Saudi Arabian Monetary Agency v Dresdner Bank AG [2004] EWCA Civ 1074

Case No A3/2004/0091[2004] EWCA Civ 1074
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE NEUBERGER)
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Friday, 30 July 2004
Before
THE RIGHT HONOURABLE LORD JUSTICE MUMMERYTHE RIGHT HONOURABLE LORD JUSTICE CHADWICKTHE RIGHT HONOURABLE LORD JUSTICE LONGMORE
Between
SAUDI ARABIAN MONETARY AGENCYClaimant/DRESDNER BANK AGDefendant/
(Transcript of the Handed Down Judgment ofSmith Bernal Wordwave Limited, 190 Fleet StreetLondon EC4A 2AGTel No: 020 7421 4040, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Miss Elizabeth Jones QC (instructed by White & Case of 7-11 Moorgate, London EC2R 6HH) for Defendant/AppellantMr Robin Potts QC and Mr Charles Marquand (instructed by Middleton Potts of 3 Cloth Street, London EC1A 7NP) for Claimant/Respondent
JudgmentLord Justice Chadwick :
[1]This is an appeal from an order made on 19 December 2003 by Mr Justice Neuberger on an application for summary judgment in proceedings between Saudi Arabian Monetary Agency (“SAMA”) and Dresdner Bank AG. The issue between the parties in those proceedings was whether the Bank was required to comply with an instruction given by SAMA for the transfer of all funds then standing to the credit of an account held in its name at the Bank’s London Branch; or, as the Bank contended, was entitled to retain on that account an amount equivalent to the indebtedness (or alleged indebtedness) of the Saudi Arabian government to its affiliate, Dresdner Bank Luxembourg SA (“DBL”). The judge held that the Bank was not entitled to retain monies with a view to set off against the government debt. The Bank appeals with the permission of this Court (Lord Justice Jacob).

The underlying facts

[2]The underlying facts may be stated shortly:(1) At all material times a Euro account, numbered 410937 51, was held at the Bank’s London Branch in the name of SAMA. On 10 October 2002, by authenticated SWIFT message, SAMA instructed the Bank to transfer €291,234,041.10 from that account to an account in its name at Deutsche Bank AG, Frankfurt. The Bank did not comply with that instruction. On 14 October 2002 it transferred a lesser sum, €243,507,040.29, to the credit of the account at Deutsche Bank.(2) The explanation for the failure or refusal of the Bank to comply with its customer’s instruction appears from a letter dated 14 October 2002 which it sent to SAMA by fax:
“We refer to your request received on Thursday 10 October that we transfer monies outstanding to the credit of account number 410937 51 held by Dresdner Bank AG London Branch to Deutsche Bank account number 1009570961 1000 in Frankfurt. . . . . . . in accordance with your instructions we confirm that we have today transferred the sum of €243,507,040.29 to the above-mentioned account with Deutsche Bank. This figure represents the full credit balance of €292,654,617 on your account as at today’s date less the sum of €49,147,576.71 (being the euro equivalent of US$48,533,232) which we have blocked. We should be grateful if you would contact us as soon as possible in relation to this latter sum which is equivalent to the amount overdue from the Ministry of Defence and Aviation and the Ministry of Finance and National Economy of the Kingdom of Saudi Arabia (“MODA” and “MOF” respectively) under a US$900,000,000 facility agreement dated 27 December 2001, under which our affiliate, Dresdner Bank Luxembourg S.A., acts as Security Trustee and Agent. This facility is secured by an assignment of the right to receive certain lease payments from MODA and MOF and by independent obligations of MODA and MOF arising under Royal Orders, Hawalas and Hawala Acknowledgements. You will understand that in its capacity as Security Trustee and Agent under the facility agreement Dresdner Bank Luxembourg S.A. has various responsibilities and owes certain obligations to the lending banks with regard to the recovery of sums owed by MODA and MOF.” (3) The response to that letter was a fax of the same date from SAMA: “This has reference to your fax 14th October 2002 re transfer of funds from SAMA’s call account. We are astonished by your action of withholding €49,147,576.71 (being eqvt of $48,533,232) from our payment instructions. We are totally unaware of the transaction referred to in your fax. We demand immediate release of funds withheld by you and pay in compliance with our instructions by today for value 14th October 2002.” (4) The Bank replied on 17 October 2002: “Unfortunately we cannot agree to release the blocked funds on your account. By an assignment dated 20 September 2002 Dresdner Bank Luxembourg SA, in its capacity as Agent under the facility agreement referred to in our letter of 14 October 2002, assigned to Dresdner Bank AG its entitlement to receive the monies outstanding from MOF and MODA. As a result, Dresdner Bank AG is now entitled to the overdue payment from MOF and MODA, the principal amount of which is US$48,533,232, i.e. the same as the blocked balance on your account.” (5) By a letter dated 18 October 2002 DBL added, by way of further explanation: “We understand that the London Branch of Dresdner Bank AG . . . has blocked the release of a Euro sum equivalent to US$48,533,232 from your account with it . . . While we understand that Dresdner Bank AG has only blocked these sums, and has not yet set them off, it is clear that a right of set-off does exist against the assets of SAMA, which is an arm of MOF and the entity that has been used to remit payments due from MOF and MODA.”

