(1) NIRU BATTERY MANUFACTURING COMPANY (2) BANK SEPAH IRAN v (1) MILESTONE TRADING LIMITED (2) MARITIME FREIGHT SERVICES LIMITED (3) ALI AKBAR MAHDAVI (4) CREDIT AGRICOLE INDOSUEZ (5) SGS UNITED KINGDOM LIMITED [2002] EWHC 1425 (Comm)

IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
[2002] EWHC 1425 (Comm)Case No Case No: 1999 Folio 910Venue Royal Courts of Justice, Strand, London, WC2A 2LL
Between
(1) NIRU BATTERY MANUFACTURING COMPANY (2) BANK SEPAH IRANClaimants(1) MILESTONE TRADING LIMITED (2) MARITIME FREIGHT SERVICES LIMITED (3) ALI AKBAR MAHDAVI (4) CREDIT AGRICOLE INDOSUEZ (5) SGS UNITED KINGDOM LIMITEDDefendants
Before
Mr Justice Moore-BickMr. Ali Malek Q.C. and Mr. David Quest (instructed by Richards Butler) for the claimantsThe first and second defendants did not appear and were not representedMr. Ali Mahdavi in personMr. Michael Bloch Q.C. and Miss Karen Maxwell (instructed by Clyde & Co) for the fourth defendantsMiss Geraldine Andrews Q.C. and Miss Zoe O’Sullivan (instructed by Ashurst Morris Crisp) for the fifth defendantsDate 11 July 2002
[1]Mr Justice Moore-Bick: Introduction The first claimant, Niru Battery Manufacturing Company (“Niru”), is an Iranian company which, as its name suggests, carries on business as a manufacturer of batteries. For this purpose it requires substantial quantities of lead for use as a raw material. In the early part of 1998 Niru entered into a contract with the first defendant, Milestone Trading Limited (“Milestone”), for the purchase of 10,000 metric tons of lead ingots for shipment to Iran. Milestone was a subsidiary of Woralco Holdings Ltd, an English company owned by a discretionary trust established for the benefit of the Mahdavi family of which the third defendant, Mr. Ali Mahdavi, is a member. Mr. Mahdavi is an Iranian who left Iran at the time of the Islamic Revolution and subsequently established a successful metal trading business in this country. Woralco Holdings is the holding company of a group whose business is the production and trading of non-ferrous metals. Milestone itself was incorporated in the Republic of Ireland and was used by the Woralco group as a single purpose vehicle for entering into the contract with Niru. It had no significant assets of any kind.[2]The first contact between Niru and the Woralco group occurred in January 1997 when Woralco Ltd, the principal trading company in the group, wrote to Niru expressing interest in tendering for the supply of lead ingots. Its letter, which was addressed to Niru’s commercial manager, was seen by the managing director, Mr. Rahnama, who gave instructions to find out who had brought Niru to Woralco’s attention. It was then passed to Mr. Ahadifar, the deputy head of the Commercial Department, who passed it to Mr. Khodayari, a member of the Foreign Purchase department, for action. Mr. Khodayari quickly made contact with Mr. Mohammed Sadri, a long standing friend of Mr. Mahdavi who acted as a commercial agent for the Woralco group in Iran. In response to the letter of enquiry Niru sent a fax to Woralco inviting it to submit an offer for the sale of 10,000 metric tons of lead ingots in the form of a pro forma invoice. The fax, which was written in English, was signed by Mr. Ahadifar and a copy was sent to Mr. Sadri. Woralco did submit an offer and although these initial contacts did not ultimately bear fruit, contact between Niru and Woralco and between Niru and Mr. Sadri as Woralco’s agent had been firmly established. The sale contract[3]In September 1997 Niru invited tenders for the supply of a further 20,000 metric tons of lead from a number of companies including Woralco. It appears that as a result of its earlier offer Woralco had by then been added to Niru’s list of acceptable suppliers. On 23 rd October Woralco responded by making an offer to supply 10,000 metric tons of lead on terms broadly similar to those previously quoted. These included, in particular, a provision for payment to be made by letter of credit against FIATA multimodal bills of lading and a certificate of weight and quality issued by SGS.[4]Over the course of the following three months negotiations continued between the parties. At the end of November 1997 Milestone was substituted as seller for Woralco in response to Niru’s refusal for political reasons to enter into a contract with a British company. During this period the negotiations were mainly directed to the quantity of goods to be supplied and the price at which they should be sold. Many months earlier Niru had secured from the Central Bank of Iran US$5.84 million in foreign exchange in order to enable it to buy lead from a Swiss supplier. Its negotiations with the Swiss seller had eventually fallen through, but Niru had retained the benefit of the foreign currency allocation which thereafter played a large part in its negotiations with Woralco. Fluctuations in the market price of lead also played an important part since Niru wanted to make full use of the currency available to it and also to obtain as keen a price for the goods as possible.[5]In the event the negotiations between Niru and Milestone culminated in an agreement on the terms of a pro forma invoice sent by Milestone to Niru on 2 nd February 1998. This provided for the sale by Milestone to Niru of 9,000 metric tons +/- 15% of lead ingots of Canadian origin c.&f. Bandar Abbas at a premium of US$16 per metric ton over the LME market price on a range of dates to be determined by Niru, basis f.o.b. stowed. Payment was to be made by letter of credit opened by Bank Sepah Iran against presentation of FIATA multimodal transport bills of lading and (among other documents) an inspection certificate issued by SGS. The letter of credit[6]On 14 th March 1998 Niru made an application to the Chamran branch of Bank Sepah for the opening of a letter of credit in favour of Milestone in the sum of US$5,838,000. The credit was opened the next day and was advised to Milestone through Bank Sepah’s branch in London. The letter of credit called for the presentation of ocean bills of lading rather than FIATA bills, but Milestone immediately requested an amendment which was duly made.[7]By the time the pricing period under the contract arrived the market price of lead had fallen and Niru was therefore in a position to buy a greater quantity than originally agreed with the amount of foreign currency already allocated to it. Milestone therefore agreed to sell Niru a further 1,400 metric tons, thereby increasing the total contract quantity to 10,400 metric tons. The price of the goods was US$5,837,480.[8]In 1998 the import of goods into Iran was closely controlled by the Central Bank of Iran. In January 1996 the Central Bank had issued a circular to all Iranian banks making the submission of an inspection certificate issued by an approved inspection company a mandatory requirement in respect of all goods to a value of more than US$20,000 imported into Iran under letters of credit. A list of the inspection companies approved by the Central Bank was set out in Appendix No. 1 to the circular, one of which was SGS.[9]Paragraph 3 of the circular provided that the inspection company should be free to determine the method of inspection and the place at which it should begin, but required that the inspection be completed by supervision of the loading of the goods or the delivery of the goods to the freight forwarder in the case of carriage by air or rail. It also provided that the certificate should clearly state that the goods loaded were the same goods as had been inspected and that the date of issuing the certificate should be the same as, or later than, that of the bill of lading. In order to implement these requirements banks were obliged to include in all letters of credit a clause containing the specific form of words set out in Appendix No. 2. This required the presentation of an original inspection certificate issued not prior to the bill of lading date certifying that “ the quality, quantity and packing of the goods loaded ” strictly complied with the contract.[10]SGS had an office in Iran and maintained a Tehran Co-ordinating Office in Geneva to advise local SGS offices around the world responsible for carrying out inspections in countries of export on the requirements of the Iranian authorities. It is clear that the Tehran Co-ordinating Office and local SGS offices in general were well aware of the requirements set out in the Central Bank of Iran’s circular and of the need to observe them scrupulously. The Woralco group’s relationship with Crédit Agricole Indosuez[11]The Woralco group had banked with Crédit Agricole Indosuez (“CAI”) from 1992. Since 1995 its primary point of contact at the bank had been Mr. Paul Francis, a member of the Commodity and Trade Finance Department. Milestone itself was not a customer of CAI, nor did it have financing arrangements with any other bank. It was a shell company used by Woralco simply for the purposes of the sale to Niru and relied entirely on Woralco to obtain the finance required to enable it to perform the contract.[12]Although Mr. Mahdavi had been successful in building up the business of the Woralco group, in 1998 its finances were in a parlous condition. Woralco Ltd had entered into a substantial project for the management of an aluminium smelter in Tajikistan, but had become embroiled in a dispute with the government which had led to its insolvency. By the autumn of 1998 the group had exhausted its credit lines with CAI and could not finance the purchase of the lead needed to fulfil the contract with Niru without additional facilities. During the latter part of 1998 Mr. Mahdavi tried to persuade the bank’s senior managers to provide the group with further long term facilities, but his efforts proved unsuccessful. CAI itself was the result of a merger between Crédit Agricole and Banque Indosuez which had taken place not long before and the bank’s policy in relation to trade financing was subject to review in London and Paris. In order to enable Mr. Mahdavi to apply for new long term facilities the London office had suggested that a new company be introduced whose financial position would not be undermined by the problems facing Woralco. Accordingly a new member of the group, Nikam Metal Finance Ltd (“Nikam”), was incorporated in September 1998 for that purpose. In the event CAI’s senior managers were unwilling to provide finance to Nikam, but in due course the company played a small but significant role in the events that led to the present proceedings.[13]Although earlier in the summer of 1998 CAI had been willing to finance the purchase by Woralco of a parcel of lead from China for resale to Niru under its existing facilities, by the autumn of that year when arrangements finally had to be put in place to enable Milestone to perform its contract Woralco’s financial difficulties were such that CAI was only willing to provide financial support for individual transactions insofar as it considered them sufficiently attractive on their own merits. This created a particular difficulty for Mr. Mahdavi in the present case because Milestone could not purchase the lead needed to satisfy its contract with Niru unless it could persuade the bank to support the transaction. The LME warrant system[14]Lead is one of the metals regularly traded on the London Metal Exchange (“LME”). Producers of lead of a quality recognised by the LME are able to deposit the metal in LME approved warehouses around the world against the issue of warehouse warrants. The metal is deposited in lots of 25 metric tons, each lot being individually identified and made the subject of a single warrant. The metal is traded by buying and selling warrants. Physical delivery can only be obtained from the warehouse against production of the relevant warrant.[15]The first step towards the performance of the contract in this case was to identify suitable goods. As Mr. Mahdavi pointed out, that was not really a problem since in order to qualify for delivery into LME warehouses the metal must meet the standards of purity laid down by the LME. However, in order to obtain a certificate confirming that the goods complied with the contract it was necessary to allow SGS to carry out a physical inspection and sampling of the goods and in order to do that Milestone had to obtain possession of the warrants covering the goods it intended to ship. On 7 th September 1998 Mr. Mahdavi approached CAI with a request to finance the “borrowing” of 336 LME warrants covering 8,400 tons of lead held in a warehouse in Gothenburg to enable the metal to be inspected and sampled. The proposal was for the bank to obtain warrants from one of the LME brokers, use them to make the lead available to Woralco for inspection and sampling by SGS, and then to return the warrants to the broker. The bank would have to pay for the warrants when it obtained them, but would be reimbursed when it returned them to the broker. This proposal left open the question of how Milestone would finance the purchase of the metal when the time came to make delivery.[16]It was common ground that there were further discussions between Mr. Mahdavi and CAI around this time as a result of which the bank agreed to retain the warrants and to finance the purchase of the lead that Milestone would eventually deliver to Niru. However, CAI was only willing to support the transaction on the basis that it would continue to hold the warrants as security pending reimbursement of the price. Difficulties had been encountered in obtaining payment in hard currency from Iranian banks in the past and CAI was not willing to accept an assignment of the proceeds of a letter of credit issued by Bank Sepah as security. Nor, it seems, was it willing to allow the goods to be delivered to a carrier in exchange for a document of title. By 26 th October CAI had purchased at Woralco’s request warrants covering 10,400 metric tons of lead held in warehouses at Gothenburg and Helsingborg.[17]The bank’s insistence on retaining the warrants as security for its advance put Milestone in a difficult position. The only source of funds enabling it to pay for the lead was the letter of credit, but in order to obtain payment under the letter of credit Milestone had to present documents to Bank Sepah which included a bill of lading. However, a bill of lading, even a FIATA bill, could not be issued until the goods had passed into the control of the carrier or forwarding agent and that could not occur until the warehouse had released the goods. However, the warehouse would not release the goods to the carrier or forwarding agent without production of the warrants which the bank would not release until it had been paid.