive findings were made in Mr. Folchi’s case and it is possible therefore that the Judge did not intend to include Mr. Folchi in the passages in question. However, that is clearly what he has done and we must take his conclusions as we find them. It would not be right for us to substitute our own view on this aspect of the case.
Dishonest Assistance (English Law)
- At one stage it looked as if these appeals would raise a number of issues of law as to the mental element required to establish claims for dishonest assistance and knowing receipt. In the event there is only one issue relating to dishonest assistance and we have not had to consider the alternative claims made in knowing receipt at all. For these reasons we can deal with the law quite shortly.
- The leading case is Royal Brunei, an appeal from Brunei in which the opinion of the Privy Council was delivered by Lord Nicholls. Mr Tan was the managing director and principal shareholder of a travel company, Borneo Leisure Travel (“BLT”) which had acted as agent for the claimant airline under an agency agreement which expressly required BLT to hold in trust money received from ticket sales. BLT used money from ticket sales for its general purposes, and later became insolvent The Privy Council, reversing the Brunei Court of Appeal and restoring the decision of the trial judge, held Mr Tan liable to account as a constructive trustee on the basis of dishonest assistance, or what Lord Nicholls called the accessory liability principle. Although the discussion of the law begins (at p.384) with a section headed ‘the honest trustee and the dishonest third party’ the opinion observes in conclusion (at p.393) that Mr Tan’s conduct was dishonest and that BLT also acted dishonestly, since Mr Tan was BLT, and his state of mind was to be imputed to it.
- For present purposes the important parts of the opinion are in its discussion of the nature of dishonesty, and its recognition and proof. Lord Nicholls said at p.389 :
In the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.
In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others’ property unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misappropriation of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know and then proceed regardless.
Speaking of what is required of a third party (such as a professional adviser) who has dealings with a fiduciary Lord Nicholls said at pp.390-1:
The only answer to these questions lies in keeping in mind that honesty is an objective standard. The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J captured the flavour of this, in a case with a commercial setting, when he referred to a person who is “guilty of commercially unacceptable conduct in the particular context involved:” see Cowan de Groot Properties Ltd v Eagle Trust Plc  4 All ER 700,761. Acting in reckless disregard of others’ rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.
He concluded at p.392
Drawing the threads together, their Lordships’ overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. “Knowingly” is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden  1 WLR 509 scale of knowledge is best forgotten.
- Since Royal Brunei there have been four recent decisions of this court which call for mention. Twinsectra v Yardley  LLR (PN) 239 (in which an appeal to the House of Lords is pending) was primarily concerned with a ‘Quistclose’ trust (see Barclays Bank v Quistclose Investments  AC 567) but there was also a claim against a solicitor whom this court (reversing the trial judge) held liable both for knowing receipt of trust money and for dishonest assistance in a breach of trust. Potter LJ (with whom Hirst LJ and Sir Ian Glidewell agreed) discussed Royal Brunei and said (at p.259) that on the judge’s own findings the Court of Appeal was in a position to carry out the exercise which the judge had not carried out, that is to consider whether the solicitor’s state of mind (in deliberately closing his eyes) was such as to establish accessory liability. He rejected a submission that what Lord Nicholls said in Royal Brunei at p.389 was restricted to the situation where the third party is aware of the existence of a trust. The test of honesty should be posed in wider terms, as Lord Nicholls did at p.391 (in a passage much of which has already been quoted).
- The next case is Heinl on which both Appellants placed reliance. The managing director of a Gibraltar bank had misappropriated large sums of money from the bank for use in property ventures in Ireland. Mr Heinl, a German commercial agent resident in Ireland, had been held liable for dishonest assistance after a long trial at which he was not fully represented. This court (Nourse and Sedley LJJ and Colman J) allowed his appeal, largely on the ground that the evidence against Mr Heinl had not justified, to the high standard of proof necessary, a finding of dishonesty against him. This court did not accept that the transactions in which Mr Heinl had assisted the fraudulent managing director were clearly money laundering operations, and the other evidence against him (the preparation of a false resignation letter, and persistent lying in the course of his evidence) was insufficient. Royal Brunei was discussed in the judgments (Sedley LJ at p.532 indicating that he did not wholly accept the explanation of that case in the judgment of Colman J, with which Nourse LJ agreed). Nourse LJ (at p.523) said of the Privy Council’s opinion that it
… recognises that, even if it is better to remove ‘knowingly’ from the definition, the application of the principle to the facts of any particular case invariably depends, to a greater or lesser extent, on the state of knowledge of the person who is sought to be made liable. For this reason I believe that [the Baden classification] will sometimes continue to be helpful in identifying different states of knowledge which may or may not result in a finding of dishonesty.
Colman J at p.547 said of Mr Heinl’s state of knowledge :
It is not enough that on the whole of the information available to him he ought as a reasonable man to have inferred that there was a substantial probability that the funds originated from the bank. It must be established that he did indeed draw that inference.