These proceedings

[3]These proceedings were commenced on 1 May 2003. The relief sought was a declaration that the Bank was not entitled to block SAMA’s account (described there as number 760004109 370051) held at its branch in London; and an order requiring the Bank to transfer €49,147,576.71 and any interest thereon to Deutsche Bank account number 10009570961 1000 in accordance with SAMA’s instruction of 10 October 2002. In its defence the Bank asserted(i) that the government of the Kingdom of Saudi Arabia, through its ministries MOF and MODA, owed a debt of US$48,533,232 to DBL “which DBL holds a trustee for [the Bank] absolutely”;(ii) that the Bank was indebted to SAMA in the same sum;(iii) that “Either SAMA is an emanation or agency of the Government of the Kingdom of Saudi Arabia such that its assets (including the debt due from [the Bank]) are the assets of the Government or SAMA holds all its assets as trustee or agent for the Government”; and(iv) that “Accordingly [the Bank] is entitled to set off the debt due (in equity) to it from the Government against the debt due from [the Bank] to SAMA and owned beneficially by the Government”.[4]By an application notice issued on 24 September 2003 SAMA sought an order for summary judgment, under CPR Part 24, on the whole of its claim. In conjunction with the application for summary judgment, and by the same notice, SAMA sought permission to amend paragraph 10 of its Details of Claim. As originally pleaded the paragraph had contained the following assertions:
“SAMA is legally and functionally independent of, and separate from, MODA and MOF. The Account [410937 51] is held by SAMA legally and beneficially for itself. SAMA has no agreement with Dresdner London or Dresdner Luxembourg or MODA or MOF (or any other organ of government of the Kingdom of Saudi Arabia which may have accounts with Dresdner) that Dresdner may set off against the Account any amounts owed by MODA or MOF (or any other organ of government of the Kingdom of Saudi Arabia) to Dresdner or any third party.”
The amendment for which permission was sought replaced those words with the following:
“(1) SAMA is legally and functionally independent of, and separate from MODA and MOF. (2) In relation to accounts in its name held outside Saudi Arabia, SAMA is the sole counter party with respect to third parties. (3) The monies in the Account are attributable to the General Organisation of Social Insurance (‘GOSI’). (4) GOSI is legally and functionally independent of, and separate from, MODA and MOF. (5) SAMA has no agreement with Dresdner London or Dresdner Luxembourg or MODA or MOF (or any other organ of government of the Kingdom of Saudi Arabia which may have accounts with Dresdner) that Dresdner may set off against the Account any amounts owed by MODA or MOF (or any other organ of government of the Kingdom of Saudi Arabia) to Dresdner or any third party.”
The effect of the amendment was to substitute for the allegation that the credit balance on account 410937 51 was held for the named customer, SAMA, legally and beneficially an allegation that, although SAMA was, at law, the Bank’s sole counter party, the monies were (in its hands) “attributable” to another entity, GOSI.[5]The application came before Mr Justice Neuberger in December 2003. At paragraph 3 of the judgment which he delivered on 19 December 2003 he recorded that, for the purposes of its application for summary judgment, the following was accepted by SAMA:
“First that MODA and/or MOF owe that sum [US$48,533,232] to DBL. Secondly, in that connection, DBL as creditor is a bare trustee for [the Bank]. Thirdly, that MODA and MOF are emanations of the Saudi Arabian Government (the Government). In these circumstances it is common ground that [the Bank] would be able to block [account 410937 51] on the ground of equitable set-off if the money in [that account] is clearly beneficially the property of the Government. In that connection, equity permits such a set-off where both debts are legal debts. Further, where either or both debts is or are held on trust the right of set-off would be determined by reference to the beneficial title – see Cochrane v Green 9 CB (NS) 448 and Thornton v Maynard Law Reports 10 CP 695 at 698 to 699.”
The judge referred to the fact that the claim, as originally pleaded, had been put on the basis that account 410937 51 was held by SAMA for its own benefit; and to the application to amend (which he had allowed in the course of argument at the hearing) so as to allege that the monies in the account were attributable to GOSI.[6]At paragraph 23 of his judgment

the judge identified the two issues which had been argued before him:

