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Iranian bank entitled to recover damages for losses suffered as a result of unlawful Treasury restrictions

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Gomes Nicholas
Nicholas Gomes

Senior Associate

London

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03 July 2015

We consider here the judgment of the High Court (Commercial Court) in Mellat v HM Treasury [2015] EWHC 1258 (Comm) (6 May 2015). The judgment relates to three preliminary issues of law in a claim by an Iranian bank, Bank Mellat, for damages under section 8 of the Human Rights Act 1998 (HRA) for loss and damage caused by measures taken by HM Treasury under section 62 and schedule 7 of the Counter-Terrorism Act 2008 (CT Act).  

Background

In Mellat v HM Treasury [2015] EWHC 1258 (Comm), the High Court (Commercial Court) gave judgment on three preliminary issues of law in a claim by an Iranian bank, Bank Mellat, for damages under section 8 of the Human Rights Act 1998 (the HRA) for loss and damage caused by measures taken by HM Treasury under section 62 and schedule 7 of the CT Act.

The Treasury measures restricted access by the bank and its UK subsidiaries to the UK financial markets on the ground that the bank allegedly posed a significant risk to national security based on allegations that it provided banking services to those involved in the development or production of nuclear weapons in Iran.

The Supreme Court had previously held that these measures were arbitrary, irrational and disproportionate as well as being unlawful because of a failure to give prior notice and an opportunity to make advance representations. The bank's claim for damages, which is estimated to be in the region of $4 billion, was remitted by the Supreme Court to the High Court, and gave rise to the preliminary issues of law decided in this judgment.

First preliminary issue: whether the Supreme Court had decided that the Treasury measures were unlawful breaches of a Convention right

The Treasury submitted that the Supreme Court's finding that its measures comprised an unlawful interference was confined to a finding that the measures were unlawful under the common law rather than that they were incompatible with a Convention right and unlawful contrary to section 6(1) of the HRA. On this basis it argued that there could be no entitlement to damages under section 8 of the HRA.

The Treasury's interpretation of the Supreme Court's decision was not accepted. The Treasury had admitted in its defence that the measures were an unjustified interference with the bank's right to peaceful enjoyment of its possessions under Article 1 Protocol 1 (A1P1) to the Convention. Further, the court observed that the bank's case as determined by the Supreme Court had been expressly pleaded on the basis that the measures were incompatible with its rights under A1P1.

Flaux J found that the Supreme Court clearly had in mind the bank's case on A1P1 in reaching its decision. The Supreme Court expressly stated that the measures were amenable to judicial scrutiny because they engaged Convention rights and it applied principles of human rights law, as developed in cases concerned with Convention rights, in determining that the measures were unlawful. The Supreme Court had therefore unarguably found that the measures were incompatible with A1P1 and it was not open to the Treasury to contend otherwise

Second preliminary issue: whether a shareholder is entitled to recover reflective loss arising from breach of a Convention right

The various categories of loss which the bank claimed for breach of A1P1 included losses arising by reason of diminution in the earnings before taxation of certain subsidiaries. The bank's claim was that it had a reasonable and legitimate expectation that these earnings would increase year on year, thereby increasing the value of its shareholdings and/or dividend returns. The Treasury responded that any such loss was reflective loss, being loss suffered by the bank as a shareholder, but which only reflected loss suffered by the subsidiary company. As a matter of English law it is well established that such loss is recoverable only in the limited circumstances where the subsidiary company is unable to pursue a claim against the wrongdoer. The question for the court was therefore whether the subsidiary companies were unable to pursue claims against the Treasury and, in any case, whether the rule against reflective loss was applicable in cases concerning Convention rights.

The court accepted the bank's submission that pursuant to section 7(1) of the HRA only a "victim" is entitled to damages against a public authority for breach of Convention rights. Following the decision of the European Court of Human Rights (ECtHR) in Olczak v Poland (30417/96) the court went on to determine that only a person whose Convention rights have been "demonstrably and directly affected" by the unlawful act can be regarded as a victim for the purpose of the HRA. Applying this test, a subsidiary of the bank could not be regarded as a victim because the unlawful measures taken by the Treasury targeted the bank as the "designated person" within the meaning of the CT Act. The bank's subsidiaries in the UK were affected only indirectly in that any person operating in the financial sector in the UK was required not to continue to participate in any transaction or business with a designated person. Consequently, the subsidiary could not have brought a claim against the Treasury for damages under the HRA.

As to whether the rule against reflective loss applies in cases involving Convention rights, the court considered the question by reference in particular to the ECtHR decision in Agrotexim v Greece (14807/89). Flaux J found that ECtHR jurisprudence recognises a rule, analogous to the rule against reflective loss under English law, that a shareholder cannot recover loss suffered by a company other than in exceptional circumstances, such as where the company cannot bring a claim against the wrongdoer. That finding was supported by Neuberger J's similar interpretation of Agrotexim in Humberclyde Finance Group Ltd v Hicks [2001] EWHC 700 (Ch).

The bank argued that, even if ECtHR jurisprudence does restrict the ability of a shareholder to bring a claim for loss suffered by a company, that should not restrict the shareholder's claim in circumstances where the shareholder could establish that they were a victim for other, independent reasons (as would have been the case here). That argument was rejected by the court, which held that the restriction recognised by the ECtHR in Agrotexim was not merely concerned to restrict a person's locus standi by limiting the circumstances in which A1P1 is engaged. Rather, it reflected the broader principle that only in exceptional circumstances should a shareholder be afforded rights which in effect require a piercing of the corporate veil. The court's interpretation of the Strasbourg jurisprudence was supported by the ECtHR decision in Khamidov v Russia (72118/01) where, although the shareholder applicant was found to have victim status, he nonetheless was entitled to recover only in respect of damage to those possessions which he personally owned.

