Bank of Scotland Plc v Watson & Anor [2013] EWCA Civ 6

Case No B5/2012/0096

[2013] EWCA Civ 6

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE BOURNEMOUTH AND POOLE COUNTY COURT

HIS HONOUR JUDGE IAIN HUGHES Q.C.

ON APPEAL FROM DISTRICT JUDGE MILDRED

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

Date 22 January 2013

Before

LORD JUSTICE LAWS

LORD JUSTICE LLOYD

LORD JUSTICE JACKSON

Between

BANK OF SCOTLAND PLCClaimant

(1) ELIZABETH JEAN WATSONRespondent

(2) CRAIG MILES WATSONRespondent

BANK OF SCOTLAND PLC Claimant Appellant- and -(1) ELIZABETH JEAN WATSON (2) CRAIG MILES WATSON Defendants Respondents

(Transcript of the Handed Down Judgment of

WordWave International Limited

A Merrill Communications Company

165 Fleet Street, London EC4A 2DY

Tel No: 020 7404 1400, Fax No: 020 7831 8838

Official Shorthand Writers to the Court)

Paul Mitchell (instructed by Eversheds LLP) for Appellant

Russell Bailey (instructed by Follett Stock LLP) for Respondents

Hearing Hearing dates: 10 October, 20 December 2012

Judgment

Introduction and summary

[1]Mrs Watson, respondent to this appeal, was a victim of a fraudulent scheme promoted by two accountants who used the firm name Dobb White & Co, Mr Shinder Singh Gangar and Mr Alan White. She invested a lot of her own money and persuaded others to do so as well. In order to invest more on her own account she borrowed £345,000 from the appellant bank (which I will call the bank), secured on a mortgage of the house which she and Mr Watson owned, and where they lived. Their investment was lost because the Dobb White operation turned out to be a classic Ponzi scheme. Now the bank seeks repayment of the loan that it made to her, and to enforce the mortgage accordingly. It brought proceedings against her and her husband in the Bournemouth County Court. Those proceedings were stayed for a time so that Mrs Watson could start her own High Court proceedings against the bank. She did commence such proceedings but they were struck out at an early stage. Now Mrs Watson seeks to make allegations along the same lines by way of a defence and counterclaim to the bank’s claim for possession. Essentially, the question is whether she should be allowed to do so.

[2]The bank applied in the county court to strike out the Defence and Counterclaim as an abuse of the court’s process, or for summary judgment on the grounds that the claims were statute-barred. The application came before District Judge Mildred on 6 June 2011. Mr and Mrs Watson had legal representation at that stage. The District Judge dismissed the application. The bank then appealed. The appeal came before His Honour Judge Iain Hughes Q.C. He had granted permission to appeal and had set aside two days for the hearing. At the time of that hearing Mrs Watson represented herself. The judge treated the appeal as a re-hearing, and dismissed the bank’s appeal. Sir Richard Buxton refused permission to appeal on the papers, but Lewison LJ granted permission to appeal to the bank at an oral hearing on 28 May 2012.

[3]The appeal came on before us on 10 October 2012. By then Mrs Watson had secured the benefit of legal representation by Messrs Follett Stock, solicitors, and Mr Russell Bailey, of Counsel. It appeared to the court in the course of the hearing on that day that a great deal might well depend on whether Mrs Watson could put forward a viable statement of case setting out the claims that she wished to advance by way of Defence and Counterclaim. Although a Defence and Counterclaim had been served, which had been prepared on Mrs Watson’s behalf by solicitors, it seemed to us that this might not be sufficient to identify and assert the claims on which Mrs Watson wished to rely. We therefore adjourned the appeal and gave Mrs Watson time in which to put forward a draft amended Defence and Counterclaim, by reference to which, if necessary, the case that she wishes to rely on could be tested and assessed.

[4]Mr Bailey has undertaken that task, and has argued her case both by reference to that draft and on the other issues in the appeal. Mr Paul Mitchell appeared for the bank, as he had before the District Judge and the circuit judge. I am very grateful to both Counsel for their assistance by way of written and oral submissions. Particular appreciation is due to Mr Bailey who found himself facing a much more substantial task than he had originally undertaken, and who discharged his tasks, both by way of drafting and in terms of advocacy, with notable skill.

[5]Nevertheless, for reasons that I will explain, I have come to the conclusion, first, that, on the existing Defence and Counterclaim, the bank’s application ought to succeed and the Defence and Counterclaim should be struck out, and secondly that Mrs Watson ought not to be permitted to amend her Defence and Counterclaim by substituting the new draft. If she is to maintain a claim against the bank along the lines set out in the draft statement of case, she must start yet further proceedings of her own. They would be at risk of being met with the defence that the claims are barred by limitation. That may not be an insuperable obstacle for her, in the case of some claims, but it is one which she would avoid if she could bring the claims by way of counterclaim in the existing county court proceedings. In my judgment she cannot bring herself within the rules which permit such an amendment.

[6]Mr Watson is represented in the proceedings jointly with Mrs Watson, but in practice the battle has been waged between the bank and Mrs Watson. In those circumstances, I do not always refer to Mr Watson as well as to Mrs Watson unless there is a special need to do so.

The history of the proceedings

[7]Because of the nature of the issue, it is appropriate to start by describing the course of the various proceedings, before I go into the underlying facts.

[8]The bank brought its possession claim in the county court in November 2008. It claimed possession and payment. Mr and Mrs Watson completed a Defence form in manuscript, signing it on 28 November 2008. This said that they disputed the claim and they denied that there were any arrears under the mortgage. They said this by way of explanation:

“The reason we dispute the claim is set out in the extensive correspondence that has passed between the parties from May 2001 up to November 2008. In summary the defendants consider that they have a claim for dishonest assistance against the bank in a breach of trust, in relation to a fraudulent investment scheme.”

[9]In his judgment which is under appeal, Judge Hughes Q.C. referred to a large ring binder containing more than 160 pages of documents as accompanying this defence form. He referred to these documents in his judgment as “the 2008 documents”.

[10]Under heading 27 in the Defence form, about why the arrears had arisen, the Watsons said this:

“Please see accompanying statements, correspondence and other documents for full details. We are in arrears because our expenses exceed our income, and the promised return of the investment did not materialise – leaving us instead saddled with the huge £345,000 loan and arrears and interest which the bank fraudulently stole from us. The [wordillegible] was supposed to service the interest repayments on the loan, which went up in smoke because of the bank’s bad “advice”.”

[11]On 17 December 2008, District Judge Hurley made an order staying the county court proceedings until 23 April 2009, and fixed a further directions hearing for 24 April 2009. It seems from his order that Mr and Mrs Watson had applied to strike out the bank’s claim; that application was refused. The stay was later extended in 2009 and again in 2010.

[12]Before the bank brought its claim, Mr and Mrs Watson and others had issued a Claim Form in the High Court, Queen’s Bench Division, against Mr Gangar, Mr White and other Defendants, including Halifax Bank of Scotland plc, in or about June 2007; the title number was HQ07X00549. The Claim Form was prepared by solicitors for the Claimants. Particulars of Claim were prepared later, it seems by other solicitors. The Claim Form was not served within the relevant period. An extension of time for service was refused by the Master and permission to appeal against that order was refused by the Court of Appeal in October 2008.

[13]The stay of the county court proceedings in December 2008 arose because Mrs Watson said she had issued proceedings in the High Court and the adjournment was intended to allow her time in which to serve the proceedings. On 8 June 2009 Mrs Watson served a new High Court Claim Form, in proceedings HQ08X04884, in which as before she and her husband were among several Claimants, and Halifax Bank of Scotland plc was the Defendant. These proceedings, it seems, were also prepared for Mrs Watson by solicitors. The bank disputed the validity of the service of the Claim Form, but that issue was never decided. The claim form identified the claims as being for(1) dishonest assistance in breach of trust or breach of fiduciary duty,

(2) breach of statutory duty under the Financial Services Act 1986 and/or Financial Services and Markets Act 2000,

(3) negligence. The claims by Mr and Mrs Watson were stated as being to have the mortgage set aside, equitable damages, damages for breach of contract, damages for negligent and/or fraudulent misrepresentation or deceit, and other such claims.

[14]On 8 September 2009 Master Eyre considered the Claim Form and Particulars of Claim of his own initiative, without a hearing. He took the view that the claim was not properly pleaded. He ordered that the Claimants must, no later than 13 October 2009, serve on the Defendant and then file draft Amended Particulars of Claim, and his order specified in some detail how the Particulars of Claim should be improved. In the meantime he stayed the action. His order did give all parties liberty to apply for the order to be varied or set aside, within 7 days after service of the order on that party. Unfortunately the order was not sealed until 11 November 2009, and it will have been served after that.

