the algosaibi litigation

The Impact of Ahmad Hamad Algosaibi & Brothers Co. on the Gulf Region

Sue Millar, Partner, Stephenson HarwoodDavid Simpson, Barrister, 3 Verulam Buildings

Banks v AHAB: Introduction

Money Changers in Saudi Arabia


The Algosaibi Money Exchange

– “The original business of the Money Exchange was to provide low value cash remittance and currency exchange services for expatriate workers in Saudi Arabia. It held current accounts through a small network of seven branches, it also operated a small American Express card franchise. It also held certain investments in publicly traded Saudi companies. It is the defendants’ evidence that as far as the AHAB partners understood, it never undertook any other business.”

[Judgment of Hamblen J, para 7]


The Algosaibi Money Exchange


Relationship with Saad

– “For many years, Mr Al Sanea used his position to defraud AHAB by procuring large unauthorised payments to companies under his ultimate ownership and control. The fraud was financed by unauthorised borrowing in the name of AHAB from third party banks; this borrowing was arranged by Mr Al Sanea but concealed from AHAB.”

[Amended Defence, para 15]



– “Mr Al Sanea caused a large number of loan agreements and other related documentation to be executed with various banks and financial institutions. In total, Mr Al Sanea purported to commit AHAB, ATS, AIH and TIBC to borrowings of about US$9.2bn. Borrowing at this level was far in excess of what AHAB required for its genuine financial services and investment business.”




– “In a great many cases (AHAB has identified well over 100 documents to date) Mr Al Sanea obtained this borrowing by forging or causing to be forged the signatures of Suleiman, Abdulaziz Algosaibi (“Abdulaziz”) or other members of the management board of AHAB on loan documentation.”


Banks v AHAB: The pleadings

C1’s claim: The ATS Facility Facility Letter (S & P) +

23.8.05 ATS Board Res (Suleiman)

[PoC 4]

ATS Board Res signature forged by MaS

So S & P had no actual authority

Facility Letter signatures procured by MaS – S & P knew there had been no meeting

[Def 4-8]

Not admitted no authority of Suleiman

S & P had ostensible authority

Requirement of Board Res waived by C

Docs signed with ATS authority through MaS as directing mind & will

ATS estopped from denying Facility Letter through MaS’s knowledge

ATS Facility adopted / ratified by FLV / SLV

[Rep 6]


C1’s claim: The First Letter of Variation Letter (Suleiman) +


[PoC 5]

Letter signature forged

Board Res signature forged

[Def 9]

As above

Covering Letter (E)

o “duly signed and executed”

o actual / ostensible authority

[Rep 7]


C1’s claim: The Second Letter of Variation Letter (Suleiman) +


[PoC 6]

Letter Signature forged

ATS Board Res forged

[Def 10]

As above

Covering Letter (E)

o “duly signed and executed”

o actual/ostensible authority

[Rep 8-9]


C1’s claim: The 2007 Guarantee AHAB agreed to secure

ATS debt

[PoC 7]

Signature forged

MaS exercising day-to-day control over ATS, AIH and TIBC

[Def 11-18]

Not admitted no authority of Suleiman

Authorised by AHAB through MaS

AHAB estopped through knowledge of MaS

AHAB estopped by covering letter

[Rep 10-13]


C1’s claim: The 1998 and 1999 Guarantees Signed by Abdulaziz

$10m + $15m

Continuing securities

[PoC 29-31]

signature forged

cannot now be relied upon

o AHAB believes ATS would have requested return / cancellation of old guarantee

o Common understanding that guarantees replace previous guarantees, notwithstanding express terms

[Def 27]

Ostensible Authority

First principles

– Where a person, by words or conduct, represents or permits it to be represented that another person has authority to act on his behalf, he is bound by the acts of that other person with respect to anyone dealing with him as an agent on the faith of any such representation, to the same extent as if such other person had the authority that he was represented to have, even though he had no such actual authority.

Bowstead & Reynolds on Agency (19th ed) Article 72


Freeman & Lockyer

– The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, per Diplock LJ at 503


The Ocean Frost

– It must be a most unusual and peculiar case where an agent who is known to have no general authority to enter into transactions of a certain type can by reason of circumstances created by the principal reasonably be believed to have specific authority to enter into a particular transaction of that type.

