Judgments - Societe Eram Shipping Company Limited (Respondents) and others v. Hong Kong and Shanghai Banking Corporation Limited (Appellants)

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    49. The question of whether the matter was one of jurisdiction or discretion was considered by the Court of Appeal in SCF Finance Co Ltd v Masri (No 3) [1987] QB 1028. Leggatt J gave judgment against Mr Masri for over US$900,000. His wife had US$400,000 in an account with the London branch of the United Arab Bank. The judge held that she was estopped from denying that this money belonged beneficially to Mr Masri. Leggatt J treated the money as a debt owed by the wife to the husband and made a garnishee order against it. The difficulty was that both of them lived in Jordan and so, it was said, the debt was a foreign debt, situate and recoverable in Jordan. But, said Ralph Gibson LJ, at p 1044:

    "[The issue estoppel] has established that, as between the two of them and as a matter of English law, the debt due from the Arab Bank, which is a debt arising in this country, is due to the first defendant and therefore available to be attached in satisfaction of the judgment debt due from him to the plaintiffs. Nothing...has given us the least reason to suppose that the second defendant could be at any risk of being ordered to pay the debt a second time to her husband."

    50. As I read this passage, the court was treating the garnishee order as operating, not so much on a debt between wife and husband, but on the debt owed by the bank, which Mrs Masri was estopped from claiming was owed to her rather than the judgment debtor. On this basis the debt was clearly not a foreign debt and there was no difficulty about the attachment. The court did however say that it thought Hill J was wrong in Richardson's case to say that there was no jurisdiction to attach foreign debts. It was, as the court had said in Martin v Nadel, a matter of discretion. This view was repeated by Balcombe LJ giving the judgment of the court in Interpool Ltd v Galani [1988] QB 738, 741.

    51. In Deutsche Schachtbau-und Tiefbohrgesellscahft mbH v R'As al-Khaimah National Oil Co [1988] 2 Lloyd's Rep 293, 300 Hobhouse J said that one could confidently regard Martin v Nadel as establishing that

    "if in accordance with the conflict of law rules recognised by the English courts, the garnishee order absolute will not suffice to discharge the liability of the garnishee and the garnishee will continue to be exposed to a risk of being held liable for the debt by a foreign court of competent jurisdiction, a garnishee order will not be made."

    52. What was more controversial was whether one should assume that foreign courts would act in accordance with recognised conflict of laws rules or whether one should also refuse to make a garnishee order if there appeared a risk that the garnishee, although discharged in accordance with English conflict rules, would be exposed to a second claim in a foreign court which did not give effect to them. On this point the House of Lords ([1990] 1 AC 295) were divided, Lord Templeman taking the former view and the other members of the House the latter. Lord Oliver of Aylmerton said, at p 343:

    "It has to be recognised that a debt is a species of property which may be recoverable by legal process from a debtor in more than one jurisdiction and it would be entirely inequitable that the garnishee should, by process in different jurisdictions properly conducted in accordance with the local law, be compelled to pay twice over in order that a judgment with which he has no connection whatever should be satisfied at his expense. If the reality is that this is likely to be the result, the fact that the particular foreign legal process is not one which commends itself to our jurisprudence is really immaterial."

    53. In analysing the authorities, Lord Goff of Chieveley said that the question was always whether it would be inequitable to make the garnishee order absolute. It would generally be inequitable to do so if the garnishee would have to pay the debt twice over. In deciding whether this might happen, the normal assumption was that any foreign court, in accordance with general principles of private international law, would treat the debt as discharged if three conditions were satisfied: (1) the English court had international jurisdiction to enter judgment against the debtor; (2) the situs of the debt was England and (3) the effect of payment under the garnishee order in English law was to discharge the debt. Lord Goff then considered whether this assumption should be made in every case: was compliance with the three criteria both necessary and sufficient? Lord Goff did not express a view as to whether compliance was necessary, although he noted the court in Martin v Nadel had not simply applied the three criteria as a matter of private international law but had considered whether in fact a payment under the garnishee order would be recognised by a court in Berlin as discharging the local debt. This suggests that if the evidence of foreign law had shown that, contrary the general principles of private international law, the foreign court would have treated the debt as discharged, it would have been acceptable to make the garnishee order absolute. But the real issue in the case was whether compliance was sufficient. Lord Goff said, at p 355, that it was not:

    "the principle which is here being applied is that a garnishee order absolute should not be made where it is inequitable to do so, and further that it is accepted in the authorities that it is inequitable so to do where the payment by the garnishee under the order absolute will not necessarily discharge his liability under the attached debt, there being a real risk that he may be held liable in some foreign court to pay a second time. To deprive the garnishee of the benefit of this equity merely because the court which may hold him liable a second time is not acting in accordance with accepted principles of international law would not be right, especially bearing in mind that the garnishee is a wholly innocent party who has been dragged into somebody else's dispute, and that the judgment creditor has the opportunity of seeking elsewhere for assets of the judgment debtor which he may seize in satisfaction of the judgment debt."

