Bank Mellat’s $4bn A1P1 claim gathers pace

9 May 2015 by David Hart QC

bank_MellatBank Mellat v HM Treasury [2015] EWHC 1258 (Comm), Flaux J, 6 May 2015, read judgment

Two recent judgments underscoring the potential high cost of the UK getting it wrong in its dealing with businesses and hence being liable to pay damages under the Human Rights Act for breach of its A1P1 obligations. Regular readers will know that A1P1 is the ECHR right to peaceful enjoyment of property.

The first case was the photovoltaics case of Breyer, all about reducing renewables subsidies unfairly: see my post of last week here. The second, this case, involves a much more direct form of impact, namely the Treasury’s direction under the Counter-Terrorism Act 2008 that no-one else should have any commercial dealings with Bank Mellat, because, the Treasury said, the Bank had connections with Iran’s nuclear and ballistic missile programme. 

Bank Mellat’s challenge got to the Supreme Court: see judgment and my post. The Court (a damn’d close run thing – 5:4) concluded that the direction was arbitrary and irrational and procedurally unfair. The nub of the complaint is that there were other Iranian banks against whom this very draconian measure was not taken, and that there was nothing specific about the Bank which made it more implicated than the rest of the banking system.

The Supreme Court remitted the case for trial as to HRA damages.

The current judgment of Flaux J is the first stage in that trial process. As we will see, Bank Mellat are distinct winners at this stage.

As is common in these massive cases, the judge was presented with various preliminary issues of law. There were 3 legal issues here, which, simplified, were

  1. could the Treasury still contend that it has not acted unlawfully under the HRA, despite the Supreme Court’s findings?
  2. could the Bank claim for its losses caused by the diminution in the earnings generated by its subsidiaries?
  3. did the Bank’s heads of claims relate to possessions within the meaning of A1P1?

And the answers were 1 – No, 2 – Yes (in principle), and 3 – It’s Complicated, and the Question needs Re-Wording anyway.

1. Unlawfulness

Flaux J found this one easy. The Treasury set itself the ambitious task of arguing that the SC’s conclusions amounted to a finding of common-law unlawfulness, and not A1P1 unlawfulness. This was despite the Bank having put its claim to the SC fairly and squarely under A1P1. Why did the distinction matter? Because there are generally no claims for damages for common law unlawfulness.

Hence his conclusion

 It could not be clearer that Lord Sumption considered the 2009 Order was unlawful because it was incompatible with that right under A1P1.

2. Subsidiaries and the reflective loss principle

The Bank brings wide-ranging claims. It lost return on funds deposited with three subsidiaries and with other non-Iranian banks, as well as suffering a diminution in the dividends derived and to be derived from those three subsidiaries. Much of the claim was for future loss of earnings or profits.

The Treasury said the claims concerning the subsidiaries offended the reflective loss principle, namely that a shareholder cannot claim for losses suffered by him reflecting losses of the company in which he has the shareholding. The rationale is that such claims belong to the company, not to the shareholder, and should be only brought by the company.

The argument turned on the position of one subsidiary, Persia International Bank, in which Bank Mellat had a 60% holding (there were factual issues about the other two). The Treasury said that PIB could have brought its own claim, and this prevented Bank Mellat from doing so.

The Bank responded that

(i) that PIB had never had a claim against the Treasury under sections 7 and 8 of the HRA and

(ii) that the rule against reflective loss had no place in the Strasbourg jurisprudence.

On (i), the Bank said that PIB was not a “victim” within section 7(1) HRA, and the Strasbourg cases make it clear that this means “direct victim”. Only the Bank itself was a direct victim.

The judge agreed with the Bank on (i), after considering cases such as Olczak v Poland, (cancellation of applicant’s shares) and Agrotexim v Greece (1996) 21 EHRR 250. PIB was only a victim in a secondary sense, in that it was directed by the legislation not to do business with the Bank. The Bank was the direct victim, against whose business the 2009 Order was directly targeted.

Hence, he thought that PIB could not have brought a claim against the Treasury as victim under sections 7 and 8 of the HRA.

It followed from that conclusion that the only potential claimant in respect of the 2009 Order was the Bank and so the reflective loss principle had no part to play.

The Bank did therefore not need to win on (ii), namely the argument that the rule of reflective loss played no part in Strasbourg case law. The judge however went on to consider this in some detail.

He was unpersuaded by the Bank:

the Strasbourg jurisprudence does recognise that, as a general rule, a rule equivalent to the English law rule against recovery of reflective loss, unless there are exceptional circumstances, such as that the company cannot bring a claim against the wrongdoer. [52]

His conclusion on (i) thus brought the case within those exceptional circumstances, because PIB could not have brought a claim against the Treasury.

 It follows that…the Bank is free to pursue a claim in these proceedings for diminution in the value of its shareholding in PIB and that the Treasury’s application to strike out that claim is refused.