[18]Mr. Mahdavi’s solution was simple. The key document was the bill of lading. He calculated that if the forwarding agent could be persuaded to issue a bill of lading before the goods had formally passed into its control, SGS would issue its certificate and documents could be presented to Bank Sepah. The price would then be paid enabling Milestone to pay CAI and obtain possession of the warrants. That in turn would enable the forwarding agent to obtain delivery of the goods from the warehouse and in due course put them on a ship to Iran. Everyone would be happy.[19]This scheme was duly implemented. On 5 th November 1998, despite the fact that the warrants remained in the hands of CAI, Maritime Freight Services Ltd (“Maritime”) purporting to act as agent for the Islamic Republic of Iran Shipping Line (“IRISL”) issued a FIATA bill of lading stating that it had taken in charge 10,425.777 metric tons of lead ingots for carriage to Bandar Imam Khomeini. The goods were stated to have been consigned by Milestone to the order of Bank Sepah. On 6 th November 1998 SGS issued an inspection certificate which described, among other things, the marking on the goods and the manner of shipment by reference to the bill of lading. The certificate also contained confirmation that the goods loaded complied with the contract as required by the Central Bank of Iran’s circular. These and other documents were then presented to Bank Sepah under the letter of credit on 13 th November. They were presented by CAI under cover of a remittance schedule to which it will be necessary to refer again at a later stage. On first presentation Bank Sepah found what it considered to be a number of minor discrepancies and on 17 th November rejected the documents. Mr. Ramanuj, the head of Woralco’s Treasury department, and Mr. Roberts, the head of the Shipping department, visited Bank Sepah on behalf of Milestone on 18 th November. At the request of Bank Sepah they made various manuscript amendments to the documents which were then presented again and accepted.[20]All might have been well had Bank Sepah paid promptly under the letter of credit, but at this point things started to go wrong. On 19 th November the London branch of Bank Sepah wrote to the Chamran branch saying that it had taken up the documents but did not have sufficient funds to pay the beneficiary. Throughout the following week CAI regularly chased Bank Sepah for payment and both Mr. Ramanuj and Mr. Francis were kept informed of the position. Milestone not only pressed Bank Sepah direct, but on 25 th November sent a fax message to Niru informing it that Bank Sepah had accepted the documents and asking it to instruct Bank Sepah to make payment immediately. This was the first indication Niru had received that documents had been presented under the letter of credit. Bank Sepah’s failure to pay was a matter of serious concern to Niru and it raised the issue with the bank’s Chamran branch.[21]On 28 th November 1998 Mr. Ahadifar sent a memorandum to the board of Niru in which he told the board that the goods were ready for loading in Gothenburg and Helsingborg, that Milestone and Mr. Sadri had said that the documents had been presented to Bank Sepah some days earlier, that Bank Sepah could not pay under the letter of credit, and that he had been warned that if Bank Sepah failed to pay Milestone, it would not be able to ship the goods.[22]During November 1998 the price of lead fell to the point at which CAI became concerned about the adequacy of its security. On 2 nd December, after consulting Mr. Mahdavi, CAI disposed of the warrants. The proceeds were remitted to CAI which credited them to the account of Nikam, but neither the bank nor Mr. Mahdavi thought to inform Bank Sepah or Niru that the goods in respect of which they were pressing for payment had been sold elsewhere. Indeed, on the very same day that the warrants were sold Milestone sought to bring matters to a head by issuing a statutory demand against Bank Sepah.[23]The documents finally reached Niru in Iran on 7 th December. They were passed to Mr. Khodayari who separated them and processed them in the usual way. He noted that the goods appeared to be in transit under the bill of lading, but he had no reason to examine the documents with particular care and did not do so.[24]In mid-December it became apparent that funds would after all be released to enable Bank Sepah to make payment under the letter of credit. However, the London branch of Bank Sepah was only too well aware that the payment was going to be almost a month late and was concerned that someone, probably Milestone, might take steps to impose a lien or some other kind of restriction on the movement of the cargo in support of a claim for damages once payment had been made. With that in mind the bank sent a fax message to Maritime on 18 th December 1998 requesting confirmation that the goods were awaiting shipment from Gothenburg due to the fact that Maritime was waiting for a vessel to be nominated, that there were no other conditions delaying shipment and that there was no lien on the cargo. Mr. Allahyari, the manager of the London branch of Bank Sepah at the time, explained that he believed Maritime was in control of the cargo and thought it would be in a good position to know whether any other party, particularly Milestone, had made a claim to it. On 21 st December Maritime sent a fax to Bank Sepah confirming that the goods were waiting to be loaded at Gothenburg and that there was no lien on the cargo.[25]On 18 th December Bank Sepah, London also sent a fax to Milestone informing it that funds had been allocated for the payment of the letter of credit. The bank referred to the fact that the goods, as it understood it, had not yet been shipped and said that it would make payment provided Milestone gave a guarantee that the funds would be repaid if the goods were not shipped to Iran. On 21 st December Milestone responded giving a guarantee that it would return the funds to Bank Sepah if the goods were not shipped within 45 days.[26]Early in December a decision was taken in CAI’s head office in Paris not to provide any further financial support to the Woralco group. On 21 st December Mr. Francis and the head of the Commodity and Trade Finance department, Mr. Michallet, had a meeting with Mr. Mahdavi at which they broke the news to him. Later that day Mr. Francis learned that Bank Sepah had obtained the foreign currency needed to pay under the letter of credit and would be remitting funds the next day. This caused him some surprise because he had assumed that no payment would be forthcoming. He knew that the lead had been sold some weeks earlier and his immediate reaction was that there must have been a mistake on the part of Bank Sepah. Someone at the bank must have informed Milestone of this development because later that day Milestone sent CAI a message directing it to credit the funds to the account of Nikam.[27]On 22 nd December Bank Sepah remitted the sum of US$5,795,560.65 to CAI in settlement of its liability under the letter of credit. Mr. Francis spoke to Mr. Mahdavi and suggested that the funds should be returned, but Mr. Mahdavi said that he was involved in negotiations with Niru and insisted that the money should not be returned in case that jeopardised the business. He threatened to take legal action against CAI if it did not deal with the funds in accordance with his instructions. So, after speaking to the head of the bank’s legal department, Miss Garner, Mr. Francis decided to accept Mr. Mahdavi’s instructions for the disposal of the funds. On 23 rd December Nikam instructed the bank to remit the sum of US$5,316,750 to a metal broker, GNI Ltd, and those instructions were carried out. The funds were subsequently paid away in accordance with Mr. Mahdavi’s instructions.[28]Nothing further happened until 4 th January 1999 when Milestone sent a fax to Niru complaining that it had suffered a loss of over US$1.8 million as a result of Bank Sepah’s failure to pay on time. This loss was said to represent warehouse charges, a market loss, interest and the cost of transporting goods from the warehouse to the port and back again. In a second fax sent the same day Milestone offered to ship 7,000 metric tons of lead by the first available vessel and suggested that it should hold back the balance as security for its losses pending a final settlement between the parties. For a seller which had presented a false bill of lading and had failed to despatch any goods at all, this was indeed a brazen attempt to throw its buyer off balance in order to extricate itself from a difficult situation. Mr. Mahdavi said that he was abroad at the time these faxes were sent, but I have no doubt that he was consulted before they were sent and that his hand was behind them. They represent the first in a series of attempts by Mr. Mahdavi to reach agreement with Niru for the supply of an alternative cargo, but they all came to nothing and the money that had been obtained under the letter of credit was dissipated in the course of Woralco’s other activities. No goods were delivered to Niru by or on behalf of Milestone or any other company in the Woralco group then or at any subsequent time. Even before it had remitted the funds to CAI, however, Bank Sepah had debited Niru’s account with the full amount of the payment pursuant to its counter-indemnity.[29]By this means Niru had been induced to part with the sum of US$5.8 million and had received nothing in return. It was able to recover the relatively modest sum of US$116,760 under the performance guarantee provided by Milestone in accordance with the contract, but nothing more. Niru and Bank Sepah therefore brought this action against the various parties involved in the transaction. In these proceedings they claim damages against Maritime for deceit on the grounds that it issued a bill of lading which it knew to be false and against Milestone on the grounds that it presented that bill of lading under the letter of credit knowing it to be false. They claim damages against Mr. Mahdavi on the grounds that he conspired with Milestone and Maritime to procure the issue and presentation of the false bill of lading and that he acted wrongfully and in breach of trust in causing the funds remitted to CAI to be paid away rather than returned to Niru. They claim damages against CAI for deceit on the grounds that by presenting the documents to Bank Sepah and subsequently calling for payment under the letter of credit it fraudulently represented to Bank Sepah that the documents, including the bill of lading, were genuine and deceived Bank Sepah into making payment under the letter of credit. They also claim damages against CAI on the grounds that it acted in breach of trust in dishonestly paying away the funds received from Bank Sepah in accordance with the instructions of Mr. Mahdavi. In the alternative they claim to recover the funds paid to CAI in restitution on the grounds that they were paid under a mistake of fact. They claim damages against SGS on the grounds that it was negligent in issuing an inspection certificate which stated that the goods had been loaded and by doing so had caused Bank Sepah to pay for the documents. Finally, contribution proceedings have been issued by SGS against Bank Sepah and between CAI and SGS, each of which alleges that the other is primarily liable for the loss suffered by Niru.[30]On 8 th December 2000 Toulson J. stayed the proceedings against Milestone and Maritime on the grounds that they had been struck off the register of companies in their respective places of incorporation and accordingly neither of them has since taken any part in the action. The claim against Mr. Mahdavi[31]It is necessary to begin any consideration of the claim against Mr. Mahdavi by looking a little more closely at the circumstances surrounding the conclusion of the contract.[32]Mr. Mahdavi submitted that Niru was aware from the outset of the manner in which Milestone intended to perform the contract and was content for it to do so. He maintained that all discussions of any significance between Niru and Woralco or Milestone were conducted through Mr. Sadri and that as soon as serious negotiations began there must have been detailed discussion of the manner in which the contract would be performed. Mr. Sadri was aware that the purchase of the lead would have to be financed by CAI and that the bank would not accept an assignment of a letter of credit issued by Bank Sepah as sufficient security. In those circumstances, he submitted, there must have been a debate about the manner in which funds could be released to Woralco to enable the goods to be shipped and the provision in the pro-forma invoice of a FIATA bill of lading must have been discussed in that context.[33]The main difficulty facing this submission is that it is entirely unsupported by the evidence. Mr. Mahdavi himself was not party to any discussions with Niru at the time the contract was being negotiated, and unfortunately Mr. Sadri was unwilling or unable to give evidence, either in person or in writing. I have some sympathy with Mr. Mahdavi in this respect because it is clear from the documents that Mr. Sadri did play an important role in this matter, as one might expect, and probably did speak to those representing Niru on various occasions. However, there is no reliable evidence of when any such conversations occurred, between whom or what was said. There is no satisfactory basis for assuming that if he had given evidence, Mr. Sadri’s account would have borne out Mr. Mahdavi’s assertions.[34]Among the witnesses called by Niru were Mr. Ahadifar and Mr. Khodayari. Mr. Ahadifar accepted that Mr. Sadri had been acting as Woralco’s agent in Iran, but said that he himself had not taken any direct interest in the matter until January 1999 when things had started to go wrong. Mr. Sadri’s name appears on many of the documents signed by Mr. Ahadifar during the period leading up to the contract, but most if not all of these were drafted for him by Mr. Khodayari who had day to day responsibility for handling this business. Mr. Ahadifar was responsible for a large department which generated a significant amount of correspondence and I accept his evidence that he often signed letters drafted by others without reading them carefully or taking the time to consider the full implications of their contents. There is nothing in the documents to suggest that he was personally involved in any discussions with Mr. Sadri in 1998 and it was not suggested to him in cross-examination that he had been.