Case No: 2000 Folio No 1198

Neutral Citation No: [2002] EWHC 2263 (Comm)
 
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 15th November 2002

Before :

THE HONOURABLE MR JUSTICE TOULSON
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Between :

	KOMERCNI BANKA, A.S
	Claimant	
	-	and –
		
	     (1) STONE AND ROLLS LIMITED
(2) ZVONKO STOJEVIC	Defendants	

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Mr Brian Doctor QC and Mr Richard Slade (instructed by  Norton Rose) for the Claimant
Mr Christopher Carr QC, Mr David Owen and Miss Susannah Jones (instructed by Middleton Potts) for the Defendants

Hearing date :  11th June 2002    
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Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

.............................
The Hon Mr Justice Toulson

Mr Justice: Toulson

Introduction

1.	This action is about an allegedly fraudulent scheme involving letters of credit (LCs) issued by the claimant bank in favour of the first defendant (SR) at the request of a company called BCL Trading GmbH (BCL). The first was issued in December 1997.  The 51st and last was issued in July 1999.

2.	The LCs related to purported sales by SR to BCL of large quantities of agricultural products of Russian or Ukrainian origin. A notable feature was that they were all “deferred payment” LCs. Their maturity dates varied from 180 days to 360 days after presentation of the relevant documents. 

3.	In 13 cases the LC did not become operative, and in 8 cases the bank was repaid on maturity.  The claim relates to the remaining 30 LCs, in respect of which the loss alleged by the bank amounts to $94,720,382.80 (excluding interest). Of these 30 LCs, 7 were issued between July and December 1998 and 23 between April and July 1999.  Attention during the trial was concentrated mainly on the 30 LCs from which the bank suffered loss, but it is relevant also to look at earlier instances to see how the story began.  I will come to that in due course. 

4.	There was some variation in the requirements of the LCs, but they all required the presentation of a commercial invoice, confirmation of insurance of the goods and a warehouse “warrant list”. 

5.	The pattern of events in relation to the operative LCs was as follows. SR as beneficiary would procure the presentation of documents to the bank, via an intermediary bank.  The documents presented were accepted by the claimant bank.  The LCs were then assigned by SR to a discounting bank or in some cases forfaited by the claimant bank itself.  The proceeds were mostly paid over by SR to BCL or connected companies.  

6.	The bank’s case is that there were no genuine underlying sales of produce lying in Russian warehouses; the invoices and warrant lists presented to it were sham; and SR acted as BCL’s puppet and accomplice in a dishonest scheme designed to obtain money from it by false pretences. 

7.	The second defendant, Mr Stojevic, is SR’s chief executive officer. SR’s ultimate ownership is obscure, but Mr Stojevic was in command of its dealings with BCL and the bank. It is the bank’s case that Mr Stojevic was responsible for procuring the fraudulent presentation of documents to the bank, and he and SR are therefore jointly liable to the bank.

8.	The action is brought against SR and Mr Stojevic in deceit.  There are separate  proceedings pending between the bank and BCL in Austria and the Czech Republic.

9.	The defendants deny that there was any dishonesty on their part. BCL proved to be an unreliable trading partner, but SR was not its puppet nor was it complicit in any dishonesty which there may have been on the part of BCL.  They say that as far as the defendants were concerned, the LCs related to genuine transactions, and the presentation to the bank of the invoices and warehouse warrant lists involved no attempt at deception of the bank. 

10.	The defendants also point to grave internal irregularities and shortcomings on the part of the bank. If there was dishonesty by the defendants in the presentation of the invoices and warehouse warrant lists, they deny that this had any effect on the conduct of the bank.

11.	Since the allegations made by the bank are grave, it follows that the evidence required to establish them must be correspondingly strong.  The authorities on this point are too well known to need citation.

12.	If liability is established, certain questions of principle arise in relation to the damages claimed. The issues concern alleged benefits for which the defendants say that the bank must give credit. 

The protagonists and other relevant parties

The claimant

13.	The claimant was incorporated in the Czech republic in 1990 as part of a privatisation programme in which the former State Bank of Czechoslovakia was split into three parts. The part of the business which went to the claimant included smaller commercial customers who had loans relating to working capital and financing of trade. The Czech Republic was the majority shareholder with a stake of 60% (which it retained until it sold its interest in October 2001); the balance of 40% was privatised. It is one of the largest Czech banks, with over 300 branches in the Czech Republic and abroad, and one of the largest banks in central and eastern Europe. 

14.	Its relationship with BCL was a disaster for the bank and led to one of the largest banking scandals in the history of the Czech Republic.

15.	The LCs with which this action is concerned are only a small part of the bank’s dealings with BCL. In all, the bank issued 263 LCs on the application of BCL. Its losses from its dealings with BCL exceeded $250 million.  Reports by the bank’s internal audit department and by the Czech National Bank, in March and April 2000, revealed an astonishing catalogue of deficiencies from the board of directors downwards and resulted in a cull of the bank’s senior management. Many of the bank’s former officers and senior employees are now facing criminal proceedings in the Czech Republic, some for alleged offences of dishonesty, although it has not been alleged by either party in the present action that there was fraud by any bank officer or employee in relation to the LCs with which I am concerned. 

16.	At the time of the events in question the bank’s internal organisation was highly bureaucratic and involved a complex network of divisions and departments. In relation to BCL there appears to have been a good deal of muddle and some infighting between departments.  The departments with the most direct involvement were 3050, which dealt with trade finance, and its off shoot 3052, which dealt with LCs. The head of 3050 was Mrs Kaplanova until November 1999.  The head of 3052 was Mrs Neuhauslova until April 1999. They are facing joint criminal charges, not of dishonesty but of breach of duty in administering another person’s assets.

17.	Mrs Kaplanova was replaced as head of 3050 in November 1999 by Mrs Mitkovova, who was new to the bank. One of her main tasks became the investigation of the BCL affair. She gave evidence over three days and was an impressive witness, but she had no first hand knowledge of the circumstances in which the LCs were issued.

18.	The bank called four other employees or ex-employees as witnesses.  They were Miss Horakova, Mrs Hermanova, Mr Liss and Mr Palecka.  Miss Horakova used to be employed as a cipher in department 3052. Her responsibilities included checking that documents presented under LCs conformed with the bank’s requirements. She did so in relation to 28 of the 30 LCs in question.  She was able to identify the signatures of the ciphers who had checked the documents presented under the other 2 LCs.

19.	Mrs Hermanova was head of 4020 and Mr Liss was in the same department. It had been established to assess the risks of particular transactions, using mathematical and statistical methods. This form of risk assessment was not normally applied in the case of transactions involving foreign customers, but 4020 was asked to make an assessment of the standard risk costs for BCL’s LC transactions. Mrs Kaplanova (head of 3050) regarded the involvement of 4020 as an unwelcome form of interference. Miss Hermanova and Mr Liss were concerned about the adequacy of the monitoring of the risk to the bank from its LC business with BCL and made recommendations, which were not followed.

20.	Mr Palecka became a director of the bank in October 1999. From February to April 2000 he was its acting chairman, and from April 2000 to October 2001 he was vice-chairman and deputy chief executive.  He had not heard of BCL before he joined the board. Thereafter he was involved in attempts to tackle the problem of the bank’s exposure which had become obvious. 

21.	None of the bank’s witnesses was involved in making the decisions which led to its issue of LCs in favour of SR.  The absence from the witness box of those who had such responsibility is unsurprising, since they are no longer employed by the bank and some face criminal charges. 

22.	The bank also called as witnesses an expert on the Russian grain industry, Mr Day-Robinson; a director of a Moscow private investigation firm, Mr Grigoriev, who carried out investigations on behalf of the bank, in March and April 2000; and Mr Chasty, a chartered accountant and partner in the firm of Moore Stephens, who were SR’s auditors. 

The defendants

23.	Mr Stojevic was born and grew up in Croatia. He trained to be a naval architect. In the 1980s he moved to Austria.  There he became involved in aluminium trading.  Towards the end of 1994 that activity ceased to be profitable and he turned his interest to Russian agricultural business. 

24.	SR was incorporated in England.  It traded in aluminium for a number of years but in 1995 it was dormant. On 1st October 1995 SR began a new business, under the management and control of Mr Stojevic, as a trader of agricultural produce from the region around Rostov on Don. 

25.	The shares in SR are held by an Isle of Man company called Law Investments Limited, whose shareholders are nominee companies operating under an Isle of Man trust known as the Lucia trust. Mr Stojevic acknowledged that he was one of the beneficiaries of the trust. Objection was taken to his being asked to identify the other beneficiaries or the extent of his own beneficial interest, and the matter was not ultimately pressed by Mr Doctor QC on behalf of the claimant.

26.	SR’s last audited accounts were for the year ended 31st December 1999. (Mr Stojevic said towards the end of his evidence, on 4th July 2002, that the accounts for 2000 were going to be ready “soon” and “perhaps next week”. I have not seen them.) 

27.	Mr Stojevic was the sole witness called by the defendants. 

28.	Leaving aside the question of the validity of the transactions in question in this action , I accept without doubt that SR was involved in genuine trading of Russian agricultural produce.  In the trial bundles there are examples of contracts between SR and other parties which have every appearance of being genuine and  whose legitimacy there is no reason to question. 

