INDEX
| |
Paragraph No |
| Introduction: Overview |
1 |
| The Structure of the Banks and the Bankers mainly involved |
32 |
| National Westminster Bank |
35 |
| The History of Rabobank's Claims against NWB and others |
36 |
| The Misrepresentation Allegations |
63 |
| The Factual Background: how Bankers conduct a Workout |
97 |
| The Period before the Workout |
115 |
| The History of the Workout |
159 |
| The Meetings of 29 August 1996 |
342 |
| The van der Schrieck Meeting |
358 |
| The Good Faith Agreement |
362 |
| The Claim under Section 2(1) of the Misrepresentation Act 1967 |
369 |
| Was there dishonest Concealment? |
371 |
| Inducing PW to act in Breach of its Professional Duty |
416 |
| NWB's Claim |
425 |
| Conclusions |
454 |
| Appendix 1 |
Appendix 1 |
| Appendix 2 |
Appendix 2 |
Mr Justice Colman:
Introduction
Overview
- In March 1996 Rabobank Nederland (" Rabobank ") and National Westminster Bank ("NWB") each agreed to extend to Yorkshire Food Group plc ("YFG") an unsecured credit facility of US$50 million thereby providing YFG with a total facility of US$100 million. Rabobank was the second largest bank in the Netherlands. NWB was one of the largest independent clearing banks in the UK. YFG was a public company which had been created by Mr Michael Firth, a dynamic Yorkshire businessman, who was the largest shareholder. The business of YFG had come to be largely located in California and was concerned with the processing and sale of dried fruit and nuts. The processing was carried out through operating direct or indirect subsidiaries incorporated in the United States, including Yorkshire Foods Inc ("YFI"), effectively a holding subsidiary, Treehouse Holdings Inc, a Delaware corporation which owned Treehouse Farms Inc, incorporated in California ("Treehouse"), and Yorkshire Dried Fruit and Nuts Inc ("YDFN"), also a Delaware corporation. There was also Valley View Yorkshire Inc which specialised in processing prunes. Treehouse specialised in the processing of almonds which it bought in from the local almond growers, such as Baker Farms. YDFN processed raisins and prunes. Most of YFG's revenue was derived from its operations in the United States. Michael Firth had been Group Chief Executive of YFG until January 1995, after which he retained the role of Group Chairman. The American operations of YFG then came to be managed by Paul Haley ("PH") as Chief Executive.
- Also in March 1996 NWB agreed to advance to YFG a further overdraft facility of £4 million.
- Between March and August 1996 the financial position of YFG significantly deteriorated. On 30 July 1996 YFG gave notice to NWB that its reforecast of its trading position for 1996 indicated that it might be in breach of the Financial Covenants in the Credit Facility in as much as the ratio of Total Consolidated Net Borrowings to Tangible Consolidated Net Worth might have failed to comply with the contractual requirement. Both banks considered that YFG should be put into "workout".
- The purpose of a workout with regard to a multi-bank loan is to minimise the risk of loss to the lending banks. This may be achieved in a number of different ways; by providing additional finance to tide the company over a cashflow crisis and thereby enabling the company to go on trading or by causing the company to sell part of its assets to increase its liquidity, including selling off subsidiaries, or by putting in new management or by taking additional security or by simply allowing the company to go into liquidation. It is quite normal for lender banks to appoint investigating accountants at the outset to report on the financial condition of the company with a view to enabling the banks to decide what course to adopt the better to protect recovery of as a large proportion of their lending as possible. Such accountants would not conduct an audit but would concentrate on advising the banks as to how, if at all, the corporate resources of assets and management could be deployed to preserve the banks' recovery. Immediate cashflow requirements would often be of very substantial importance.
- Having on 20 August 1996 held an initial meeting to commence the workout and having agreed to appoint an accountant, representatives of both banks met representatives of Price Waterhouse ("PW") on 29 August 1996 and duly instructed that firm to investigate and report on YFG in accordance with agreed terms of reference. PW were subsequently formally appointed on the basis of those terms by YFG by means of a letter of instruction dated 6 September 1996.
- The fact that YFG was seriously under-funded became clear almost immediately. It was required to fund the redemption of preferred stock in Treehouse which was held by Berisford plc from which that corporation had been purchased, part of the purchase price (some US$3.2 million) having been left outstanding against the issue of preferred stock to Berisford. An extension of time for redemption from 31 July to 30 September 1996 was agreed with Berisford. Further, the company needed to pay for crops of fruit and almonds to provide itself with stock for its processing business. Harvesting was imminent and deliveries under its open contracts would have to be paid for by early October. PW calculated that the funding required for this purpose amounted to U$9 million. In the event, the banks decided to increase their lending to YFG by US$ 4.5 million each in the hope that, because it would thereby be enabled to purchase stock for processing, the profits to be derived early in 1997 from the sales of processed fruit and almonds would substantially improve the financial condition of the company. However, the banks declined to fund the Berisford redemption.
- On 18 October 1996 PW issued its Interim Report on YFG. The picture that emerged was not rosy. The company was shown to be excessively geared by comparison with its equity value and yet to be under-funded to enable it to purchase enough stock fully to utilise its processing potential and thereby to engender increased profitability. YFG's estimated operating loss for the seven months to 31 July 1996 was £3 million compared with a profit of £1.5 million previously budgeted.
- On 17 December 1996 PW issued its Second Report on YFG. That disclosed a much more serious financial position. There was a forecast loss for 1996 of £20.4 million before tax against a forecast net asset value as at 31 December 1996 of £20.5 million. The cashflow forecast incorporated in the 1997 budget showed a cash requirement in excess of current facilities of £4.9 million in February 1997 reducing to £1.5 million in May 1997, but peaking for the year in October 1997. The forecast EBIT for 1996 was a loss of £16.5 million, the major negative components being Treehouse and YFI.
- YFG's cashflow perspective continued to deteriorate. By 15 January 1997 the United States companies did not have sufficient funds to meet cheques about to be drawn. Both banks responded to YFG's requests for further funding by agreeing on 11 February 1997 to advance a further US$5 million each to enable the company to take the benefit of purchasing and processing the 1996 crop, thereby increasing its net worth in anticipation of sale of some or all of the United States companies in the course of 1997. This accorded with the advice received from PW and both banks saw it as a justifiable risk by comparison with the alternative of allowing the company to file for Chapter 11 bankruptcy, which would involve the banks in substantially greater losses than if the businesses could be sold.
- Further loans to YFG were provided by both banks on 12 June 1997 (US$450,000 each), 16 July 1997 (US$2.9 million each) and on 15 September 1997 (US$1 million each). All this additional funding was provided by the banks to stave off Chapter 11 bankruptcy pending the anticipated sale of the US companies.
- In the course of September 1997, it had at last become clear that the sale of the US businesses could not be accomplished in the near future. Those YFI companies were going to have to find sufficient cash within a few weeks to pay growers for deliveries of the product of the 1997 crops, failing which Treehouse and YDFN would not be able to engender profits from their processing operations and would effectively become unsaleable at any price which would significantly reduce the indebtedness to the banks. There then emerged a completely new suggested solution for the banks' problems over repayment of their loans. It was proposed by Rabobank's New York office, in particular by Mr den Baas of the Structured Finance Department, that a special purpose company ("SPC") should be set up to which YFG's US subsidiaries would transfer their open sale contracts for the 1997 crop together with their inventory. The SPC was at the centre of a complex structure within which it would borrow $45 million by issuing loan notes, and obtain by asset sales and increased borrowing a further $29.5 million. Part of the indebtedness to the banks would be converted into loan notes and $15 million would be written off by each of NWB and Rabobank London in exchange for 20 per cent of the equity in YFG. The London banks would also establish a revolving credit facility to the extent of $30 million which would be used to provide working capital and to contribute towards repayment of the banks' indebtedness. The effect would be that part of that indebtedness would be converted into loan notes to be held by the banks and part (US$15 million) would be written off against which 20 per cent of the equity in YFG would be issued to the banks to be held for at least three years. Further, a total of $45 million would be repaid to both banks against the outstanding indebtedness. Loans (some $29 million) would be repaid to the banks over the next several months but a substantial part of the debt ($31 million) would be written off and/or extended into the future and its repayment would substantially depend on unpredictable earnings and proceeds of sale of shares in Treehouse.
- Neither NWB nor Rabobank London were in favour of this proposed solution, the precise working of the structure remaining a matter of great doubt to those concerned at both banks.
- However, in the course of a meeting between representatives of NWB and Rabobank London and Rabobank New York ("RNY") in New York on 26 September 1996, it was proposed by Mr den Baas that RNY should take out the indebtedness to both the London banks and that NWB should agree to a discount. Further negotiations resulted in an agreement dated 15 October 1997 known as the Deed of Transfer ("DoT"). This was an agreement entered into by N, Rabobank and Utrecht-America Finance Co, a subsidiary of Rabobank, together with YFG and YDFN. Its effect was as a novation agreement under which NWB assigned to Utrecht both the US dollar indebtedness of YFG (US$ 48,946,110.07) and the sterling indebtedness (£5,466,734.51) for a total price of US$ 39,525,386.30. This represented a discount of £11.3 million. Although a party to the DoT, Rabobank undertook no substantive positive obligations and had conferred upon it no substantive rights except that by clause 21.3 it agreed to release NWB as agent in respect of the Credit Facility from any obligations, liabilities or responsibilities in respect of any action taken or not taken in its capacity as Agent under the credit agreement or under the security documents. Further, Rabobank, amongst all other parties, agreed not to bring any claims against NWB in its capacity as Agent and that it would procure its subsidiaries not to do so.
- On 30 October 1997 YFG issued interim accounts recording a loss before tax of nearly £13.7 million.
- On 5 December 1997 there was a meeting of the Rabobank International Credit Committee ("the RICC") which, having observed that Rabobank's gross exposure on YFG totalled US$127 million, and that, according to a consultant's advice, the Group was being mismanaged, recommended that RNY should file for administrative receivership in London and should try to ensure that the receiver replace the existing management.
- It will thus be appreciated that, although NWB and Rabobank had been lenders of equal amounts ($50 million) under the credit facility in March 1996, with NWB providing an additional £4 million overdraft facility, by October 1997 NWB had by means of the DoT sustained an accrued loss of £11.3 million (approximately US$18.2 million) whereas that of Rabobank had become about US$127 million.
- In these proceedings Rabobank claims by counterclaim that, by reason of misrepresentations made to it by NWB and upon some or all of which it acted in reliance in advancing moneys to YFG from 3 October 1996 and on those occasions in 1997 referred to in paragraph 10 above and further in entering into the DoT in October 1997, it is entitled to rescission of the DoT or a declaration that it has already rescinded the DoT or, if not rescission of the DoT as a whole, then at least of clause 21.3 (see paragraph 13 above) and/or an indemnity in respect of any sum that NWB might otherwise be entitled to recover in respect of its claim in these proceedings (see paragraph 18 below) and further the return of the amount of the additional loans advanced by Rabobank to YFG as described in paragraph 13 above and of the moneys paid by Rabobank in order to fund Utrecht's acquisition of the debt of YFG (US$ 37 million) as well as the further advances made by Rabobank to YFG, after entering into the DoT, to enable it to pay growers for the deliveries of product from the 1997 crops (US$ 18 million).