[35]Mr. Khodayari made contact with Mr. Sadri early in 1997 following Woralco’s initial approach to Niru. Insofar as anyone at Niru had dealings with Mr. Sadri prior to the conclusion of the contract, that person was Mr. Khodayari. However, Mr. Khodayari did not give evidence of any discussions with Mr. Sadri of a kind which would suggest that he had been told about the way in which the sale would be carried out and it was not suggested to him by Mr. Mahdavi in cross-examination that there had been any. This is perhaps all the more striking in view of the fact that a similar point arose when Mr. Bloch Q.C. was cross-examining Mr. Khodayari shortly before he was questioned by Mr. Mahdavi. I asked Mr. Bloch to clarify whether it was his case that Mr. Sadri had told Mr. Khodayari that a false bill of lading had been issued and why, and if so, to put the matter to the witness in clear terms. He said that it was not, but it should have been clear at that point that any allegation of that kind had to be put to Mr. Khodayari for his comment. In fact, this aspect of Mr. Mahdavi’s case did not emerge until a much later stage in the hearing.[36]Mr. Mahdavi himself made two witness statements for the purposes of these proceedings. The first was made on 7 th December 2001. In it he dealt with various aspects of the contract, but nowhere did he say that Mr. Sadri had explained to Niru how the contract would be performed, or even that he believed him to have done so. Indeed, Mr. Mahdavi’s main purpose in making that statement appears to have been to distance himself as far as possible from the making of the contract and Woralco from the issue of the bill of lading.[37]Mr. Mahdavi’s second statement was made on 14 th February 2002. Again, it contains no suggestion that Niru was informed, whether by Mr. Sadri or anyone else, prior to the conclusion of the contract that it was Milestone’s intention to obtain a bill of lading prior to the release of the goods in order to unlock the funds available under the letter of credit. Mr. Mahdavi does refer in his statement to various messages passing between Milestone and Niru in November and December 1998 to which I shall come in a moment, but these were all sent after things had started to go wrong. It is interesting to note that although in this statement Mr. Mahdavi said that he had spoken to Mr. Sadri very recently, he did not suggest that Mr. Sadri recalled telling Niru that the contract would have to be performed in the manner that was actually adopted.[38]I have already referred to the communications that passed between Milestone and Niru in November and December 1998. These, it was suggested, must have made it clear to Niru that the goods remained in the warehouse in Sweden and would not be despatched unless and until Milestone received payment under the letter of credit. However, none of these is worded in a way which supports Mr. Mahdavi’s contention that Niru had been told at the outset that the despatch of the goods depended on Bank Sepah’s releasing the funds. If there had been a common understanding of that kind it is likely that it would have been reflected in some way in this and subsequent exchanges between the parties. In fact, the only evidence that tends to support this part of Mr. Mahdavi’s case in any way is to be found in some brief answers he gave to Mr. Malek Q.C. in the course of cross-examination, but these were entirely unsubstantiated and amounted to little more than bare assertion.[39]It is fair to say that some of Niru’s witnesses do not appear to have had a very precise understanding of the mechanism of the contract. Nonetheless, there is nothing to support the suggestion that any of them understood that Bank Sepah was expected to make payment against documents that did not give it control over the goods. Indeed, the whole thrust of their evidence was to the contrary. Taken as a whole I am left in no doubt that those who were dealing with the matter on behalf of Niru believed that this contract was to be performed by the presentation of documents that would give Bank Sepah, and in due course Niru itself, control over goods in transit to Iran and were unaware of the way in which Milestone would seek to perform its obligations.[40]Niru contended that the Woralco group as a whole, and Milestone in particular, were effectively controlled by Mr. Mahdavi. Mr. Mahdavi for his part denied that and gave evidence, which I accept, that he was not a director of Milestone and had ceased to be a director of Woralco Holdings some time before the present contract was made.[41]Despite his denial, however, the evidence in this case leaves me in no doubt that, whatever may have been Mr. Mahdavi’s formal position, the Woralco group was under his effective control. Mr. Mahdavi had founded Woralco soon after he left Iran and it represented his personal business venture. He originally owned 60% of the shares. His two business partners owned 20% each, but they left the company in 1990. The holding company was set up in 1993. Mr. Mahdavi transferred his shares in Woralco to the trustees of his family trust and it is that trust which now holds the shares in Woralco Holdings. Mr. Mahdavi said that he resigned as a director of Woralco in 1998, but that does not detract in the slightest from the fact that the business remained under his effective control. By 1998 it had grown substantially. The group as a whole employed many people in a variety of different capacities and I am quite prepared to accept that much of the regular business was transacted by employees who did not need to take instructions from Mr. Mahdavi on a day to day basis. Nonetheless, it is clear that he was still regarded as the person in primary control of the group and its affairs and the person who was to be consulted if a decision had to be taken on a matter of any real importance.[42]The evidence of the group’s dealings with CAI, SGS and Maritime in relation to the present transaction demonstrate the importance of his position. Although Mr. Ramanuj was well known to CAI, the evidence of Mr. Francis and Mr. Michallet, as well as that of Mr. Mahdavi himself, makes it quite clear that he was the person who had built up the relationship with the bank and was the person to whom the bank would turn for a decision. In short, they regarded him as the client. He was the person ultimately in control of the business and the person who would have to sanction anything other than routine matters. Thus, it was Mr. Mahdavi who discussed with Mr. Francis the terms for financing the purchase of the lead warrants and it was to Mr. Mahdavi that Mr. Francis turned for instructions when the funds were received from Bank Sepah. Similarly, although Mr. Mahdavi originally denied having had any contact with SGS in relation to this matter, one can see from the exchanges between Milestone and SGS relating to the inspection of the goods and the issue of the certificate that he did become directly involved whenever he considered it necessary to bring his weight to bear.[43]One sees a similar picture when it comes to making arrangements for the movement of the goods. Although Mr. Roberts was responsible for making the arrangements for the movement of the lead, he reported to Mr. Mahdavi from whom he took his instructions. As early as 13 th May 1998 he pointed out to Mr. Mahdavi that he was attempting to obtain a FIATA bill of lading but that it would not help to do that because of the need to obtain an inspection certificate from SGS confirming that the goods had been loaded on a specific vessel. This was just the sort of problem that Mr. Mahdavi would be expected to resolve and I have no doubt that in this case he did so. In January 1999 Bank Sepah’s solicitors wrote to Maritime alleging that it had broken the contract of carriage evidenced by the bill of lading and was liable in damages. A few days later Mr. McArthur of Maritime sent a fax to Milestone marked for the attention of Mr. Mahdavi complaining that Maritime had co-operated fully with Milestone to enable it to present documents under the letter of credit on the express understanding that once payment had been received Milestone would immediately release the cargo. Mr. Mahdavi originally denied having seen that fax, but that was plainly untrue since he replied to it the same day. The copy of the fax before the court had been disclosed by Maritime and contained a handwritten note to the effect that Mr. Mahdavi had confirmed that he would pay any legal costs incurred by Maritime. Mr. Mahdavi, however, denied having had any conversation of that kind with Mr. McArthur or anyone else at Maritime.[44]In the light of this evidence and of the fact that Mr. Mahdavi himself said that it had always been his intention that a bill of lading should be issued before the warrants covering the goods had been released by CAI, I am satisfied that at some point in the weeks leading up to 5 th November 1998 Mr. Mahdavi himself spoke to Mr. McArthur and persuaded him that it would do no harm for Maritime to issue the bill of lading before the goods had been formally released into its control. He did so by assuring Mr. McArthur that the documents would enable Milestone to obtain payment under the letter of credit and that as soon as the funds were released CAI would release the warrants.[45]Mr. Mahdavi said that it was common practice in the trade for FIATA bills of lading to be issued with the approval of the banks at a time when the goods were not in fact under the control of the freight forwarders and that he believed such a practice to be perfectly acceptable. I should be very surprised if there were any widespread practice of this kind and even more surprised if it were considered to be legitimate. Neither Mr. Lundberg, a director of AB Skandiatransport Logistik, the operator of the warehouse at Gothenburg where the lead in this case was stored, nor Mr. Savage, the manager of CAI’s Trade Finance Department, were aware of any such practice. It may be that some freight forwarders can be persuaded to issue multimodal bills of lading for goods which they have not taken into their control, but there can be no question that such a practice is dishonest and that the resulting bill of lading will be false. I do not think that Mr. Mahdavi had any doubt about that. He knew that in order to obtain payment from Bank Sepah under the letter of credit it was necessary for Milestone to obtain a bill of lading which evidenced the fact that the goods had passed into the control of the first carrier and were held to the order of Bank Sepah. He also knew that any bill of lading issued by Maritime while the warrants were still in the possession of CAI must be false in that respect. Did Bank Sepah and Niru rely on the bill of lading?[46]I have no doubt that when the bill of lading was presented to Bank Sepah it was Mr. Mahdavi’s intention that the bank should accept it as genuine and make payment under the letter of credit. However, that did not happen and payment was not actually made until a month later. Mr. Mahdavi contended that in the meantime Niru had discovered that the goods had not been despatched and that the bill of lading was not genuine, but decided that it would be better to permit Bank Sepah to pay Milestone in order to ensure that it did not lose the foreign currency allocated to it for the purchase of lead.[47]In my view the evidence does not bear out that suggestion. By early December the position had become quite confused. Everyone was aware by then that Bank Sepah had failed to honour the letter of credit and that Milestone was complaining in a general way that it had suffered damage as a result. Threats had been made and the statutory demand had been issued. It was known that the vessel on which the goods had originally been expected to be shipped, the Iran Jahad , was not going to call at Gothenburg and that the goods were not afloat. On the other hand, a bill of lading had been issued by Maritime stating that the goods were under its control and being held to the order of Bank Sepah. On 18 th December neither Bank Sepah nor Niru knew that the goods had in fact been sold. There was genuine concern, however, that until they were safely afloat there was a risk that a claim could be asserted against them that would interfere with their shipment and carriage to Iran. There is no evidence that Niru became aware at that stage that the freight forwarder did not have the goods under its control; nor is there any evidence that Niru was willing for Bank Sepah to part with a very large sum of money in the hope that Milestone would ship goods soon after, but without any form of security. I therefore reject the suggestion that Niru deliberately permitted payment to be made against what it knew were false documents. I have no doubt that when Bank Sepah paid under the letter of credit it did so in the belief that goods were held to its order under the bill of lading and that Niru were of the same understanding. Personal liability of Mr. Mahdavi[48]The bill of lading was intended to be, and was, relied on as genuine by Bank Sepah in making payment under the letter of credit. I am satisfied, therefore, that in tendering documents including the bill of lading and obtaining payment Milestone committed the tort of deceit against both Bank Sepah itself and against Niru which became bound to, and did, indemnify Bank Sepah in the ordinary way under its counter-indemnity. Is that something for which Mr. Mahdavi is personally liable?[49]In support of his submission that Mr. Mahdavi is personally liable for the deceit practised by Milestone Mr. Malek drew my attention to three authorities, C. Evans v Spritebrand Ltd [1985] 1 W.L.R. 317, Standard Chartered Bank v Pakistan Shipping Corp. (No. 2) [2000] 1 Lloyd’s Rep. 218 and MCA Records Inc v Charly Records Ltd [2001] EWCA Civ 1441 ; [2002] EMLR 1 . All three cases concern liability for torts committed by a company of which the defendant is a director. In the event I am satisfied that Mr. Mahdavi was not a director of Milestone at the time in question, but these authorities are nonetheless of assistance in illustrating the principles governing liability for instigating or procuring the commission of wrongful acts by another person.[50]The relevant principle is succinctly stated in Clerk & Lindsell on Torts , 18 th ed. §4-108 in the following terms:
“Where one person instigates another to commit a tort they are joint tortfeasors.”