    54. My Lords, so far I have been considering the matter, as almost all the authorities have done, as one of fairness and equity between the parties. But there is another dimension. The execution of a judgment is an exercise of sovereign authority. It is a seizure by the state of an asset of the judgment debtor to satisfy the creditor's claim. And it is a general principle of international law that one sovereign state should not trespass upon the authority of another, by attempting to seize assets situated within the jurisdiction of the foreign state or compelling its citizens to do acts within its boundaries.

    55. In the modern world, banking is perhaps the strongest illustration of the importance of mutual respect for national sovereignties. There are nearly 500 foreign banks in London, to say nothing of British banks with branches overseas. Banking is a highly regulated activity and each head office or branch has to comply with the laws of the jurisdiction in which it operates. If the courts of one country in which a bank operates exercise no restraint about using their sovereign powers of compulsion in relation to accounts maintained with that bank at branches in other countries, conflict and chaos is likely to follow.

    56. There is already a hint of this in Willes J's example of the foreign banker (cuius pecunia est alter sanguis) who was entitled to say civis Romanus (or wherever) sum and not be mulcted by foreign attachment in the City of London on account of an alleged debt owing at his foreign place of business. But sensitivity to foreign sovereignty appears most clearly in the rules which have been developed for that younger offspring of foreign attachment, the Mareva injunction or freezing order. Unlike the case of its elder sibling, there is no question of a freezing order putting a bank in the position of having to pay twice. Nevertheless, unless carefully limited, a freezing order applying to foreign banking debts can put the bank in the position of having to choose between being in contempt of an English court and having to dishonour its obligations under a law which does not regard the English order as a valid excuse.

    57. So in Babanaft International Co SA v Bassatne [1990] Ch 13 the late Kerr LJ, who was a master of international commercial law, said, at p 35:

    "Unqualified Mareva injunctions covering assets abroad can never be justified, either before or after judgment, because they involve an exorbitant assertion of jurisdiction of an in rem nature over third parties outside the jurisdiction of our courts"

    58. The result was that freezing orders have been tailored to make it clear, first, that they do not affect anyone outside the jurisdiction unless enforced by a court of the relevant country and, secondly, that they do not prevent third parties such as foreign banks, which have an English presence and are therefore subject to the jurisdiction, from complying with what they reasonably believe to be their obligations under the law of the situs or proper law of the debt or any order of a local court: see Baltic Shipping Co v Translink Shipping Ltd [1995] 1 Lloyd's Rep 673.

    59. The conclusion I draw from this survey of principle and authority is that there are strong reasons of principle for not making a third party debt order in respect of a foreign debt. I agree with my noble and learned friend Lord Millett that the application of such principles is not at all the same as the exercise of a discretion. To that extent, the references to a discretion in cases like SCF Finance Co Ltd v Masri (No 3) [1987] QB 1028 and Interpool Ltd v Galani [1988] QB 738 are misleading. On the other hand, a principle is not the same as a statutory rule restricting the jurisdiction. It may have to give way to some other overriding principle. But I find it hard to think what such a principle might be. Until this case there was no reported instance in which the normal principle had not been applied.

    60. That brings me to the judgments in the present case. The bank produced uncontradicted evidence that by Hong Kong law the garnishee order would not discharge the debt owing by the bank to the judgment debtor in Hong Kong. Tomlinson J refused to make the order absolute on the ground that the bank would be at risk of having to pay its customer again in Hong Kong. But the Court of Appeal reversed his decision and granted the order.