29.	Mr Stojevic’s evidence was that he receives no income for his services to SR except that his expenses are paid in part by his father and in part by an Isle of Man entity called United Consultants, which provides consultancy services for companies doing business in Russia, the Ukraine and Croatia. Mr Stojevic was reticent in his answers to further questions about United Consultants and said that he did not know who controlled it. 

Other SR entities

30.	The name Stone and Rolls was used by entities trading in London (the first defendant), Rostov, Geneva, Prague and Vienna. It is accepted that Stone and Rolls, Rostov, was a branch of the first defendant.   It is the defendants’ case (not accepted by the bank) that the Stone and Rolls entities operating in Geneva, Prague and Vienna were unconnected with SR (or with Mr Stojevic). They say that SR Prague and Vienna were part of the BCL group, and SR Geneva SA was not under the control of either SR or BCL.

FIG Don

31.	Since 1995 Russian law has recognised entities known as Financial Industrial Groups (FIGs), which are corporate groups formed and operating under licences granted by the Ministry of Finance.  FIG Don was formed and registered in 1997. Its members included Rostovskiy-Na-Donu Kombinat Khleboproductov (RKHP), OAO Central Company Don (CCD), OAO Donkhleboprodukt (DKHP) and OAO Millerovskii Masloextractionnii Zavod (Millerovskii).

32.	CCD was formed at the same time as FIG Don to act as a management company for the whole group, but it also operated as a trader of grain. RKHP, DKHP and Millerovskii were long established enterprises. RKHP’s activities included port services, storage and sale of flour, grain and seed products. DKHP acted as a co-ordinator of the financial participation of state administrations, federal and regional, in the agricultural sector. Its activities included buying agricultural products from a large number of farmers in the Rostov region, collecting them and selling them on the domestic or export market. Millerovskii had a factory for crushing sunflower seeds and separate storage facilities. There were various cross shareholdings between the different companies, the details of which are not important. The most senior figure in FIG Don was Mr Alexander Shershunov. He was a member of the boards of directors of the companies mentioned. From December 1997 he was the general manager of DKHP (having previously been the general manager of RKHP and CCD) and from 1998 he was the chairman of Millerovskii. 

33.	Mr Stojevic met Mr Shershunov in September 1995, and SR came to have a close relationship with FIG Don.  Mr Shershunov described SR in a letter dated 6 October 1999 as “ the company responsible for promotion of the group’s programs in the West as well as organizing the financing, export and transfer of Western Agro-technology”. 

34.	Mr Shershunov provided a witness statement for the defendants.  At the start of the trial it was anticipated he would be called to give evidence, but on the eleventh day (after Mr Stojevic had been under cross-examination for two days) I was told that Mr Shershunov had informed the defendants’ solicitors that he had other commitments for the next two months. 

BCL

35.	BCL was incorporated in Austria in March 1993. Its registered operations were stated as being import and export, as well as wholesale trade in goods of any kind, especially metals, foods and soft commodities. It was formed, and is controlled, by Mr Barak Alon. 

36.	BCL approached the bank in August 1995 with a view to becoming a customer and obtaining finance to support its trading activities. 

Documents presented to the bank

37.	A typically worded LC described the documents to be presented as follows:
“Commercial invoice in 1 original duly stamped and signed.
Confirmation of Insurance indicating that goods are fully insured and that insurance is vinculated in favour of Komercni Banka,a.s. Prague
Original of Warrant List, duly signed, indicating LC number, total quantity of goods, unit price and total amount, stating that the goods under consignment of LC are lying in the warehouse and are held only in favour of Komercni Banka, a.s, indicating that goods will be released to final consignee only upon authorisation of Komercni Banka, a.s. Furthermore confirming that all charges accrued from storage will not be calculated to Komercni Banka,a.s.”

38.	A typical invoice from SR to BCL read as follows: 

STONE & ROLLS LTD

INVOICE

Date: 22.12.1998  
						VAT REG No. GB 609 8178 11

							INVOICE No. 29A 22/12

To:
B.C.L. TRADING GMBH
WEYRINGERGASSE 9
1040 WIEN, AUSTRIA

Description of Goods			Weight		Unit price	Amount
							Per MTO	Value
Milling Wheat				50.000,MTO	$95.-		$4,750.000-
Based warehouse received
EXW Russia

Payment irrevocable documentary credit no. 9822590007003

Advise Through:	Trigon Bank Aktiengesellschaft
			Mahlerstrasse 14
			1010 Wien, Austria

With Best regards

Stone & Rolls Ltd.

39.	A typical warrant list read as follows:
“ORIGINAL WARRANT LIST
Consignment-LC number:				9822590007003
Description of goods:					Milling wheat
Total Quantity:					50,000 mt
Unit Price:						USD 95.00 per mt
Total Amount:						USD 4,750,000.00
We, as the sellers warehouse holder, herewith confirm and state that goods under consignment LC number 9822590007003 are lying in our warehouse and are held only in favour of Komercni Banka,a.s., Prague. We irrevocably confirm that respective goods will be released to final consignee only upon authorisation of Komercni Banka, a.s, Prague.
We also confirm that all charges accrued from storage will not be calculated to Komercni Banka, a.s, Prague.”

40.	Of the 30 relevant warrant lists (or 38 including cases in which the bank was repaid), 6 were issued by RKHP, 2 by Millerovskii and the rest by DKHP. All except 3 were signed by Mr Shershunov. 

41.	As an objective matter of construction, by the end of the trial there was not much dispute about the nature and effect of the bank’s requirements and the joint effect of the invoice and warrant list. The bank required written confirmation that goods corresponding to the description set out in the invoice had been sold to BCL, were lying in a warehouse and were being held there only in favour of the bank, but not at the bank’s expense. The invoice and warrant list provided such confirmation. 

42.	The words “We, as the sellers warehouse holder” indicated the capacity in which the warehouse gave the confirmation which followed, and necessarily implied that it was authorised by the seller to give that confirmation. The seller could only mean, sensibly speaking, the seller under the contract of sale to which the particular LC identified in the warrant list related, namely SR. The warrant list neither stated nor necessarily implied that goods of the relevant quantity and description had been set apart from other similar goods in the warehouse (if such there were). The picture presented to the bank by the invoice and the warrant list, taken together, was that there was a contract for the sale of a specific quantity of goods as described in the invoice and warrant list; that such goods, possibly forming part of a larger bulk, were lying in the warehouse which issued the warrant list; and that, at the behest of the seller (SR), the warehouse was giving undertakings to hold the stated quantity of the described goods only in favour of the bank, to release them only upon authorisation by the bank and not to charge the bank for their storage.

43.	By presenting the documents or causing them to be presented to the bank, SR represented to the bank that they were what they purported to be and that they reflected the true position to the best of SR’s knowledge and belief. 

44.	So far I have been considering, objectively, what was represented to the bank. Because the action is brought in deceit, the bank has to establish not only that there was misrepresentation on a comparison between the objective meaning of the documents presented to it and the true facts, but that the defendants either intended to deceive it or were indifferent, i.e. reckless, whether it was deceived.  For this purpose the focus shifts from the objective meaning of the documents to what was in the mind of Mr Stojevic.  In Spencer Bower, Turner and Handley on Actionable Misrepresentation, 4th ed. (2000), p60, the principle is stated in this way:
“In deciding whether the representation was fraudulent, the question is not whether the representor honestly believed it to be true in the sense assigned to it by the court, or on an objective consideration of its truth or falsity, but whether he honestly believed it to be true in the sense in which he understood it when it was made.”

The Russian agricultural background

45.	Mr Day-Robinson’s evidence was based on his experience as a grain marketing and merchandising consultant between 1993 and 2001 for the Foreign and Commonwealth Office, the UK Department for International Development and the United Nations Common Fund for Commodities. He had previously been a grain trader with Cargill, but not specifically involved in the Russian grain trade. Since 1993 he has regularly met and worked with Russian grain trade representatives. Between 1999 and 2001 he was the director of a United Nations project in the Volga region not far from Rostov, in which he was specifically involved with grain warehousing systems, banking and the development of warehouse warrants. 

46.	In his report he commented that:-
“The Russian grain trade is conducted with a rip-off mentality. Traders exploit producers wherever possible. It is difficult for producers to gain access to reliable price information. Contracts are treated with cursory regard. A warehouse warrant is a dubious document.” 

47.	The Rostov region is in the extreme south west of Russia, between the Ukraine and the Caucasus, and has a land area of approximately 100,000 square kilometres. The region is responsible for about one third of Russia’s production of wheat, rice, millet, barley, buck wheat, sunflower seeds and maize. It is connected by the Don and Volga rivers and canal systems to the sea of Azov (giving access to the Black Sea) and to the Caspian, White and Baltic Seas. 

48.	There are 17,500 farms in the Rostov region, of which about 1000 are run by joint stock companies.  The farming system is generally short of cash. Few farms have storage facilities. The terminal silos, warehousing and trading companies buy grain as and when farmers have produce for delivery and the buyers are able to pay them.

49.	Local traders try to establish lines of finance (known locally as trade “credits”), based on promises of bank lines or other borrowing facilities from parties purporting to have access to funds; but local traders and their counterparties will not necessarily know if, how or when, they will be able to cash in such “credits”.  Hard currency is therefore important.

