30 Mar 2021

Opening the tort gateway

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On 1 March 2021, the Court of Appeal handed down judgment in Manek & Ors v IIFL Wealth (UK) Ltd & Ors [2021] EWCA Civ 264, finding that the Claimants were entitled to rely on the tort gateway at CPR 6B PD paragraph 3.1(9)(a) (the "Tort Gateway"), and serve proceedings out of the jurisdiction on the Second and Third Defendants, reversing a first instance decision of HHJ Pelling QC, and reviving an underlying fraud case.

Given the leading judgment, Coulson LJ held that “substantial and efficacious acts had been committed within the jurisdiction” and that HHJ Pelling QC had wrongly applied a comparative approach to an “ongoing and evolving” fraud. In correcting these errors of fact and principle, the Court of Appeal determined that the Tort Gateway was engaged as misrepresentations made within the jurisdiction had contributed to the ultimate deception.

Background

At all material times, the Claimants were minority shareholders in an Indian company, Hermes i-Tickets Private Limited (“Hermes”). The majority shareholder was another Indian Company (Great Indian Retail Private Limited “GIR”), which was controlled by the Second and Third Defendants (“Ramu” and “Palani” respectively).

The Claimants allege that the Defendants fraudulently persuaded them to sell their minority shareholding in Hermes to GIR, on the understanding that an offer had been made by a further company (EMIF) to buy Hermes for USD $40M. The Claimants’ case is that Ramu and Palani had insisted, on a number of different occasions, and in a number of different ways, that the Claimants had to sell their shares to GIR (as opposed to directly to EMIF), who would then sell all the shares in Hermes to EMIF. However, unbeknownst to the Claimants, the Defendants had already arranged for EMIF to immediately sell Hermes to Wirecard AG, the now insolvent German financial services company, for approximately €300M.

The proceedings

The Claimants issued proceedings before the Commercial Court, asserting a claim in deceit. The Claimants argued that they had been compelled to sell their shares in Hermes at an undervalue by virtue of fraudulent misrepresentations made by the Defendants during phone calls and meetings which had taken place in multiple jurisdictions, including in London in August and September 2015. During these London meetings, the Claimants were not made aware that an agreement had allegedly been reached for Wirecard to acquire Hermes from EMIF in summer 2015, following discussions which had begun in late 2014.

On 2 February 2018, permission was granted to serve the proceedings on Ramu and Palani out of the jurisdiction (the “Order”), and on 14 March 2018, a worldwide freezing order was made against Ramu and Palani.

Ramu and Palani applied to set aside those orders on the basis that, amongst other things, the Tort Gateway was not engaged, and therefore the Court did not have the jurisdiction to hear the claims against them.

The Law

The Tort Gateway provides that: “the Claimant may serve a claim form out of the jurisdiction with the permission of the Court where … (9) a claim is made in tort where … (b) damage which has been or will be sustained results from an act committed, or likely to be committed, within the jurisdiction”.

Where jurisdiction is disputed on the basis that the Tort Gateway is not engaged, the test to be applied by the Court is that enumerated in Metall und Rohstoff v Donaldson [1990] 1 QB 391, namely to: “look at the tort alleged in a common sense way and ask whether damage has resulted from substantial and efficacious acts committed within the jurisdiction (whether or not substantial and efficacious acts have been committed elsewhere); if the answer is yes, leave may (but of course need not be) given”.

In satisfying this test, per Kaefer Aislamientos SA de CV v AMS Drilling Mexico SA de CV and others [2019] EWCA Civ 10, a Claimant is obliged to persuade the Court that a plausible evidential basis exists that they have the better argument on any disputed allegation of fact.

The first instance decision

On 11 December 2019, HHJ Pelling QC held that the Claimants were not entitled to rely on the Tort Gateway, as they had not shown that “substantial or efficacious” acts had been committed within the jurisdiction. In fact, the substantial and causative acts had occurred abroad. In contrast, the events that took place within the jurisdiction were at most minor and insignificant.

Accordingly, HHJ Pelling QC set aside the Order permitting service of the proceedings out of the jurisdiction.

The Claimants appealed HHJ Pelling QC's decision to the Court of Appeal.

The Court of Appeal's decision

Although several meetings and phone-calls took place, ultimately resulting in the Claimants parting with their minority shareholding in Hermes, the Court of Appeal focused on a meeting that occurred in London on 8/9 April 2015 (the “London Meeting”). The London Meeting took place shortly after a separate meeting at which, Wirecard's internal documents demonstrate, it had made clear its willingness to buy Hermes for up to €300 million.