Earlier at p.535 he had formulated the test as follows :
The person alleged to have assisted the breach of trust must be shown to have had, at the time when he provided the assistance, actual knowledge of facts which amount to a breach of trust or which suggest that a breach of trust has been or is to be committed. If the accessory knows facts which fall short of constituting a breach of trust, but which lead him to believe that other facts exist which do amount to an actual breach of trust or will involve a future breach, although he cannot be certain that those facts exist, he will be judged to have been acting dishonestly if he renders assistance when in all the circumstances an honest man, having that knowledge, would not have done so, either at all or without making further enquiry or taking some other steps to satisfy himself that there was no breach of trust.
- Mortgage Corporation v Newman (26 May 2000) was a case in which this court reluctantly ordered a new trial after the trial judge had declined to make a finding of dishonesty against a solicitor (whose claim for indemnity had been rejected by the Solicitors’ Indemnity Fund). Aldous LJ (with whom Tuckey and Mance LJJ agreed) did not discuss the authorities at any length but he said (para 40) :
“In cases where honesty is in issue, the mind of the person responsible, the understanding and practice of solicitors at the relevant time and the events that took place are all relevant. Once the facts have been found, the judge has to decide, according to the standards of right thinking members of society, whether the act or omission was due merely to incompetence or to dishonesty. That, as Millett J pointed out in Agip (Africa) -v- Jackson 1990 CA 265, is essentially a jury question.”
- The fourth case is Walker -v- Stones  4 AER 412. The beneficiaries of a family settlement of which the defendant solicitor was a trustee alleged breach of trust by pledging the trust’s principal assets. Various defences to the claim were raised including reliance on a term in the trust deed which exonerated the trustee for anything other than dishonesty. The judge refused to allow the beneficiaries to amend their claim to allege dishonesty in the face of the solicitor’s assertion that he genuinely believed that he had acted in the interests of the beneficiaries. Sir Christopher Slade (with whom the other members of this court agreed) said that he was unable to agree, without qualification, to the judge’s proposition that it was impossible to call a trustee’s conduct “dishonest”, even if he knew he was acting in breach of the terms of the trust, if he acted in a genuine (if misguided) belief that what he was doing was for the benefit of the beneficiaries. He continued at p.443:
“At least in the case of a solicitor-trustee, a qualification must, in my opinion, be necessary to take account of the case where the trustee’s so called “honest belief”, though actually held, is so unreasonable that, by any objective standard, no reasonable solicitor-trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries. I limit this proposition to the case of a solicitor-trustee, first, because on the facts before us we are concerned only with solicitor-trustees and, secondly, because I accept that the test of honesty may vary from case to case, depending on, among other things, the role and calling of the trustee: compare Twinsectra -v- Yardley …….. in that case the court regarded the standard of honesty applicable in the case of the defendant solicitor, as being “that to be expected of a reasonably prudent and honest solicitor”.
- We think it is important to note that judicial restatements or refinements of the relevant principles should be seen in the context of the factual situation before the court. It is of course the principle of a case , and not its facts, which is relevant for the doctrine of precedent. But all the cases show that in this area of the law the nature of the transaction, and whether it would appear to an honest observer as an ordinary commercial transaction, is always a most important factor. There is not any clear dividing-line between commercial and non-commercial transactions, but a need to look at all the circumstances of the particular case.
- Mr. Davies argued that Heinl (which was not and could not have been cited to the Judge, since it was decided a month after Mance LJ handed down his judgment) would have had a significant effect on his decision. We disagree. Heinl was very much a decision on its own facts. On those facts it was critical to a finding of dishonesty that Mr Heinl knew that the funds had been misappropriated, rather than coming from the managing director’s own resources. But in this case Mr Folchi knew perfectly well where the funds came from, and he knew of facts making the transactions highly suspicious.
- The one issue of law to which we have referred is whether in a claim for dishonest assistance it is necessary to show knowledge by the defendant of the facts giving rise to the breach of trust or fiduciary duty to which his liability is accessory. Mr. Davies submits that it is and relies on what Rimer J. said in Brink’s Mat -v- Abu-Saleh (196) CLC 133, 149-151. Mance LJ declined to follow this decision and concluded that the answer lay in recognising that for dishonest assistance the defendant’s dishonesty must have been “towards the plaintiff in relation to property held or potentially held on trust or constructive trust”. The Respondents did not support this solution to the problem before us. Rather they contended that a claimant need only show dishonest assistance because someone who dishonestly involves themselves in some impropriety takes the risk that it involves a fraud on the claimant.