“The first is that, although it is accepted that SAMA is a separate entity from the Saudi Government, any asset held by SAMA must, in the light of the terms of its charter as interpreted by Saudi law, be held on trust for the Saudi Government. Secondly, in so far as it is contended on behalf of SAMA that the fund is held on trust for GOSI, that contention should be rejected, but even if it is not rejected, the question between the parties being the identity of the beneficiary on behalf of whom the account is held, i.e. a different issue from that which was canvassed in the three cases to which I have referred, the normal CPR Part 24 test is applicable, namely whether [the Bank] has an arguable case, and the special rule, as explained in the cases to which I have referred, has no application.”
[7]In that context, the three cases to which the judge had referred earlier in his judgment were Bhogal v Punjab National Bank [1988] 2 All ER 296, Uttamchandami v Central Bank of India (1989) New Law Journal 222 and BankofCredit and Commerce International SA (in liquidation) v Al-Saud [1997] 1 BCLC 457. The “special rule” was that set out in the headnote to the report of the Bhogal appeal, to which Mr Justice Neuberger had referred in paragraph 1 of his judgment:
“A banker was required to pay all cheques drawn by a customer in accordance with the mandate given to him if he had funds belonging to the customer, and he was not entitled without warning to refuse to honour a customer’s cheque, when there was money in his account to cover it, merely on the basis of a suspicion that the account was held by the customer as nominee for a third party who was indebted to the bank. Instead, clear and indisputable evidence was required that the customer held his account as nominee or bare trustee for the third party before the bank could set-off the credit in one account against the debit in another.”
[8]The judge took the view that the first of the two issues identified in paragraph 23 of his judgment was not, on a true analysis, a real issue between the parties. As he put it, at paragraph 37 of his judgment:
“Although it was SAMA’s initial case that the fund was its property beneficially, SAMA has now unreservedly resiled from that and accepts, and indeed contends, that the fund is held beneficially for GOSI”
. But he went on to observe that, if that were a real issue between the parties, the Bank “would face insurmountable difficulties because the Bhogal approach would be applicable and the very high hurdle set by that test could not in my view be crossed by Dresdner”.[9]The judge accepted that the second of the two issues identified in paragraph 23 of his judgment raised a point of principle:
“Does the rule in Bhogal apply to a case where the account holder accepts that he is not the beneficial owner of the money in the account, and contends that a third party, who is not a debtor of the bank, is the beneficiary? In other words does the rule apply where the issue between the bank and the customer is not whether the account holder is the beneficial owner, but which of two competing candidates, neither of whom is the account holder, is the beneficial owner?”
And he went on to say this, at paragraph 42 of his judgment:
“If the Bhogal principle does not apply in such a case, then I am quite clear that [the Bank] has made out a sufficiently arguable case for saying that it is the Saudi Government and not GOSI who is the beneficial owner, so as to be able to defeat a claim for summary judgment on the normal CPR Part 24 approach. On the other hand, if the Bhogal principle applies in such a case, I am equally clear that I must grant summary judgment in favour of SAMA because I am quite satisfied that [the Bank] has not established to my satisfaction that the Saudi Government is the beneficial owner of the fund. There is plainly an arguable case, on the facts and the arguments raised by SAMA, that GOSI is the beneficiary.”
[10]The judge held, for the six reasons which he gave, that what he had described as the Bhogal principle did apply in a case such as the present – that is to say in a case where, as he put it, “the account holder’s case is that it is not the beneficial owner of the money in the account concerned, and that another party, not the debtor of the bank, is the beneficial owner”. Accordingly, he made the order for summary judgment which SAMA had sought.

The issues on this appeal

[11]The issues raised on this appeal are(i) whether the judge was right to hold that he should approach the application for summary judgment against the Bank on the basis of what he had described as the Bhogal principle even in a case (such as the present) where the customer accepted that it was not the beneficial owner of the balance standing to its credit on the account; and(ii) if so, whether the judge ought to have held that, approaching the application on that basis, the evidence that SAMA held the balance on the account for the Saudi government was sufficiently clear and indisputable.