Amongst other things1, at the London Meeting:

  • The Claimants’ representatives were shown a draft SPA between GIR, Hermes and EMIF, resulting in the “obvious inference” that EMIF was the ultimate purchaser and that "there was no downside or risk involved in the appellants selling their minority shares to GIR rather than directly to EMIF";
  • Ramu said that: (1) Hermes’ sales figures were “not that great”, and therefore EMIF's USD $40M offer was particularly attractive; and (2) The Claimants’ minority shareholding in Hermes should be sold to GIR as soon as possible.

The Claimants’ representatives were not informed, at any stage of the London Meeting (or thereafter), that EMIF were not to be Hermes' ultimate purchaser, and that the advanced discussions with Wirecard had indicated that Hermes' value was far beyond that which had been discussed with the Claimants. Indeed, to the contrary, further communications were made to the same effect, both by the Defendants and related third parties, including at a further meeting in London, and through calls received by the Claimants in the UK.

The Court of Appeal noted that, in contrast to the view expressed by HHJ Pelling QC2, the London Meeting was of considerable importance as it was the first face-to-face meeting of the parties and had taken place the day after separate, and withheld, negotiations with Wirecard which set (internally) a purchase price of €300M for Hermes.

The Court found that various express representations “were all made expressly or could be inferred from the background to, the discussions during, and the sharing of the SPA at the meeting”, and these "went to the heart" of the alleged fraud: "[t]his was not a complex or sophisticated arrangement. On the appellants' case, Ramu and Palani wanted control of all the Hermes shares so that they could arrange the sale to EMIF, presumably so that they could then arrange the onward sale, for a much larger sum, to Wirecard."

The Court of Appeal also noted “errors of principle” in the High Court’s analysis, which seemed to argue that because the Claimants did not immediately enter into the transaction following the London Meeting, the representations made during the meeting were insubstantial or inefficacious. The Court of Appeal took issue with this, finding instead that the fraud was an “ongoing process” and that “the immediate reliance on one particular misrepresentation in an evolving fraud cannot be said to render that particular misrepresentation insubstantial or not causative of eventual loss; it is sufficient if the misrepresentation substantially contributed to the ultimate deception”.

On a fair reading of the evidence, it was clear that the London Meeting resulted in "substantial and efficacious acts" being committed within the jurisdiction and therefore the Claimants were entitled to rely on the Tort Gateway to serve the proceedings out of the jurisdiction.

Comment

Fraud cases frequently involve complex fact patterns, with the parties often meeting on multiple occasions, in different jurisdictions, prior to any allegedly fraudulent act occurring.

The Court of Appeal's judgment provides helpful clarification that the Tort Gateway will permit the Court to assume jurisdiction where misrepresentations made within the jurisdiction are "substantial and efficacious" and contribute to an evolving fraud, whether or not other substantial and efficacious acts of greater significance happened in other jurisdictions in the context of that fraud.

The judgment emphasises that, in determining the extent to which this is the case, the Court should not engage in an “over-elaborate salami slicing” of events featured in evidence or “embark on a geographical comparison exercise, identifying where each event happened and then announcing the single winner of this jurisdictional contest by reference to the competing quantities or qualities (in terms of causative significance) of the relevant events”. Rather, the Court should review the chronology as a whole, without conducting any weighted analysis of an event’s importance in the overall story.



1 At paragraph 42, 12 separate representations are relied on as having been made during the London Meeting.

2 Summarised by the Court of Appeal as follows: "the only allegation material to the deceit claim was the representation that the sales figures for Hermes in 2014-15 "were not that great and as a result the buyer's offer was particularly attractive". He said that all the other misrepresentations relied on in the pleaded claim were derived "either from prior or subsequent statements, all of which were alleged to have been made at meetings in, or in emails or telephone calls emanating from India or Singapore"… as he put it, "nothing material resulted from the discussions" [26]. He said that the issue between the parties at the meeting "was not the sale of the appellants' shares but to whom they were to be sold"… He said that he had to assess not only "the intrinsic potency of the particular event relied on but also assessing its significance in the context of all other facts and matters relied on by [the appellants]"… He went on to say that "what was said at the meeting was at best of minor importance and can be properly characterised as insignificant. That is all the more the case when what is alleged to have happened at the meeting is viewed in the context of all the other allegations made by the appellants, each of which are more important, and in the case of the impact of what AS is alleged to have said, much more important, than what was said at the first London meeting." The reference to what AS is alleged to have said was a reference to the telephone call on 22 August 2015 and the threat to asset-strip: see paragraph 19 above."

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