- Rabobank further counterclaims damages for deceit based on the allegation that NWB made fraudulent misrepresentations upon which it relied in entering into the agreements to advance additional amounts to YFG and in entering into the DoT, alternatively damages for misrepresentation under section 2(1) of the Misrepresentation Act 1967. Rabobank also raises an alternative claim based on NWB's breach of the Good Faith Agreement ("GFA").
- NWB's claim is for damages for breach of clause 21.3 of the DoT (see paragraph 13 above) on the grounds that Rabobank acted in breach of that provision by bringing, together with Utrecht, proceedings against NWB in the Superior Court, State of California, County of Contra Costa. Those proceedings having either been variously summarily dismissed on the merits or dismissed on the grounds of forum non conveniens, NWB now claims as damages the costs which it has incurred in defending those proceedings and which cannot be recovered in the Californian courts. These are said to amount to approximately £5.5 million.
- The circumstances which have given rise to this litigation are somewhat unusual. They stem from the fact that, at one and the same time as NWB entered into the Credit Facility in March 1996 and throughout the period up to the agreement of Rabobank to take out NWB under the DoT, NWB was advancing to Mr Firth and other directors and former directors and managers of YFG substantial sums by way of personal loans. The borrowers were all shareholders of YFG. Mr Firth beneficially owned 8,243,111 shares out of a total issued share capital of 44,550,000 as at 31 December 1995 and 1996, ie. just over 18.5 per cent. The second largest shareholder was Mr Giddings. He had been a director of YFG until his resignation on 30 June 1995 but he remained a director of YFI. He owned 5,957,483 shares in YFG or some 13.37 per cent of the issued share capital. The total shareholding of the remaining directors and Mr Giddings was approximately 40 per cent. Mr Haley owned 1,440,686 shares or 3.23 per cent.
- As from May 1996 some 6,726,430 shares in YFG (15.1 per cent) were deposited with NWB as security for facilities granted to directors and managers. This security interest was increased to 18.9 per cent in December 1996 with the deposit of a further 1,651,911 shares by Mr Firth. That bank's security interest remained unchanged at the time of the DoT in October 1997. By October 1996 the total of loans to the YFG directors stood at £3,636,400 secured by deposits of shares in YFG, and, in the case of Mr Firth, property then valued at £4,314,600.
- Whereas the personal borrowings of the directors were, for the most part, used for the purchase of shares in YFG, Mr Firth's borrowings were of a different nature. They totalled £2.56 million. Of that total, £1.96 million had been advanced to the MRF Trust, which I infer was effectively controlled by Mr Firth. Of that amount some £770,000 was advanced, as it is described, as a Bridging Loan ("BL") in the sum of US$1,200,000. That advance was made on 1 May 1996 for 3 months, but repayable on demand at the bank's discretion with interest rolled up. Its purpose was to finance part of the purchase price of 1685 acres of land in California on which almond orchards were to be planted. It was hoped to replace it by July/August 1996 by means of refinancing by an American lending institution. The land was to be purchased in two halves by two corporations known as Almond Farming I ("AF I") and Almond Farming II ("AF II"), incorporated in Delaware. Those corporations were to be under the control of White Rose Farming Inc, another Californian corporation in which all the issued shares would be owned by directors of YFG, except for Mr Kevin Matthews, who was to own 5 per cent. He was to be nominee President of AF I and AF II. Mr Matthews was currently an officer of YFI. Mr Firth was to own 48 per cent of the issued stock in White Rose and Haley 32 per cent. It was anticipated by Mr Firth that later in 1996 a loan of US$5.5 million could be made available by Travelers Insurance Corp which would replace the BL. It was further intended that the land would be developed as orchards by Baker Farming, who owned orchards in close proximity to the White Rose land and who, it was intended, should plant and operate the White Rose orchards as a joint venturer with White Rose. It would normally take three to four years from planting before almond trees produced commercial crops. 90 per cent of the land would be devoted to almond trees and the market for the almonds so produced would be major processors, such as Treehouse. Prunes and raisins would also be produced and the market for those products would include respectively Valley View Yorkshire and YDFN, both subsidiaries of YFG.
- The BL was in the form of an advance to the MRF Trust and was then to be re-loaned to White Rose Farming and by White Rose Farming to AF I and AF II. It was predicted by the White Rose directors that the value of the farmland, according to current market values, would be of the order of US$8,000 per acre by the time when crop production started in 3-4 years against purchase and development costs of $4,000 per acre.
- The BL was supported by a deposit of shares in YFG which, at the current share price, substantially exceeded the amount of the BL.
- The land for the orchards had originally been intended to be purchased by YFI and leased to AF I and AF II but, in circumstances which will be considered later in this judgment, on 10 May 1996 YFI assigned to AF I and AF II the whole of its rights under the purchase contract between it as purchaser and Williams & Fickett as sellers. As prospective purchaser of the land YFI had by that time already paid over about US$600,000 to the vendors and others in connection with the purchase. The assignments to AF I and AF II included provisions to the effect that amounts proportional to the averages respectively purchased totalling $600,000 would be paid by the assignees to the assignor in accordance with the terms of loan agreements of even date under which the assignor was to lend such amounts to the assignees. No such loan agreements appear ever to have been executed.
- Subsequently, during the period up to October 1997, YFI and Treehouse are said to have paid out amounts totalling about US$2 million which were utilised by White Rose for the development of the almond farms.
- The underlying substance of the allegations of fraudulent misrepresentation by Rabobank is that:
i) with the exception of the utilisation of the $600,000 already paid out in connection with the purchase of the land, NWB was aware at and from 20 August 1996 of all the facts summarised in paragraphs 20 to 25 above;
ii) all those facts were "material" to Rabobank as co-workout bankers because, had those facts been disclosed to them, they and any reasonable bank would not have (a) continued to prop up YFG by advancing additional sums to that company in order to keep it in business and would have allowed it to go into liquidation or (b) entered into an agreement such as the DoT or caused Utrecht to do so, thereby assuming most of NWB's portion of the amount outstanding from YFG;
iii) during the period starting with the first workout meeting on 20 August 1996 NWB had so conducted itself in all the circumstances as to represent by implication, and on one occasion expressly, that no material facts known to them existed;
iv) NWB knew that its express and implied representations were untrue or were reckless as to whether they were true or false;
v) in addition to the facts in paragraph 20 to 25 a further material fact was that a representative of NWB (Mr Hamilton) had immediately following the meeting with PW on 29 August 1996 attempted to deflect representatives of PW (Mr Barrett and Mr Hargrave) from investigating and reporting upon the directors' private borrowings from NWB;
vi) NWB's conduct thereafter amounted to express or implied representations that it knew of no such facts as in (v) and NWB knew that those representations were false;
vii) NWB intended YFG to act in reliance on its express or implied misrepresentations.
viii) NWB's purpose in making these misrepresentations was (a) to cause Rabobank to continue to prop up YFG as co-lender with NWB up to September 1997 by making further additional loans to YFG and by refraining from calling in its loan under the Credit Facility thereby causing YFG to go into receivership and (b) ultimately, in September 1997, to cause Rabobank to take out NWB by causing Utrecht to purchase YFG's indebtedness in order that NWB could maximise its recovery both of the corporate loans to YFG and the directors' personal loans secured on YFG shares.
- The substance of the case advanced by Rabobank as to the materiality of those facts can be outlined as follows.
i) The directors' personal loans, including in particular the BL were in default or at least overdue for repayment and NWB was therefore likely to put the borrowers under pressure for repayment which would deflect their attention from their corporate management responsibilities with regard to YFG and YFI and the subsidiaries, thus adversely affecting the business of the debtor company.
ii) The existence of the BL was the gateway to disclosure of a complex substructure of misconduct by the directors. In particular:
a) they had, by causing AF I and AF II to purchase the land for the almond farms, usurped the position of YFI and taken the benefit of a corporate opportunity without the independent consent of the YFG Board or the outside shareholders and thereby acted in breach of their fiduciary duty as directors or officers of YFG;
b) they had by that means positioned themselves indirectly to pursue commercial activities in conflict of interest with YFG in as much as the purpose of AF I and AF II was to sell produce for processing to YFI's subsidiaries, in particular almonds to Treehouse, as well as to its competitors in the processing industry, which conduct would be in breach of fiduciary duty on their part.
If the BL had been disclosed to Rabobank, that would also have involved further questions as to its underlying purpose and disclosure of the White Rose directors' wrongdoing, discovery of which would have deterred Rabobank from continuing to lend to YFG and ultimately from taking out NWB.
iii) As to the misrepresentation in respect of the secret meeting of Mr Hamilton with PW on 29 August 1996, the substance of the materiality was that PW, if left to their terms of reference without being deterred by Mr Hamilton from investigating and reporting upon the directors' private borrowings, would have unearthed the BL and thereby discovered and disclosed to Rabobank not only the existence of the directors' personal borrowings but also the directors' breaches of fiduciary duty. Had NWB disclosed to Rabobank the circumstances of the secret meeting and what was allegedly said at it, Rabobank would have been sufficiently suspicious to have wished PW to investigate the directors' personal loans, including the BL.
- The claim advanced by Rabobank in the alternative under Section 2(1) of the Misrepresentation Act is put forward on the hypothesis that, if NWB did not know that the misrepresentations were untrue, it is put to proof that the relevant representor in NWB believed the relevant representation by him to be true and had reasonable grounds for so believing.
- The claim advanced by Rabobank for breach of the GFA rests in substance on the allegation that NWB, by failing to disclose those matters as to which misrepresentations had been made up to and including the time of negotiation of the terms of the DoT, had acted in breach of an agreement in terms of a fax sent by Rabobank to NWB on 30 September 1997, the meaning of which is in issue, by which, Rabobank submits, there was imposed on both parties an enforceable obligation to negotiate the transfer of YFG's indebtedness to NWB in good faith.
- Finally, with regard to Rabobank's alternative claim under section 2(1) of the Misrepresentation Act 1967, NWB contends that there was contributory negligence on the part of Rabobank in offering to take out NWB and in entering into the DoT. There was a failure to carry out due diligence with regard to the continued viability of YFG and in particular of Treehouse, a failure to comply with Rabobank's own internal credit and control procedures and a failure to consult those in Rabobank London who had been involved in the workout since August 1996. A major issue in connection with this defence is whether contributory negligence is available as a defence to a claim for damages under Section 2(1) of the 1967 Act.
- The Structure of the Banks and the Bankers mainly involved
(a) Rabobank Nederland
R is a co-operative entity. It acts as the central clearing bank for 248 separate co-operative banks in the Netherlands. Those separate banks are the sole shareholders in Rabobank and are bound together by a system of cross-guarantees. The entire structure is treated as a single bank for regulatory and financial reporting purposes. Its head office is in Utrecht. It is the second largest Dutch bank and it specialises in agricultural lending. It has an International Division to which Rabobank's offices outside the Netherlands report, including in particular those in London and New York. Baron van Slingelandt was chairman of the Managing Board of the International Division.