[15]Eventually Mrs Watson served a draft Amended Particulars of Claim on 19 March 2010, having obtained an extension until that date. Master Eyre considered that document on that day and made an order the same day (sealed on 22 March) as follows:

“Upon considering the Claimants’ “(Revised) Particulars of Claim” dated the 19th March 2010 and the order sealed on the 12th November 2009 And it appearing that the 74-page, gigantically-prolix, and unfairly-expressed “(Revised) Particulars of Claim” represent a wholesale failure to obey that order It is ordered as follows, namely that the claim-form is struck out, and the action is dismissed, with judgment for the Defendant for costs.”

[16]The order was not in the correct form, as it failed to inform the parties of their right to apply to the Master for the order to be set aside or varied. Unaware of that point, Mrs Watson issued an application notice dated 6 April 2010 to have the order set aside, but for consideration by a High Court Judge. That application came before Davis J on the papers. At first he treated it as an application for permission to appeal, and he refused such permission. Later, however, still without a hearing, on 6 July 2010 he set aside his own order and replaced it with an order dismissing the application to set aside the Master’s order. He did, however, include in that order the proper notice that a party may apply to set it aside within 7 days after service. It seems that Mrs Watson did make such an application within the proper time, and requested an oral hearing, but that application has never come to an oral hearing, and it must now be treated as a dead letter. The second Queen’s Bench action therefore came to an end in July 2010. The bank was not served with a copy of the revised draft Particulars of Claim in that action, though it has since received a copy.

[17]After the High Court proceedings had come to an end in this way, on 1 December 2010 District Judge Hurley ordered the Defendants to file and serve a defence to the claim in the county court proceedings by 28 January 2011. On that date a Defence and Counterclaim was served on behalf of Mr and Mrs Watson by Dunham solicitors, then acting for them. That is the statement of case which the bank seeks to have struck out.

The underlying facts

[18]In summarising the facts of the case I will be as brief as I can, bearing in mind that a great deal is in dispute. It is not in dispute that the Watsons paid a lot of money to Dobb White, including money which they borrowed from the bank, and they lost it all, or almost all of it. I will not at this stage include in my summary of events all of those that the Watsons rely on in support of their case against the bank.

[19]In February 2001 Mrs Watson met Mr Gangar, having been told by an acquaintance that he was offering exceptionally attractive returns on investments. He persuaded her to deposit £45,000 in his scheme, promising that the funds would never leave the control of the firm and would be covered by the firm’s professional indemnity insurance. She received handsome returns on this initial investment, as had been promised. She then persuaded other members of her family to make larger investments, and Mr Gangar suggested to her that she and her husband might deposit larger sums by obtaining a loan secured on their home. He offered to introduce her to a contact of his at the Manchester office of the bank who could recommend the making of loans for such purposes.

[20]Mrs Watson followed this suggestion. The contact was Mr Fraser Mackay, Director of Client Services at the bank’s Manchester private banking division. He approved a loan of £345,000 in July 2001. The matrimonial home was subject to a mortgage securing a debt of £70,000 to Alliance & Leicester plc, but the bank was willing to accept a second mortgage, subject to that security, and stipulated this in its offer. Mrs Watson had to provide a statement of means to the bank. Mr Gangar completed this for her, on the basis of information which she supplied. The house was said to be worth £520,000. Mr Watson’s earnings were given as £2,200 to £2,500 net per month, and they had a further income of £2,000 per month from lodgers and letting a flat. The form also mentioned an income of £35,000 from the proposed advance of £350,000, i.e. from the investment to be made with the benefit of that advance, but this was not taken into account in calculating Mr and Mrs Watson’s income available to service the loan. Mrs Watson gave a figure of £5,000 for her income from her existing investment with Dobb White, and that figure was included, though not identified as such in the statement of means. Mr and Mrs Watson signed this form on 18 July 2001 and sent it to the bank.

[21]An internal note of the bank at the time, requesting the approval of the loan, stated that the Watsons had been introduced by Mr Gangar, that their main asset was their property, and that they had some small businesses which provided a modest income. “Their family background and wealth is the main reason that we looking at this proposal.” The purpose of the loan was stated as being to provide a vehicle to release equity from the property which would be invested through Dobb White. Repayment was expected to come from the return of the capital sum. An undertaking was to be given confirming that the funds would be released by Dobb White within 30 days of demand. The interest was to be covered by the Watsons’ monthly income. The funds lent were said to be secure with Dobb White, with additional security to be provided by the second mortgage over the house and by an assignment of a life policy to be effected.

[22]On this basis the bank offered a loan of £345,000, for 120 months, and on terms and conditions set out in the bank’s letter of offer sent on 18 July and accepted by the Watsons on 20 July. Dobb White provided a letter of undertaking to Mr and Mrs Watson dated 23 July 2001, confirming that any funds received from the drawdown of the loan would be held to the bank’s order pending their further instructions, and that the firm would be responsible for returning the principal with accrued interest within 30 days of written instructions from the Watsons. They sent a copy of this to the bank as well, by a letter in which they undertook to hold any funds received from the bank to the bank’s order, and to return those funds within 30 days of the bank’s notice to them. They also told Mrs Watson the details of the offshore account to which the funds provided by the bank should be directed to be paid. Mr and Mrs Watson gave the corresponding instructions to the bank by letter dated 25 July 2001. A legal charge was then executed by Mr and Mrs Watson, and for the bank, and dated 31 July 2001. On the same date £345,000 was advanced by the bank and credited to a new account opened for the purpose, and was then transferred as instructed by the Watsons on 1 August 2001. On that date Dobb White confirmed to Mrs Watson the receipt of US $491,832 (the dollar equivalent of £345,000) which was said to be bound by the firm’s undertaking.

[23]Mrs Watson relies on some later events as well and it is appropriate to say something about them. In May 2002 Mrs Watson had become unhappy with the Dobb White investment, and she sought to withdraw it from their management. She rang the bank and spoke to a Mr Derek Wells, then associate director of client services. He wrote to her in reply, saying that the undertaking by Dobb White to return the funds on demand was part of the bank’s security, and that if the money was to be withdrawn from Dobb White, the bank would need to know what was to happen to the money and to be satisfied of her ability to service the loan and to provide for ultimate repayment of the principal. Mrs Watson wrote back to him, providing further information on the basis of which she sought the bank’s agreement to the withdrawal of the money from Dobb White, with a new statement of means form which, she said, showed a considerable increase in their joint income. Mr Wells wrote to the Watsons on 30 May confirming that the bank would accept either of two arrangements as an alternative to the existing arrangement with Dobb White. The first was a similar letter of undertaking to that which had been provided by Dobb White, from the institution with which the funds were to be placed once withdrawn from Dobb White; this was to be provided before the funds could be placed with that institution, and the bank had to be satisfied with the standing and reputation of the institution and the authority of the person providing the undertaking. The second would be the deposit in a pledged account with the bank of £70,000, the amount outstanding on the Alliance & Leicester mortgage, which could be released in due course to repay that mortgage (which was to fall due for repayment early in 2003) subject to the bank then obtaining a first mortgage over the property.

[24]It seems that on 30 May 2002 Mrs Watson wrote to Mr Gangar giving 30 days’ notice to withdraw the whole of their investment. Including investments made by other members of the family this came to a total of over $1 million in terms of principal, with further sums due for interest. On 25 June 2002 Mrs Watson wrote to Mr Stephen Baker of the bank (director of client services) telling him that they were about to make arrangements to transfer $105,000 to the bank (the equivalent, I take it, of £70,000) on the basis of the second suggestion made in Mr Wells’ letter dated 30 May 2002, so that the bank could then release Dobb White from its undertaking to the bank.

[25]On 5 July 2002 Mrs Watson wrote to Mr Wells at the bank telling him that she had instructed Dobb White to pay the full amount of over $1 million to the bank, so that the amount required for the £70,000 pledge could be set aside directly by the bank, and the balance could then be paid out as Mrs Watson would later direct. On 13 July 2002 Mrs Watson wrote again to Mr Wells in terms which indicate that Dobb White had transferred the $1 million or so to the bank. However, instead of instructing the bank to transfer the balance of the funds to a different overseas institution on a private arrangement, as had been forecast in the letter of 5 July, by this second letter she instructed the bank to return most of the money to Dobb White, with Dobb White’s letter of undertaking still in place as security for the bank.

