DADOURIAN GROUP INTERNATIONAL INC V SIMMS

[2009] EWCA Civ 169, Court of Appeal, Lady Justice Arden, Lady Justice Hallett and Mr Justice Blackburne, 13 March 2009

Option to purchase goods – Fraudulent misrepresentation by intermediary as to his interest in the purchaser – Failure by purchaser to open letter of credit – Arbitrator finding that purchaser was in breach of contract and that there had been fraudulent misrepresentation on its behalf – Award not honoured – Proceedings brought in England by seller against controllers of purchaser – Whether controllers implicated in the fraud – Effect of arbitration award on controllers – Measure of damages – Whether worldwide freezing orders should be discharged

In September 1997 DGL (controlled by Alex Dadourian and Haig Dadourian) and Charlton (Mr Simms being the chairman) entered into an option contract under which Charlton had the option to purchase various assets and know-how for US$1.5 million. The option was exercised in March 1998, the effect being that Charlton came under an obligation to open a letter of credit. Charlton failed to do so, and DGI treated the contract as having been repudiated. Charlton asserted that the obligation to pay did not arise until the goods had been delivered, and that DGI itself had repudiated the contract. Charlton commenced proceedings in New York, but these were stayed in favour of an arbitration clause. The arbitrator ruled in a series of awards that: (a) Charlton was in breach of contract by failing to open the letter of credit; (b) there had been fraudulent misrepresentations o the part of Charlton as to the shareholding in, and creditworthiness of, that company; and (c) Charlton had been aware that the assets were not owned by DGI when the option agreement was entered into. Damages in favour of DGI were assessed as US$1,358,085, plus costs and interest. The award was not honoured and DGI obtained worldwide freezing orders. In a subsequent trial between the parties, Warren J held in a series of judgments that: Jack Dadourian and Helga Dadourian were indirect owners of Charlton and had a personal interest in the acquisition; Jack had made a representation that he was a mere intermediary when that was not true, and Mr Simms was aware of this; Mr Simms and Helga were liable for the misrepresentation to DGI as joint tortfeasors, and Mr Simms was additionally liable for adopting the representation; the damages recoverable by DGL were limited only to the costs incurred by DGL in the arbitration and in the New York proceedings; DGI was to receive 75 per cent of its costs of the action on an indemnity basis; and the freezing orders were continued. On appeal the Court of Appeal held as follows. (1) The judge had not erred in finding that Jack had made the intermediary representation, and there was sufficient evidence of fraud on the part of Jack, Helga and Mr Simms before Warren J. (2) The judge had correctly ruled that Mr Simms was liable for the intermediary representation, in that he had a common design and/or had adopted the misrepresentation. (3) The judge had correctly ruled that Helga was liable as a joint tortfeasor for the intermediary representation. (4) The judge had not erred in finding that DGI had been induced by the intermediary representation to enter into the option agreement. There was a rebuttable presumption that if a fraudulent misrepresentation was made it was intended to be relied upon, and it had not been rebutted. (5) The judge had not erred in finding that DGI was entitled to recover as its loss caused by the intermediary representation the costs and expenses incurred in the New York and arbitration proceedings. The judge had ruled that it was not possible to go behind the arbitrator’s ruling and to assert that that DGI was in breach of contract with Charlton and that DGI had caused its own loss. The Court of Appeal’s view was that the judge was wrong and that DGI was not entitled to rely upon the arbitrator’s findings in order to bring an action against Mr Simms, Jack and Helga, as they were not parties to the arbitration. However, the question was not whether the arbitrator was right or wrong but whether the costs incurred by DGI in defending Charlton’s claim in the New York proceedings and in the arbitration, and making a counterclaim in the arbitration, directly flowed from the misrepresentation. On the facts there was a sufficient causal connection. (6) There was no basis to challenge the judge’s exercise of discretion in ordering that 75 per cent of DGI’s costs should be paid on an indemnity basis under CPR 44.3(4)(a). (7) The judge had not erred in exercising his discretion to refuse to discharge the interim freezing orders. The Court of Appeal also held that an application by the claimants under CPR 52.9 to strike out the notices of appeal, on the basis of non-disclosure of important documents, should be dismissed. Any prejudice could be compensated in other ways.