    61. In a judgment given by Mance LJ the Court of Appeal reasoned as follows: (1) The Hong Kong court would recognise the underlying judgment in the French court; (2) it would therefore recognise that the judgment debtor was indebted to the creditor; (3) if the bank paid pursuant to the garnishee order, it would have paid the judgment debtor's debt under compulsion of law; (3) a person who pays the debt of another under compulsion of law can claim reimbursement by a restitutionary action; (4) this applies equally when the compulsion is applied by a foreign law (5) Hong Kong law on this point can be assumed to be the same as English law (6) therefore if the bank were sued by the judgment debtor in Hong Kong it could set off its restitutionary claim and would not have to pay twice; (7) there was no infringement of Hong Kong sovereignty because the bank was being required to pay in England, not Hong Kong.

    62. The argument does not lack novelty and ingenuity but I respectfully think it is flawed because it travesties the nature of a third party debt order. The essence of such an order is that it is execution in rem against the property of the judgment debtor, against a res or chose in action which belongs to him and which is within the jurisdiction of the court making the order. As the Royal Commissioners said in 1853, it is an attachment of "monies of [the] debtor in the hands of third persons". It is true that once the judgment debtor's chose in action has been captured or attached, the court will realise it or turn it to account by ordering the third party to pay the debt to the judgment creditor. But that is a process of realisation in the same way as the sale of a chattel belonging to the debtor which has been taken in execution. It is not a personal claim against the third party. The third party pays with his own money only in the same sense as a bank upon which a cheque has been drawn by a customer in credit pays with its own money. But the substance of the matter is that the judgment creditor is paid with the debtor's money, as the drawee of the cheque is paid with the customer's money.

    63. The discharge of the third party's indebtedness effected by rule 72.9(2) (formerly RSC, Ord 49, r 8) is therefore an essential part of the execution. As Lord Blackburn said in Mayor etc of London v London Joint Stock Bank (1881) 6 App Cas 393, 415, the garnishee, "if he is to be obliged to pay the money, must be discharged from paying it to his creditor". It is this which ensures that the creditor is paid with the debtor's money and not the third party's.

    64. It is not in my opinion an adequate substitute for this protection to argue that if the third party has to pay out of his own money, he will acquire a restitutionary claim in personam which he can set off against the debt. In the domestic context, such a claim is impossible. As Tomlinson J said in this case ([2001] CLC 685,692):

    "The fact that it is...of the essence of the procedure that the garnishee thereby obtains a good discharge against his own creditor means that he has no need of a restitutionary claim against his creditor...Indeed, it can readily be seen that it would in fact be wholly inimical to the structure of the garnishee jurisdiction if...a garnishee were by payment to the judgment creditor to obtain the right to a restitutionary claim against the judgment debtor...A claim in restitution could only be consistent with the garnishee remaining liable to the judgment debtor..."

    65. Paradoxically, therefore, the restitutionary claim postulated by the Court of Appeal can exist only in a foreign law. In the present case, the Court of Appeal inferred its existence in the law of Hong Kong from the decision of Donaldson J in Liberian Insurance Agency Inc v Mosse [1977] 2 Lloyd's Rep 560, in which he began his judgment by saying that the facts were probably unique and that he certainly hoped they were. That is not a promising introduction if one is looking for universally applicable principles of law. The facts were that Liberian insurance brokers had been held liable in a Liberian court to pay a cargo claim alleged to be owing to the insured plaintiff by underwriters in London. The brokers were obliged to satisfy the claim in Liberia. Having done so, they sued the underwriters in London on the ground that they had paid their debt under compulsion of law. Donaldson J said that compulsion under a foreign law could found a restitutionary claim but dismissed the action on the ground that the underwriters would have had a good defence to a claim by the insured.

    66. The claim against the brokers, whatever its merits, was an ordinary in personam contractual claim over which the Liberian court undoubtedly had jurisdiction. It is therefore not surprising that Donaldson J was prepared to recognise it as creating a legal obligation to pay. But there is no in personam claim against the bank in this case. The bank owes the judgment creditor nothing. The third party debt jurisdiction is, as I have said, execution in rem against the chose of action. If the English court has no jurisdiction over the debt, I do not understand why a foreign court should recognise the third party's obligation to pay as having been under compulsion of law. Under generally accepted conflict of law rules, it is simply an unlawful seizure. The notion that one can justify the attachment of a foreign debt by imputing to the foreign law recognition of an exorbitant order for the purpose of founding a claim of payment under compulsion of law is in my opinion quite unreal.