- Brink’s Mat was a case arising out of the notorious Brink’s Mat gold robbery in 1983. In an action against numerous defendants Brink’s Mat claimed that Mrs Elcombe (who had been found to have no case to answer on criminal charges of conspiracy to handle stolen goods) had between August 1984 and February 1985 assisted her husband in laundering the proceeds of stolen gold by taking about £3m in cash to Switzerland by car. She accompanied her husband on three out of a total of five trips. Mrs Elcombe gave evidence which Rimer J found unsatisfactory. He found that she knew that her husband’s trips were for the purpose of exporting large sums of cash, but thought that it was tax evasion. He found that Mrs Elcombe had not in fact assisted her husband in any meaningful way, but went along as his wife to keep him company. Rimer J then expressed the view, which he acknowledged was not necessary to his decision, that if Mrs Elcombe had assisted in the money-laundering, but in the belief that it was an exercise in tax evasion and without knowledge of the breach of trust in which she was assisting, she would not have been accountable as a constructive trustee. He rejected the submission that Lord Nicholls’ conclusion in Royal Brunei at p.392 (quoted at para 97) went that far.
- We are disposed to agree with Rimer J’s observations in Brink’s Mat, but it is not necessary to express a final view because the factual situation in that case was very different. Mrs Elcombe knew (as Rimer J found) that her husband was up to no good, but she supposed that the money for which he was acting as courier belonged to Mr Parry, an old friend of theirs whom they believed to be wealthy. On Rimer J’s findings or assumptions, Mrs Elcombe had no knowledge, actual or constructive, of any misappropriation from anyone.
- Mr Folchi, by contrast, knew that all the funds with which he was concerned belonged to or emanated from THL, GT and its holding companies owned by the KIO. He knew that these funds were under the stewardship of directors, including Mr de la Rosa and Sheikh Fahad. Indeed, by the time of the Pincinco transaction Mr Folchi had been appointed as a director of THL. As a lawyer who had accepted appointment as a director of an English company, he ought to have informed himself of the fiduciary responsibilities which English company law imposes on directors. But even if he was not aware of the precise legal position, that could not assist him if he gave assistance in dubious arrangements suggestive of misappropriation.
- However, Mr. Davies’s main complaint on behalf of Mr. Folchi is that the Judge misapplied the law. He submits that the Judge applied an entirely objective test and expressed his conclusions in terms of negligence rather than dishonesty. Applying the Royal Brunei test a person can only be found objectively dishonest where his standard of honesty is lower than an objective standard – so called “Robin Hood” dishonesty. The Judge made no such finding against Mr. Folchi. His references to Mr. Folchi’s competence, intelligence and perspicacity point the other way. The Judge had therefore to make some finding of conscious impropriety against Mr. Folchi. He did not do so. One finding he could have made was that Mr. Folchi, suspecting the propriety of the transactions in question, deliberately closed his eyes and ears or deliberately did not ask questions about them – so called “blind eye” dishonesty. But no such finding was made by the Judge who expressed his conclusions in terms of what an honest lawyer would do rather than what Mr. Folchi actually did. In other words he wrongly applied an objective test attributing constructive or imputed knowledge to Mr. Folchi. Such knowledge cannot give rise to a finding of dishonesty.
- These submissions have caused us considerable concern. The starting point however must be that the Judge cited in full the passage at p.389 in Royal Brunei (quoted at para.99). A few pages later he said that on the basis of the facts found in section IV 3(g) of his judgment he considered that the assistance which Mr. Folchi had rendered in each of the four transactions
was rendered regardless of whatever may have been going on and was dishonest in the sense explained by Lord Nicholls in Royal Brunei.
The Royal Brunei test is not difficult to understand or apply. There must be a strong presumption that Mance LJ did understand and apply it.
- Nevertheless in the findings which he made and we have quoted there is obvious scope for argument as to what the Judge really meant. Did he find Mr. Folchi guilty of objective dishonesty on the basis that he believed that he was not doing anything wrong but no honest lawyer would have held such a belief ? Or did he find that Mr. Folchi was guilty of conscious impropriety by closing his eyes and ears and not asking questions ? Whilst such impropriety is best characterised as subjective dishonesty because it involves an element of deliberation, it could be and sometimes is characterised as objective dishonesty because it does not involve actual knowledge of wrongdoing. Or is Mr. Davies right when he says that the Judge simply applied the wrong test ?
- In attempting to answer these questions we must of course bear in mind the Judge’s finding to which we have referred that Mr. Folchi was deceived into believing that the transactions were in the interests of GT or their shareholders.
- We have very carefully considered the passages which we have quoted and the other passages relied on by Mr. Davies in support of his submission on this part of the appeal. We have concluded that the Judge decided that Mr. Folchi was guilty of “blind eye” dishonesty. Thus, in Oakthorn 1 he found that Mr. Folchi knew that the transaction was “of an obviously questionable nature” and yet he did not “at any stage [raise] any questions”. An honest Spanish lawyer “would” have done so “to gain a fuller understanding and assurances as to his position”. In other words the Judge is saying that the failure to ask questions was dishonest not because it was negligent not to ask them, but because any honest Spanish lawyer would have done so. Put another way, he is saying that this failure on the part of Mr. Folchi was deliberately dishonest. In Oakthorn 2 Mr. Folchi’s instructions “conflicted on their face and in the most obvious way with the most fundamental of fiduciary duties, to keep private and corporate affairs and money separate” and yet Mr. Folchi dishonestly (as in Oakthorn 1) “implemented his instructions unquestioningly and uncomprehendingly”. If his account is to be believed he was unquestioning and uncomprehending. That is not consistent with the Judge’s assessment of him as a highly intelligent business lawyer. It must follow that the Judge cannot have accepted that he did fail to understand. He understood well enough, but thought it wisest to probe no further. As to Pincinco the Judge, rightly in our view, took into account his findings in relation to Oakthorn 1 and 2. This transaction was “even more opaque” and Mr. Folchi knew that it involved payments to Mr. de la Rosa and Mr. Jaffar and yet he dishonestly did not insist “on a better understanding and assurances regarding such an operation before becoming involved”. In Wardbase Mr. Folchi “appreciated that he was being asked to lend his assistance” to a questionable transaction and did so dishonestly “out of a willingness to service the requirements of Mr. de la Rosa without apparent discrimination or limits”.
