UK financial sanctions: bank cannot claim for subsidiary’s losses
18 July 2016
Bank Mellat v HM Treasury  EWCA Civ 452, 10 May 2016
The Iranian bank, Bank Mellat, whilst having had recent success challenging EU sanctions before the Court of Justice for the European Union (CJEU)1, is having mixed success claiming USD 4 billion before the English courts for wrongful sanctions imposed under English law. A recent UK Court of Appeal ruling considered important preliminary issues concerning whether Bank Mellat could recover for losses suffered by one of its subsidiaries and also whether it could claim for loss of future income. These issues were considered in the context of the European Convention on Human Rights and related case law. The bank claimed for USD4 billion loss and damages caused by measures (the Measures) taken by the Treasury under s62 and Schedule 7 of the Counter-Terrorism Act 2008 (the 2008 Act), which the Supreme Court had previously held were incompatible with its Article 1 Protocol 1 (A1P1) rights.2 The Measures restricted access by the bank to the UK financial markets on the basis that it posed a significant risk to national security by providing banking services to those involved in the development or production of nuclear weapons in Iran.
Could bank recover loss suffered by its partially-owned subsidiary
A category of loss claimed by the bank included loss from reduced earnings before tax of its 60% owned subsidiary, PIB, as a result of the Measures. The bank claimed that it had a reasonable and legitimate expectation that these earnings would increase, thereby increasing the value of its own shareholdings in and/or dividend returns from PIB.
The High Court had decided that the bank was in principle entitled to recover such loss on the basis that European Court of Human Rights jurisprudence, in particular the decision in Agrotexim v Greece (914807/89), recognises a rule that whilst loss suffered by a company cannot generally be recovered by its shareholder, there is an exception where the company cannot itself bring a claim against the wrongdoer. The rule is comparable to the rule against reflective loss under English law. Flaux J found that PIB was not a victim for the purpose of the HRA and could not have brought a claim itself for the alleged loss. Accordingly it was open to the bank to avail itself of the exception to the general rule to claim the ‘reflective’ loss which its subsidiary had directly suffered.
The Court of Appeal disagreed. Whilst it essentially agreed with his interpretation of Convention law, it rejected his conclusion that PIB was not a victim and did not have standing to bring a claim under the HRA.
PIB has victim status
Flaux J decided that to achieve ‘victim status’ under s7 HRA, PIB had to be ‘demonstrably and directly affected’ by the Measures. He concluded that the test was not met because the Measures directly targeted only Bank Mellat as the ‘designated person’ under the 2008 Act. PIB was affected but only in the indirect sense that it, like all other ‘persons operating in the financial sector’, was restricted in its business relationship with Bank Mellat.
The Court of Appeal disagreed with that analysis, finding instead that PIB had victim status under both ss7(3) and 7(7) of the HRA.
Section 7(3) of the HRA provides that on an application for judicial review an applicant has sufficient interest in relation to an unlawful act if he is a victim of that act. Section 63 of the 2008 Act under which the Measures were made provides that any person ‘affected’ by a decision to impose such measures may apply to have it set aside and the Act further provides that if measures are set aside, a court may grant ‘such relief as might be granted on judicial review’. It was common ground that PIB had a right to bring a claim under s63 and the Measures had already been set aside. PIB was therefore clearly entitled to ‘such relief as may be granted on judicial review’ and accordingly the Court of Appeal held that, as a matter of ordinary construction, PIB was a victim.
Section 7(7) provides that a person is a victim if they would be a victim for the purpose of Article 34 of the Convention. Interpreting this requirement on the basis of Axa General Insurance Ltd v HM Advocate  UKSC 46, the Court of Appeal determined that the requirements of Article 34 would be met. PIB was directly affected by the measures, because it was subject to the restrictions described above; indeed the only way in which the measures could be given effect was by imposing them on persons such as PIB. The consequence to PIB was also not too remote, because the Measures as imposed on PIB were one of the principal means of preventing Bank Mellat from dealing through the UK. Accordingly PIB had victim status.
The Court therefore agreed with HM Treasury that PIB had a right to bring a claim and allowed that part of its appeal.
Could Bank Mellat bring a claim in respect of diminution in its rights as a shareholder of PIB?
Bank Mellat argued that it was entitled to claim in respect of PIB’s loss even if PIB had a right to bring a claim itself. In particular, it submitted that a claimant that has established victim status for the purpose of the HRA in respect of clearly recoverable losses (as was the case) may go on to recover all of its losses.
The Court of Appeal relied on the principle established in Agrotexim that there is clear rule that the right to claim in respect of loss suffered by a company is reserved to it alone, save in exceptional and fact specific circumstances which did not apply here.3 Accordingly there was no basis upon which Bank Mellat could claim standing to recover loss sustained by PIB, which should properly be recovered by PIB.
Could the bank claim for loss of future income?
In addition to a claim for damages in respect of its marketable goodwill, the bank sought to recover future loss of profits and other consequential losses. The Treasury opposed the claim as a matter of law on the basis that damages must be limited by reference to whether the loss itself is of a ‘possession’ within the meaning of A1P1. It argued that, unlike marketable goodwill, future loss of profits is not a possession by that definition and so is irrecoverable.
The bank submitted that, once liability for breach of A1P1 has been established, compensation should be awarded according to the principle of restitutio in integrum, putting it in the position it would have been in had the unjustified interference not occurred. That would allow it, in principle, to recover in respect of losses which are not ‘possessions’, including future loss of profits. The bank also sought to persuade the Court that, at any rate, a wide range of economic interests constitute ‘possessions’ within the meaning of A1P1.
Flaux J had agreed with the bank that, once liability for breach of A1P1 has been established by reference to a qualifying possession, the scope of damages should not be limited to qualifying possessions. Accordingly he ordered that the question whether the bank was entitled to claim for loss of future income be determined at trial; the question being an essentially factual one as to whether the losses were demonstrably and directly caused by the violation.
The Court of Appeal rejected the High Court’s determination, finding that all the points made by both sides as to recoverability of the pleaded losses were fully arguable. In particular it did not accept, and expressly stated that the trial should not adopt Flaux J’s re characterisation of the issue as concerning only whether particular losses were, as a matter of causation, caused by the violation.
Instead, the Court concluded that the matter requires a full consideration of both factual issues, as to the nature, extent and causation of the losses, and legal issues and, as to the recoverability of those losses under A1P1. Accordingly this was not a matter that was appropriate for determination as a preliminary issue.
It appears to follow from this decision that any person affected by measures made and subsequently set aside under the 2008 Act may have standing to claim damages under the HRA, even if the measures directly target a third party. This potentially affords standing to a substantial population, in particular where the relevant measure is, as in this case, directed at all persons acting in the financial sector.
The challenge, however, for any claimant seeking damages on the basis of violation of A1P1 is establishing that it has suffered recoverable loss. The decision confirms that it will generally not be possible to claim in respect of loss sustained by a subsidiary and leaves uncertain the scope of the exceptions to that rule. It would be prudent to assume that (as in the English law context) where a claim is being made for breach of Convention rights, the company within a group which directly suffered the loss must bring, or be party to, the claim.
As to the types of loss that might be recovered, the decision provides scarce guidance, serving only to confirm that the question may be a complex one unsuited to resolution as a preliminary matter. This may encourage claimants to plead a wide range of types of loss, including future loss of profits, on the basis that a court will now find it difficult to determine before trial whether such losses are recoverable.
2As we previously reported in the July 2015 edition of the Litigation and Dispute Resolution Review.
3See Ankarcrona v Sweden (35178/97) or Khamidov v Russia (2009) 49 EHHR 13).