    67. The Court of Appeal rejected the suggestion that it was infringing the sovereignty of Hong Kong by saying that it was not ordering the bank to do anything in Hong Kong. All it had to do was to pay money in London. On this ground it distinguished cases like R v Grossman (1981) 73 Cr App R 302 and Mackinnon v Donaldson, Lufkin and Jenrette Securities Corporation [1986] 1 Ch 482 in which courts had refused to order banks to produce information about accounts held in foreign jurisdictions. But this distinction depends upon treating the third party debt order simply as an order against the bank instead of what it really is, namely, a process of execution by the attachment of property of the judgment debtor. Once the true nature of the order is understood, it becomes plain that an order in respect of a foreign debt is an attempt to levy execution on an asset in the foreign jurisdiction, which infringes the principle of international law applied in the Grossman and Mackinnon cases.

    68. I would therefore regard this as a straightforward case governed by Martin v Nadel [1906] 2 KB 26. In cases in which the debt is plainly foreign, I find it hard to imagine a case in which such an order could be made. I do not find the example of the Panamanian debt given by the Court of Appeal persuasive. It was said that if the third party owing money to the judgment debtor was a Panamanian company which had no assets other than an account in a bank in London, it would be justifiable to make the order and execute against the third party's assets in London. But that would still leave the Panamanian company exposed to proceedings by the judgment debtor in Panama to recover the same debt. I do not see why it would be equitable to put the Panamanian company, which has nothing to do with the basic dispute, into a position of insolvency in Panama so that the creditor's claim can be satisfied in London.

    69. For these reasons I would allow the appeal and discharge the garnishee order.

LORD HOBHOUSE OF WOODBOROUGH My Lords,

    70. In full agreement with the Opinions of my noble and learned friends Lord Bingham of Cornhill and Lord Hoffmann, I too would allow the appeal and make the order proposed. I am also in broad agreement with what my noble and learned friend Lord Millett is to say in his Opinion.

    71. I will however add two observations relevant to this and similar cases. The first relates to the situs of a debt. In the present case there is no dispute that the situs of the relevant debt is Hong Kong and not England. (The same is true, mutatis mutandis, in the parallel case concerning UBS ag.) But it is still necessary to understand why this is so. Stirling LJ in Martin v Nadel [1906] 2 KB 26 at 31, like others before and since, found it most appropriate to refer to the work Dicey: Conflict of Laws. I will do the same, using the 13th edition (2000).

    72. Rule 112 states that "choses in action generally are situate in the country where they are properly recoverable or can be enforced". The text amplifies this in relation to debts, saying, "a debt is [generally] situate in the country where the debtor resides. .... It may not, however, be the only place: English courts may take jurisdiction against non-residents on the basis of temporary presence", or under the CPR or the Brussels or Lugano Conventions. Nevertheless, this possibility does not make the debt situate in England if the debtor is not resident here. But, generally speaking, "for the purpose of determining situs, a corporation is resident wherever it carries on business". (pages 925-6)

    "Where … the debtor has two or more places of residence and the creditor either expressly or impliedly stipulates for payment at one of them, then the debt will be there situate. This refinement is important in connection with bank accounts where (as in English law) under the applicable law of the contract between banker and customer the bank's obligation to repay is performable primarily at the branch where the account is kept, and accordingly in such a case all accounts kept at a particular branch are to be held there situate…. Where the debtor has more than one place of residence but there is no express or implied promise to pay at any one of them then the debt is situate at that place of residence where it would be paid in the ordinary course of business." (pp.926-7)

    73. The third party debtor, garnishee, is a corporation. It is incorporated in Hong Kong where it presumably has its head management. But it has places of business in England and is registered as an overseas company under Part XXIII of the Companies Act 1985. The English courts accordingly have jurisdiction. The company can be served within the jurisdiction and has one or more places of business here. If the company were an ordinary trading company and the debt it owed to the judgment debtor an ordinary commercial debt, say, payment for a service rendered or goods supplied, the judgment debtor could have sued the company and recovered the debt in England and could have argued that the company had sufficient residence here to make England the or a situs of the debt. But, with banks and the debts of banks to their customers, the debt is, absent some special agreement, repayable at the branch where the customer's account is kept and the situs of the debt is in that country. This has a double significance. It is part of and defines the substantive obligation of the bank to its customer and it identifies the situs of the debt for the purposes of Private International Law. The authorities cited, in particular Mayor of London v Cox (1867) LR 2 HL 239, Martin v Nadel [1906] 2 KB 26, Swiss Bank Corp v Boehmische Industrial Bank [1923] 1 KB 673 and Richardson v Richardson [1927] P 228, demonstrate this. The recognition of what is the substantive obligation of the bank is an essential part of the analysis.

