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Re: Mozambique ‘hidden debt’ scandal________________________________________NOTE ________________________________________IntroductionThis note briefly addresses the potential for the citizens of Mozambique, or groups of its citizens, to recover damages for harm caused to them in connection with the ‘hidden debt’ scandal against Credit Suisse (“CS”) and/or the Privinvest Group (“Privinvest”), in particular by means of a representative action in the English High Court (“EHC”). The Republic of Mozambique (the “Republic”) has already commenced a related claim in the EHC against CS and a number of its former employees, as well as against various constituent entities of Privinvest (which are entities incorporated in the UAE and, in one instance, Lebanon), in which at least CS has filed a defence (the “Republic’s EHC Claim”).In summary:There is a good argument that a cause of action for damages against CS and Privinvest is in principle available to citizens of Mozambique under English law on the basis of unlawful means conspiracy. They also have arguable claims based on the tort of bribery and dishonest assistance. The damages recoverable potentially extend to losses in connection with both the general contraction in the economy and the contraction of public spending which resulted from the revelation of the hidden debt. The approach to the award of damages for conspiracy in particular is quite liberal in English law and extends to losses which cannot be strictly proved. Nonetheless, whether a sufficient nexus exists between the defendants’ wrongdoing and the losses suffered would inevitably be a major area of dispute in the proceedings and evidence supporting that nexus in respect of particular losses is an important area of factual enquiry. A claim on behalf of all citizens, or particular segments of the population, could potentially be brought as a representative action. The attraction of this procedure is that a single claimant can represent a class of parties with the same interest – potentially extending to the entire population – without the need for any participation of (or even authorisation by) the represented parties. To bring such a claim, it would be necessary to identify a ‘lowest common denominator’ of loss suffered by each citizen, or by each member of the represented segment of the population. This would not preclude further claims on the basis of demonstrating additional loss on the part of particular individuals or groups. The fact that the Republic’s EHC Claim is already in existence potentially adds significantly to the ease and attraction of seeking to bring these claims on behalf of citizens. Given that the existing claim appears to be progressing, there may be a need for relatively swift action if the claims are to be joined together.The views expressed in this note are based on limited information and are provisional views in relation to complex claims for purposes of giving information. The note assumes that the substantive causes of action are governed by English law.Assumed factsFor purposes of this note the following facts are assumed:In 2013, CS’s London branch arranged lending to two entities owned by the Republic, respectively called Proindicus and EMATUM, in a total amount of c.US$1 billion. VTB Capital arranged further lending to Proindicus and EMATUM, in respective amounts of US$118 million and US$350 million. The loan from CS to Proindicus was subsequently syndicated in the market and that to EMATUM was repackaged into loan notes which in 2016 were exchanged for Eurobonds as part of a refinancing transaction that was also arranged by CS (the “EMATUM loan refinancing”). The loan obligations were backed by sovereign guarantees (respectively, the “Proindicus Guarantee” and the “EMATUM Guarantee”) purportedly given by the Republic and signed by its then finance minister, Manuel Chang.A further similar transaction took place in May 2014, whereby a third entity owned by the Republic, called MAM, entered into borrowing backed by a sovereign guarantee given by the Republic. The lending in that case was arranged by VTB Capital.In each case, the monies loaned (collectively, the “Hidden Debt”) were ostensibly to be used for state projects to be delivered by the Privinvest Group. Although the transactions were carried out with the knowledge and involvement of various senior officials of the Republic and its central bank, they were not at the time disclosed to (among others) the IMF or World Bank (which were a critical source of funding for the Republic) or other foreign donors, or to the Parliament or citizens of the Republic.The three transactions involved the payment by Privinvest of large bribes to both (i) officials of the Republic, including to Mr Chang (the “Bribed Officials”) and (ii) a number of the then senior employees of CS (the “Bribed CS Employees”). The Bribed CS Employees knew of the bribes paid to the Bribed Officials.In about April 2016, the fact and circumstances of the Hidden Debt were revealed and attracted public and international scrutiny. In the wake of the revelations, the Republic suffered a severe financial crisis and in particular (i) the IMF suspended the second instalment of a US$282 million loan to the Republic; and (ii) fourteen other donors and financial agencies who had given direct support to the Republic ceased their funding.The Republic’s EHC ClaimBy the Republic’s EHC Claim, it seeks to avoid the Proindicus Guarantee as against CS, on the basis that the giving of the guarantee was not authorised or that it can be set aside by reason of the alleged fraud. Given the EMATUM loan refinancing, the ability to avoid the EMATUM Guarantee has been lost, but the Republic seeks damages for deceit against CS in respect of that refinancing on the basis of alleged continuing implied representations as to the absence of corruption affecting the EMATUM transaction. It also seeks remedies, including damages, against all the defendants