Halley v Law Society [2003] EWCA Civ 97

Case No A3/2002/0399A

[2003] EWCA Civ 97

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM CHANCERY DIVISION

(MR JUSTICE LLOYD)

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 13 th February 2003

Before

LORD JUSTICE MUMMERY

LADY JUSTICE HALE

LORD JUSTICE CARNWATH

Between

MARTIN J. HALLEYAppellant

THE LAW SOCIETYRespondent

Mr Romie Tager QC and Mr Justin Kitson (instructed by Downs) for Appellant

Mr Timothy Dutton QC and Mr Richard Coleman (instructed by Russell-Cooke)

for Respondent

Hearing Hearing dates : 9 th to 10 th December 2002

JUDGMENT: APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)

[1]This case follows an intervention by the Law Society, under the Solicitors Act 1974, into the practice of Michael Wilson-Smith (“the solicitor”), as sole practitioner, on the grounds of suspected dishonesty. Mr Halley’s claim is for payment of a sum of US$114,000 odd, which was credited to his name in the solicitor’s client account. The Society holds such sums, subject to the provisions of the Act, “upon trust for the persons beneficially entitled to them” (1974 Act, Sch 1 para 6(1)). The simple issue, therefore, is whether Mr Halley can make out his claim for an order for payment, as the person so entitled to the $114,000.

[2]The sum allegedly represents commission paid in connection with (in Mr Halley’s words) “high yield investments programmes” or (in the Society’s words) “bank instrument frauds”. Although the amount involved in this case is relatively small, from the Society’s point of view it represents the tip of a large iceberg. Evidence obtained in the intervention showed $16m having been received into this solicitor’s client account, under arrangements apparently similar to those in issue in this case; and there are other cases involving comparable amounts. More generally, the Society, like other regulators here and internationally, has expressed concern at the proliferation of similar schemes in recent years. The concern for the Society arises, both from the use of solicitors to give apparent respectability to such schemes, and also from their own responsibility for sorting out the mess following an intervention, and for dealing with claims for compensation from the victims.

[3]The judge found that the sum in this case was derived from fraud, in that the bank instruments for which the commission was paid were worthless, as Mr Halley and his colleagues were aware (para 113-4). However, he decided that this fraud by itself was not enough to defeat Mr Halley’s claim (para 125). Instead, he decided in favour of the Society on narrower technical grounds. Mr Halley appeals against the judge’s decision on those grounds; the Society cross-appeals against the rejection of its case based on fraud. The judge’s findings

[4]The facts are complex, and have been set out in admirable and meticulous detail by the judge (notwithstanding the considerable difficulties which had attended the preparation for the case). Since much of the detail is unlikely to be of interest to anyone not directly involved in the case, and is unnecessary for the determination of the issues in the appeal, I propose only to summarise the main points.

[5]The two key players in the judge’s account were Mr Halley, the claimant, and Mr Gibbins. Mr Halley described himself as a “corporate funding broker”. He used the trading name, Benington Securities, first from about 1984 in connection with business as a mortgage broker, and later in connection with other forms of financial business. Mr Gibbins described himself as “a property developer and venture capital and finance broker”. Since 1991 he had worked on his own account, but he operated through various companies. For the purposes of the present transactions he used a BVI company called Tidal Services Inc (“Tidal”) set up in 1997. His precise relationship to Tidal was not wholly clear, as the judge noted: “He said he was not a director or shareholder of, or financially interested in, this company, and that he is not the only broker who uses it. He claimed to be a self-employed representative of Tidal. In relation to his transactions which involve Tidal he said he paid a fee to Tidal and that it acts in accordance with his instructions. It is not necessary for me to decide whether the reality is that Tidal acted as an agent for Mr Gibbins rather than the other way round.” (para 11)

[6]Mr Halley and Mr Gibbins met in 1989, and from 1993 they started an informal working relationship. By the time of the present transactions they had developed both a close friendship and a close business collaboration, involving a high degree of mutual confidence. Mr Wilson-Smith was introduced to Mr Gibbins in about 1996, and from that time was involved in the preparation of agreements connected with the business activities of Mr Gibbins.

[7]The story leading to the present transactions, as described by the judge, began in about 1996: “In the mid 1990’s Mr Halley was learning from Mr Gibbins about the sort of business that the latter was, or professed to be, able to undertake, through his contacts with people holding large sums of money available for an investment project of one kind or another… Just as Mr Gibbins acted, in essence, as a broker looking for opportunities for these funders, so Mr Halley would do the same, finding people through his contacts to introduce to Mr Gibbins and thereby to a funder. Because of his state of health, Mr Halley was not able to do anything effective in this respect until 1996….” (para 17) There was an informal arrangement for the sharing of net fees from completed transactions on an equal basis between the two.

[8]Mr Halley sought business by various means. He placed an advertisement in the Wall Street Journal, which apparently generated many inquiries and useful publicity; he wrote a letter to a number of holders of large US dollar deposits, which was less successful, and attracted the attention of the Securities and Investments Board; and he launched a website. He also prepared an Introductory Document Set for prospective clients, which described the history of Benington Securities (in terms regarded by the judge as “highly misleading”) and included draft transaction documents, substantially in the form of those used in this case.

[9]The money in issue in this case is said to represent part of Mr Halley’s share of fees on four transactions, all of a similar nature, which are referred to in the judgment as the “Wagner”, “Abacus”, “Young” and “Toro” transactions. The first involved no more than the introduction by Mr Halley in mid 1998 of a client-broker, a Mr John Wagner, for which Mr Halley’s fee was $25,000. Although Mr Halley was not further involved in setting up the transaction, and little evidence of its substance was available to the judge, he inferred that it was “similar in essence” to the other three contracts.

[10]The Abacus transaction, concluded in August 1998, was the first in which Mr Halley played an active role. It resulted from his contact with a Mr Arthur Agustin, of Abacus International Financial Network. However, the solicitor involved in this transaction was not Mr Wilson-Smith. Its only relevance appears to be that Mr Halley’s payment for the Young contract may have reflected in part a sum due in respect of the Abacus contract (judgment para 52). In so far as it matters, it appears to have followed the same form as the two later transactions, and raises no separate issues.

[11]The main emphasis of the evidence and argument at the hearing and before us has been on the other two contracts, concluded respectively in September and December 1998. They followed Mr Halley’s contact with a Mr Walter Combs, who introduced two clients, Mr J W Young and M Toro Ltd, a Bahamian company, who became parties to the transactions. Mr Charles Moro, who with his son Richard was one of the “individuals behind” M Toro Ltd, gave evidence, with the agreement of both parties, at the beginning of the hearing.

The judge commented:

“Though highly unusual, this course in the event proved valuable, as well as convenient for Mr Moro, since it enabled the evidence called on behalf to Mr Halley to be considered in the light of the real experience of Mr Moro as a disappointed investor.”

Mr Halley’s fees in relation to the Young and Toro contracts were $143,750 and $154,000 respectively.

[12]The treatment of these fees in Mr Wilson-Smith’s client account shows how the sum claimed is arrived at. The first credit was the $143,750 (on the Young contract) on 16 September 1998. On 27 October $7,500 was transferred to Mr Gibbins’ account and $36,000 paid out at Mr Halley’s order, with some bank and agent’s charges being incurred and debited. The $154,000 (on the Toro contract) was credited on 20 November, and the $25,000 (on the Wagner contract) on 25 November. On 11 January 1999 $164,952.98 was transferred to the credit of Mr Gibbins by way of loan. The balance left was $114,209.72, which, with interest, is claimed by Mr Halley in these proceedings.

The nature of the transactions

[13]The judge gave a detailed description of documents and dealings involved in the Toro transaction, on which he had the most complete evidence. His summary of the terms of the Principal Agreement and the Escrow Agreement is included as an appendix to this judgment.

[14]A convenient description of the main features of such transactions (although with differing interest rates) is found in Mr Halley’s witness statement, where he describes “the procedure and general principles of the transactions to which (he) introduced applicants to Gibbins”, and for which “a standard form of agreement has evolved over the years”:- “31. In respect of the facilities that I offer there is a fixed set of ground rules, namely:(a) No risk to funder’s capital.

(b) No exchange of cash for any instrument rated less than “AA-”.

(d) A safeguard via an independent third party to ensure that the service is properly provided and verified. 32… 33. The agreements are between the applicant and a corporate broker known as the “Company” and represented on all occasions by Gibbins. The agreements are in two parts, the first called the “Principal Agreement” deals with the funding matters, the second, called the “Escrow Agreement” is, in effect, a joint instruction by the applicant and the Company to the escrow agent defining his precise role. 34. The Principal Agreement states that in consideration of the arrangement fee, generally in the range of 3% - 4% of the funding amount, the Company undertakes to procure from a third party, the “funder” or sometimes in the past the “account holder”, a commitment to make funds available as required for a period of time, usually of one month, called the “Validity Period”. The funds, if exchanged for an instrument can be retained for the full life of the instrument which could be for up to 10 years. For the funds to be drawn-down, their return at the end of the year has to be guaranteed by a bank instrument providing the funder a rate of interest generally in the range of 6% to 5% per annum. The agreements define and illustrate, with agreed examples, all the documentation requested by the applicant and approved by the funder. The bank holding the funder’s money and which is to provide the bank advice (which I define later) is clearly identified in the Principal Agreement as this is generally of great importance to the applicant. This bank is referred to as the “Issuing Bank”. 35. … The commitment to provide the funds is in the form of a corporate board resolution also supported by a letter to the applicant confirming this. This is generally called a “Letter of Appointment” and can take various forms as required by the applicant. The Board Resolution and the Letter of Appointment and any other documents required from the funder are jointly referred to as the “corporate documents”. 36. A bank statement of account for the funder is always included in the documents provided to the applicants as part of the service. Its sole intent is to confirm to the applicant that the funder has sufficient cleared funds to cover the commitment he is making. This is called the “Bank Advice”. The agreements require the delivery of the original bank and corporate documents, initially to the escrow agent for verification and then onward to the applicant’s order. 37. To ensure that the fees are available to the Company for prompt payment of the funder’s fee, brokerage fees and all associated costs and disbursements, the applicant is required to lodge the arrangement fee with a third party lawyer, the “escrow agent”, only to be released to the Company after the delivery of the original corporate documentation and the Bank Advice to the escrow agent and the verification thereof by the Escrow Agent. The instructions to the Escrow Agent form the second part of the agreements between the applicant and the Company and this is called the “Escrow Agreement”….”