- The Judge’s overall finding against Mr. Folchi (quoted in para. 108) supports the conclusion we have reached. Mr. Folchi’s assistance had been rendered “regardless” of what was going on and was dishonest. In other words it had been rendered because Mr. Folchi decided to have no regard to what was going on. This is “blind eye” dishonesty.
- The Judge’s finding that Mr. Folchi was deceived into believing that the transactions were in the interests of GT is not inconsistent with his finding that Mr. Folchi was guilty of “blind eye” dishonesty. These two apparently diverse findings can be reconciled since it can have been only by turning a blind eye and refraining from asking the obvious questions that Mr. Folchi was able to sustain that belief whilst knowingly conniving at a breach of what the Judge called the most fundamental breach of fiduciary duties. That would be in line with the view expressed by Sir Christopher Slade in Walker -v- Stones (quoted at para.101). Mr. Folchi’s belief may also have been induced or sustained by what Mr. Popplewell described as “suppression of the moral antennae” caused by the desire for personal gain and the influence of Mr. de la Rosa. This may also explain, but does not excuse, the dishonesty itself. The blunting of moral antennae is not, as Mr. Popplewell suggested, a separate head of objective dishonesty, rather it explains why a defendant may have a lower standard of honesty or, in this case, may have turned a blind eye. It explains the Defendant’s reckless regard for the rights of others.
- It follows from what we have said that we reject Mr. Davies’s submission that the Judge failed to apply the right test. In doing so however, we think it is important to emphasise that in these cases, as with any other case where a finding of dishonesty is made, the Judge should make the basis for his finding crystal clear. If he is finding objective dishonesty, properly so called, he should say so making it clear that, although/even if he accepted that the Defendant believed that he was doing nothing wrong, he was nevertheless dishonest by objective standards. If he finds “blind eye” dishonesty, he should make this clear by saying that the Defendant is dishonest by lending assistance after deliberately closing his eyes and ears and/or deliberately not asking questions for fear of learning something he would rather not know.
- Apart from the conflict of law issues, we can deal with Mr. Davies’s other criticisms of the judgment more shortly in the order in which they appear in his notice of appeal.
- Mr. Davies submits that having declined to hold that Mr Folchi was a conspirator, the judge could not consistently hold him liable for dishonest assistance to successive conspiracies. This submission is based on the further submission that, on the facts of this case, the liabilities would be co-extensive (the Respondent’s Notice to the effect that the judge should have found that Mr Folchi was indeed a conspirator is in a sense the mirror-image of the Appellant’s submission). We reject this submission. On the facts of this case many of Mr Folchi’s acts might have been viewed as the acts of a conspirator, but the judge abstained from that conclusion because he was not satisfied that Mr Folchi was engaged on any concerted action aimed or directed at GT or THL. The reference to concerted action is important because that is an essential of the tort of conspiracy. It is not however an essential of accessory liability. We do not therefore think that this point assists the appeal; nor (if it were necessary to consider it) would we accede to the mirror-image point in the Respondent’s notice.
- We have already referred to the judge’s approach to the standard of proof (paragraph 39) which is criticised in paragraph 12 of the Notice of Appeal. The judge did not err in this respect. He took account of Mr Folchi’s profession and experience. But that was in this case a two-edged sword, since Mr Folchi could not plead inexperience or naiveté. Mr Folchi was, as the judge said, an energetic and intelligent business lawyer with an excellent grasp of affairs.
- Paragraphs 13 and 14 of the Notice of Appeal criticise the judge’s approach to causation, arguing that GT failed to establish a causal link between any acts or omissions on the part of Mr Folchi and the loss which the judge foundGT to have sustained. However, we think the judge was right when he said :
…….. the requirement of dishonest assistance relates not to any loss or damage which may be suffered but to the breach of trust or fiduciary duty. The relevant enquiry is … what loss or damage resulted from the breach of trust or fiduciary duty which has been dishonestly assisted. In this context, as in conspiracy, it is inappropriate to become involved in attempts to assess the precise causative significance of the dishonest assistance in respect of either the breach of trust or fiduciary duty or the resulting loss.