in respect of the bribery that induced the original transactions. The following points arising from the Republic’s EHC Claim are especially material to a potential claim by citizens of the Republic:Bribery is a civil wrong under English law giving rise to claims against both the briber and the recipient of the bribe, for damages as well as for other remedies. There is no doubt that such a claim is in principle (and subject to defences) available to the Republic against Privinvest, on the basis of the bribing of Mr Chang and/or other officials of the Republic, to recover losses that it has suffered as a result of the bribe. Those losses are presumed to extend to at least the amount of the bribe. The essence of the wrong giving rise to that claim is the interference of the relationship between principal (in this instance, the Republic) and agent (the Bribed Officials, who are likely to be treated in English law as fiduciaries of, at least, the Republic) arising from the bribes. It is less obvious that the Republic has a self-standing claim against CS in the tort of bribery as regards the bribing of its employees or the receipt of the contractor fees, because (at least on the face of it) no fiduciary or agency relationship existed as between CS and the Republic. However, the Republic asserts a number of bases on which CS is said to be liable with Privinvest jointly or as an accessory to Privinvest’s wrongdoing.First, the Republic alleges that CS is jointly liable with Privinvest for the bribing of the Bribed Officials on the basis that it took place to further a common design between them (the “Joint Tortfeasor Liability”). This requires the Republic to show that (i) CS acted in a way which furthered the commission of the tort of bribery by Privinvest; and (ii) CS did so in pursuance of a common design to do or secure the doing of the acts which constituted the tort. Factually, the crux of the allegation in this regard is that Privinvest’s bribing of the Bribed Officials was merely one aspect of a corrupt scheme in which CS substantially assisted.Second, the equitable wrong of dishonest assistance gives rise to liability on a similar basis (the “Dishonest Assistance Liability”). The essential basis for this claim is that the Bribed Officials acted in breach of their fiduciary duties to the Republic by accepting the bribes and CS is liable as an accessory by reason of having assisted in those breaches. CS’s dishonesty is a necessary element of the claim: for these purposes the Republic principally relies on attributing the Bribed CS Employees’ state of mind to CS (but its ability to do that is disputed by CS).Third, the Republic asserts a claim on the basis of unlawful means conspiracy, broadly on the basis that the transactions involved CS and Privinvest (as well as the Bribed Officials and the Bribed CS Employees) taking concerted action using the unlawful means of (among other things) bribery. As expanded on below in relation to a potential claim by citizens of the Republic, the major controlling element in relation to this cause of action is the required element of intention: the conspirators must have intended to cause loss to the Republic for the liability to arise. That requirement can be satisfied where the Republic suffered loss which was the obverse of the gain pursued by the conspirators, but that loss must have been a necessary, not merely likely or foreseeable, consequence of their concerted actions. As noted, the Republic is also pursuing a claim in deceit against CS arising from the EMATUM loan refinancing. In essence, it is alleged that CS impliedly represented, in connection with arranging the refinancing, that there had been no corruption which tainted the original lending, whereas CS (through the Bribed CS Employees) knew this to be untrue. The Republic alleges that, as a result of the refinancing, it is in practice unable to challenge the validity of the EMATUM Guarantee and has therefore suffered loss to the extent of the liabilities which could have been avoided.Is a claim available to citizens and/or particular groups of citizens of the Republic?The crucial issues which arise with regard to a potential claim by the Republic’s citizens seem to me to be: (i) whether there is an available cause of action, notwithstanding that the relevant dealings ostensibly concerned liabilities of the Republic and the actions of officials of the Republic; and (ii) whether identifiable damage has been suffered by citizens which is sufficiently direct a consequence of the relevant wrongdoing.Available cause of actionAs regards the first of these issues, whilst such a claim would so far as I am aware be novel, it nonetheless seems to me that a number of causes of action are potentially available on the present facts.The first and on balance the most promising of these is unlawful means conspiracy. More particularly:The?tort is committed where two or more persons combine and take action which is unlawful in itself with the intention of causing damage to a third party who does incur the intended damage.? Its attraction in the present context is that the liability does not turn on establishing any pre-existing relationship with or duty to citizens, or indeed any claim which would be independently actionable by citizens, so long as damage has intentionally been caused to them by means that are unlawful. The vital control on the scope of liability instead arises from the requirement of intention: in particular, it is necessary to show that the conspirators intended to inflict harm on the citizens, although that need not be a predominant purpose of the conspirators. It will not, so far as I am aware, be possible to suggest that any of the conspirators had a direct intention to harm the Republic’s citizens as such: their purpose, one assumes, was to enrich themselves. However, the necessary element of intention can be established where the claimant’s loss is the obverse of the defendant’s gain – in other words, where the gain