First Atlantic Commerce Ltd v Bank of Bermuda Ltd

• Jurisdiction: Bermuda
• Judgment Date: 19 March 2009
• Date: 19 March 2009
• Docket Number: Civil Appeal 2007 No. 22
• Court: Court of Appeal (Bermuda)

In The Court of Appeal for Bermuda

Before: Zacca, P; Nazareth, JA; Evans, JA

Civil Appeal 2007 No. 22

BETWEEN:

FIRST ATLANTIC COMMERCE LTD

Appellant

and

BANK OF BERMUDA LIMITED

Respondent

Mr V Lyon, QC and Mr N Turner for the Appellant

Ms B Dohmann, QC and Mr A Martin for the Respondent

The following cases were referred to in the judgment:

BCT Software Solutions Ltd v C Brewer & Sons LtdUNK[2003] EWCA Civ 939

BCCI v Ali (No. 4)[1999] NLJ 1734

SCAL Ltd v Beach Capital Management LtdBDLR[2006] Bda LR 93

Re Walker Wingsail SystemsWLR[2006] 1 WLR 2194

Brawley v MarczynskiWLR[2003] 1 WLR 813

In re Elgindata Ltd. (No. 2)WLR[1992] 1 WLR 1207

Appeal against order for costs - Settlement agreement - Whether substantial success

JUDGMENT of EVANS, JA

Bermuda FAC judgment

1. This Appeal is concerned with the costs of a major piece of litigation which began in 2004. The Plaintiff was First Atlantic Commerce Ltd. ("FAC") who is now the Appellant. The Defendant in the action, and the Respondent to the Appeal, is The Bank of Bermuda Ltd. ("the Bank").

2. The action was fixed for trial on 5 November 2007, estimated length four weeks. It ended with a Consent Order dated 7 November 2007 which was made "without prejudice as to costs". The remaining costs issue was decided by Kawaley J. on the following day. He awarded FAC one-third of its costs of the action, and made no order as to the costs of the Bank's Counterclaim.

3. Both parties now appeal. FAC contends that the Judge should have awarded it the whole of its costs, both on the Claim and the Counterclaim. (Its claim for these to be assessed on an indemnity basis was refused by the Judge, and has not been renewed on the appeal). The Bank submits that the Judge was wholly wrong and that FAC should have been ordered to pay all of its costs of defending the claim.

4. The amounts are very large. We were told that FAC's costs up to trial total about $3 million, the Bank's about $1.2 million. Bearing in mind that these figures do not include the likely costs of a four week trial, they bear comparison with the amount of the claim, even if that was as great as FAC contends, namely about $6million. The Bank contends that it was very much less, even worthless.

5. The Judge's Order regarding costs was made on the basis that FAC was seeking leave to discontinue the action, and the Bank likewise to discontinue its Counterclaim. Hence, paragraph 38 of his Judgment reads as follows -

"38. The Plaintiff is granted leave to discontinue its action, and is awarded one-third of its costs, to be taxed if not agreed, on the standard basis. The Defendant is granted leave to discontinue its Counterclaim, but no order is made with respect to the costs of the Counterclaim."

6. Whether that is a correct basis on which to proceed may be questioned, but overall it is clear that the task of the Court is to apply the provisions of Order 62 Rule 3 of the Rules of the Supreme Court in the circumstances of the case. This provides -

"(3) If the Court in the exercise of its discretion sees fit to make any order as to the costs of the proceedings, the Court shall order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs."

The Judge correctly described this as the "fundamental guiding principle".

7. We consider first the history of the matter and the nature of the dispute. Although the details are complicated, the outline is clear and relatively straightforward. FAC offered a service to the Bank which enabled it to process credit card transactions between credit card companies and retailers who sold goods on the internet. The service involved a 'Payment Gateway' which linked the retailer's website, the Processor which communicated with the Card Association, the customer's bank (the Issuing Bank) and the retailer's bank (the Acquiring, or Receiving Bank). Under the scheme, the Bank held accounts not only for FAC ("the Merchant") but also for individual retailers ("sub-Merchants"), and the sub-Merchants` accounts were credited with sums received as payments made on behalf of its customers. They were also debited with amounts which were paid to customers who claimed repayment for goods not supplied or which they were entitled to return under the credit card payment rules.