This is the essence of accessory liability clearly spelled out by Lord Nicholls in Royal Brunei. In any case Mr Folchi was, as the judge found on ample grounds, a linchpin of the arrangements for all four transactions in respect of which he was held liable.
- Having considered and rejected each of the criticisms of the judgment, we should add that we think the case against Mr. Folchi was formidable and that the Judge’s conclusion that he had rendered dishonest assistance to the conspirators was almost inevitable. In each of the four transactions Mr. Folchi was at the heart of devising structures which were designed to conceal the true purpose for which the money was being paid away and its source and destination. He gave the instructions for paying the money away knowing or believing that large amounts were being paid into accounts owned or controlled by Sheikh Fahad, Mr. Jaffar and Mr. de la Rosa. He created sham documents. He witheld and gave false information about the payments in his November 1992 memorandum. On the basis of the Judge’s findings of primary fact we would have had no hesitation in reaching the same conclusion as he did.
Dishonest Assistance – Conflict of Laws.
- We now turn to the issues of conflict of laws raised in the Notice of Appeal and the Respondent’s Notice in Mr Folchi’s appeal. Until recently there was great uncertainty, and very little authority, on the conflict of laws rule applicable to a claim that a defendant should be made liable as a constructive trustee. In recent years it has become apparent that there can be no simple answer to that question, for two separate reasons. The first reason is that, as this court has stated in Macmillan Inc v Bishopsgate Investment Trust  1 WLR 387, the determination of the applicable law depends not on the cause of action but on the particular issue in dispute: see Staughton LJ at p.399, Auld LJ at pp.406-9, and Aldous LJ at pp.417-8, approving what Millett J had said at first instance  1 WLR 978, 988,
In order to ascertain the applicable law under English conflict of laws, it is not sufficient to characterise the nature of the claim: it is necessary to identify the question at issue. (original emphasis)
- The other reason why there is no simple answer is that ‘constructive trust’ and ‘constructive trustee’ are terms which are often imprecisely used, or misused. The basis of liability in a case of knowing receipt is quite different from that in a case of dishonest assistance. One is a receipt-based liability which may on examination prove to be either a vindication of persistent property rights or a personal restitutionary claim based on unjust enrichment by subtraction; the other is a fault-based liability as an accessory to a breach of fiduciary duty.
- Dishonest assistance can therefore be described as equitable wrongdoing (the expression used by Auld LJ in Macmillan at p.407, citing Charles Harpum’s article, Accessory Liability for Procuring or Assisting a Breach of Trust (1995) 111 LQR 545, 546). The notion that dishonest assistance could be regarded as a tort was firmly rejected by this court in Metall & Rohstoff v Donaldson Lufkin & Jenrette Inc  1 QB 391, 474. But that was in the limited domestic context of the old RSC 0.11 r 1(1)(f). In Dubai Aluminium v Salaam  LLR 415, 467 Rix J recognised that equitable wrongdoing, although not a tort in the eyes of English law, has marked similarities to it:
It is true that liability in dishonest assistance is not a liability in tort: Generale Bank Nederland NV v ECGD  1 Lloyd’s Rep 19. Rather it is a liability in equity to pay damages based on fault: as Mr Justice Chadwick said in Arab Monetary Fund v Hashim (July 29, 1994, unreported) at p.42B:
… the defendant is held liable in equity not because he is, or has been, a trustee of trust property; but because his conduct in relation to trust property has been such that he ought to be liable in damages for its loss as if he were a trustee who had disposed of the trust property in breach of trust. The claim is a claim for monetary compensation based on fault …
- Arab Monetary Fund v Hashim was another massive fraud case in which Chadwick J delivered several judgments: at the end of 1993 on liability of the main defendants, including Dr Hashim, the former director-general of the Arab Monetary Fund; on 15 June 1994 on quantum of damages and restitutionary claims; and on 29 July 1994 on contribution proceedings brought against Dr Hashim by an American bank (FNBC) which had paid US$ 13.45m in settlement of a claim for dishonest assistance made against it. There had also been other proceedings, referred to by Chadwick J as the Sunley proceedings, brought by the Arab Monetary Fund against Dr Hashim over bribes paid in connection with a building contract. In the Sunley proceedings Dr Hashim succeeded at first instance on a limitation point ( 1 LLR 543, Evans J) but this court took a different view on the limitation point ( 1 LLR 589).
- Chadwick J’s judgment of 29 July 1994 is the most important for present purposes, because (having been followed by Rix J in Dubai Aluminium) it was also followed by Mance LJ in this case. But we should also note a passage in his judgment of 15 June 1994 (p.313 in the consolidated transcript) which was expressly approved by this court in Kuwait Oil Tanker Co v Al-Bader (18 May 2000, para 192),
In the context of a claim to invoke its equitable jurisdiction it is for the English court to decide whether the necessary fiduciary relationship exists. Where the duties to which a relationship gives rise are determined by foreign law, the question for the foreign law is what is the nature of those duties. It is for the English court to decide whether duties of that nature are to be regarded as fiduciary.
