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Case No: A3/2000/0433
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIA L COURT
(Longmore J)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 23rd October 2000
B e f o r e :
LORD JUSTICE ALDOUS
and
LORD JUSTICE BROOKE
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CENTRAL
BANK OF YEMEN
|
Appellants
Defendants
|
|
-
and -
|
|
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CARDINAL
FINANCIAL INVESTMENTS CORPORATION
|
Respondents
Claimants
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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2HD
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Michael Brindle QC and Akhil Shah (instructed by Slaughter and May for
the Appellants)
Mark Hapgood QC (instructed by Clifford Chance for the Respondents)
- - - - - - - - - - - - - - - - - - - - -
JUDGMENT
As Approved by the Court
Crown Copyright
LORD JUSTICE BROOKE:
1. This is an appeal by the defendants, the Central Bank of Yemen ("CBY"),
against an order of Longmore J dated 13th April 2000 whereby he dismissed with
costs their application for a declaration that the court lacked jurisdiction on
the grounds that they were immune from suit.
2. In this action the claimants Cardinal Financial Investments Corporation
("Cardinal") claim US$8,237,684.71 from CBY under 15 promissory notes dated 8th
August 1989 which were all payable in London on seven dates, spaced at
six-monthly intervals, between 1st January 1996 and 1st January 1999. Although
the promisor named in the notes was the Bank of Yemen, it was common ground
that in 1990 CBY assumed the liabilities of the Bank of Yemen following the
merger of the People's Democratic Republic of Yemen with the Yemen Arab
Republic which led to the creation of the present Republic of Yemen.
3. The promisee named on each of the notes was Ceskoslovenska Obehodni Banka AS
("CSOB"). The notes were all payable to CSOB "or order". Each of them was in
due course endorsed by CSOB and delivered to Cardinal. There was evidence that
they were delivered to Cardinal for an agreed sale price, so that it was
asserted that Cardinal became holders of the notes for value, but this evidence
was put in issue and Cardinal was unwilling to tell the judge what value had
been given. At all events, there was no dispute that Cardinal were both
endorsees and holders of the notes. They bring this action in those
capacities. There was evidence that before the endorsements took place each of
the notes were presented for payment in London on their maturity dates, and
none of them were paid.
4. Section 89(1) of the Bills of Exchange Act 1882 provides:
"(1) Subject to the provisions of this part, and except as by this section
provided, the provisions of the Act relating to bills of exchange apply, with
the necessary modifications, to promissory notes."
5. It has not been suggested that the provisions of the Act with which we are
concerned in this appeal do not apply equally to promissory notes as they do to
bills of exchange.
6. On this appeal we are concerned with issues relating to the liability of a
promisor on promissory notes which were endorsed when they were already
overdue. Relevant provisions of the Bills of Exchange Act, substituting
"promissory note" for "bill" and "maker" for "acceptor" in the interests of
greater clarity, and including provisions relating to the giving of value for a
note, are these:
S27(1) Valuable consideration for a [promissory note] may be constituted by
-
(a) Any consideration sufficient to support a simple contract;
S27(2) Where value has at any time been given for a [promissory note] the
holder is deemed to be a holder for value as regards the [maker] ...
S36(1) Where a [promissory note] is negotiable in its origin it continues to be
negotiable until it has been (a) restrictively endorsed or (b) discharged by
payment or otherwise.
S36(2) Where an overdue [promissory note] is negotiated, it can only be
negotiated subject to any defect of title affecting it at its maturity, and
thenceforward no person who takes it can acquire or give a better title than
that which the person from whom he took it had.
S38 The rights and powers of the holder of a [promissory note] are as
follows:
(1) He may sue on the [promissory note] in his own name."
7. There are four other preliminary matters which are worth mentioning at this
stage. The first is that it is elementary law that a promissory note is a
separate contract from the underlying agreement for which the note represents
the instrument of payment. See, for example, Nova (Jersey) Knit Ltd v
Kammgarn Spinnerei GmbH [1977] 1 WLR 713, per Lord Russell of Killowen at p
732G :
"It is in my opinion well established that a claim for unliquidated damages
under a contract of sale is no defence to a claim under a bill of exchange
accepted by the purchaser; nor is it available as set-off or counterclaim.
