Factual and Procedural Background
This judgment concerns a Phase 1 trial ordered on 3 April 2020 addressing the validity of alleged variations to an investment agreement ("Investment Agreement") between the Plaintiff ("HF3") and the Defendants ("the Funded Parties"), and whether certain heads of costs claimed by the Plaintiff are recoverable under the Investment Agreement, as damages for breach of contract, or on the basis of unjust enrichment.
HF3 is a Cayman Islands limited partnership engaged in litigation funding, with Harbour Litigation Funding Limited ("HLF") as its investment sub-adviser. The Defendants include a group of companies collectively referred to as the "KK Group," with the Second Defendant ("KK JSC") being a holding company registered in Kazakhstan.
KK JSC was declared insolvent and placed into rehabilitation proceedings in Kazakhstan in March 2016, with a rehabilitation plan approved in September 2016. The rehabilitation was briefly terminated in late 2017 but reinstated in October 2018.
The Investment Agreement was entered into on 31 December 2015 to fund litigation against certain former officers of the KK Group (the "KK Proceedings"). Following a judgment in favour of the Funded Parties in December 2017, HF3 exercised rights under the Investment Agreement to take control of enforcement proceedings.
After the Investment Agreement, six purported amendments ("Disputed Variation Letters") were made, of which KK JSC admitted only the first as valid. The validity and authority to enter into the remaining variations are contested.
Legal Issues Presented
- Did Mr Tomas Werner, as CEO or Rehabilitation Manager of KK JSC, have actual authority under Kazakh law to enter into each of the Disputed Variation Letters on behalf of KK JSC?
- If not, did Mr Werner have ostensible (apparent) authority to enter into the Disputed Variation Letters?
- Did KK JSC intend to be bound by the Disputed Variation Letters when signed by Mr Werner?
- Whether the Variations Payments made by HF3 constituted "Claimants' Legal Costs" within the Investment Agreement.
- Whether the KK Proceedings Payments constitute "Claimants' Legal Costs".
- Whether the Enforcement Costs constitute "Claimants' Legal Costs" or form part of the "HF3 Investment".
- Whether other alleged costs incurred by HF3 constitute "Claimants' Legal Costs".
- Whether it was an express or implied term of the Investment Agreement that the Funded Parties would continue to pay ongoing legal costs after the Agreed Budget was exhausted, negotiate in good faith to vary the funding commitment, or act reasonably in entering such variations.
- Whether HF3 is entitled to damages for breaches of Clause 10.3 of the Investment Agreement or whether such rights are excluded.
- Whether HF3 is entitled to recover sums equal to the Variations Payments or KK Proceedings Payments in unjust enrichment.
Arguments of the Parties
Plaintiff's Arguments
- The Variations Payments were costs incurred to preserve HF3's rights under the Investment Agreement, necessary to prevent trial failure due to breaches by the Funded Parties.
- The Disputed Variation Letters were valid or at least Mr Werner had ostensible authority to enter into them.
- The Enforcement Costs were recoverable as part of Claimants' Legal Costs or as part of HF3 Investment.
- The Funded Parties had express or implied contractual obligations to continue funding and negotiate in good faith.
- HF3 is entitled to damages for breaches of Clause 10.3 and to recover sums paid in unjust enrichment due to failure of consideration or mistake.
Defendants' Arguments
- Mr Werner lacked actual authority under Kazakh law to enter into the Disputed Variation Letters as they were outside ordinary commercial operations and required creditors' consent under the Rehabilitation Plan and Kazakh Bankruptcy Law.
- Mr Werner did not have ostensible authority as HF3 did not have an honest belief in his authority and turned a blind eye to the lack of authority.
- The Variations Payments and other disputed costs do not constitute Claimants' Legal Costs as they were not incurred consistently with the Agreed Budget or accepted variations.
- The Enforcement Costs are recoverable only under Clause 10.3 and do not form part of Claimants' Legal Costs or HF3 Investment.
- There is no express or implied contractual obligation on the Funded Parties to continue funding beyond the Agreed Budget or to negotiate variations in good faith.
- HF3 is not entitled to damages for breaches of Clause 10.3 as costs are recoverable only through the waterfall distribution of proceeds.