[15]As appears from this description, the essential parties in commercial terms are the “applicant” or “client”, and the “funder” or “account-holder”. The “applicant” provides a fee for the funding services supposedly to be provided under the agreements, for which it pays a substantial advance fee. The “account-holder” is the prospective provider of the funds, but he is not committed in any way, and his capital is not at risk. He needs (presumably) to have sufficient funds available with the “issuing bank” (in these cases, the Royal Bank of Canada), to provide the basis for it to issue the “bank advice”. However, he has no enforceable obligation to provide any funds. Although Mr Halley refers to the account-holder’s “commitment to provide the funds” in the form of a board resolution, the form used in this case (schedule C to the agreements) is no more than a resolution to “consider” participating in a “Bank Guarantee Investment Programme”, subject to acceptable guarantees.

[16]In the case of the Toro transactions, the “account-holder” was a company called Lardel Holdings Inc (“Lardel”), which the judge described as “associated” with a Canadian resident, Mr William Deluce. Another of his companies, Chaynemac Financial Inc. (“Chaynemac”), was the Account Holder for the Young and Abacus transactions.

[17]The two agreements were signed on behalf of M Toro Ltd by Mr Combs, and on behalf of Tidal by its director, Star Services Inc. Mr Wilson-Smith signed the Escrow Agreement for himself as Escrow Agent. For present purposes, it is sufficient to note that the Arrangement Fee to be paid by Toro was $750,000. In return, Tidal was to procure the issue of various documents, including three Bank Advices, in prescribed form, each evidencing the sum of $10 million, and these were to be verified by the Escrow Agent. These Bank Advices, which would remain valid for 15 international banking days, would in theory entitle the Applicant to draw down the funds represented by them, but only in exchange for negotiable instruments for the same amounts, payable within one year of the date of delivery thereof to the Issuing Bank and carrying interest at 8% per annum.

[18]Mr Wilson-Smith’s part in the process and his allocation of the arrangement fee was described by the judge as follows:- “48. On 18 November 1998 Mr Wilson-Smith wrote to the director of Toro in the Bahamas, and also to Mr Charles Moro, confirming that he had the hard copies of the Bank Advices, that they conformed with the Principal Agreement and that he had verified their issue with the Bank. He confirmed that he would be releasing the Arrangement Fee to Tidal. He awaited the identification of the Receiving Bank to whom the Bank Advices were to be sent, and he held the Corporate Documents to be handed over to Mr Combs, to whom facsimile copies had already been sent. So far as the documents show, no Receiving Bank was ever identified to him, so he presumably never parted with the original Bank Advices. 49. His files include a single page addressed to him by Tidal, dated 19 November, but faxed to him in the morning of 20 November, giving instructions as to how to deal with the Arrangement Fee on this transaction. The page bears the initialled stamp of Star Services Inc on behalf of Tidal. The payments directed, which left some $6,000 or so unallocated, were as follows:(i) About $134,400 to Mr Martin Gibbins or to his order;

(ii) $154,000 to Mr Halley

(iii) $50,000 to Mr Wilson-Smith

(iv) $136,000 to Mr Deluce

(v) $43,500 to a Mr Colin Youell, who had played a part in effecting the introduction of Mr Gibbins to Mr Deluce

(vi) $168,000 to an entity referred to as MCY which according to the evidence is a joint venture of some kind involving Mr Gibbins, Mr Deluce, Mr Wilson-Smith and a Mr Imdad Ullah

(vii) $58,000 to persons whose connection with the transaction is not altogether clear but which may represent payments for the benefit of Mr Ullah. 50. Mr Wilson-Smith released the Arrangement Fee to Tidal by transferring it from his stakeholder’s account to his client account, giving the instruction on 19 November. On 20 November he caused to be made entries in relation to his client account which showed the transfer of $154,000 to the credit of Mr Halley. That is part of the credits which, after several payments out, make up the balance claimed by Mr Halley against the Law Society.”

[19]The Young contracts, dated 3 September 1998, were in similar form. The Applicant was Mr J W Young. Tidal played the same role, Mr Wilson-Smith was the Escrow Agent, and the Account Holder was Chaynemac. The Arrangement Fee was $400,000, and the funds to which the Bank Advice and the Corporate Documents were to relate would be $10 million. Mr Wilson-Smith’s actions, and the instructions for allocation of the arrangement fee, followed the same pattern as under the Toro contract. The judge’s finding of fraud

[20]The judge was understandably struck by the very limited nature of the “service” received by the applicant for its fee. His overall view of the transactions, the factual basis of which I do not understand to be challenged by Mr Tager, was as follows:

“59. From what I have said about the agreements, it may be wondered what was the point of them as regards the Applicants. In return for payment of a significant sum of money, they obtained evidence that someone else, not contractually bound to them, namely the Account Holder, had a given sum of money in a bank account. They had a corporate decision by the board of the Account Holder which indicated a willingness to enter into a transaction with these funds. This transaction, however, involved the Account Holder receiving, within a strictly limited time, a bank instrument issued by the Receiving Bank which appeared to ensure the payment to the Account Holder of the principal amount of the funds plus 8% p.a. interest. The terms of the board resolution were subject to such caveats and qualifications that, even if every other aspect of the proposition were apparently satisfactory, and shown to be so within the validity period, the Account Holder could simply choose not to enter into the transaction. The Applicant’s agent (Mr Combs or Mr Wells) was given limited authority on behalf of the Account Holder to negotiate the terms of the bank instrument, but not to commit the Account Holder to it. They, or someone on their behalf, would have to persuade the Receiving Bank to commit itself to issuing such an instrument. Since the Applicant did not, in any of these cases, have the principal amount, which was why it needed to borrow it, the Receiving Bank would be bound to require security in one way or another for its liability. As explained to me by Mr Gibbins, the Receiving Bank would insist on retaining the principal amount of the funds under its control, so as to be safe in that respect. It would however be at risk for the interest which, at 8%, was significantly higher than rates normally obtainable at that time. Mr Gibbins said that it would therefore require the Applicant to provide security for that liability, by depositing a sum which, with interest accruing on it, would provide the 8% payable at the end of the year; he suggested this might be about 7.7%. The profit to be made by the Applicant would be the amount by which the return which it was able to secure on the principal sum during the period would exceed 8% plus any margin required by the Receiving Bank for its services.”

[21]The judge also sought to explain the perception of Mr Moro, whom he accepted as a being an innocent (albeit over-credulous) party to the transaction:

“60. Mr Moro, in his evidence, showed no awareness of a possible need to fund the Receiving Bank to the extent of interest on the principal amount. Since on the figures mentioned he would have been required to put up well over $2 million as security for the Receiving Bank’s obligation as regards interest over a year, his lack of awareness of this requirement seems to be a rather major flaw in his understanding of the transaction. Though his willingness to believe in the existence of fabulously profitable investment opportunities which would be opened up to him by way of the transaction with Tidal was remarkable, it has to be open to very serious question whether he would have undertaken the transaction if he had known that he had to put up not just $750,000 up front at once but then a further $2.3 million or so within a matter of days.”

Later in his judgment, he considered why it was that Mr Moro “did not feel that he had been let down by Mr Halley”: “It seems to me that this attitude on Mr Moro’s part is attributable to his not being fully aware of the deceit that was practised on him. Mr Moro had plainly not understood the transaction. His evidence as to how he thought it would work so as to allow him to participate in a profitable investment programme showed that he had had wool pulled over his eyes very successfully. In particular, he had not understood the need, in order to persuade a Receiving Bank to undertake liability for the Account Holder for $30 million, to put up, or procure that someone else put up on his behalf, security for the interest on the $30 million.” (para 126)

[22]The position in relation to the other applicants was less clear (judgment, paras 126-129). The Society had made an alternative submission that the other transactions were “money-laundering schemes” in which the applicants were dishonest co-conspirators. The judge felt unable on the evidence to do other than consider the matter “on the footing that the applicants were honest”. Similarly, although he was informed that Mr Young was in prison in the USA awaiting trial on charges of fraud, and he was also shown documents suggesting that Mr Young may not have been the true owner of the money advanced in his name, he felt unable to base any finding on those matters.

[23]The judge considered the question whether the transactions with Tidal gave the applicants “a chance of any real benefit”, and concluded that they did not (paras 74-96). He noted without surprise (para 82):

“… that, first, in none of the three cases concerned in this claim of which I have any detail was the Applicant able to secure the release of the Account Holder’s funds, and secondly, that neither Mr Gibbins nor Mr Halley knew of any transaction of this kind in which the Applicant had ever been able to obtain the release of these funds.”

This view was confirmed by draft instructions to Counsel, prepared by Mr Wilson-Smith in September 1997, but never submitted, in which he recorded that:

“Having carried out a number of transactions, neither Mr Gibbins nor any of instructing solicitors’ other clients have seen a transaction actually complete by the delivery of the bank instruments in question.” and noted his “concern” - “… as to the possibility of it being said that, taken as a whole the business is fraudulent by reason of none of the Contracting Parties in any of the agreements having in practice been able to perform by delivery of the bank instruments.”

