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High value metals fraud: unlawful means conspiracy

Forged warehouse receipts have proved fertile ground for commodity finance disputes in recent years. In Natixis S.A. v Marex Financial and Access World Logistics (Singapore) Pte Ltd1 the Commercial Court delivered a judgment with broad implications for commodity financing and warehousing, particularly in respect of sale and repurchase (or 'repo') transactions governed by English law.

The Commercial Court has handed down another commodity financing judgment in E D & F Man Capital Markets Limited v Come Harvest Holdings Limited.2 On its face, the judgment is analogous with Natixis: both concern the use of forged nickel warehousing receipts in respect of repo transactions. However, E D & F is distinctive as the Claimant in this case had purported to rescind the purchase contracts. If effective, rescission would mean that contractual remedies were unavailable to the Claimant. Consequently, the Claimant's claims were principally brought in tort and equity, engaging causes of action which can often arise in the context of fraud claims, including (i) the tort of deceit; (ii) unlawful means conspiracy; (iii) knowing receipt; (iv) equitable proprietary claims; and (v) unjust enrichment. 

These causes of action are addressed comprehensively in Mr Justice Calver's 164-page judgment. In this alert, we focus on one particular cause of action, the economic tort of unlawful means conspiracy.

 

Background

The Claimant was E D & F Man Capital Markets Limited ("MCM"), a global financial brokerage business. Between May and October 2016, the First Defendant, Come Harvest Holdings Limited ("Come Harvest"), and the Second Defendant, Mega Wealth International Trading Limited ("Mega Wealth"), sought to raise finance by entering into various nickel purchase contracts with MCM (the "Purchase Contracts"). Each of the Purchase Contracts were intended to constitute the first leg of a repo transaction whereby Come Harvest or Mega Wealth would repurchase the nickel for a higher price at a later date.

Under the Purchase Contracts, Come Harvest and Mega Wealth provided MCM with 92 purported original warehouse receipts (the "Purported Receipts") issued by the warehouse storing the nickel. 83 of these were transferred as consideration under the Purchase Contracts. The remaining nine receipts were retained by MCM as collateral for margin payments. In exchange for the Purported Receipts, MCM provided financing (including hedging) to Come Harvest and Mega Wealth totalling over USD 284 million. This financing was in turn financed by MCM on-selling 83 of the Purported Receipts to a third party. 

In January 2017, MCM discovered that certain on-sold warehouse receipts had failed authentication with logistics warehousing provider Access World. Upon checking, the nine Purported Receipts retained by MCM also failed the authentication process. In each case, the relevant nickel had already been sold by Come Harvest and Mega Wealth to another Defendant, Straits (Singapore) Pte Ltd ("Straits"). The Purported Receipts provided by Come Harvest and Mega Wealth to MCM were in fact colour-scanned copies of original warehouse receipts with doctored signatures. 

On 21 June 2017, MCM served notice of rescission on Come Harvest and Mega Wealth in respect of the Purchase Contracts. Consequently, MCM's positon was that the Purchase Contracts were void and the parties should be restored to the position they were in before the Purchase Contracts were entered into. 

On this basis, MCM brought a claim under the tort of unlawful means conspiracy to injure against Come Harvest, Mega Wealth, their agent and advisor Genesis Resources Inc. and its sole director and shareholder Mr Steven Kao ("Mr Kao"), and Straits. In addition, MCM brought claims against various Defendants for knowing receipt of funds, equitable proprietary interest, unjust enrichment, breach of contract (in the alternative) and the tort of procuring a breach of contract.

 

Unlawful means conspiracy3

Straits was the only Defendant to turn up to trial. Accordingly, the unlawful means conspiracy section of the judgment is predominantly concerned with Straits.

MCM alleged that there was an "agreement, combination or understanding"4 between Straits and Mr Kao (acting on behalf of certain of the Defendants) to, among other things: (i) supply colour scanned copies of the original warehouse receipts, (ii) provide 'PMA letters' which suggested that Straits was free to release the nickel, and (iii) to enter into contracts which on their face purported to be, but were in fact not 'repo' contracts. This permitted certain Defendants to purport to sell nickel to MCM which was in fact held by Straits. 

Elements of the tort

In his judgment, Mr Justice Calver adopted the key elements of unlawful means conspiracy used in FM Capital Partners Ltd v Marino:5 

(i)    "A combination, arrangement or understanding between two or more people"; 

(ii)    "An intention to injure another individual or separate legal entity, albeit with no need for that to be the sole or predominant intention";

(iii)    "Use of unlawful means as part of the concerted action"; and 

(iv)    "Loss being caused to the target of the conspiracy."

