Bank Mellat’s $4bn claim: CA rules out one element, but the rest to play for

bank_MellatBank Mellat v HM Treasury [2016] EWCA Civ 452 1258, Court of Appeal, 10 May 2016: read judgment

Bank Mellat’s challenge to the Treasury’s direction under the Counter-Terrorism Act 2008  has been before the courts on a number of occasions. In 2009, the Treasury had concluded that the Bank had connections with Iran’s nuclear and ballistic missile programme. In 2013, the Supreme Court quashed the direction, which had stopped any institution in London from dealing with the Bank.

The Bank claims for damages caused by the unlawful direction. The claim is under the Human Rights Act via A1P1 of the ECHR, (the right to peaceful enjoyment of possessions).

Preliminary issues on damages came before Flaux J (judgment here, my post here). The Treasury appealed, with, as we shall see, some measure of success.

Before Flaux J, there were 3 legal issues:

  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 for loss of income relate to possessions within the meaning of A1P1?

Flaux J found 1 easy: the Supreme Court’s findings precluded the Treasury continuing to say that it had not acted unlawfully, and there was no appeal against this.

This left 2 and 3 for argument before the CA.

2. Subsidiaries and the reflective loss principle

The facts were relatively simply, the law not so.

Bank Mellat had a 60% shareholding in the Persian Investment Bank (PIB). PIB, a UK bank regulated by the FCA, had suffered losses as a result of it not being able to deal with Bank Mellat. So Bank Mellat claimed 60% of the consequent loss of earnings suffered by PIB. PIB brought no claim itself.

The problem is the domestic principle against reflective loss, namely that a shareholder cannot sue for the diminution in the value of his shareholding where that loss “merely” reflects the loss suffered by a company. This is because the claim in those circumstances should really be brought by the company. It matters not that the company has not in fact brought such a claim. Any other rule runs the risk of double recovery with claims being brought by both company and shareholder. The only exceptions lie where the company could not bring such a claim, either because it had no cause of action (alleged here) or (in exceptional circumstances) where the tortfeasor had so disabled the company that it could not practically bring such a claim.

So the first step in the Bank’s argument (accepted by Flaux J) was that PIB had no claim in respect of these losses.

The CA disagreed. PIB was a “relevant person” under the 2008 Act – in effect any UK Bank. s.63(2) permitted any person affected to apply to the High Court in respect of the direction, and s.63(4) enabled the court to grant any relief which could be given on a claim for judicial review. That included a claim for damages.

The CA continued: PIB had victim status under section 7(1) HRAand could therefore have sought just satisfaction under s.8 HRA. It rejected the Bank’s submission that PIB was not a direct victim, and that the only direct victim was Bank Mellat.

But the Treasury had to succeed on the next point in order to strike out Bank Mellat’s PIB-related claim – namely that PIB could have brought that type of claim and Bank Mellat could not bring such a claim, under the principles laid down by the Strasbourg Court.

The judge had ruled against the Bank on this latter point, considering that the Strasbourg cases do recognise that 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.

The CA agreed with the judge on the latter point. The key case was Agrotexim v Greece (1996) 21 EHRR 250. 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.

So PIB could have sued, and Bank Mellat was disabled from suing because the losses it sought were merely reflective of the losses sustained by PIB.

3. Should the assessment of just satisfaction include Bank Mellat’s loss of income?

The above is how the CA encapsulated this further issue. In effect, the Treasury was arguing for a very limited definition of potential losses, namely contracts concluded before the 2009 order and marketable goodwill at that point. Everything else in the claim by way of future claim was not a possession, and the court should so rule.

Otherwise than rejecting the Treasury’s application to rule out such claims, Flaux J was reluctant to be drawn very far on this issue, and the CA was even less so.

The Bank said that, once liability has been established on the basis that the 2009 Order was an unjustified interference with its A1P1 rights, 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 riposted that the Treasury’s case law 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. He 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.

The judge then concluded that nothing in the A1P1 caselaw prevented recovery of such consequential damages. The cases relied on by the Treasury (e.g. Malik – the suspended GP casewent 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?).

The CA rowed back from these comments, albeit in rejecting the Treasury’s invitation to rule out parts of the claim. [40] helpfully sets out the material case law, but the following paragraphs studiously avoid approving or disapproving of Flaux J’s analysis. The CA added only this:

There is clearly force in the arguments advanced as to whether any of losses in dispute are or are not recoverable. The significant issue relates to the recovery (if any) in respect of the loss of income from future business. I do not think it helpful at this stage to try and characterise any of the matters in dispute as a threshold question, an artificial restriction or a question of causation. Nor in my view in the absence of findings of fact is it a useful exercise to try to determine as a matter of law what can constitute an equitable award of just satisfaction by further analysis of the case law of the Strasbourg Court and by attempting to reconcile its more open textured and flexible approach to just satisfaction under Article 41 with the traditional common law approach to the calculation of damages.

So, the CA concluded, all  the points made by Bank Mellat and the Treasury are at this stage fully arguable. Flaux J was right in declining to decide the issue, but

as his judgment expressed views on some of the arguments and identified what he considered the issue to be, it is important to make clear that his judgment should not therefore be regarded as determining in any way any point on this issue in this litigation; I expressly decline to express a view, one way or the other, on the correctness of his views on the disputed points. All the points remain open.

Hence, the trial judge should therefore approach the factual determinations and the application of the law wholly unfettered by any of the views expressed by Flaux J on this issue.

Conclusion

Bank Mellat therefore lost the element of its claim in respect of PIB, assuming that by reason of lapse of time PIB cannot bring this in its own right. But this finding may come with a sting in the tail for the Treasury in such cases, because it enables in principle any bank affected by an unlawful direction to bring a challenge and a consequential claim for damages, even if the bank was not a subsidiary of the entity the subject of the direction.

On the second issue, the CA made in effect the same order as Flaux J, but the Bank must have been disappointed that the CA did not any make any endorsement of the generally favourable comments made below. This must make the case more difficult to resolve out of court – a consideration in the CA’s mind but one which did not induce them to say more: [43]. At root, there was a reluctance to say anything very much before the facts became clearer.

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