- HF3 is not entitled to recover sums in unjust enrichment because KK JSC did not freely accept the payments, nor were they paid at KK JSC’s request, and the Creditors' Committee had no reasonable opportunity to reject them.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 |
Definition and requirements of ostensible (apparent) authority. |
Established that ostensible authority depends on representation by the principal and reliance by the third party; applied to assess Mr Werner's ostensible authority. |
| Kelly v Fraser [2013] 1 AC 450 (PC) |
Clarification that an agent cannot self-authorise but that companies may create representations of authority through their organisation. |
Used to consider whether HF3 could rely on representations about Mr Werner’s authority. |
| Quinn v CC Automotive Group Limited t/a Carcraft [2011] 2 All ER (Comm) 584 |
Requirement of honest belief or recklessness in reliance on ostensible authority. |
Guided the court’s approach to whether HF3 had an honest belief in Mr Werner’s authority or turned a blind eye. |
| Akai Holdings Ltd (in liquidation) v Thanakharn Kasikorn Thai Chamkat (2010) 13 HKCFAR 479 |
Refined the test for reliance on ostensible authority to include recklessness or turning a blind eye. |
Supported the court’s finding on the reliance element in ostensible authority. |
| Wood v Capita Insurance Services Limited [2017] UKSC 24 |
Principles of contractual interpretation including balancing language and commercial common sense. |
Applied to interpret the Investment Agreement provisions concerning Claimants' Legal Costs and funding obligations. |
| Chartbrook Ltd and another v Persimmon Homes Ltd [2009] UKHL 38 |
Permitted correction of contractual language where it is clear what parties intended. |
Considered in assessing the meaning of ambiguous contract language on costs definitions. |
| Marks & Spencer plc v BNP Paribas Securities Services Trust Company [2016] AC 742 |
Test for implying terms into contracts. |
Applied to reject implication of a term obliging Funded Parties to pay legal fees beyond the agreed budget. |
| Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 |
Elements required for unjust enrichment claims. |
Used to assess unjust enrichment claims regarding Variations Payments and KK Proceedings Payments. |
| Dextra Bank v Bank of Jamaica [2002] 1 All ER Comm 193 |
Requirements for recovery of money paid under mistake. |
Applied to reject HF3’s claim of mistake in making the payments. |
| Marine Trade SA v Pioneer Freight Futures Co Ltd BVI [2010] 1 Lloyd's Rep 631 |
Considerations regarding knowledge and doubts in unjust enrichment claims. |
Referenced in assessing HF3’s knowledge and doubts about authority. |
Court's Reasoning and Analysis
The court first considered whether Mr Werner had actual authority under Kazakh law to enter into the Disputed Variation Letters. It held that under the Kazakh Bankruptcy Law and the Rehabilitation Plan, transactions outside the ordinary commercial operations require creditors' consent. KK JSC, as a holding company, did not conduct litigation as part of its ordinary commercial operations, and the Disputed Variation Letters were outside that framework.
The court found that Mr Werner did not have actual authority to enter into the Disputed Variation Letters without creditors' consent, as required by Articles 68(2)(1) and 71(1)(4) of the Bankruptcy Law. The court preferred the evidence of Professor Ilyasova over Professor Abzhanov on the interpretation of these provisions, emphasizing that authority is assessed at the time of entering into the transaction and is limited by the need for creditors' approval.
On ostensible authority, the court examined whether HF3 had an honest belief in Mr Werner’s authority or whether it turned a blind eye to the lack of authority. The contemporaneous documentary evidence showed HF3 was aware of the need for creditors' consent and repeatedly sought such approval but proceeded with the variations when consent was delayed. The court found that HF3 did not have an honest belief in Mr Werner’s authority and, if mistaken, turned a blind eye. Therefore, Mr Werner lacked ostensible authority.
The court did not address KK JSC’s intention to be bound given the findings on authority.
Regarding the costs claimed, the court interpreted the Investment Agreement’s definition of "Claimants' Legal Costs" narrowly, requiring costs to be incurred consistently with the Agreed Budget or agreed variations. The Variations Payments exceeded the Agreed Budget and were not accepted variations, thus not qualifying as Claimants' Legal Costs.
The KK Proceedings Payments, incurred after the trial but before and after judgment, were also not Claimants' Legal Costs, as they were not consistent with the budget and were subject to creditor approval.
The Enforcement Costs were incurred after HF3 took control under Clause 10.3. The court held these costs do not constitute Claimants' Legal Costs or part of the HF3 Investment but are recoverable only under the waterfall distribution set out in Clause 10.1(c). The court rejected HF3’s claim for damages for breach of Clause 10.3, as the clause does not provide for direct damages outside the waterfall mechanism.
The court rejected any implied contractual term obliging the Funded Parties to continue funding beyond the Agreed Budget or to negotiate variations in good faith, finding no necessity or commercial incoherence without such terms.
On unjust enrichment, the court found that KK JSC did not freely accept the Variations Payments or KK Proceedings Payments, as the Creditors' Committee had no reasonable opportunity to reject them and did not consent. HF3’s payments were not at KK JSC’s request. Therefore, HF3 is not entitled to recover these sums in unjust enrichment.
Holding and Implications
The court held that:
- Mr Werner did not have actual or ostensible authority under Kazakh law to enter into the Disputed Variation Letters on behalf of KK JSC.
- The Disputed Variation Letters are invalid as not being authorised by the required creditors' consent under the Rehabilitation Plan and Kazakh Bankruptcy Law.
- The Variations Payments and KK Proceedings Payments do not constitute Claimants' Legal Costs under the Investment Agreement and are not recoverable as such.
- The Enforcement Costs do not constitute Claimants' Legal Costs or part of the HF3 Investment but are recoverable only under the waterfall distribution provisions.
- HF3 has no express or implied contractual right to compel the Funded Parties to fund beyond the Agreed Budget or to negotiate variations.
- HF3 is not entitled to damages for breach of Clause 10.3 of the Investment Agreement.
- HF3 is not entitled to recover sums in unjust enrichment in respect of the Variations Payments or KK Proceedings Payments.
The direct effect is that the Plaintiff's claims based on the validity of the Disputed Variation Letters and related costs fail. No new precedent is established beyond the application of Kazakh law principles on authority and contractual interpretation in this context.