The Royal Bank of Scotland Plc v Highland Financial Partners LP & Ors

Factual and Procedural Background

This case arises from actions taken by employees of Company A who used a change in International Accounting Standards IAS/39 to augment the value of Company A's banking book during a financial crisis following the collapse of Lehman Brothers in 2008. Extensive litigation ensued between Company A and the Highland group of companies, resulting in three judgments by Judge Burton in January 2010, December 2010, and May 2012. The present appeal concerns the third judgment and related orders refusing final anti-suit injunctions sought by Company A to prevent respondents from continuing proceedings in Texas, USA, in breach of a jurisdiction clause. The respondents cross-appeal the dismissal of their claim to set aside the initial Liability judgment made in favor of Company A.

The Highland group, associated with the first to fourth respondents, is based in the USA and engaged in investment management. The first to third respondents are entities registered in Delaware, the Cayman Islands, and Bermuda respectively, all headquartered in Dallas, Texas. The fourth respondent is an English company with no active part in the English proceedings. The fifth respondent is a Texan entity and assignee of claims against Company A.

The litigation concerns a Collateralised Debt Obligation (CDO) transaction planned in 2006 involving a Special Purpose Vehicle ("The Issuer") acquiring a loan portfolio managed by the Interim Servicer. Company A acted as Advisor and financier. The portfolio consisted mainly of European Senior Secured Loans ("Acquired Loans") held in a Warehouse Facility. The transaction was governed by a Mandate Letter, Interim Servicing Deed ("ISD"), and other agreements, all subject to English law.

Key contractual provisions included Clause 4.2 of the ISD, which governed the sale of Acquired Loans if no Closing Date occurred before the Termination Date, giving the Interim Servicer and Company A rights to purchase loans under specified procedures. Clause 5.6 of the ISD dealt with payment obligations in case of shortfalls. The Mandate Letter and other agreements contained termination provisions and jurisdiction clauses.

Following the collapse of Lehman Brothers in September 2008, no Closing Date occurred, and Company A terminated the Mandate Letter and ISD in October 2008. Company A then sought to recover sums advanced for the loan portfolio. Two Company A employees, a distressed credit trader and an in-house lawyer, were centrally involved in managing the loans' liquidation.

Company A notified the Interim Servicer of its intention to liquidate the portfolio by inviting bids for the Acquired Loans in a process described as commercially reasonable. Company A subsequently purchased all the Acquired Loans. A shortfall of approximately 30.5 million remained, for which the Highland companies were liable under the contractual arrangements. The Highland parties refused to pay, leading to litigation initiated by Company A.

The initial 2009 claim resulted in a Liability judgment in favor of Company A, granting summary judgment on liability but leaving quantum issues for trial. Highland challenged the valuation process and alleged breaches of contract and equitable duties by Company A, including allegations of a sham auction and misrepresentation concerning the transfer and sale of certain loans.

Subsequent litigation included a Quantum trial addressing valuation and conduct issues, and a disciplinary hearing against the Company A employee responsible for misleading conduct. Parallel proceedings were brought by the Highland parties in Texas alleging fraud and seeking damages. Company A sought anti-suit injunctions in England to restrain these proceedings, leading to further contested hearings and judgments.

Legal Issues Presented

1. Whether the Liability judgment should be set aside on the ground that it was obtained by fraud through deliberate and dishonest misstatement and concealment by Company A's employee.
2. Whether Company A is entitled to an anti-suit injunction restraining the Highland parties and their assignees from pursuing proceedings in Texas, based on the exclusive jurisdiction clause in the First Loss Deposit Facility Deed ("FLD").
3. Whether the misconduct of Company A's employee is sufficiently connected to the equitable relief sought to invoke the doctrine of "unclean hands" and bar the grant of an anti-suit injunction.
4. Whether the jurisdiction clause in the FLD extends to claims against individual employees of Company A and to the claims made in the Texas proceedings.
5. Whether the misconduct of Company A's employee should be attributed to Company A for the purposes of the anti-suit injunction and setting aside the Liability judgment.