The judge concluded (para 96):

“I am satisfied that these particular transactions produced no benefit to the Applicants. Moreover I do not see how they could have done, unless, first, the Applicant was aware that the payments that would need to be made would have to cover both the Arrangement Fee and whatever was needed by the Receiving Bank to provide collateral security for the bank instrument, and the Applicant was in a position to pay or arrange payment of those sums and, secondly, the Applicant was ready to proceed at once upon the agreement becoming unconditional. Even if the Applicant were in a position to offer a bank instrument from the Receiving Bank which would be objectively satisfactory, within the short period available, the Applicant would be at risk of the Account Holder rejecting the offer within its discretion. There was in fact no real commitment from the Account Holder at all…”

[25]He found that both Mr Gibbins and Mr Halley “realised that these agreements were worthless to the Applicants” (para 114-117), and that the making of the contracts had been induced by fraudulent misrepresentations: 118 …The representation, if any, was not as to the opportunity of investing in an investment programme, but as to being able to buy bank instruments, so as to exchange such an instrument for funds of the Account Holder and thereby to obtain access to or the use of those funds. 119 I have no doubt that the conduct of Mr Halley and Mr Gibbins in turn to those with whom they dealt on behalf of Applicants (whether the Applicant direct or a broker such as Mr Combs) involved the making of an implied representation to this latter effect. I am satisfied, for reasons already given, that neither Mr Gibbins nor Mr Halley believed that there was in fact any such chance that the Applicant would obtain that opportunity. They both knew that it had never happened before in any case of which either of them was aware and that there were such obstacles to it happening in future that it could be ruled out as a practical possibility. The representation was therefore dishonest and fraudulent. There was and could be no point for the Applicant in entering into the agreement, which was no more than a vehicle for obtaining money from him by false pretences.” The warnings and disclaimers in the contracts were not effective to exclude the consequences of such fraud (para 120).

The issues decided by the judge

[26]The main issues considered by the judge, so far as relevant to the appeal, were:- i) whether Mr Halley’s claim was barred by the fraudulent misrepresentations to which he had been a party; ii) if not, whether Mr Halley could establish that the beneficial interest in the client account belonged to him; this turned on sub-issues:- a) whether the conditions for release of the arrangement fees to Tidal were satisfied, and, if not, whether non-conformity was waived; b) assuming Tidal was entitled to receive the money, whether the beneficial interest in the money was validly assigned to Mr Halley.

[27]The judge decided the first issue in favour of Mr Halley. The Society, through Mr Dutton QC, had submitted, that, given the finding of fraud, Mr Halley could not establish his claim – “… because he would have to rely on a fraudulent and illegal agreement with Mr Gibbins or Tidal, or on an agreement between Tidal and the Applicant which he knows and always knew would be, and was, fraudulent on the part of Tidal.” (para 122)

[28]The judge accepted Mr Tager’s submission that the misrepresentation made the contract voidable, not void, and that, in the absence of evidence of rescission by any of the applicants, property in the money must be taken to have passed from them to Tidal. He referred Lonrho v. Fayed (No 2) [1992] 1 W.L.R. 1, 11-12 (per Millett J), and Halifax Building Society v. Thomas

[1996] Ch 217

CA. He also rejected a submission of Mr Dutton (based on the decision of Hutchison J in Thackwell v. Barclays Bank

[1986] 1 All ER 676

) that the court should apply a “conscience test” in deciding whether a party’s involvement in illegality was a bar to recovery. The judge held that approach to be inconsistent with the decision of the House of Lords in Tinsley v. Milligan

[1994] 1 AC 340

(referring also to Webb v. Chief Constable of Merseyside Police

[2000] 1 All ER 209

, 223, per May LJ).

[29]On the second issue - whether Mr Halley could establish his beneficial interest in the remaining money – the judge started from the “undeniable proposition” that Mr Halley had no legal title to the money, and that the question was whether he could establish his right as beneficiary (para 130). He also accepted that the money was paid to the escrow agent as trustee: “When an Arrangement Fee was paid to the Escrow Agent under one of these contracts, it was held by him on trust to dispose of it in accordance with the terms of the Escrow Agreement. (Not all stakeholder arrangements involve trusts, but this form of agreement clearly does.) If the conditions were duly satisfied, he held it for Tidal, and if not then he held it for the Applicant. Until the time came when it would be determined whether or not the conditions had been satisfied, he could not dispose of it without the agreement of both parties.” (para 131)

[30]Overall, he found for the Society. This involved a number of technical points: i) The Bank Advices issued in the Toro transaction were held not to comply with the requirements of the Principal Agreement, because they failed to warrant that existence of three separate sums of $10m (paras 137-8). There had been no waiver of this requirement by Mr Moro, because he was not made aware of the relevant circumstances (para 144). The judge rejected the Society’s case of non-compliance in relation to the Young transaction (paras 134-5). ii) With regard to the Wagner and Young transactions, there were no assignments to Mr Halley in a form complying with section 53(1)(c) of the Law of Property Act 1925 (paras 151-153). However, the judge accepted Mr Tager’s submission that the requirements of section 53(1)(c) do not apply to a disposition of funds in a solicitor’s client account, provided it complies with the special regulations governing such accounts (paras 154-157). There was a document which could be regarded as a proper instruction for payment of the $143,750 for the Young transaction, but not in respect of the $25,000 for the Wagner transaction (paras 157-8) iii) Mr Halley had accordingly, failed to establish his right to the Toro $154,000 or the Wagner $25,000, but had established his right to the Young $143,750. iv) However, the result, applying the rule in Re Hallett’s Estate

(1880) 13 Ch D 696

, was that he had no claim to the $114,210 remaining in the account: “Under this rule a person is to be treated as drawing out for his own benefit his own money before any that belongs to another. Thus all the drawings, including that of $165,000 by way of loan to Mr Gibbins, are treated as drawn first on the payments to which Mr Halley was entitled, (including the $25,000 even though last paid in, if he were entitled to it), in priority to the other money in the fund, the $154,000, which did not belong to him. The result, therefore, is that he is treated as having taken out the whole of his entitlement, and more, and no part of the remaining balance of $114,210 is regarded as belonging to him.” (para 160)

[31]In a separate judgment, the judge rejected the Society’s submission that Mr Halley should pay all its costs on an indemnity basis. He ordered Mr Halley to pay half the Society’s costs on the standard basis. In doing so he took account of the facts that the finding of fraud against Mr Halley did not ultimately lead to success for the Society, and that the point on which the Society ultimately succeeded was a relatively narrow point of construction, which had been raised by a late amendment to the pleadings.

The issues on the appeal

[32]The judge gave Mr Halley permission to appeal against the substantive decision, limited to three points:(i) his finding that the bank advices supplied under the M Toro agreement did not comply with the agreement;

(ii) his finding that M Toro Limited had not waived such failure;

(iii) his finding that there was no proper written instruction for the transfer of the $25,000.

[33]By a further application notice, served shortly before the appeal hearing on 25th November 2002, Mr Halley sought permission to include further grounds of appeal, the substance of which was that the escrow agent held the money, not a trustee, as the judge found, but “as stakeholder”, subject only to the contractual arrangements. We refused permission. Not only was the application made very late, with no adequate explanation; but it was also directly contrary to the basis on which the matter proceeded before the judge, with Mr Tager’s acquiescence.

[34]The Society for its part gave notice that it sought to uphold the decision on four additional grounds: i) Having regard to his findings as to the nature of the transactions, the judge was wrong to hold that, subject to the terms of the agreement being satisfied, the beneficial interest in the arrangement fee passed to Tidal unless and until there was rescission. ii) The judge was wrong to hold that the conditions for release of the arrangement fee under the Young agreement had been satisfied. iii) The judge was wrong to assume that the conditions for the release of the arrangement fee under the Wagner agreement had been satisfied; iv) The judge was wrong to hold that the formal requirements for the transfer of beneficial ownership contained in s 53(1)(c) of the Law of Property Act 1925 were effectively overridden by the Solicitors Accounts Rules 1991. The Society has indicated that it does not seek to reopen before this Court the argument that there is “a separate defence based on illegality/public policy”, but wishes to reserve the point.

[35]In relation to the judge’s order on costs, the Society was granted permission to appeal by Robert Walker LJ. Mr Halley was refused permission by the judge to appeal in respect of the order on costs, and no further application was made for permission to this court at that stage. However, before us Mr Tager has sought to re-open this issue, although no formal application for permission has been made. As it is put in his skeleton argument:

“It is Halley’s contention that the finding of fraud should not have been made against him. Had it not been, he would not have been ordered to pay any of the Law Society’s costs. It is accepted that if the finding of fraud is upheld, then the costs order made was within the proper exercise of the judge’s discretion. By appealing the costs decision, Halley is, in effect, challenging the finding of fraud.”

We indicated at the beginning of the hearing that we would defer all issues in relation to costs, before the judge and before this court, until we had given judgment on the substantive issues.

[36]Finally, on 29th November 2002, there was a further application on behalf of Mr Halley, this time to admit further evidence in the form of several bundles of documents (amounting to some 900 pages), dealing with the detail of some of the transactions; and to permit additional grounds based on that evidence. The skeleton in support was dated 5th December, two working-days before the hearing on 9th December. According to this, the evidence related largely to the challenge to “the judge’s finding of dishonesty, (which ultimately only went to his exercise of discretion on the question of costs)”. It was said that:

“…had this documentation been before Lloyd J he would have realised that it went to the heart of the evidence relating to the representation which he found…”

[37]The lateness of this application made it impossible for the Law Society or the Court to deal with it effectively at the hearing, without disrupting the timetable for this and other cases. The Law Society made clear that they strongly opposed the application on the grounds that it was “hopelessly and inexcusably late”; that the Ladd v Marshall conditions for allowing new evidence were not satisfied; and that in any event the new evidence did nothing to improve Mr Halley’s case. From what we have seen, their opposition is wholly understandable. It seems quite extraordinary that this material, much of which, according to Mr Halley’s statement in support, was identified at various times between March and August 2002, has only been produced at the last moment. It is also wholly unclear, even on the basis of that statement and Mr Tager’s skeleton, why it is thought to add materially to the information which was, or could have been, available to Mr Halley, with the assistance of Mr Gibbins, at the trial; or how it is thought to undermine the judge’s critical finding that these transactions did not, and were never expected to, produce any benefit to the applicants.

[38]In view of the time-constraint, we did not feel it possible not to make a formal determination of the application to admit as part of this hearing; and we were not pressed by Mr Tager to do so. In taking this course, we noted that the material is directed (at least, nominally) to the judge’s decision on costs, on which the appeal hearing had been deferred. Technically, therefore, Mr Tager would be able to renew it in that context, but he can expect no encouragement from the court. I propose, therefore, to deal with the substantive issues without regard to this material, except where stated.

Discussion

[39]In considering the substantive issues, I propose to address first the central issue, raised by the Society’s additional grounds, whether, having regard to the nature of the transactions, any beneficial interest could have passed to Tidal, before considering the other narrower grounds.