The Bhogal principle

[12]The appeal to this Court in Bhogal v Punjab National Bank [1988] 2 All ER 296 was one of two conjoined appeals; the other was an appeal in Basna v Punjab National Bank. Each of the claimants, Mr Ajit Singh Bhogal and Mr Yaacoub Basna, were customers of the Punjab National Bank, with accounts at the bank’s London branch. They each called for payment of the amounts standing to the credit of the accounts in their names. The bank refused payment. Its case was that each of Mr Bhogal and Mr Basna, and a third customer, Mr P Kumar, held the accounts ostensibly in their respective names for a fourth party, Mr Joginder Pal Sanger; that the account in the name of Mr Kumar was overdrawn in a substantial amount at the time when Mr Bhogal and Mr Basna demanded payment; and that the bank was entitled, by way of equitable set-off, to set the debit on the account in the name of Mr Kumar against the credits on the accounts in the names of Mr Bhogal and Mr Basna. Mr Bhogal had obtained summary judgment against the bank in the Commercial Court (Mr Justice Hobhouse); and Mr Basna had obtained a summary judgment for interim payments in the Chancery Division (Mr Justice Scott). As Lord Justice Dillon put it, in this Court, the claims of the bank to set-off “were rejected by Hobhouse J in Mr Bhogal’s case as not amounting on the facts to an arguable defence and by Scott J on the law in Mr Basna’s case”. The issue in this Court was whether Mr Justice Scott had been correct in the approach which he had adopted in the Basna case. He had said this: “The commercial banking commitment that a bank enters into with a person who deposits money with it is just as needful of immediate performance as are a bank’s obligations under a letter of credit or bank guarantee. I think it would be lamentable if a bank were able to defeat a claim by a person who had deposited money on such grounds as the bank is asserting in the present case. It is possible that this action will come to trial in some two to three years’ time and that the bank will fail to make good the arguable case that it has set out before me. It would have succeeded in postponing for that considerable period its obligation to repay a customer who had made a simple deposit of money with it. That seems to me to be totally contrary to the basis on which banks invite and get money deposited with them. I hold that a bank is not entitled to refuse repayment of money deposited with it on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money”.[13]As Lord Justice Dillon explained, in giving judgment on the conjoined appeals, the doctrine of equitable set-off has developed from the practice of the courts of equity, before the Judicature Acts, of granting an injunction to restrain a claimant from pursuing his claim at law against a defendant pending the resolution of some cross-claim of the defendant which, at law, would not have provided a defence to the claimant’s claim. And, as Lord Justice Dillon also pointed out ([1988] 2 All ER 296, 300):
“In the banking field there are clear rules of law. (1) It is the duty of the banker to pay within a reasonable time of presentment all cheques drawn by the customer in accordance with the mandate given to the banker provided that the banker has money in his hands belonging to the customer. As Lord Cairns LC stated in Gray v Johnston (1868) LR 3 HL 1 at 11, it would be a serious matter if bankers were to be allowed, on grounds of mere suspicion or curiosity, to refuse to honour a cheque drawn by their customer. He added on the facts of that case: ‘. . . even although that customer might happen to be an administrator or an executor.’ (2) As Scrutton LJ pointed out in Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 at 847, sums paid by a customer into his current account cannot be used by the bank in discharge of the customer’s loan account without the consent of the customer, since no customer could otherwise have any security in drawing a cheque on his current account if he had a loan account greater than his credit balance on current account.”
[14]After referring to the decision of this Court in Ex parte Morier, In re Willis, Percival, & Co (1879) 12 ChD 491 – and, in particular, to the observations of Lord Justice James at page 496 – Lord Justice Dillon went on: “The bank seeks to extend the law as stated by James LJ so as to cover the present case. But it is to be noted that the law as laid down in Ex parte Morier is crystallised in a short statement of Brett LJ, expressly approved by James LJ which was in the following terms (at 502): ‘My view is this, that, the account standing in the names of the brother and sister, the case could not have been brought within the rules of equitable set-off or mutual credit, unless the brother was so much the person beneficially interested that a Court of Equity, without any terms or further enquiry, would have obliged the sister to transfer the account into her brother’s name alone.’ (My emphasis) It is one thing when the fact that a customer holds his accounts as nominee or bare trustee for a third party is clear and indisputable. It is quite another where the alleged nomineeship is very far from plainly made out and is strongly disputed. It would be wholly contrary to the rules of banking law, above indicated, if a bank could without warning dishonour a customer’s cheque when there were funds to cover it in the account, on a tenuous, if just arguable, suspicion that the account was held by the customer as nominee for a third party who was indebted to the bank, and if the bank could then freeze the customer’s account until it had been ascertained after full inquiry a year or more later whether the customer was indeed such a nominee. I can see no equity in the bank in such a case to override, in the words of Lord Wilberforce [in Aries Tanker Corp. v Total Transport Ltd [1977] 1 All ER 398] cited above, the clear rules of law on which bankers and customers habitually deal with each other, especially as the bank in the present case has only itself to thank for not following ordinary banking practice and obtaining standard form security documentation before allowing the account in the name of Mr Kumar to be seriously overdrawn”. ‘My view is this, that, the account standing in the names of the brother and sister, the case could not have been brought within the rules of equitable set-off or mutual credit, unless the brother was so much the person beneficially interested that a Court of Equity, without any terms or further enquiry, would have obliged the sister to transfer the account into her brother’s name alone.’ (My emphasis)[15]Lord Justice Dillon described as “extensive” the inquiries which need to be made if the bank were to be granted leave to defend and the actions were to go to trial. He observed that the extent of those inquiries took the cases “way outside” the concept of equitable set-off as explained by Lord Justice Brett in the passage which he had cited from Ex parte Morier. He concluded that the bank had failed to show an arguable defence on the law in either action. And he added that, in the Bhogal action, he agreed with Mr Justice Hobhouse that no arguable defence had been made out on the facts; as he put it “there is no evidence worthy of the name to support the contention that Mr Bhogal was a bare nominee for Mr Sanger”.[16]Lord Justice Bingham, the other member of the Court in the Bhogal and Basna appeals, took the view (differing from Mr Justice Hobhouse and Lord Justice Dillon in the Bhogal case, but agreeing with Mr Justice Scott in the Basna case) that, in each case, the bank had demonstrated a triable issue, on the facts, that Mr Sanger was the true holder of the accounts in the names of the claimants and of Mr Kumar. So, in the context of both appeals, it was necessary for him to address what he described as the second question: whether, if there were a triable defence on the facts, that would in law afford the bank any defence to the claims.[17]At [1988] 2 All ER 296, 305e-306h, Lord Justice Bingham set out a long passage from the judgment of Mr Justice Scott in the Basna case. He observed, at page 306j, that the facts of the cases then before the court “powerfully illustrate the wisdom of the rule which Scott J laid down”. After summarising those facts he went on to say this (ibid, 307c-f):