[26]Not long after this, it seems, the Dobb White scheme was revealed as the fraudulent Ponzi scheme that it really was. In December 2003 Mr Gangar and Mr White were made bankrupt. In January 2004 Mrs Watson spoke to Mr Wells of the bank on the telephone and made accusations against Mr Mackay of collusion with Mr Gangar, and thereby of responsibility on the bank’s part for the loss she had suffered by reason of her investment. Mr Wells wrote to her on 8 January denying any such responsibility. She replied on 22 January 2004 making a number of points which have featured in her contentions ever since then, including reliance on the fact (as she asserts it) that Mr Mackay left the bank’s employment some time after the loan had been made in July 2001 and went to work with Dobb White for some time. In early 2005 the Watsons instructed Balsara & Co, solicitors, who wrote to the bank, informing it that the Watsons considered the bank to be vicariously liable for the acts of Mr Mackay.

[27]Mr Gangar and Mr White were tried for conspiracy to defraud in 2007 and were found guilty in February 2008. Mrs Watson gave evidence at the trial. In the meantime the bank had demanded repayment from the Watsons in May 2007, both on the term loan and on an overdraft. This may have provoked Mrs Watson to issue the first High Court Claim Form in June 2007. Ultimately it led to the bank issuing the county court Claim Form in November 2008.

[28]Subject to whatever money Mrs Watson received by way of interest on her investment with Dobb White, and anything that she may have held back from her reinvestment with Dobb White in 2002, it seems clear that she has lost the entire investment. She was able to make payments in respect of the loan from the bank until some time in 2007 but has made none since then. Thus she, and her property, are at risk from the bank’s proceedings unless she has a good defence or counterclaim. That is what she has sought to assert by the successive proceedings which I have described, of which only her Defence and Counterclaim in the county court claim remains at present.

The Defence and Counterclaim

[29]It is therefore necessary to examine first the case made on Mrs Watson’s behalf by the Defence and Counterclaim.

[30]The Defence denies that the bank is entitled to payment of any money under the loans or to possession of the property. It avers that the Watsons have a substantial counterclaim against which any arrears under the loans are to be set off. It also alleges that the bank cannot rely on the loans because the Watsons “were enticed into entering into them by the fraudulent misrepresentations of the [bank] as particularised in the counterclaim”. No other defence to the claim is set up.

[31]The counterclaim is therefore the place where the Watsons’ allegations are to be found. It alleges the presentation of investment opportunities (“the Scheme”) to investors by Dobb White, and in particular its presentation to Mrs Watson in February 2001 by Mr Gangar. As part of that presentation, it is said, representations were made to Mrs Watson that the bank “supported the Scheme and that as such they were prepared to lend investors money to put into the Scheme”. Since that was part of the presentation by Mr Gangar, it was not a representation by the bank itself.

[32]It is alleged that on 30 May 2001 Mrs Watson spoke on the telephone to Mr Fraser Mackay of the bank, who asked Mrs Watson to send to the bank a letter confirming the discussions and stating what they required. Thereafter, it is said, the Watsons received a letter from Mr Baker of the bank with outline terms and conditions for an equity release loan. On 11 June, it is said, the Watsons signed the outline terms and conditions. Those terms and conditions required a postponed legal charge over the Watsons’ property which, it is said, had been orally agreed should be held by the Watsons’ solicitors in escrow but not executed unless necessary whereby certain conditions (not identified) applied or were met. On 12 June 2001 the Watsons returned the outline terms and conditions duly signed with a letter which recorded the fact that Mr Mackay had agreed to a reduced arrangement fee of 0.5% (instead of 1%) with a proviso that the Watsons were able to make one or two further referrals in the near future. It is alleged that if such referrals were made Mr Mackay had agreed that the whole arrangement fee might be waived. Also in the same letter reference is made to Dobb White having agreed to provide a letter of comfort to the bank that they would underwrite the repayments on the loan.

[33]It is alleged that on 18 July 2001 Mr Baker of the bank completed a personal credit application on behalf of the Watsons for a loan of £347,000. This is a reference to the bank’s internal document by which he proposed that the bank should approve a loan of that amount as requested by the Watsons. In paragraph 21 of the Defence and Counterclaim reference is made to the following features of the document. First, Mr Gangar is identified as the introducer. Secondly, the funds were to be invested through Dobb White, with a guarantee of the funds being returned at the request of the bank. Thirdly, the bank is said to have placed great importance on a letter of confirmation from Dobb White. Fourthly, the involvement of Dobb White was said to be crucial and fifthly the money had to be used for the “business investment opportunity” with Dobb White. Then the later steps leading up to the making of the loan of £345,000 are alleged.

[34]Then it is alleged that the Scheme was a fraudulent Ponzi scheme, and that Mr Gangar and Mr White were prosecuted for offences including conspiracy to defraud, convicted and sent to prison as a result.

[35]At paragraph 30 the Defence and Counterclaim starts to allege legal consequences. First it is alleged that Dobb White and its partners were liable as constructive trustees, following a breach of trust or of fiduciary duty in dealing with the money invested.

[36]Then at paragraph 31, which is the critical paragraph for present purposes, it is alleged that the bank assisted in the breach of trust committed by Dobb White in relation to the Scheme and that the bank’s action “therefore constituted dishonest assistance in a breach of trust”. This is followed by a series of allegations headed “particulars of dishonest assistance”. The first is as follows:

“The principal lender to investors was the [bank]. The [bank’s] name appears to have been used by [Mr Gangar and Mr White] as a seal of approval of the investment scheme. In circumstances which will be fully particularised upon disclosure herein, the [bank] permitted its name to be associated with the Scheme and readily lent money for investment in the Scheme.”

[37]There follow fourteen instances of what are said to be “unusual features of the [bank’s] involvement”. These are the only details given of conduct on the part of the bank which could constitute particulars of assistance or of dishonesty in giving such assistance. I set them out, with direct quotations in some cases. i) Substantial sums were lent to home-owners by the bank on favourable terms with the proviso that they were invested back into the Scheme. ii) The lending was carried out very speedily and with minimal or non-existent due diligence being carried out into the Scheme, or to Mr Gangar or Mr White, or as to the ability of investors to service the loan. iii) Investors including the Watsons were given special status by the bank. iv) The bank purported to rely on its relationship with Dobb White and on a letter of undertaking from Dobb White that the money lent would be held to the order of the bank. This letter was said to provide part of the bank’s security. Although this is said to have been incorrect, it is also said to have been of importance in persuading investors including the Watsons to borrow from the bank. v) The bank “knew that the investment was, in their own words, “high-risk” but led investors such as the [Watsons] to believe that the existence of the letter of undertaking meant that the actual money they invested was safe with [Dobb White] by treating that letter as part of the bank’s purported “security package”.” vi) Dobb White were relied on by the bank to carry out purported due diligence for the bank concerning the ability of the Watsons to service the loan and to complete a statement of means in the case of the Watsons. vii) The amounts lent to the Watsons and other investors were extremely high relative to their income. The primary anticipated means of servicing the interest payments were high returns from the investment. viii) The bank knew or ought to have known that Dobb White was not authorised to carry on deposit-taking or investment business activities. ix) The bank knew or ought to have known that Mr Gangar and Mr White had been subject to publicised investigations and action by the FSA before 2001. x) The bank knew or ought to have known that Dobb White arranged for investors such as the Watsons to sign a letter in a form which made clear Dobb White’s lack of authorisation to give investment advice. xi) Mr Mackay, the senior manager of the bank responsible for lending at the Manchester branch, was at all material times a close business associate of Mr Gangar while employed by the bank. xii) Mr Mackay subsequently left the bank and joined Mr Gangar’s organisation or worked closely with him. xiii) The bank and Dobb White “were working together to attract investors and borrowers, as evidenced for example by the fact that [the Watsons] sent signed outline terms and conditions back to [Mr Mackay] under cover of a letter dated 12 June 2001. In the letter they recorded that [Mr Mackay] had said that he would consider waiving the arrangement fee of 0.5% if [the Watsons] were able to make a further one or two referrals (as already discussed with [Mr Gangar]) in the near future”. xiv) Mr Mackay “gave strong advice to [the Watsons] that the Scheme was “very very good”, such that he told them he “would be investing in it himself soon”.”

[38]Then it is alleged that the Watsons suffered significant loss and damage as a result of the matters set out, and they seek a declaration that they are not liable on the loan and they claim exemplary damages from the bank.

[39]At the first hearing of the appeal Mr Mitchell for the bank subjected this statement of case to close examination in order to show its deficiencies.

[40]The claim is based on dishonest assistance in a breach of trust. The breach of trust on the part of Dobb White can be taken as read, but it did not consist of accepting the money in the first place, but rather of misapplying it once it had been received by Dobb White.

[41]In order to implicate the bank by way of dishonest assistance, it is necessary to consider first what the bank did to assist the breach of trust and secondly whether what it did in that respect was done dishonestly, that is to say knowing that it was a breach of trust, or reckless as to whether it was.