[40]At the outset, however, it is useful to keep in mind certain basic points. There is no doubt that the legal title to the money passed to Mr Wilson-Smith, and is now vested in the Law Society by statute following its intervention. Mr Halley has to establish his right to payment. He, however, has been found to be a fraudster; while Mr Moro, who was the source of a major part of the funds, has been found to be an innocent victim. At first sight, it might be thought obvious that, as between the fraudster and the innocent victim, the money should be paid out to the latter. The legal analysis cannot of course be so straightforward. However, if it appears to lead to a contrary result, one is bound to examine the steps in the analysis with some scepticism.

[41]At the same time, the limits of the Society’s statutory function must be recognised. It holds the money on trust according to the beneficial interests in it. It has no general discretion to pay it to the most deserving recipient. Nor does it have power to act as agent for potential beneficiaries. Thus, if formal rescission of a contract by an apparent victim of fraud is required to defeat the claim of a fraudster, the Society cannot take that step itself, and it may be inconvenient or impracticable to get the victim to take it. Furthermore, success on narrow grounds such as were upheld by the judge in this case may be of limited help to the Society, if it simply results in the money having to be paid to some other equally undeserving intermediary (such as Tidal), or leaves the beneficial interest undetermined. It is for these reasons that it is important for the Society, if possible, to establish that under transactions of this kind, there is no transfer at all of the beneficial interest.

Did the transactions have any effect in law?

[42]Before us Mr Dutton puts the argument somewhat differently from his case as recorded by the judge. He accepts the general principle, applied by the judge, that the beneficial interest under a contract induced by fraud does not revert to the innocent party unless and until he gives notice of his election to rescind. However, he says that principle has no application to this case:- “Whilst the principle is correct, it does not apply where the “contract” is not supported by consideration (only by worthless documents) and/or where the consideration totally fails, and/or where there is no mutual intention to create legal relations, and where the “contract” is nothing more than a dishonest device to obtain money. In other words, it does not apply when there is no legally recognisable contract at all.”

[43]Although this is put as a single submission, it collates a number of logically distinct points: i) That there was no consideration; ii) That there was a total failure of consideration; iii) That there was no mutual intention to create legal relations; iv) That the “contract” was no more than “a dishonest device to obtain money”.

[44]In my view, the emphasis should be on the last of these points. It is not clear to me how the others are maintainable, at least as distinct points. Apart from the finding of fraud, it is difficult to see why the elaborate bundle of documents provided in return of the advance payment, which was precisely what was contracted for, was incapable of satisfying the minimal requirements for “adequate consideration” (see Chitty on Contracts, 27th Ed, para 3-013ff; and cf Haigh v Brooks (1839) 10 A&E 309). If that is so, there was no “total failure”, because that consideration was duly provided. Furthermore, it seems clear that the parties “intended” to create legal relations; the applicant was to be under a legal obligation to pay the fee, and Tidal under a legal obligation to produce the documents.

[45]The submission, as I understand it, is that this is not simply a case of a valid contract being induced by fraud; but that the fraud so infected the whole transaction that it had no legal effect at all. The “contracts” were in reality no more than devices to extract money by fraud; in Mr Dutton’s words - “The “agreements” were fictitious contracts. They were as the judge found merely part of an elaborate charade (or mechanism) by which the loser was persuaded to part with his money.” The position, accordingly, is said to be “akin to theft”. Where property is stolen, no beneficial interest passes to the thief. Mr Dutton submits that the same applies where money is extracted by fraud, otherwise than under a legally enforceable contract. He relies on Westdeutsche Bank v. Islington LBC

[1996] AC 669

at 705C-D, 715H-716D (per Lord Browne-Wilkinson). “I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v. Wilson [1913] 2 K.B. 235, 244; R. Leslie Ltd. v. Sheill [1914] 3 K.B. 607. Moneys stolen from a bank account can be traced in equity: Bankers Trust Co. v. Shapira [1980] 1 W.L.R. 1274, 1282C-E: see also McCormick v. Grogan (1869) L.R. 4 H.L. 82, 97.”

[46]Mr Tager submits that so to hold would be contrary to the decision of this Court in Twinsectra v. Yardley [1999] LlLR 527 (paras 98-9), where his own submissions to like effect (as counsel for the claimant in that case) were rejected. Twinsectra lent money to a Mr Yardley, on the security of a solicitor’s undertaking given by a Mr Sims, whom Twinsectra believed to be acting for him. Mr Yardley fraudulently failed to inform them that, by the time of the loan, he had withdrawn Mr Sims’ instructions (para 64). It was held that this was sufficient to establish Twinsectra’s claim in deceit, but not, in the absence of rescission, to given them a proprietary right over the money lent. Mr Tager, relying on the Westdeutsche case, had argued that the obtaining of money by false pretences should be regarded as “theft”, and that accordingly it should be held that a constructive trust was imposed on the recipient at the moment of receipt (para 98). This argument was rejected. Potter LJ said (para 99):

“It seems to me that, whatever the legal distinctions between ‘theft’ and ‘fraud’ in other areas of the law, the distinction of importance here is that between non-consensual transfers and transfers pursuant to contracts which are voidable for misrepresentation. In the latter case, the transferor may elect whether to avoid or affirm the transaction and, until he elects to avoid it, there is no constructive (resulting) trust; in the former case the constructive trust arises from the moment of transfer. The result, so far as third parties are concerned, is that, before rescission, the owner has no proprietary interest in the original property; all he has is the ‘mere equity’ of his right to set aside the voidable contract…”

Within the dichotomy which begins that passage, Mr Tager submits that the present case cannot be categorised as one of “non-consensual transfer”. The transfers were made voluntarily by the applicants under what they at least believed to be valid contracts.

[47]In my view, however, there are important distinctions between that case and the present. In that case, there was a straightforward contract of loan, under which legal and beneficial interest in the money passed to Mr Yardley (subject only to a “purpose” trust, which does not affect the present argument). The contract may have been induced by the fraud, but it was not itself the instrument of fraud. In this case, the contract has been held to be the instrument of fraud, and nothing else. The elaborate documentation was, in the words of the judge, “no more than a vehicle for obtaining money… by false pretences” (para 119). Furthermore, the legal interest in the money passed to the escrow agent, but the beneficial interest remained with Toro, unless and until it passed to Tidal under the contract. In my view, the court is entitled to disregard the apparent effect of that fraudulent contract, and hold that the beneficial interest remained throughout with Toro.

[48]In such a case, it is meaningless to impose a requirement for the fraudster to be notified of “rescission”. From the fraudster’s point of view there is nothing to rescind; for practical purposes, he has parted with nothing of value and incurred no obligations; the victim is left with some documents which, from the outset, were known and intended by the other party to be worthless. The “election” to which Potter LJ referred is not a real option. Although the case does not fit neatly into Potter LJ’s binary classification, he was not dealing with these facts. Subject to any direct authority, I see no reason why it should not be regarded as a simple case of “property obtained by fraud”, in Lord Browne-Wilkinson’s terms.

[49]Mr Tager referred us to Car and Universal Finance Co. Limited v. Caldwell

[1964] 1 All ER 290

, as the classic illustration of the principle on which he relies. In that case, the defendant had sold a car, in return for cheque which was dishonoured; the plaintiffs later bought the car in good faith. It was held that the defendant was entitled to return of the car. Although the original purchaser had disappeared, and could not be notified, it was held that in the circumstances, communication to the police was sufficient. Mr Tager relies on the fact that, even in the exceptional circumstances of that case, where the vendor’s wish to undo the contract must have been obvious, the requirement for rescission remained. Thus, Sellers LJ said (p 293H-294A):

“In such exceptional circumstances, it does not seem to me appropriate to hold that a party so acting can claim any right to have a decision to rescind communicated to him before the contract is terminated… (The other party) has to establish clearly and unequivocally that he terminates the contract and is no longer to be bound by it. If he cannot communicate his decision he may still satisfy a judge or jury that he had made a final and irrevocable decision and ended the contract.”

However, in that case the contract itself had substance; ownership of a car was transferred. The fraud was simply in the method of payment.

The judge himself referred to two cases:

[50]Lonrho v. Fayed (No. 2)

[1992] 1 WLR 1

,11- 12, and Halifax Building Society v. Thomas

[1996] Ch. 217

. The latter does not assist on the present point, because it was accepted that the transaction was voidable only, and that absent avoidance the Society could not assert a property right (p 226H).

[51]The Lonrho case concerned one stage in the prolonged battle between Lonrho plc and the Fayed brothers for control of House of Fraser plc and Harrods. The issues were complex, but one argument for Lonrho was that the Fayeds had acquired shares from them and others by fraud, in that they had presented a false picture of their commercial standing; and that in consequence the shares acquired from Lonrho were held by them as constructive trustees. Lonrho’s argument failed on a number of grounds, one of which was that at the relevant time there had been no rescission of the share-sale. Millett J said (in a passage cited with approval by Potter LJ in Twinsectra, para 97) “A contract obtained by fraudulent misrepresentation is voidable, not void, even in equity. The representee may elect to avoid it, but until he does so the representor is not a constructive trustee of the property transferred pursuant to the contract, and no fiduciary relationship exists between him and the representee: see Daly v Sydney Stock Exchange Ltd

(1986) 160 CLR 371

at 387–390 per Brennan J….” (p 11H-12A) However, the facts were very different from the present. The alleged fraud may have induced the vendors to sell, but the shares themselves were bought and sold under ordinary contracts.

[52]Earlier in his judgment, Millett J was at pains to affirm the flexibilility of the equitable principle to deal with fraud:

“It is, as Lonrho submits, the independent jurisdiction of equity, as a court of conscience, to grant relief for every species of fraud and other unconscionable conduct. When appropriate, the court will grant a proprietary remedy to restore to the plaintiff property of which he has been wrongly deprived, or to prevent the defendant from retaining a benefit which he has obtained by his own wrong. It is not possible, and it would not be desirable, to attempt an exhaustive classification of the situations in which it will do so. Equity must retain what has been called its ‘inherent flexibility and capacity to adjust to new situations by reference to mainsprings of the equitable jurisdiction’: see Meagher, Gummow and Lehane Equity: Doctrines and Remedies (2nd edn, 1984) para 1207. All courts of justice proceed by analogy, but a court of equity must never be deterred by the absence of a precise analogy, provided that the principle invoked is sound….”