“It is obvious from these facts that to allow a bank to raise a defence of equitable set-off would subvert the ordinary straightforward relationship between bank and nominal customer and could moreover cause grave embarrassment to third parties who had relied on the apparent credit of the nominal customer. During much of the hearing I was nevertheless inclined to doubt whether the law was sufficiently clear to enable this court confidently to reject the bank’s claim to equitable set-off in limine. Little of the law is recent, and the cases arose in quite different circumstances. I am, however, persuaded that the commercial considerations referred to expressly by Scott J and impliedly by Hobhouse J, which I have also mentioned, would require any court to reject a defence of equitable set-off in this field unless the defence was clearly brought within the scope of the existing authorities. I would for present purposes be willing to accept the submission of counsel for the plaintiff Basna that a bank may challenge its customer’s title to money in the customer’s account on its own behalf only where (a) its claim is against a sole beneficiary and (b) there is no dispute as to the beneficiary’s sole entitlement and (c) there are no competing claims and (d) there is no requirement for an investigation into whether or not a trust in fact exists. It seems to me that (b) and (d) fairly reflect the effect of Brett LJ’s succinct summary of the law in Ex parte Morier, re Willis Percival & Co (1879) 12 ChD 491 at 502, and in this case there is a very live dispute as to the alleged beneficiary’s sole entitlement and a need for a very searching inquiry whether a trust exists or not.”
[18]The Bhogal and Basna appeals were decided by this Court in November 1987. A similar point came before the Court for decision some fourteen months later, in Uttamchandami v Central Bank of India (1989) New Law Journal 222. It was submitted on behalf of the bank in that case(i) that the decision in the Bhogal appeals were not binding on this Court – on the grounds (it was said) that no ratio decidendi could be identified because the two judgments in those appeals had proceeded on different grounds – and(ii) that Lord Justice Dillon had misunderstood the reasoning in Ex parte Morier. Lord Justice Lloyd (with whose judgment the other member of the Court, Sir Roger Ormrod, agreed) rejected both of those submissions. He held that the ratio decidendi in the Bhogal appeals was to be found in a single sentence of the judgment of Mr Justice Scott in the Basna case (which both Lord Justice Dillon and Lord Justice Bingham were to be taken to have adopted): “I hold that a bank is not entitled to refuse payment of money deposited with it on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money”.[19]As Lord Justice Lloyd recognised, it would have been sufficient, in Uttamchandami, merely to rely on the earlier decision of this Court in the Bhogal appeals; but he added some observations of his own:
“As I understand the old cases on this topic [equitable set-off], set-off in equity was never allowed save where a court of equity could see that the person claiming to rely on set-off was the beneficial owner of the debt in question, either on the face of it, or by distinct admission, or otherwise without the need for any further enquiry. That is the ground on which James LJ distinguished Cochrane v Green [(1860) 9 CBNS 448]in Ex p Morier (1879) 12 ChD 491; and that is the explanation which he gave in the same case for the decision of Wigram VC in Jones v Mossop (1844) 3 Hare 568. Thus it was not sufficient for a person seeking to rely on set-off in equity to establish an arguable case of beneficial ownership. The rule was never extended that far. But if I am wrong about that, then I see even greater difficulty in applying an extended rule of set-off in equity in the case of banker and customer, so as to enable the banker to combine the accounts of different customers. The customer is, prima facie, the person in whose name the account is held. Take by way of example the case of a father with an account at a bank, who arranges for an account to be opened in the name of his son. Suppose he pays in the opening credit from his own account, and makes regular monthly transfers thereafter. The customer is the son, not the father. The son is entitled to assume that so long as his account is in credit, his cheques will be met. That is an implied term of the relationship between the son and the bank. Suppose now that the father’s account is overdrawn. It would be quite wrong that the son should find his cheques dishonoured, and his credit balance extinguished, because of some alleged right of set-off on the part of the bank. Such conduct on the part of the bank would be wholly inconsistent with the relationship of banker and customer. Just as there are sound practical banking reasons excluding the right of set-off between a loan account and a current account (see Bradford Old Bank v Sutcliffe [1918] 2 KB 833 at 847 per Scrutton LJ) so also there are sound practical banking reasons against incorporating an extended right of set-off in equity into the relationship of banker and customer. Of course there may be cases where the account is, on its face, a nominee account; or where it is admitted that the account is a nominee account. In such cases the equitable rule will apply. So also if it is indisputable that the account is a nominee account. But it is not sufficient that it is arguable that the account is a nominee account. The reason is quite simple. If it is only arguable that the account is a nominee account, then it will inevitably take time to resolve the argument. If the account is frozen in the meantime, the customer will be deprived of the use of the funds which in the end may turn out to be his. This would be inequitable. It would be contrary to the terms of the contractual relationship. . . .”
[20]In Bank of Credit and Commerce International (in liquidation) v Al-Saud [1997] 1 BCLC 457, this Court (Lord Justice Neill, Lord Justice Simon Brown and Lord Justice Waite) had to consider whether, in circumstances in which the bank was in liquidation, the principles said to be derived from Ex parte Morier (supra) were distinguishable or were to be taken to have been modified by the decision of the House of Lords in Stein v Blake [1996] AC 243, [1995] 2 BCLC 94. The Al-Saud case is of little direct assistance: the present case is not one in which statutory set-off under the insolvency code is in point. But, in the course of his judgment (with which the other members of the Court agreed),