[42]The Defence and Counterclaim alleges a telephone conversation between Mrs Watson and Mr Mackay on 30 May 2001, but says nothing (in terms) as to what was said, although the allegation quoted at paragraph [37(xiv)] above may be attributed to this occasion. It alleges a breach by the bank of its agreement with the Watsons about the security for the loan but that has nothing to do with the breach of trust.

[43]Coming to the particulars in paragraph 31, there is the allegation that the bank permitted its name to be associated with the Scheme. Then there are various allegations about the bank’s willingness to lend to those wishing to invest money in the Scheme, including the point that the bank worked with Dobb White to attract investors and borrowers. The only allegation as to the bank’s knowledge about the Scheme is that it was known to be “high-risk”. That is far short of an allegation that the bank knew the scheme to be fraudulent. Equally, the allegation that the bank knew or ought to have known that Dobb White was not authorised under the FSMA to carry on investment business, and that it knew or ought to have known that the individuals had been investigated and subjected to sanctions by the FSA previously, is not at all the same as an allegation that they knew the scheme to be fraudulent, or that they would have known this but for the fact that they turned a blind eye to it.

[44]To say the least, therefore, this pleading is far from a clear allegation of dishonest conduct on the part of the bank by which it assisted Dobb White in breaching the trust. Moreover, the only assistance which the bank is alleged to have given is in helping to gain investors for the scheme, not in enabling Dobb White to misappropriate or misapply the money once invested. Nor, despite the reference in paragraph 8 of the Defence, to “fraudulent misrepresentations of the [bank] as particularised in the counterclaim”, is any representation of fact by the bank, let alone a fraudulent misrepresentation, alleged in the counterclaim.

The new draft Amended Defence and Counterclaim

[45]The new draft statement of case makes more specific and more varied allegations. It seeks to make the bank liable in a number of different ways for the losses suffered by the Watsons directly as a result of the fraudulent scheme perpetrated by Dobb White. It is a completely new draft, rather than being grafted on to the existing statement of case by alteration of the text of that document.

[46]Whereas the Defence and Counterclaim refers specifically only to Mr Mackay, the new draft refers to Mr Wells and Mr Baker as well, and it alleges that all three men “behaved fraudulently, or negligently, in the course of the employment by the bank, as a result of which the Watsons have suffered damage”. “Either they were complicit in the fraud described below or they deliberately turned a blind eye to it such that they are to be taken as having acted dishonestly”.

[47]At paragraph 20 the fraudulent scheme is alleged, by which Dobb White persuaded investors to advance funds for a legitimate investment scheme including bond underwriting, but under which in fact the funds were not used for any legitimate investment at all.

[48]As before it is alleged that the bank provided funds for investment in the scheme by lending it to investors, pursuant, it is said, to an arrangement with Dobb White.

[49]Allegations are made as to Mrs Watson’s dealings with Dobb White before she made contact with the bank. These are not relevant to her case against the bank. The telephone conversation between Mrs Watson and Mr Mackay on 30 May 2001 is alleged in much more detail than before. It is alleged that he said several relevant things: i) That he was working closely with Mr Gangar and had known him for years; ii) That he had checked out the scheme and that it was very very good and was endorsed by the bank; iii) That he was planning to invest in it himself; iv) That she should borrow the maximum loan available against the equity of her home; v) That he could arrange a term loan and put it through on an equity release basis which would require an arrangement fee; vi) That the loan must be used for a business investment opportunity; vii) That he knew Dobb White’s scheme well and it had a fully managed risk; viii) That he was doing lots of business for the scheme and would like to do more business with anyone she cared to introduce and that the bank was prepared to pay commission for introductions.

[50]It is alleged that, in further telephone conversations between Mrs Watson and Mr Mackay (one or some of them also involving Mr Gangar), Mr Mackay said that the money would be safe because it was being held to the bank’s order and would not ever need to be moved, that the scheme therefore involved no risk, that the bank had checked the scheme out and was happy with it.

[51]Departing from the scope of the original Defence and Counterclaim, the new draft statement of case goes on to make allegations about what happened in 2002, when Mrs Watson wanted to withdraw her funds from the Dobb White scheme. I will not go into the detail of this aspect at this stage.

[52]Reverting to the original loan, it is said that “there were irregularities and unusual features of the arrangements whereby the Watsons came to borrow £345,000 from the bank secured against the property”. Eight matters are identified: i) The loan was for a large sum which the Watsons would be unable to repay from their income as disclosed to the bank. ii) The loan repayments depended almost entirely on returns from the investment. iii) The underlying assumption was that the investment would yield at least 10% per annum which was a very high return absent substantial risk. iv) The statement of means was prepared by Mr Gangar on behalf of the bank. v) The personal credit application provided that the Watsons were introduced to the bank on the basis of their family background and wealth, yet their main wealth was the equity in their home which was apparent from the statement of means. vi) The bank’s security was stated to include Dobb White’s undertaking to return the money to the bank within 30 days of demand, but the bank did not transfer the money to an account in the name of Dobb White but to an account of a corporate third party. vii) Mr Mackay offered Mrs Watson an incentive by way of reduced fees and the payment of commission if she introduced others to the scheme. viii) The bank had in fact carried out no due diligence in relation to the scheme despite lending substantial funds in reliance on its success.

[53]Then, after some allegations about other investors in the scheme, the draft statement of case comes to causes of action alleged against the bank.

[54]The first, starting at paragraph 72, is that the bank is liable for Mr Gangar’s acts which it is alleged were carried out as agent for the bank. The bank is alleged to have authorised Mr Gangar to procure applications to the bank for loans to be used for investment in a Dobb White scheme. “It was within the course of that authority that [Mr Gangar] procured the Watsons’ loan application and made fraudulent or negligent misrepresentations to the Watsons. In so doing Mr Gangar acted as the agent of the bank.” In the following paragraphs the statement of case makes further allegations against Mr Gangar in this respect.

[55]Then at paragraph 82 the draft statement of case turns to dishonest assistance in a breach of trust. The trust is said to be the obligation of Dobb White to hold the funds advanced by the bank to the Watsons for the legitimate purpose which had been represented to the Watsons as the nature of the scheme. The breach consists of not applying the money for such a purpose. The bank is alleged, at paragraph 85, to have assisted Dobb White in the breach “by making the loans available and by transferring the funds to accounts controlled by” Dobb White. The bank, by its directors, is said to have been dishonest as being either complicit in the fraud or by turning a blind eye to it. In support of that allegation the statement of case relied on several matters: i) That the bank was aware from previous FSA press releases that Dobb White were engaging in unauthorised and unlawful deposit taking and investment business, or they turned a blind eye to this. ii) Mr Mackay and Mr Baker had been told (in respect of another investor) that a Dobb White scheme generated returns of 4% per month for 10 months of the year, figures achievable on the short term only by gambling or criminality and in the long run only by the latter. iii) Even the return stated in relation to the Watsons of 10% would have put an honest banker on notice that the scheme was at best high risk but probably illegitimate. If they made no enquiry they turned a blind eye, as any enquiry would have revealed that it was a fraudulent scheme. iv) The bank had advanced loans to many customers for investment in the Dobb White scheme, from which it can reasonably be inferred that Mr Mackay, Mr Baker and Mr Wells were familiar with the scheme. v) Commonly in such cases investors borrowed substantial sums against their homes and would only be able to pay the interest payments if the scheme generated sufficient funds. vi) The loan arrangements made no provision for the repayment of capital. vii) The funds lent by the bank were transferred to an account of Cotswold Trading Co, so that a collective investment scheme was being operated by Dobb White, and unlawfully (for lack of authorisation). viii) The relationship between Mr Mackay and Mr Gangar was not an arms’ length commercial relationship. The proximity of the relationship leads to the inference that Mr Mackay was aware of the business of Dobb White, which was fraudulent. ix) The conduct of Mr Mackay and of Mr Gangar is strongly indicative of a concerted joint effort to attract investors to borrow from the bank for investment into the scheme. x) The remainder of the allegations deal with periods after the making of the loan and the investment of the advance on the part of Dobb White.

[56]Next, at paragraph 87, it is alleged that the Watsons entered into the loan arrangements and the legal charge by reason of fraudulent or negligent misrepresentations on the part of Mr Mackay. The representations alleged were: i) That he had checked the scheme out and it was very very good and was endorsed by the bank. ii) That he knew the scheme well and it had a fully managed risk. iii) That the money would be safe because it was being held to the bank’s order in custodian accounts and would not be moved. iv) That the scheme therefore involved no risk. v) That the bank had checked the scheme out and was happy with it.

[57]The representations are alleged to have been untrue, and to have been made by Mr Mackay either knowing that they were false or without any honest belief in their truth, so as to make him liable for deceit. Alternatively he had no reasonable belief in the truth of the representations and they were made negligently. The Watsons contend that they entered into the loan arrangements in reliance on these misrepresentations.

