Kohn v Sheva Wagschal & 2 Ors [2006] EWHC 3356 (Comm)

Case No 2006/939[2006] EWHC 3356 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 21 st December 2006
Before
THE HON MR JUSTICE MORISON
Between
Chaim KohnClaimantSheva Wagschal & 2 OrsDefendant
Mr Thomas Seymour (instructed by Greenwood & Co) for ClaimantMr Clive Freedman QC and Mr Max Mallin (instructed by Teacher Stern Selby) for DefendantHearing Hearing dates: 14 December 2006
JudgmentThe Hon. Mr Justice Morison :Background
[1]Mr I.S. Kohn (the Deceased) died intestate on 21 August 2001. He was twice married. His first wife pre-deceased him in 1987 leaving four daughters and one son. His second wife, whom he married in 1989, Mrs Sarah Beinhorn, has two daughters.[2]The deceased’s estate is valuable. Part of his estate comprised shareholdings in various private companies. Parts of the family were unable to agree on the distribution of the assets on the intestacy and agreed to arbitrate their differences. The son, Chaim, who is the claimant in these proceedings, and three of the four daughters entered into arbitration agreements in March and September 2002. The claimant had commenced proceedings for an injunction to prevent the three sisters from exercising their alleged powers as directors of the various companies. In relation to these proceedings and to the question of ownership of the shares in the companies, the parties agreed to the submission of “these matters” “to the Beth Din for a binding arbitration under the Arbitration Acts for the time being in force and under the following terms”. One of the terms was that the Beth Din were to “decide the matter under Jewish Law, incorporating such other laws as Jewish law deems appropriate.” It is to be noted that the parties did not require the widow to participate. She has renounced her rights to a share in the estate and under English Law her right to claim under the Inheritance (Provision for Family and Dependants) Act 1975 is for a period of 6 months after the grant of representation [letters of administration] to Chaim Kohn. That has not yet happened; the relevant Office has simply asked for a copy of the widow’s renunciation before the estate can be administered.[3]The arbitration panel comprised three religious judges and oral hearings took place over three days spread between March and September 2002. They published their Award on 20 December 2002. There was a further hearing on 17 June 2003 leading to a further Award dated 16 September 2003 and a further clarification in a supplemental Award dated 13 December 2004.[4]In relation to the principal claim relating to the various companies, the issue before the Arbitrators was whether by reason of the fact that the deceased had put shares into the daughters’ names, with the accompanying entries in the Shareholders Register, and references to the shareholding in the companies’ accounts, the deceased had intended to make gifts of them to the daughters. There is no presumption of advancement under Jewish Law. Under that law it is the intention of the donor which is all important. The Panel found that although the shares were put into the names of the daughters, they themselves were unaware that that had been done until after he died and they received no dividends from these shares. In answer to the question why were these shares put into their names, the answer was two fold: first to put them out of the reach of the widow and second to avoid inheritance tax. Having heard the evidence, under the heading “Halachic Principles” the Arbitrators concluded as follows: 26. The crucial question for determination is whether or not the deceased made an effective immediate gift to his children during his lifetime. If he did, then each of the children is entitled to 20% of the shares in the companies … If he did not make an effective gift of the shares, then they remained as part of his estate until his death and in Halacha would fall to his only son, the Applicant, on his death.30. In order to constitute a valid gift in Halacha, the deceased must have intended to make the gift. Even if the Deceased were to have effected a mechanism that could legally transfer the shares in Jewish Law, nonetheless, if there [are compelling factors] which demonstrate that the Deceased had not really intended the gift but had effected the transfer for a motive other than for the beneficiary to receive the gift, in that case the transfer would be voided.31. It was evident at the hearing that the alteration of the proposed shareholdings was suggested by [the Deceased’s accountant] and was not the Deceased’s idea. … We find it greatly significant that the Deceased never informed the Respondents or their husbands during the years after the transfers were signed, that he had gifted his shares to them and that they were now owners of the shares with immediate effect. Of further significance is the fact that no dividends were paid to the Respondents. We also find