- Before looking more closely at what Mance LJ derived from Arab Monetary Fund and Dubai Aluminium we must refer to the ‘double-actionability’ rule which applied to tort claims until replaced, for claims based on acts or omissions after it came into force, by the Private International Law (Miscellaneous Provisions) Act 1995 (the 1995 Act). The rule was stated in the 12th (1993) edition of Dicey and Morris, The Conflict of Laws as follows (Rule 203, pp.1487-8; in the latest edition it appears as Rule 205 applicable to defamation claims):
(1) As a general rule, an act done in a foreign country is a tort and actionable as such in England, only if it is both
(a) actionable as a tort according to English law, or in other words is an act which, if done in England, would be a tort; and
(b) actionable according to the law of the foreign country where it was done.
(2) But a particular issue between the parties may be governed by the law of the country which, with respect to that issue, has the most significant relationship with the occurrence and the parties.
- The general rule in the first limb was settled in that form by the decision of the House of Lords in Boys v Chaplin  AC 356. That was a case arising out of personal injuries sustained in a traffic accident in Malta involving two British servicemen normally resident in England. There was therefore no difficulty in identifying the nature of the claim, or the place in which the tort had been committed. The qualification in the second limb was derived mainly from the speech of Lord Wilberforce in Boys v Chaplin and its subsequent development was reviewed by Lord Slynn delivering the opinion of the Privy Council in Red Sea Insurance v Bouygues  1 AC 190.
- The issue in Boys v Chaplin was whether the claimant could recover general damages for pain and loss of amenities (assessed at £2,250) as well as special damages for direct financial loss (assessed at £53). Under the law of Malta only the latter was recoverable. The House of Lords allowed both sums, so applying English law rather than Maltese law as to the recoverable heads of damage. Their lordships gave differing reasons (although all rejected the notion of the ‘proper law of the tort’, and all but Lord Donovan agreed that the test should be whether the wrong was actionable – rather than ‘not justifiable’ – under local law). Lord Wilberforce (with whom Lord Hodson agreed on this point) thought that English law could be applied in determining the damages recoverable, not because the issue was procedural, but because a degree of flexibility was required to deal with special cases. He said ( AC 356, 392),
The rule limiting damages is the creation of the law of Malta, a place where both plaintiff and defendant were temporarily stationed. Nothing suggests that the Maltese state has any interest in applying this rule to persons resident outside it, or in denying the application of the English rule to these parties. No argument has been suggested why an English court, if free to do so, should renounce its own rule. That rule ought, in my opinion, to apply.
- Lord Pearson, on the other hand, relied particularly on The Liverpool, Brazil and River Plate Steam Navigation Co v Benham (The Halley) (1868) LR 2 PC 193 as showing the dominant role of English law, once the bare threshold of double actionability was reached (at p.397):
Even in an action for a tort committed abroad the English court is administering English law and enforcing a cause of action which must be valid according to English law, and is not enforcing a foreign cause of action according to foreign law. As appears from other cases, the foreign law, proved by evidence as a matter of fact, may come in as a secondary factor providing a defence to the cause of action.
This enabled him to conclude, at p.406, that the judge was right to apply English substantive law. The decision of the Privy Council in Red Sea Insurance, which contains a full discussion of the Australian jurisprudence, has adopted and extended Lord Wilberforce’s flexible approach. (See also Pearce v Ove Arup Partnership  1 AER 769, 803-4).
- After these preliminary observations we come to the judgment of Chadwick J in Arab Monetary Fund, and Mance LJ’s reliance on it in section V.3(b) of his judgment. Money misappropriated by Dr Hashim had been paid into accounts at the Geneva branch of FNBC. The bank’s counsel presented the court with an apparent dilemma: its wrongful conduct was not actionable as a tort in England, and the accessory liability for a breach of trust which (if incurred in England) would be actionable here would not be actionable in Switzerland because Swiss law had no concept of proprietary rights arising under a trust.
- Chadwick J accepted the force of some of these submissions, but rejected the final step as based on a false premise. He described the nature of accessory liability for dishonest assistance in terms which we need not repeat, and went on (at p.42),
The claim is a claim for monetary compensation based on fault: it is not a claim to enforce a proprietary interest against a holder of a fund. In these circumstances the question whether or not Swiss law (or any other relevant foreign law) recognises the concept of proprietary rights under a trust is irrelevant.
(See also the observations of Millett J in El Ajou -v- Dollar Land Holdings  3 AER 717, 736-7.)
- Chadwick J then went back to the basic reasons why the English court enquires into and acts on the law of a foreign country, as stated by Selwyn LJ in TheHalley :
… in these and similar cases the English court admits the proof of the foreign law as part of the circumstances attending the execution of the contract, or as one of the facts upon which the existence of the tort, or the right to damages, may depend, and then it applies and enforces its own law so far as it is applicable to the case thus established.