This is a deep rooted concept of English commercial law. A vendor and
purchaser who agree upon payment by acceptance of bills of exchange do so not
simply upon the basis that credit is given to the purchaser so that the vendor
must in due course sue for the price under the contract of sale. The bill is
itself a contract separate from the contract of sale."
8. The second is that liability on a promissory note attaches, and attaches
only, to those who are named on the note. Even if the maker of the note is an
agent for another party in the underlying transaction, it is liable on the note
as a principal and the other party has no liability on the note. See
Churchill & Son v Goddard [1937] 1 KB 92 per Lord Roche at p 103
("the Law Merchant and Common Law founded thereon of themselves, as I think,
had regard only to the parties to negotiable instruments") and per Scott LJ at
p 111. See also Pollway Ltd v Abdullah [1974] 1 WLR 493 per Roskill LJ
at p 496B-D. Mr Brindle sought to escape the effect of this rule by reference
to dicta in the cases of Leadbitter v Farrow (1816) 5 M & S 345 and
Elliott v Bax-Ironside [1925] 2 KB 301, but he eventually accepted that
he could point to no decided case in the long history of the law merchant in
which anyone had been held liable on a bill of exchange whose name did not
appear on the bill. As Holroyd J said in Leadbitter v Farrow at p 350:
"I apprehend that no action would lie on the bill, except against those who are
the parties to it."
9. Section 26(1) of the Act, which is concerned with the case where a person
signs a promissory note as maker and then adds words to his signature,
indicating that he is signing as agent or in a representative capacity, has no
relevance in this case since no such words were added.
10. The third is that under English law, diplomatic privilege, or any other
matter that gives rise to a successful plea of sovereign immunity, does not
import immunity from legal liability, but only exemption from the local
jurisdiction of the English court. See Dickinson v Del Solar [1930] 1
KB 376, per Lord Hewart CJ at p 380. See also Oppenheim's International
Law Vol 1, Ninth Edition (1992) at pp 460-1:
"International law, however, gives every state a right to claim exemption from
local jurisdiction, chiefly for itself, its Head of State, its diplomatic
envoys, its warships and its armed forces abroad. It may be noted, however,
that this does not prevent the local law applying to those benefiting from the
exemption, although it does prevent the enforcement of the law against
them."
11. The fourth preliminary matter is that it was accepted both before the judge
and in this court that these promissory notes constituted commercial
transactions within the meaning of Section 3(1) of the State Immunity Act 1978
and that CBY was not a state within the meaning of that Act.
12. Since Mr Brindle QC relied in this court on much the same line of argument
as that on which he had relied unsuccessfully before the judge, it will be
convenient to move directly to a consideration of his arguments on the appeal
without first summarising the very clear, brief reasons given by the judge for
dismissing his clients' application for a declaration that the court lacked
jurisdiction because they were immune from suit.
13. Mr Brindle's first argument was that each of the promissory notes was a
transaction in which the disclosed principals were two states, namely the Czech
Republic and the Republic of Yemen. He founded this argument on the evidence
relating to the underlying transactions. This showed that the former Republic
of Czechoslovakia had provided credits to the former People's Democratic
Republic of Yemen, the predecessors of the present states, during the 1970s,
and that the Promissory Notes constituted the instruments by which the latter
agreed to discharge its liability under the credits to the former. Further
details of these transactions are set out in Longmore J's judgment.
14. In my judgment, this argument inevitably fails because it disregards the
principle of English law I have set out above which shows that a promissory
note constitutes an independent contract in its own right, and only the parties
named on the note have any rights or liabilities under that contract.
15. Next, Mr Brindle argued that on a proper interpretation of Section 3(2) of
the State Immunity Act 1978, if the parties to a transaction are two states
then any resulting dispute from that transaction will be subject to Section
3(2) even if the parties named on the claim form are not states. He developed
an argument in this court to the effect that the words "parties to the dispute"
in Section 3(2) of the Act should be given a wide meaning, and sought to cite
passages in Hansard in support of that construction.
16. Section 3 of the State Immunity Act 1978 provides, so far as is
relevant:
"(1) A State is not immune as respects proceedings relating to -
(a) a commercial transaction, entered into by the State; or
(b) an obligation of the State which by virtue of a contract (whether a
commercial transaction or not) falls to be performed wholly or partly in the
United Kingdom.