50.	Goods are delivered in bulk to silos and mingled in different bins, each holding grain of a specific quality tested on arrival. There are a number of GOST (state) standards, which determine the type of grain and its quality, and warehouses and export silos work to those standards. Each warehouse maintains a register of tonnage delivered, by whom and on whose behalf, in central records held manually and on computer.

BCL’s default

51.	Under the terms of agreement made between the bank and BCL for the issue of each LC, the bank was entitled to transfer the funds necessary for the settlement of the LC from BCL’s account and BCL was liable to a contractual penalty if there were insufficient funds in its account for this purpose. It was also invariably a term of the LC that it would not become operative until a pre-payment had been made into a BCL US dollar account with the bank. The stipulated amount of the pre-payment varied.  Occasionally it was 100%, but more usually it was 35% in the early days of the scheme and 25% from June 1998. 

52.	When Mrs Mitkovova joined the bank in November 1999, she found a most disturbing situation. As LCs had matured, the bank had reimbursed itself from BCL’s accounts, but there were no longer sufficient funds both to repay maturing LCs and to maintain blocked pre-payments for LCs which had not yet matured. There had been serious irregularities at branch level. 

53.	The branch that had operated BCL’s account had sent confirmations to department 3050, in relation to each of the 30 LCs with which I am directly concerned, that the required pre-payment funds had been blocked. However, the branch had used the same funds as “cover” both for LC transactions and for foreign exchange transactions (for which there was also supposed to have been blocking of funds).
 
54.	For 8 of the 30 LCs, the bank originally received a 25% prepayment, and the confirmations sent by the branch to 3050 may have been correct at the time, although the funds did not remain blocked.  For the other 22 LCs, no such pre-payment was made, nor did BCL have the funds in its account to enable such blocking to be made, and the confirmations sent by the branch to 3050 were false. These matters have led to criminal charges against certain branch employees. 

55.	By 1st November 1999 BCL had defaulted on 11 matured LCs, amounting in value to over US$31 million.  More LCs were due to mature in the near future. 

The bank’s investigations 

56.	One of the matured LCs, not involving SR, supposedly represented payment for a consignment of steel sheets worth over US$1 million.  The warrant list had been issued by a plant in the Czech Republic.  Mrs Mitkovova was aware from press reports that the plant was in financial trouble. She spoke by phone to its general manager, who told her that the company was almost bankrupt and its warehouse was empty. She faxed him a copy of the warrant list. He told her that he had never seen it, but that the signature was the genuine signature of the previous general manager. On 8th November 1999, she went to look at the plant for herself and found that it was as the general manager had described. There were no steel sheets to be seen. She also learned that Mr Alon owned 30% of the shares of the company. Her suspicions alerted, Mrs Mitkovova made a report to the bank’s board of directors on the following day.

57.	The bank instructed SGS to carry out inspections at all the warehouses which had issued warrant lists. On 16th November 1999 SGS wrote to DKHP enclosing copies of the warrant lists issued by it and asking for facilities for inspection.  DKHP faxed SGS’s request to SR (although the bank did not know this at the time). 

58.	On 23rd November 1999 Mr Stojevic sent a fax to Mr Shershunov in which he said, “I am sending you draft of letter to SGS which must be printed out on your headed letter, duly signed and stamped”.  The draft contained a refusal of SGS’ request on the grounds that there were disputes between SR and BCL, and that the warehouse could not allow a third party to carry out inspection of the goods until those disputes had been resolved.  DKHP followed Mr Stojevic’s lead by sending SGS a reply to that effect (with some additional paragraphs drafted or approved by Mr Shershunov).

59.	In his evidence Mr Stojevic denied that he was trying to obstruct the bank’s efforts to inspect the goods. He said that his only concern was that he regarded it as unprecedented for the bank to write directly to the warehouse when its proper line of communication should have been via BCL. I do not believe that he was telling the truth. If there had been goods in the warehouses as described in the warrant lists and they were being held in favour of the bank, I do not imagine that Mr Stojevic (or the relevant warehouse) would have tried to stop inspection by SGS. There would have been no rational cause to do so. 

60.	Attempts by the bank to gain access to RKHP’s warehouse in Rostov met, unsurprisingly, with similar lack of success.

61.	On 26th January 2000 the bank’s solicitors, Norton Rose, wrote to SR summarising the history of its unsuccessful attempt to gain access to the warehouses and asking SR to send letters to DKHP and RKHP in the following terms:
“We refer to the enclosed warrant list issued by yourself in respect of goods stored in your warehouse. The goods are held to the order of Komercni Banka a.s (“KB”), Prague, and Czech Republic. We understand that KB have attempted to gain access to the warehouse to check that the goods are still held in the warehouse but to date they have been unable to gain access. Please would you allow a representative acting on behalf of KB (who will bring a faxed copy of this letter as proof of identity together with a letter of authorisation from KB) access to the warehouse without further delay so that he can check that the goods referred to in the warrant lists are still held by yourselves.”

62.	Norton Rose made a similar request in respect of the Millerovskii warehouse (except for a slight difference of wording to reflect the fact that no attempts had been made to gain access to that warehouse).

63.	On 3rd February 2000 SR wrote to FIG Don enclosing letters of request to the three warehouses substantially in the form drafted by Norton Rose, except that the sentence “the goods are held to the order of Komercni Banka” was rephrased to read “the goods were meant to be held to the order of Komercni Banka” and the final words “so that he can check that the goods referred to in the warrant list are still held by yourselves” were omitted.

64.	At the same time SR replied to Norton Rose expressing its willingness to help as requested, but registering surprise that the bank had not clarified matters with BCL or, if it needed SR’s help, had not approached it directly.  Mr Stojevic referred to this letter in his evidence as indicative of a sincere willingness to help the bank.  In the light of his previous behaviour, I regard his professed willingness to help as a posture.

65.	In March 2000 the bank instructed Mr Grigoriev to visit the warehouses and deliver to each a letter from the bank in the following terms:
“We refer to certain Letters of Credit issued by Komercni Banka a.s (“KB”) upon the application of BCL Trading GmbH (“BCL”). We attach an appendix of those Letters of Credit. Please note that in each case Stone and Rolls Ltd was the beneficiary of those Letters of Credit. 
The bearer of this letter is authorised by and on behalf of KB to enter your warehouses on its behalf for the purpose of checking the goods which are stored within as per the Warrant List issued by you and listed in the attached appendix. Please allow the bearer of this letter access your warehouses for this purpose. 
Alternatively, if this is not possible, please provide the bearer of this letter with written confirmation: 
(1) That you hold, either at your warehouse or at another storage premises, or have allocated for your use with another party, the requisite goods under each Letter of Credit;
(2) Which warehouse or storage premises the requisite goods under each Letter of Credit are held in if they are not held by you;
(3) What the name of the party is that has allocated the requisite goods under the Letter of Credit for your use if applicable;
(4) That you will make the requisite goods under each Letter of Credit available to KB to supply to parties as and when designated by KB;
(5) Provide a full written explanation of why you were unable to allow the bearer of this letter immediate access to the warehouses to check the goods stored therein.”

66.	Mr Grigoriev visited Rostov between 4th and 7th April 2000. On 5th April 2000 he attended a meeting at DKHP with Mr Shershunov and others. He made contemporaneous notes, which he produced in evidence.

67.	Mr Shershunov agreed, as head of FIG Don, to accept the letters addressed to all three companies. His response, according to Mr Grigoriev, was that the warrant lists were nothing more than expressions of willingness on the part of the FIG Don warehouses to obtain and store goods of the relevant descriptions and to supply them, provided that they received payment in advance from SR. No such payment had ever been received by FIG Don from SR. The goods listed in the warrant list were not necessarily available at the moment when the warrant lists had been issued, and they did not belong to SR or BCL, but FIG Don had been ready, and remained ready, to buy the required goods from producers in the Rostov region at any time, subject to being provided with the necessary funds. FIG Don had the capacity to store the goods as well as the ability to buy them from the farmers. He was willing to allow Mr Grigoriev to view the warehouse’s storage facilities, but he was not prepared to give any information about the grain being kept there or who owned it, in case the bank tried to make an arrest.

68.	On 5th and 6th April 2000 Mr Grigoriev visited four storage premises.  He was given a certain amount of information about the facilities and the goods in store, but he was not shown any records or given any information to indicate for whom the goods were being held.

69.	On 7th April 2000 Mr Grigoriev had a further meeting with Mr Shershunov and others, during which he was given a letter addressed to the bank. It contained some statistical data about the grain harvested in the Rostov region and quantities of goods stored by FIG Don during the previous two to three years.  The letter also stated:
“Products specified in the warranty lists on behalf of KB could have been purchased and can be purchased at the moment by DKP [DKHP] on condition that an agreed sum of money will be credited to DKP bank account. 
The price for the goods should be determined according to the current world prices at the time of transaction. 
Shipment of the goods by DKP in favour of any third party is possible only after pre-payment in full.”

The bank’s case

70.	The bank’s pleadings alleged that the presentation of the invoices and warrant lists by SR involved deliberate deception of the bank in a number of respects. 

