ACTION NOT STRUCK OUT BECAUSE ALLEGATIONS OF BAD FAITH AND WILFUL MISCONDUCT NOT FULLY PARTICULARISED

In Palladian Partners LP & Ors v The Republic of Argentina & Anor [2020] EWHC 1946 (Comm) Mrs Justice Cockerill refused to strike out pleadings alleging, bad faith, wilful misconduct and manifest error.  This is the second example recently of a judge refusing to strike out pleadings because of alleged lack of particularisation.

“… these authorities indicate that at the pleading stage what is needed is a pleaded case which, while it may contain allegations consistent with innocence, amounts to a case which if proved at trial, and making allowance where appropriate for the imbalance of information at the pleading stage, is capable of justifying a plea of fraud at trial. There need not be one killer fact or allegation; it is enough if those facts together are capable of tilting the balance”

THE CASE

The claimants held securities from the defendants which represented some 25 – 35% of moneys originally owed. The judge noted that the holders of the original Securities took what was described as a “considerable haircut”.  The defendant is due to make payments on those securities each year, subject to certain pre-conditions being met.  The claimant brought an action alleging that the defendant was taking steps to ensure that the pre-conditions were not being met.  The defendant sought summary judgment on the claimant’s case, alternatively it sought to strike out the case on the basis that key allegations were not properly particularised. The judge refused the summary judgment application.  She then went on to consider the allegations that the case should be struck out because of unparticularised pleadings.  Again she rejected the defendants’ contentions.

THE JUDGMENT ON THIS ISSUE

 