it significant that [the Accountant] said that he would probably have destroyed the transfer documents had he been asked to do so either by the Deceased or the Applicant after they had been signed by the Deceased.32. We have therefore come to the conclusion, that the Deceased did not intend at any time for the share transfers actually to effect a transfer of the shares for the benefit of the Respondents and the purpose of the share transfers was to avoid tax by the submission of documents that purportedly transferred the shares. A secondary purpose was to prevent the Deceased’s property from falling into the hands of [his widow] after his death. We believe that had one of the Respondents found out about the share transfers during her father’s lifetime, she would not have dreamt of challenging her father to the effect that he was no longer the owner of the companies and he must relinquish control of the companies in her and her sisters’ and brother’s favour. We believe the share transfers and the subsequent presentation of annual returns and accounts reflecting the shareholdings, to have been a cosmetic device aimed at giving the impression to the outside world, that all the Deceased’s children were equal owners of the shares, when in fact it was not the case.”[5]I would interpolate at this stage and observe that as a result of this decision there is no evidence that the Revenue have been defrauded, since the Arbitrators exposed the ‘sham’ transactions and restored the position to reality. So far as inheritance tax is concerned [the target of the scheme] that tax will, I assume, be levied on the full worth of the estate on the factual basis that the shares were at all times in the ownership of the Deceased. Any attempt to avoid or evade that tax has not worked. There would only be an evasion of tax if the children maintain, contrary to the facts, that the shares had been transferred to them during the deceased’s lifetime.[6]Regrettably, the three sisters were unwilling to accept the Award. They had used the shares to take control of the companies and obtain monies from them. In due course an attempt was made to resolve the position by endeavouring to agree a mechanism so as to give effect to the Award. There is a dispute between the parties as to whether any such agreement was ever made. On behalf of the sisters, it is submitted that the agreement was made albeit that they were not prepared to abide by its terms. The effect of this proposal, submits Mr Clive Freedman QC, on their behalf, is that the Award is no longer enforceable since it has been superseded by the agreement, whether or not his clients intend to honour its terms.[7]In due course, having issued an arbitration claim form, the claimant [the son] sought an order that the Award of the Beth Din might be enforced in the same manner as a judgment or order to the same effect. Colman J. made that order on 28 September 2006, in accordance with the normal practice. The terms of the order are a little more complex than usual and they involve a declaration that the Claimant is entitled to the shareholdings in the companies identified, and to the shareholding of the Deceased in a named company and a further declaration that he is entitled to the Deceased’s property, and an order requiring the sisters to account for the monies they have received from the Companies since the death of the deceased.[8]The Order contained what is identified as an “Important Statement” to the effect that the Defendants had the right to make an application to set aside the Order within 14 days. Such an application was made within the 14 day period and, wrongly, when the papers were presented to me, I dismissed the application, without giving the sisters a chance to make submissions and adduce evidence. The matter has come back before me on 14 December and the parties have agreed that I should discharge my previous order dated 19 October 2006 and treat this as the application to set aside the order of Colman J. in accordance with the terms of the ‘Important Notice’ as applicable whenever the court makes an order ex parte.[9]Before turning to the submissions of the parties, it would be right to observe that although the parties expressly agreed, by the Arbitration Agreement, to the application of the Arbitration Acts, there has been no application under sections 67 – 69. It is now just under 4 years since the primary Award was made. Whilst I am sensitive to the fact that many Orthodox Jews do not welcome the intervention of the law as applied by the courts of this country to their affairs, I cannot accept that as a justifiable excuse. They have been advised by competent lawyers throughout and must be taken to have known of their rights and the time limits within which such rights had to be exercised. The Beth Din in London operates within the ambit of the 1996 Act, whether the parties like it or not. Their rights to challenge an Award are defined by the Act.