intended by the defendant is inseparably linked with a loss to the claimant. That corresponding loss must, though, be inevitable rather than merely foreseeable or even likely:“One intends to cause loss even though it is the means by which one achieved the end of enriching oneself. On the other hand, one is not liable for loss which is neither a desired end nor a means of attaining it but merely a foreseeable consequence of one's actions.”Returning to the facts here, the bribing of an agent is presumed to cause loss in the amount of the bribe to the principal, which was a means to the conspirators’ intended end of enriching themselves. It seems to me that this presumed loss to the Republic necessarily also represented a loss to its citizens who were, in effect, both the ultimate funders and beneficiaries of its system of public finance: the loss to the Republic was necessarily represented by correspondingly reduced spending for citizens’ benefit or higher taxes for them (notwithstanding the intermediate role of external borrowing, which necessarily carried a cost ultimately borne by the citizens). It is unlike cases that have failed to establish a cause of action against cartels where, for instance, a supplier pays an increased price for goods as a result of the unlawful cartel – the difference is that whether the supplier suffers a loss depends on whether in the event it passes on the price increase to its customers, whereas no such uncertainty obtains here. The above analysis is concerned with the requirement of an intention to cause harm, rather than the question of the extent of the harm caused that is relevant to the amount of damages recoverable. If liability can be established by reference to the bribes to the Bribed Officials, the recoverable losses are not confined to the amount of the bribes but extend to other losses caused by the conspirators’ unlawful actions (the question of identifying which is addressed below).Indeed, damages for conspiracy are said to be “at large”, meaning that the court “is not limited to awarding that amount of loss which can be strictly proven; and that, in coming to a view as to the level of damages which a defendant ought to pay, the court will consider all the circumstances of the case, including the conduct of a defendant and the nature of his wrongdoing.” The significance of this is expanded on below. The conspiracy relied on by the citizens would essentially be that already asserted by the Republic in the Republic’s EHC Claim and as to which there appears prima facie to be a strong case. A second basis for asserting claims on behalf of the citizens might be that they are to be treated as, in effect, the ultimate principal of the Bribed Officials (or, to put it another way, the Bribed Officials were the sub-agents of the citizens) and that the Bribed Officials owed fiduciary duties to the citizens and not just the state. More particularly in relation to this:If it can be established that an agency and/or fiduciary relationship existed between the Bribed Officials and the citizens of the Republic, at least in relation to the payment of the bribes, then it would seem to follow that a cause of action in the tort of bribery is available to the citizens against Privinvest, broadly along the lines of the Republic’s existing claim on the basis of that tort, and against CS as a joint tortfeasor pursuant to their common design, and against both Privinvest and CS for dishonestly assisting the Bribed Officials’ breaches of their fiduciary duties in accepting the bribes. Claims put in this way in a factual context of this kind would, to my knowledge, again be novel. Nonetheless, there are examples in which fiduciary duties have been found to be owed by sub-agents to a principal, notwithstanding the absence of a contractual nexus between them, the breach of which can be enforced by the principal. there is academic support for the notion that officials are fiduciaries of the citizenry of a state. The facts that the bribery at issue involves the abuse of powers entrusted to the officials for the ultimate benefit of the people and that under the constitution of Mozambique sovereignty resides in the people seem to me further to support the recognition of such duties. There may be matters of the law of Mozambique or the particular terms on which the officials acted which are more or less helpful or unhelpful to this type of argument, but at present it seems to me one having some force. Careful thought would need to be given to the interrelation between a claim by citizens on these bases and the Republic’s existing claim. An analogy might be attempted with the principles relevant to claims in respect of losses suffered by trusts and companies, where generally the appropriate claimant is, respectively, the trustee or the company itself in respect of losses of the trust or company. Citizens’ claims might on this basis be limited to losses which are clearly separate and distinct from losses of the Republic, but as referred to below, such separate losses in principle seem readily identifiable. Identifiable damageEach of the causes of action potentially available to the citizens considered above offers comparatively favourable rules as to the recoverability of losses. In particular, the foreseeability of losses, which plays an important limiting role in relation to other torts, would not appear to limit the scope of the available damages. Furthermore, as already noted, damages may be recoverable for conspiracy even where losses in that amount cannot strictly be proved. Nonetheless, this does not mean that the requirement of causation is absent from either tort. Damages for bribery must flow “directly” from the bribe (although this does not mean that consequential losses are barred and in practice the requirement has been interpreted generously). Even in relation to damages for conspiracy, there must be a sufficient nexus of causation between the defendants’ wrongdoing and the losses actually