The Allegations of Bad Faith, Wilful Misconduct and Manifest Error
    1. The essence of the Republic’s case was that the Claimants have not properly pleaded the necessary parts of the relevant defences. Specifically, it is said that:
i) The pleaded allegations of bad faith and wilful misconduct lack the particularity required for serious allegations of conscious wrongdoing on the part of public officials and are unsupported even by the particulars given in the Particulars.
ii) The pleaded allegation of manifest error fails to identify any error, alternatively any error which is plain and obvious and easily demonstrable without extensive investigation….
Bad Faith and Wilful Misconduct
    1. There was next to nothing between the parties on the law as regards the correct approach to strike out, or as to the requirements for pleading, and I shall not rehearse the common ground.
    2. The issues between them were:
i) Whether in the context of a plea of fraud it is necessary to plead facts which are only consistent with fraud;
ii) Whether bad faith was equivalent to fraud.
    1. On the first point, this issue to some extent appeared to disperse as submissions progressed. To the extent it did not, I accept the Claimants’ submission that what is needed at the pleading stage is not a pleaded set of facts which lacks any other possible explanation than fraud, but rather the pleading of facts which, if proved, tilt the balance to fraud. This can be seen from the following authorities.
    2. The first is the judgment of Lord Millett in Three Rivers DC v Bank of England (No.3) [2001] 2 AC 1, at 291E-H (HL):
“185.  It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means “dishonestly” or “fraudulently”, it may not be enough to say “wilfully” or “recklessly”. Such language is equivocal. …
186.  The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.”
    1. The second is the judgment of Flaux J in JSC Bank Moscow v Kekhman [2015] EWHC (Comm) 3173 at [20]:
“The claimant does not have to plead primary facts which are only consistent with dishonesty. The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty“. At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge.”
    1. Reference was also made to the judgment of Mann J in Gulati v MGN [2013] EWHC 3392 (Ch) where he declined to follow Moore-Bick LJ in ICI Chemicals TTE Training [2007] EWCA Civ 725 because Moore-Bick LJ had been dealing with arguments relating to construction and because:
“He was also not dealing with the familiar case in which a claimant makes an ostensibly sustainable allegation but acknowledges that the process of disclosure is necessary to make the case stronger or to have it investigated properly. It is a familiar state of affairs that a claimant is ultimately reliant on disclosure from the other side in order to bring his case home, particularly in cases where the nature of the wrong is such that the defendant’s activities were covert so that, if the case is good, the defendant is likely to have a substantial amount of material in its hands with no equivalent in the hands of the claimant. Unless the prospects of getting disclosure are “fanciful”, the claimant is generally entitled to maintain its case in those circumstances. That is not to say that claimants are entitled to embark on speculative cases in the hope that disclosure will throw up something useful. The claimant must have more than that to start with, but the inability to make a full case without disclosure is not, in my view, a bar to starting the litigation in the first place…
Provided that there is enough to prevent them falling into the category of the purely speculative, the nature of the wrong alleged is such that the claimants will or may have little knowledge and evidence of their own at this stage and will need the benefits of pre-trial procedures in order to add to their case. There is nothing wrong with this. It is what disclosure (among other steps) is for. The alleged activities in this case were covert and, of their very nature, would be activities of which the victims would know little or nothing. Better evidence of what happened would lie with the defendant. There is nothing wrong with pleading a starting point, on an appropriate basis, and then expecting the case to become clearer after pleading and disclosure (if not the extraction of further information pursuant to a request).”
    1. I consider that these authorities indicate that at the pleading stage what is needed is a pleaded case which, while it may contain allegations consistent with innocence, amounts to a case which if proved at trial, and making allowance where appropriate for the imbalance of information at the pleading stage, is capable of justifying a plea of fraud at trial. There need not be one killer fact or allegation; it is enough if those facts together are capable of tilting the balance.
“Bad Faith”
    1. The second issue between the parties concerned the meaning of bad faith. A contractual provision governed by English law that requires one party to the contract to establish that the other party has acted in “bad faith” is capable of being interpreted as requiring proof that the party acted with either:
i) Actual dishonesty (i.e. in the sense most commonly used in the English criminal law or in cases involving civil fraud), which is the definition for which the Republic contends; or
ii) An improper purpose (in the sense most commonly used in the context of English administrative law), which is conduct which is commercially unacceptable, including sharp practice of a kind falling short of outright dishonesty.
    1. This point is plainly in issue between the parties, but given the conclusion I have reached on summary judgment and manifest error I need not decide it now.
    2. I would also note that as the Republic submitted, in practice there is unlikely to be any material difference between the application of these two definitions to the facts. The important point is that the Republic submits that even if, as the Claimants contend, “bad faith” is to be interpreted as requiring proof of an improper purpose short of dishonesty, this will require the Claimants to prove that the relevant decision was taken, or calculation made, by an official of the Ministry of Economy for a purpose which the official knew to be improper or incorrect, or suspected was improper or incorrect, but he or she carried on regardless of the consequences.
    3. It follows that in the Republic’s submission, “bad faith” in the Binding Effect provisions in this case requires the Claimants to plead and (if the matter were to proceed to trial) prove that an identified official of the Ministry of Economy made a calculation of the Payment Amount (or some other related calculation required under the Securities) on behalf of the Ministry of Economy, which he/she knew to be improper or incorrect, or suspected was improper or incorrect, but carried on regardless of the consequences.
    4. This was then used as the basis for a similar pleading point to that raised in relation to manifest error, with which I shall deal together with the same point, arising in the context of wilful misconduct.
“Wilful Misconduct”