This passage had been cited with approval by Lord Wilberforce and Lord Pearson in Boys v Chaplin  AC 356 at pp.385-6 and 396-7 respectively (but, as already noted, with rather different ends in view). Chadwick J treated this principle as being general, and not restricted to claims in tort “in the strict, common law sense”. That view has been questioned in the latest (13th, 2000) edition of Dicey & Morris (p.1536, footnote 78), on the ground that Chadwick J was dealing with a restitutionary claim; in fact he was dealing with a claim for contribution (which is restitutionary) in respect of equitable wrongdoing.
- Chadwick J stated his conclusion as follows (p.45, the first requirement having been stated as establishing a cause of action under English law),
The second requirement, as it seems to me, was that the English Court must have satisfied itself that there was no rule of any relevant foreign law which – in the words of Lord Pearson in Boys v Chaplin (supra,  AC 356, 397) – would provide a defence to the AMF’s cause of action; or -as it might, perhaps, be put in the context of a Barnes v Addy constructive trust claim – would make it inequitable to hold that an FNBC defendant should be treated as if it were a trustee. If, as the authorities show, the basis of such a claim is dishonesty or lack of probity on the part of the defendant, then it must be right to judge honesty or dishonesty in the light of all relevant circumstances; and those circumstances must include relevant provisions of the local law.
He then made findings as to Swiss law and concluded that the claimant would have succeeded in the English court in its claim against FNBC, and would have recovered not less than US$ 13.45m.
- Dubai Aluminium was yet another case of large-scale fraud perpetrated on an Arab enterprise by some of its most senior officials. In his judgment Rix J followed the approach which Chadwick J had taken in Arab Monetary Fund, but only to the limited extent of being ready to take account of local conditions and practices: see  1 LLR 415 at p.452. Rix J did not find it necessary to go further into the appropriateness of double actionability to a claim for dishonest assistance, since he had no evidence of Dubai law (and it is therefore reasonable to infer that this point was not raised on the pleadings).
- In his judgment Mance LJ quoted at some length from Chadwick J’s judgment (of 29 July 1993) in Arab Monetary Fund, including the conclusion which we have quoted. He also referred to his having treated as irrelevant that the foreign law might not recognise the concept of proprietary rights under a trust. He noted that Rix J adopted the same approach in Dubai Aluminium. He stated that, sitting at first instance, he proposed to do the same, while expressing the view that ‘full double actionability’ (which he saw as the alternative approach) would be likely to lead to the same conclusion.
- Mr Davies opened his argument on this part of the appeal with the general submission (echoing Staughton LJ in Macmillan  1 WLR 387, 392) that the law’s approach to characterisation, for the purposes of conflict of laws, should if possible be “simple and easy to apply” and aimed at arriving “at a sensible and practical result”. He submitted that by any possible test the dishonest assistance claim against Mr Folchi had a closer connection with Spanish law than with any other system (including English law).
- Mr Davies made the following points (in summary) in support of that submission: (1) the breaches of fiduciary duty alleged were committed by Spanish-based directors of GT, a Spanish company; (2) Mr Folchi’s alleged dishonesty was not established to the standard imposed by any system of law (Spanish, Swiss or English) which could possibly apply, and Mance LJ ought not to have considered notions of ‘objective dishonesty’ under English law; (3) the assistance was rendered mainly in Spain (though partly in Switzerland); and (4) the loss was suffered in Spain and by a Spanish company, but was not caused immediately or directly by Mr Folchi. Causation, Mr Davies said, is GT’s Achilles heel.
- Some of Mr Davies’ points about the case’s strong connection with Spain were overstated (in particular, neither Sheikh Fahad nor Mr Jaffar was based in Spain; they seldom visited it and did not speak Spanish). But it is not necessary to debate those points because Mr Popplewell accepted that the duties which GT’s directors owed to that company were governed by Spanish law, and that the dishonesty of any assistance rendered in Spain must be judged by the standards then applicable in Spain. It was only on the issue of causation that he submitted that no foreign law could be relevant, because the English court is concerned with English causes of action.
- Mr Davies rightly did not press other submissions, raised in his original skeleton argument, to the effect that Mance LJ had imposed a remedial constructive trust. It is clear from his judgment that he did not do so.
- Mr Davies also relied on the rule as to restitutionary claims stated in the latest edition of Dicey & Morris (Rule 200, chapter 34) but for reasons already stated we do not consider that that rule applies to this type of claim for dishonest assistance since there is no receipt-based liability amounting to an unjust enrichment; Mr Folchi received beneficially only a tiny fraction of the sums for which he was held liable. By contrast the earlier Arab Monetary Fund case, the Sunley proceedings, included claims based on unjust enrichment as well as other causes of action (see  1 LLR 543 at pp.565-6,  1 LLR 589 at p.597).