Lord Justice Neill said this ([1997] 1 BCLC 457, 465h-j):

“I have therefore had to consider first whether the decision in Ex p Morier is distinguishable on any of the grounds suggested by counsel for the Prince [the defendant, Prince Fahd bin Salman bin Abdul Aziz Al-Saud]. I have come to the conclusion that it is not. It is true that Mr Ghazzawi has asserted in his affidavits that the money in the accounts belongs in the main to the Prince, but it seems to be a sensible rule that a beneficial interest has to be established by clear evidence and without the necessity of taking an account. BCCI does not recognise the existence of the trust.”
[21]It is clear, therefore, that the Bhogal principle has been recognised and applied in this Court on three occasions in the past twenty years. Counsel for the Bank accepts that it is binding on us; although she has drawn our attention to the criticism of the principle in Derham, The Law of Set-Off (Third Edition, 2003) at paragraphs 11.12 to 11.16 and shereserves the right to challenge the principle elsewhere. In that context, I note that the principle is referred to without apparent disapproval in Paget’s Law of Banking (12th Edition, 2002) at paragraphs 29.27 to 29.28 and in Wood, English & International Set-Off (1989) atparagraph21-156, where it is expressed in this form:
“Mere suspicion that a credit balance in one person’s name is held as nominee or trustee for another is not enough to permit a bank to set-off a debit balance owed to it by the supposed beneficiary. The bank must establish that the credit balance is, without enquiry, beneficially owned by the bank’s debtor.”
[22]For my part I can see force in the criticism that, in general, the existence or non-existence of a right of set-off in equity should not depend on whether the necessary mutuality between the debts which are to be set-off against each other is obvious, without investigation, or only becomes apparent after investigation. With respect to those who have taken a different view, I have some doubt whether Ex parte Morier (supra)was authority, on its facts, for a proposition of that width. It is, I think, important to have in mind that, in that case, the monies in the executors’ account were assets in an unadministered estate. Until the estate had been administered and accounts taken it could not be said that one executor (the brother) was beneficially entitled to the exclusion of the other (his sister). The question, in that case, was not whether, at the time of the purported set-off, the executors held the account on a bare trust for the brother; but whether, when the estate had been fully administered and accounts taken, it would be seen that no-one other than the brother was beneficially interested in the monies standing to the credit of the account. But it is unnecessary to express a considered dissent from the proposition; even if it were open, in this Court, to do so in the light of the subsequent authority. What, to my mind, is the critical element in cases where a banker seeks to rely on a right of equitable set-off against his customer – that is to say, against the person in whose name the account is held – is that their relationship is governed by the underlying banking contract to which they (and they alone) are party.[23]The question whether the banker, say A, is entitled to set-off a debit balance owed by B against the credit balance on an account in the name of C – on the grounds that C holds that account as nominee or trustee for B – turns on the contract between A and C. It is, I think, plain that that contract could provide that there were no circumstances in which A could set-off B’s debt against the balance on C’s account. Conversely, the contract could provide that A could set–off B’s debt against the balance on C’s account whenever A had reasonable grounds for a belief that B was beneficially interested in the monies in that account. But, if the contract is silent on that question, then – in the light of the decisions of this Court in Bhogal and Uttamchandami -the rule is that stated by Mr