(2) This section does not apply if the parties to the dispute are States or
have otherwise agreed in writing ..."
17. This submission appears to be equally doomed to failure. The dispute in
this case, in so far as there is one, relates to liability under each
promissory note, which constitutes an independent contract quite separate from
the underlying transaction. It has been conceded that this is a commercial
transaction and that CBY is not a State. Section 3(2) therefore is irrelevant
in this context. The language of the section is clear, and we are therefore
precluded from resort to Hansard for the purposes of exploring alternative
possible meanings of the statutory language.
18. The third argument raised on this appeal is founded on Section 36(2) of the
Bills of Exchange Act. It is said that there was a defect of title affecting
these promissory notes at their maturity and that because they were negotiated
to Cardinal when they were overdue Cardinal could not acquire a better title
than CSOB from whom they took the notes. This argument is based on the
contention that as between the original parties the notes were subject to the
limitation that they could not be enforced in court because of state immunity,
except by a holder in due course.
19. On the hearing of the appeal, Mr Brindle conceded that he could only
succeed on this point if he had succeeded on the earlier points. It appears to
me that this argument fails because the Republic of Yemen and the Czech
Republic were not, and never have been, parties to these bills. This
consideration is fatal to the argument, because it has not been and could not
be contended that as between CSOB and CBY any question of state immunity could
arise in relation to promissory notes which, as the words "or order" make
clear, were intended to be treated as negotiable instruments in the market
place. We therefore do not have to consider Mr Brindle's alternative argument
to the effect that state immunity may in appropriate circumstances constitute a
defect in title within the meaning of Section 36(2) of the 1882 Act.
20. I would add, by way of explanation, that Section 36(2) of the Act has the
effect that a person to whom an overdue bill or note is offered is put on
inquiry. He knows that the bill or note ought to have been paid, and he takes
it with the knowledge that there may be some defect of title in the holder
which prevented the holder from enforcing payment. For the meaning of "defect
in title" in this context, see Chalmers and Guest on Bills of Exchange,
Cheques and Promissory Notes, Fifteenth Edition (1998) at p 317:
"The meaning of the words `defect in title' (which, prior to the Act, was
referred to as an `equity attaching to the bill') has been explained and
discussed in the Comment on Section 29(2) of the Act. In particular, a holder
to whom an instrument was negotiated when overdue has been held to take it
subject to a defect of title arising from fraud, illegality, breach of an
agreement between the acceptor and the payee that the bill was not to be
negotiated or as to how it was to be paid, negotiation under such circumstances
as amounted to fraud, and the fact that the bill was purchased with money
stolen from a third party."
21. Although these examples, taken from decided cases, are not of course
exhaustive, in the present case there is no evidence to suggest that CSOB had
any defect in its title to the notes or that there was any equity attaching to
the notes such as to make it unconscionable for Cardinal to sue on them.
22. We do not have to deal with the argument that Cardinal should not be
treated as a holder for value just because it said it was, since as holder of
the notes Cardinal is entitled to sue on them in its own name without showing
that it is a holder for value: see Section 38(1) of the 1882 Act.
23. Mr Brindle's final argument was that CBY is entitled to claim state
immunity under Section 14(2) of the State Immunity Act 1978 in its own right.
It was said that CBY is a "separate entity" within the meaning of Section 14(1)
of the Act, being distinct from the executive organs of the government of the
State and being capable of suing or being sued. Section 14(2) provides, so far
as is material, that:
"A separate entity is immune from the jurisdiction of the courts of the United
Kingdom if, and only if -
(a) the proceedings relate to anything done by it in the exercise of sovereign
authority; and
(b) the circumstances are such that a State ... would have been so immune."
24. On the hearing of the appeal Mr Brindle told us that he could not rely on
this argument because he could not succeed on the second part of this
requirement. We therefore need not say anything more about that part of his
argument.
25. For these reasons I would dismiss this appeal.
Lord Justice Aldous:
26. I agree.
Order: Appeal dismissed with costs, to be the subject of a detailed
assessment; £10, 000 to be paid on account.
(Order does not form part of approved judgment.)
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