- Mr Davies contended that the judge was wrong not to apply the test of ‘full double actionability’ (meaning, as we understand it, that Mr Folchi could not be held liable in the English court for dishonest assistance if the evidence of Spanish law showed that it did not recognise a liability with essentially the same ingredients and basis of liability). But Mr Davies produced no authority in support of that proposition and it appears to us to be contrary to a line of binding authority, including the decision of the House of Lords in Boys v Chaplin and the decision of this court in Kuwait Oil Tanker Co v Al-Bader. In delivering the judgment of the court in the latter case Nourse LJ said (para 171),
The rationale of the rule that the act or omission of the defendant must be actionable abroad in civil proceedings between the same parties is by way of a safeguard against imposing liability upon a defendant in England as the lex fori for acts in respect of which there would be no liability in the lex loci delicti. However, it is not necessary for the act or omission to be characterised as a tort or delict under the foreign law, provided there is a right of recovery to a similar extent by way of civil action. The reasons of policy which dictate that the defendant should not be held liable in circumstances where, or to the extent that, he would not be held civilly liable in the country where the relevant acts or omissions took place, do not dictate that the legal basis of such liability should be the same. Indeed, the degree to which systems of civil law differ the world over, and the diversity of the conceptual routes by which they impose liability on a defendant to compensate or otherwise make restitution to a claimant in respect of a civil wrong, militate against the requirement that the court of the lex fori should enmesh itself in an exercise of characterisation and fine distinction as between the remedies afforded by different jurisdictions to achieve a similar result.
The same point was made by Auld LJ in Macmillan (at p.407).
- The argument about the conflict of laws issue has therefore ranged quite widely and some novel points have been raised. But for practical purposes, once some ill-founded points have been eliminated, there is in the end relatively little between the two sides. Neither side challenged the judge’s inevitable finding that Mr Folchi’s assistance was substantially rendered in Spain, or his findings as to where the conspiracies were carried out (Croesus and Wardbase in Spain, Oakthorn 1 and 2 in England, Pincinco in Switzerland). Neither side sought to use the latter findings as a basis for varying the usual non-statutory tort rule (cf Rule 203(2) in the 12th and Rule 205(3) in the 13th editions of Dicey & Morris). Mr Popplewell accepted that the court must have some regard to Spanish law and Mr Davies accepted that Mr Folchi would, on the judge’s findings, have been liable to civil proceedings brought in Spain for breaches of his contractual duty as GT’s lawyer. The position which Mr Davies most stoutly defended, and sought to hold to the last, was his point as to the need for individual liability and a sufficient causal link between individual fault and the ensuing loss.
- This was a point which Mr Davies had already taken in relation to accessory liability for dishonest assistance under English law, regardless of any foreign element. We have already considered and rejected it, so far as English law is concerned (Para. 119).
- However, the point becomes rather more formidable, at any rate as a theoretical point, when the Spanish dimension is added. Mr Folchi’s putative liability under Spanish law would be for loss caused by breaches of his individual contractual duty to GT. It would not, on the judge’s findings as to Spanish law, be an accessory liability for the wrongdoing of the conspirators. The need for a sufficient causal link between the defendant’s fault and the claimant’s loss cannot be regarded as a procedural rather than a substantive matter. The line of reasoning (based on The Halley) which led Lord Pearson, in Boys v Chaplin, to award general as well as special damages, seems not to have prevailed over the alternative line of reasoning followed by Lord Wilberforce and adopted and extended by the Privy Council in Red Sea Insurance.
- However in section V.1(f) of his judgment, dealing with Spanish law, the judge did make a clear finding about Mr Folchi’s individual responsibility for loss suffered by GT. He said :
So far as concerns causation, it is common ground that, in respect of contractual or extra-contractual liability, individual causal responsibility would have to be shown. Mr Folchi argues that all relevant acts occurred without his intervention and were done by GT directors or executives. That is difficult to follow. Mr Folchi was a lynch-pin of the arrangements which were made for and the instructions which were given in the Oakthorn 1 and 2 transactions, the Pincinco transaction and the Wardbase transaction. If he was party to or knew the facts making them conspiracies to injure GT by unlawful act or means, it was his obvious duty to stop them. Had he taken any steps to do so, their further implementation would have been impossible.
This passage is expressed hypothetically because it is in a part of the judgment dealing with Spanish law in relation to the conspiracy claims. The judge was not prepared to hold that Mr Folchi was a conspirator. But his findings of fact about what Mr Folchi did know, or shut his eyes to, take his conclusion out of the sphere of hypothesis. The assistance that Mr. Folchi gave in all the transactions was crucial and without it they could not have taken place as they did. He was just as much a linchpin in giving dishonest assistance as he would have been if he was a conspirator. It was the obvious duty of an honest lawyer to make more enquiries as to why very large sums of money were being dealt with in highly questionable ways, and to stop the transactions if he did not receive satisfactory explanations. Mr Folchi repeatedly failed in his duty and in consequence GT suffered losses. Mr Davies’ point on causation fails on the facts.
- We allow Sheikh Khaled’s appeal. The judgment against him will be set aside.
- Mr. Folchi’s appeal is dismissed.
Order: Appeal allowed with costs on standard basis. Minute of order to be agreed and lodged.
(Order does not form part of approved judgment)