- Control over larger credit facilities granted by both the London and New York offices was exercised by the RICC, of which Baron van Slingelandt was Chairman and Mr Gentis was a member. The RICC met three times a week. The highest internal governing body of Rabobank was the Executive Board, of which Baron van Slingelandt was also a member. That met once a week. It appointed the members of the RICC.
- The RNY office was sub-divided into the following, amongst other, divisions.
i) The Corporate Finance Department, which included the Mergers and Acquisitions division. Mr den Baas was from March 1997 Head of that department. Amongst the activities of that department was structured finance work. Mr den Baas was a specialist in this field. The Department also undertook private placement work under the leadership of Mr Richard Gormley. He reported to Mr den Baas. Mr Roger Barr also worked in that department and he worked in the field of providing advice on the sale and purchase of businesses in the agricultural field. Ms Nancy O'Connor also worked in structured finance. Mr Mesritz was Head of Investment Banking and Mr den Baas reported to him.
ii) The New York Credit Committee was a supervisory group within the New York office to which applications for new lending would normally be made in the first instance.
iii) Utrecht-America Finance Company Inc was a corporation within the Rabobank group which was used by Rabobank's structured finance group for most of its transactions. Mr den Baas was Vice President and director.
iv) The London office had its own subsidiary group – the London Credit Committee. The General Manager was Mr van der Schrieck. Mrs Parsons was Deputy Head of credit and Mr Davies was London relationship manager for YFG. Mrs Parsons reported to Mr Cunningham, Head of Credit in London and he reported to Mr van der Schrieck. Cora Hanley was a credit analyst at Rabobank London.
- National Westminster Bank
There were two distinct relevant areas of operation – Leeds Business Centre ("LBC") and Credit Support Services ("CSS"), the latter located at NWB's King's Cross office in London.
i) As for the LBC, all the lending by NWB to YFG and the directors personally had from about 1989 emanated from Leeds where Mr Catton was Senior Corporate Manager. Mr Skelley was, until September 1986, the Chief Manager at Leeds to whom Mr Catton reported and was then succeeded by Mr Martin. The Chief Managers reported to Mr King, Regional Managing Director. The Regional Head of Credit was Mr Yates. Mr Catton was a relationship manager closely familiar with Mr Firth, Mr Giddings and Mr Haley, as well as YFG generally.
ii) CSS operated specialist workout teams divided into two sections – one dealing with multi-bank lending and one dealing with lending only by NWB. Mr Hamilton was a manager in the workout team. Mr Cresswell, to whom he reported, was a senior manager. Mr Havelock was Head of CSS and he reported to Mr Side, Head of Corporate Credit. Mr Side reported to Mr Shaw, Director of Corporate Banking.
iii) In August 1996, as YFG was about to go into workout, in circumstances which I shall have to consider, CSS took over from Leeds responsibility for the corporate lending to YFG, including the workout, leaving the management of the personal lending, including the BL under the administration of Leeds and Mr Catton in particular. Mr Hamilton was put immediately in charge of the corporate workout.
- The History of Rabobank's Claims against NWB and others
A major difficulty presented by the trial before this court has been that witnesses on both sides were required to give evidence about words spoken and their own mental reactions nine or ten years ago. In many cases this proved well beyond their powers of recollection or even of reconstruction with the help of contemporary documents. One unavoidable exercise has been to separate that which is true recollection from that which, having started as surmise derived from reading documents many years after the event in the course of preparing to give and giving evidence before the United States courts, has subsequently been elevated into exact recollection for the purposes of the preparation of witness statements for this trial. There has also been the familiar problem of witnesses, possibly having truly remembered events and their original state of mind five or six years earlier when giving evidence on deposition in the United States, who have subsequently (three or four years further on) lost all or substantially all recollection of what they previously appeared to remember.
- A further problem in evaluating the evidence has been the lack of familiarity by almost all the key witnesses with the way in which lawyers understand "representation" and particularly "implied representation". There are no less than 13 distinct allegations of fraudulent implied misrepresentation in this case which, as I shall explain, were expressed in pleadings of great complexity and which had been drafted by counsel and then had to be explained in some detail to the witnesses, such as Mr Davies and Mrs Parsons, to enable them to approve, and sign witness statements in support of, the misrepresentation allegations in the pleadings. Their understanding of the concept of the implications in consequence of non-disclosure relied upon proved to be somewhat limited.
- Before summarising the allegations of misrepresentation, it is necessary to outline the development of Rabobank's claims in this jurisdiction and in the United States.
- The first proceedings launched by Rabobank were commenced in the Superior Court of California, County of Contra Costa, on 28 October 1999 ("the CC Proceedings"). In that action Rabobank and Utrecht claimed against NWB and the officers and directors of YFI, alleging against NWB aiding and abetting breaches of duty by the officers of YFI, fraudulent concealment by NWB of unlawful transactions by those officers, negligent failure by NWB to disclose information, breach of fiduciary duty by NWB as agent for Rabobank, breach by NWB of the covenant of good faith and fair dealing, breach by NWB of the 1996 Credit Facility and a general tort claim.
- On 19 May 2000 Rabobank and Utrecht launched a claim against PW and Coopers & Lybrand in the Superior Court of California, County of San Francisco ("the SF Proceedings"), claiming inter alia that PW had acted in breach of professional duty in the preparation of the reports on YFG which had been commissioned by the banks in August 1996 by having negligently failed to uncover the underlying operations of the YFI directors through White Rose Farming and AF I and AF II.
- On 27 November 2000 this Court (Mr Peter Gross QC, as Deputy High Court Judge) ordered that Utrecht be injuncted from pursuing the CC Proceedings against NWB and ordered Utrecht to pay damages for breach of the English jurisdiction clause in the DoT. An appeal to the Court of Appeal against that judgment was dismissed on 10 May 2001.
- On 1 August 2001 in the CC Proceedings all the claims against NWB were struck out on demurrer without qualification except for those based on breach of the covenant of good faith and breach of the 1996 Credit Facility where the demurrer was sustained but leave to amend was given. On 21 August 2001 the Second Amended Complaint was filed. On 16 November 2001 the demurrers were overruled. Meanwhile, depositions began in the CC Proceedings with Mr Davies being deposed during February 2002 and in February 2003, Mrs Parsons in February 2002 and February 2003, Mr den Baas in April 2002, Mr Gormley in April 2002, Mr van der Schrieck in August 2002 and Baron van Slingelandt also in August 2002. Of the NWB witnesses Mr Catton was deposed in January 2002, Mr Hamilton in January 2002 and March 2003, Mr Cresswell in January 2003 and Mr Havelock in January 2003.
- On 28 May 2002 Rabobank filed its Third Amended Complaint by which there were introduced Causes of action against NWB for breach of fiduciary duty based on the workout relationship between Rabobank and NWB, a claim for damages for sharp practices and a claim in negligence based on a duty of care attributable to the workout relationship. Those causes of action were continued in Rabobank's Fourth Amended Complaint filed on 19 July 2002.
- Shortly after that, on 1 August 2002, a settlement agreement was entered into in respect of the CC Proceedings between the directors and Rabobank and Utrecht. That left NWB as a defendant. It then filed motions to dismiss on the grounds of forum non conveniens.
- On 6 January 2003 in the CC Proceedings the demurrer as to the claim for breach of fiduciary duty was overruled, but those as to the sharp practices claim and the negligence claim were sustained without leave to amend. On 7 April 2003 the breach of the Credit Facility and breach of the covenant of good faith claims were struck out on the merits. On 4 September 2003 the motion by NWB to dismiss Rabobank's breach of fiduciary duty as agent, sharp practices and negligence claims on the grounds of forum non conveniens succeeded.
- In October 2003 there were depositions in the SF Proceedings from Mr Barrett of PW on 21 and 22 October and from Mr Hargrave of PW on 28 and 29 October. Both gave evidence with regard to the so-called secret meeting with Mr Hamilton following the 29 August 1996 meeting between Rabobank, NWB and PW: (see paragraph 5 above). On 22 September 2004 those proceedings were settled with effect from 16 June 2004. The defendants, including PW, were to pay US$9 million to Rabobank.
- In the meantime, NWB had on 30 January 2004 commenced the present proceedings claiming an indemnity or damages for breach of the DoT in respect of the costs and expenses incurred by NWB in defending the CC Proceedings.
- On 29 October 2004 Rabobank served its Defence and Counterclaim, its causes of actions then being (i) fraudulent misrepresentation in the course of the workout; (ii) breach of fiduciary duty arising out of the workout relationship; (iii) negligence in the course of the workout; (iv) alternatively damages under section 2(1) of the 1967 Act. There was no claim for breach of the GFA nor any claim for inducing PW to act in breach of professional duty.
- Meanwhile Rabobank had appealed the decisions against it in the CC Proceedings. Its application to stay the proceedings before this court was refused by Cooke J. on 4 February 2005. On 15 June Aikens J. dismissed NWB's application for summary judgment on its claim, NWB having on 26 May withdrawn its summary judgment application on Rabobank's counterclaim.
- On 20 June 2005 Rabobank served an Amended Defence and Counterclaim in which it raised a claim in respect of breach of the GFA, but raised no claim for inducing PW to act in breach of its professional duty.
- On 4 August 2005 the California Court of Appeal reversed the first instance Court's judgment in part and reinstated Rabobank's claims against NWB (i) for aiding and abetting breaches of duty by the officers of YFI (ii) for fraudulent concealment (iii) for breach of fiduciary duty as agent and (iv) for breach of fiduciary duty based on the workout relationship. This appeal was then stayed: the claim for fraudulent breach of fiduciary duty as agent, on the grounds of forum non conveniens, and the claims for aiding and abetting the breach of the directors' duty and for breach of fiduciary duty as agent, pending the result of the proceedings before this court.
- On 3 March 2006 I ordered that Rabobank should serve a full statement of its case on misrepresentation, giving the information set out in a schedule to the order. This order was made necessary by the fact that the Amended Defence and Counterclaim was expressed in terms which did not sufficiently clearly state Rabobank's case on fraudulent misrepresentation. It is axiomatic that, as a matter of case management and intrinsic fairness to the defendant, allegations of fraud can be permitted to proceed to trial only if they are expressed in words which clearly and unambiguously indicate each essential element of each allegation of fraud. The schedule to that order is Appendix 1 to this judgment. The order expressly provided that permission was not thereby given to depart from the case on misrepresentation already pleaded.
- Rabobank responded to that order by serving on 3 April 2006 a schedule of its misrepresentation allegations, consisting of 23 pages each of eight very closely printed columns. This Schedule is referred to as the April Misrepresentation Schedule ("AMS").
- When on 19 June 2006 NWB objected to the content and complexity of the AMS, Tomlinson J. ordered that Rabobank should serve a Misrepresentation Statement of Case ("the MSC") setting out in full such case as Rabobank intended to advance on fraudulent and section 2(1) misrepresentation and negligent misstatement by way of substitution for and amendment of each and every part of the pleading in the Amended Defence and Counterclaim. The order made clear that the MSC was to be a stand-alone document and was not to contain cross-references back to the main pleading and further that if and to the extent the MSC amended that pleading Rabobank would have to apply for permission.
- Tomlinson J. also struck out on the grounds of res judicata Rabobank's claim against NWB in negligence in the course of the workout by reason of the successful demurrer of the identical claim in the CC Proceedings.