However, given the court's finding that the bank's subsidiary could not have brought a claim against the Treasury for damages, the exception to the general rule applied in the circumstances of this case such that the bank was entitled (subject to the outcome of the third preliminary issue) to bring a claim in respect of the diminution in value of the shareholdings and/or dividend returns of its subsidiary.

Third preliminary issue: whether the scope of damages recoverable for violation of A1P1 should be limited by reference to whether the applicable losses constitute possessions within the meaning of A1P1

The Supreme Court's decision that the Treasury was liable under A1P1 for unjustified interference with the bank's right to peaceful enjoyment of its possessions was based on a finding that the Treasury measures had interfered with the bank's goodwill. It is well-established that commercial goodwill constitutes a "possession" for the purpose of A1P1. The preliminary issue for determination was whether, liability having been established by reference to goodwill, the scope of damages might extend beyond loss of goodwill to include future loss of profits and other consequential losses. Such losses constituted a substantial proportion of the bank's claim.

The bank argued that, once liability for breach of A1P1 has been established, compensation should be awarded on the basis that there should be restitutio in integrum, to put the bank in the position it would have been had the unjustified interference not occurred. If the bank could at trial prove its factual case on quantum, that approach would in principle require any award of compensation to include future loss of profits. The Treasury submitted that damages recoverable for unjustified interference under A1P1 are limited by reference to whether what is claimed constitutes a possession, and that future loss of profits is not a possession within the meaning of A1P1 and so is not recoverable. The Treasury relied on several decisions of the English and European courts, including decisions whose effect was recently summarised by Lord Dyson MR in Department for Energy and Climate Change v Breyer Group PLC and Others [2015] EWCA Civ 408.

On the basis of a number of ECtHR decisions, including Papamichalopoulos v Greece (14556/89) and Centro Europa v Italy (38433/09), Flaux J agreed with the bank that, so far as Strasbourg jurisprudence is concerned, once liability for breach of A1P1 has been established, damages are recoverable in respect of any loss or damage which is caused by unlawful interference with qualifying possessions, irrespective of whether the loss is itself of a possession within the meaning of A1P1. Dealing with the cases on which the Treasury relied in response, Flaux J likewise accepted the bank's argument that, whilst these decisions establish that loss of future income is not a possession protected by A1P1, they are concerned only with the threshold test as to whether A1P1 is engaged by an alleged interference. None of the decisions relied on by the Treasury decided the scope of damages that would be recoverable once a violation of A1P1 has been established.

Accordingly, the court decided that it would not be correct to approach the issue of the scope of damages by seeking to determine whether particular losses, such as loss of future profits, were themselves possessions for the purpose of A1P1. Rather, in accordance with the principles summarised by Coulson J in his first instance decision in the Breyer case, the court is required to determine whether any losses claimed were directly caused by the violation of A1P1 that established liability. That was a largely factual question and one of causation, to be determined on the evidence following full trial, which should not be subject to what Flaux J described as an "artificial restriction" limiting the recoverable damages by reference to whether the losses are themselves possessions for the purpose of A1P1.

Comment

An award of damages is exceptional even amongst the scarce successful claims for violation of A1P1. This decision (and the judgment of the Court of Appeal in Breyer) therefore provides a useful exposition of circumstances in which the UK courts will award damages for a breach of A1P1 and the principles that they will apply when assessing their scope. Whether the court will, following trial in this case, be prepared to award the very large sums claimed is unclear, but this decision nonetheless makes a number of findings of wider importance.

First, the decision confirms that the English law rule precluding recovery of reflective loss applies to restrict claims for damages arising from a breach of Convention rights. However, the decision also recognises the exception to that rule where the subsidiary itself is not a "victim" with a right to damages under section 8 of the HRA. As a result, it appears there will often be no practical restriction on the ability of a corporate group to claim its losses, irrespective of which entity within the group directly incurred them, provided that the entity which is "demonstrably and directly affected" by the unlawful interference (and which brings a claim) is either an entity that suffered loss or a shareholder of an entity that suffered loss, but is not a qualifying "victim".

Second, the decision confirms that the scope of damages that can be awarded for breach of A1P1 is relatively wide, assessed as they are on the basis of the principle restitutio in integrum. Crucially, the basic distinction established in Strasbourg jurisprudence between a claim in respect of existing possessions, which are qualifying possessions for the purpose of A1P1, and future possessions, which are not, will be of limited significance when determining the scope of damages. Provided the applicant can establish sufficient causal relationship between the losses it seeks to recover and the unlawful interference giving rise to liability under A1P1, the fact that those losses may comprise future possessions will not in itself prevent them from being recovered.

The decision also demonstrates how human rights law provides protection not only to individuals, but also to financial institutions. It illustrates the significant advantages that bringing a claim for breach of a Convention right offers over and above a judicial review claim based merely on common law.

Case

Mellat v HM Treasury [2015] EWHC 1258 (Comm) (6 May 2015) (High Court).

This article first appeared on Practical Law and is published with the permission of the publishers.