[51]In Standard Chartered Bank v Pakistan Shipping Corp. (No. 2) the claimants were seeking to hold a director liable for the action of the company in issuing a false bill of lading. Aldous L.J., with whom on this point the other members of the court agreed, said “A person who procures and induces another to commit a tort becomes a joint tortfeasor (see Unilever Plc v Gillette (U.K.) Ltd [1989] R.P.C. 583 and Molnlyke A.B. v Proctor & Gamble Ltd [1992] R.P.C. 583. There is no reason why a director of a company should be in any different position to a third party and therefore it is possible that a director can be capable of becoming a joint tortfeasor by procuring and inducing the company, for which he works, to carry out a tortious act. However, there are good reasons to conclude that the carrying out of duties of a director would never be sufficient to make a director liable.”[52]In MCA Records Inc v Charly Records Ltd the claimant sought to recover damages from the first defendant for breach of copyright. The fourth defendant, against whom alone the action proceeded to trial, was not a director of the first defendant but controlled its activities as a de facto director. He had not personally participated in the tortious acts committed by the first defendant. Chadwick L.J., with whom the other members of the court agreed, after considering the authorities, including Standard Chartered Bank v Pakistan Shipping Corp. (No. 2), held that the fourth defendant had incurred personal liability as a joint tortfeasor because he had directed and procured the company’s unlawful act. He expressed the principle in the following way: “. . . . . . in order to hold Mr. Young liable as a joint tortfeasor for acts of copying, and of issuing to the public, in respect of which CRL was the primary infringer and in circumstances in which he was not himself a person who committed or participated directly in those acts, it was necessary and sufficient to find that he procured or induced those acts to be done by CRL or that, in some other way, he and CRL joined together in concerted action to secure that those acts were done”.[53]Although that case was concerned with breach of copyright, I see no reason to think that the same principles do not apply to other types of deliberate acts such as those with which I am concerned. In the present case Mr. Mahdavi brought his influence to bear at a number of distinct stages in the events which culminated in the presentation of the false bill of lading. The idea that a bill of lading should be issued while the goods were still in the warehouse and while the warrants were still held by the bank was essentially an adaptation of a method of doing business that he had himself devised some years before in order to circumvent the difficulties posed by the Iranian banks and he was ultimately responsible for deciding that it should be adopted in this case. Mr. Mahdavi, although not a director of Milestone, exercised effective control over the company as a de facto director. He was directly involved on behalf of Milestone in persuading Mr. McArthur that Maritime should issue the bill of lading before it obtained control of the goods and he was thus directly involved in procuring the creation of the false document. He did all this specifically to enable that document to be presented under the letter of credit. In those circumstances I see no escape from the conclusion that he instigated and procured the making of the false representation by Maritime knowing that it was false and intending that it be acted upon by Bank Sepah. He also instigated and procured the making of a false representation to Bank Sepah by causing the bill of lading to be presented under the letter of credit. The nature and extent of his personal involvement in the matter were sufficient for him to incur joint liability with both Maritime and Milestone for the tort of deceit.[54]That being so, it may seem superfluous to consider whether Mr. Mahdavi is also liable to the claimants as a constructive trustee and I shall therefore deal with this basis of claim against him briefly. Mr. Malek drew my attention to the passage in the speech of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at page 715 where His Lordship suggested that the retention of money paid by mistake after the payee has learned of the mistake may give rise to a constructive trust. I do not think it necessary to consider that particular question in the present case, however, because here the payment was, as I have held, procured by fraudulent means. Mr. Mahdavi had procured the payment and through him Nikam, whose account was used to receive the payment, was aware of the fraud. Indeed, it was necessary to the completion of the scheme that the funds should be paid to or for the credit of Nikam or Woralco since Milestone itself had no account with the bank.[55]A little later in his speech at page 716 Lord Browne-Wilkinson said “Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity”.[56]In my judgment Nikam became a constructive trustee of the money obtained from Bank Sepah by fraud. Mr. Mahdavi knew that Nikam was not entitled to retain the money and in giving instructions for its disposal he acted dishonestly. Mr. Mahdavi thereby also incurred liability to Niru as an accessory to Nikam’s breach of trust. The claim against SGS[57]Mr. Malek submitted that SGS as the surveyor designated by the contract to inspect the goods and to issue a certificate in respect of them owed a duty to Niru to take reasonable care to ensure that any certificate it issued was accurate. He submitted that in the present case SGS was negligent in the manner in which it performed its functions and that as a result the certificate was inaccurate in the following respects: it incorrectly stated that the goods were marked with the name of Niru; it incorrectly stated that the goods had been shipped under the bill of lading issued by Maritime; and it incorrectly referred to the goods as having been loaded at the date of the certificate. Mr. Malek submitted that Bank Sepah had relied on the accuracy of the certificate in accepting the documents presented under the letter of credit and in making payment of the amount due under it, and that as a result Niru had become obliged to reimburse Bank Sepah and had suffered loss.[58]Miss Andrews Q.C. rightly accepted that the purpose of providing for an independent surveyor to inspect the goods under a contract of this kind is to provide the buyer with an assurance that the seller has shipped goods that conform to the contract. She submitted, however, that the function of such a certificate is to guard against the shipment of inferior goods, not to confirm that the goods have been shipped or to guard against the issue of a dishonest bill of lading and in fact was not relied on by Bank Sepah or Niru for that purpose. In support of this argument she relied on the fact that under a transaction of this kind the buyer will not normally see the certificate until after he has paid for the goods. In any event, she submitted, there had been no negligence on the part of SGS in issuing its certificate. Duty of care[59]Parties to a contract of this kind are free to agree between themselves what aspects of the seller’s performance are to be the subject of certification by an independent third party. The quality and quantity of the goods are perhaps the most common subjects of certification, but there is no reason in principle why other aspects of the seller’s performance should not also be confirmed in that way. Miss Andrews submitted that since legal remedies exist against those who put false bills of lading into circulation there is no need to impose a duty on a surveyor to take care to ensure that the bill of lading is truthful, but in my view that misses the point. The question is, what was the surveyor asked to do and in relation to what aspects of the seller’s performance did he assume responsibility? There is no reason, if the parties so wish, why the surveyor’s functions should not extend to certifying that the goods have actually been loaded on an ocean- going vessel. The fact that it is the function of the bill of lading to evidence shipment does not detract from that, although it may make it less likely in practice that the surveyor will in fact be expected to undertake any responsibility in that respect.[60]It is true that in the ordinary way the buyer will not normally see the inspection certificate until after he has paid for the goods, but that does not take the matter any further. Although a certificate of this kind does contain important statements about the characteristics of the goods, its primary importance lies in the very fact that it has been issued. The buyer does not so much rely on what the certificate says about the goods - after all, he knows that if it did not state that the goods conformed to the contract it would not have been tendered at all - as upon the fact that the certificate has been issued. Possession of a certificate covering the required matters, together with the other documents called for by the contract, enables the seller to demand payment under the letter of credit and triggers the corresponding obligation of the buyer to indemnify the issuing bank. This is just as much true if the surveyor is required to certify that the goods have been loaded as it is if he is required to certify that they are of contractual origin or quality.[61]Over the years a variety of different tests for the existence of a duty of care have been approved, most notably in the present context that of an assumption of responsibility. In Bank of Credit and Commerce International (Overseas) Ltd v Price Waterhouse (No. 2) [1998] PNLR 564 Sir Brian Neill, with whom the other members of the court agreed, considered the various tests and suggested that they should be regarded as mutually supportive approaches which, if properly employed, are all likely to point to the same conclusion. This view has recently received further approval in Parkinson v St James and Seacroft University Hospital NHS Trust [2002] QB 266 , [2001] EWCA Civ 530 (see in particular the judgment of Brooke L.J. at paragraphs 16 and 17). In the present case the relationship between SGS and Niru arose out of a commercial contract and was closely akin to one of contract in which a duty of care would fill the gap left by the contractual doctrines of consideration and privity. I think it appropriate, therefore, to focus primarily on questions of responsibility and reliance as they have been discussed in the leading authorities to which Miss Andrews drew my attention, namely, Hedley Byrne & Co. Ltd v Heller & Partners Ltd [1964] AC 465 , Henderson v Merrett Syndicates [1995] 2 AC 145 and Williams v Natural Life Health Foods [1998] 1 WLR 830 .[62]In Hedley Byrne v Heller Lord Morris of Borth-y-Gest put the matter in this way at pages 502-503:
“. . . . . . it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. . . . . . . Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.”
[63]In defending the use of the concept of assumption of responsibility as a ground for imposing a duty of care in circumstances of the present kind Lord Goff in Henderson v Merrett Syndicates said:
“Furthermore, especially in a context concerned with a liability which may arise under a contract or in a situation "equivalent to contract," it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff: see Caparo Industries Plc. v. Dickman [1990] 2 AC 605 , 637, per Lord Oliver of Aylmerton. In addition, the concept provides its own explanation why there is no problem in cases of this kind about liability for pure economic loss; for if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows from the negligent performance of those services. It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further enquiry whether it is "fair, just and reasonable" to impose liability for economic loss . . . . . . . . ”
[64]As Lord Goff pointed out, the question whether there has been an assumption of responsibility of this kind depends primarily on an objective assessment of all the circumstances. This was further emphasised by Lord Steyn in Williams v Natural Life Health Foods in the following passage in his speech at page 835:
“The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said and done by the defendant or on his behalf. Obviously the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff.”
[65]Miss Andrews submitted that there was no direct contact between SGS and Niru in this case and that any assumption of responsibility on the part of SGS must therefore be based simply on its willingness to undertake the task of inspecting the goods and issuing a certificate of a kind which it knew would be required for presentation under a letter of credit opened by Niru. I accept that, but the fact that the purchaser was an Iranian company meant that in accepting instructions to act in this case SGS accepted the responsibility of carrying out its task in accordance with the requirements of the Iranian authorities of which it was aware.[66]Inspection companies such as SGS are instructed in connection with documentary sales precisely because they are understood to have the necessary facilities and expertise to enable them to determine whether the seller has performed his contract in the relevant respect and are trusted to exercise independent judgment. Although an inspection company may receive its instructions from the seller, it will be aware that its certificate is likely to be required for presentation to the buyer or a bank as part of the documents against which payment is to be made. It is aware, therefore, that the buyer, or a bank which ultimately has recourse to the buyer, will rely on the existence and accuracy of its certificate in paying the price of the goods. The buyer is therefore the person whom the inspection company should have in contemplation as the person most likely to be affected by any error in the certificate. This is a classic example of the situation envisaged by Lord Morris in Hedley Byrne v Heller in which a person known to have particular expertise is instructed to produce a report which he knows will be passed on to another who can be expected to rely on it. In my judgment it is inherent in the nature of the task undertaken by the inspection company that it assumes responsibility to the buyer for what is stated in its certificate. That, after all, is the whole purpose of its employment.[67]In 1998 SGS carried out a great deal of inspection work on goods imported into Iran and maintained a detailed manual setting out the requirements that had to be observed in order to satisfy the Iranian authorities. These make it clear that SGS was well aware that it was the buyer that nominated it to carry out the inspection and that although it expected to receive its instructions from, and to be paid by, the seller, it regarded the Iranian importer as effectively its client. Miss Andrews submitted that the objective nature of the enquiry rendered evidence of SGS’s own perception of its position as set out in the manual irrelevant, but in fact the manual does little more than reflect the position as I am confident it is understood by inspection companies and parties to transactions of this kind the world over. I am satisfied, therefore, that SGS owed a duty to Niru to exercise reasonable care to ensure that any certificate it issued was accurate as regards those matters on which it had been instructed to report. There is nothing unfair or unjust about that; indeed, it would in my view be unjust and unfair if the law did not recognise that the inspection company owes a duty of care to the buyer in such circumstances.[68]The first question to consider, therefore, is the scope of SGS’s responsibility in this case. SGS received its first approach from Milestone in July 1998, but even before that Mr. Roberts and Mr. Mahdavi had been alive to the difficulties likely to be encountered in obtaining a satisfactory certificate because of the need for compliance with the Iranian regulations. On 29 th July Milestone asked Niru to make a number of amendments to the letter of credit, including an amendment to allow the inspection certificate to refer to goods “inspected” instead of goods “loaded”. Niru passed this request to Bank Sepah without objection, but it was ignored by Bank Sepah and so on 18 th August Milestone repeated its request. Again, Niru passed the request to Bank Sepah without objection.