    74. In the present case (and in the UBS ag case), the third party debtor is a bank and the debt (or alleged debt) is one owing by the bank to its customer (the judgment debtor) at a branch in another country. This is an important fact because to make a garnishee or third party debt order requiring payment of the debt in this country (probably also translating it into sterling) is to impose on the bank an obligation which it has never assumed. It is not an obligation which the customer (the judgment debtor) could have asserted let alone enforced against the bank. This shows the fundamental objection to the reasoning and decision of the Court of Appeal. Nothing could be a better illustration of the disregard of this truth than the order actually made by the Court of Appeal which would convert the bank's relationship to its customer from that of banker and customer to that of claimant and respondent in restitution litigation. Nor is maintaining respect for the actual obligation of the bank an academic point. There may be a whole number of practical reasons why the bank's contract must be respected: local law, local regulation, currencies, tax, exchange control, insolvency rules, confidentiality and so on. One can also ask why is it that the judgment creditor is so reluctant to enforce his judgment in the country where the debt is payable which in the present case it is accepted that it could have easily done. But the most important point is that the order would purport to enforce a supposed right which did not exist and the judgment debtor did not possess. This is unprincipled and in the true sense exorbitant. Another way of stating the same point is that the application for the third party debt (garnishee) order lacked subject matter.

    75. The other additional observation I would make is that the possible question of subject matter jurisdiction is always important. There are relatively few examples in English procedural law but the present case is one of them for the reasons my noble and learned friends have already given. Subject matter jurisdiction also has a major role under the Brussels and Lugano Conventions. A garnishee or third party debt order will result in an enforceable liability in personam of the third party to the judgment creditor which is amenable to execution (in re Combined Weighing & Advertising Machine Co 43 Ch D 99; Pritchett v English and Colonial Syndicate [1899] 2 QB 428), but it does not follow that only personal jurisdiction is relevant as is illustrated by Babanaft International Co SA v Bassatne [1990] Ch 13. This is the misunderstanding which has led to the erroneous dicta in SCF Finance Co Ltd v Masri (No.3) [1987] QB 1028 and Interpool Ltd v Galani [1988] QB 738 and the mistaken criticism of what Hill J said in Richardson v Richardson. It is unfortunate also that what Lord Goff said in Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v Shell International Petroleum Co Ltd [1990] 1 AC 295 should have been cited without having regard to what that case was about. The debt was a commercial debt with an admitted situs in England. It was properly recoverable in England and the order made by the English court would discharge the debt. The question which arose was the exceptional one whether there was a real and substantial risk that the garnishee, Shell, would nevertheless, in a foreign country, be compelled to pay the debt again. This did not raise a question of jurisdiction or lack of subject matter but more simply the, in that case, difficult question whether it was equitable in the discretion of the court to make the garnishee order. Lord Goff was not expressing a view about the question which the present appeal raises.

LORD MILLETT

My Lords,

    76. The question in this appeal is whether an English court can properly make a garnishee order absolute (now known as a final third party debt order) in respect of a foreign debt, in this case a sum standing to the credit of the judgment debtor in an overseas bank account and so situate abroad.

    77. In formulating the question in this way I have deliberately avoided using the slippery word "jurisdiction", a word which is

    "used in a variety of senses and takes its colour from its context"

(Anisminic Ltd v Foreign Compensation Commission [1968] 2 QB 862, 889 per Diplock LJ). The expression "the jurisdiction of the court" connotes its authority to decide a case or make an order having legal effect. But it is possible to distinguish between two different senses in which the expression is used. The first is where the jurisdiction of the court is statutory or is excluded or limited by statute. Two examples may be given. One occurs because statute has given the county court exclusive jurisdiction to make a possession order against the tenant of rent controlled property, with the result that the ordinary jurisdiction of the High Court to make such an order is excluded. The present case provides a second example, for under the terms of the relevant Rules of Court the power of the court to make a third party debt order is and always has been expressly limited to the case where the third party (garnishee) is within the jurisdiction, with the result that the power of the court to make such an order against a third party who is outside the jurisdiction is excluded. In such cases, where the limits of the court's jurisdiction are imposed ab extra, the lines of demarcation are defined. The court has jurisdiction within the prescribed limits and none outside them.

 
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