His reasoning on the reflective loss point is of considerable interest. It includes an analysis of the “difficult case” of Agrotexim v Greece (1996) 21 EHRR 250 also considered in the photovoltaics case of Breyer. The applicants were shareholders in the Fix Brewery. Fix wanted to develop two of its sites, but Athens Council adopted measures with a view to expropriating the site. The applicants went to Strasbourg on A1P1. The Greek government said that the applicants were not victims. The Strasbourg Court noted that the applicants did not complain about any infringement of their rights as shareholders (to attend meetings and to vote), as distinct from their financial interests in Fix. And it found that the piercing of the corporate veil was justified only in exceptional circumstances. Although Fix was in liquidation, there was no evidence that it was impossible for its liquidators to bring their own A1P1 on its behalf.

The reasoning of the Strasbourg court in Agrotexim as Flaux J pointed out bears a

distinct resemblance to the scope of the rule against reflective loss in English law

and was followed in OlczakA similar reading of Agrotexim was reached by Neuberger J in an early domestic A1P1 case, Humberclyde Finance.

3. The relationship between “possessions” and damages

Flaux J summed up what really lay between the parties under issue 3 as follows.

The Bank said that once liability has been established on the basis that the 2009 Order was an unjustified interference with its rights to peaceful enjoyment of its A1P1 possessions, there is no scope for limiting the damages recoverable by reference to what might technically amount to a “possession”.  The fundamental compensatory Strasbourg principle is restitutio in integrum which will include in an appropriate case consequential losses or future losses if the recovery of those losses is necessary to achieve just satisfaction in respect of the breach.

The Treasury submitted that damages are only recoverable in respect of what amounts to “possessions” within the meaning of A1P1 and that this is the effect of the Strasbourg jurisprudence, as interpreted by the English courts. Future loss of income does not amount to a “possession” within A1P1.

The Bank’s riposte is that the case law on which the Treasury relies is concerned with the threshold question of liability: whether there has been unjustified interference with a possession, not with whether there is some limitation on the scope of damages recoverable once liability is established.

At [55], the judge gave his reaction as a matter of principle to these arguments, before dealing with the case law.  The original first instance judge, Mitting J, had found there has been interference with the Bank’s possessions, specifically the goodwill it had built up in this country. The Supreme Court found the interference unjustified. That unjustified interference had a wide-ranging effect on the Bank’s business, both at the time of the 2009 Order and subsequently, in terms not only of damage to the goodwill but future loss of profits and other consequential losses, as indeed was intended by the Treasury – that is what these sanctions are all about.

….one would expect such consequential losses to be recoverable, provided that it can be said that they were caused by the relevant unjustified interference with the Bank’s possessions, unless there is some rule of law which precludes their recovery. In other words, if consequential losses are recoverable in principle under the Strasbourg jurisprudence, one would expect that the damages or compensation recoverable would not be limited in some way to direct loss of or damage to the possessions, given that the whole concept of consequential losses is a wider one.

Obviously, the issue of causation, whether the consequential losses were caused by the unlawful interference with the Bank’s UK goodwill had to be determined at trial.

The judge then considered the A1P1 cases, and at [67] concluded that once an unlawful interference with the applicant’s “possessions” so as to establish a violation of A1P1 was established

 damages are recoverable for whatever loss and damage can be established as having been suffered as a consequence of the unlawful interference, including consequential losses such as loss of future earnings or profits, not constrained by whether what is claimed by way of loss is itself a “possession”, but only by whether the loss claimed was caused by the unlawful interference with the relevant “possessions” which the court has found.

As the Bank submitted, the cases relied on by the Treasury (e.g. Malik – the suspended GP case considered at length in Breyer) went to the threshold question (was there an A1P1 breach?) rather than to the damages question (what are the damages payable for an established A1P1 breach?).

This is obviously helpful to the Bank, but causation remains very much in issue. As the judge noted at [78],

Whilst it is correct that the possessions with which there was unlawful interference cannot include future loss of profits, rather than the goodwill which the Bank had built up in this country, which Mitting J has found was a “possession”, the issue as to what damages are recoverable for that unlawful interference with the Bank’s possessions will depend, not upon an artificial restriction to the effect that, for example, the loss of future profits claimed could not itself be a “possession”, but upon issues of causation.

And those issues of causation will include whether it can be established that the damages claimed were “demonstrably and directly” caused by the violation of A1P1, which is an issue for the full trial, not to be determined on these preliminary issues.

Conclusion

This is a highly important ruling, not just for Bank Mellat. Issue 2 (reflective loss) brings some domestic clarity to what was implicit in the Strasbourg case law. Issue 3 helpfully makes it clear that cases involving the threshold question of whether the possessions qualify as A1P1 possessions do not answer the question as to whether consequential losses are recoverable. The latter depends on whether factually those losses were caused by the specific A1P1 breach.

My first post since the election, and I cannot help but muse on the rival impulses in our new government triggered by these types of A1P1 decisions. They are firmly pro-business and anti-governmental interference with business – which might point in one direction. But pro-human rights and pro-claimants (one foreign)- which will go a long way in the other. I suspect that if the Treasury ended up paying millions (let alone billions) to an Iranian Bank, the latter might come to the fore. And, as for Breyer, paying big sums to renewables businesses may be even less popular given the government (indeed parliament) has lost its Lib Dem climate change minister.

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