Armagas Ltd v Mundogas SA (“The Ocean Frost”) [1986] AC 717per Lord Keith at 779G


The Raffaella

– if a company confers actual or apparent authority on A to make representations on the company’s behalf but no actual authority on A to enter into the specific transaction, why should a representation made by A as to his authority not be capable of being relied on as one of the acts of holding out?

Soplex Wholesale Supplies Ltd v Egyptian International Foreign Trade Co (“The Raffaella”) [1985] 2 Lloyd’s Rep 36

Per Browne-Wilkinson LJ


First Energy

– It seems to me that the law recognises that in modern commerce an agent which has no apparent authority to conclude a particular transaction may sometime be clothed with apparent authority to make representations of fact.

First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] BCLC 1409

Per Steyn LJ at 1422

Restitution

On assumption banking documents unauthorised

monies paid to AHAB by mistake AHAB unjustly enriched by receipt Subject to change of position defence, AHAB

liable to repay

Restitution

Issues arising:

1 were the monies paid under a mistake?2 if so, did it make any difference if the monies

were paid via 3rd parties3 was the receipt of the monies authorised by

AHAB?4 had AHAB changed its position?

Were the monies paid under a mistake?

1 was there a mistake?- banks believed that the documents were authorised by AHAB

2 did the mistake cause the payment?- banks would not have advanced monies if they had known “true” position

3 did payee have rights to receive sums?- AHAB had no entitlement to monies

received

Involvement of 3rd parties in payment

Court looks at the reality of the position between payer and payee

- banks paid monies via 3rd parties- 3rd parties paid monies on the AHAB- AHAB received the monies

Was the receipt of the monies by AHAB authorised?

Monies paid into named AHAB US and Euro accounts

Used by AHAB for certain authorised purposes Operated by Mr Al Sanea

BUT authority of receipt, in any event, legally irrelevant

Had AHAB changed its position?

Defence: Receiving party changes position in good faith following receipt- injustice to payee › injustice to payer

AHAB’s defence: monies diverted by Mr Al Sanea to Saad Group

Had AHAB changed its position? (2)

banks had advanced monies under failed transactions- they were not gifts

- Haugesund [2010] EWCA Civ 759

Had AHAB changed its position? (3)

Change of position in good faith by “innocent” party(i) AHAB had given Mr Al Sanea power to

borrow in TME’s name(ii) AHAB partners knew TME was heavily

borrowed(iii) “name borrowing”(iv) money flowed between AHAB and Saad

Article 20 of Saudi Arabian Companies Law

“A partner may not be required to satisfy a debt of the partnership out of his own money unless the partnership’s liability for the debt has been established, either by virtue of the acknowledgement of those responsible for its management or by decision of the [Board of Grievances], and after the partnership has been called upon to effect payment”


AHAB: Article 20 provided individual partners with substantive defence to banks’ claims

Banks: Article 20 was procedural and therefore could not be relied upon before English Court


English law draws a distinction between foreign substantive law and foreign procedural law


Banks’ argument:- Articles 16 and 19 of Companies Law

determined liability of partners

- Article 20 did not but did affect time and circumstances of enforcement

- Therefore, Article 20 was procedural, not substantive


Article 16“A general partnership is an association of two or

more persons who assume “joint liability, to the extent of their entire fortune, for the partnership’s debts”


Article 19"A partner who joins the partnership (after its

formation) shall be liable, jointly with his co-partners and to the extent of his entire fortune, for the partnership's debts (incurred) before and after the date of his joining (the partnership). Any agreement to the contrary between the partners shall be of no effect in respect of third parties.

If the partner withdraws from the partnership he shall not be liable for such debts as the partnership may incur following the publication of his withdrawal. But if a partner assigns his interest he shall be exonerated from liability for the partnership's debts to creditors only if the latter consent to such assignment."


Take home points:

1 English law differentiates between substantive and procedural foreign law- it will apply foreign substantive law- it will not apply foreign procedural law

2 English Court will consider whether foreign rule is procedural or not through English eyes/prism

The Impact of Ahmad Hamad Algosaibi & Brothers Co. on the Gulf Region

Sue Millar, Partner, Stephenson HarwoodDavid Simpson, Barrister, 3 Verulam Buildings

the algosaibi litigation

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