3PLR – BANK OF CHINA V. NBM LLC AND OTHERS
POLICY, PRACTICE AND PUBLISHING, LAW REPORTS 3PLR
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BANK OF CHINA
V.
NBM LLC AND OTHERS
COURT OF APPEAL
CIVIL DIVISION
18 DECEMBER 2001
3PLR/2001/77 (CA)
OTHER CITATIONS
[2002] 1 All ER 717
BEFORE THEIR LORDSHIPS:
PILL
TUCKEY AND
JONATHAN PARKER LJJ
EDITORS
[Sam Eleanya, Agboola Omolola Oluwafolakemi, Eleanya Kalu Vincent, Eleanya Ugochi Vine]
MAIN ISSUES
Practice – Pre-trial or post-judgment relief – Freezing order – Worldwide freezing order – Pre-trial order – Extra-territorial effect of order – Protection of third parties – Freezing order in standard form – Proviso protecting third parties in respect of assets outside the jurisdiction – Appropriate terms.
REPRESENTATION
Melanie Martyn Barrister.
MAIN JUDGMENT
TUCKEY LJ (giving the first judgment at the invitation of Pill LJ).
Introduction
Paragraph F19.10 of the Commercial Court Guide says:
‘As regards freezing injunctions in respect of assets outside the jurisdiction of the English Courts, the standard wording in relation to effects on third parties may in some cases appropriately incorporate wording to enable overseas branches of banks or similar institutions which have offices within the jurisdiction to comply with what they reasonably believe to be their obligations under the laws of the country where the assets are located or under the proper law of the relevant banking or other contract relating to such assets.’
Such wording was incorporated into the worldwide freezing order in this case by David Steel J at the request of Union Bank of Switzerland AG (UBS), a Swiss bank with an English subsidiary and a branch in London. On this appeal Bank of China, the claimant, says that the judge should not have varied the order in this way.
The facts
The claimant obtained the worldwide freezing order under the provisions of s 25 of the Civil Jurisdiction and Judgments Act 1982 in aid of proceedings in New York against companies and individuals associated with John Chou and his wife Sherry Liu (the fifteenth and sixteenth defendants) who are alleged to have defrauded the bank in the United States by various means. The claim is for $US34m plus interest, punitive damages and costs. None of the defendants are incorporated or resident in England and Wales and none of them has complied or is likely to comply with that part of the freezing order requiring them to disclose their assets.
Although UBS are not defendants, in his evidence asking for the freezing order the deputy general manager of the claimant’s New York branch said:
‘I believe that defendants Chou and S Liu had an historical relationship with the Union Bank of Switzerland in Zurich Switzerland. The inquiry agents also reported that defendants Chou and S Liu had an historical relationship with the Union Bank of Switzerland in the Cayman Islands.’
The freezing order made by Tomlinson J on 13 March 2001 was in the standard CPR/Commercial Court form (CPR PD 25 ‘Interim Injunctions’/app 5(2) to the Guide) which in the guidance notes under the heading ‘Parties other than the Applicant and Respondent’ says :
‘(1) Effect of this Order:—It is a Contempt of Order for any person notified of this Order knowingly to assist in or permit a breach of this Order. Any person doing do may be sent to prison, fined or have his assets seized.
(2) Effect of this Order outside England and Wales:—The terms of this order do not affect or concern anyone outside the jurisdiction of this Court until it is declared enforceable by or is enforced by a Court in the relevant country and then they are to affect him only to the extent that they have been declared enforceable or have been enforced UNLESS the person is: (i) a person to whom this Order is addressed … or (ii) a person who is subject to the jurisdiction of this Court and (a) has been given written notice of this Order at his residence or place of business within the jurisdiction of this Court and (b) is able to prevent acts or omissions outside the jurisdiction of this Court which constitute or assist in a breach of the terms of this Order.’
When the order was served on UBS they asked for it to be varied to add after the words of the standard form which I have quoted:
‘It is further ordered and directed that nothing in this order shall, in respect of assets located outside England and Wales, prevent UBS AG or its subsidiaries from complying with:
(i) what it reasonably believes to be its obligations, contractual or otherwise under the laws and obligations of the country or state in which those assets are situated or under the proper law of any bank account in question; and
(ii) any orders of the courts of that country or state provided reasonable notice of any application for such an order by UBS AG or any of its subsidiaries (to the extent such notice is permitted by the criminal law of such country or state) is given to the claimant’s solicitors.’