suffered. Nonetheless, the law recognises that the precise causation of losses may be difficult to show in cases of this kind and that difficulty ought not, as a matter of policy, to frustrate the recovery.My present understanding is that the essence of the case here would be that the consequence of the corruption, when revealed, was to hamper severely the Republic’s ability to raise funds, with the corollaries that (i) there was an immediate financial crisis giving rise to severe damage in the general economy; and (ii) the Republic’s planned public expenditure had to be severely curtailed. These were, strictly speaking, results of the subsequent revelation of the corruption, rather than the original corrupt acts. There also appears to be a factual dispute as to whether it would have been open to the Republic to reveal the borrowing to the IMF. Putting that dispute to one side, however, it seems to me that the consequences of the subsequent revelation are likely to be regarded as inherent in the corruption itself. Investigations will be needed to examine what specific consequences may be demonstrated on the basis of evidence (I anticipate much of that evidence may consist in expert evidence from developmental economists and other relevant experts). Nonetheless, it seems to me entirely plausible that damages could be recovered under each of the categories identified above. The court will not, of course, permit double recovery insofar as the Republic recovers damages for its own losses, but it is difficult to see how these could extend beyond the consequences for public finances themselves (such as additional costs of future borrowing).Procedural means of bringing the claimThe Court of Appeal has suggested, in relation to unlawful means conspiracy claims, that “if a defendant intends to cause harm to the members of a particular class, but in fact only some suffer harm, then those actually damnified can sue.” It seems likely that, on the basis that causes of action are generally available as suggested above, claims could be brought by particular citizens or groups of citizens on the basis of particular losses which they could demonstrate that they had suffered. These could be brought and managed as a group claim: there would be common issues across the claims, but each of the relevant citizens would have to be a party, would have to establish their particular losses and would be liable for adverse costs orders if the claims failed.There are considerable attractions, instead or as well, to a representative claim on behalf of all citizens of Mozambique or particular segments of the citizenry. A representative claim is a collective redress procedure under English law, whereby a single representative can bring a claim on behalf of the represented class (which would in this case be the citizens generally or relevant segments of them). The represented citizens do not need to have authorised the claim or participate in it in any way (save that, if the claim is successful, there would be a scheme for distributing the damages to which they had been entitled) and they do not become liable for costs of the claim if it is unsuccessful. This potentially offers huge logistical advantages in a claim of the present kind and enables the citizens’ collective claims, which together are potentially extremely valuable given that there may be some 30 million represented claimants each entitled to damages if the claim succeeds, to be pursued through the initiative of a single representative. It is a procedure which offers, in my view, significant potential in at least some cases to fill the gap in cases where states have failed to act, adequately or at all, in response to corruption.The major limitation on the availability of the procedure is that it requires each member of the represented class to have the “same interest” in the claim. However, a recent decision of the Court of Appeal has clarified that this requirement is less stringent than previously thought. In particular, it appears that, as the law presently stands, even where members of the class may have suffered different levels of loss as a result of particular circumstances, the representative procedure can be utilised on a ‘lowest common denominator’ basis (in other words, to pursue the minimum level of damages that each member of the class has suffered). Furthermore, those who had suffered additional losses could be personally joined to the proceedings to pursue those additional claims on the basis of their own particular circumstances.That approach would seem potentially to be very attractive here insofar as there are particular losses that can be said to have been suffered by each citizen up to a certain minimum. (Alternatively, this could be done by reference to smaller representative groups constituted by particular segments of the population impacted by the wrongdoing in a specific way.) One example might be exposures to health risks across the population as a result of the contraction in healthcare spending. Given categories of loss may raise specific legal issues to be considered, although the liberal approach to the proving of loss where conspiracy is concerned as discussed above may be of particular assistance here. It is suggested that, in the first instance, further thought be given to the factual question of what types of damage affecting the entire population, or segments of it, can be demonstrated. The necessary legal and factual analysis can then be brought together.As noted at the outset, the fact of the Republic’s EHC Claim potentially offers an attractive opportunity to pursue the claims of citizens – as the true victims of the corrupt acts at the proceedings’ core – alongside the existing claims. Given that those proceedings now seem to be progressing, it would be sensible to advance the factual enquiries referred to above as soon as possible.JAMES MATHERSerle Courtjmather@serlecourt.co.uk27 February 2020 ................
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