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“Arck” Litigation: Clydesdale Bank successfully defeats Arck investors’ claims

Ian Wilson and Rebecca Zaman acted for the bank. 

1) BERNARD CHUDLEY (2) RUTH CHUDLEY (3) ANITA BEAN (4) THE ESTATE OF CHRISTOPHER BEAN (BY HIS EXECUTRIX ANITA BEAN) v CLYDESDALE BANK PLC (T/A YORKSHIRE BANK) [2017] EWHC 2177 (Comm) (Judge Hancock QC)

On 24 August 2017, Christopher Hancock QC, sitting as a Deputy High Court Judge in the Commercial Court, handed down judgment in Chudley & Ors v Clydesdale Bank [2017] EWHC 2177 (Comm).  3VB’s Ian Wilson and Rebecca Zaman, instructed by Addleshaw Goddard LLP, represented Clydesdale Bank (“the Bank”). The Bank successfully defended claims made against it by four investors for the losses they suffered after investing in an offshore property development scheme, called “Paradise Beach”, run by an entity called “Arck”. Arck was in fact acting fraudulently; it had gone into liquidation and its principals had been prosecuted and convicted in separate criminal proceedings.

The claims were directed against the Bank for two reasons. First, Arck was a customer of the Bank, and it was to an account held at the Bank that the investors had paid over their money. Second, a Bank employee (Arck’s relationship manager) had signed certain “letters of instruction” from Arck to the Bank, each of which contained statements about how the Bank was to open new accounts for Arck and deal with sums held in those accounts. These statements were not correct. One such letter of instruction concerned the Paradise Beach investment scheme (the “PB LOI”). The investors said that they had been shown the PB LOI by Arck, and that they had relied on it in investing in the Paradise Beach scheme. 

The investors’ claims against the Bank were for (1) breach of contract (which, they said, they were entitled to enforce under the Contracts (Right of Third Parties) Act 1999); (2) negligent misrepresentations made in the PB LOI; (3) breach of a Quistclose trust by the Bank; (4) dishonest assistance (by the Bank relationship manager) in Arck’s breach of trust; and (5) restitution.

The Court determined each of these claims as follows:

1. Contract: The PB LOI was not objectively intended to be a legally binding contract between Arck and the Bank. As such, there was no contract to breach or third party rights for the investors to enforce. Moreover, the investors bore the onus of proving that they would not have suffered their losses but for the Bank’s alleged breaches, and they failed to produce sufficient evidence (even on a loss of a chance basis) to show that the fraudster would not have made off with their money in any event.

2. Negligent Misrepresentation: The Bank did not owe a duty of care to the investors, as it did not deal with them directly and lacked the necessary proximity to warrant imposing a duty. The Court further found (contrary to the oral evidence of the investors’ lead witness) that the investors were not shown the PB LOI and so did not rely on it in deciding to invest. The Court accepted that the witness in question believed his evidence of the events of 2009 to be true, but found that, when weighed against the inconsistent documentary evidence from 2009 and thereafter (and the lack of further documents that would be expected to exist), the witness’s “memories” were retrospective reconstructions and could not be relied upon.

3. Quistclose Trust: The Quistclose purpose of the investors’ payment to Arck was for investment in the Paradise Beach scheme, not for retention of the sums by the Bank. That purpose had been discharged. The Court further confirmed that the Bank would not be a trustee of the funds in any event, as even if a Quistclose trust had arisen, it would be the account holder Arck that would be the trustee.

4. Dishonest assistance in breach of trust: There was no trust to be breached for the same reason as at (3). In any event, the Bank employee (Arck’s relationship manager) who signed the PB LOI was naïve to do so, but did not act dishonestly or otherwise turn a blind eye.

5. Restitution: The investors paid the money to Arck’s account with the intention that it be paid on to Paradise Beach. The money was then paid on to Paradise Beach. There was, therefore, no mistake of fact that could give rise to a restitutionary remedy.  In any event, the Bank had a defence of ministerial receipt. 

The case is of particular interest as an illustration of the limits of a bank’s duties to third parties affected by the wrongdoing of its customer. It is also of interest as an illustration of the well known principles in Gestmin v Credit Suisse [2013] EWHC 3560 (Comm) about the limits of witness memory as a source of reliable evidence.

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