The Sisters’ arguments

[10]The submissions on behalf of the sisters advanced by Mr Freedman QC may be summarised in this way: (1) The court should refuse to enforce the Award because to do so would offend English notions of public policy. In particular, to enforce the Award would be to enforce an arrangement tainted by illegality. There was a conspiracy between the Deceased, the accountant and the son to cheat the tax man and enforcing the award would enable the son to rely on his own wrongdoing:
“It was on this fraudulent and illegal purpose that [the son] based his claim with a view to showing the absence of intention despite all the documents indicating the contrary. He did so notwithstanding that on this case, he was seeking to take advantage for himself of a conspiracy to which he was a party, and which on his case, was to benefit himself solely, at the expense of the Revenue and [the widow].” – [skeleton argument paragraph 40]. Counsel referred me to the case of Tinsley v Milligan [1994] AC 340 for the proposition that “where a person has to plead or give evidence as to or in any way rely upon an underlying illegal purpose or to rely upon his own illegality or fraud, such that this forms of necessity a part of his case, the claim will be barred.” [skeleton argument paragraph 43.1]. He also referred me to Gascoigne v Gascoigne [1918] 1 KB 223 and Re Emery’s Investment Trusts [1950] Ch. 410 It was further submitted that the bar to enforcement of an Award on grounds of public policy applied regardless of the applicable law of the arbitration or the place where it was conducted. The fact that this arbitration was conducted under Jewish Law was irrelevant to the question of enforcement: Soleimany v Soleimany [1998] 3 WLR 811 at page 822G-H. (2) Because the parties entered into a binding agreement on the terms set out in a document dated 10 January 2006, the Award has been superseded and there is nothing left to enforce. Reliance was placed on a passage in Chapter 8 of a book entitled the Law & Practice of Compromise, 6th edition by David Foskett QC, and other contributors. The passage is a statement of general principle namely: “Given the normal meaning, purpose and effect of a compromise, the natural inference is that the common intention of the parties is that the compromise will henceforth govern their legal relationship in connection with the disputes in which they had been engaged and that, accordingly, those disputes would still be regarded as “dead” even in the event of breach of the compromise. In these circumstances, it is submitted that recourse to the original claims will not be permitted unless, upon a true construction of the compromise, it is clear that this is what the parties intended. In this context, whilst the matter is primarily one of construction, the nature of the consideration furnished by the party answering the claims being made by the claimant will operate as a pointer.”
It is clear on the evidence that neither party has performed this alleged contract. I invited counsel for the sisters to say that they would undertake to do so; but this was not possible. Instead I was invited to accept that whether this alleged agreement was going to be performed, its mere existence meant that the claimants was not entitled to rely upon or enforce the Award. (3) The Beth Din sought to do more than they had power to do: namely to rule on the case as though this were a probate action and they had no jurisdiction to do so especially as they purported to determine matters affecting the rights and obligations of persons not a party to the arbitration. “The Award cannot of itself affect the devolution of the deceased’s estate, which is governed by English law. Whether or not this can be mitigated by a deed of variation as between all interested parties does not arise in this case, because they were not all before the Beth Din.” [paragraph 57 of the Skeleton]. Thus the attempt by the Beth Din to create a decision as to the regulation of the estate on the intestacy was void. If any of the parties are precluded from objecting to want of jurisdiction, “the Court as a matter of public policy or otherwise should not enforce an Award arising out of an ad hoc arbitration to which third parties were not parties.” [skeleton, paragraph 63]. (4) There has been a failure to effect the full terms of the Award because under the terms of the supplemental Award it was stipulated that the son “must distribute 50% of the assets of the companies .. to his sisters”. The terms of the order made by Colman J. made no provision for this. (5) The claimant failed to draw the attention of Colman J. to the difficulties referred to above and therefore was guilty of material non-disclosure.