- It is against that background that this trial has been conducted with regard to misrepresentation on the basis of the case advanced in the MSC. This was served on 3 July 2006, some three months before the date fixed for the commencement of the trial. On the same date Rabobank informed NWB that it had decided not to pursue the allegations previously made against Mr Side personally.
- Finally, on 21 July 2006, Rabobank's solicitors informed NWB's solicitors that Rabobank proposed further to amend its counterclaim by adding as new causes of action claims against NWB based on the secret conversation between Mr Hamilton and PW on 29 August, namely that NWB had procured PW to act in breach of its contract with YFG to investigate and report in accordance with its terms of reference and/or had led PW to act in breach of professional duty ("the PW Amendment").
- The MSC introduced three new allegations of misrepresentation and an entirely new claim for negligent misrepresentation based on NWB having a duty of care based on Hedley Byrne v. Heller in as much as it had voluntarily assumed responsibility for the accuracy of the information passed to Rabobank during the workout. Having considered written submissions from both parties on Rabobank's application for permission to introduce these amendments, I allowed on terms the introduction of the misrepresentation allegation but refused on case management grounds the introduction of the negligence claim.
- This trial began on 3 October 2006. There had not up until then been sufficient time to hear Rabobank's application to re-amend by introducing the claims for inducing breach of contract and on account of being a joint tortfeasor. It was only on 16 October 2006, after the case had been opened, that it was possible to decide this issue.
- On 16 October 2006 that application was refused on case management grounds having regard to the unexplained delay in advancing it and the likely disruptive effect on an already tight trial timetable. On 24 October 2006 this decision was reversed by the Court of Appeal. I therefore gave PW the opportunity to be represented at the trial and consideration was given as to whether they should be joined as a party. Having heard representations from PW's solicitors, I decided that it was unnecessary for PW to be joined and PW considered it unnecessary for them to participate or be represented. At that point in the trial both Mr Barrett and Mr Hargrave of PW had completed their oral evidence but Mr Hamilton, a key witness on this issue, had not yet been called by NWB.
- On 27 October 2006 Rabobank put forward yet a further amendment to the PW Amendment. After I had refused permission to amend, partly because I considered that it raised a hopeless point and Auld LJ. had refused permission to appeal, the parties agreed to that further amendment being allowed. I shall have to consider the substance of this further amendment later in this judgment.
- Witness statements were taken from most of the witnesses (but not Mr Catton) in April 2005 for the purposes of summary judgment applications. However, the main body of written evidence was in witness statements taken in May 2006. There were further witnesses statements taken from Mr Davies, Mr den Baas, Mrs Parsons, Mr Barrett and Mr Hargrave of PW as well as Mr Catton, Mr Hamilton and Mr Havelock as late as the period July to November 2006.
- The Misrepresentation Allegations
Before setting out the factual background and the manner in which the relationship between Rabobank and NWB developed during the workout, it is necessary to outline the separate events said by Rabobank to have given rise to misrepresentations. I use the same numbering as that in the MSC.
- The first workout meeting took place on 20 August 1996, attended by Mr Catton, Mr Hamilton and/or Mr Cresswell for NWB and by Mr Davies and Ms Hanley for Rabobank. Those NWB representatives then knew the "material information". The latter is a term of art in the MSC, defined by reference to information, identified in paragraphs 11 to 27 of the MSC, which can be briefly summarised as comprising:
i) the BL, its purpose and the fact that it was overdue for repayment and therefore already in default and would in any event be in default if it were not repaid by 31 August 1996 which was the ultimate agreed extension beyond the initial 3 months (see paragraph 22 above);
ii) the facts that prospects for repayment of the BL were at least questionable, that acquisition of the almond farmland and repayment of the BL required refinance which had not yet been obtained;
iii) the existence of the White Rose Farming project and the fact that the directors of YFG and YFI and Treehouse had taken from those companies the corporate opportunity of acquisition and that it was intended by them to sell almonds to Treehouse and/or to competitors in the nut processing industry;
iv) that the matters in (iii) amounted to breaches of fiduciary duty by the directors of YFG/YFI;
v) that NWB held about 15 per cent of issued YFG shares as security for loans to the directors, including the BL, that all such loans were in default, that NWB had the ability to foreclose and force a sale of all those shares and the exercise by NWB of such security rights would negatively affect third parties' views of YFG's financial position and so materially affect YFG's ability to repay the corporate loans;
vi) NWB had a conflict of interest between its corporate lending to YFG and its private lending to directors which was secured on shares in YFG.
- Misrepresentation (1) occurred at the 20 August 1996 meeting at which the NWB representatives represented and agreed that
"that until further notice NWB and Rabobank would:
a) Undertake a joint investigation into YFG's financial condition, financial needs, business and management.
b) Jointly instruct a firm of accountants.
c) Present a 'united front' and 'co-ordinated response."
and that as part of that agreement and in pursuit of what are described as "the Common Goals" Rabobank and NWB jointly agreed to appoint PW by whom they were subsequently jointly advised throughout the workout period.
- It is pleaded that NWB's agreement to those matters involved implied mutual representations ("the Paragraph 42 Representations"), namely:
"The representations made by NWB were to the effect that:
(i) In pursuing the Common Goals the Banks' investigation and assessment was being undertaken jointly.
(ii) When discussing the issues which arose, setting agendas for their meetings, and questioning the directors of YFG, and instructing the investigating accountants (subsequently PW), that NWB was doing so candidly, openly, in good faith, fully and fairly informing Rabobank and the investigating accountants about any relevant communications with directors of YFG (or other relevant persons who might provide information) that NWB might have in the absence of Rabobank.
(iii) NWB was providing Rabobank and the investigating accountants with all facts and matters known to NWB which were material to the achievement of the Common Goals.
(iv) NWB was not concealing from Rabobank any facts and matters which NWB knew and which were material to the achievement by the parties of the Common Goals."
- The NWB representatives at the 20 August meeting are said to have known that such representations were being made by them and each of Mr Catton, Mr Hamilton and Mr Cresswell is said to have known that the representations were false, in particular at that time:
a) "NWB was not undertaking the investigation and assessment jointly.
b) NWB was not discussing the issues on the workout openly, in good faith, fully and fairly informing Rabobank about The material information.
c) NWB was not providing Rabobank with all facts and matters known to NWB which were material to the achievement of the Common Goals.
d) NWB was concealing from Rabobank facts and matters which NWB knew and which were material to the achievement by the parties of the Common Goals."
- It is pleaded that by making those representations NWB was "required" to disclose the material information (see paragraph 64 above) or parts of it because, without such disclosure, the Paragraph 42 Representations were misleading and that non-disclosure falsified what NWB said. It is said that NWB's failure to disclose was consistent only with its having a hidden agenda inconsistent with both banks' common goals under the workout and that such non-disclosure diverted the joint investigation from the hidden facts.
- Because the three NWB representatives knew the material information it was self-evident to them that their representations at that meeting were false.
- Misrepresentation (2) is in substance the repetition of the Paragraph 42 Representations by NWB's subsequent conduct, namely at each meeting thereafter, but, in the alternative, at a meeting on 22 August attended by Mrs Parsons, Ms Hanley and Mr Davies of Rabobank and by Mr Cresswell and Mr Hamilton at NWB's offices and/or at the meeting on 29 August at Rabobank's London offices at which PW were present and at which it was agreed to engage their services. By its participation in the subsequent meetings NWB is said to have impliedly made the Paragraph 42 Representations. Its giving partial information to Rabobank while excluding the totality of that information gave rise to the misrepresentation, as was known by the NWB representors, Mr Catton, Mr Hamilton, Mr Cresswell and Mr Havelock.
- I interpose that, as it developed from Rabobank's Closing Submissions, the essence of Rabobank's complaint is that NWB's conduct amounted on subsequent occasions to repeated representations that it had knowledge of no further information material to Rabobank as co-workout banker.
- As to Misrepresentation (3), this is said to arise from a comment made by Mr Catton at the 20 August 1996 meeting in the following terms:
"the company has deliberately withheld information regarding the disappointing trading results against budget. Management figures had been requested on a number of occasions recently by the Relationship Manager, Mark Catton. When these had not been forthcoming from David Morgan, Mark had telephoned Paul Haley to make sure there was nothing wrong and was told everything was in order. However, only a week later, Mark was contacted regarding the poor results and covenant breaches."
This comment which expressly represented those matters stated in it is said to have given rise to the following implied representations.
(a) "NWB was providing an open, good faith, full, fair and accurate representation of its views about and the information available to NWB about YFG's management, including (but not limited to) Mr Morgan and Mr Haley.
(b) NWB thought, and the available information known to NWB showed, that Mr Morgan may have been unforthcoming in providing information to the Banks, and Mr Haley may once have denied that anything was wrong in relation to YFG's performance, but that was all that was relevant.
(c) NWB had no further information which was material about:
(i) YFG's management or YFG generally.
(ii) NWB's information and opinions about YFG's management.
(d) NWB was not withholding from Rabobank other material information relating to YFG's management."
It is further said to be for Mr Catton to disclose on that occasion the material information which showed that Mr Haley and Mr Morgan and the directors involved in White Rose were or were probably unsuitable to hold any ongoing position within YFG and that they should be dismissed.
- Misrepresentation (4) is one of the alleged misrepresentations connected with the meetings at Rabobank's London office on 29 August 1996. It is pleaded that in the course of that meeting attended by Mr Davies, Mrs Parsons, Mr Cunningham and Ms Hanley on behalf of Rabobank and by Mr Hamilton on behalf of NWB, Mr Hamilton spoke of a letter from YFG authorising Rabobank and NWB to disclose to PW for the purpose of its report any information, including confidential information at the bank's discretion that might be relevant. This reference to the letter impliedly represented that NWB was acting in accordance with YFG's authority to disclose everything and was not unilaterally holding back from Rabobank any information available to NWB in relation to YFG, the directors' private borrowings and the fact that those borrowings were secured by YFG shares. In the course of the meeting Mr Hamilton knew that this representation was false because he knew of the material information and he knew that he was going to attempt after the meeting to persuade PW to ignore the directors' private borrowings.
- Misrepresentation (5). In the course of the same meeting on 29 August 1996 Mr Hamilton told the Rabobank representatives that NWB considered that Mr Firth's continued involvement in management was important to the viability of YFG but that Mr Morgan was not seen as the man to provide the financial leadership needed by YFG. It is pleaded that Mr Hamilton thereby impliedly represented that he was giving an open, good faith, full, fair and accurate representation of the information known to NWB about YFG's management, which to Mr Hamilton's knowledge was untrue in as much as the material information was known to him at the time of the meeting.
- Misrepresentation (6). At the 29 August meeting Mr Hamilton proposed that, as was agreed by Rabobank, PW should be appointed as the jointly instructed accountants to investigate and report on YFG, subject to joint terms of reference, in order to provide the banks with the best information as to the financial condition, needs, business and management of the group so that the banks could determine what course to take in the course of the workout, with regard to continuing to fund YFG, to disposing of its assets or to liquidation.