[69]On 19 th August Mr. Mahdavi on behalf of Milestone sent a fax to Mr. Carr, who at the time was the manager of the Minerals Division of SGS UK Ltd, asking whether in this case SGS could issue an inspection certificate without sampling the goods because they were of an LME registered brand and therefore of known purity. Mr. Carr was unwilling to give a certificate based simply on the producer’s records, but he suggested that Milestone ask Niru for a dispensation from the usual inspection requirements. Accordingly, on 25 th August Milestone sent a fax to Niru asking for the letter of credit to be amended to permit presentation of a certificate certifying that the goods inspected were of LME registered brand. Niru, however, was not willing to agree to dispense with analysis by SGS and did not pass on that part of the request to Bank Sepah.[70]At the end of August there were discussions in Iran between Mr. Khodayari, a local representative of SGS and Mr. Sadri relating to the amendments requested by Milestone. I think it likely that what was of most concern to all those involved was the need for sampling of the cargo. That was not a matter on which Niru was willing to give way and this request was dropped. There is nothing to suggest that Niru objected to the request to substitute “inspected” for “loaded”, however, and I think there can be little doubt that if Bank Sepah had been willing to make that amendment, Niru would have been content for the clause (and thus the certificate) to be modified in that way. In the event that departure from the established form was rejected by the Central Bank of Iran whose approval to the amendment had been sought by Bank Sepah.[71]In the event, therefore, the letter of credit, a copy of which was provided to SGS, simply called for the presentation of an inspection certificate issued by SGS not prior to bill of lading date certifying that the quality, quantity and packing of the goods conformed to the contract. Since the goods were being exported to Iran all concerned were aware that the inspection certificate would have to comply with the requirements of the Central Bank circular by referring to “the quality, quantity and packing of the goods loaded”. Moreover, it is clear from the evidence of Mr. Carr that it was understood on all sides that it was part of the inspection and certification procedure that the company should satisfy itself that the goods delivered to the carrier were those that had been inspected. In these circumstances I am satisfied that it was part of SGS’s function in this case to certify that the goods it had inspected had been loaded and that the certificate should be construed accordingly.[72]The word “loaded” gives rise to some difficulty in the present context, however. The FIATA bill of lading is designed for issue by a multimodal transport operator (described in the bill of lading as a “freight forwarder”) who assumes liability as carrier for the transport of the goods from the place at which he takes charge of them to the designated place of delivery. He may perform all or part of the carriage himself, or he may sub-contract all or any part of it to one or more third parties. The expression “taken in charge” is defined in the bill of lading itself as meaning that the goods have been handed over to, and accepted for carriage by, the person issuing it. That could occur, for example, when the goods were delivered to the freight forwarder’s premises, or when they were loaded onto a third party’s truck at the shipper’s premises. In my view, therefore, a freight forwarder could properly issue a bill of lading of this kind once the goods were under his control, even though they were not in his actual possession. In these circumstances although SGS might fairly be expected to certify that the goods it had inspected were the goods delivered to the freight forwarder, it is more difficult to accept that the parties, if they had thought about it, could have expected SGS to confirm the shipment of the goods on an ocean-going vessel. In the context of this case, therefore, I think that the word “loaded” in Appendix 2 to the Central Bank circular must be understood as meaning “delivered to the freight forwarder for carriage to the agreed destination”.[73]It was not until the end of September that Mr. Roberts sent SGS firm instructions to inspect 8,400 metric tons of lead held in Gothenburg for the purposes of the sale to Iran. Mr. Carr was responsible as head of division for arranging the inspection, but he delegated the task to a member of his staff, Miss Jeanette Kelly. Arrangements were made for the visual inspection and sampling of the goods to be carried out by the local SGS office in Sweden and for the samples to be sent to this country for analysis.[74]Towards the end of October SGS was asked to provide a certificate in respect of a further 2,000 metric tons of lead in another LME warehouse in Helsingborg which was needed to make up the full cargo. By then time was getting short and SGS agreed to dispense with the sampling and analysis of those goods, partly because they formed part of the same production run as the lead inspected in Gothenburg.[75]Throughout late October and early November 1998 Milestone continued to put pressure on SGS to speed up the issue of its certificate. Miss Kelly had intended to arrange for the loading of the goods on board an ocean vessel to be supervised by a representative of SGS in Sweden, but she was told by Mr. Roberts that since Maritime had issued a FIATA bill of lading it would not be necessary for SGS to inspect the loading of the goods at all. On 6 th November he sent her by fax a copy of the bill of lading issued by Maritime the previous day. Miss Kelly was unfamiliar with multimodal bills of lading and Mr. Carr was out of the office, so she sought advice from a Mr. Wilcox, an employee in SGS’s Industrial Division who had experience of inspecting machinery for export to Iran. He told her that his division regularly accepted multimodal bills as evidence that goods had been taken in charge by the freight forwarder and were effectively loaded. Miss Kelly was still not entirely convinced so she sent a message to the Tehran Co-ordinating Office in Geneva seeking further advice. In her message she pointed out that SGS had not supervised the loading of the goods. The response she received was to follow the layout and conditions of the Iranian certificate, which was less helpful than she might have expected. She telephoned Mr. Carr for advice. He too was apparently unsure about the effect of a multimodal bill, but after speaking to Mr. Wilcox he authorised the release of the certificate. It appears that Mr. Wilcox was of the view that once a bill of lading had been issued the seller was entitled to have a certificate issued. Breach of duty[76]The certificate issued by SGS contained the following statements:
“Commodity: LEAD INGOTS % 99.97 LME Registered Brand Method of Inspection: Checking of material and packing against L/C and Proforma Invoice Marking: VEZARATE DEFA. NIRU BATTERY MFG. Co Shipment: By Truck and I.R.I. Shipping Lines Co vessel IRAN JAHAD under FBL No. A1089920 dated 5 Nov. 1998 Weight: 10,425.777 MT No of Bundles: 8712 Based on the above, we hereby certify that the quality and quantity and packing of the goods loaded are strictly complying with the specifications of the goods indicated in the relative proforma invoice and the terms of the L/C and any amendments made thereto as presented to us by the buyer. Above findings are limited to date and place of intervention only. The Company is neither an insurer nor a guarantor and disclaims all liability in such capacity.”
[77]Since the whole purpose of the certificate is to verify the quality and condition of the goods despatched under the contract, I think that the statement that the findings are limited to date and place of intervention must be understood as referring to the date of the certificate and the place at which the goods were inspected. In other words, the certificate speaks of the condition of the goods on 6 th November 1998 at Gothenburg.[78]The certificate was inaccurate in two important respects. In the first place, the goods were not marked with the name of Niru. Milestone had arranged for them to be labelled by Skandiatransport when they were delivered out of the warehouse, but while they remained in the warehouse under the control of CAI no steps could be taken to mark them in any way. On 6 th November the goods were still in the warehouse unmarked. One consequence of this was that the certificate did not adequately identify the goods to which it related. Secondly, and perhaps more importantly, the certificate was inaccurate in stating that the goods had been loaded. On the 6 th November they had not been delivered to, or placed under the control of, a carrier or freight forwarder; they remained firmly in the warehouse under the control of CAI.[79]Although the use of a multimodal bill of lading may have been unusual in connection with a bulk shipment of lead, I am surprised that it caused SGS quite so much difficulty in this case. Mr. Carr had come across such documents before, but only in connection with containerised shipments. As he recognised, in such cases the inspection company cannot in practical terms confirm the loading of the goods on to the ocean vessel, but can and will certify that they have been stuffed into containers and have passed into the control of the carrier or forwarding agents. Milestone sent SGS a copy of the bill of lading in this case which stated on its face that the goods had been “taken in charge” by the carrier. It should therefore have been apparent that the document purported to evidence the fact that the goods were under the control of the carrier, but in any event SGS as an international inspection company should have understood the nature of multimodal bills of lading.[80]SGS understood well enough that the Iranian authorities insisted on their particular form of certification because they wanted confirmation that the goods delivered to the carrier were the goods the surveyor had inspected, but in the present case no one at SGS seems to have stopped to think how that requirement could be met. If the letter of credit had called for an ocean bill of lading, I do not think that anyone at SGS would have doubted that it was necessary for an inspector to be present at the port to watch the goods being put on board. Indeed, that was what was originally contemplated in this case. The mere fact that a bill of lading had been issued by the ship would not have been regarded as sufficient. I find it difficult to understand, therefore, why in this case the fact that Maritime had issued a bill of lading should have been considered a sufficient basis for SGS to issue a certificate referring to goods “loaded”. Here again the question of marking is relevant. In the absence of any marks it was impossible, as Mr. Carr conceded, to identify the goods to which the certificate related unless they had already been appropriated in some way as would be necessary for the purposes of passing control to the carrier. However, no one at SGS seems to have recognised that problem either.[81]Miss Andrews submitted that there were no further steps that SGS could reasonably have been expected to take before issuing its certificate, but that is to approach the matter from the wrong direction. SGS was instructed to inspect the goods and certify the results of its findings. If it could not satisfy itself of a matter on which its opinion was required, it could not properly give any certificate in respect of it. I accept that, if SGS had wished to verify the fact that Maritime had control over the goods it had inspected, the avenues of enquiry open to it were limited. Skandiatransport would not have known for certain who held the warrants, although instructions to allow inspection had come from CAI as holder of the warrants on 1 st October, but it would have been able to confirm that it had received no instructions from the warrant holder to deliver the goods to Maritime. The only other sources of information were Milestone and Maritime themselves. Miss Andrews submitted that it would have been pointless to ask either of them whether Maritime had control over the goods, both because whatever they said would not provide independent confirmation of the position and because it is unlikely that either of them would have told the truth. I can see the force of that, but I can see no obvious reason why SGS should not have asked Maritime when and how it had taken charge of the goods. If Maritime had said that it held the warrants and had been able to identify them, that might well have justified the issue of a certificate, but SGS made no attempt to do that. However, despite the obvious difficulties, unless SGS had sufficient grounds for certifying that the goods had been put under the control of the forwarding agent or carrier, it could not properly issue a certificate referring to goods described as “loaded”.[82]In my view SGS failed to take all reasonable steps to satisfy itself that the goods were under the control of Maritime at the time when it issued its certificate, but more importantly, such information as it did have did not provide reasonable grounds for issuing a certificate in the form required by the Iranian regulations. In issuing a certificate in that form it was in breach of its duty of care to Niru.[83]In the light of that it adds little to say that in my view SGS was also negligent in certifying that the goods were marked with the name of Niru. Miss Andrews submitted that it was reasonable for SGS to rely on the undertaking of Skandiatransport to label the goods when they left the warehouse, but that ignores the nature of the certificate itself. On its face it purports to certify the state of affairs existing at the date when it was given. It can do no more. On 6 th November the goods did not bear the marking stated in the certificate and SGS was aware of that. Causation and loss[84]Miss Andrews submitted that even if SGS was in breach of its duty to Niru, that breach of duty did not cause Niru’s loss. A number of different points have to be considered under this head.[85]The first is whether SGS would have issued a certificate in the same, or any, terms even if it had exercised reasonable skill and care. I think it very unlikely that it would have done so. There was, as I have already said, no basis for stating in the certificate that the goods were marked with Niru’s name and if that had been recognised and the reference to marking deleted from the certificate, I think it likely that someone at SGS would have realised that it contained no other identification of the goods. That of itself would almost certainly have led someone to ask Maritime how the goods should be identified and would have led in turn to an enquiry about who had control over them. Moreover, if SGS had made proper enquiries about the location and control of the goods, I think it unlikely that it would have been satisfied that they were under Maritime’s control. In those circumstances it could not properly have issued an inspection certificate referring to goods “loaded”.[86]The second question is whether the issue of the inspection certificate played any relevant part in causing Bank Sepah to make payment under the letter of credit or Niru to reimburse Bank Sepah. Miss Andrews submitted that it did not. She submitted that Niru knew well before the payment was made that the goods were still in Sweden and that it paid no attention to what was said either in the bill of lading or in the certificate.[87]Although there appeared to be some confusion on the part of some of Niru’s witnesses about exactly how far the goods had progressed on their journey to Iran by the time they received the documents, neither Bank Sepah nor Niru had any reason to think that the goods were not at least under the carrier’s control and neither had any reason to think that Milestone had been party to the issue of a false bill of lading. Once conforming documents had been presented to Bank Sepah, therefore, both the bank and Niru were under the impression that an obligation to make payment in accordance with the letter of credit had accrued. (Had the certificate not been issued in the required form, it is clear that Bank Sepah would have rejected the documents.) Thereafter both Bank Sepah and Niru relied on the existence of the certificate as satisfying one of the essential conditions of liability and conducted itself accordingly. That being so, the act of SGS in issuing a certificate in the form required by the Central Bank circular enabled Milestone to obtain payment under the letter of credit despite its failure to despatch the goods, thereby causing Niru to suffer loss in the amount of the purchase price.