High Court considers unlawful means conspiracy claim in the context of a repo fraud

The High Court has found in favour of a global financial brokerage business in its claim for unlawful means conspiracy against several businesses and individuals in the context of a repo fraud: ED & F Man Capital Markets Limited v Come Harvest Holdings Limited & ors [2022] EWHC 229 (Comm).

The decision will be of broader interest to financial institutions who may have been victims of a fraud perpetrated by a counterparty, or when defending mis-selling litigation, where allegations of unlawful means conspiracy are commonly included as part of a suite of claims.

While the decision did not involve new law, it serves as a reminder of the principles underpinning the tort of unlawful means conspiracy, and provides a useful application of the test set out in Kuwait Oil Tanker v Al Bader & ors [2000] EWCA Civ 160. Of note is the court's view is that in pursuing a claim for unlawful means conspiracy: (a) there can be different levels of intentionality involved when assessing whether there has been an intention by the fraudster(s) to cause harm; (b) it is not necessary that a party prove that the perpetrator(s) must have directed their actions towards a specific claimant, as opposed to a third party or class of persons more generally; and (c) blind-eye or Nelsonian knowledge (i.e. where a party abstains from inquiry because they do not wish to confirm a particular state of affairs which they believe likely to exist) may be sufficient to establish intention to cause harm.

In the present case, the court was satisfied that the defendants knew that the global financial brokerage was an intended victim of the unlawful means conspiracy, and if this had not been the case, the court noted that it would have found that the defendants had blind-eye knowledge. They also knew it was the global financial brokerage who would suffer loss.

We consider the decision in more detail below.

Background

Between May and October 2016, the claimant global financial brokerage business (MCM) entered into 28 sale and repurchase transactions. The counterparties to the transactions were 2 Hong Kong companies (together, the HK Companies). As part of the transactions, MCM received 92 purportedly genuine original warehouse receipts (Purported Receipts) purporting to give a right to title to parcels of nickel issued by the warehouse storing such metals. MCM consequentially provided finance to the HK Companies via its own sub-sale of 83 of the Purported Receipts to an Australian financial services company (ANZ).

When it later transpired that the Purported Receipts were forgeries which did not confer title to any nickel, MCM brought an unlawful means conspiracy claim against the HK Companies on the basis that it had been left seriously out of pocket for the monies it had advanced. MCM also added the following parties as defendants to the claim: (a) the sole director and shareholder of the HK Companies (Mr Wong); (b) the agent and adviser of the HK Companies (Genesis); (c) the sole director and shareholder of Genesis (Mr Kao); and (d) a Singaporean brokerage (Straits).

MCM's case was that Straits either knew or consciously decided not to enquire as to how the HK Companies, Mr Kao and Genesis were obtaining finance from MCM, ANZ and other financiers using the Purported Receipts. If they chose not to enquire, MCM submitted that this was a situation where the test for "blind-eye" or Nelsonian knowledge (i.e. refraining from making enquiries when suspicious) was satisfied.

However, Straits contended that there was no (documentary or otherwise) evidence that it had any knowledge of the fraud perpetrated on MCM; nor did it have blind-eye knowledge. Rather, it claimed that it was itself misled by Mr Kao and at most "with the benefit of hindsight as perfect vision", it could be said that Straits missed a number of "red flags" in regard to Mr Kao and his associated companies.

Decision

The court found in favour of MCM, holding that the defendants had conspired to injure MCM by unlawful means.

The key issues which may be of broader interest to financial institutions are set out below.

Test for unlawful means conspiracy

In reaching its conclusion, the court noted that the tort of conspiracy to injure by unlawful means is actionable where the claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the defendant to do so (as per Kuwait Oil Tanker).

A combination or understanding between two or more people

The court found that there was a combination, understanding or agreement between the CEO and Vice President of Straits, Mr Wong and Mr Kao that Straits should carry out certain steps as part of the wider fraud. The basis upon which this conclusion was reached was fact specific and related to the state of certain defendants' knowledge. However, it is notable that the court found that the "overt acts" of Straits were themselves strongly suggestive of a conspiracy, and what is more, the implausible explanation offered by Straits' witnesses and "untruthful attempts" in evidence to explain away the part Straits played only provided further "compelling evidence" in support of Straits' involvement.

Intention to injure

In regard to this element of the tort, Straits sought to contend that the defendant must have directed their actions towards a specific claimant, as opposed to a third party or class of persons more generally, and mere recklessness as to injury to the claimant was not sufficient. However, MCM maintained that this was not supported, and in fact contradicted, by the authorities cited.

The court referred in its analysis on this point to OBG v Allan [2007] UKHL 21, where the House of Lords considered the level of intentionality required to establish liability, and highlighted the distinction between ends, means, and consequences. In summary: (i) ends, where harm to the claimant is the end sought by the defendant, then the requisite intention is made out; (ii) means, where the harm to the claimant is the means by which the defendant seeks to secure his/her end, then the requisite intention is made out; and (iii) consequences, where the harm is neither the end nor the means but merely a foreseeable consequence, the requisite intention is not made out. The court then went on to note that there was another category, known as "the other side of the coin", to consider if harm to the claimant was the necessary consequence of the defendant's actions. This was differentiated from category (iii) on the basis that the defendant's gain and the claimant's loss are inseparably linked and the defendant cannot obtain the one without bringing about the other, and the defendant knew this to be the case. In such circumstances, then although the purpose of the defendant's action was not to harm the claimant, they will be considered as having intended to harm the claimant. The court also noted that there was no additional requirement that the precise identity of the victim be required at law to establish the requisite intention.

The court acknowledged the overlap between intention and knowledge and in particular, the fact that blind-eye or Nelsonian knowledge may be sufficient, which strengthened the view that there can be no requirement to intend to harm a specific claimant (because, in a case of blind-eye knowledge, no inquiry would have been undertaken to confirm the state of affairs, such as the identity of the claimant).

In any event, the court found on the facts that Straits knew that MCM was an intended victim of the unlawful means conspiracy at least from or shortly prior to April 2016, and if this had not been the case, the court noted that it would have found that the CEO and Vice President of Straits had blind-eye knowledge.

Similarly, the court found that the HK Companies, Mr Kao, and Genesis entered into a combination with intent to injure MCM by deceit. In the court's view, they knew it was MCM who would suffer loss.

Unlawful means

The court agreed with the parties that there were two constituent parts to this element of the tort, namely (i) the unlawfulness of the act; and (ii) whether the unlawful act is in fact the "means" by which injury is inflicted. Straits contended that the "indeed the means" component of the tort was made up of two aspects, causation and intention, and that this requirement of "intention" was in addition to the separate requirement that the defendant had intent to injure the claimant (considered above). By contrast, MCM maintained that in fact the "indeed the means" concept went to the unlawful means and causation elements of the tort, but not intention.

The court held that MCM's analysis was correct and confirmed that there was no intention requirement to this component of the tort. It found that MCM had sufficiently met the required threshold, given that Straits knew about the forgeries (although it was noted that the defendant is not required to know the specifics of the "unlawful means" deployed).

Loss

On the question of loss, the court considered there to be no doubt that MCM had suffered loss as a result of the unlawful means.

Accordingly, for all the reasons above, the court found in favour of MCM in relation to its claim for unlawful means conspiracy.

Note: In March 2022, the defendants applied to the Court of Appeal for permission to appeal.

In May 2022, the Court of Appeal allowed the defendants' application for permission to appeal.

In December 2022, the Court of Appeal dismissed the defendants' appeal. Please see our Civil Fraud and Asset Tracing blog post for more information.

In May 2023, the Supreme Court refused the defendants' application for permission to appeal.