8. These arrangements were set out in an Ecommerce Visa and MasterCard Master Merchant Agreement ("MMA") dated 18 February 1999. Under its terms, FAC identified particular internet merchants as potential customers for the Bank, and the Bank carried out 'due diligence' on them before accepting them as clients under the scheme. More than 50 retailers were approved in this way as sub-Merchants, each becoming a customer of the Bank. The accounts of nine of these became heavily overdrawn because of the large number of repayments etc. which was debited to them. It emerged that, in four cases, this was the result of fraudulent trading by the sub-Merchant concerned. The total amount debited to these accounts by October 2000 was $5.4 million, and the Bank demanded payment of that amount from FAC, the Merchant, also.

9. That claim by the Bank brought FAC to the verge of insolvency. It led to a series of Agreements between them, collectively called The Refinancing Agreement , under which the Bank agreed to become a shareholder in FAC, purchasing common stock for $1 million and Preference Shares for $3million, and FAC agreed to use the $4 million proceeds to discharge the sub-Merchants` overdrafts to that extent. FAC also agreed to discharge the remaining $1.4 million of the overdrafts using a new lending facility from the Bank, which it drew down in the sum of $1.437 million for that purpose.

10. The facility which enabled FAC to pay off the remaining $1.4 million approx. was secured by an assignment to the Bank of recoveries which FAC expected to make from certain of the sub-Merchants in Nevis. FAC's action against them was successful, and in 2002 FAC transferred the proceeds totalling about $1.6 million to the Bank, thus repaying the special lending facility which was granted for that purpose.

11. Crucially, the 'debt for equity' transaction described above, whereby the Bank became a shareholder in FAC, was subject to the Bank's right to redeem the Preference shares for a price of $3 million on or after 1 November 2010. In addition, those shares carried interest at 10 per cent. p.a. accruing from 1 November 2003, and in the event that the Bank exercised its right to sell the shares back to FAC, the accrued interest totalling became payable also. By 1 November 2010, the interest would amount to $2.4 million, and a total of $5.4million would become due to the Bank.

12. On 10 February 2004, FAC issued proceedings against the Bank, claiming (in short) that the Bank was grossly negligent in its vetting of the sub-Merchants who became overdrawn with the Bank to the extent of $5.4 million, and was thereby in breach of

its obligations to FAC under the MMA. FAC claimed damages for that breach which it quantified as the total amount of the overdrafts, alleged to be $5,828,236, and in addition claimed the total of legal and other costs incurred in Nevis and Bermuda as losses incurred in mitigation, producing a total claim of $6,488,436.

13. The Bank's Defence raised an issue as to whether the Financing Agreements debarred FAC from making the allegation of gross negligence, and it also contended that the effect of the Agreements was to replace FAC's previous liabilities under its overdrawn accounts with its obligation to repurchase the Preference shares, and to pay interest thereon, which would not arise until 2010.

14. In its Reply to the allegation that its claim for damages was barred by the terms of the Financing Agreement, FAC contended that the Agreements could be rescinded (set aside) on the grounds that they were procured by duress, and later (17 September 2007) as having been concluded under a common mistaken assumption of fact.

15. Throughout the long interlocutory processes of amended and re-amended pleadings, FAC failed to give any clear explanation of why it was entitled to quantify its losses, if liability was established, by reference to the amount of the sub-Merchants` overdrafts, which had been repaid with money provided by the Bank (as regards both the $4 million and the $1.4 million payments; moreover, the latter been recovered through the proceedings in Nevis). The Bank applied to strike out the Statement of Claim as disclosing no reasonable cause of action, partly on the basis that FAC had suffered no recoverable loss. The application was heard by Deputy Judge John Riihiluoma, who observed in his Judgment dated 24 August 2004 that "the Statement of Claim is lacking in a properly pleaded case that informs the Defendant of the basis on which the Plaintiff claims to have suffered loss". He ordered FAC to give full particulars of its damages claim, and he gave leave to the Bank to restore the strike-out application "if [it] takes issue with the adequacy of the particulars". Particulars were served which recited the history of the Financing Agreements and the issue of Preference shares to the Bank pursuant thereto, but they stopped short of alleging, in terms, that the loss caused to FAC could be measured by reference to its contingent liability to repurchase the shares and to pay accrued interest in 2010. The Bank did not...