- It is pleaded that by his proposal to appoint PW Mr Hamilton "necessarily implied and reiterated" the Paragraph 42 Representations which he knew to be false. In particular he intended unilaterally to instruct PW not to investigate the directors' private borrowings and thereby to cause PW to conceal from Rabobank the material information, particularly the White Rose substructure involving the directors' breaches of fiduciary duty as well as the fact that personal borrowings were in default and were secured on YFG shares.
- Further, the conversation between Mr Hamilton and Mr Barrett and Mr Hargrave of PW which took place immediately after the meeting between both banks and PW on 29 August 1996 was an act of concealment of the material information from Rabobank. This had the effect of concealment in as much as PW did not investigate the directors' private borrowings and in particular the BL or the bank's security interest in the shares in YFG and therefore did not report on them and did not disclose to Rabobank the meeting with Mr Hamilton or the facts which he had told them or his request that Rabobank should not be informed of the private borrowings. Rabobank did not discover that this meeting and conversation had taken place until it was referred to by Mr Hargrave of PW in the course of his deposition in the SF Proceedings in October 2003. I refer to this episode as "the Pavement Conversation".
- Further material facts developed after 29 August 1996 in as much as NWB is said to have been placing the directors under increasing pressure to repay or further secure their borrowings, including the BL. This was known to Mr Catton, Mr Hamilton and Mr Cresswell.
- Misrepresentation (7). On 12 September 1996 Mr Davies of Rabobank spoke to Mr Catton (NWB) on the telephone "to compare notes" on the workout and Mr Catton told him that Mr Firth was "looking to exit 50% of (his) interests", thereby stating that Mr Firth intended to sell shares. It is pleaded that Mr Catton thereby impliedly represented that this was the only material information he knew about Mr Firth and YFG shares. It is further pleaded that Mr Catton intended the representation to be so understood. Mr Catton's words gave rise to a misrepresentation because he failed to disclose the material information, that NWB was seeking further security over YFG shares for Mr Firth's indebtedness and that one of the reasons why Mr Firth intended to sell shares was that NWB required repayment of his debts.
- Misrepresentation (8). On 12 September 1996, in the course of that same telephone conversation, Mr Davies and Mr Catton discussed the relative management abilities of Mr Haley and Mr Morgan in the context of what Mr Catton said were Mr Firth's views as to Mr Morgan's future with YFG/YFI. It is pleaded that it was the necessary implication from what Mr Catton said that he and NWB knew nothing further about Mr Haley and Mr Morgan which was material to the workout which had not already been disclosed. This was untrue by reason of NWB's knowledge of the material information and subsequent material facts (see paragraph 78 above). He failed to disclose those facts known to Mr Catton which showed that none of Mr Firth, Mr Haley or Mr Morgan was fit to hold any ongoing office with YFG. Mr Catton intended what he said to be understood in accordance with the implication pleaded.
- Misrepresentation (9). In the course of a further telephone call on about 12 September 1996 Mr Catton told Mr Davies in passing that Mr Firth had a mortgage loan with NWB secured by shares in YFG. It was pleaded that the necessary implication was that Mr Catton and NWB knew nothing else about Mr Firth's indebtedness or the YFG shares that was material to the workout which had not already been disclosed to Rabobank. Mr Catton intended what he said to be so understood. That implication was as Mr Catton knew false in as much as it concealed from Rabobank the substructure of personal loans to Mr Firth and the other directors, the security structure, as well as the BL and its purpose.
- Misrepresentation (10). In the course of a telephone conversation on or about 25 September 1996 from YFG to NWB and Rabobank in which it was stated:
"All of [Mr Firth's] and fellow Management member's wealth is invested in YFG shares: no other liquid assets are owned. Shares in YFG held by [Mr Firth] and Management are already deposited with National Westminster Bank, Leeds as collateral for personal borrowings (e.g, YFG share purchases, homes), so insufficient collateral exists and the asset would be unmarketable in present form. Another problem exists here: the matter would be a 'related party transaction' and unfortunately, should be disclosable to shareholders."
It is pleaded that this letter was misleading in as much as it made no reference to the BL or its purpose or that the Firth Trust was in default in repaying it and that by failing to disclose the existence of that borrowing Mr Catton impliedly represented that:
(a) The contents of the YFG letter were materially accurate in relation to statements about Mr Firth's and his fellow members of YFG's management's wealth.
(b) It needed no material qualification, correction or further information from NWB in order for the Banks to hold an informed discussion about it.
(c) So far as NWB, as the management's bankers, was concerned and so far as NWB was aware 'All' of Mr Firth's and (substantially) the management's wealth consisted of YFG shares and homes.
(d) There were no loans in default.
(e) NWB had no other information relating to (a)-(d) above which was material to the workout and a fair understanding of the financial position of YFG's management or the role it might play in the financing of YFG."
It is said that there were implied representations which were untrue to Mr Catton's knowledge and were intended by him to be understood by Rabobank in the sense impliedly represented. Their falsity arose from Mr Catton's failure to mention the BL and that the Firth Trust was in default and the other material information and that NWB was seeking further security over Mr Firth's shares and that one of the reasons for the intended sale of YFG shares was that NWB wanted Mr Firth to repay his debts to NWB.
- On 30 September 1996 Mr Catton sent to Mr Cresswell a memo to which were attached documents which gave Mr Cresswell and Mr Hamilton information about the BL.
- Misrepresentation (11). On or about 24 October 1996 a meeting was held between Mr Catton and Mr Hamilton for NWB and Mr Davies and Ms Hanley of Rabobank with PW to discuss PW's interim report. That report stated at Appendix 18 in relation to Treehouse:
"... Management is currently contemplating farmland. A joint venture and/or acquisition will greatly enhance the company's ability to obtain a consistent supply of quality almonds."
It is pleaded that by discussing the PW interim report, without saying that Appendix 18 needed to be corrected or further information given for the banks to hold an informed discussion about the report, Mr Hamilton and Mr Catton impliedly represented that the report was accurate as far as NWB was aware with regard to YFG's management, Treehouse and the acquisition of farmland by that management and NWB had no other material information with regard to the matters or Appendix 18. They intended their representations to be so understood and both knew them to be false having regard to the fact that the directors, including some of the Treehouse management had already bought the almond farms using the BL which was in default or had not been repaid and was secured on YFG shares.
- Misrepresentation (12). On or shortly after 13 November 1996 Mr Hamilton and Mrs Parsons discussed a further PW report on the suitability of Mr Firth, Mr Haley and Mr Morgan to hold their current positions. By engaging in that discussion without disclosing that the PW report was not open, full, fair and accurate as to those matters in view of the instruction given by Mr Hamilton to PW in the course of the Pavement Conversation on 29 August 1996 Mr Hamilton impliedly represented that:
a) "The PW Report was open, full, fair and accurate as far as NWB was aware.
b) NWB knew of no material fact or matter which ought to be disclosed to correct the PW Report in relation to the management of YFG, YFI and Treehouse."
He knew that representation to be false in view of his participation in the Pavement Conversation and his knowledge of the material information.
- On 22 January 1997 Mr Cresswell and Mr Barrett of PW agreed to hold a meeting on 28 January which was not to be disclosed to Rabobank. It is pleaded that PW was secretly partisan and disposed to help NWB's interest at the expense of Rabobank's interest and further:
"Agreeing to hold the 28 January 1997 secret meeting was deceitful in that Mr Cresswell knew and intended that the fact and terms of the proposed meeting were and were intended by the participants to be kept secret from Rabobank.
NWB agreed the proposal for (and held) these secret discussions to enhance NWB's position at the expense of Rabobank's position, on this occasion by seeking advantageously and unilaterally to obtain (and obtaining) and subsequently to deploy the ostensibly independent views of PW."
It is further pleaded that the existence of this agreement and PW's position were material facts so far as Rabobank were concerned.
- On 25 March 1997 Mr Catton held a meeting with Mr Firth and Mr Haley without telling Rabobank. Two notes of that meeting were copied to Mr Hamilton. In one of them it was suggested that "we refrain from bringing this knowledge into our continuing discussions with both RNY and Rabobank London". The other note stated:
"The directors have the ability to make the orchard further attractive by attaching (if necessary/appropriate) a potential supply contract regarding almonds to Treehouse Farms Inc representing part of the YFG Group."
It thereby indicated to Mr Catton and Mr Hamilton that the directors of YFG had not only acted in breach of fiduciary duty but were prepared to do so again in order to assist in the sale of the farms. This meeting and the matters discussed were material facts never revealed to Rabobank.
- Misrepresentation (13). On 12 June 1997 Mr Hamilton had a telephone conversation with Ms Hanley. She had already spoken to Mr Stevens of Rabobank and had recorded that he had told her that half an almond orchard development was up for sale but that he was not sure which company owned it. She recorded in her note of the later conversation with Mr Hamilton that he "seem(s) to think it is owned by the directors personally". It is pleaded that by so expressing himself he impliedly represented that he had no "particular knowledge of the sale of any almond farms connected to YFG or its directors or why any such almond farm might be for sale" and he intended so to be understood by Rabobank. This representation he knew to be false from the material information which had already been given to him by 25 March and also by means of a note sent to him of a meeting of Mr Catton with the White Rose directors held on 25 March 1997 in the course of which they had informed Mr Catton that the value of the almond farms had substantially increased since purchase and that the farms were already for sale in order to repay the BL and the other personal borrowings of the directors. He also knew that NWB had been pressing the directors to sell the farms in order to repay the BL and their personal borrowings.
- Rabobank further pleads that another fact material to the workout occurred when on 12 August 1997 Mr Catton had a "secret" meeting with Mr Haley at Carter Mills, Bradford, at which there was a discussion about plans of the White Rose directors to sell part of the farm property. On 10 September 1997 Mr Catton spoke by telephone to Mr Hamilton about the status of sale negotiations with Marubeni who had expressed interest in the purchase of some of YFG's Californian subsidiaries. Mr Catton recorded that conversation and a conversation with Mr Firth in a memorandum to which he added in manuscript the words:
"Steve [Hamilton] - I will do a note also on the subsequent conversations with both Paul [Haley] and Mike [Firth] - but need to be guided by you on what we record."
- On 19 August 1996 NWB's Leeds office sent to CSS documents which gave information as to the material information, including the BL to the Firth Trust (categorised by NWB as a personal loan), that it remained to be paid, that refinancing had not been obtained for it, that NWB held at least 15 per cent of the issued capital of YFG as security for personal borrowings of the YFG directors (including the BL) and that NWB's involvement in the corporate loans, the BL and the directors' private borrowings had generated a conflict of interest for NWB. It is pleaded that it is to be inferred that Mr Havelock was aware of all the material information upon which the alleged implied misrepresentations are based as well as of those material facts occurring subsequently to June 1997 (see paragraph 89 above). That inference is to be drawn from the facts that the documents described above were sent to CSS, that Mr Havelock was Mr Cresswell's manager and worked closely with him in an open plan office, that he had been regularly updated as to the BL and the directors' personal borrowings and NWB's security over YFG shares and further that in August 1997 Mr Havelock had visited YFG's operation in California with Mr Hamilton and Mrs Parsons.
- Misrepresentation (14). This is referred to as "the van der Schrieck Misrepresentation" for the following reasons. It is the only express misrepresentation relied upon.