Arguments of the Parties

Appellant's Arguments (Company A)

• The relevant time to assess conscious and deliberate dishonesty is the Liability hearing; at that time, neither Company A nor its employee sought to make a case about the manner of sale or valuation of the loans.
• The employee's conduct constituted fraudulent concealment rather than a deliberate positive misstatement, and he reasonably believed that quantum-related information need not be disclosed at that stage.
• The alleged breaches would not have changed the outcome at the Liability hearing, as the contractual provisions preclude certain defences.
• The liability judgment was properly granted on summary judgment, and even if set aside, the Quantum judgment would not be affected as it was not procured by fraud.
• The misconduct of the employee is not sufficiently connected to the anti-suit injunction claim to invoke the "unclean hands" doctrine.
• The employee's misconduct in giving evidence at trial was personal and not attributable to Company A.
• The jurisdiction clause in the FLD does not cover all claims in the Texas proceedings or claims against individual employees in their personal capacities.

Respondents' Arguments (Highland and Scott Law)

• The employee's actions were not mere concealment but deliberate positive misstatements, including misleading emails and witness statements, amounting to conscious and deliberate dishonesty.
• If the true facts had been disclosed, the Liability judgment would not have been granted on summary judgment.
• The Liability judgment should be set aside as obtained by fraud, and this undermines Company A's claim to exclusive jurisdiction in England.
• The employee's misconduct is central to the litigation and suffices to invoke the "unclean hands" defence, barring Company A from obtaining an anti-suit injunction.
• The jurisdiction clause should not be construed narrowly and extends to claims against employees acting in the course of their employment.
• Mr Hall, another employee, should also be found to have engaged in misconduct relevant to the injunction claim.

Table of Precedents Cited

Court's Reasoning and Analysis

The court conducted a detailed review of the facts and evidence surrounding Company A's handling of the Acquired Loans, the contractual framework, and the litigation history. It accepted the findings of Judge Burton that Company A, through its employee SG, deliberately misled the Highland parties and the court by concealing the true nature of the transfer and sale of certain loans, particularly the 36 Loans reclassified under amended IAS/39.

The court analysed whether the conduct constituted a fraudulent misstatement or mere concealment and concluded that it was a deliberate, conscious, and dishonest misstatement, notably in the 6 November 2008 email and subsequent correspondence and witness statements. The employee knowingly suppressed material facts to avoid giving Highland grounds to challenge the valuation and liability claims.

The court considered the legal test for setting aside a judgment obtained by fraud, focusing on whether the dishonesty was causative of the judgment. It held that but for the fraudulent misstatements and concealment, Company A would not have sought or obtained summary judgment on liability, as the true facts would have undermined the basis for such judgment.

While the Quantum judgment addressed the substantive issues on full evidence, the court emphasised that the existence of a later judgment on merits does not validate an earlier judgment obtained by fraud. It would be unjust to allow Company A to retain the benefits of a judgment procured improperly.

The court also examined the anti-suit injunction claim and the equitable defence of "unclean hands." It found that Company A, through SG's misconduct in the 2012 trial—specifically his continued false testimony—had come to court with unclean hands, justifying refusal of the injunction. The misconduct was closely related to the relief sought, as it touched on the very allegations underpinning the Texas proceedings that Company A sought to restrain.

Regarding attribution, the court applied established principles to conclude that SG's misconduct was attributable to Company A because of his central role as Company A's key witness and his involvement in managing the litigation strategy. The court rejected Company A's argument that SG's trial testimony was personal and not attributable.

On the construction of the jurisdiction clause in the FLD, the court held it to be an exclusive jurisdiction clause broadly encompassing claims "in connection with" the deed, including tort claims based on alleged fraudulent misrepresentations by Company A's employees. The clause bound the Highland parties and their assignees, and claims against employees acting on behalf of Company A fell within its scope.

However, the court concluded that the unclean hands defence barred Company A from obtaining the anti-suit injunction, notwithstanding the jurisdiction clause, as Company A's misconduct undermined its equitable entitlement to relief.

Holding and Implications

The Liability judgment, the Court of Appeal's judgment on liability, and the Quantum judgment are set aside as having been obtained by the fraud of Company A through deliberate and dishonest misstatement and concealment by its employee.

The direct consequence is that Company A loses the benefit of these judgments. The court further held that Company A is not entitled to an anti-suit injunction restraining the Highland parties and their assignees from pursuing Texas proceedings because Company A has come to court with unclean hands due to the employee's misconduct during the litigation.

No new precedent was created beyond the application of established principles concerning fraud on the court, attribution of misconduct to corporate parties, and the equitable defence of unclean hands in the context of anti-suit injunctions. The case highlights the importance of full and honest disclosure in litigation, particularly in complex financial disputes, and signals caution in the use of issue-by-issue disclosure directions under the Civil Procedure Rules to avoid injustice.