[88]Miss Andrews submitted, however, that Niru’s loss in this case did not really flow from the fact that it was induced to pay the price of the goods in return for worthless documents, but from the extraordinary sequence of events which resulted in the funds remitted by Bank Sepah being paid away by CAI in accordance with Mr. Mahdavi’s instructions rather than being promptly returned to Bank Sepah.[89]I accept that following the presentation of the documents to Bank Sepah on 18 th November events took a most unusual course, but I am unable to accept that the failure of Bank Sepah to honour its obligations promptly, the decision of CAI to realise its security, its subsequent failure to return the money received from Bank Sepah, or Mr. Mahdavi’s failure to use the money to purchase another cargo, or even a combination of all four of these occurrences, can be regarded as the real cause of Niru’s loss for these purposes.[90]The inspection certificate was one of the keys to the funds represented by the letter of credit. Possession of it enabled Milestone to present conforming documents and thereby (on the face of it) trigger Bank Sepah’s obligation to make payment. The fact that Bank Sepah failed to honour its obligations promptly helped to bring about a situation in which CAI felt it necessary to realise its security, but it did not itself cause the loss to Niru. That arose when Bank Sepah made payment against false documents, having debited Niru’s account a little earlier in respect of the funds. Bank Sepah’s failure to pay promptly merely delayed the loss. Nor was CAI’s disposal of the lead the cause of the loss. It was no more than one element in a combination of circumstances which ensured that the incipient loss was not averted. Since the bill of lading was in fact worthless Niru was bound to suffer loss once apparently conforming documents had been presented under the letter of credit, unless something subsequently intervened to prevent it. Mr. Mahdavi had hoped and intended that the payment of the price and the release of the goods by CAI would intervene to make good the position, but in the event they did not. The loss thus flowed from the original cause, namely, the presentation of worthless documents. Similarly, the prompt return of the money by CAI would no doubt have made good the loss, but the loss itself occurred as soon as the funds were transferred to CAI. The shipment of a substitute cargo might have substantially made good the loss, but Milestone’s failure to provide such a cargo did not cause it. I should add, since this was specifically relied on by Miss Andrews, that in my view Bank Sepah’s demand for a guarantee of repayment from Milestone as a condition of effecting payment played no part in causing Niru’s loss.[91]Despite all the arguments to the contrary, therefore, I am satisfied that SGS’s breach of duty was one, though not the only, effective cause of the loss suffered by Niru in this case and that Niru is therefore entitled to succeed in its claim against SGS. The claim against CAI[92]The claim against CAI is put in a number of different ways: as a claim in deceit, as a claim in restitution, as a claim for breach of trust and as a claim for dishonest assistance in a breach of trust. The claim in deceit[93]The claimants say that in presenting the documents to Bank Sepah under the letter of credit CAI represented that the bill of lading was genuine, although it knew that it was in fact false, and did so with the intention that Bank Sepah should accept it as genuine and make payment accordingly. The allegation is, therefore, one of dishonesty in the full sense of the word.[94]It has often been said that the court will require cogent evidence in order to be satisfied that it is appropriate to make a finding of dishonesty. As Lord Nicholls pointed out in In re H (Minors) [1996] AC 563 at pages 586-587, “. . . . . . . the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability”. I need hardly say that I bear this principle very much in mind when considering the conduct of CAI and its employees in this case.[95]CAI had not taken a formal assignment of the proceeds of the letter of credit from Milestone and so was not itself the beneficiary, but it was willing to present the documents to Bank Sepah on behalf of Milestone, partly in order to enable it to obtain a degree of control over the funds. Although created for the presentation in question, the remittance schedule which accompanied the documents followed a standard pattern, being printed on CAI headed paper and containing different sections which could be completed as required for the transaction in hand. It states that the documents are forwarded in trust and should be held at the disposal of CAI in the event of non-payment. There is a request to remit the funds to CAI’s account with Citibank in New York.[96]The remittance schedule contains no reference of any kind to Milestone and I think Mr. Malek was right in submitting that it is to be understood as involving a presentation by CAI in its own right. I accept that it is the practice of the international banking system for dollar funds to be cleared through New York and that the request to remit the payment to Citibank does not necessarily indicate that CAI is collecting the funds on its own behalf, but the fact remains that there is nothing in this document to suggest that it is acting simply as an agent for Milestone. Whatever representations are made by this document are in my view made by CAI on its own behalf. In my judgment by presenting the documents for payment in this way CAI necessarily represented to Bank Sepah that it believed them to be genuine. That representation was subsequently repeated on each occasion thereafter when CAI pressed Bank Sepah for payment.[97]The main thrust of Mr. Malek’s submission was that Mr. Francis knew from the moment the bank received the documents from Milestone that the bill of lading could not be genuine because CAI was still holding the warrants for the lead. It was therefore impossible for the goods to have passed into the control of a forwarding agent or carrier. Despite that, Mr. Francis not only passed the documents to the back office for checking and presentation under the letter of credit, but at a later stage himself wrote to Bank Sepah pressing for payment.[98]The documents were sent to CAI under cover of two letters, one from Milestone and one from Woralco, each dated 11th November 1998 and addressed to Mr. Francis and his assistant, Mr. Robson. The Commodity and Trade Finance department was divided into a ‘front office’, which was occupied by the relationship managers such as Mr. Francis and others who were responsible for marketing and for dealing with clients, and a ‘back office’, which was responsible for the administration of transactions such as documentary sales. Although not physically separated, other than by a line of filing cabinets, the two offices worked independently. In the ordinary way documents sent to the bank for checking and presentation under sale contracts would be delivered by the client to his contact in the front office who would pass them to the back office for processing, often with very little or no prior scrutiny. The back office would then process the documents without further reference to the front office.[99]In the present case the documents were passed to the back office for checking and presentation under the letter of credit in the usual way. Quite why two letters were written in similar, though not identical terms, is not clear. It may have had something to do with the fact that Milestone was not formally a client of the bank, but in the end I do not think anything of importance turns on it. What is important, however, is what Mr. Francis and Mr. Michallet had learned about the nature of this transaction by the time the documents were sent to the bank for transmission to Bank Sepah.[100]As far as CAI was concerned this particular transaction had had its origins some months earlier. At an early stage, probably in June but perhaps even earlier, Mr. Francis had been shown a copy of the letter of credit and he made no secret of the fact that he knew that at that stage it called for an ocean bill of lading. However, that was almost certainly at a time when Woralco was still operating under its existing facilities which it had intended to use to finance the purchase of lead from China. By the autumn the position had changed and Mr. Francis was well aware that the bank was only willing to finance this transaction against the security of the lead warrants themselves. He and Mr. Michallet both said they had made it clear to Mr. Mahdavi that CAI would not support a transaction that required the presentation of a bill of lading under a letter of credit before the bank had received payment and that he would have to make some other arrangements with Niru which would allow the letter of credit to be operated without a document of title. They said that they left it up to him to make whatever arrangements he could and did not enter into any discussions about how he might go about it. Mr. Francis said that he was told some time later that an amendment had been made to the letter of credit, but that he did not ask for details and paid little or no attention to its precise nature. He said he gave no further thought to what the letter of credit required in terms of the documents to be presented under it.[101]Mr. Mahdavi said that he and Mr. Ramanuj had discussed the sale of lead to Niru with Mr. Francis and Mr. Michallet over lunch some months before the goods were due to be supplied. He maintained that he had explained to them how he proposed to get round the problem of the document of title by persuading the forwarding agent to issue a multimodal bill of lading before the goods left the warehouse, thereby obtaining the funds needed to reimburse CAI. According to Mr. Mahdavi, Mr. Francis and Mr. Michallet had given their tacit approval to his proposal.[102]It was not disputed that from time to time Mr. Mahdavi did meet Mr. Francis and Mr. Michallet over lunch to discuss Woralco’s business and that there may well have been a meeting of this kind during the summer or early autumn of 1998, but both Mr. Francis and Mr. Michallet denied that Mr. Mahdavi had made clear to them what he had in mind and I have no hesitation in accepting their evidence. Mr. Mahdavi’s plan was plainly dishonest and I am sure that if Mr. Michallet had been aware of what he intended to do he would not have been willing for CAI to become involved in the transaction at all. Moreover, I think the proposal that a bill of lading should be issued in relation to the goods would have caused him to be concerned about the possible effects on the bank’s security. The fact that Milestone did subsequently send documents which included a bill of lading to CAI for presentation to Bank Sepah is certainly consistent with Mr. Mahdavi’s account of his conversation with Mr. Francis and Mr. Michallet, but it is not sufficient to persuade me that they were not telling the truth. I think the most likely explanation is that the lunchtime conversation was conducted in rather vague terms on both sides when it came to the manner in which the contract might be performed, and that although Mr. Mahdavi knew that CAI would not release the warrants until it had been paid, he did not think that it would refuse to present the documents to Bank Sepah if they did not contain an ocean bill of lading. Accordingly, I reject the suggestion that CAI was aware that the documents Mr. Mahdavi intended to present to Bank Sepah would include a bill of lading.[103]The letter from Milestone to CAI enclosing the documents set out a list of the documents enclosed, the first of which was a full set of original FIATA multimodal transport bills of lading. Mr. Francis accepted that he ought to have seen a letter of this kind addressed to him and that if he had done so he would have had to read part of it in order to decide what action was required. He could not remember seeing this letter at the time, however, and was adamant that if he had done so, he had not appreciated the significance of the reference to the bill of lading. For him this was a documentary matter to be passed to the back office without further ado.[104]It is appropriate at this stage to say something about Mr. Francis and the way he gave his evidence. It is fair to say that although he was facing serious criticism for the way in which he handled this transaction, he gave his evidence in an unusually straightforward and open manner. He did not seek to evade the difficult question or bluster when under pressure, nor did he attempt to deflect an unwelcome line of questioning even when it was likely to place him in a difficult position. For example, he unhesitatingly accepted that the letter of credit provided Milestone’s only source of funds, that it was almost invariably the case that a letter of credit required the presentation of a transportation document of some kind and that the bank’s insistence on retaining possession of the warrants made it impossible for a genuine transport document to come into existence before the bank had been paid.[105]The letters from Milestone and Woralco enclosing the documents were essentially of a routine kind and many such routine communications passed across Mr. Francis’s desk in the course of each day. Although it can no doubt be said that all letters coming into the bank should be read carefully and their contents fully digested before any action is taken, in practice this does not always happen even in the best regulated offices. I think it more likely than not that Mr. Francis did see one or both of these letters, but I accept his evidence that he did not appreciate the significance of the reference to the bill of lading. That may have been due to carelessness on his part, but having seen and heard him give evidence I am not persuaded that he allowed the documents to be sent to the back office for checking and presentation to Bank Sepah knowing full well that the bills of lading were not genuine. Nor, I should make it clear, am I persuaded that he was reckless in that regard, in the sense that he realised something might be wrong but did not bother to investigate. I accept that the significance of the letter simply failed to register with him.[106]The fact that the bank had agreed to finance this transaction against the security of the warrants was not something that would ordinarily be communicated to the back office whose role was limited to one of administration. It is not surprising, therefore, that none of those responsible for the checking and presentation of the documents was aware of the inconsistency between the existence of a bill of lading and the continued retention by the bank of the warrants covering the goods. On 26 th November Mr. Francis sent a fax to Bank Sepah complaining about its failure to pay for the documents and seeking urgent action on its part, but there was no need for him to review the documents for the purposes of sending that fax and nothing further had occurred in the meantime to alert him to the fact that the documents that had been presented included a bill of lading.[107]Mr. Malek submitted that Mr. Francis knew that the documents called for under the letter of credit included a transport document and that both he and Mr. Michallet were willing for that to be the case despite the fact that such a document was bound to be false. For the reasons I have given I am unable to accept that. The claim against CAI in deceit must therefore fail. The claim in restitution[108]This brings me to the claim in restitution. It was common ground that payment was made by Bank Sepah under a mistake of fact, but CAI contended that it had a good defence to a claim in restitution by reason of a change in position arising from the payment away of the funds at the direction of Mr. Mahdavi acting on behalf of Milestone and Nikam.[109]The defence of change of position was finally established in English law by the decision of the House of Lords in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 . Lord Templeman, with whom Lord Bridge, Lord Ackner and Lord Griffiths agreed, analysed the question primarily in terms of the unjust enrichment of the recipient, noting that an innocent recipient of money paid by mistake who had parted with it in good faith without retaining any benefit had ceased to be unjustly enriched and was therefore no longer under any liability to make restitution (see page 560). Lord Goff, with whom Lord Bridge, Lord Ackner and Lord Griffiths also agreed, stated the principle in the following way at page 580:
“At present I do not wish to state the principle any less broadly than this: that the defence is available to a person whose position has so changed that it would be inequitable in all the circumstances to require him to make restitution, or alternatively to make restitution in full.”