71.	As to the invoices, it was alleged that the purported contracts of sale were not genuine, and that the absence of genuine contracts of sale was to be inferred from the following facts:- SR never paid the FIG Don entities the sums required to buy the goods purportedly covered by the contracts of sale or contracted with them  for their delivery; SR recycled to BCL, or connected companies, the bulk of the funds received by SR from discounting the LCs; and SR made no attempt to supply the relevant goods to BCL. 

72.	In relation to the warrant lists, it was alleged that they falsely represented that the issuing warehouse, as SR’s agent, was holding the goods mentioned in favour of the bank, when this was not so.  Particular reference was made to Mr Shershunov’s claim that the warrant lists were merely supposed to confirm the ability of the FIG Don entities to acquire the relevant goods from growers on receipt of pre-payment. 

The defendants’ case

73.	The defendants set out their case regarding the transactions underlying the LCs, in para 8 of the re-amended defence, as follows:
“So far as the transactions underlying the Letters of Credit were concerned:
(a) By late 1997 Stone and Rolls had been in the financing of agricultural production and the marketing of crops and agricultural products in the Rostov region of Russia and the Ukraine.
(b) Stone and Rolls agreed with BCL that BCL would raise finance for the agricultural programmes in which Stone and Rolls was involved by arranging for Letters of Credit to be issued by KB in favour of Stone Rolls; that Stone and Rolls would assist BCL by making advances for deposits required for the Letters of Credit, and that Stone and Rolls would enter into agreements to sell the goods to BCL covered by the Letters of Credit. This agreement was concluded orally in or about November and December 1997 between Mr Stojevic for Stone and Rolls and Mr Alon for BCL.
(c) Prior to the issue of each of the Letters of Credit, Stone and Rolls and BCL agreed upon the type of goods to be sold together with quantity, price and credit period, which would be covered by the Letters of Credit, and which Stone and Rolls was prepared to supply to BCL. Such agreements were made orally, in telephone conversations or meetings, between Mr Stojevic and Mr Radicopoulos for Stone and Rolls and Mr Alon and Mr Gerhard Langmann for BCL. They were confirmed by the issue of the Letters of Credit, and by the issue of invoices by Stone and Rolls.
(d) No agreement was reached as to the terms upon which delivery would be made under the sale arrangements. BCL and Stone and Rolls negotiated during 1998/99 in respect to further terms to apply in respect of the dealings between them but failed to reach any agreement. Stone and Rolls made advances to BCL, amounting to approximately $121,000,000, for the purpose of being used as 25% deposit to open further Letters of Credit. BCL failed to use all of the advances for this purpose, and only arranged for the opening of Letters of Credit with a value of approximately US$116,000,000. No goods were delivered by Stone and Rolls prior to the collapse of BCL in late 1999, caused by the breakdown of the relationship between BCL and KB which occurred at around that time.”

74.	As to the bank’s allegation that SR never paid the FIG Don entities the sums required to buy the goods to fulfil the contracts supposedly made between SR and BCL, the defendants pleaded, in para 12 of the re-amended defence, that:
“(a) Stone and Rolls maintained prepayments with FIG Don entities in the period from July 1998 to July 1999 in amounts averaging over $30,000,000, as shown in schedule A, which could have been applied towards the supply of goods to BCL, although final agreement with regard to such supply depended upon agreement of delivery terms with BCL. 
(b) At the time of presentation of documents to KB under the Letters of Credit, Mr Stojevic believed that Stone and Rolls would be in a position to meet its commitments to BCL as and when delivery was required by BCL.”

75.	It was admitted that SR made payments to BCL, or BCL connected companies, from funds from the discounting of the LCs or from working capital of SR, as identified in amended schedule B to the re-amended defence. 

76.	With regard to the warrant lists, the defendants pleaded, in para 20 of the re-amended defence, that:
“The warrant list indicated that the issuers of the list intended to treat specified quantities of goods as being held in favour of KB. If there was any misrepresentation made by the issuers of the list, or any breach of any obligation thereby undertaken by them, and if KB suffered any loss as a result (as to which no admissions are made), KB’s remedy lies against the issuers of the list.”

77.	As to Mr Shershunov, the defendants stated, in para 20(d) of the re-amended defence, that:
“…no admissions are made as to what Mr Shershunov is alleged to have told KB or as to its accuracy. If the gist of what he has said is that the warehouse lists were factually inaccurate when issued, 
i.	no admissions are made as to whether what he may have told KB is correct, and
ii.	it is denied that the defendants knew of such factual inaccuracy when the lists were presented to KB.”

Mr Stojevic’s witness statements 

78.	At the heart of the case lies the question what was the true nature of the relationship between SR, BCL and the issuer of the warrant list at the time when documents were presented to the bank under each LC.  This was a matter peculiarly within Mr Stojevic’s knowledge. He made three witness statements.

79.	In his first witness statement, Mr Stojevic described what would happen before the issue of each LC as follows:
“121. 	Before the issue of a Letter of Credit, BCL would contact SR. Typically, Barak Alon would raise with me the subject of a new transaction, either by telephone or in a meeting. Occasionally Billy Radicopoulos of Stone and Rolls and Mr Gerhard Langmann of BCL were involved at this stage. BCL would either indicate the type of commodity in which they were interested and the quantity or would ask for details of what type and quantity of goods were available.
122.	Usually we had a good overall idea as to the availability of commodities from DKHP’s database, to which SR had access. Stone and Rolls would then contact Mr Shershunov (or in cases where he did not issue a warrant list the individual who did later issue the list). We would make the approach and ask if a quantity of the particular commodity was available. So far as I recall, this contact was made by telephone.  I generally made this call myself. 
123.	Once we had confirmation of a given quantity which was available, then we would go back to BCL (by phone or in meetings) and conclude the deal, by reference to type of goods, quantity and price. We anticipated in each case that payment would be made by LCs issued by KB. We did not agree any particular time for delivery. The LCs had an extended maturity, and I was content to leave the time of delivery open.
124.	I consider that each deal was confirmed by the issue of the relevant Letter of Credit at request of BCL and by issue by Stone and Rolls of the relevant invoice. No other sales confirmations were issued for these deals.”

80.	Mr Stojevic went on to explain the use of the proceeds of the LCs:
“130.	When SR discounted a Letter of Credit, the proceeds formed part of the SR’s working capital and it was free to use those proceeds as it saw fit. The discounted proceeds were largely used to fund payments to BCL and companies connected with Mr Alon and BCL. The payments are listed in amended schedule B to the defence. Out of the total amount of approximately $90,000,000 received from discounted LCs 1-30, SR paid over US$80,000,000 to BCL/connected companies. Most of the payments were made on the basis, agreed between Barak Alon and me, that BCL would use them as pre-payments for Letters of Credit. The payment instructions were given on behalf of BCL either by fax or orally by telephone. 
131.	Most of the payments went into accounts at KB, and many went to BCL as payee. The payments also included a number to companies other than BCL (e.g. MFC; Westphalia and SR Prague), and to banks other than KB (e.g. Erste Bank and Trigon Bank). On each occasion, SR paid according to the request or instruction of BCL or Mr Alon. I believed that such payments would ultimately be used as pre-payments for LCs. I believed that the other companies were connected with BCL, and assumed that BCL requested that payments be made to those other companies for cash management reasons.”

81.	Mr Stojevic acknowledged (in paragraphs 134 and 138) that there was no specific programme for SR to make payments to the FIG Don entities in relation to the goods covered by LCs issued by the bank, nor were the contracts between SR and BCL expressly linked with any contracts between SR and the FIG Don entities. But, he said, throughout the period from December 1997 to August 1999 SR maintained a substantial balance of pre-payments with the FIG Don entities under contracts for the purchase of grain, and those pre-payments provided a pool of funds which he anticipated could be used to obtain goods when BCL called for delivery. There was a great deal of flexibility in the relationship between SR and the Russian companies, and SR was able to negotiate with the FIG Don companies for agricultural commodities as required. 

82.	As to deliveries under the contracts between SR and BCL, and repayment by BCL of the sums advanced by SR to BCL from the proceeds of discounting the LCs, Mr Stojevic said:
“135.	On the other hand, once BCL started to call upon SR to make deliveries of goods, SR, in turn, would have called upon the FIG Don entities to make deliveries. The FIG Don entities, by delivering goods, would have started to reduce the balance of pre-payments made by SR.
136.	There was no agreement between SR and BCL as to when the advances made by SR to BCL (or BCL connected companies) would be repaid. I expected this aspect of the arrangement to be linked with BCL’s instructions for physical deliveries. I anticipated that when BCL required delivery of goods, SR would have made delivery only if (and to the extent that) the value of the goods covered by the Letters of Credit was greater than the value of the sums advanced to BCL.”

83.	In his third witness statement Mr Stojevic expanded on the last point as follows:
“34.	When SR advanced the proceeds from the discounting of LCs to BCL, this created a corresponding debt on the part of BCL to SR. From my point of view no formal security for this debt was required, because the goods to which it related had not yet been delivered. I therefore regarded SR as having security for that element of the transaction, although delivery would have taken place at the appropriate time had BCL properly called for the goods. 
	As long as the total value of all goods contracted for purchased by BCL under the LCs was greater than the total amount handed over by SR to BCL, then the ability of SR to withhold delivery of goods until appropriate payments were made was in SR’s view a form of security for the debt of BCL.
	SR drew a degree of comfort with respect to the increasing indebtedness of BCL to SR from the fact that SR had the security of being able to withhold delivery of the goods until the necessary payments had been made by BCL.”