Justice Scott in the Basna case:

“a bank is not entitled to refuse payment of money deposited with it on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money”
. If it is thought necessary to seek some jurisprudential basis for that rule, then it can be found either in the need to imply a term to that effect into the banking contract between A and C in order to give business efficacy to the relationship of banker and customer; or in the proposition that, where the existence of the equitable interest is not clear and indisputable, equity will not override the clear rules of law on which bankers and customers habitually deal with each other. There is support for both in those passages from the judgments in this Court which I have already set out.[24]If that is the correct analysis of the authorities binding on this Court, then the judge was plainly right to hold that he should approach the application for summary judgment against the Bank on the basis of what he had described as the Bhogal principle even in a case (such as the present) where the customer accepted that it was not the beneficial owner of the balance standing to its credit on the account. The relevant question, as between the customer and the bank, is not whether the customer holds the account in its name for its own benefit or as nominee or trustee for another: the relevant question is whether the customer holds the account as nominee or trustee for the bank’s debtor. It is in relation to that question that the rule applies. The bank is not entitled to refuse to comply with instructions given by its customer on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money standing to the credit of the customer’s account.

The second issue: can the Bank meet the Bhogal test in the present case?

[25]It was submitted on behalf of the Bank that, even if the judge were right to hold that the application before him was to be approached on the basis that SAMA’s averment that the monies in account 410937 51 were “attributable” to GOSI did not take the present case outside the Bhogal principle, he should have held that the evidence that SAMA held those monies as trustee for the Saudi government was sufficiently clear and indisputable to meet the test which that principle requires. In support of that submission the Bank relied on the charter under which SAMA was established by Royal Decree in 1957; and on the evidence of Mr Hassan Mahassni, a Saudi lawyer who is a partner in White & Case, the international law firm instructed by the Bank in the present case.[26]Mr Mahassni’s evidence, at paragraph 18 of his witness statement dated 18 July 2003, was that SAMA’s relationship with the Saudi government is twofold:
“First it carries out the functions of currency issue/management and support. Further it acts as agent and asset manager for the Government in relation to the assets of the Kingdom of Saudi Arabia.”
It was his view, founded principally on Article 2 of the charter, that the assets which were under its management “do not belong beneficially to SAMA but to the Government”. Article 2 of the charter is in these terms:
“The Saudi Arabian Monetary Authority shall not pay nor receive interest, but it shall only charge certain fees on services rendered to the public and to the Government, in order to cover the Agency’s expenditures. Such fees shall be charged in accordance with a regulation passed by the Board of Directors and approved by the Minister of Finance. The agency shall not have a capital and shall, therefore, repay to the Government its entire capital.”
Mr Mahassni placed much emphasis on the second paragraph of Article 2, which he described as “a critically important provision for this case”. He said this, at paragraph 22.1 of his witness statement:
“SAMA is not authorized by the Government to maintain funds in its own name or for its own benefit, but merely holds and acts as trustee or agent in connection with funds that are the property of the Kingdom. As used in Article 2, ‘Capital’ refers to Government assets coming under the temporary control of SAMA in the performance of its legislated duties. Such monies by statute do not belong to SAMA, they are held in trust for the Government. Such funds must be returned to the Government upon demand. They appear as liabilities in SAMA’s accounts.”
[27]The final sentence of that paragraph appears – at least to English eyes – to contradict the assertion in the third sentence of that paragraph, that the monies “are held in trust for the Government”. If the monies which, as the accounts show, SAMA invests on the world markets were, in truth, held upon trust for the Government, they would appear in SAMA’s accounts as neither assets nor liabilities of SAMA; they would be shown as assets of the Government. But the accounts which are in evidence (for the year ending 30 June 2002) have been audited by a well known international firm of accountants (Ernst & Young) and they do show SAMA as a trading organisation with a profit and loss account and assets and liabilities of its own. More pertinently the accounts show, in a separate section of the balance sheet, assets and liabilities attributable to “Independent Organizations”, amongst which is GOSI.[28]Mr Mahassni’s view is contradicted by the evidence of Mr Mohamed Al-Shumrani, the Director of General Investment of SAMA, who described the monies in account 410937 51 as “funds maintained in SAMA’s name with Dresdner Bank and managed by SAMA for the benefit of [GOSI]”. Mr Ghassan Al Awaji, an attorney practising in Riyahd, explained that GOSI was “a legal entity with an independent legal existence”. Its purpose is “to administer the social insurance system in the State by providing social benefits to workers in Saudi Arabia, primarily those in the private sector and their related beneficiaries”. Its funds are not the funds of the Government; but are derived from employer and employee contributions. Dr Mohamed Almulhim, now practising as an attorney in Riyahd but formerly a Minister of State and Member of the Council of Ministers of the Kingdom of Saudi Arabia and a Professor of Law and Dean of the College of Commerce at King Saud University, confirmed that, “like any other central bank, [SAMA] acts as banker to the Government of Saudi Arabia”; but that “as a matter of law and fact, SAMA is a distinct and autonomous entity, separate from and independent of the Saudi Government”.[29]In the light of that conflicting evidence the judge held that the Bank had not established to his satisfaction that the Saudi Government was the beneficial owner of the monies in account 410937 51. There was “plainly an arguable case, on the facts and the arguments raised by SAMA, that GOSI is the beneficiary”. At paragraph 39 of his judgment he had said this:
“. . . so far as the evidence is concerned, it is fair to say that, at least to my mind, [the Bank] has made out a more detailed and powerful case to support the contention that, subject to GOSI’s involvement, the fund would be held on trust for the Saudi Government, than the case SAMA has made out to support a contrary argument. I do not consider it can properly or fairly be said on the evidence to which I have been referred, that the position is clear. In other words, although I take the view that a powerful case has been put forward by [the Bank] to the effect that Government funds deposited with SAMA are held on trust for the Saudi Government, I do not consider that the point can fairly [and] confidently be determined at this stage. . . .”
[30]In my view the judge was right to hold that the evidence upon which the Bank sought to rely in order to establish that SAMA held account 410937 51 as trustee for the Saudi government was not clear and indisputable. That is sufficient to dispose of this appeal.[31]I would add, however, that it seems to me that the correct approach is to look at the position on the basis of the material on which the Bank relied at the time when it refused to comply with SAMA’s instruction on 10 October 2002. If the rule is that a bank is not entitled to refuse payment of money deposited with it on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money, then – whether the basis for that rule lies in the need to imply a term into the banking contract in order to give business efficacy to the relationship of banker and customer or in the proposition that there is no equity in the Bank to override the clear rules of law on which bankers and customers habitually deal with each other – the rule ought to be applied by reference to the reason for refusal given at the time when payment ought to have been made. It is pertinent, therefore, to have in mind that the reason for the refusal to comply with SAMA’s instructions in the present case, given on behalf of the Bank by DBL in the letter dated 18 October 2002, was that “it is clear that a right of set-off does exist against the assets of SAMA, which is an arm of MOF and the entity that has been used to remit payments due from MOF and MODA.” The contention that SAMA held all its assets as trustee for the Saudi government first emerged (as an alternative basis for the refusal) in the defence filed some six or seven months later. No attempt was made in these proceedings to substantiate the assertion that SAMA was an arm of MOF. To my mind that, of itself, provides the answer to the second issue.