- It is pleaded that in September 1997, shortly after it had been proposed that a wholly-owned Rabobank subsidiary or a company controlled by Rabobank would take out NWB's interest in the 1996 Credit Facility, Mr Hamilton arranged a meeting which took place on 25 September 1997 between himself and Mr Havelock of CSS and Mr van der Schrieck, the General Manager of Rabobank, London. Mr Hamilton insisted that the meeting should be attended by Mr van der Schrieck and not by Mrs Parsons or Mr Cunningham because of the confidential subject-matter of the meeting. In the course of the meeting NWB asked Mr van der Schrieck to tell it whether Rabobank knew anything which NWB did not know which was material to NWB's decision as to matters discussed at a meeting which had been held with Mr den Baas on 18 September 1997 "and any further proposals developed therefrom, including the proposed take-out of NWB's interest in the 1996 Credit Facility". Mr van der Schrieck replied that there was not. The latter then asked NWB whether it knew anything which Rabobank did not know "and which was material in connection with the same matters and proposals including the proposed 'take-out' of NWB's interest in the 1996 Credit Facility Mr Havelock and Mr Hamilton said that NWB did not.
- It is pleaded that the questions at that meeting were asked and answered in circumstances in which both Rabobank and NWB accepted a duty to answer honestly, openly, in good faith, fully and fairly, informing the other about any relevant communications and any information material to the workout and to the take-out.
- It is further pleaded that having regard to what Mr Havelock and Mr Hamilton knew of the facts relating to the directors' loans and the other material information, both must have known that their answers were false. It is then pleaded as follows:
"The van der Schrieck Misrepresentation was made in order to induce Rabobank to continue to support YFG during the work out period and to induce Rabobank to enter into arrangements for the solution of the problems with the lending to YFG which would involve the reduction or removal of NWB's participation in the lending, including the take-out of NWB by Rabobank in circumstances in which NWB well knew that Rabobank would also immediately have to fund approximately an additional US$20 million to enable YFG to make payments to growers for the Autumn 1997 crop."
It is said that, induced by and in reliance on the van der Schrieck Misrepresentation, the RICC decided on 29 September 1997 at a meeting attended by Mr van der Schrieck to proceed with the takeout of NWB's participation and to enter into the DoT. Had NWB not made that misrepresentation, "as Mr Havelock and Mr Hamilton well knew", Rabobank would have put YFG into administration and would not have agreed to fund the take-out of NWB.
- Rabobank plead that in relation to each of the 14 misrepresentations the individual NWB representor concerned intended that Rabobank should rely on the misrepresentation by continuing to support YFG from 20 August 1996, including entering into the agreements for additional lending identified in paragraphs 6, 9 and 4 above and by supporting Utrecht's entry into the DoT, as well as the provision of further advances to enable the YFI companies to pay for the 1997 crop. Rabobank did rely on those misrepresentations by agreeing to the further lending, by leaving the YFG management in place, by not putting YFG into some form of insolvency procedure in August 1996 or later and by supporting Utrecht's entry into the DoT. Had the misrepresentations not been made, the workout would not have started or continued, Rabobank would not have lent any further funds to YFG but would have instructed their own investigating accountants to look into that company's affairs and those of the directors. Rabobank's further investigation would have led to discovery of the whole of the material information, in particular the White Rose Project.
- With regard to Rabobank's alternative claim under section 2(1) of the 1967 Act, it relies on each and all of the misrepresentations, that after they or some of them were made Rabobank entered into the further loan contracts and the DoT and as a result suffered loss. Rabobank puts NWB to proof of the statutory defences, namely that NWB believed up to the time when each contract was made that the prior representation was true and had reasonable grounds for that belief. It is Rabobank's case that once the workout had commenced, NWB's misrepresentations not having been corrected, continued up to the time when each of the subsequent contracts were entered into: they were thus of continuing causal effect.
- The Factual Background: how Bankers conduct a Workout
The relationship that is established between banks participating in a workout has been a matter of considerable importance in this case but has given rise to a fundamental issue between the parties. That issue can be shortly stated. On the one hand Rabobank contends that there is a common practice between banks involved in a workout that each will disclose to the other all facts known to it which are relevant or material to the other's decision-taking in the course of the workout, in the sense that they would influence the judgment of the other bank in taking its workout decisions. Although there is no legal duty to make that disclosure, it is what banks invariably do. It has also been accepted by Rabobank, albeit after the conclusion of the evidence in this case, that, at least in the present case, NWB owed no fiduciary duty to Rabobank to disclose any of the facts relied on as material. The relevance of this submission is therefore that the existence of the common practice is a decisive factor in determining whether NWB's conduct gave rise to implied misrepresentations. The argument works thus: given that the common practice of banks is to give to co-workout banks all information known to them which is material to each other's workout decision-taking, one bank is entitled to infer, particularly where only two banks are involved, from the other's silence or from the other's imparting some particular information on a matter under discussion between them that the other knows either no material facts or no more material facts than have been disclosed. The combination of the act of participation in the workout with the common practice of disclosure of information material to each bank is thus deployed to form the basis for the identification of a representation that no other material facts are known to the bank to exist than those, if any, which have been imparted on the occasion in question.
- NWB's position is as follows. Banks pursuing a mutual workout do normally disclose to other banks information known to them which they consider material for other co-workout banks to know for the purposes of the workout. Although this is a normal practice, it is not an invariable practice such as would support the implication of a term on the basis of trade usage into a contract relating to the workout.
- Rabobank relied on the expert evidence of Mr David Hudson. He had experience of workouts as a workout banker, but only before 1989 when he had become a consultant. Before that, as a banker, he had been actively involved in workouts but subsequently he had been involved as a consultant and adviser to debtor companies under workout. He had been involved in 30 to 40 workouts overall, but of these only about 6 or 7 had been since 1989 and not as a workout banker. At no time had he ascertained from others experienced as workout bankers what test they applied or expected to be applied in relation to material information. His views can be summarised as follows:
i) At paragraph 11 of his Expert Report he stated:
"A matter would be regarded by a bank as material if it would or might significantly influence a decision made in relation to a loan. Normal banking practice, both in UK lending and in international lending through the London market, is for a syndicate leader to disclose to all members of the syndicate matters within its knowledge which they would be expected to regard as material. There are ways to overcome impediments to disclosure, whether duties of confidentiality or organisational problems."
ii) In the course of cross-examination he stated as follows:
"A. I accept that if unusually there was a piece of information which was not in his opinion material by that definition, then I would not expect him to disclose it. However, I would expect him to be able to recognise, as material information, which clearly was material.
Q. Therefore, the expectation among bankers is entirely dependent upon and takes into account the subjective nature of the process, namely it is always qualified by reference to what the banker on the other side believes is relevant.
A. I do not agree, for the reasons I have just stated, that it is entirely dependent upon the subjective nature of the process, because, as I have said, the definition of materiality is an objective one, and any banker would expect his counterpart to have the competence to recognise as material something that was objectively material, though I do accept that there could be borderline cases where, while it was on analysis material, the banker disclosing it or not disclosing it might not appreciate that fact at the time."
iii) He also accepted in cross-examination that reasonable bankers could hold different views as to whether a particular matter was material.
iv) In his Supplementary Report Mr Hudson stated at paragraph 13 that not only did NWB have "a duty" to disclose matters which NWB considered material but to disclose "matters which might reasonably be expected to have a significant influence on decisions made by its fellow lender (Rabobank)".
v) In the course of cross-examination, however, he said this:
"A. It is quite clear that one bank would not be well equipped to determine precisely what would influence the lending decision of another bank, and that is why I include the words "or might". It is exactly equivalent in my opinion to insurance. If I take out a medical policy, I have a duty to disclose material information about my medical history. However, that duty is not satisfied if I simply disclose what I think is material. I have to disclose what the underwriters will take into account when making their decision, and this is a comparable situation."
vi) He accepted that a situation could arise where one bank possessing certain material information known to officials other than those dealing with the workout did not disclose that information because it was not known to those dealing with the workout.
vii) He said in cross-examination that there was no duty on a workout bank to have a system of collation of material information which they considered to be material to the workout.
- NWB relied on the expert evidence of Mr Paul Thompson who, until three months before the start of the trial, had been Head of Lending Services at HSBC Bank plc, having been in banking for 33 years. He had spent the bulk of that time dealing with lending and credit issues in the UK and the Far East. During the 1990s he had worked exclusively on the workout of corporate loan accounts in the UK and Europe. He estimated that he had been involved in well over 150 workouts in a wide range of sizes, industry sectors and complexity. From 2002 to 2006 he was a member of the INSOL Lenders Group. He stated in paragraph 5 of his report that in the context of the workout or the takeout he would regard as "material" a matter of sufficient importance in terms of subject and scale that it would significantly influence decisions being made by that bank in respect of either the workout or the takeout. He accepted the view expressed by Mr Davies of Rabobank that a matter would be material if it would probably influence the decision of the bank. However, he considered that bankers normally disclose information which they consider to be material to the workout.
- He emphasised in his report that he had never heard it suggested by any banker that there was any legal obligation to disclose anything during a workout. Were it otherwise, workouts would have to be conducted in a much more formal manner and with documentation prepared in advance and with access to legal advice. This would involve cumbersome structures which would hamper the workout decision-taking which often had to be done very urgently. In a large proportion of workouts a bank will disclose what it considers to be material because it is in its commercial interests to do so. In paragraph 13 of his report he stated:
"Banks in workout situations regard their reputations as paramount and will not seek to do anything during a workout which could damage that reputation through deliberately or accidentally misleading other participants. Disclosure of matters believed to be material makes the conduct of the workout as efficient as possible through making sure that whatever each workout banker himself considers to be material is shared with the other banks. This makes it more likely that the banks will come to the same conclusions."
- He further stated that a workout banker only discloses what he himself considers material because he will tend to focus on what is important to the workout decisions to be taken. "No workout banker goes through a conscious process of considering whether there is information which he should or should not disclose. He simply discloses what seems to him to be important. Disclosure of peripheral information would be potentially confusing and might distract from the efficient management of the workout process." He had never come across the practice within a bank of making special internal enquiries or conducting a trawl of the bank's records to see what might be of possible relevance to a co-workout bank.
- Mr Thompson further stated that if information came to the attention of the bank which caused it to be suspicious of something, such as impropriety, which would be material if true, the bank would not disclose that information to co-workout banks until those suspicions had been investigated by it and the truth confirmed.
- Mr Hudson had at paragraph 15 of his report quoted from the Principles of Multi-Bank Workouts published by INSOL in 2000:
"It is essential that during the rescue process all relevant creditors are provided with the same information regarding the assets, liabilities and business of the debtor … In the case of a group of relevant creditors that comprises only banks, it is quite common for all of them (with the agreement of the debtor) to receive the same information at the same time .. This is partly linked to the fact that the banks, under many legal jurisdictions, have either implied or contractual duties of confidence to their debtor customers and those banks are accustomed to receive and hold price-sensitive and confidential information."