84.	As to the warrant lists, Mr Stojevic said in his first witness statement:
“149.	I have to say that I did not, at the time, give much thought to the precise wording of the warrant list…looking at the documents now, I think that the reference in the warrant list to “seller’s warehouse holder” is unclear. “Seller” could refer to a farm, FIG Don or SR. I did not, at the time that the warrant list were presented, consider that the word “seller” referred to SR. It is true to say that the warrant lists were issued at SR’s request. KB say that the statement is untrue because the goods were never owned by SR, and SR never intended to own them. I have already explained that SR did not own the goods when the warrant lists were presented. It certainly intended to own them, or to be able to procure the passing of title to them, when required to make delivery. 
151.	As noted above, the Letters of Credit issued by KB from July 1998 onwards required the warrant list to contain some wording additional to that prescribed by the two Letters of Credit issued in December 1997. The additional wording was (with slight variations in particular cases) as follows:
“We irrevocably confirm that respective goods will be released to final consignee only upon authorisation of Komercni Banka a.s. We also confirm that all charges accrued from storage will not be calculated to Komercni Banka a.s, Prague.”
152.	The first sentence is, I think, important. To me, it is a confirmation by issuer of the warrant list that it will not deliver up the goods to any consignee without KB’s prior authorisation. At the time of presentation of each of the warrant lists, I believed that was what the issuer of the warrant list was confirming. I believed and I still believe that the warrant list would not have been issued unless the issuer intended and believed that it could honour that obligation. I did not understand the warrant list to contain a promise by the issuer by the warrant list to deliver the goods unconditionally to KB upon demand.”

Mr Stojevic’s oral evidence 

85.	Mr Stojevic was cross-examined for 7 days. This must have been a considerable endurance test. Mr Stojevic has the advantage of a very quick mind, and he had an impressive command of the documents in the case.  He understands English well, and the fact that the evidence was being simultaneously recorded in writing meant that he could read, as well as listen to, the questions being put to him. His own use of English is at times broken and ungrammatical, but, subject to that qualification, he has a good command of English.  But even so, the strain of giving evidence over such a long period must have been increased by the fact that English is not his first language. In evaluating his evidence it is right to bear those matters in mind and to consider any possibilities of misunderstanding.

86.	However, taking those matters into account, I was left in no doubt that on significant issues he was evasive and untruthful. Part of the reason for the length of his cross-examination was that progress was often made slow by the length and indirectness of his answers. With those general observations I turn to particular topics.

Warrant lists

87.	Mr Stojevic was cross-examined about his understanding of the reference to the “seller” in the standard wording of the warrant lists “We, as the sellers warehouse holder, hereby confirm…” (day 10, p 37 & ff).  His attention was drawn, by reference to a typical transaction, to the requirements of the LC (that the warrant list should specify the LC number, total quantity of goods, unit price and total amount) and to the matching details shown on the warrant list and on the invoice issued by SR (the same description of the goods, unit quantity, contract price and LC number).  However, he denied that he understood the word “seller” in the warrant list to be a reference to SR.  He said that he did not analyse the documents closely, but that as far as he was concerned the “seller” referred to in the warrant list might have meant whichever company owned the goods or the warehouse itself or SR. 

88.	Mr Stojevic obtained the warrant lists from the warehouses in order to meet the requirements of the bank. This happened many times. The invoices and warrant lists were brief. They must have been familiar to Mr Stojevic. He may not have scrutinised them at length, but the language used was not complex.  I reject his evidence that the meaning of “seller” in the warrant list was unclear to him or that he ever truly thought that it could sensibly be taken to be someone other than SR.  The warrant list was patently referring to a consignment of goods which were supposedly the subject of a contract of sale financed by a specified LC, under which the seller was SR.

89.	Reliance was placed by the defendants on the witness statement of Mr Shershunov. In particular, I was referred in the defendants’ opening submissions to paragraph 5.6 of his statement, in which he said:-
“In each of the warrant lists we (i.e. DKHP and RKH) are described as “the sellers warehouse holders”. I have been asked to whom we intended to refer when using the expression “sellers”. Before answering this I should stress that we have not created the wording of this document and therefore I cannot say what the person who drafted this wording intended it to mean. However, according to my understanding, the “sellers” referred to in each of the warrant lists were the owners of the goods at the time of signing of the warrant list, whoever they might be. As I shall explain below, none of the warrant lists related to specific goods. It was, therefore, impossible to point to a specific parcel of goods as being that covered by any particular warrant list. Equally it was impossible to identify the owner or owners of such goods. When in the document we use the expression “sellers”, we were therefore referring to whosoever might be the owners of the goods. 
Such owners could be the farms, the silo owners, or other companies storing the goods in their warehouses. As I shall explain further below, we anticipated that the goods covered by any particular warrant list could be situated in the warehouses, or come from anywhere in the Rostov region.”

90.	He went on to say:
“I understand that in the English proceedings KB say that each of the warrant lists represented that DKHP or RKH (as appropriate) was acting on behalf of SR. Although, as I have explained above, we issued the warrant list at the request and on the instructions of SR, we were certainly not representing (as far as I was concerned) that the “sellers” were SR and that we were therefore SR’s warehouse holder.” 

91.	The effect of this would appear to be that Mr Shershunov was willing to sign documents containing undertakings to the bank, on the instructions of SR, in relation to goods which might be anywhere in the Rostov region and in respect of which it was impossible to identify the owner. This would no doubt have been explored in cross-examination if Mr Shershunov had given evidence. Without having seen and heard him, I can say only that I do not regard his evidence on the topic as carrying any weight. 

92.	I move from Mr Stojevic’s understanding of the reference to “seller” in the warrant list to the issues of his honesty in causing warrants list to be presented to the bank in which the issuer, as SR’s warehouse holder, stated that the relevant goods (a) were lying in its warehouse and (b) were being held only in favour of the bank.

93.	As to (a), it is the defendants’ case that Mr Stojevic believed that goods of the relevant description were in the relevant warehouse and available for delivery to BCL as a result of pre-payments made by SR to the FIG Don entities and Mr Shershunov’s oral assurances as to the goods’ availability. I will come back to that issue.

94.	As to (b), it is the defendant’s case that the giving of instructions by SR to the warehouse to hold goods as described in each warrant list only in favour of the bank, and the acceptance of those instructions by the warehouse, was effected by SR instructing the warehouse to issue the warrant list and by the warehouse doing so. This was the effect, as I understand it, of an answer by Mr Stojevic to a question from me at the end of his evidence (day 13, pages 96-97). 

95.	However, at the same time as it was being represented to the bank that goods as described in the warrant list were being held only in favour of the bank, Mr Stojevic on his own evidence knew that he intended to pass all or most of the discounted proceeds of the LC to BCL, and that he intended not to permit delivery under the contract of sale between SR and BCL, for which payment was to be by the LC, until after repayment by BCL of the re-cycled proceeds of the LC. As he made clear in the passages from his third witness statement set out above, he regarded the ability of SR to withhold delivery of the goods sold to BCL as a form of security for BCL’s debt created by SR passing to BCL the proceeds of the LC by which payment for those goods had been made. How could that be squared honestly with the making of representations to the bank that the goods were held only in its favour (assuming for this purpose that Mr Stojevic believed that the goods were being held in the warehouse)? At the end of his evidence I asked Mr Stojevic about this (day 13, pages 88-90, 93-95).  

96.	Mr Stojevic gave a lengthy answer containing two parts.  The first part was that he was confident from the pre-payments made by SR to FIG Don that SR had the ability to fulfil its contractual obligation to BCL.  Whether true or not, this was not an answer to the point.  The second part involved drawing a chronological distinction between the presentation of documents to the bank and the subsequent loan of discounted LC proceeds to BCL, and treating the two stages as unconnected.  I regard this as disingenuous. The plan to recycle the proceeds of the LC to BCL, and to withhold delivery of goods under the contract of sale financed by the bank, was in existence at the time of the presentation of documents to the bank; it was not a later independent idea. Mr Stojevic on his own evidence intended all along that the goods should not be held “only” in favour of the bank, but rather that they would not be released to the supposed buyer, BCL, until it had repaid the re-cycled proceeds of the discounted LC. 

97.	I reject also Mr Stojevic’s suggestion that he believed that the statement in the first sentence of the warrant list that the goods “are being held only in favour of” the bank was narrowed by the irrevocable confirmation in the next sentence that the goods would be released to the final consignee only upon the bank’s authorisation. On that argument it would not have mattered what rights anybody else might have to prevent delivery of the goods. That would make no commercial sense from the bank’s viewpoint and would be contrary to the requirement of the LC that the warrant list should state that the goods were held only in its favour.

Pre-payments
98.	The subject of pre-payments by SR to the FIG Don entities is complex and occupied a considerable time at the trial.

99.	Given the nature of the Russian grain trade, as described by Mr Day-Robinson, it would be highly unlikely that a company in the position of SR would make very large pre-payments to FIG Don unless it was either well secured or had some form of financial interest in FIG Don.  It was not well secured. (It appears from SR’s accounts for 1998 that SR’s bank overdraft was secured by a charge given by RKHP over grain stored in its silos, a promissory note or notes from RKHP for $20 million and a personal promissory note from Mr Shershunov for $1 million.)