(p 9A-C)

[53]The Lonrho formulation was referred to in another recent case in the Court of Appeal, Collings v Lee

[2001] 2 All ER 332

. Lee was asked by Mr and Mrs Collings to help them find a purchaser for their house, and was paid a fee. On the pretence that he had found a purchaser, he obtained from them the documents necessary to register the transfer, and he received a further payment towards the deposit on a new house. In fact the alleged purchaser was himself, under an assumed name. He was registered as proprietor, and he obtained a substantial advance on a first charge to a building society. He was later convicted of fraud. The Collings, who were still in possession, received no money for the sale of their house, and none of the other payments was returned. In a dispute between the Collings and the Building Society, the issue was whether their interest was “an overriding interest” (under Land Registration Act 1925, s 70(1)(g)) as that of a “person in actual occupation”. The Society, relying on Lonrho and Twinsectra argued, “… that the transfer of the property to the first defendant was not void, but voidable by Mr and Mrs Collings; that unless and until they avoided it they had no subsisting equitable interest in the property, their right to avoid it being a ‘mere equity’; and that such a right does not fall within s 70(1)(g).” (p 337c) The argument was rejected. Referring to Lonrho, Nourse LJ said:

“The rationale of the principle, as it applies to a transfer of property, is that even where the transfer is obtained by fraudulent misrepresentation, the transferor nevertheless intends that the whole legal and beneficial ownership in the property shall pass to the transferee. But that was not this case. Mr and Mrs Collings did not intend to transfer the property to the first defendant and they did not intend to transfer it for no consideration. The first defendant acquired the property without their knowledge and consent and in breach of his fiduciary duty to them. The equitable interest remained vested in Mr and Mrs Collings.”

(p 337g)

[54]The facts are again different from the present, but the judgment shows the need for caution in applying the principle to different facts. In this case, the legal interest was intended to pass to the escrow agent, but the passing of the beneficial interest was dependent on the contract. Since the contract itself was the instrument of fraud, the Court is not required to give effect to it.

[55]For completeness, I note Mr Dutton’s submission that, if formal notice of rescission were required, it was in fact given: either by Mr Combs letter of 2nd February 2000 (as agent for Toro and Mr Young), alleging non-performance and asking for return of the arrangement fee; or by Toro’s claim against the compensation fund, based on the contention that the agreement was procured by fraud. There is no indication in the judgment that this contention was made to the judge; nor was any attempt apparently made to clarify the matter when Mr Moro was in the witness-box. In the circumstances, I prefer to express no view.

[56]Accordingly, I would hold contrary to the judge’s conclusion, that the transactions in this case did not result in the transfer of the beneficial interest in money in the client account, whether to Tidal or to any of those claiming under it, and that accordingly Mr Halley’s case must fail on these grounds.

Were the conditions for release of the arrangement fees satisfied?

[57]As has been seen, the judge found the conditions satisfied in respect of the Young transaction, but not the Toro contract. Both conclusions are under challenge.

[58]The relevant clause 4 of the Escrow Agreement provided (in both cases):

“The Escrow Agents shall irrevocably pay and release the Arrangement Fee to either [Tidal] or to the [Applicant] (as the case may be) as follows: A. Upon and in the event that the Bank Advices are issued by the Issuing Bank conforming in all material respects to the text set out in Schedule A to the Principal Agreement and upon the Escrow Agents being able to satisfy themselves that the Bank Advices have been duly issued by the Issuing Bank then the Escrow Agents shall release and pay the Arrangement Fee to [Tidal] or to its order….”

A. Upon and in the event that the Bank Advices are issued by the Issuing Bank conforming in all material respects to the text set out in Schedule A to the Principal Agreement and upon the Escrow Agents being able to satisfy themselves that the Bank Advices have been duly issued by the Issuing Bank then the Escrow Agents shall release and pay the Arrangement Fee to [Tidal] or to its order….”

[59]Clause 1.1 of the Principal Agreement defined “Bank Advice” as, in the Young contract - “the letter of advice to be issued by the issuing Bank evidencing the sum of US$10million addressed to the Account Holder in the form set out in Schedule A.” and in the Toro contract - “the three letters of advice to be issued by the issuing Bank each evidencing the sum of US $10 million addressed to the Account Holder in the form set out in Schedule A” Provision of such an advice was part of the “service” which Tidal undertook to provide under the Principal Agreement (clause 3).

[60]The form in Schedule A was that of a letter on the Bank’s notepaper, identifying an account holder, account number and “account reference”, and containing the following statement:

“We can confirm that the above company is considered highly respectable and trustworthy and undoubted for its normal business engagements. The principal of the company has been a Royal Bank Financial Group client for many years. We can also confirm that there is within the Royal Financial Group the availability of US $10,000,000 free and clear of all encumbrances.”

[61]The only point now taken by the Society on the Young transaction is that the Bank Advice which was given, although in the form of Schedule A, did not in fact “evidence the sum of $10,000,000” as required by the Principal Agreement; it indicated merely the availability of that sum within the Group, rather than its availability to the account-holder. I agree with the judge in rejecting this argument. As he said: “Since the Bank Advice had to use this phrase in order to correspond with the form in Schedule A, it does not seem to me that it is open to challenge on the basis that the phrase is not ideal for the purpose. In context, it must be read as representing that the stated amount is available in the account referred to.” (para 135) Indeed, I would find it difficult to see how the officers of the Royal Bank of Canada, who signed this letter, and are not alleged to have been a party to the fraud, can have read it as meaning anything else.

[62]The Society’s point on the Toro contract, which the judge accepted, turned on the fact that in that case there were to be three advices, not one. The judge explained the point and his view on it:

“137. The second point, however, is that, although the three Bank Advices use the form set out in Schedule A, as substituted, they do not comply with the Principal Agreement and do not qualify as “Bank Advices” under that agreement because they do not “each evidence the sum of $10 million”, that is to say, three separate sums. In my judgment, this is the correct reading of the contract. That seems to me clear from the definition of “Funds” in the contract, which speaks of “each of the said sums of $10 million the subject of the Bank Advices”

. The Bank Advices had to be in the form set out in Schedule A to the contract, but they also had to warrant the existence of separate sums of $10 million. How they did that is not prescribed. They could, for example, have referred to three separate accounts, each of which held the necessary sum. 138. It is not sufficient to say that, by using the bare text of Schedule A, the Bank Advices conform “in all material respects to the text set out in Schedule A”. “Bank Advices” has the same meaning as in the Principal Agreement, and they must therefore evidence three separate sums. Use of the text in Schedule A is only part of the definition of Bank Advice. It seems to me that the Escrow Agent could only properly release the funds if what was issued complied with the Principal Agreement in evidencing three separate amounts of $10 million.”

[63]Although the point is a technical one, I agree with the judge’s conclusion. It is perhaps not surprising, in view of the unreality of the wholly exercise, that Mr Wilson-Smith did not give any thought to this point, before approving the documentation. However, I agree with the judge that the Principal Agreement must be construed as entitling the applicant to evidence of three separate sums of $10m each, and that there is nothing on the face of the letters which could reasonably have been regarded by Mr Wilson-Smith as providing that evidence.

[64]Before us, Mr Tager relied on the fact that the three letters in the Toro transaction had separate, consecutive “account reference” numbers. He submitted that, as a matter of construction, the three letters were to be construed as referring to three separate sums of $10million; or at least that the fact that the Royal Bank of Canada issued three separate letters, with unique and consecutive reference numbers, was sufficient to satisfy the Escrow Agent of compliance. However, in the absence of any evidence as to the significance of the “account reference” numbers, it is not in my view possible for us – nor was it possible for Mr Wilson-Smith – to reach that conclusion. I do have some concerns as to how the Royal Bank came to issue three letters in this form, or what precisely they thought their purpose to be. However, it is reading too much into the letters, standing on their own, to regard them as evidencing the availability of a total of $30m.

[65]Mr Tager argued before the judge and before us that any such non-conformity was waived by Toro. He relied on Toro’s knowledge and implied acceptance of the release of the arrangement fee (evidenced by letters written by Mr Wilson-Smith to Toro on 18th November 1998, indicating that the arrangement fee was about to be released); and to Tidal’s “change of position” in reliance on that acceptance, in its efforts later in November to obtain substitute bank advices and corporate documents for Toro.

[66]The judge rejected this submission, on the grounds that, notwithstanding these letters, Mr Moro was not in fact aware of the release of the arrangement fee; and further that, although he was told by Mr Combs that there was something wrong with the Bank Advices, he was never told that the problem was the failure to show three separate sums of $10,000,000 (para 144). Mr Tager submits that the judge attached too much importance to the knowledge of Mr Moro, who was simply a share-holder of Toro, as opposed to that of Mr Combs who was agent for the company. However, in my view, the judge was entitled on the evidence he had heard to treat Mr Moro as in effect the mind of the company, and to hold that Mr Combs’ authority (defined by a power of attorney date 12th October 1998) did not extend to waiver of a defect in performance, even if he had the necessary knowledge (para 143-4). I agree therefore with the judge that there was no waiver.

[67]The Society has a separate point in relation to the payment of $25,000, under the Wagner transaction. The evidence relating to this transaction before the judge was very limited, but the judge inferred that it was similar to the other three (para 54). Mr Dutton submits that, given the paucity of information concerning this transaction, and the judge’s finding in relation as to non-compliance under the Toro transaction, compliance in this case could not be assumed. The judge should have held that Mr Halley had failed to discharge the burden of proving that the condition for the release of the arrangement fee had been complied with. This was a point taken by the Society in its Re-Amended Defence, but not dealt with in the judgment.

[68]This point might have had more force if non-compliance had been established also in relation to the Young contract. The conclusion reached on the Toro transaction depends on the particular nature of that contract. I do not think it is right, on that basis, to assume a pattern of non-compliance, nor to shift the burden of proof, which would otherwise fall on the Society, of establishing a failure in the process of approval.