The Decision

[11]I have to say that I regard the objections to enforcement of the Award as specious. Dealing with illegality, enforcing the Award does not involve any reliance upon illegal activities. The ratio decidendi in Tinsley v Milligan is that a claimant to an interest in property, whether based on a legal or equitable title, was entitled to recover if he was not forced to plead or rely on an illegality. There the property was acquired through an illegal transaction; here the property [the shares] was not acquired through an illegal transaction, and this case is a fortiori Tinsley. The Award is simply recording the decision that title to the shares formed part of the estate which, on death passed to the son. In no sense is the son seeking to enforce a contract tainted by illegality; rather he is seeking to enforce his statutory rights under section 66 of the Act. This is in contrast to the Soleimany case where there was an attempt to base a claim on an illegal export contract. The rights of the son derive from his status as Halacha heir to the deceased’s estate. The Arbitrators had to judge whether the mind of the deceased went with the paperwork. That was the crucial issue and, therefore, the circumstances in which the paperwork was generated was material to their consideration. There was no presumption of advancement; the son did not need to displace any such presumption. Cases such as Gascoigne and Emery’s Investment Trust are distinguishable.[12]I agree with Mr Seymour’s submission that what the illegality point comes down to is that the defendants say that the evidence as to true intention behind the documents should not have been admitted, since it was evidence of an attempted fraud on the Revenue. Yet no objection was taken at the time to this evidence and it is doubtful if it is open to the defendants now to complain about it, by reason of section 73(1). But even if Mr Freedman QC is right that this a point which can be taken at the enforcement stage, I simply do not understand how he can make a case on illegality. The Arbitrators, at most, have said that there was an attempted fraud on the Revenue, which, by their Award, they have put an end to.[13]The next argument related to the ‘agreement’ allegedly made in January 2006. The approach of the court to an issue such as this is set out in the second edition of Mustill & Boyd on Commercial Arbitration. This edition and the 2001 Companion to it, are dealing with section 26 of the 1950 Act rather than with section 66 of the 1996 Act. But I see no reason to doubt its application to this case. “But because the application under section 26 is a summary form of procedure intended to dispense with the full formalities of a trial, such as pleadings, discovery of documents and oral evidence , it is not suitable where an objection is taken to the award which cannot properly be disposed of without a trial. It used to be said that section 26 could only be invoked in ‘reasonably clear cases’. But this did not prevent the Court from deciding summarily questions of law which did not involve issues of fact, and the court would probably now only refuse the application where the objection cannot properly be disposed of without a trial.”[14]The passage highlighted was approved in Curacao Trading Co BV v Harkisandas & Co [1992] 2 Lloyd’s Law Reports 186. Mr Freedman says that there is a dispute between the parties as to whether a contract was made and that is an issue that can only be determined after a trial. He did not suggest that the illegality point was not one for the court to resolve at this stage.[15]The facts relating to the alleged Agreement, which are not in dispute, are these. On or about 10 January 2006, through the good offices of Rabbi Padwa the parties to these proceedings signed a document headed “Amended Suggested proposals for settlement between Mr C Kohn and his Sisters.” The terms are as follows:
“Entirely without prejudice to our claim and entitlement to the shares gifted us by our late Father we are prepared to receive properties and monies to the value of 131/2% each (in total 54% for the four Sisters) of the total value of the companies concerned. A current valuation to be obtained as appears below based on the situation of each Company as at the time our late father passed away. Generally once each of our entitlements has been established as set out below we shall agree to the immediate removal of the restrictions registered at the Land Registry and shall also resign the positions we hold in the companies in exchange for the simultaneous grant of legal mortgages over properties (to be agreed) to secure sums which have been established as our entitlements. The terms of these mortgages to be to the satisfaction of our legal advisors to ensure not only that amounts due to us are properly secured but also to ensure that the payments will be made according to the agreed timetable. The assets and properties of the Companies are to be valued as quickly as possible by John Slater. All information given to John Slater will be from Mr Markovic who will receive this from the managing agents and the managing agents will not be allowed direct contact with Mr Slater. Mr Slater will be instructed to seek any further clarification or other information directly from Mr Markovic and not from the managing agents. In the event this valuation falls in line with the figures proposed by Mr Kohn, then we shall agree with his proposals however in the event that substantial differences become apparent then it will be necessary to renegotiate those proposals, but any shortfall will be made up in cash. In order to arrive at the true situation of each company as at the time of our father passed away it will be necessary to appoint an independent auditor to establish what income has or should have been received, what changes there have been in the mortgage position, and what properties have been disposed and where the various funds which may have been received have been applied. Any sums already received by any party will be deducted from the amount found to be due to that party.”