UBS’s evidence suggests that they always ask for such a variation when they are served with a worldwide freezing order. The claimant was prepared to agree the second of the provisos and the first but only in relation to UBS’s obligations under the criminal law of the country or state in which the assets were situated. The proviso sought by UBS related to its civil obligations as well. Thus, what is known as ‘the Baltic proviso’ refers to ‘obligations contractual or otherwise’. So the judge had to decide whether the proviso in this form should be added to the order.
The judgment
In deciding that it should the judge said:
‘As a matter of general principle it is in my judgment important that the freezing order should be clear and unequivocal so that both the parties to it and any third party knows exactly where they stand. In particular banks which are domiciled or otherwise present within the jurisdiction should not be required to decide whether to act in conflict with the terms of the freezing order or in conflict with its duties to its customer under local law. Such an approach in my judgment is consistent with the interests of comity …’ After referring to the passage from the guide which I have quoted, the judge said (at [20]): ‘As presently advised I would prefer the view that such a provision should be included unless inappropriate, rather than only included if appropriate.’ He added that he thought the Rules Committee should consider whether the proviso should be included in the standard form.
The cases
The standard form of freezing order has evolved since 1975. This court first had to consider a worldwide freezing order in Babanaft International Co SA v Bassatne [1989] 1 All ER 433, [1990] Ch 13, [1989] 2 WLR 232. The court recognised that third parties such as banks within the jurisdiction might be in contempt if their offices abroad permitted frozen overseas assets to be dealt with in breach of the terms of the order. So, Nicholls LJ said:
‘It would be wrong for an English court by making an order in respect of overseas assets against a defendant amenable to its jurisdiction, to impose or attempt to impose obligations on persons not before the court in respect of acts to be done by them abroad regarding property outside the jurisdiction. That, self-evidently, would be for the English court to claim an altogether exorbitant, extra-territorial jurisdiction.’ (See [1989] 1 All ER 433 at 453, [1990] Ch 13 at 44.)
The court therefore decided that a worldwide freezing order should only bind the defendants personally and would only be enforceable against third parties in respect of assets outside the jurisdiction if it was declared enforceable in the country concerned (the Babanaft proviso). As has been pointed out the latter meant very little since enforceability against the third party would depend upon the order of the foreign court and not the English order.
Shortly after the Babanaft case, Derby & Co Ltd v Weldon (No 2) [1989] 1 All ER 1002, [1990] Ch 65 came before this court. The court again had to consider the effect of a worldwide freezing order on third parties such as banks. After referring to the problem and its solution by the court in the Babanaft case Lord Donaldson MR discussed a number of objections to the Babanaft proviso. Only the second is relevant to our case. He said:
‘The second objection is that it places an English corporate bank in a very difficult position. It may know of the injunction and may wish to support the court in its efforts to prevent the defendant from frustrating the due course of justice, but the proviso deprives it of the one justification which it would otherwise have for refusing to comply with his instructions.’ (See [1989] 1 All ER 1002 at 1012,
By this it appears he meant that the bank could not rely on the order of the English court because before it was effective an order of the foreign court had to be obtained. This led him to revise the Babanaft proviso by adding the requirement that persons who were subject to the jurisdiction of the English court with notice of the order were required to prevent breaches of its terms if they were able to do so (the Derby v Weldon proviso).
There the matter stood so far as the cases are concerned until the decision of Clarke J in Baltic Shipping v Translink Shipping Ltd [1995] 1 Lloyd’s Rep 673 from which the Baltic proviso gets its name. But, on 30 July 1993 in his end of year statement Saville J, the judge in charge of the Commercial Court, had said:
‘A problem emerged earlier this year which was of great concern to those banks which are subject to the jurisdiction of both the English court and the courts of the country or countries where they may be holding assets of the defendant which are made the subject of a worldwide [freezing order]. Certain countries may not recognise or give effect to ex parte orders made in this jurisdiction and indeed may make inconsistent orders. In such cases third party banks can be put in an impossible position, being required to do something by a court in this country and the opposite by a court abroad. The Derby v Weldon proviso does not seem to help as it does not apply to persons who are subject to the jurisdiction which of course is the case with most major banks. To solve this problem of double jeopardy we suggest in appropriate cases that something along the lines of the following provision be added to the order.’
He then set out the proviso in the terms which UBS sought in this case.