[58]In addition Mrs Watson alleges at paragraph 102 that when she agreed to reinvest money in the Dobb White scheme in 2002 she was induced to do so by representations on the part of Mr Gangar but also of Mr Mackay and Mr Wells.

[59]Then at paragraph 103 the statement of case alleges undue influence on the part of Mr Gangar, by which the Watsons were induced to enter into the loan agreement and the legal charge, and of which the bank had actual or constructive knowledge. For that reason it is said the loan arrangement and the legal charge are to be set aside.

[60]At paragraph 109 the statement of case turns to allegations of breaches on the Financial Services and Markets Act 2000 (FSMA). The gist of this is that the bank knew or ought to have known that Dobb White was operating a collective investment scheme, or taking deposits, and had actual or constructive notice of how the scheme was operated, or that by the bank’s participation in what Dobb White were doing it rendered itself jointly liable with Dobb White for breaches of FSMA.

[61]Lastly, under the heading duty of care, at paragraph 115 and following, the Watsons allege that the bank assumed a duty of care to them by encouraging them to enter into the transactions by describing the scheme in glowing qualitative terms, or that the bank came under a duty to advise the Watsons that the scheme was very high risk and probably illegitimate, because of what they had been told about the terms of the scheme and its prospective returns.

[62]The hearing before District Judge Mildred was, unfortunately, abbreviated because of practical problems. The District Judge decided the case in favour of the Watsons partly on the basis of a case which had not been relied on before him and which, it was said, was not properly analogous to the present facts. In those circumstances it is best to focus on the judgment of Judge Hughes on appeal from the District Judge.

[63]I will leave some aspects of the judge’s reasoning until later. He sought to apply the guidance given by Lord Bingham on the subject of abuse of process in Johnson v Gore Wood

[2002] 2 AC 1

. In so doing he identified eleven relevant factors. i) There was a public interest in the investigation of a claim of dishonest assistance by a relatively senior employee of a major clearing bank in a breach of trust committed by two convicted fraudsters. ii) The county court action is of vital importance to Mrs Watson and her family, since her home is at risk, and therefore

article 8 of the Convention

is engaged. iii) She seeks to use her allegations as a defence to the possession claim, and without them she would have no such defence. iv) Neither she nor the bank was put to an election as to the forum in which the issues were to be tried. v) The bank did not have to defend either of the High Court claims, and would therefore be defending the allegations for the first time if the Defence and Counterclaim were allowed to stand. vi) There has not been any decision on the merits and the nature of the bank’s defence is undisclosed. vii) Mrs Watson was in receipt of legal advice from time to time, but not at all of the important procedural stages. viii) Her financial position has been very difficult at all times. ix) Her attempt to rely on the counterclaim did not seem to the judge to be unreasonable as a defence to the possession claim. x) She is liable to pay the bank some £25,000 under a default costs certificate upon the striking out of the second High Court action, which she has not paid. xi) Finally he concluded that the counterclaim “is substantial and has merit, albeit it is imperfectly pleaded at present”.

[64]The factors that led him to conclude that there was substance to the counterclaim, based on an allegation against the bank of dishonest assistance in a breach of trust by Dobb White, are set out at his paragraphs 77 to 88. They start with statements by the FSA about its regulatory action against Dobb White up to mid 2000, of which it is said that it is reasonable to infer not only that the bank would have known of these statements but that it would have had procedures to disseminate such information among appropriate members of its staff, so that Mr Mackay would have known of them.

[65]At his paragraph 85 the judge said that a number of aspects of the transaction evidence dishonest collusion between Mr Mackay and Mr Gangar. These are matters either pleaded in the counterclaim or apparent from the 2008 documents. One is that Mr Mackay and Mr Gangar knew each other, and that the bank had not conducted any due diligence as to the quality of the investment or the standing of the institution in which the money was being invested by Mr Gangar. He said that the facts show a business relationship in which Mr Gangar introduced potential borrowers to the bank and Mr Mackay approved loans with a view to investment in Dobb White’s schemes. The terms of the loan stipulated that the money be invested through Dobb White, though Mr Mackay could be inferred to have been aware that Dobb White was not authorised to carry on investment business.

[66]Mr Gangar had introduced Mrs Watson to the bank, and provided the bank with the statement of means for the Watsons, which included as part of their income “proposed income from the advance of £350,000 minimum £35,000”. Moreover the bank’s internal document upon which approval was given to the loan application “revealed that the advance … was unaffordable” because Mrs Watson had only free funds of £8,320 per annum with which to service the loan on which annual interest payments would exceed £21,000. In fact the figure of £8,320, though given under the heading Annual Income, is plainly a monthly figure, after deduction of a monthly figure for expenditure of £1,180. This particular point is therefore not well taken by the judge. Nor did that document refer to the anticipated income from the investment, though it did take into account income from the investments already made by Mrs Watson with Dobb White.

[67]The funds borrowed were to be placed with Dobb White or to their order, the stated purpose of the loan being equity release for the purposes of a business investment, and to be invested through Dobb White, despite the fact that, as the judge put it, the bank and Mr Mackay knew that Dobb White was not authorised to carry on investment business and that the FSA had taken action against the firm in respect of illegal investment activity.

[68]Dobb White were to provide a letter of undertaking which was accepted by the bank as part of the security for the loan. Despite the FSA’s action taken against the firm and despite the bank having carried out no due diligence about it, the bank regarded the money as secure with Dobb White, and Mr Mackay recommended the approval of the loan on the basis of the introducer and the fact that the funds would be invested through Dobb White, with the guarantee of the funds being returned on request.

[69]The judge summarised what he considered that Mrs Watson might plead and argue as follows at his paragraph 88: i) Mr Mackay actively and knowingly assisted in the dishonest scheme operated by Mr Gangar and Dobb White. ii) Alternatively, given his position within the bank, Mr Mackay knew of the FSA action against Dobb White yet kept silent and concealed this information from Mrs Watson. That, the judge said, is dishonest assistance in a breach of trust. iii) Alternatively, Mr Mackay deliberately closed his eyes to the true nature of the activities of Mr Gangar and Dobb White. No reasonably competent and honest banker of the seniority of Mr Mackay, with his knowledge of the facts, would act in such a way. That is also dishonest assistance. iv) If it were said that Mr Mackay thought that what he was doing was in the interests of Mrs Watson and other depositors, such a position would be so unreasonable that no honest and reasonably competent banker, with knowledge of the facts, could form such a view. Therefore Mr Mackay did not hold such a view and his actual position was dishonest.

[70]That, therefore, was the basis on which the judge concluded that the material he had seen (including some from the 2008 documents) would allow Mrs Watson to put forward a legally tenable counterclaim. The draft statement of case prepared by Mr Bailey relies on some of these points, and on others not mentioned by the judge, but not on all of those which the judge identified. Accordingly, while noting the basis on which, in this respect, the judge allowed the Defence and Counterclaim to stand (though he clearly indicated that it needed to be better pleaded), it is appropriate at this stage to examine Mr Bailey’s draft, rather than the judge’s suggestions, in order to assess Mrs Watson’s case.

Permission to amend the Defence and Counterclaim; the relevance of limitation

[71]Mr Bailey was careful to make the point that there was no application for permission to amend the Defence and Counterclaim before the court, but he did say that, if it were necessary to save Mrs Watson’s position by applying for permission to amend, then he would do so, and the court could treat such an application as being before it.

[72]If the question of amendment does arise, an important issue turns on the dates. All the acts or omissions of the bank relied on by Mrs Watson occurred either in 2001 or in 2002. In principle any cause of action against the bank arising from such matters should have been brought within six years of the relevant date. A later claim would face a defence under the Limitation Act. Mrs Watson might have an answer to that, to the extent that the claim is based on fraud of which she did not know and could not reasonably have known until a later date. Even so, she only has until 6 years have elapsed from the date on which she did know, or could reasonably have known, about the fraud. Since she was complaining to the bank already in 2004, it may be open to question whether she could assert successfully that time had not started running at least by then. If so, a new claim brought by her at this stage would be seriously at risk of a successful limitation defence.

[73]If, however, she could amend her Defence and Counterclaim in the county court action, she would escape from that difficulty because the claim would be treated as having been started when the original claim was issued in 2008. This is the effect of the Limitation Act 1980, section 35(1)(b) and (2). There might still be a possible limitation defence but the claim would be much less vulnerable in this respect than a new claim brought now.

[74]Section 35 allows for rules to permit amendment when a limitation period has expired; the rules are contained in CPR rule 17.4. The relevant provisions are these:

“(1) This rule applies where- (a) a party applies to amend his statement of case in one of the ways mentioned in this rule; and (b) a period of limitation has expired under- (i) the Limitation Act 1980; … (2) The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings.”