[110]Both Lord Bridge and Lord Goff explicitly recognised that the principles governing the defence of change of position would have to be developed on a case by case basis. Lord Goff put the matter in this way at page 580: “I am most anxious that, in recognising this defence to actions of restitution, nothing should be said at this stage to inhibit the development of the defence on a case by case basis, in the usual way. It is, of course, plain that the defence is not open to one who has changed his position in bad faith, as where the defendant has paid away the money with knowledge of the facts entitling the plaintiff to restitution; and it is commonly accepted that the defence should not be open to a wrongdoer. These are matters which can, in due course, be considered in depth in cases where they arise for consideration”.[111]I begin by setting out the circumstances in which the disposal of the funds occurred. CAI disposed of the warrants in consultation with Mr. Mahdavi early in December 1998. Once that had been done any prospect of completing the transaction (as CAI understood it) disappeared because Milestone was no longer in a position to give delivery of the goods. The documents had been presented to Bank Sepah in trust for CAI and in theory could have been recalled. Indeed, both Mr. Francis and Mr. Michallet recognised that CAI should have taken steps to recall them. Had it done so, I have no doubt that the arrangements being made to enable Bank Sepah to make payment under the letter of credit would immediately have come to a halt, whether the documents had actually been returned or not. Apart from anything else, it would have become clear to Bank Sepah and Niru that no goods had been delivered to a carrier and that Milestone was no longer able to perform the contract. However, Mr. Francis did not take steps to recall the documents, nor did he tell the back office to stop pressing for payment. That was not because he intended to obtain payment from Bank Sepah for goods which he knew could not be delivered, but simply because at that stage he did not give any thought to what Bank Sepah was doing and failed to make sufficient allowance for the fact that payment might still be made.[112]On 21 st December CAI learned from Bank Sepah that the funds would be remitted the next day. CAI must have informed Mr. Mahdavi immediately because on the same day he and Mr. Ramanuj gave instructions by fax on behalf of Milestone for the funds to be credited to the account of Nikam. Mr. Francis said that he was surprised when he learned that funds would be received from Bank Sepah. His immediate reaction was that the money ought to be returned because the transaction had come to an end. He thought that payment had simply resulted from the inefficiency of the Iranian banking system.[113]At that point Mr. Francis decided to speak to Mr. Mahdavi. He told Mr. Mahdavi that in his view the money should be returned to Bank Sepah, but Mr. Mahdavi became emotional and threatened legal action against CAI if it did not comply with his instructions. He told Mr. Francis that he was in discussions with Niru for the shipment of a new consignment of lead and that the only matter still to be agreed was the precise quantity to be delivered. He did not want the money to be returned to Bank Sepah because that would imperil the whole business. Mr. Francis thought that what Mr. Mahdavi had told him was plausible but there were conflicting considerations at play: should he comply with the customer’s instructions, or should he return the funds to Bank Sepah? He was in something of a quandary, so he went to see the head of CAI’s Legal department, Miss Garner, for advice.[114]Unfortunately neither Mr. Francis nor Miss Garner made any note of their conversation, but both said it was brief and I infer from their evidence that it was quite informal. According to Mr. Francis, he told Miss Garner that funds had been received in respect of a transaction which he understood to have been abandoned and asked whether, in the light of what Mr. Mahdavi had told him, he should follow his instructions. She told him that provided he was comfortable with the explanation given by Mr. Mahdavi and if the instructions were for the funds to be transferred to a metal broker, he should do so.[115]Miss Garner’s evidence was to essentially the same effect. She recalled the conversation as having been brief and very informal. Mr. Francis had told her that he had suggested to Mr. Mahdavi that the funds should be returned to Bank Sepah since the transaction would not go through, but that Mr. Mahdavi had insisted that negotiations were going on with a view to completing the transaction on a revised basis. Mr. Francis had wanted to know whether he should follow Mr. Mahdavi’s instructions and she had told him he should if he was satisfied with what he had been told.[116]Mr. Mahdavi himself said he had no recollection of a conversation of the kind described by Mr. Francis, but he did not dispute the account he had given, except for the suggestion that he had threatened to sue the bank.[117]I accept as reliable Mr. Francis’s account of his conversation with Mr. Mahdavi.[118]In the light of all the evidence I am satisfied that Mr. Francis did not give Miss Garner a full account of the circumstances which had led up to the receipt of the money or of the reasons why he thought it ought to be returned to Bank Sepah. Although he did give her to understand that he was concerned that Milestone might not have access to sufficient lead to satisfy its contract with Niru, he failed to make it clear that he understood the payment to have been made under a letter of credit in respect of specific parcels of lead that had since been disposed of by the bank, thereby making it impossible for that transaction to be completed. That had played a large part in causing him to think that the money should be returned, but he does not appear to have articulated the reasons for his concern very clearly. If he had, it would have been an easy matter for Miss Garner to check the file and I think she would probably have done so.[119]Mr. Mahdavi had been a customer of CAI for a long time and had shown himself to be a successful trader who was adept at putting deals together. Mr. Francis accepted his account of negotiations with Niru and decided that he should follow his instructions with regard to the disposal of the funds. He therefore gave instructions for the funds to be put at the disposal of Nikam from whose account they were shortly afterwards paid away on Mr. Mahdavi’s instructions.[120]Two aspects of these events strike me as particularly significant. First, I think it is clear, both from Mr. Francis’s recognition that the documents should have been withdrawn when the warrants were sold and from his concern on 22 nd December that payment had been made in respect of a transaction that could no longer be completed, that he realised that Bank Sepah had paid on a false basis. He did not, of course, analyse the situation in legal terms, but he was aware that CAI should not have received the funds because by that time the contract had irretrievably broken down. Secondly, the grounds put forward by Mr. Mahdavi for retaining the money were not that the original contract was still capable of being performed, but that he was in negotiations with Niru and had almost reached the point of agreeing terms for a new contract. The fact that Mr. Mahdavi said that he did not want the money to be returned to Bank Sepah in case that put an end to the whole business simply emphasised the fact that the negotiations were still at a delicate stage. In fact, unbeknown to Mr. Francis, no such negotiations were going on at that time. It was not until January 1999 that Milestone opened the bidding with its faxes to Niru of 4 th January putting forward its claim for damages and offering to ship part of the goods pending the satisfactory settlement of its claims.[121]An important feature of the present case is the fact that the payment which CAI relies on as constituting a change of position was made after it had been recognised that Bank Sepah had probably been labouring under a mistake and had a strong claim to recover the payment it had earlier made. CAI did not, in Lord Goff’s words in Lipkin Gorman v Karpnale , have “knowledge of the facts entitling the plaintiff to restitution” since Mr. Francis did not know that the documents against which the payment had been made included a false bill of lading, but it did have knowledge of other facts, namely the sale of the lead, which, on its own understanding of the position, made it impossible for the transaction to be completed and which, if known to Bank Sepah would have led it to withhold payment. A moment’s reflection would have led Mr. Francis to realise that the reason given by Mr. Mahdavi for wishing to retain the payment did not justify the course he was asking the bank to take. He did not suggest that the transaction pursuant to which the payment had been made had not broken down or that Bank Sepah or Niru were aware that the lead had been sold. He did not say that he had managed to reach agreement with Niru, or even that Niru had agreed that Milestone should retain the payment pending agreement. He simply said that he was in the throes of negotiating a substitute transaction with Niru and that the repayment of the funds on the grounds that the lead had been sold would prejudice those negotiations. Thus, on the facts as Mr. Francis understood them, nothing said by Mr. Mahdavi actually undermined Bank Sepah’s right to repayment of the money.[122]Mr. Bloch submitted that the only ground on which a recipient of money paid under a mistake will be deprived of the defence of change of position is bad faith and that bad faith in this context means dishonesty. He therefore drew my attention to several recent authorities in which the courts have considered what constitutes dishonesty in the context of ancillary liability for breach of trust. He submitted that, whether or not CAI acted negligently, it did not act dishonestly and is therefore entitled to rely on its change of position.[123]It is necessary to begin by referring to the recent decision of the Privy Council in Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All E R (Comm) 193 . In that case Dextra drew a US dollar cheque on its bankers in favour of the Bank of Jamaica which was delivered to that bank by an intermediary. The Bank of Jamaica negotiated the cheque to another bank which collected the sum in question from Dextra. Dextra and the Bank of Jamaica were deceived as to each other’s intentions by persons involved in a fraud: Dextra drew the cheque intending to lend the sum in question to the Bank of Jamaica, whereas the Bank of Jamaica intended to buy the sum in question from Dextra with Jamaican dollars. The Bank of Jamaica delivered the Jamaican dollars to the fraudsters whom it believed to be authorised to receive them on behalf of Dextra.[124]Dextra sought to recover the value of the cheque from the Bank of Jamaica on a variety of grounds including mistake of fact giving rise to a right to restitution. The Bank of Jamaica relied on the defence of change of position. In response Dextra argued that in such cases it was necessary to balance the respective faults of the two parties in order to decide whether it would be inequitable to require the payee to make restitution and that in that case the Bank of Jamaica was the more blameworthy. In the event the claim in restitution failed because it was held that Dextra had not issued the cheque under any relevant mistake of fact. Nonetheless, the Privy Council went on to consider whether an assessment of the relative fault of the parties has a part to play in the defence of change of position. Having considered the position in other countries their Lordships declined to admit the concept of relative fault into this branch of the common law, considering that good faith on the part of the recipient was a sufficient criterion. They reached that decision partly on the grounds that since a claimant who makes a payment under a mistake of fact is not precluded by negligence from recovering in restitution, it would be anomalous if the defendant’s conduct were to be examined for negligence and even more anomalous if it were then necessary to examine the payer’s conduct to see which of them was more at fault.[125]The decision of the Privy Council in the Dextra Bank case is authority for the proposition that mere negligence on the part of the recipient is not sufficient to deprive him of the defence of change of position, but it leaves open the question of what exactly constitutes lack of good faith in this context. The Privy Council was not concerned with that question, any more than was the House of Lords in Lipkin Gorman v Karpnale .[126]Mr. Bloch drew my attention to a number of cases in which the courts have considered what constitutes dishonesty in the context of liability as an accessory to a breach of trust. It is necessary to refer to only two of them, Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (P.C.) and Twinsectra Ltd v Yardley [2002] UKHL 12 ; [2002] 2 All E R 377 .[127]In Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (P.C.) the court had to decide whether an accessory to a breach of trust could be liable even if the trustee himself had not acted dishonestly, and if so under what circumstances. The Privy Council held that he could, but only if he had acted dishonestly. Lord Nicholls said at page 389:
“Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts (see, for instance, Reg. v. Ghosh [1982] QB 1053 ), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.”
[128]Again, at page 390 Lord Nicholls said:
“The analysis of the position of the accessory, such as the solicitor who carries through the transaction for [the trustee], does not lead to such a simple, clear-cut answer in every case. He is required to act honestly; but what is required of an honest person in these circumstances? An honest person knows there is doubt. What does honesty require him to do? The only answer to these questions lies in keeping in mind that honesty is an objective standard. The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J. captured the flavour of this, in a case with a commercial setting, when he referred to a person who is "guilty of commercially unacceptable conduct in the particular context involved:" see Cowan de Groot Properties Ltd. v. Eagle Trust Plc. [1992] 4 All E. R. 700, 761.”
[129]These passages might be taken to suggest that in this context dishonesty is to be judged in objective terms, but in Twinsectra Ltd v Yardley the House of Lords held that that is not what Lord Nicholls meant. Lord Hoffmann dealt with the matter in this way:
“19. My noble and learned friend Lord Millett considers that the Court of Appeal was justified in taking this view because liability as an accessory to a breach of trust does not depend upon dishonesty in the normal sense of that expression. It is sufficient that the defendant knew all the facts which made it wrongful for him to participate in the way in which he did. In this case, Mr Leach knew the terms of the undertaking. He therefore knew all the facts which made it wrongful for him to deal with the money to the order of Mr Yardley without satisfying himself that it was for the acquisition of property. 20. I do not think that it is fairly open to your Lordships to take this view of the law without departing from the principles laid down by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 . For the reasons given by my noble and learned friend Lord Hutton, I consider that those principles require more than knowledge of the facts which make the conduct wrongful. They require a dishonest state of mind, that is to say, consciousness that one is transgressing ordinary standards of honest behaviour. I also agree with Lord Hutton that the judge correctly applied this test and that the Court of Appeal was not entitled, on the basis of the written transcript, to make a finding of dishonesty which the judge who saw and heard Mr Leach did not.”
[130]Lord Hutton, having analysed in some detail what Lord Nicholls said, concluded that Lord Nicholls had not intended to hold that in this context a person can be dishonest even if he does not know that his conduct would be regarded as dishonest by honest people. For his own part he considered that it would be wrong to allow a finding of dishonesty to be made against a person who did not know that what he was doing would ordinarily be regarded as dishonest. He said:
“35. There is, in my opinion, a further consideration which supports the view that for liability as an accessory to arise the defendant must himself appreciate that what he was doing was dishonest by the standards of honest and reasonable men. A finding by a judge that a defendant has been dishonest is a grave finding, and it is particularly grave against a professional man, such as a solicitor. Notwithstanding that the issue arises in equity law and not in a criminal context, I think that it would be less than just for the law to permit a finding that a defendant had been "dishonest" in assisting in a breach of trust where he knew of the facts which created the trust and its breach but had not been aware that what he was doing would be regarded by honest men as being dishonest.”