In the Baltic Shipping case the claimant had obtained a post-judgment freezing order in respect of a specific bank account in Noumea, New Caledonia. The London branch of the French bank whose subsidiary held the account had been served with the order and asked the court to include the proviso suggested by Saville J. The claimant argued that this gave the bank too much protection and that it would be sufficiently protected by the undertaking in damages. In rejecting these submissions Clarke J said that there was no case in which this particular point had been decided and accepted the submission that Lord Donaldson MR in Derby v Weldon did not have in mind the position where the English order constituted no justification as a matter of foreign law for refusing to comply with the defendant’s instruction. He said (at 678–679):
‘The bank is not a party to these proceedings. It should be given all reasonable protection. It is not in principle desirable for a bank to have to rely upon the undertaking in damages … I do not think that the bank should have to run the risk that it would be in breach of its contract under the law of Noumea for it to pay out pending an application by the plaintiff to the local Court. That approach appears to me to be consistent with the general approach of the Courts in the cases to which I have referred …’
He added:
‘So, it appears to me that in general and subject to the facts of the particular case it would be desirable that a proviso along the lines of that proposed here and along the lines of that proposed in Mr. Justice Saville’s end of year statement should be included in the standard [freezing order].’
In his judgment in the Baltic Shipping case Clarke J referred to the decision of Hoffman J in MacKinnon v Donaldson Lufkin & Jenrette Securities Corp [1986] 1 All ER 653, [1986] Ch 482 which was not considered by the Court of Appeal in the Babanaft case or Derby v Weldon. In that case the court had to consider whether an order under the Bankers’ Books Evidence Act 1879 should be made against an American bank in respect of documents held at its head office in New York. In deciding that no such order should be made, the judge said ([1986] 1 All ER 653 at 658, [1986] Ch 482 at 493): ‘The principle is that a state should refrain from demanding obedience to its sovereign authority by foreigners in respect of their conduct outside the jurisdiction.’ And:
‘The nature of banking business is such that if an English court invokes jurisdiction even over an English bank in respect of an account at a branch abroad, there is a strong likelihood of conflict with the bank’s duties to its customer under the local law. It is therefore not surprising that any bank, whether English or foreign, should as a general rule be entitled to the protection of an order of a foreign court before it is required to disclose documents kept at a branch or head office abroad.’ (See [1986] 1 All ER 653 at 660, [1986] Ch 482 at 496.)
Finally, we were referred to Securities and Investments Board v Pantell SA [1989] 2 All ER 673 at 678, [1990] Ch 426 at 432–433 where Browne-Wilkinson V-C said of the Derby v Weldon proviso:
‘The result of that proviso in the present case is to ensure that my order has no operation within the Channel Islands and does not trespass on the jurisdiction of the Guernsey court. However, if the branch of Barclays Bank in Guernsey is holding moneys belonging to either of the defendants, the bank (being a bank locally resident in England) will, after service of the order, be required not to part with such moneys from the accounts held with the bank with their Guernsey branch.’
It is not entirely clear from the report where the money to which the judge referred was, but, despite the eminence of its author, this statement was made on an ex parte application without any consideration of the point we have to decide and so I attach little weight to it.
Argument discussion and conclusion
Ms Prevezer QC, for the claimant, submits that there is no warrant for the inclusion of the Baltic proviso in this case or in the standard form of worldwide freezing order. She says this court struck the balance between providing adequate protection for a claimant and avoiding double jeopardy for third parties such as banks in Derby v Weldon. There are no reported cases of third parties having had problems with the proviso and so we should leave well alone. The Baltic Shipping case was an exceptional case where the claimant knew that the money was in Noumea and yet failed to go to the local court to freeze it. In an ordinary case such as the present the Baltic proviso gives too much protection because it enables a third party to decide itself what its obligations are. It effectively turns back the clock to the Babanaft case. A requirement that the third party should prevent breaches if it is able to do so is more exacting. She emphasises that an English court only has jurisdiction over the third party because it has chosen to do business here, so there is nothing exorbitant about the Derby v Weldon proviso, particularly where the overseas assets in question are the frozen assets of, in this case, fraudsters. Here, it is conceded that the claimant has a strong case of fraud and that the worldwide freezing order was rightly made even though there were no assets or defendants within the jurisdiction so the court should do all it can to help.
It does not seem to me that this court has ever properly considered the point we have to decide. There is certainly no reference in any of the judgments to the difficulty which a third party might face under the law of the place where assets abroad are situated or the proper law of the contract under which they are held. Even if the point has been considered the cases show that this jurisdiction is an evolving one which means that we should not be inhibited by earlier decisions on different facts.