Compliance with section 53(1)(c)

[69]This is a point of more general significance.

(c) of the LPA provides:

“… a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will.”

Mr Dutton submitted that, on the assumption (which he had accepted for the Young contract) that the Arrangement Fee had become payable by the Escrow Agent to Tidal, the money in the client account was beneficially that of Tidal; that, in order that it should become that of Mr Halley, a disposition of the equitable interest in the money by Tidal or on its behalf was required; and that, to satisfy section 53(1)(c), this would have had to be in a document in writing, signed by Tidal or its agent.

[70]The judge accepted that, if compliance with section 53(1)(c) was required, there was no such document in respect of the Young payment. The papers included a letter dated 16 September 1998 from Tidal to Mr Wilson-Smith containing the necessary instructions, but it was not signed by anyone on behalf of Tidal (in contrast to a similar letter of instructions relating to the Toro payment). He declined to accept Mr Tager’s invitation to infer the existence of a properly signed version (para 151). Similarly, in the absence in the papers of any document of instruction relating to the Wagner payment, he declined to infer the existence of a document in that case complying with section 53(1)(c) (para 153).

[71]However, he held that the rules contained in the Solicitors Accounts Rules 1991 (since superseded by the Solicitors Accounts Rules 1998) overrode the requirements of s 53(1)(c). He relied on rule 7(a)(iii) and rule 10(1). The former provided that a solicitor could withdraw money from a client account if he had “the client’s authority”; it did not in terms require writing (unlike rule 22(1)(e) of the 1998 rules, which requires either written instructions or written confirmation of instructions). Rule 10(1) in effect applied the same requirements to the transfer of sums between the ledger accounts of different clients. The judge’s reasoning (para 155) was as follows:

“Money can be paid into a client account for a particular client only if it is held on behalf of that client. If money is withdrawn from a client’s account, on his authority, and paid out to a third party on his instructions, it would become the property of that third party, legally as well as beneficially. Section 53(1)(c) does not apply there, because the legal title is transferred. If then the third party were to pay it to the solicitor to be held as client’s money on his behalf, it would belong beneficially to the third party. It seems to me that, by virtue of rule 10, what happens on a transfer between two clients’ ledgers should be treated as simply short-circuiting the process which I have described. It would be rather absurd if money which had properly (under the rules) been transferred from A’s client ledger to B’s within the same general client account should have to be regarded by the solicitor as still belonging to A unless and until the disposition was authorised by a written document signed by or on behalf of A.”

He rejected Mr Dutton’s submission that subsidiary legislation, such as the Accounts Rules, could not override the effect of general legislation:

“It seems to me that it must be open to the makers of such rules to make whatever provision is thought appropriate for the formalities required for, for example, transfers between clients’ ledgers, unfettered by a general provision such as section 53(1)(c). It is of course prudent for the solicitor to require written authority, or confirmation, but that is not essential under the 1991 rules.”

[72]In challenging that conclusion, Mr Dutton has referred us to section 32 of the Solicitors Act 1974, under which the rules were made. It provides, so far as relevant:

“(1) The Council shall make rules, with the concurrence of the Master of the Rolls – (a) as to the opening and keeping by solicitors of accounts at banks [or with building societies] for clients’ money; and (b) as to the keeping by solicitors of accounts containing particulars and information as to money received or held or paid by them for or on account of their clients; and (c) empowering the Council to take such action as may be necessary to enable them to ascertain whether or not the rules are being complied with; and the rules may specify the location of the . . . branches at which the accounts are to be kept. (2) The Council shall also make rules with the concurrence of the Master of the Rolls – (a) as to the opening and keeping by solicitors of accounts at banks [or with building societies] for money comprised in controlled trusts; and (b) as to the keeping by solicitors of accounts containing particulars and information as to money received, or held or paid by them for or on account of any such trust; and (c) empowering the Council to take such action as may be necessary to enable them to ascertain whether or not the rules are being complied with; and the rules may specify the location of the . . . branches at which the accounts are to be kept.”

[73]As Mr Dutton submits, this provision gave the Council of the Law Society the power to make rules regulating the opening and keeping of bank accounts for clients’ money and trust money, and the keeping of proper records in relation thereto, and prescribed the sanction for the failure to comply with such rules. It did not empower the Council to make rules that affect property rights, or the legal formalities for transferring property. I agree with Mr Dutton. In my view, clear words in the enabling statute would be necessary for subsidiary legislation to be construed as in effect overriding the requirements of general legislation such as the Law of Property Act 1925. I find no such words in the Solicitors Act.

[74]The judge was impressed by the “absurdity” of requiring a solicitor, who has (in accordance with the rules) on verbal instructions of one client transferred money to another client ledger within the same general client account, to have to regard it as still belonging to the first client, unless and until authorised by a written document signed by him. Mr Tager went further, and painted a dramatic picture of the consequences for the operation of ordinary conveyancing transactions between solicitors, if the judge’s view were overturned.

[75]These concerns do not enable the Court to read words into section 32 which are not there. In any event, it is difficult to see why a requirement for writing (which is in effect what the 1998 rules now contain) should cause problems. The concerns are not shared by the Law Society, which is the body responsible for promulgating the rules and dealing with their practical effects. Furthermore, it is important to keep in mind the very special context in which the issue arises in this case. The need to identify the beneficial interest in the money in the client account arises only because of the Society’s intervention; and, as the judge commented (para 148) Mr Halley cannot (as might be possible in an ordinary case) overcome any formal difficulty by reference to his contractual rights, because he cannot plead a fraudulent contract.

[76]Accordingly, in relation to the Young payment, I disagree respectfully with the judge’s view that there was an effective disposition to Mr Halley.

[77]In relation to the Wagner payment, there was a further problem, in that the money had been held by Mr Wilson-Smith for the benefit of a company called “CBOD”, rather than Tidal, and there was no evidence of an instruction (written or not) from that company. In this context, Mr Tager referred us to some of the additional documents, relating to the Wagner transaction, without prejudice to Mr Dutton’s unresolved objection. (In fact, as Mr Dutton demonstrated, many of these documents could be found among the voluminous papers which had been before the trial-judge.) They appear to show that the transaction in that case was between a Mr Santipongchai, as client, and “CBOD”, which Mr Halley’s describes in his supporting statement, as “Mr Wagner’s company”. Mr Tager also showed us some documents (including a fax from CBOD, a manuscript note apparently in CBOD’s name, and an unsigned letter in Tidal’s name), from which it appears that Mr Halley’s $25,000 on that transaction was his share of an “arrangement fee” of $300,000; and that instructions for its allocation were given to Wilson-Smith by CBOD in conjunction with Tidal. However, the document (in Tidal’s name) which apparently gave notice of Mr Halley’s share, was not signed at all. Accordingly, on the view I have taken of the law, this does not overcome the problem.

[78]In my view, the Society’s submission on this point is correct.

Mr Halley’s challenge to the finding of dishonesty

[79]Finally, I should comment briefly on those parts of Mr Tager’s original skeleton argument which are directed to challenging the judge’s finding of dishonesty against Mr Halley (ignoring for this purpose the additional material which he sought permission to admit). They are put forward in the context of an attempt to appeal against the judge’s order on costs. As I have already noted, Mr Halley does not have permission to appeal against this order, and in any event this aspect is to the considered at a later hearing. It is not clear to what extent Mr Tager is hoping for this part of his argument to be taken into account in dealing with the substantive issues. In my view, it is not formally before the court, and my comments will accordingly be limited.

[80]It is necessary first to note that the judge’s finding of fraud was directed specifically to the particular transactions before him. He referred to evidence which had been given of other forms of transaction, some of which followed different pattern. He said:

“61…Those that I have described were all cases where the Applicant did not have the full amount it wanted to be able to use, or to have someone else use on its behalf, in some investment or trading operation, and where it was necessary for that operation that the Account Holder’s funds be made available. There were other cases in which the person in the position of the Applicant did have the funds, and did not need to do anything in the nature of borrowing: the considerations affecting such transactions might be different. I am concerned only with cases which, in substance, involved borrowing by the Applicant, as the Particulars of Claim recognised. These were sometimes referred to as leveraged transactions, or as involving the leasing or renting of money, but it seems to me clear that, in reality, the purpose was for the Account Holder to lend its money for use by or on behalf of, and at the risk of, the Applicant. 62. There seem also to have been other transactions in which it was not necessary for the Applicant to obtain the actual use of the Account Holder’s funds, but only that those funds should remain for a given time untouched in the Account Holder’s account. These were sometimes referred to as Blocked Funds transactions. What the commercial sense or purpose of these can have been I do not know. Mr Halley gave evidence in his witness statement that, after the four transactions with which this case is directly concerned, he was able to introduce three other Applicants who completed their transactions and were entirely satisfied with the results. These, however, were of this latter category of Blocked Funds cases. Again, the circumstances may have been materially different, and I cannot draw any inference from the professed success of those transactions which helps me with the issues actually before me.”

[81]Mr Tager claims that Mr Halley’s only involvement with the Abacus, Young and Toro transactions was at a time when they were intended to be “blocked funds transactions”, which the judge treated as significantly different from those before him, and about which he made no fraud findings. In support of this he relies on an examination of the relevant documents relating to each of the transactions, in order to show that they were only changed to “bank instrument exchange transactions” at a late stage in negotiations between Mr Gibbins and the applicants.

[82]Even if it were open to us to consider this issue, I do not see how by reference simply to the documents we could properly reverse the judge’s findings, which were based not only on the documents but, as he said (para 117) “after careful reflection, with the benefit of having observed him giving evidence for three days”. The judge specifically considered and rejected the submission that Mr Halley’s involvement was “limited to the early stages”, and that he was not aware of the contractual detail (para 95). The judge accepted Mr Gibbins’ evidence in cross-examination (which he regarded as more reliable than that of Mr Halley himself) that “he and Mr Halley worked to put together the contractual package, in conjunction, for the Toro contracts, with Mr Combs”. On this basis, he was satisfied that Mr Halley was fully aware of the negotiations and their result, even if not directly party to them. He concluded:

“Mr Halley cannot distance himself from these transactions and their terms by feigning non-participation in and ignorance of the terms of the contracts. I find that Mr Halley knew what was going on, to a considerable level of detail, in all these cases except that of the Wagner contract.”