While drawing attention to the fact that this passage does not cover information about third parties' assets, liabilities or business (such as those of a director) Mr Thompson also pointed out that the Principles are expressly non-binding and that even where more than two banks are involved and a co-ordinator is appointed to facilitate negotiations with the debtor and the provision of information to the other co-workout banks, the notes to the Fourth Principle state:
"Importantly, each of the relevant creditors will be expected to make its own assessment and decisions regarding any information, advice or proposals it receives either directly or via co-ordinators with regard to matters related to the restructuring process. Co-ordinators will have no duty or liability to the other creditors or the debtor with regard to the accuracy or completeness of such information or advice with regard to any proposals or their acceptance or rejection of them."
- Mr Blasi, the American banking expert called by NWB, accepted in cross-examination that materiality meant something "that would or might significantly affect lending decisions of the workout banker". He had some experience of working in the London market in the 1990s.
- Mr Davies of Rabobank accepted that it was up to each individual banker involved in a workout to decide for himself whether any given fact was material. Mrs Parsons said in cross-examination:
"Q. So you regarded any obligation you understood existed between the parties as one which was limited by a subjective view of either you or Mr Hamilton or whoever it was, as to what the other party would think was relevant, is that right? A. What was relevant or material, yes. Q. So if you thought that something -- and let us take this as an example -- Mr Stevens' views on mergers and acquisitions coming to no results, if you took the view that that would not be relevant to Mr Hamilton's decision, then you did not think you were under an obligation to disclose it? A. No. Q. By the same token, we can take it that if Mr Hamilton had some information which he did not think would be relevant to your decision, he was under no obligation to disclose it to you? A. Correct."
Mr Cunningham's evidence in the CC Proceedings was to the same effect. As to the answer given to Mr van der Schrieck, his evidence was as follows:
"Q. The question is, anything which you, Mr Hamilton, believe is important or relevant? A. That is implicit understood, yes. Q. Implicit and understood in that? A. I think that they understood and I understood it as well that, if I ask this question, that they only give me information which is relevant and important. Q. Which they think is relevant or important? A. Yes, of course. Q. So if they had a piece of information which they did not think was relevant or important, and they answered "no", that would be, as far as you are concerned, a truthful answer? A. Yes, of course."
- It was further the evidence of Mr Thompson – and in this respect he and Mr Hudson and also Mr Cresswell, Mr Side, Mr Havelock, Mr Hamilton and Mr Catton to a substantial extent were in agreement – that, in the course of a workout, decisions are based on the entire body of information available to and known by a bank at any one time, although it may be that in comparatively few cases one fact proves to be decisive.
- On behalf of Rabobank it is submitted that, whatever may be the normal trade practice with regard to disclosure in the course of a workout, when it comes to a takeout by one bank of a co-workout bank, the position is different in a case where the bank about to do the taking out asks if material facts are known to the bank about to be taken out. In such a case the test of materiality must be an objective one – what facts known to the bank would a reasonable bank consider to be material to a decision that it should take out the other? This was Mr Hudson's view.
- In the course of cross-examination of Mr Catton and Mr Hamilton answers were given to the effect that workout banks followed the practice of disclosing information material to the workout. However, the questions and answers left open whether materiality was to be judged objectively or was to be that which was considered to be material by the bank in possession of the information.
- In my judgment the weight of the evidence points strongly to the following conclusions.
i) In the 1990s the London banks considered it to be good practice to disclose information known to them which related to the assets, liabilities and business of the debtor corporation and which had been obtained for the purposes of the workout, so as to achieve as far as possible common knowledge between co-creditors as to such information.
ii) In the absence of an express contractual framework to the contrary, banks recognised no legal duty to adhere to that practice or to exercise reasonable care to do so, but normally followed it.
iii) Banks would give effect to that practice by disclosing those facts which each considered to be material to the decisions that a co-workout bank would need to take in the course of the workout. Amongst workout bankers the perception of what was material would usually be a matter of instinct as to what would probably be taken into account based on experience of workouts, rather than the result of a careful balancing exercise weighing their perception of the relative importance of information within their knowledge. Workout banks did not usually maintain systems for collating material information for the purposes of operating a workout or for the disclosure of information. If such information was available only to one office or division in a bank other than the workout office, it might not necessarily be disclosed.
iv) In consequence of (i) and (iii), a co-workout bank would be entitled to assume that there probably (but not necessarily) would be disclosed to it all information known to those in another co-workout bank who were personally responsible for dealing with the workout which those persons honestly considered would probably be taken into account as significant in arriving at necessary decisions.
v) In further consequence of (i) to (iii) it was up to each co-workout bank to make its own enquiries and conduct its own due diligence in relation to the debtor corporation, for, if it relied solely on what it was told by a co-workout bank, it would not be entitled to assume that there would be disclosed to it each and every piece of information which either it or bankers generally might consider material. That piece of information might not be known to those in the other bank who were dealing with the workout and, if it were, those persons might honestly not believe that it would probably be taken into account as significant in the course of that workout.
vi) In the likely event of the appointment of an investigating accountant, such as PW, it would be good practice, but not a legal duty, for the co-workout banks to disclose information known to those handling the workout which they considered material to the accountant's terms of reference in the context of the workout.
vii) With regard to the takeout of one creditor bank by another, whether there were a duty to respond to a question from the taking out bank, either by the disclosure of all material information known to the bank to be taken out or by refusing to respond, would depend upon the terms of the question and the circumstances in which it was asked. I consider later in this judgment the circumstances of the van der Schrieck Misrepresentation and in particular what Mr van der Schrieck was entitled to assume from the answer to his question.
- In relation to the conclusions in paragraph 110, the weight of the evidence identified above is strongly supported by conceptual and practical considerations.
- Firstly, if the characterisation of a piece of information as material were not left to the judgment of that workout banker who knew of it and were to be determined objectively just as if it were necessary to test its disclosability as a material fact under section 18 of the Marine Insurance Act 1906, the effect would be to superimpose on the practice usually followed by co-workout banks what would in effect be an obligation to ensure that they did not fail correctly to identify a fact as material and therefore to disclose it if it were within their knowledge. If they did fail so to identify it, they would be at risk of making a misrepresentation by non-disclosure to a co-workout bank. That could lead to consequences quite as serious as if there were a duty to disclose such information, such as a liability for damages which might arise under section 2(1) of the 1967 Act. It is no longer contended by Rabobank that NWB owed it a fiduciary duty to disclose material information. Nor is it any longer open to Rabobank to contend that NWB owed it a duty of care to do so under Hedley Byrne v. Heller principles. Nor can it seriously be suggested, except perhaps by Mr Hudson, that the banks are in an uberrimae fidei relationship. So to characterise the practice of disclosure by reference to an objective test as distinct from the subjective determination by the bank as to what is material would potentially expose banks to the risk of liability for misrepresentation notwithstanding universal acceptance that no legal duty to disclose material facts exists. I do not consider that the practice of bankers should be regarded as such as to accommodate this inconsistency.
- Secondly, if the test of materiality were to be truly objective with the potential consequences of non-disclosure to which I have referred, banks involved in a workout would be obliged to be very cautious as to the performance of the disclosure requirement. For this purpose they would be inclined to take legal advice and would have to develop internal systems for information analysis and transmission. The effect would be to impede the rapidity of decision-taking in workout situations which often, particularly in the early stages, demand an urgent response to corporate problems and may do so later in a workout if, as happened in this case, a choice has to be made between funding immediate payment of obligations under open contracts and allowing the debtor to file for insolvency.
- For these reasons, I accept the evidence of Mr Thompson, derived as it was from a wealth of experience in workout procedures, that amongst London banks it was in the 1990s considered good practice for co-workout banks to disclose to each other what those concerned with the workout personally considered to be material information, to the effect that in the absence of a specific contract to go beyond that, there could be no justifiable reliance on any wider or more specific disclosure.
- The History of the Workout
The main elements in Rabobank's case are:
i) that on or about 20 August 1996, or soon after, there was to be derived from the words and conduct of Rabobank and NWB an agreement for the purposes of the workout that each bank should disclose to the other all the material facts that it knew which were relevant to the workout;
ii) from the outset and subsequently NWB withheld from disclosure to Rabobank facts which it knew to be material in order to induce Rabobank to continue to provide funding to YFG when otherwise it would or might have declined to do so, preferring that YFG should be put into receivership, administration or liquidation;
iii) NWB's conduct, in particular the conduct of Mr Catton, Mr Hamilton, Mr Havelock and Mr Cresswell, in making either partial disclosure or total non-disclosure in the circumstances of its other conduct and of the trade practice of banks in London and/or against the background of the anterior agreement referred to in (i), amounted to implied positive misrepresentations that NWB knew of no material facts beyond those already disclosed;
iv) NWB intended what it said and its conduct to be understood by Rabobank as having that meaning;
v) Rabobank relied on the implied representations in taking its decisions to continue to fund YFG and ultimately in its decision to take out NWB's loan;
vi) The only express misrepresentation relied upon by Rabobank (the van der Schrieck Misrepresentation) was made in response to a question about a specific matter (the take-out) which demanded an accurate answer by NWB and the answer that was given was known to be untrue by both representatives of NWB – Mr Havelock and Mr Hamilton – and was untrue for the purpose of causing Rabobank to agree to enter into the take-out and ultimately the DoT;
vii) The misrepresentations had a continuing effect because NWB did not correct them, allowing that effect to continue up to the entry into of the DoT.
viii) In considering the developing relationship between the two banks it was also necessary to have regard to the developing parallel relationship between NWB and the directors of YFG with regard to the White Rose project.
- YFG first banked with NWB in 1989 and first became involved in the United States fruit and nut market in 1991 when it acquired Rio Del Mar which specialised in the export of dried fruit and nuts. In July 1992 YFG acquired Treehouse Farms Inc, the nut processors, from Berisford Plc. In March 1993 YFG was listed on the London Stock Exchange. Thereupon Mr Davies of Rabobank approached YFG offering Rabobank's services. Early in 1994 YFG sought finance from both NWB and Rabobank. On 21 April 1994 NWB (Mr Skelley of Leeds Business Centre) wrote to Mr Haley of YFG following discussions between Mr Haley and Mr Catton the previous day, offering a £250,000 loan to each director and member of senior management to enable them to purchase YFG shares with bullet repayment in 4 years maximum, amortising over 7 years maximum. As security each director was to sign a memorandum of deposit over YFG shares or alternative security to provide 200 per cent minimum cover, the borrower to restore cover if the value fell to 150 per cent. Among those directors and others who borrowed from NWB were Mr Firth, Mr Giddings, Mr Haley, Mr Morgan and Mr Atkinson.
- On 12 May 1994 YFG and YDFN raised a multi-bank syndicated loan of US$80 million, the lenders being Rabobank, NWB, Bank of Scotland, Nikko Bank (UK), ABN Amro NV, NWB Capital Markets Ltd was arranger and NWB was facility agent. NWB's share was $30 million and Rabobank's share was $15 million.
- In September 1994 six of the directors and others borrowed further amounts from NWB totalling £105,000 to purchase more shares in YFG.
- On 1 January 1995 Mr Firth resigned from the post of YFG Group Chief Executive but remained Group Chairman. He was replaced as Chief Executive by Mr Haley. Mr Morgan became Group Financial Director.
- On 24 February 1995 a NWB internal audit letter drew attention to the rather unusual, although satisfactory, situation arising from the directors' share purchases loans against deposits of YFG shares and the need to monitor the adequacy of security cover.