    1. There was little between the parties on the subject of wilful misconduct (which encompasses, and has the same essential elements as its close cousin, wilful neglect or default). Wilful misconduct by a party to a contract requires proof that the party either knew that it was acting in breach of duty or the law, or suspected that it was acting in breach of his duty or the law, but carried on without regard to the consequences and that person appreciated that his conduct created or might create a risk or harm in respect of the subject matter of the contract. Harm here is not in issue. The point on which the Republic placed emphasis was the need for conscious wrongdoing on the part of the relevant official.
    2. Again there were two parts to the argument, the formal and the substantive. So far as the former is concerned, the Republic submitted that “wilful misconduct” or “bad faith” require the Claimants to plead that an identified official of the Ministry of Economy made a calculation of the Payment Amount (or some other related calculation required under the Securities) on behalf of the Ministry of Economy, which he/she knew to be a wrongful breach of his duty or a breach of the law, or suspected as much, but carried on regardless of the consequences. This level of particularisation is, the Republic says, lacking.
    3. The second point is whether the pleaded case based on inference is sufficient to clear the hurdle delineated in the authorities.
Discussion
    1. As with the pleading point on manifest error, I am not unduly troubled by the first issue. It is entirely unrealistic to expect such a level of particularity, and I do not conclude that the authorities say that this is necessary. It may be necessary to prove conscious wrongdoing on the part of the relevant official, but it cannot be the case that the official needs to be identified in the pleading at the stage where the knowledge of the decision-making process is outwith the Claimants knowledge. There might be an argument that if advance disclosure had been given, such details should be pleaded; the position would then be more analogous to the ICI Chemicals case, but that does not arise here. The Republic has not acceded to requests for disclosure of its documents showing when, on what grounds and by whom the key decision was made, which might elucidate this subject. That is no criticism of the Republic, but it does at least potentially affect the degree to which the Claimants can be criticised for lack of particularity in their pleading.
    2. The question then becomes one of whether the pleaded case on inference is sufficient. The Claimants’ pleaded case in respect of bad faith and wilful misconduct is founded on: (i) the twin assertions made in paragraph 45(a) and (b) of the Particulars, and (ii) the nine factual matters set out at paragraph 46(a) to (i) of the Particulars, which it is said lead to the inference that “the Republic did not have any or any real belief that the purported rebasing was being carried out on a sound statistical basis“.
    3. The pleaded conduct which it is alleged constituted bad faith or wilful misconduct on the part of the Republic (Particulars, paragraph 45) is:
“(i) deciding to switch to 2004 as Year of Base Prices and to immediately cease to publish or cause to be published data in 1993 prices, and/or (ii) in refusing to apply the Adjustment Provision, and/or (iii) the matters set out in paragraph 39 above”.
  1. The question is whether this would suffice as a pleading of bad faith or wilful misconduct in the light of the authorities above. In the end I am persuaded that it would do so.
  2. I do not accept that, as was submitted for the Republic, this allegation “necessarily involves an allegation of a largescale, interagency governmental conspiracy … to defraud the Claimants and all holders of the Securities”. It is quite possible for the decision to have been made by a key senior person, and then followed by more junior staff.
  3. The Claimants acknowledge that their case on bad faith and wilful misconduct is necessarily an inferential one and it must also be accepted that a number of the particulars relied on are not particularly impressive. I do not propose to go through each sub-paragraph, as Mr Valentin did in submissions, but I can quite see that the arguments that there was nothing sinister in the use of 2004 as a new base year, or in not waiting for an updated census, have real force. So too do the arguments regarding what the Director of INDEC may or may not have said.
  4. However, there is in the pleading a core of issues which, depending on the way the evidence comes out at trial, may be enough to justify such a conclusion. Part of this will involve the argument about the implied term. If that argument were to succeed, and the Court were to conclude that the term was so obvious and clear as to require to be implied to give business efficacy to the contract, that would be a point which (even absent manifest error) would provide food for thought as to how in those circumstances the Republic could have done otherwise. There are then the other issues to which I will allude below. Though none of these alone would have sufficient weight to justify a case, it cannot be said that, taken together, and depending on the strength of the case on each one, they could not tip the balance so as to justify an inference.
  5. There will obviously be a vibrant issue as to the relevance of the IMF correspondence to the precise timing of the change. The Republic of course points to the chronology as indicating that the IMF had required remedial measures by September 2013. However, as Ms Prevezer noted in submissions, there is material for exploration as to whether the IMF were pushing for a change as soon as possible, which the Republic then actioned, or as to whether the IMF did not anticipate a change part way through the year. There may also be scope for argument about whether the IMF anticipated or the Republic had intimated that it would make a clean break.
  6. There will also be an issue as to just how relevant the Republic’s past behaviour is, both in terms of quasi-admissibility and proper weight. However while I can see that there may well be grounds for saying that the judge should conclude that there is insufficient similarity, given the different nature of the alleged previous conduct, which related to understating CPI figures (as opposed to overstating GDP figures), to make it proper to say that the question of propensity is even open to be taken into account, it cannot be said that there is no scope for the argument. To use a criminal analogy, the past conduct may or may not be of the same “description … or… category” (as it is put in Criminal Justice Act s. 103), but it cannot be said that the Republic’s past is a blank slate. I was taken to reports which suggest that it has in the past manipulated other economic statistics and that that behaviour has had the effect of avoiding bond payments.
  7. Adding to that the co-incidence of timing, the Republic’s financial difficulties at the time and the evidence that the payment of these bonds was attracting some controversy prior to the decision to rebase, I conclude that these facts do amount to a sufficient pleaded case to run the issues which are relied on. As I have noted I do not see some of the facts pleaded as adding much if anything to the argument, however given that the Republic explicitly makes the point that unpleaded facts cannot be relied upon to support an inferential case of dishonesty, an approach of “better safe than sorry” is plainly prudent.
  8. Accordingly, I would also dismiss the strike out application.