Al Sadik v Investcorp Bank Bsc and Others

• Jurisdiction: Cayman Islands
• Judge: (Lord Wilson, Lord Sumption, Lord Reed, Lord Hughes and Lord Briggs)
• Judgment Date: 18 June 2018
• Court: Court of Appeal (Cayman Islands)
• Date: 18 June 2018

Judicial Committee of the Privy Council

(Lord Wilson, Lord Sumption, Lord Reed, Lord Hughes and Lord Briggs)

AL SADIK

and

INVESTCORP BANK BSC and OTHERS

M. Black, Q.C. and M. Staff for the appellant;

Lord Falconer of Thoroton and E. Levey for the respondents.

Cases cited:

(1)Anderson v. City of Bessemer (1985), 470 US 564, referred to.

(2)Central Bank of Ecuador v. Conticorp S.A., [2015] UKPC 11; [2016] 1 BCLC 26, followed.

(3)Devi v. Roy, [1946] A.C. 508; (1946), 62 T.L.R. 549; 176 L.T. 209, referred to.

Investments and Securities — investment management — scope of management agreement — agreement allowing investment in leveraged funds and wide discretionary mandate interpreted as permitting economically equivalent leveraging of investment at portfolio level — contractual document to be interpreted according to meaning conveyed to reasonable person having all background knowledge reasonably available to those to whom addressed — not interpreted in way that would flout business common sense

The appellant brought claims in the Grand Court alleging, inter alia, breach of contract, breach of fiduciary duty and breach of trust against the respondents.

The appellant was a wealthy businessman with previous experience of high-value investments. Meetings took place between the appellant and the first respondent, a regulated international investment bank, regarding a proposed investment, at which the appellant indicated that he wished to obtain a 45% return on his investment over three years. The proposed hedge fund strategy involved the investment of AED1 bn. in three Investcorp funds. 50% was to be invested in Leverage Diversified Strategies Fund Ltd. SPC (“LDSF”) at 3× leverage, the remainder was to be invested in two blocks of 25% each in Single Managers Fund Ltd. SPC (“SMFCo.”) at 1× leverage and Leveraged Event Driven Fund (“LEDF”) at 1× leverage. The investment proposal made clear that the amount of leverage within the portfolio might change from time to time, but the aggregate initial leverage would be 2×.

In the event, the appellant decided to invest AED500m., which he transferred to the first respondent in February 2008. In March, the appellant, the first respondent and Shallot IAM Ltd. entered into a share purchase agreement (“the SPA”) which inter alia (a) provided that a separately managed investment account would be established as a special purpose vehicle—Shallot—to invest in hedge funds or segregated accounts with hedge fund managers selected by the investment manager (cl. A); (b) gave the first respondent a discretion to take any actions it believed necessary or desirable to achieve the purpose of the investment or otherwise manage the affairs of Shallot (cl. D2); (c) required the firstrespondent to provide the appellant with monthly statements of the underlying investments (cl. F4).

Shallot was incorporated in the Cayman Islands as a special purpose vehicle to handle the appellant’s investment and was controlled by directors appointed by the first respondent. In March, the appellant’s investment was converted into US dollars and credited to an account of Shallot. As it was entitled to do under the SPA, the first respondent had decided not to invest the appellant’s money strictly as required by the investment proposal and instead split the investment between DSF (the hedge fund for which LDSF was the feeder fund) as to 50% and as to the balance between five (later six) single manager funds for which SMFCo was (or was equivalent to) the relevant feeder fund. The first respondent’s strategy involved 2× leverage of the investment in DSF and 3× leverage of the remainder. As the plan to leverage within feeder funds had been abandoned, the first respondent decided to achieve its planned leverage through a new SPV, Blossom IAM Ltd., a wholly owned subsidiary of Shallot. Shallot transferred the appellant’s money to Blossom (as the subscription price for the issue of redeemable preference shares by Blossom to Shallot) which was added as a party to a master note purchase agreement (“White Ibis III”) whereby the first respondent could leverage customers’ investments by borrowing from Royal Bank of Scotland. This enabled Blossom to leverage the appellant’s investments.

The first respondent did not inform the appellant that his investment had been leveraged in this way and failed to provide him with complete monthly statements as required by the SPA. The appellant believed his investment was being leveraged by means of “second-layer leverage”—i.e. being used for investment in hedge funds which sought to achieve a certain specified level of leverage.