- In March 1995 YFG applied to both Rabobank and NWB for further loan facilities involving an overall increase of $30 million in the syndicated loan. Mr Davies recommended approval of this additional borrowing. The internal credit application at Rabobank observed:
"YFG is evolving into one of the most significant and dynamic participants in the global food ingredients market. The company is now positioned as a leading supplier of dried nuts and fruits to major food manufacturers such as Mars, Cadburys and Grand Met. In the case of Cadbury providing over 95% of this requirement in this area. Secondly, under its Del Monte brand YFG has a powerful retail franchise in the US with enormous potential for expansion in Europe and the Far East."
It stated that YFG's ability to take advantage of uniquely favourable market conditions was restricted by the availability of working capital and the gearing covenants of the existing facility. It noted that Mr Haley "for whom we have extremely high regard" was appointed as Chief Executive for the US. The memorandum continued:
"We have invested considerable time in developing our relationship with
senior management through numerous UK and US site visits and regular
meetings. Our overall high opinion of management at all levels has been
confirmed by this process."
NWB's reaction to YFG's request was equally enthusiastic, Mr Catton wrote a 17 page Information Memorandum which Mr Skelley approved. The management risk was said to be strong with a well-balanced team, particularly Mr Haley who was first class. The financial risk was acceptable with the balance sheet ok "albeit gearing/leverage towards the outer edges". Mr Catton observed:
"Cash flow risk hinges on debt/working capital cycle which
sees strong management control but influenced also by capex
aspirations which perhaps need to be checked."
However, the repayment risk was "a little more tenuous" and would need to come from downsizing/refinancing. He went on "In Armageddon we have the comfort of substantially tradeable/liquid assets."
- On 21 April 1995 Rabobank and NWB entered into a Supplemental Agreement whereby they each agreed to increase by US$10 million the facility granted by each under the 12 May 1994 Facility. The effect was to increase the facility provide by NWB to US$ 40 million and that provided by Rabobank to US$25 million, the aggregate syndicated loan facility then increasing to US$100 million.
- On 12 May 1995 NWB provided to the Firth Trust a facility of £1 million for the purpose of the purchase of a large country house for Mr Firth – Oaklands, Whixley, near Harrogate. It was granted for one year. The facility offer stated that on expiry of the facility NWB would wish to establish with the Borrower an appropriate repayment arrangement.
- By August 1995 it had become YFG's medium term strategy to dispose of the whole of its UK business, in particular its Home Baking, Beverages and Sugar Divisions in order to fund the expansion of its US activities. Mr Davies had met with Mr Morgan and had been so informed. He had also been told that a private placement of equity in the US was well advanced in that in consequence YFG intended to "unwind" its banking syndicate and replace it with NWB and Rabobank as the sole core banks. Mr Davies commented that in the long term YFG would become a US company and would no doubt eventually be lost as a client to London. Mr Davies further commented:
"However, our profile with the company is clearly strong and the proposed changes should generate good long term commercial opportunity for the bank in addition to improving the financing structure of the group."
On 26 September 1995 YFG engaged Rabobank London as exclusive financial adviser in relation to the disposal of a substantial number of companies and businesses owned by YFG in the UK.
- On 22 November 1995 Mr Matthews signed on behalf of Yorkshire Foods a Real Estate Purchase Contract and Receipt for Deposit ($25,000) on account of the purchase price of $3,018,600 being the purchase price of the almond farmland (see paragraphs 22-24 above). The buyer was given 10 days to check title and the district water rights, after which a further $175,000 deposit would be payable. Investigation of the water rights gave rise to problems. The difficulties were set out in the summary prepared by Mr Matthews and sent to YFI's attorneys on 15 December 1995, and in which the following was recorded:
i) It was intended that YFI would enter into some type of partnership arrangement with Baker Farms for the development/farming of almond acreage, YFI to contribute 1675 acres and Baker Farms 400 acres.
ii) Baker would grow and supply the trees to be planted.
iii) YFI would provide funding for ground preparation and tree planting and annual cultivation.
iv) Baker would manage the farm.
v) Annual crop proceeds would be split 50/50.
vi) Since the land to be farmed was in a Federal Water district it had a few problems namely:
" - A corporation can have up to 960 acres of water rights.
- Rights are allocated to members of the corporation based on their
percentage ownership share.
- Corporations cannot be foreign owned.
- Participants (owners) of the corporation must be either citizens or
resident aliens.
- If the corporation leases to a partnership, members of both will get
"charged" for the water credits.
- Yorkshire cannot be the parent of the new corporation as the ultimate ownership is traced "upstream".
- Yorkshire can be the lender to the new corporations.
- Baker Farms cannot be part of the new corporation as they have no water rights available.
- Corporations can have a custom farmer doing the work. Custom farmers do not get charged for the water credit.
- If the corporations have more than 25 employees it would be limited to 160 acres of water credits.
In our meeting with the Bureau of Reclamation they recommended a couple of attorneys in Fresno who specialize in developing structures that will be approved for water credits. Once we have a proposed structure the Bureau will review the plan and if they approve, will provide us with a letter to the water district stating their approval. They stated that their review would take no more than 30 minutes once we provide the proposed structure to them.
The Bureau felt that our ultimate structure should be at least 2 corporations with a minimum of 2 employees per corporation (2 are needed to allow for transferability of the water between corporations). The corporations could then hire Baker to be the custom farmer."
As appears from the summary the remaining part of the deposit for purchase of the farmland had yet to be paid.
- In the course of January 1996 there was a presentation by Mr Firth, Mr Haley and Mr Skelley, copied to Mr Catton. This set out in broad outline intentions for the future development of YFG's businesses in the US but it also mainly described the intention of Mr Firth and Mr Haley to set up a private asset management company ("PAMCO") as "a vehicle for managing a diverse collection of business interests" which would be privately held by Firth and Haley employing proven, trusted, high-calibre ex-YFG personnel. Once the UK assets of YFG had been disposed of, the core UK corporate staff would be re-employed early in 1997 by the PAMCO. That company would be incorporated with immediate effect, and "farming business in California will commence Spring 1996" at which time finance would be raised for farming and other new businesses. The presentation stated that during Spring 1996 a farming business would be started in California with an initial equity of $1.5 million to $2 million principally subscribed by Firth and Haley.
- On 12 January 1996 it was agreed between Williams/Fickett, the sellers of the farmland, and YFI that the escrow period on the deposits should be extended to 15 February 1996 or, if not then, to 1 March 1996. On 1 February 1996 YFI paid a further $100,000 deposit and on 13 February 1996 a further $75,000 was paid by YFI. This reflected an agreed increase in the overall selling price to US$3.3 million as a quid pro quo for the extension of completion. Further, in view of the vendors' cash shortage, YFI agreed to discharge various outstanding indebtedness in respect of the farmland, such payments to be set off against the price of the land. By 10 April 1996 YFI had paid US$599,189.95.
- On 20 February 1996 AF I and AF II were incorporated. Each had two shareholders, Mr Matthews of YFI and Mr Campbell. The division in land title to be accomplished by splitting it between the purchaser corporations reflected expert advice given to YFI by local lawyers experienced in creating land holding structures and was aimed at maximising permissible water extraction: see paragraph 125 above.
- In the course of his deposition evidence in the SF Proceedings, and as confirmed before this court, Mr Matthews explained the economic benefits of controlling almond farms. There was at the time relative over-capacity in the almond processing industry by comparison with the available supplies of nuts. For that reason processing companies tended to maintain or acquire control of almond farms in order to maximise utilisation of their capacity. Alternatively, they might develop partnerships or similar links with nut producers. Otherwise, they would have to purchase nuts on the open market and be subject to market price variations and would be obliged to compete for supplies with other processors. In view of this, Mr Matthews had contemplated even while he worked for Treehouse, before YFI bought it, that it would be sensible for Treehouse to acquire farmland and/or go into partnership with growers. I find that this purpose was the genesis of the idea that YFI should gain control of nut production by acquiring farmland.
- By the end of February 1996 legal advice received with regard to maximising water rights clearly showed that YFI could neither own the farms nor own the corporations which owned the farms. Nor could Treehouse. Accordingly, YFI, being a subsidiary of the English company was obliged to assign the purchase contract to Californian corporations AF I and AF II. Further, it had been suggested to Matthews by representatives of local water districts that YFI could maintain control over the farming companies through nominee shareholders who were Californian citizens and employees of YFI. There thus developed a general understanding between Mr Matthews and Mr Haley and others at YFI, including, I infer, Mr Firth, that, although YFI would not own AF I and AF II, it would be effectively the owner and in control of those corporations and of the almond farms through nominee shareholders, as an "in-house" method of ensuring future supplies, to the benefit of YFI and Treehouse.
- The idea of farming and interposing White Rose Farming developed in March/April 1996. The creation of that corporation was associated with the PAMCO concept. A draft memorandum of March 1996, which I infer to have been the work of Mr Haley and approved by Mr Firth, referred to PAMCO as providing management services to White Rose. The structure of the transaction which involved, according to the evidence of Mr Matthews, AF I and AF II holding title to the farms for the benefit of White Rose which was a limited liability company in which Mr Firth and Mr Haley were the major shareholders with 80 per cent and other directors of YFI/Treehouse with 20 per cent. Mr Matthews stated that Mr Haley, in response to the specialist advice on water rights obtained by Mr Matthews had subsequently changed the ownership structure for the farms to the effect that White Rose would replace YFI as the owner of AF I and AF II. In the event, although White Rose was incorporated and Mr Morgan made a payment by way of capital subscription to it, it was not otherwise capitalised. Mr Matthews received no shares in it, and it had no employees and conducted no business, although initially it had an office.
- I interpose that, according to Mr Matthews, he saw nothing objectionable about this control structure. Indeed, on 10 April 1996 he wrote to Arthur Andersen who were advising YFI setting out sufficient detail to show that those in control of YFI had caused the purchase of the farms to be switched from YFI to AF I and AF II which were in turn now to be purchasing for the benefit of the private company (White Rose) instead of YFI. This conduct is consistent with his view of the acceptability of the transaction and it also demonstrates that, absent any objection in reply, Arthur Anderson must also have seen nothing objectionable in what was proposed.
- The purchase of the farmland gave rise to considerable financial difficulties for YFI and the White Rose directors. Not only did they lack the funds to complete but also it had been agreed with the vendors that deposit payments would be made and also that YFI would discharge various other debts of the vendors in relation to the land. As at 1 March 1996 it had been agreed with the vendors that the completion date should be postponed until 1 May 1996.
- On 14 March 1996 Rabobank had under consideration an application by YFG that the existing multi-bank syndicated loan be replaced by a credit facility of US$100 million shared equally with NWB. An internal credit application signed by Mr Herbert and Mr Davies was enthusiastic. It referred to the competitor market strength of YFG in the US and to the organisation being "characterised by high quality personnel". Taking note of the fact that Rabobank was already advising YFG on disposal of its UK businesses and that the company's exit from the UK food businesses increased Rabobank's profile "given our strength in US food and agribusiness and NWB's withdrawal from the market". The current proposal would "without doubt place Rabobank San Francisco in an excellent position to lead any US bank debt issue".
- A