[131]Mr. Bloch submitted that lack of good faith is really the same as dishonesty and that the same test should apply in each case, whether one is dealing with an accessory to a breach of trust or with a recipient of a mistaken payment who seeks to rely on a change of position that he has himself brought about. In either case the defendant should not be liable unless he has acted in a way which he knows ordinary people would regard as dishonest.[132]Miss Andrews challenged the proposition that good faith in the context of the defence of change of position is to be equated with dishonesty. She did so by reference to the law relating to the position of an agent who receives payment on behalf of his principal. In such cases, she submitted, no question of dishonesty arises; the agent acts at his peril if he pays the money over to his principal after receiving notice of the claim for restitution.[133]Although it has similarities with the modern defence of change of position, the defence available to an agent who has paid money over to his principal before receiving notice of the claim has been recognised for a long time. Nowadays it is not normally regarded as an example of a change of position of the kind contemplated by Lord Goff in Lipkin Gorman v Karpnale , but as a rule by which the correct defendant may be identified when payment is made to one who is known to be acting as an agent. In Portman Building Society v Hamlyn Taylor Neck [1998] 4 All E R 202 Millett L.J. put the matter in this way at page 207f:
“I myself do not regard the agent’s defence in such a case as a particular instance of the change of position defence, nor is it generally so regarded. At common law the agent recipient is regarded as a mere conduit for the money, which is treated as paid to the principal, not to the agent. The doctrine is therefore not so much a defence as a means of identifying the proper party to be sued. It does not, for example, avail the agent of an undisclosed principal; though today such an agent would be able to rely on a change of position defence. The true rule is that where the plaintiff has paid money under (for example) a mistake to the agent of a third party, he may sue the principal whether or not the agent has accounted to him, for in contemplation of law the payment is made to the principal and not to his agent. If the agent still retains the money, however, the plaintiff may elect to sue either the principal or the agent, and the agent remains liable if he pays the money over to his principal after notice of the claim. If he wishes to protect himself, he should interplead”
. Nonetheless, it is perhaps instructive that notice of the claim is said to be sufficient to deprive the agent of the benefit of this defence.[134]To answer the question raised by Mr. Bloch I think it is necessary to return to the principles stated by Lord Templeman and Lord Goff in Lipkin Gorman v Karpnale Ltd , namely, that unjust enrichment gives rise to an entitlement to restitution unless it would be inequitable in all the circumstances to require the recipient of the benefit to make restitution in full or in part. These are broad principles the details of which have yet to be developed. It was not necessary in that case for their Lordships to consider the range of circumstances which would prevent a recipient from relying on the defence of change of position and insofar as they dealt with that subject I do not understand either Lord Templeman or Lord Goff to have provided more than a broad indication of what they might be. It is, however, interesting to note that they contemplated that a change of position after the payee “receives notice of the victim’s claim for restitution” (per Lord Templeman at page 560) or “with knowledge of the facts entitling the claimant to restitution” (per Lord Goff in the passage at page 580 cited earlier) would not provide a defence.[135]In the light of these observations, and having regard to the nature of the principles underlying the right to restitution in the case of a mistaken payment and the defence of change of position, I do not think that dishonesty in the sense identified in Twinsectra Ltd v Yardley is the sole criterion of the right to invoke the defence of change of position. I do not think that it is desirable to attempt to define the limits of good faith; it is a broad concept, the definition of which, insofar as it is capable of definition at all, will have to be worked out through the cases. In my view it is capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself. The factors which will determine whether it is inequitable to allow the claimant to obtain restitution in a case of mistaken payment will vary from case to case, but where the payee has voluntarily parted with the money much is likely to depend on the circumstances in which he did so and the extent of his knowledge about how the payment came to be made. Where he knows that the payment he has received was made by mistake, the position is quite straightforward: he must return it. This applies as much to a banker who receives a payment for the account of his customer as to any other person: see, for example, the comment of Lord Mersey in Kerrison v Glyn, Mills, Currie & Co. (1912) 81 L.J.K.B. 465 (H.L.) at page 472. Greater difficulty may arise, however, in cases where the payee has grounds for believing that the payment may have been made by mistake, but cannot be sure. In such cases good faith may well dictate that an enquiry be made of the payer. The nature and extent of the enquiry called for will, of course, depend on the circumstances of the case, but I do not think that a person who has, or thinks he has, good reason to believe that the payment was made by mistake will often be found to have acted in good faith if he pays the money away without first making enquiries of the person from whom he received it.[136]Having regard to what Mr. Francis knew about the disposal of the goods and to what he had been told by Mr. Mahdavi, I find his failure to inform Miss Garner fully about the grounds for his concern and CAI’s failure to make any enquiries of Bank Sepah most surprising. Mr. Francis said he did not think it necessary to speak to Bank Sepah because he did not think CAI owed it any duty. It is fair to say that Miss Garner did not think that it would be normal to make an enquiry of the paying bank in a case of this kind, but the problem as presented to her was simply one relating to a customer’s payment instructions and I am satisfied that she did not know the full story. In fact, this was a very unusual situation in which the position of Bank Sepah called for much greater consideration than it received.[137]Mr. Bloch submitted that Mr. Francis had no reason to think that Mr. Mahdavi was acting fraudulently. He understood from their conversation that Niru was aware that the lead had been sold and that, whether or not Bank Sepah was labouring under a mistake, Niru as its principal was not. In my view that would be to read far too much into the evidence. It is true that Mr. Mahdavi told Mr. Francis that he was in negotiations with Niru, but he did not say that Niru had agreed to allow Bank Sepah to make a payment under the letter of credit notwithstanding that the goods had been sold. On the contrary, the thrust of what Mr. Mahdavi said was that he did not want the payment to be returned because that would upset his negotiations. I therefore reject the suggestion that Mr. Francis believed that Niru had agreed to the payment in the knowledge that the original transaction had broken down.[138]In my view, given what Mr. Francis understood to be the position in relation to the contract and what he had been told by Mr. Mahdavi, he did have good reason to think that Mr. Mahdavi was not acting honestly. However, he did not think the matter through carefully and he took what I consider to be a very limited view of CAI’s responsibilities. The need to make enquiries of Bank Sepah is not a matter to be viewed in terms of a duty owed by one banker to another; it is a matter to be viewed in terms of a duty of good faith which a person who has received a payment that he has good reason to think was made under a mistake owes to the person who made it. If under those circumstances the payee fails to make enquiry of the payer before disposing of the money he can properly be described as failing to act in good faith because he acts in the knowledge that he may be infringing the rights of another despite having the means of avoiding that consequence. In fact I think that the present case is even stronger than that because on the information available to him Mr. Francis had no real basis for thinking that Milestone was entitled to receive or retain the funds that had been remitted by Bank Sepah or that there was any proper basis for complying with Mr. Mahdavi’s instructions. Although Mr. Francis did not consciously act in disregard of the standards to be expected of an ordinary honest banker, he was willing in the circumstances to accept the risk that releasing the money might infringe Bank Sepah’s rights.[139]For these reasons I am unable to accept that CAI acted in good faith in paying away the funds it had received from Bank Sepah. Fault on the part of Bank Sepah and Niru[140]Mr. Bloch submitted that Bank Sepah and Niru were both at fault in failing to take prompt action to protect their own position and that of CAI. He submitted that Niru became aware early in January 1999 that Mr. Mahdavi had practised a fraud on it and that it should immediately have warned both Bank Sepah and CAI that the payment under the letter of credit had been made under a mistake. If it had done so, CAI could and would have taken steps to freeze them and so avoid any loss. This failure to act was, he submitted, a matter to be taken into account when deciding whether it would be inequitable to require CAI to make restitution in this case.[141]In my judgment this argument fails for three reasons. In the first place, I am unable to accept that either Bank Sepah or Niru was aware until very much later that they had been the victims of a fraud. Although Niru was aware from early December that the documents had been presented, although the goods had not yet been shipped, it was not aware that the goods had not even been put into the control of the freight forwarder as stated in the bill of lading. At some point, probably fairly soon after Niru received Milestone’s faxes of 4 th January 1999, General Mansouri, Niru’s managing director, called Mr. Sadri into his office to find out what was going on. He suspected a fraud because Milestone was withholding delivery despite having received payment. Viewing his evidence as a whole, however, I do not think he realised at that stage that Milestone had never had any goods and that the bill of lading was false. On 8 th January Lovell White Durrant wrote to Maritime on behalf of Bank Sepah accusing Milestone of having procured redelivery of the goods to itself and Maritime of being in breach of the bill of lading contract. This letter must have been based in part on information that had been obtained from Niru and it reflects the understanding of both Niru and Bank Sepah at that time that the goods had been handed over to Maritime and that the bill of lading was genuine. This continued to be Niru’s understanding for some time. When General Mansouri first considered what action might be taken to protect Niru’s position he thought about trying to freeze the goods rather than the purchase price, and indeed Niru did later obtain an injunction to prevent Milestone disposing of the lead which remained in the warehouse in Gothenburg. In these circumstances I do not think that Niru or Bank Sepah can really be criticised for failing to notify CAI that there might have been a fraud of the kind that has since been uncovered.[142]However, even if I am wrong about that, I do not think it assists CAI. Although the defence of change of position turns on whether it would be inequitable to require the payee to make restitution, this depends on the application of established principles of law rather than the discretion of the court: see Scottish Equitable plc v Derby [2001] 3 All ER 818 per Robert Walker L.J. at pages 825h and 828c-d. Mr. Bloch cited no authority in support of the proposition that a failure by the claimant to protect his position following the payment affects his right to recover in restitution and in my view it should not. As the Privy Council pointed out in the Dextra Bank case, negligence on the part of the claimant in making the original payment does not affect his right to recover if the payee has been unjustly enriched and I can see no reason why negligence at a later stage should do so. If the defendant has paid the money to a third party otherwise than in good faith, he must still make restitution because he remains responsible to the payer to make good his loss. The fact that the payer was himself negligent in failing to take steps to recover the money from a third party does not undermine the basis of the defendant’s liability. In my view this is little more than an attempt to reintroduce by another route the concept of relative fault which was rejected by the Privy Council in Dextra Bank . I do not think that CAI is relieved from making restitution on this ground.[143]Mr. Bloch suggested as an alternative, however, that CAI’s failure to take steps to obtain a freezing injunction over the funds in the hands of GNI was a further change of position. I cannot accept that. A relevant change of position for these purposes is one that results in payee’s ceasing to retain the benefit he received as a result of the payer’s mistake. Once CAI had transferred the funds to GNI it no longer retained any benefit. An opportunity to freeze the funds in the hands of GNI was not part of the benefit CAI received from Bank Sepah; it was merely an opportunity to avoid the consequences of its existing obligation to make restitution.[144]For these reasons I am satisfied that CAI is not entitled to rely on the defence of change of position in answer to the claim in restitution.[145]Following the joinder of Bank Sepah the question whether Niru was entitled to maintain a claim in restitution against CAI in its own right assumed less significance. However, it is necessary to deal with it briefly because it may be relevant to the contribution proceedings between SGS and CAI. In my view Niru can maintain a claim on two grounds. First, although Bank Sepah paid the money in performance of its own obligation under the letter of credit, it did so as agent for Niru to discharge its obligations under the contract of sale. Accordingly, Niru can recover the funds mistakenly paid on its behalf. Secondly, as I have already mentioned, by the time Bank Sepah remitted the funds to CAI it had reimbursed itself by debiting Niru’s account. It follows that the only claimant to have suffered a loss in this case is Niru and that Bank Sepah would be obliged to hold any money recovered from CAI in trust for Niru. In these circumstances I think that Niru itself is entitled to make a claim against CAI in restitution, although it might have been necessary for it join Bank Sepah as an additional defendant if it had not otherwise been a party to the proceedings. The claims in equity[146]Mr. Malek submitted that CAI held the funds received from Bank Sepah as a constructive trustee by virtue of the fact that it knew that they had been paid under a mistake. However, in the light of my decision that the bank is liable in restitution to restore the value of the funds it is unnecessary to prolong this judgment by considering whether CAI also incurred liability for committing or assisting in a breach of trust.[147]It follows that Bank Sepah and Niru are entitled to recover from CAI the sum of US$5,829,522.03 paid under the letter of credit less the sum of US$116,760 already recovered under the performance guarantee. Contribution proceedings[148]Both SGS and CAI have brought contribution proceedings, SGS against Bank Sepah and CAI; CAI against SGS.

(a) SGS’s claim against Bank Sepah

[149]SGS sought to made a claim against Bank Sepah in respect of any liability it might have incurred towards Niru on the grounds that its failure to honour the letter of credit promptly caused or contributed to Niru’s loss. This was always likely to be a difficult case to maintain and was not pursued with much enthusiasm. It is bound to fail, if only because Bank Sepah’s obligations did not extend to paying against documents known by the beneficiary to be false. I need say no more about it.

(b) SGS’s claim against CAI (c) CAI’s claim against SGS

[150]Both these claims give rise to some difficult questions on the construction of section 1(1) of the Civil Liability (Contribution) Act 1978. I shall adjourn them for further argument in the light of the recent decision of the House of Lords in Royal Brompton Hospital NHS Trust v Hammond [2002] UKHL 14 ; [2002] 1 WLR 1397 .

Cited in 12 later judgments

and 3 more of the most senior