[83]I see no basis for questioning that view. For the same reason, I see no force in Mr Tager’s point that the judge made no specific finding of reliance by the applicants on representations by Mr Halley himself. It is clear from these findings, that he treated Mr Gibbins and Mr Halley as acting in concert, and as having shared responsibility for the fraud and its consequences. In any event, whether or not Mr Halley was party to the persuasion, his knowledge of the fraud would be enough to make him liable as a constructive trustee for any money received by him.

Conclusion

[84]For these reasons, I would uphold the judge’s dismissal of Mr Halley’s claim, both on the grounds on which he reached his decision; and also, differing respectfully from the judge, on the additional grounds that the transactions were not effective to transfer the beneficial interest in the money to Tidal, and (in relation to the Young transaction) that there was no transfer to Mr Halley complying with section 53(1) (c) of the Law of Property Act 1925. Lady Justice Hale

[85]I agree, principally for the reasons given by Mummery LJ but also in agreement with Carnwath LJ that this appeal should be dismissed.

Lord Justice Mummery :

[86]For the reasons given by Carnwath LJ I agree that this appeal should be dismissed. I only wish to deal with one point in my own words.

[87]There is another reason reinforcing the result reached by Carnwath LJ on the issue discussed in paras. 42 to 56 of his judgment. The issue, as I see it, is whether, notwithstanding his involvement in the fraud on the applicants who paid arrangement fees, Mr Halley is entitled to a beneficial interest in the sum of $114,209.92 held in Mr Wilson-Smith’s client account. That sum is alleged to represent the balance of his agreed proportion of the arrangement fees. If he is entitled to a beneficial interest, as he claims, the Law Society holds it for him upon the statutory trust arising on the intervention of the Society in Mr Wilson-Smith’s practice.

[88]Mr Romie Tager QC, on behalf of Mr Halley, submitted that the beneficial interest in that sum vested in his client in accordance with instructions given by Tidal to Mr Wilson-Smith. Tidal gave those instructions to Mr Wilson-Smith after he had verified the bank documents under the escrow agreement and released the arrangement fee to Tidal. Mr Tager argued that an applicant could not have a beneficial interest in the arrangement fee, as the legal and equitable title to it had passed from him on payment of it and the applicant had not elected to rescind the contract under which it was paid. The legal title to the arrangement fee paid under the contract had passed to Mr Wilson- Smith. The beneficial interest in it had passed to Mr Halley on the instructions of Tidal. Fraudulent misrepresentations, if established, would only make the contract voidable. They would not prevent the payment made under the contract from passing legal and equitable title. There could be no re-vesting of the legal or beneficial interest in the transferor, unless he first rescinded the contract under which title had passed.

[89]This was the legal position, Mr Tager submitted, even though the judge had held that Mr Halley was aware of the fraud and that he had been involved in making dishonest and fraudulent misrepresentations, which led the applicant to pay an arrangement fee to Mr Wilson -Smith.

[90]I reject Mr Tager’s submissions on this issue for the reasons given by Carnwath LJ. I would also reject them on broader equitable grounds.

[91]In their submissions and citations of authority both sides naturally focused on the contractual approach. In my judgment, however, the crucial point is that Mr Halley’s claim is not contractual: it is a claim to an equitable proprietary interest. The equitable interest exists, if it exists at all, under the trust used by the contracting parties to receive, hold and dispose of the arrangement fees.

[92]Both sides agree that(a) that the legal title to the arrangement fees was transferred to Mr Wilson–Smith, but that

(b) no beneficial interest in them was transferred to him. There being an admitted split in the legal and the equitable title to the arrangement fees, they must be held upon a trust by the escrow agent, Mr Wilson-Smith. The critical question is for whose benefit? Is it for the benefit of the particular applicant, who was fraudulently persuaded to pay the arrangement fee, or is it for the benefit of Mr Halley, who was implicated in the fraud?

[93]This simple question admits of only one sensible answer, though it appears to be easier for a layman than for a lawyer to justify the answer. As a matter of legal analysis, the complex interaction of contract law, property law and equitable doctrines can sometimes be puzzling.

[94]The parties to the contract, under which the arrangement fee was paid and of which Mr Haley claims a proportion, agreed to use Mr Wilson-Smith as escrow agent. Whatever the parties chose to call him in their contracts, in equity he was constituted a trustee of the arrangement fees paid to him. He was to hold the arrangement fees upon an express trust to deal with them in accordance with the terms of the escrow agreement. Until he had verified the documents, the beneficial interest in an arrangement fee remained with the particular paying applicant. It is not disputed that the applicant was entitled to the return of the fee, if, for example, the bank documents were not verified by Mr Wilson-Smith.

[95]Mr Halley acknowledges and asserts the existence of the trust against the Society, as the statutory successor to Mr Wilson-Smith. He claims that he is entitled to a beneficial interest in the sum in the client account following the release of the arrangement fee to Tidal and the instructions of Tidal to Mr Wilson-Smith as to Mr Halley’s proportion. As already indicated, he contends that the applicant, who paid the arrangement fee, is not entitled to any beneficial interest in it, as he has made an absolute disposition of it and it cannot re-vest in him unless and until he has rescinded the contract under which it was paid.

[96]In my judgment, the legal effects of the payment of an arrangement fee to Mr Wilson-Smith under an unrescinded contract are not determinative of Mr Halley’s claim to enforce an equitable proprietary interest in the balance of the arrangement fee remaining in the hands of, and under the legal control of, first, Mr Wilson-Smith and, subsequently, the Society. Mr Halley needs and invokes the assistance of equity to establish and enforce his proprietary claim. The existence of the beneficial interest claimed by him, and the enforcement of the trust under which it is held, are only recognised and available in equity. It is not a matter of the court simply giving effect to a contract under which the title to the arrangement fee passed.

[97]I agree that the contract is very relevant to Mr Halley’s claim. In order to establish his beneficial interest and to enforce it against a trustee, Mr Halley has to rely on the contract under which the arrangement fee was to be paid to Mr Wilson-Smith as the escrow agent and held by him on trust. The contract and the payment of the arrangement fee made under it were induced by false pretences, to which Mr Halley was a party. In seeking to establish his beneficial interest, Mr Halley cannot distance the formulation of his claim from the fraud perpetrated on the applicant.

[98]I do not see any ground on which the court of equity could properly respond to Mr Halley’s attempt to invoke its equitable jurisdiction in respect of trusts by directing, or even permitting, a trustee to execute a trust in favour of a person, whose claim to the beneficial interest is founded on his implication in a fraud. That is precisely what Mr Halley is asking the court to do in these proceedings. He wishes to enforce an equitable property right in the arrangement fees paid as a result of fraudulent misrepresentations. The fact that the beneficiary, who was the victim of the fraud, has not rescinded the contract, under which title to the fee passed to the escrow agent to hold upon the agreed trusts, is irrelevant to the question of enforcement by Mr Halley of his claim to an equitable interest in a proportion of the fee.

[99]I would emphasise that this is a case of an express trustee (Mr Wilson-Smith), whom the parties agreed to use to receive, hold and carry out instructions for disposing of the arrangement fees. This is not the case of a trust affecting the recipient of property when a contract, under which an absolute disposition of property was made, is rescinded by the transferor on the ground of fraudulent misrepresentation. A resulting trust might then affect, or a constructive trust might then be imposed on, the property transferred under the contract.

[100]Nor is this case concerned with a claim under, for example, a resulting trust, which can be made without the beneficiary having to rely on his participation in wrongdoing to enforce his equitable proprietary right, as was the case in Tinsley v Milligan

[1994] 1 AC 340

. Miss Milligan was able to establish and enforce her equitable interest in property vested in the sole name of Miss Tinsley through the medium of a resulting trust arising in her favour from her contribution to the purchase the property and from the common understanding of the purchasers that they would own it equally. In advancing that claim it was not necessary for Miss Milligan to rely in any way on the underlying illegal purpose of putting the property into the sole name of Miss Tinsley, namely to make false social security benefit claims for the benefit of both of them. Miss Milligan only had to rely on the resulting trust in her favour to establish an equitable interest in the house. Her vested equitable interest was not destroyed or rendered unenforceable by her part in carrying out the fraud on the Department of Social Security.

[101]In this case, however, it is necessary for Mr Halley to rely on his own role in the payment of an arrangement fee in order to establish his entitlement to a beneficial interest in a proportion of it. He has to plead and rely on the agreements which make use of Mr Wilson-Smith as escrow agent, holding the arrangement fee as trustee. This is clear from Mr Halley’s Particulars of Claim dated 5 July 2000. He pleads the following matters: his introductory role, the provision in the standard form of agreement for the payment of an agreed arrangement fee to a nominated third party (“the escrow agents”), the service provided by Tidal to the applicant, the standard form of escrow agreement, the verification of documents by the escrow agent, the circumstances in which the arrangement fee was released to Tidal, for whom he claimed to act as agent, and the oral agreement between Tidal and Mr Halley “…what proportion of the arrangement fee agreed between Tidal and the applicant under the principal agreement in question will be paid by Tidal to the Claimant in consideration of his acting as Tidal’s agent as aforesaid in the transaction in question.”(para 6).

[102]It is then pleaded in para 9 that the sum agreed was “ duly transferred to Wilson-Smith’s client account ledger in the Claimant’s name as money to which the Claimant was and remains absolutely entitled” and in para 11 that the “arrangement fee had been duly earned and that it was not returnable once the corporate and bank documents had been issued.” It is alleged in para 17 that Mr Wilson–Smith had failed to “account to the Claimant for the money standing to the Claimant” and that the Society had neglected and failed to pay to him that sum.

[103]It was pleaded in the re-amended defence (para 25 e) ii) ) that the money claimed represents the proceeds of fraud, that the agreement through which Mr Halley claims a proprietary interest relates to the proceeds of fraud and that “it is unconscionable for the Claimant to seek to enforce his equitable title” to the money he claims.