100.	Schedule A to the re-amended defence showed what the defendants claimed was the outstanding balance of pre-payments made by SR at various dates starting in July 1999, when the alleged balance was US$30,254,449. At the start of the case Mr Doctor attacked this schedule on various grounds. During the trial the sums were recalculated by the defendants. The recalculated opening figure was $20,959,011 net, or $24,205,010 including interest.

101.	The bank does not dispute that some payments were made by SR to FIG Don, but it questions the purpose and amount of the payments.

102.	On 11th August 1999 Mr Stojevic sent a fax to Mr Alon, which began:
“The purchasing of goods at Rostov is continuing at a rapid rate. We are receiving bearer warehouse receipts for goods stored in inland silos on a daily basis and the situation as of today is as follows……”.

He went on to state that BCL had transferred $500,000 to Russia and that SR had received bearer warehouse receipts for specified quantities of feed wheat, feed barley and milling wheat, the total purchase price of which stood at $1,319,624. The fax continued:
“In the light of the above, it is clear that we need to effect payment to cover the outstanding balance of $819,624 due to the Russians. Importantly, this is the only way to ensure the continuing purchase of goods.”

103.	That fax was sent at a time when, according to the defendants’ recalculated figures,  there was an outstanding balance of pre-payments made by SR to FIG Don of over $24 million (including interest).  Yet the fax said that there was a balance due to the Russians of $819,624 and that this needed to be paid as “the only way to ensure the continuing purchase of goods”.
 
104.	This apparent contradiction was put to Mr Stojevic in cross-examination (day 12, pages 61-65). Mr Stojevic began by saying that there were many other elements which had to be included and that the analysis had nothing to do with reality. Mr Doctor pressed his point, but he received no satisfactory answer.

105.	The nature of SR’s claimed pre-payments to FIG Don was also challenged by reference to particular examples. 

106.	SR claimed to have made a pre-payment to DKHP of $10 million on 17th July 1998 under a contract for the purchase of sunflower seeds. There was some confusion as to the written contract.  The bank also wanted to see SR’s bank statements for verification of the payment. This led to some skirmishing and some production of further documents. The position on the documentary evidence at the end of the trial can be summarised as follows.  A payment of $10,000,000 was paid to DKHP on 20th July 1998 and debited to SR’s account with Trigon Bank. SR’s account with that bank had been in overdraft until 17th July 1998, when two credits were received of $4,700,000 and $4,907,076. The source of the first was BCL and the source of the second was the discounting of one of the LCs issued by the claimant bank.  What underlay these money movements is unclear.

107.	SR also claimed to have made pre-payments to CCD amounting at 3rd August 1998 to approximately $3,400,000, including interest of approximately $325,000. This sum consisted principally of payments said to have been made by SR to CCD in respect of two contracts identified as C4/97 and C6/98. 

108.	This was a strange saga.  SR was not a party to either of the contracts, nor were they contracts for the purchase of grain. They were both loan agreements made between CCD as borrowers and a company called West East Private Investments Limited (“West East”) as lenders. The first was for $1.7 million and the second for $1 million. Each loan agreement specified that the sums borrowed were to be applied “only for the purpose of increasing of working capital and bridge of the finance of investments”. 

109.	The $1 million loan was paid by West East to CCD on 23rd June 1998. On 25th June 1998 BCL paid $1,000,000 to West East. On 26th June 1998 CCD made two payments totalling $1,000,000 to West East. Money appears to have been circulating, but no payment was made by SR. 

110.	Both loan agreements were signed on behalf of West East by Mr Alon.  In his cross-examination Mr Stojevic was asked about West East. He said that the company was not related to BCL or Mr Alon. He described it as a shell company and said that its beneficial owner was a businessman called Mr Kresmir Fancev, who lives in Zagreb. West East has the same business address as SR at 32 Hans Road, London. 

111.	Mr Stojevic gave a convoluted and in the end incomprehensible explanation how these transactions gave rise to obligations on the part of SR and could in some way be regarded as involving pre-payments by SR to CCD (day 12, pp 94-114). 

112.	I have no doubt that SR and FIG Don had a close relationship, but I do not believe that on the evidence it is possible to arrive at any reliable conclusions as to the true nature and details of their dealings or the balance of accounts between them at any time.

Beginnings of the LC scheme

113.	The defendants’ pleaded case was that the transactions underlying the LCs had their origin in an oral agreement made between Mr Stojevic and Mr Alon in November or December 1997. 

114.	The first two LCs were issued on 29th December 1997, but only one of them became operative. The operative LC was in respect of a sale of 13,700 mt of sunflower seeds by SR to BCL in the sum of $3,014,000. The other was for 50,000 mt of barley in the sum of $4,500,000.

115.	The story of these transactions is rather complicated, but I will begin with the documentary evidence and then consider Mr Stojevic’s evidence.

116.	Warrant lists for the sunflower seeds and the barley, each referring to the relevant LC number, were issued by RKHP on 29th December 1997. 

117.	There were several documents dated 5th January 1998:- (a) there was an invoice from SR to BCL for the sunflower seeds, and it is highly probable (from other documents) that there was a similar invoice for the barley; (b) there was a fax from Mr Stojevic to Mr Alon, asking him to fax invoices (of which Mr Stojevic provided samples) from Whitehawk Enterprises Limited, a company associated with BCL, for the sunflower seeds and the barley; (c) there were invoices of the same date from Whitehawk to RKHP; and (d) specimen payment orders were faxed by Mr Stojevic to RKHP for issue on RKHP’s headed paper, instructing SR to pay Whitehawk for the sunflower seeds and barley in accordance with Whitehawk’s invoices to RKHP.

118.	On 7th January 1998 SR paid $1,750,000 to Whitehawk.

119.	On 12th January 1998 SR’s invoice to BCL and RKHP’s warrant list in relation to the sunflower seeds were presented to the bank through the advising bank (Bank Austria Handels Bank AG). They were accepted on or about 14th January 1998. The other LC was never made operative, although its validity was extended until 30th March 1998.  (In his first witness statement Mr Stojevic said he did not know why Mr Alon did not set the LC operative. I suspect that the reason may well have been that BCL was not in a position to make the pre-payment required under the LC before it could become operative. There is evidence that Mr Alon was financially stretched, from a letter which he wrote to Mr Stojevic on 12th March 1998.)

120.	In his oral evidence Mr Stojevic said that these transactions were intended to be a test to see how the LC business would operate. After the documents relating to the sunflower seeds sale had been presented to the bank, Mr Stojevic decided that he wanted to wash out the business. He then learned from BCL that it had sold on the goods to Whitehawk. The payment of Whitehawk by SR and the invoicing of RKHP by Whitehawk were means by which the deal was closed. 

121.	I do not believe this explanation for a number of reasons. 

122.	First, if the object of the exercise was to see how the LC scheme which had agreed between Mr Stojevic and Mr Alon would work as a way of generating income for both companies from the sale of Russian agricultural produce, what was the point of washing out the business in such a way that the only thing tested was the ability of the participants to get money out of the bank? 

123.	Second, why should Whitehawk be paid $1,750,000 when its only role was to agree to buy goods from BCL and resell them to DKHP? 

124.	Third, why should DKHP agree to buy back the goods? 

125.	Fourth and foremost, the explanation does not fit with Mr Stojevic’s involvement in the creation of the documents which passed between SR, BCL, Whitehawk and RKHP, and the timing of those documents. RKHP’s warrant list and SR’s invoice to BCL in relation to the sunflower seeds were not presented by the advising bank to the claimant until 12th January1998. As a matter of ordinary commercial sense, one would expect these documents to have been forwarded by the advising bank promptly after receiving them from SR, and in any event the invoice from SR to BCL cannot have been supplied by SR until on or after 5th January 1998 (the date of its issue). On the same day Mr Stojevic was involved in the creation of documents relating to the “wash out”.  When the warrant list and SR’s invoice in respect of the sunflower seeds were presented to and accepted by the claimant bank, enabling SR to raise money from the LC issued by the bank, Mr Stojevic already knew that the entire transaction was circular and that no sunflower seeds would be changing hands.

126.	Having disbelieved Mr Stojevic’s explanation, I can see no intelligible explanation except that this transaction was a fraud on the bank, for the purpose of which paper went in a loop between willing participants under the organisation of Mr Stojevic. 

Accounts between SR and BCL

127.	SR employed a firm called Abros to provide bookkeeping services. The name of the bookkeeper was Mrs Chakera. Her bookkeeping records were made available each year to the auditors. 

128.	SR’s audited accounts for 1998 and 1999 did not properly reflect SR’s receipts from the discounting of LCs, and the payments made by SR from those proceeds to BCL (or connected companies), according to Mr Stojevic’s explanation of the transactions. In relation to the payments made by SR to BCL (or connected companies) from the proceeds of discounted LCs, 6 payments were not included in the audited accounts (2 in 1998 and 4 in 1999), 3 were netted off in creditors against loan advances shown from BCL, and the remainder (the large majority) were treated as cost of sales. Mr Chasty, the audit partner, stated that he would not knowingly have accepted as proper the inclusion in SR’s cost of sales of any amount which had been advanced by SR to BCL or a third party by way of loan. The auditors were unaware of the financing scheme which, on Mr Stojevic’s evidence, explained the payment of discounted LC proceeds by SR to BCL. 