[75]Thus, it is necessary to consider whether the amendment would add or substitute a new claim; if it does it is then necessary to see whether the new claim arises out of the same or substantially the same facts as a claim already made. If it does, but not otherwise, then the court has a discretionary power to allow the amendment to be made.

Does the draft Amended Defence and Counterclaim assert new claims?

[76]What is meant by a new claim for this purpose? Auld LJ had this to say on the point (in the context of the RSC rather than the CPR) in Lloyds Bank v Rogers

[1999] 3 EGLR 83

“It is important to note that what makes a ‘new claim’ as defined in section 35(2) is not the newness of the claim according to the type or quantum of remedy sought, but the newness of the cause of action that it involves. The formula employed in section 35(2)(a) and (5) is ‘a claim involving ... the addition or substitution of a new cause of action’. And Order 20 rule 5(5) refers not to a claim but to ‘[a]n amendment the effect of which is to add or substitute “a new cause of action”‘. Diplock LJ’s widely accepted definition of a cause of action in Letang v Cooper[1965] 1 QB 232, at 242-3, as ‘simply a factual situation the existence of which entitles one party to obtain from the court a remedy against another person’, as distinct from ‘a form of action ... used as a convenient and succinct description of a particular category of factual situation’, is of importance. It makes plain that a claim and a cause of action are not the same thing. It follows, as Mr Croally argued, that an originally pleaded ‘factual situation’ may disclose more than one cause of action, although one of them may not be individually categorised as such or the subject of a claim for a separate remedy. However, as Mr Browne-Wilkinson submitted, it does not follow that a claim so categorising it and/or seeking a remedy for it made for the first time by amendment is the addition of a new cause of action so as to render it a new claim. That the draftsmen of section 35 and Order 20 rule 5 had the distinction in mind is underlined by their respective provision for new claims by reference to substituted new causes of action, as well as additional new causes of action. The remedy claimed - ‘any claim’ - may or may not be the same; what makes the claim ‘a new claim’ is the newness of the substituted cause of action. Thus, a claim for damages is a new claim, even if in the same amount as originally claimed, if the claimant seeks, by amendment, to justify it on a different factual basis from that originally pleaded. But it is not, even if made for the first time, if it does not involve the addition or substitution of an allegation of new facts constituting such a new cause of action.”

[77]In turn, in HMRC v Begum

[2010] EWHC 1799 (Ch)

David Richards J, relying on Lloyds Bank v Rogers, said this:

“Thus, “claim” in the phrase “any claim involving … a new cause of action” refers to the remedy sought, while “cause of action” refers to the factual basis for the claim. Whilst the distinction is clear, it might be thought to lead to some tautology when applying the test in section 35(5)(a) as to whether “the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action”

. The answer lies in treating “cause of action” as those facts relied on in the statement of case as giving rise to a particular legal result and remedy. A change in the remedy may change the claim, but not the cause of action. A change in the essential features of the factual basis (rather than, say, giving further particulars of existing allegations) will introduce a new cause of action, but it may be permitted under s.35(5)(a) and CPR 17.4(2) if the facts are the same or substantially the same as those already in issue.”

[78]These two cases, which are referred to in the notes to the White Book (the first indirectly via another case and the second directly) at paragraph 17.4.4, were not cited to us but it does not seem to me that they do more than set out rather clearly propositions which are also apparent from cases that were cited, including Paragon Finance v Thakerar, to which I refer later. As appears from the points made, there is or may be a close relationship between the first question, whether a claim is a new claim, and the second, whether a new claim is based on the same or substantially the same facts as a claim already made. However, I will consider the two questions separately.

[79]The starting point is that the existing Defence and Counterclaim asserts only a claim in dishonest assistance. I will come back to that claim later.

[80]The draft Amended Defence and Counterclaim asserts a range of different claims as well as dishonest assistance. At first sight they are new claims. But they are not if they do not involve the addition or substitution of an allegation of new facts as compared with those alleged in support of the existing claim. I will refer to them in turn.

[81]At paragraphs 72 to 81 Mrs Watson alleges that the bank is liable for Dobb White’s misrepresentations, whether fraudulent or negligent, because Mr Gangar was authorised by the bank to act as their agent and made his misrepresentations in the course of so acting. The present Defence and Counterclaim contains no allegation that the bank authorised Dobb White or Mr Gangar to act as its agent. The closest it gets to paragraph 72 of the new draft is at paragraph 31(xiii) (see paragraph [37(xiii)] above) but that does not include any allegation of authority from the bank to Mr Gangar.

[82]Paragraphs 82 to 86 deal with dishonest assistance, to which I will return later.

[83]Paragraphs 87 to 102 set up a claim that the Watsons entered into the loan agreement and the legal charge by reason of fraudulent or negligent misrepresentations on the part of Mr Mackay. As I have said, there is a similar reference in paragraph 8 of the Defence, but the existing counterclaim does not allege any misrepresentation on the part of the Bank. The closest it comes is what is said in paragraph 31(xiv) as quoted at paragraph [37(xiv)] above. That does not set out any representation of fact, except possibly a representation that Mr Mackay did in fact intend to invest himself. That assertion is not alleged to have been false. Indeed in the new draft statement of case it is said that he did, later, invest £50,000: paragraph 86(q).

[84]The representations alleged in the new draft go a great deal further than that, even as regards the events of 2001, as I have set them out above. They also include reliance, for the first time, on things said in 2002 by Mr Wells. This therefore amounts to a new claim.

[85]The next claim is undue influence, set out at paragraphs 103 to 108. This is new. It involves an assertion that Dobb White exercised undue influence over the Watsons. That is a new factual allegation, and therefore a new claim.

[86]Next comes liability of the bank for breaches of FSMA. This too is a new kind of claim. It involves an allegation that the bank operated in concert with Dobb White (an unauthorised person under FSMA) in communicating an invitation to enter into an unlawful and unauthorised CIS, and that, together with Dobb White, it carried on the Dobb White Scheme without authorisation. These involve new factual allegations, so it is a new claim.

[87]Lastly there is a claim in negligence, including the assertion that the bank assumed a duty of care towards the Watsons, or became subject to such a duty because of the bank’s active involvement in promoting the Scheme. The factual allegations relied on for this go a great deal beyond those asserted in the existing Defence and Counterclaim. This, too, is therefore a new claim.

[88]In Paragon Finance v Thakerar

[1999] 1 All ER 400

Millett LJ said this at page 418:

“Whether one cause of action arises out of the same or substantially the same facts as another was held by this court in Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409 to be essentially a matter of impression. In borderline cases this may be so. In others it must be a question of analysis.”

[89]I return to the claims other than that asserted under the label of dishonest assistance.

[90]The case based on the proposition that Mr Gangar, or Dobb White, were authorised to act as the bank’s agents, so that the bank is liable for their misrepresentations, plainly arises (in part at least) out of facts other than those which are already relied on, above all the new assertion of authorisation by the bank of Dobb White, or Mr Gangar in particular, to act on the bank’s behalf.

[91]The case of misrepresentation by the bank is new, in that, as I have already said, the present Defence and Counterclaim, though referring to fraudulent misrepresentations, does not allege any. To the extent that the new draft relies on this, if it is to overcome this fundamental defect, it must allege misrepresentations of fact by Mr Mackay on behalf of the bank. To the extent that it does, it does not arise from the same or substantially the same facts.

[92]Undue influence is new and is based on quite different factual allegations.

[93]The same is true of the case under FSMA.

[94]It is also true of the case based on an alleged duty of care on the bank.

[95]Accordingly I conclude that none of these claims can be allowed in by amendment under CPR rule 17.4(2).

The claim in dishonest assistance

[96]Mr Bailey pointed out that the bank’s application to strike out the counterclaim was not put on the basis that it did not disclose any cause of action. The basis was that it was an abuse of process, or that the claims were time-barred. Only the first point was relied on in the courts below. (Before the District Judge there was not enough time to deal with the limitation issue.) However, it was part of Mr Mitchell’s argument on abuse of process, in this court at least, that the claim in dishonest assistance was not viable, even with amendment or clarification such as Judge Hughes envisaged. Judge Hughes himself considered the question whether there was a viable claim in the Defence and Counterclaim. We cannot ignore that argument.

[97]The breach of trust on the part of Dobb White was the misuse and misappropriation of the money invested by the Watsons, as alleged (in general terms) at paragraphs 26 and 27 of the Defence and Counterclaim. In effect Dobb White stole the money. The claim against the bank has to be that it assisted in this breach of trust, and did so knowing that it was a breach of trust, or recklessly as to whether the application of the money was in breach of trust.