As is common for unlawful means conspiracy claims, the second and third element were the most contentious – specifically, (ii) the nature of the intention to injure that is required; and (iii) whether an unlawful act is the means by which injury is inflicted. 

(ii) Intention to Injure

Intention to injure has previously been described as the 'mental element' of the tort. On this requirement, the Court relied on the usual test established in OBG v Allan.6 The statements from Lord Hoffmann and Lord Nicholls from OBG v Allan were summarised in the judgment as distinguishing between "ends", "means", and "consequences":7

(i)    "Ends: If harm to the claimant is the end sought by the defendant […] then the requisite intention is made out."

(ii)    "Means: If harm to the claimant is the means by which the defendant seeks to secure his/her end […] then the requisite intention is made out (even if the defendant would have rather secured the end without causing loss to the claimant […]"; and

(iii)    "Consequences: If harm is neither the end nor the means but merely a foreseeable consequence, the requisite intention is not made out […] "recklessness" will not suffice […]".

A key dispute between the parties was whether the tort – in addition to the three elements set out by the Supreme Court in OBG v Allan – requires a Defendant to 'target' the Claimant. Straits argued that the test was not made out "if the defendant intended to harm a third party or class of persons; rather, the defendant must have directed their actions towards the specific claimant […]" (emphasis added).8

The Court referred to the dicta of Lord Hoffmann in OBG v Allan: if harm to the claimant "is neither an end in itself nor a means to an end, but merely a foreseeable consequence […] it cannot for this purpose be said to have been intended."9 Therefore, the 'targeting' or 'aiming' of an intention to injure is "simply a reiteration of the test for intention […] that harm to the claimant must be the end sought by the defendant or the means by which the defendant seeks to secure its end rather than merely a foreseeable consequence of its actions".10 Accordingly, it is not necessary for harm to be directed at a 'specific' claimant.11

The judge held that Straits had therefore satisfied the mental element of the tort: it had sought to advance its own interest by using means that would necessarily be injurious to MCM and other financiers similar to MCM. 

(iii) Unlawful Means

The parties agreed that the unlawful act in question was capable of founding liability for the purpose of the tort. What was in dispute, was "[w]hether an unlawful act is, in fact, the 'means' by which injury is inflicted on the claimant pursuant to the conspiracy".12 Straits argued there were two sub-elements to unlawful means: 

(a)    causation (i.e. the unlawful means were "indeed the means" by which harm is inflicted); and

(b)    intention (an intention to injure the claimant by the unlawful means which caused the claimant loss).13

Straits argued that "any defendant must also have had knowledge of the unlawful means in order to intend them" (albeit Straits accepted that blind-eye knowledge would suffice).14

The Court rejected Straits' submission, holding that there was no intention requirement in respect of the unlawful means component of the tort, which was a question of causation. The intention to injure forms a separate part of the tort, as addressed above. Accordingly, the unlawful means – forgery and deceit – were indeed the means that caused the loss suffered by MCM. 

In addition, the Court found that Straits did have knowledge of the "specific means" used by Come Harvest and Mega Wealth in any event: deceit as well as forgery.15

 

Comment

This judgment provides a useful reminder of the Commercial Court's approach to unlawful means conspiracy claims. Potential third party defendants should be wary. As this case shows, it is not enough to plead ignorance of the precise method of unlawful means or Nelsonian (i.e. blind-eye) knowledge. 

 

1 [2019] EWHC 2549 (Comm). 
2 [2022] EWHC 229 (Comm). 
3 E D & F Man Capital Markets Limited, [457] to [553]. 
4 Ibid., [58]. 
5 [2018] EWHC 1768 (Comm), at [94] (which was in turn adopted by Butcher J in Iranian Offshore Engineering and Construction Co v Dean Investment Holdings SA [2019] EWHC 472 (Comm)).
6 OBG v Allan [2008] 1 AC 1. E D & F Man Capital Markets Limited, at [484].
7 E D & F Man Capital Markets Limited, at [487].
8 Ibid., [479]. 
9 OBG v Allan [2008] 1 AC 1, at [43].
10 E D & F Man Capital Markets Limited, at [495].
11 Ibid., [495].
12 Ibid., [533].
13 Ibid., [535].
14 Ibid., [538].
15 Ibid., [543], [548]. 

 

James Brook (Trainee Solicitor, White & Case, London) and Ashwini Mohan (Trainee Solicitor, White & Case, London) contributed to the development of this publication.

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