Conclusion

[32]I would dismiss this appeal.

Lord Justice Longmore:

[33]I agree with Chadwick LJ that this appeal is governed by the principles set out in Bhogal v Punjab National Bank [1988] 2 All ER 296. It would be “lamentable”, to use the word of Scott J at first instance in that case, if a bank which had received a customer’s instructions to transfer what is on the face of the account the customer’s money could assert against the customer an equitable set-off on the basis that the money in the account was beneficially held for a person who was himself indebted to the bank, without having “indisputable” evidence that the money in the account was so held. The judge was correct to hold that the evidence relied on by the bank in the present case was by no means indisputable and that summary judgment should, therefore, be given to the customer.[34]Miss Jones QC sought to distinguish Bhogal by submitting that in Bhogal the claimant was beneficially entitled to the money in the account in his name, whereas in the present case the claimant did not claim to be beneficially entitled to the money but only entitled in law. That is not a distinction which appeals to me; the bank ought not to be concerned whether money in an account is held beneficially for the account-holder or beneficially for another. The bank must comply with its customer’s instructions and it can only be in a clear and convincing case that it can be entitled to invoke the doctrine of equitable set-off.[35]I would myself have said that the present case is even clearer than Bhogal. As my Lord has pointed out the claim in the present case is that the bank has failed to follow the claimant’s instructions and that the bank be required to follow the instructions given. The order of the judge upheld the claim. This is a form of specific performance. I do not consider that it is possible to say that the existence of a cross-claim to recover a debt is a defence to an action for specific performance. The most that a defendant in that position can say is that the court should not, in its discretion, grant specific performance of an obligation to comply with its customer’s instructions to transfer money if it is clear that the money which the bank is asked to transfer belongs beneficially to a person indebted to the bank. But, as it seems to me, the Bhogal test that a defendant bank must be able to say that such beneficial ownership is “indisputable” should apply even more strongly in a case where the claim is for specific performance than in a case where the claimant, as in Bhogal, is merely asserting a claim in debt.[36]I agree that the appeal should be dismissed.

Lord Justice Mummery:

[37]I agree with both judgments. The appeal is dismissed.

ORDER

Appeal dismissed with costs to be assessed if not agreed. Leave to appeal to the House of Lords refused. Stay pending petition to their Lordships’ House refused. (Order does not form part of approved judgment)