[98]The allegations against the bank in the Defence and Counterclaim are of two kinds: first, it helped to gain investors for the scheme, by lending them money which could be so invested, thereby helping Dobb White to promote the scheme, and secondly it knew or ought to have known that Dobb White and Mr Gangar had been investigated and subjected to sanctions for regulatory infringements in the past. There is no allegation in the Defence and Counterclaim that the bank did anything which could amount to helping Dobb White to misappropriate the money once it had been received. Nor is there any allegation that the bank knew that Dobb White was misappropriating the money, or that it turned a blind eye to matters that would have put it on notice of this. Accordingly, it seems to me that Mr Mitchell was justified in his submission on behalf of the bank that the present Defence and Counterclaim does not disclose a cause of action in dishonest assistance.

[99]What of the revised allegations in paragraphs 82 to 86 of the draft Amended Defence and Counterclaim? The breach of trust by Dobb White is alleged at paragraph 84 as being that they did not apply the funds for a legitimate investment in a bond underwriting scheme, “but used the funds as their own or for an unauthorised purpose”. The bank is alleged to have assisted Dobb White in that breach of trust by making the loans available (i.e. to potential investors) and by transferring the funds to accounts controlled by Dobb White. As regards the latter allegation, at paragraph 24 it is said that the Watsons’ funds were transferred to “various offshore accounts whereby investors’ moneys would be combined”, identifying in particular an account in the name of Bank of Butterfield International (Guernsey) Ltd held at HSBC Bank plc in London for the benefit of Cotswold Trading Co Ltd. That is the account to which Dobb White asked Mrs Watson to instruct the bank to transfer the £345,000 lent to the Watsons once it had been advanced. Apart from the fact that this does not appear to be an offshore account itself, it could not be argued that payment to that account as such was a breach of trust, since it was the Watsons who stipulated, and therefore agreed, that the money should be paid into that account.

[100]Accordingly, it seems to me that neither lending the Watsons the money nor paying it, on their instructions, to the Cotswold Trading Co account could amount to assisting Dobb White in misappropriating the money in breach of trust.

[101]Judge Hughes considered that it was open to Mrs Watson to plead an arguable case of dishonest assistance, which he outlined in the latter part of his judgment, as summarised above. However, as I have said, now that Mrs Watson has the benefit of Mr Bailey’s professional assistance, it seems to me that the correct focus of attention must be what is alleged in the new draft statement of case, rather than what Judge Hughes thought might be so alleged.

[102]The new draft statement of case does set out some new matters which were not in any way foreshadowed in the existing Defence and Counterclaim, namely reliance on things said and done in 2002. If these could constitute dishonest assistance, they would nevertheless clearly be a new claim. The cause of action is the same, in general terms, but in detail it is quite different. Originally Mrs Watson alleged that the bank assisted in Dobb White’s breach of trust by lending the money in 2001 and transferring it to the Cotswold Trading Co account. Now she seeks to rely on things done in 2002 as well. It is not clear whether these are said to be further acts of assisting in a breach of trust; if they are not, they seem to be irrelevant, since what matters is what the bank knew at the time it did whatever is said to have been the acts of assistance.

[103]In Paragon Finance v Thakerar Millett LJ said at page 406:

“Breach of fiduciary duty was already pleaded, but in terms which did not involve any conscious impropriety. The plaintiffs submit that the mere addition of an allegation of intent does not amount to a new cause of action. In my judgment this is contrary to the authorities already cited, which show that intentional and unintentional wrongdoing give rise to distinct causes of action. Moreover the existing pleading disclosed no cause of action for the reasons given in Bristol & West Building Society v Mothew[1998] Ch 1. A sufficiently pleaded allegation of breach of fiduciary duty is made for the first time by the amendment, and this to my mind unquestionably amounts to the introduction of a new cause of action.”

[104]On this basis Mr Mitchell submitted that, even if (which he did not accept) the new draft statement of case contains a viable allegation of dishonest assistance, it amounts to a new claim, and is therefore subject to the conditions set out in CPR rule 17.4.

[105]Against this, Mr Bailey relied on a passage from the judgment of Longmore LJ in Berezovsky v Abramovich [2011] 1 W.L.R. 2290 at paragraph 59:

“A new claim, according to section 35(2) of the 1980 Act is a claim involving the addition or substitution of a new cause of action. A cause of action is that combination of facts which gives rise to a legal right. A cause of action in tort has, as its essential ingredients, a plea of duty, breach of duty and consequent damage to the Claimant. If it happens to be the case that an element of one of those essential ingredients is misstated, misdescribed or omitted, it does not mean that a correct statement, description or inclusion is a new cause of action; even if the formal result of such a statement misdescription or omission might technically be that an unaltered claim would have to be dismissed, that still does not mean that a corrective alteration involves or constitutes a new cause of action.”

[106]There does seem to be a degree of inconsistency between what Millett LJ said and what Longmore LJ said in the later case (in which Paragon Finance v Thakerar was cited). It is worth noting the difference, in practical terms, between what was at issue in the two cases. In Paragon Finance a breach of fiduciary duty was already pleaded but one which was not alleged to involve any conscious impropriety. Millett LJ regarded the addition of the allegation of intentional wrongdoing as transforming the claim. Mr Berezovsky, by contrast, alleged the tort of intimidation against Mr Abramovich, and sought to amend some of the details of the allegation. The nature of the changes is set out in the judgment of Longmore LJ at paragraph 58, summarising the detailed submissions of Counsel for Mr Abramovich. The judge rejected the contention that, for this reason, the amendment would assert a new claim. As a matter of decision he did so on the basis of reasoning which is set out, principally, at paragraphs 62 to 66. He held that the essence of the facts alleged was the same in each case unless it could be said that by identifying the loss suffered in a different way, the claim was necessarily new. That he rejected as a general proposition, holding that if different types of loss all stemmed from the same breach of duty which had caused loss, then to identify a new kind of loss would not amount to asserting a new claim.

[107]Looking at the two cases in the light of their facts and circumstances, it seems to me clear that the present case is much closer to Paragon Finance. The existing Defence and Counterclaim does not, in my judgment, make out a viable claim in dishonest assistance, because there is neither an allegation of assistance in the conduct which constituted the breach of trust, nor an allegation of dishonesty against the bank in what it did do. The new draft statement of case is in part similar to the existing Defence and Counterclaim, but it goes a great deal further, and it cannot in my judgment be said that the alterations are within the scope of what Longmore LJ indicated should be regarded as not amounting to a new claim. It may be that Millett LJ’s observation in Paragon Finance has to be read as subject to possible qualification in a different kind of case, but in relation to the facts of the present case it seems to me to be a sound guide.

[108]Accordingly I consider that the claim under the heading of dishonest assistance set out in the draft Amended Defence and Counterclaim is a new claim, if it is viable at all. If it can get over the deficiencies in the Defence and Counterclaim, it must be by alleging against the bank, first, that it assisted Dobb White in their breach of trust and, secondly, that in doing so it knew that what Dobb White were doing was a breach of trust, or it was reckless as to whether that was so. Since the present Defence and Counterclaim does not allege any facts which can make such a claim out, the new draft statement of case must either suffer from the same deficiency or, if it does not, it asserts new facts and must therefore be a new claim, and one which does not arise from the same or substantially the same facts as the existing claim. This claim, therefore, like the others in the draft statement of case, fails to satisfy rule 17.4.

[109]It follows that permission to amend could not be given to Mrs Watson so as to allow her to make these claims by way of a counterclaim.

Abuse of the process

[110]The limitation point was not one which featured in the argument before Judge Hughes Q.C. It arose from the examination before us of the question whether Mrs Watson could assert a viable claim against the bank and from the new formulation of that claim by Mr Bailey on Mrs Watson’s behalf.

[111]Before the District Judge and to some extent before Judge Hughes the debate centred on whether it was an abuse of the process of the court for Mrs Watson to raise issues of this kind in her Defence and Counterclaim in the county court proceedings when these had been stayed, for a time, so that she could do so in her own High Court proceedings, and she had tried to do so but had failed.

[112]For the bank Mr Mitchell relied on Chanel Ltd v F W Woolworth & Co Ltd [1981] 1 W.L.R. 485 and on Koshy v DEG-Deutsche Investitions und Entwicklungsgesellschaft Mbh

[2008] EWCA Civ 27

, to argue that because Mrs Watson had applied, successfully, to have the county court proceedings stayed so that she could bring her own claim in the High Court, she could not go back on that, despite the failure of her High Court proceedings, and seek to argue the points in the county court instead. He also advanced the argument that the order of Master Eyre by which the second Queen’s Bench claim was struck out involved a judicial determination that the facts alleged in the Claim Form and the draft Particulars of Claim did not disclose a valid claim against the bank; on that basis he argued that that point was res judicata as between Mrs Watson and the bank.