129.	Mr Stojevic sought in his evidence to distance himself from the preparation of the accounts, saying that it was the job of the accountants and bookkeepers (day 10, pp 78-79).  

130.	Mrs Chakera was not called to give evidence, but I can think of no sensible reason why she should have treated payments by SR to BCL (or connected companies) as cost of sales if she had been told that they were in truth loans.

131.	There is a further reason why it is remarkable that Mr Stojevic did not disclose to SR’s auditors the nature of what he now says were loans to BCL (or connected companies). Note 17 to the 1998 audited accounts read as follows:
“Deed of Assignment 
The company entered into a number of transactions during 1998 on behalf of third parties. These principally involved the receipt and payment of funds and resulted in balances due to and by the company of £10,034,884. A letter of understanding dated 27th October 1998 was signed between the company and a third party and on 19th October 1999 a deed of assignment was signed to formalise this letter of understanding. Under this deed, the balances owing to the company were assigned to a third party and the third party assumed responsibility for the corresponding liabilities. 
The directors have incorporated the effect of the deed of assignment in these financial statements as they consider this gives a correct reflection of the nature of the underlying transactions. There is no effect on the net assets or the profit and loss account in either year presented as a result of the above treatment.”

132.	Mr Stojevic’s evidence was that Moore Stephens wanted to remove items which were not pure trading debts from debtors and creditors in the balance sheet. This was the reason for the deed of assignment. The other party to the deed of assignment was West East, and the signatory on West East’s behalf was Mr Alon. Originally Moore Stephens were intending to qualify SR’s accounts because the deed of assignment was not executed until more than 9 months after the balance sheet date. However, a note by Mr Chasty on the audit file, dated 15th October 1999, recorded that Mr Stojevic told him that (with apparent prescience) “the arrangement to transfer the funding obligations and related receivables to West East Private Investments Limited had been discussed and agreed with West East during 1998”. Mr Chasty agreed to remove the audit qualification if satisfactory documentary evidence to that effect were forthcoming. Mr Stojevic subsequently produced a letter of understanding, which was signed by Mr Alon for West East and bore the date 27th October 1998. In the context of the auditors’ concern to remove any items which were not pure trading debts from the debtors and creditors in SR’s balance sheet, it would have been particularly relevant for Mr Stojevic to disclose to the auditors the fact that SR had been making large loans to BCL (and connected companies) from the proceeds of discounted LCs, if that was the truth.

133.	The state of accounts between SR and BCL at the end of 1998, as shown to the auditors and in SR’s audited accounts, was that SR owed BCL approximately  $3,400,000 (a figure confirmed by BCL).  However, on the defendants’ case in these proceedings, this was the opposite of the truth, and SR was owed many millions of dollars by BCL (or connected companies).

134.	One of the companies connected with BCL was a company called MFC. In 1998 SR paid MFC over $20 million from the proceeds of discounted LCs. Invoices were at times issued by MFC to SR, ostensibly for the sale of soft commodities. It was suggested to Mr Stojevic in cross-examination (day 11, page 8) that there was no reason why, during the period from December 1997 to August 1999, SR would have wanted to enter into any contracts to buy soft commodities from either BCL or MFC.  Mr Stojevic said that whenever, during that period, SR apparently bought a soft commodity from BCL or a related company, it was in fact washing out a contract by which BCL or some other company had contracted to buy a soft commodity from SR.  He was asked to explain, by reference to particular examples, which contracts were being washed out, but he was not able to do so.

135.	Under the deed of assignment, the liabilities assumed by East West included a debt of £5,601,635 supposedly owed by SR to MFC.  The auditors were told (as appears from a document at O 1/182) that this sum, equivalent to $9,320,000, represented payments due to MFC for purchases in respect of LC sales. On Mr Stojevic’s evidence, that was not true. On 3rd August 1999 Mr Chasty wrote to Mr Stojevic asking him, among other things, to “supply supporting documentation for the creditor of US$9,320,000 in respect of LC sales”. Mrs Chakera replied on 5th October 1999 saying “I enclose letter confirming the balance, together with Off-take Agreement”. The letter of confirmation came from MFC, and the off-take agreement was an agreement between SR and MFC (signed on its behalf by Mr Alon), dated 12th June 1998, entitling MFC to require SR to buy various types of Russian agricultural produce, at prices to be based on the prevailing domestic market price, on deferred payment terms up to 360 days after presentation of documents.

136.	Mr Stojevic was unable to remember why SR entered into that agreement with MFC. He said that no goods were delivered to MFC under it. It was simply a facility given to MFC, but it was never operated. He was unable to explain how SR came to owe the debt to MFC supposedly assigned to West East. On the evidence it is incomprehensible.

137.	By the end of the trial it was obvious from these and other matters that a true analysis of SR’s dealings with BCL and related companies is not to be found in SR’s audited accounts or the records on which they were based. 

138.	However, for his own purposes Mr Stojevic needed to have a record of the balance of accounts between SR and Mr Alon’s companies; and he kept a record (J7/2351). Mr Stojevic and Mr Alon also both signed a document (B5/245) headed “Balance of account for 1998 for the transactions between the group of companies associated with Mr Barak Alon and the group of companies associated with Mr Zvonko Stojevic”.  This document showed a total amount due to BCL for the year ended 31st December 1998 of $23,718,689.07. Mr Stojevic was asked to explain the document. His answer was that it was only a working document, prepared for the purposes of a possible settlement of affairs between Mr Stojevic’s companies and Mr Alon’s companies under which SR would “take back” all the goods which it had sold to BCL but had not been delivered (day 11, page 33).

139.	This explanation is not consistent with the words which he signed (“Mr Alon and Mr Stojevic hereby accept the following as a final and binding statement of their account for the year ending 31st December 1998)”.  It is also noteworthy that the agreed balance due to BCL as shown on the document tallies almost exactly with Mr Stojevic’s own record. His record (J7/2354) showed a balance due to BCL of $21,598,468.59 and interest due of $2,120,268.65. The agreed figures (B5/245) were $21,598,420.42 net and interest of $2,120,268.65 – a difference of less than $50.

140.	On the face of it, the only rational way of understanding the balance signed by Mr Stojevic and Mr Alon is on the premise that funds received from discounted LCs were regarded, as between SR and BCL, as belonging to BCL. If sums received by SR from discounting LCs had been treated as belonging to SR, and payments from those proceeds to BCL as loans to BCL (as is the defendants’ case), the resulting figure would have been very different and would have shown a substantial balance due from BCL to SR. 

Off-take agreements

141.	I mention this subject briefly because Mr Stojevic relied on the fact that SR entered into genuine off-take agreements for the 1999 season with well-known companies, such as Louis Dreyfus, as evidence which tends to support the genuineness of the sales by SR to BCL. I do not accept that it does.  On the contrary, if the sales to BCL were genuine and SR was paid for them by the LCs, SR had no need to protect itself by entering into off-take agreements. In doing so SR provided a service to BCL, to whom the agreements were assigned.  Why did  it do so?  From the contemporaneous evidence, I believe that it did so in order to persuade the bank to continue issuing LCs on the application of BCL.  For example, on 11th May 1999 SR wrote to Louis Dreyfus asking it to send a fax to the bank confirming that it had instructions from SR to pay irrevocably and exclusively all proceeds from its take-off agreement with SR (which had been assigned to BCL) to BCL’s account with the bank.

Conclusions

142.	The purported sales by SR to BCL underlying the LCs were abnormal in many and in important respects. First, there were no contractual documents apart from the invoices. Second, there were no terms as to quality or time for delivery.  Third, substantial amounts were involved, but no delivery took place. Fourth, despite non-delivery under the earlier contracts, further contracts for large amounts continued to be made.  Fifth, payment by deferred LC was unusual.  Sixth, the regular payment by the seller to the buyer of the discounted proceeds of the LCs was still more unusual. Seventh, there were no written loan agreements recording the terms on which these payments were made. Eighth, there was no agreement as to the period of the loan or the rate of interest.

143.	Mr Stojevic sought to explain these matters by his trusting relationship with Mr Alon.  If SR and BCL were on such close and trusting terms that they were prepared to do business by word of mouth, and to leave contracts of sale open ended until such time as the buyer might wish, and be in a position, to take delivery of the goods and resell them, there was no need as between themselves to enter into advance contracts of sale with payment by deferred LCs. The sole reason for doing so was, in reality, to raise money from the bank. 

144.	Although it is hard to judge how far Mr Stojevic and Mr Alon trusted each other, on detailed examination Mr Stojevic’s account of the LC scheme did not stand up, and he was driven on numerous occasions to what I have concluded were lies and evasions.  I have not dealt with all the points which were raised regarding his credibility, but I have attempted to concentrate on those matters which seem to me to bear most closely on the central issues. 