The cases to which I have referred do, I think, establish two general propositions. Firstly the limit of the courts’ territorial jurisdiction and the principle of comity require that the effectiveness of freezing orders operating upon third parties holding assets abroad, should normally derive only from their recognition and enforcement by the local courts. In this respect it is worth remembering that the English courts’ jurisdiction to grant freezing and disclosure orders is a good deal more extensive than in most other jurisdictions, notably the United States. Secondly, third parties amenable to the English jurisdiction should be given all reasonable protection.
It follows that any order of the English court which has the effect of requiring a third party to do or refrain from doing something abroad is exceptional.
With this in mind, what does ‘able to prevent’ in the Derby v Weldon proviso mean? It was not spelt out in that case and Ms Prevezer accepts that it does not require the third party to disobey the local criminal law or an order of the local court. Her submission is, however, that it does require the third party to breach its contractual obligations to its customer (its mandate) and that if it has to pay damages as a result, it is adequately protected by the terms of the standard form undertaking which the claimant gives which says:
‘The applicant will pay the reasonable costs of anyone other than the respondents which have been incurred as a result of this order … and if the court later finds that this order has caused such person loss and decides that such person should be compensated for that loss, the applicant will comply with any order the court may make.’
Ms Prevezer submits that if the bank was unwilling to breach its mandate it could apply to the local court for relief so that anything it did or did not do would not be in contempt of the English court.
This analysis, if nothing else, shows that the Derby v Weldon proviso is unclear. A third party would be ‘able’ to disobey the local criminal law or an order of the local court, but it is rightly conceded that the proviso does not require it to do this. Should it be required to breach its contractual obligations? I do not think so. Those obligations could be enforced by order of the local court which the third party would have to obey. I see no logical justification for distinguishing between the third party’s contractual and other legal obligations under the local law. The onus should be upon the claimant to obtain relief from the local court rather than upon the third party.
Like Clarke J I do not think the undertaking in damages provides sufficient protection for the claimant. Damage to reputation and regulatory consequences abroad could not be adequately compensated. The bank might also be forced into litigation abroad with a customer or a third party or be faced with arguments here as to whether any particular loss fell within the terms of the undertaking.
Saville J’s statement makes it clear that there have been problems with the Derby v Weldon proviso and we were told by UBS that claimants usually agree to the Baltic proviso being added to the standard form so I do not think it can be assumed that the standard form has not given rise to problems in practice. The Baltic proviso does of course only require the third party to have a reasonable belief as to what its obligations are, but I think it is entitled to this degree of protection. As Clarke J pointed out in the Baltic Shipping case if the court had to decide whether the third party was able to prevent a breach of the order this might involve a prolonged and contentious inquiry as to what the local law in fact was.
So, like the three experienced commercial judges who have previously had to consider this point, I conclude that the need to avoid unwarranted extra-territorial jurisdiction, the need to provide reasonable protection for third parties affected by freezing orders and the need to clarify the Derby v Weldon proviso will usually entitle third parties to have the Baltic proviso added to the worldwide freezing order unless the court considers on the particular facts of the case that this is inappropriate. As third parties are not represented when the order is first made, I think the Baltic proviso should be included in the standard form.
I see no reason for not including the Baltic proviso in this case. The claimant deserves the best protection which this court can give, not least because it does not know where the defendants’ assets, if any, are. On the other hand none of the defendants are domiciled or resident in this country and there is no evidence or suggestion that UBS have held any of their assets here. Ms Prevezer argued that this was an ordinary case of its kind and I agree.
For these reasons I think this appeal should be dismissed and that the Rules Committee and the Commercial Court should consider the prescribed standard form in the light of this judgment.
JONATHAN PARKER LJ.
I agree.
PILL LJ.
I also agree.
Appeal dismissed.
Cases referred to in judgments
Baltic Shipping v Translink Shipping Ltd [1995] 1 Lloyd’s Rep 673.
Babanaft International Co SA v Bassatne [1989] 1 All ER 433, [1990] Ch 13, [1989] 2 WLR 232, CA.
Derby & Co Ltd v Weldon (No 2) [1989] 1 All ER 1002, [1990] Ch 65, [1989] 2 WLR 412, CA.
MacKinnon v Donaldson Lufkin & Jenrette Securities Corp [1986] 1 All ER 653, [1986] Ch 482, [1986] 2 WLR 453.
Securities and Investments Board v Pantell SA [1989] 2 All ER 673, [1990] Ch 426, [1989] 3 WLR 698.