[113]I do not accept the latter proposition. A res judicata must be based on a decision on the merits. According to Spencer Bower and Handley, Res Judicata, 4th ed. (2009) paragraph 2.01, footnote 1, such a decision includes a final judgment by default or consent but not decisions on procedural grounds. It seems to me plain that Master Eyre’s decision to strike out the second Queen’s Bench action was a decision on procedural grounds, and not on the merits. The basis of the decision was not that Mrs Watson had no cause of action against the bank, but that she had not pleaded her case properly, and therefore had failed to comply with the previous order. A striking out order made on the basis that the statement of case disclosed no cause of action could give rise to a res judicata, but this order was not made on that basis, as appears from the terms of the Master’s order.

[114]It seems to me that the real issue is whether Mrs Watson’s attempt to put matters in dispute by her Defence and Counterclaim is an abuse of the process, in the sense explained by the House of Lords in Johnson v Gore Wood

[2002] 2 AC 1

. As Judge Hughes did, I cite a now familiar passage from Lord Bingham’s speech (at page 31 of the report), not as a definitive and comprehensive statement of the law, but as a sound guide to the principles which are in play in a case where it is said that a party’s attempt to raise issues in proceedings which either have been, or could have been but were not, raised in earlier proceedings is an abuse of process. “But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not. … While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party’s conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.”

[115]In Aldi Stores Ltd v WSP Group plc

[2007] EWCA Civ 1260

, [2008] 1 W.L.R. 748 this court said that “there can … only be one correct answer to whether there is or is not an abuse of process”: see Thomas LJ at paragraph 16, and to the same effect Longmore LJ at paragraph 38.

[116]Mr Mitchell relied particularly on the following words of Arden LJ in paragraph 34 of her judgment in the unusual and much-litigated case of Koshy:

“On the other hand, the issue is not now simply whether the allegations in the new action have substance but whether Mr Koshy has already had ample opportunity to have those allegations made the subject of judicial determination. Even though the allegations which Mr Koshy raises are of such seriousness and importance, nonetheless the justice system is not bound to provide more than one opportunity to run these issues. That is because the courts have to strike a fair balance between the interests of Mr Koshy on the one hand and of the other parties and the general interest on the other hand. That fair balance in my judgment is struck once Mr Koshy has had one effective opportunity to put his case.”

[117]So, Mr Mitchell argued, the court had allowed Mrs Watson an opportunity to put her case by staying the county court claim, and it was not right to allow her another opportunity, even though the first opportunity given to her had not proved fruitful, in the circumstances already described. Koshy was a very different case on the facts and in terms of its litigation history. Mr Koshy had made a choice between two courses of action, the choice being presented to him explicitly by the court. He chose to continue with his appeal to the Court of Appeal rather than to have the case remitted to the first instance court for the finding of further facts. In the part of her judgment in which she gave her reasons for holding that it would be an abuse of process for Mr Koshy to start a new action, Arden LJ said this at paragraph 55 (having just cited the passage from Lord Bingham which I have set out above):

“In some circumstances, where a person brings one claim but that claim is dismissed on procedural grounds, he is not prevented from bringing a second claim merely because the first is dismissed; still less a claim which was not brought in those proceedings but which could have been brought. But there are cases where he will not be able to bring a second claim: see generally Securum Finance Ltd v Ashton [2001] Ch 291. He will also be precluded from bringing a second action if he has validly given up or waived his right to do so, but I am proceeding on the basis that an election has not been shown. DEG contends that Mr Koshy in fact waived his right to bring the new action in a binding manner that was equivalent to a true election. It is unnecessary to determine this submission as I will make the assumption in Mr Koshy’s favour that there was no such waiver.”

[118]She went on to hold that, on balance, it was an abuse of the process to start a new action because Mr Koshy had been given a choice which he had exercised on a fully informed and autonomous basis, and accordingly the hearing of his appeal had proceeded, instead of the other option, a proceeding at first instance with a factual investigation of the kind that he now sought to have carried out by his new proceedings.

[119]Chanel v Woolworth is a very different case. Chanel brought an action for trade mark infringement and for passing-off and applied for interim injunctions. That application was dealt with by agreement on the giving by the Defendants of undertakings in certain terms. Later the Court of Appeal decided a case which, according to the Defendants, showed that Chanel had no reasonable prospect of getting an injunction at trial, and they applied to the court to be discharged from their undertakings. The judge refused the application and the Court of Appeal refused permission to appeal. Buckley LJ said, at page 492-3:

“Even in interlocutory matters a party cannot fight over again a battle which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in time for the first encounter.”

[120]It made no difference that the party did not fight the battle but came to an agreement as to the outcome. This approach is clearly not limited to the effect of consent orders.

[121]However, the effectiveness of the orders staying the county court proceedings is not at issue now. Neither Mrs Watson nor the bank seeks to have those varied or discharged. The question is whether, Mrs Watson having obtained those orders and having attempted, but without success (in the circumstances already described), to bring High Court proceedings against the bank, it is now an abuse of the process for her to try to raise the issues by way of a Defence and Counterclaim in the county court.

[122]I agree with Judge Hughes that this question cannot be answered simply by saying that she had one chance, in the High Court, and should not be allowed another, in the county court. This case is not at all like Koshy. The choice made by Mr Koshy was between two ways forward in terms of litigation, one of which he took by carrying on with the appeal that was under way, thereby opting against the other. He knew that he had to make a choice between the one and the other, and with advice he knew and understood the choice he had to make. That is not at all comparable to the situation as it was when the District Judge was asked to stay the county court proceedings in January 2010. A stay of proceedings is, in its nature, no more than a temporary decision as to their future.

[123]Of course, if the High Court proceedings had resulted in a decision on the merits, either way, that would have been, to the relevant extent, conclusive because of the rules of res judicata. But that did not happen. Accordingly, it seems to me that Judge Hughes approached the issues on the right basis, looking at what had happened as a whole. On the one hand Mrs Watson had the opportunity to bring her own High Court proceedings, and she took it by issuing the second Queen’s Bench claim. On the other hand, that claim was struck out without the bank having to engage with it, and without any decision on the merits. It is true that the bank incurred costs in relation to the second claim, but it has obtained an order for those costs and, we were told, a default costs certificate quantifying the costs payable (though Mr Bailey said that there might be a procedural issue as to the validity of that certificate).

[124]If Mrs Watson were to bring a further action of her own against the bank, without having paid whatever costs are due from her to the bank by reason of the striking-out of the second Queen’s Bench claim, the bank could obtain an order under CPR rule 3.4(4) staying the new action until those costs are paid. That protection would not be open to the bank if she could assert the same claims by way of Defence and Counterclaim in the county court proceedings. However, on instructions, Mr Mitchell told us that, if the bank’s appeal were allowed so that, if Mrs Watson wishes to pursue her claims against the bank, she would have to start yet further new proceedings, the bank would not apply for a stay of those proceedings under rule 3.4(4). It would, no doubt, apply to strike the new claim out on the basis that the claims would be time-barred.

[125]Leaving aside that last factor, which arose only in the course of the adjourned hearing of the appeal, it seems to me that there is much to be said for Judge Hughes’ approach to the question of abuse of process. I agree with him on many of the points which he mentions in the course of his paragraphs 53 to 69.

[126]I do not regard the bringing by Mrs Watson of either of the Queen’s Bench claims as making it an abuse of the process by itself for her to seek to raise the same or similar issues by counterclaim in the county court, given that the first action was never served on the bank and the second was struck out at an early stage because of Mrs Watson’s failure to comply with Master Eyre’s order as regards particularity in pleading.

[127]Where I part company with the judge is on his conclusion that the counterclaim is substantial and has merit, taken with the significance of the limitation arguments, which were not raised before him. In my judgment, for the reasons that I have set out at greater length than I would have wished, first the present Defence and Counterclaim does not disclose a valid counterclaim, so that Mrs Watson’s position in that respect can only be saved by amendment, and secondly the new draft statement of case is not one for which permission to amend can be granted, because of rule 17.4, even if it does disclose one or more causes of action that could not be struck out.

[128]I express no view as to whether the new draft statement of case discloses good causes of action. We do not need to decide that question because, even if it does, CPR rule 17.4 prevents the grant of permission to amend to make the new claims set out in the draft statement of case.

[129]It follows that the bank’s appeal should be allowed, the counterclaim should be struck out, permission should not be given to amend it in terms of the new draft, and Mrs Watson has to be left to bring a new claim if she wishes to do so, though she will face the danger that her claims may be found to be barred by the lapse of time under the Limitation Act 1980.

[130]I agree.

[131]I also agree.

Cited in 3 later judgments

Copeland v Bank of Scotland Plc 2020
MR L GALILEE v THE COMMISSIONER OF POLICE OF THE METROPOLIS 2017
MR L GALILEE v THE COMMISSIONER OF POLICE OF THE METROPOLIS 2017