Following the market collapse beginning in September 2008, the appellant’s investments began to perform poorly. He gave instructions to redeem in December 2008. He asserted that he had the benefit of a guaranteed 45% return by way of collateral contract. The first respondent denied the existence of this guarantee. The final redemption proceeds reflected a total loss since inception of approximately AED207.6m., which represented a return on investment of –42%. He brought proceedings against the respondents in the Grand Court for fraudulent misrepresentation, breach of the SPA, deceitful non-disclosure, breach of trust and/or fiduciary duty and breach of guarantee (the claim for fraudulent misrepresentation was subsequently withdrawn).

The Grand Court (Jones, J.) dismissed the appellant’s claims (the decision is reported at 2012 (1) CILR 451). The judge held that the first respondent had not breached the SPA in leveraging the appellant’s investment at the portfolio level. The SPA gave the first respondent a wide discretion to manage the investment. It would flout business common sense to construe the SPA as prohibiting leveraging at the portfolio level since it achieved a result that was economically equivalent to investing in leveraged funds, which clearly was permitted. In the alternative, if the firstrespondent had not been entitled to leverage the investment as it did, it was likely that the different portfolio construction that would have been adopted would have resulted in a worse return for the appellant. Therefore, even if he had established that the first respondent breached the SPA, he would have failed to prove any loss or damage. The court also held that the first respondent was not liable to the appellant by reason of deceitful non-disclosure. The first respondent’s duty of disclosure was defined by cl. F4 of the SPA. It had not deliberately or deceitfully failed to disclose details of the leveraging. The court held that the first respondent had not acted in breach of trust and/or fiduciary duty, and in making its investment decisions it had not ignored the appellant’s best interests in favour of its own. The court also found that there was no legally enforceable guaranteed return of 45%. That decision was upheld by the Court of Appeal (in a decision reported at 2017 (1) CILR 1).

On appeal to the Board, the appellant submitted inter alia that (a) the SPA did not authorize the transfer of his money by Shallot otherwise than by investment in a qualifying hedge fund, and did not authorize borrowing other than for liquidity purposes, under cl. I of the SPA, so that the payment to Blossom and its leveraging by means of the White Ibis III facility were unauthorized; and (b) the first respondent’s non-disclosure of the payment to Blossom and of its leveraging prior to investment in hedge funds was dishonest.

Held, dismissing the appeal:

(1) The Grand Court and the Court of Appeal had been correct in concluding that, upon its true construction, rather than by way of an implied term, the SPA authorized first-layer leverage and that the payment to (or purchase of shares in) Blossom was an authorized administrative step, rather than an investment, for the achievement of that leveraging purpose. The SPA was, quintessentially, a commercial agreement of a business kind, dealing with the substance of the transaction between the appellant and the first respondent at a relatively high level of generality, and by reference to purpose rather than by spelling out in minute detail every power exercisable by the first respondent and Shallot, in the manner sometimes to be found in a modern trust deed. In cl. A, the hedge funds or segregated accounts, investment in which formed the purpose of the agreement, were identified in non-exclusive terms. Further, it was plainly legitimate for the judge and the Court of Appeal to have had regard, as part of the admissible factual background known to the parties, to the fact that the investment proposal had suggested leveraged investments in hedge funds so that, as a matter of construction and without the need to identify an implied term, the purpose of the agreement identified in cl. A of investing in hedge funds included leveraged investments in hedge funds. The judge was right to conclude that the purpose identified in cl. A needed to be construed so as to permit investment in accordance with the investment proposal although, of course, the discretionary power conferred on the first respondent to select hedge funds meant that it was notrequired to do so, either as specified in the proposal or indeed at all. There was no basis on which to challenge the judge’s finding, after hearing expert evidence, that the hedge fund industry did not, at the time of the SPA, treat first- and second-layer leveraging as terms of art, or make any particular distinction between leveraging at the portfolio level before investment, or investing in internally leveraged feeder fund or hedge funds. They were simply different available techniques for leveraging so that a discretionary investment agreement would leave the investment manager free to choose whatever method appeared most appropriate in the customer’s interests. There was no reason to doubt the judge’s conclusion that those different methods of leveraging were, or could be, economically...