[16]The agreement has never been implemented by either party. The claimant says that the agreement has been repudiated by his sisters. None of the assets and properties has been valued by Mr Slater or anyone else; no independent auditor has been appointed under clause 4 and none of the restrictions referred to in clause 1 have been removed. The argument that this was a binding agreement was made for the first time in these proceedings.[17]The fact that neither party regards itself as obliged to implement the terms of the document is good evidence that neither considered themselves bound by it. Its terms are vague; the heading suggests that this was a first stab at providing for a mechanism for implementing the general tenor of the Award. These were proposals not binding commitments. The proposals were not said to replace the Award; rather they were to implement the Award and consistent with the son’s commitment to hand over 50% of the estate, together with what Mr Seymour felicitously described as a 1% douceur for co-operation. The document was not signed by the fourth sister. Even if this was an agreement, through repudiation its terms no longer apply for the future and the plain intention of the parties must have been that if this stab at a mechanism failed they would then look to their legal positions under the Award. As it seems to me, using the language of Professor Foskett, upon a true construction of this document it is clear that recourse to the original claims would follow if this ‘agreement’ broke down. The existence of this document provides no basis for refusing to enforce the Award.[18]The third argument is, in effect, that the arbitrators exceeded their jurisdiction in dealing with matters which were not the subject of the arbitration agreement. The Act gives the parties rights to come to the court and raise jurisdiction questions. See sections 30 – 32, section 67. Section 70 prevents parties to an arbitration challenging the jurisdiction of the arbitrators for the first time in court, without putting the point to the arbitrators first. There is also a strict time limit for challenging the arbitrators’ jurisdiction. I have to say that there is no substance in the jurisdiction argument in any event. It is said that the arbitrators have gone too far; that is simply unfounded. They have dealt with the matter as the parties presented their cases to them. Despite the fact that there were persons who might have been joined as parties but were not, the arbitration was constituted with the express agreement of both sides; it was known that the non-parties, such as the widow, had expressed no interest in the estate. The real impediment to the distribution of the estate was entirely due to the dispute between those who participated in the arbitration and who are bound by the Award. This point is empty.[19]The fourth argument is not so much that the Award should not be enforced; rather it is that the Award does not contain all the relevant terms. The son has always indicated, as I understand it, that he would honour the obligation to distribute to the sisters a half share in the estate after all monies had been collected in, including from the sisters themselves. At the hearing before me a formal undertaking to be given by the son to this effect was tendered. It seems to me appropriate that it should be attached to and form part of the Order made by Colman J. Furthermore, to give effect to the supplemental Awards the shareholdings in paragraph (A)(i) in the order need to be amended. In relation to Ladenhead Investments Limited there should be added the words “excluding 25% held by the third defendant” and the entity described as a charitable company having no share capital called Gemach Scheindel Limited should be deleted as it is a trust fund and not a company.[20]The final point that there was material non-disclosure is not made out. All the relevant material was placed before the court. In accordance with my judgment, had certain matters been drawn expressly to the court’s attention, such as the alleged agreement, it would have made no difference to the result.[21]Subject to those amendments, in my judgment the order of the court should now be enforced. It is most regrettable that the sisters cannot accept the adjudication made against them. It reflects no credit on them that they have failed to comply with the Award and will now be subject to the weight of the legal process which is designed to ensure that arbitral awards are respected by the parties who voluntarily agreed to the arbitral process leading to them.[22]I therefore dismiss the application made.

Cited in 3 later judgments