[104]In short, the proportion of the arrangement fee agreed to be payable to Mr Halley was for his part in the fraud. In seeking to enforce his proprietary claim, which Mr Halley alleges the Society is bound to pay him as “the person beneficially entitled to [the sum] standing to his name in the client account” (para 13 of the Re-amended Reply), he is forced to rely his own part in the fraud. He must suffer the consequences of having to do so.

[105]The result is hardly surprising. It does not involve a denial of justice. Quite the contrary. Equity, operating as it does on the conscience of the legal owner, will not assist Mr Halley’s to enforce against the legal owner a claim to a beneficial interest in the balance of the arrangement fee held in Mr Wilson-Smith’s client account. His claim is founded on his own part in the fraud. He has no right to, or reasonable expectation of, assistance from the court in reaping the rewards of his fraudulent efforts. For this reason the purported disposition of a beneficial interest in the arrangement fee in his favour is, and was from the very beginning, unenforceable by him. It fails. Upon its failure the arrangement fee is held instead upon a resulting trust for the particular applicant who paid it.

[106]For these further reasons I agree that the appeal should be dismissed. Appendix (Lloyd J’s Summary of the Toro Contract – see judgment para 13) “The Toro contract may be summarised as follows, starting with the Principal Agreement. i) First, the Applicant was to pay to the Escrow Agent an Arrangement Fee, in this case $750,000, which was to be held and dealt with in accordance with the Escrow Agreement. ii) Tidal was then to procure the issue by the Issuing Bank of three Bank Advices; these were three letters addressed to the Account Holder each evidencing the sum of $10 million, in the form set out in Appendixa. A. The form there set out was in fact to be addressed to Mr Combs, as agent acting on behalf of the Applicant. The definition of Funds in the agreement makes it clear, if that were needed, that the three Bank Advices are to relate to three separate sums of $10 million. iii) Next Tidal was to see to the issue by the Account Holder of what was defined as the Corporate Documents. These were also to conform with forms set out in Appendices. One was a Board resolution and the other a letter of appointment. I will come to their details later. There was to be one of each in relation to each of the three Bank Advices. iv) The Bank Advices and the Corporate Documents were to be delivered to the Escrow Agent, who was then to verify that the Bank Advices were duly issued by the Issuing Bank. Having done that he was to deliver the Bank Advices to the Receiving Bank and the Corporate Documents to Mr Combs or the Applicant. v) These steps were to be completed within 7 banking days, save that delivery to the Receiving Bank had to await notification by the Applicant of the identity of that bank. It had to be a Western European Bank rated no less than AA- by Standard & Poors or Moody’s and acceptable to the Issuing Bank. vi) Under the terms of the Escrow Agreement (more specific in this respect than the Principal Agreement) if the Bank Advices were issued by the Issuing Bank within 7 banking days after the date of the signature of the Escrow Agreement and payment of the Arrangement Fee, and conformed in all material respects to the text set out in Schedule A to the Principal Agreement, and if they were verified by the Escrow Agent as having been issued by the Issuing Bank, then the Escrow Agent was to release the Arrangement Fee to Tidal. If those conditions were not satisfied, then the Arrangement Fee was to be repaid to the Applicant. vii) According to the Principal Agreement, the Bank Advices would be effective and valid for use by the Applicant for the Validity Period, which was 15 international banking days from and including the date of issue of the Bank Advices. The use which could be made of them, as set out in clause 3.6, was that the Applicant is to be entitled to exchange the funds represented by the Bank Advices for Negotiable Instruments, conforming with the description in the Principal Agreement, in the principal amount of those funds. viii) Negotiable Instruments were defined as meaning unconditional negotiable bank instruments to be issued by a Western European or American Bank rated no less than AA- by Standard and Poors or Moody’s, each in the Principal Sum of $10 million, acceptable to the Issuing Bank and payable within not less than one year from the date of delivery thereof to the Issuing Bank pursuant to the agreement and each carrying interest at 8% per annum. ix) The Principal Agreement contains a number of other provisions to which I should refer. By clause 3.7 Tidal is stated to have no interest in the transactions or business of the Applicant for or in connection with which the Bank Advices are to be issued, otherwise than in connection with the acquisition by the Account Holder of any Negotiable Instruments delivered in exchange for the Funds. By clause 3.8 the Applicant accepts that it is not entitled to receive the original or any copy of any Bank Advice, nor to see the originals before delivery to the Receiving Bank except upon request in writing to the Escrow Agent at his office. By clause 4, all communications with the Issuing Bank are to be solely from an officer of the Receiving Bank and in writing, and any attempt by or on behalf of the Applicant to communicate otherwise with the Issuing Bank renders the agreement null and void at once and terminates the Validity Period. The terms of the agreement are also said to be confidential. Clause 5 makes time of the essence of all dates or periods, requires that any amendment or variation of the agreement be in writing and signed by both parties, and includes an entire agreement provision and an acknowledgement that neither party has entered into the agreement in reliance on any representation warranty or undertaking by the other except as expressly set out in the agreement. x) The Principal Agreement also contains a series of warnings. These are to the following effect. a) The Arrangement Fee will become payable to Tidal under the Escrow Agreement notwithstanding that the Applicant may not deliver acceptable Negotiable Instruments, request the funds to be exchanged or make any other use of the Bank Advices during the Validity Period. b) Tidal’s only representation is that the Bank Advices will be duly issued by the Issuing Bank and delivered to the Escrow Agent and that the funds will be available “as therein provided”. c) Tidal has only agreed to seek to arrange for the issue of the Bank Advices and Corporate Documents as specified, and has not given any advice to the Applicant as to the availability or otherwise of any Negotiable Instruments for exchange against the Funds. d) Tidal gives no assurance as to whether or not the Bank Advices will be suitable for the needs of the Applicant and has given no advice as to whether or not it is in the Applicant’s interest to proceed with the transaction set out in the Principal Agreement or the transaction or investment transaction or project finance or otherwise howsoever proposed by the Applicant as the purpose for which the client has requested the issue of the Bank Advice, details of which have not been provided by the Applicant to Tidal. e) Tidal has not given and is not qualified to give any investment advice to the Applicant. f) The Applicant confirms that it has obtained its own legal and financial advice or that it has had sufficient opportunity to do so before entering into the agreement. xi) The Escrow Agreement includes various relevant provisions, besides those setting out the Escrow Agent’s duty to dispose of the Arrangement Fee as described above. Thus, the other parties acknowledge that the Escrow Agent is acting as stakeholder only and shall be under no further obligation once he has paid the Arrangement Fee in accordance with the agreement. His duties are only those specifically provided for in the agreement, and he is under no liability to the Applicant or Tidal for any action taken or omitted to be taken except for wilful misconduct or gross negligence (though clearly that would not exempt the Escrow Agent from liability in contract for paying the Arrangement Fee away inconsistently with the terms of the agreement). It is acknowledged that, except as regards the drafting and any amendment of the agreements, the Escrow Agent is not the solicitor for either the Applicant or Tidal, has not advised either on the terms of the agreement and owes neither of them any professional or other duties except those expressed in the Escrow Agreement, nor has either of them entered into the Escrow Agreement or the Principal Agreement in reliance on any representation or advice by the Escrow Agent. There are also similar disclaimers to those in the Principal Agreement set out at sub-paragraphs (x)(d) and (e) above. The Applicant represents that the Arrangement Fee comprises funds which are “clean, clear and of non-criminal origin and freely and legally available to it for the purposes of the Principal Agreement”. Clause 8 records that Tidal is to be responsible for the fees of the Escrow Agent for acting under the Escrow Agreement and all bank charges and the like. xii) The form of Bank Advice prescribed by the Principal Agreement and set out in Schedule A was to be addressed, as above mentioned, to Mr Combs. It would state the name of the Account Holder, the number of the account and the account reference. The text would confirm that the “above company”, that is to say the Account Holder, “is considered highly respectable and trustworthy and undoubted for its normal business engagements”, and that the principal had been a client of the Royal Bank Financial Group for many years. It would confirm specifically that “there is within Royal Bank Financial Group the availability of US $10,000,000 free and clear of all encumbrances.” xiii) The form of Board resolution was to be in the following terms, apart from formalities: a) The corporation will consider participating in a US$10 million bank guarantee investment program, subject to the following conditions: A. Recommendation by the president of the corporation

b. B. Satisfactory due diligence by the corporation’s law firm

c. C. The guarantee is acceptable to the bankers for the corporation b) The president is mandated to enter into such discussions and negotiations and if necessary to appoint an agent to assist in such process c) The funds mentioned at (a) above will be available for a period of 15 international banking days d) The president is to report back to the board within 15 international banking days on the status of any discussions that have taken place. xiv) The other Corporate Document was a letter of appointment, implicitly under paragraph (b) of the resolution set out above. The agent to be appointed was Mr Combs. He was appointed as agent for the “sole purpose of negotiating a 108% negotiable bank instrument”. That instrument is to be acceptable to the corporation, its bankers and its legal advisers. It is to be issued by a Western European bank rated AA- or better, and the documentation relating to the bank guarantee investment programme is not to incur any financial liability for the corporation other than purchase of the 108% negotiable bank instrument. Any profit generated by Mr Combs through the investment programme he is entitled to keep. xv) Despite the reference to his appointment for the “sole purpose” mentioned above, the letter goes on to authorise him to create, negotiate and sign all documentation appertaining specifically to the investment programme which will come into effect only after the exchange of the $10 million of corporate funds. The letter of appointment also confirms that the Bank Advice and the letter of appointment are valid for 15 banking days from their date, and that the Account Holder will not change its financial position, which will remain as stated in the Bank Advice, during the period of 15 banking days from that date.”

Halley v Law Society [2003] EWCA Civ 97

JUDGMENT: APPROVED BY THE COURT FOR HANDING DOWN (SUBJECT TO EDITORIAL CORRECTIONS)

The judge commented:

The nature of the transactions

The judge concluded (para 96):

The issues decided by the judge

The issues on the appeal

Discussion

Did the transactions have any effect in law?

The judge himself referred to two cases:

Were the conditions for release of the arrangement fees satisfied?

Compliance with section 53(1)(c)

(c) of the LPA provides:

Mr Halley’s challenge to the finding of dishonesty

Conclusion

Lord Justice Mummery :

Cited in 6 later judgments