145.	I am in no doubt that the true explanation of the scheme lay in the fact that Mr Alon had a credit line with the bank, but in order to raise money he wanted a “seller” who would then pass the proceeds of the discounted LCs back to him. SR was prepared to play that role and was well fitted to do so.  SR had an established relationship with FIG Don; BCL had an established relationship with the bank. Mr Stojevic and Mr Alon may both have seen the scheme as a way of enabling BCL to raise working capital to participate in trade in Russian agricultural produce, in which SR was interested. However, I do not believe that either SR or BCL regarded the invoices which were presented to the bank as anything more than pieces of paper brought into existence for the purposes of raising finance. On that basis the evidence falls into place.  It explains why the proceeds of the discounted LCs were paid over to BCL, rather than to the producers.  It explains why Mr Stojevic and Mr Alon agreed as they did on the balance of accounts between their respective companies at the end of the first year of operation of the scheme. In short, I am fully satisfied that the invoices were sham documents. They did not reflect any true underlying contractual commitment for the delivery of goods.  SR’s role in the LC transaction was complete when it paid the LC proceeds to BCL. BCL would be left to reimburse the bank.

146.	As to the warrant lists, the warehouses may or may not have held the described goods when the warrant lists were issued; but they were certainly not holding them in any true sense in favour of the bank. If they had been, this would have been an elementary matter to establish in evidence. Mr Day-Robinson’s unchallenged evidence was that Russian warehouses keep records of the receipt of goods and for whom they are held. The warehouses were not unfriendly to SR. If they had records showing that the relevant produce had been held for SR in favour of the bank, no doubt the records would have been produced. Moreover, if the warehouses had been holding relevant goods in favour of the bank, there is no obvious reason why Mr Shershunov should have said the opposite to Mr Grigoriev. 

147.	The defendants’ pleaded case that any misrepresentation contained in the warrant lists was without the knowledge of the defendants, and was the sole responsibility of the warehouses, is in my view unsustainable. 

148.	Mr Stojevic procured the warrant lists from the warehouses and it is significant that when SGS asked the warehouses for facilities for inspection, FIG Don immediately faxed the request to SR, who drafted a reply refusing inspection. Both must have known that the warehouses were not holding the relevant goods in favour of the bank, but FIG Don was looking to SR for guidance how to handle the situation.  Further, Mr Stojevic’s letter to Mr Alon of 11th August 1999, saying that further payments by BCL were needed if supplies were to continue, would make no sense if Mr Stojevic had believed the true position to be that the warehouses were holding large quantities of produce on SR’s instructions in favour of the bank, for which the warehouses had been prepaid. Moreover, even if at the time of the alleged contracts the warehouses were in fact holding goods of the relevant description and quantity, the defendants on their own case (as already discussed) were intending to treat the quantities of produce purportedly sold to BCL as security for repayment by BCL of the LC proceeds; and that itself is inconsistent with an honest representation to the bank that such goods were being held only in favour of the bank.

149.	I conclude that the bank has proved to the required high standard that the invoices and warrant lists presented to the bank were false to the defendants’ knowledge. 

Reliance

150.	The bank accepted the documents presented under the LCs because of their apparent conformity (except in some instances for minor matters which are not relevant for present purposes). This was the evidence of Miss Horakova, who checked the documents in most cases, and it is properly to be inferred in the remaining cases. It follows that by presenting documents which apparently conformed with the requirements of the LC but were false, as I have concluded, the defendants by their dishonesty caused the bank to act to its detriment in accepting the documents presented. 

151.	It is pleaded in the re-amended defence that the bank did not rely upon representations in the documents which were presented insofar as the LCs stipulated for pre-payment. This is a false point. The defendants’ deceit caused the bank to accept the documents presented. In reliance on those documents it accepted liability to pay SR, or its assignee, the face value of the LC. The stipulations in the LCs for pre-payment had nothing to do with the question of the bank’s reliance on the authenticity of the documents.  Whether they affect the calculation of the amount of damages to which the bank is entitled is another matter, to which I will come. 

Quantum

152.	The leading case on the assessment of damages for deceit is Smith New Court Securities Limited v City Bank NA [1997] AC 254. The defendant is bound to pay compensation for all the damage directly flowing from the transaction, but the claimant must give credit for any benefits received as a result of the transaction. Contributory negligence is not available as a defence to an action in deceit: Standard Chartered Bank v Pakistan National Shipping Corporation (No.2) [2000] 2 Lloyd’s Rep 511 affirmed by the House of Lords on 6th November 2002.

153.	The starting point for the assessment of the bank’s loss is the amount paid out by it under the relevant LCs, ie $94,720,382.28. 

154.	It is accepted that the bank must give credit for any fees or commissions which it received as a result of the operation of the LCs. The bank has said that the appropriate figure is $250,000, and that has not been challenged.

155.	There are two issues which have been argued as matters of principle. One concerns pre-payments required under the terms of the LCs. The other concerns sums paid by SR to BCL or connected companies.

Pre-payments

156.	The defendants’ argument is that, insofar as the bank failed to obtain or to retain the pre-payments stipulated in the LCs, such behaviour was the sole cause of the bank’s resulting loss of those amounts. Accordingly, those sums must be deducted in calculating the amount of the damages. 

157.	I do not agree with this argument. When the bank accepted the documents presented to it, as a result of the defendants’ fraud, it incurred an apparent liability to the beneficiary (or its assignee) for the face value of the LC. The defendants’ fraud was therefore an operative cause of the loss sustained by the bank in paying that amount (or a discounted proportion). Its own negligence in failing to obtain or retain the pre-payment specified in the LC was a concurrent partial cause of its loss. However, the bank breached no duty to the beneficiary in that regard and its own contributory negligence is not available as a defence to a fraudster.

Amounts paid by SR to BCL and connected companies

158.	The defendants contend that the bank received benefits as a result of the LC transactions, for which credit should be given, to the extent that sums derived from the proceeds of discounting the LCs were used to discharge liabilities of BCL or connected companies to the bank.

159.	Schedule C to the re-amended defence sets out details of payments totalling approximately $84 million made by SR from the proceeds of discounted LCs to BCL, MFC, Westphalia and SR Prague. There is an issue whether SR Prague was controlled by Mr Stojevic or Mr Alon. It is common ground that the other companies mentioned were controlled by Mr Alon. It is said that approximately $64 million out of that $84 million was paid to an account of BCL, MFC or SR Prague held with the bank.

160.	It is the defendants’ case that the $64 million is deductible from any damages recoverable by the bank on the basis that it went to discharge liabilities owed to the bank and accordingly constituted a benefit to the bank for which credit must be given. It is further suggested that the balance of the $84 million may also have been transferred to the claimant bank, in which case credit would similarly have to be given for it. 

161.	Because the point was raised by a late amendment, full disclosure of relevant documents has not been given, but the defendants invited me to decide that their argument is correct in principle, or is at least arguably correct, and to direct a trial on this aspect of quantum.  Two examples have given by way of illustration in a helpful statement of agreed propositions and facts relating to quantum issues.

Example 1: Payment of $3,900,000 to SR Prague on 4th August 1999
a)   On 4th August 1999 SR paid $3,900,000 to an account held with the claimant    bank in the name of SR Prague. The payment is an example of the re-cycling of funds obtained from discounting LCs. 

b)	 On 6th August 1999 $3,900,000 was transferred from SR Prague’s account to BCL’s account with the bank.

c)	Before 1st August 1999 the balance of BCL account was $5,625,995. 

d)	On 1st and 3rd August 1999 the bank reimbursed itself from the BCL account in respect of three matured LCs, one of which had been issued in favour of SR. The total amount deducted by the bank from the BCL account in respect of the matured LCs was $8,413,503.

e)	The balance on the BCL account on 6th August 1999, after it had been credited with $3,900,000, was $1,112,492.

f)	 Applying a “first in and first out” approach to the transactions on the BCL account, the defendants say that approximately $2,780,000 of the $3,900,000 transferred from the SR Prague account from 6th August 1999 was used to discharge BCL’s liabilities to Komercni Bank in respect of the LCs for which the bank reimbursed itself. The bank does not accept that this approach is appropriate.

Example 2: Payment of $10,030,000 to SR Prague on 10th August 1999
a)	A payment of $10,030,000, apparently derived from three of the relevant LCs, was paid to SR Prague’s account with the bank on 10th August 1999. It was transferred to BCL’s account with the bank on 12th August 1999. 

b)	Prior to this transfer, the balance on the BCL account was $5,137,492. 

c)	On 20th August 1999 a sum of $300,000 was credited to the BCL account from another source.

d)	On 27th August 1999 the bank reimbursed itself from the BCL account in respect of two matured Letters of Credit, in respect of both of which SR was the beneficiary. The amount deducted from the account in respect to the matured LCs was $9,586,131. 

e)	The closing balance on the BCL account on 27th August 1999 was $5,881,318. 

f)	If a “first in first out” approach is applied to the above transactions, approximately $4,450,000 of the $10,030,000 transferred from the SR Prague account to the BCL account on 12th August 1999 was used to discharge BCL’s liabilities to Komercni Bank in respect of the LCs for which the bank reimbursed itself on 27th August 1999.

The defendants’ argument

162.	The defendants argue that there is a very close relationship between the bank’s loss on the one hand and the type of benefit which it gained on the other hand. The loss consisted of the amount paid by the bank to holders of LCs for which BCL failed to reimburse it. The gain consisted of credits to the account of BCL which were then applied by the bank in the discharge of BCL’s LC reimbursement obligations.

163.	The defendants accept that they cannot claim a benefit in the form of the discharge of the indebtedness of BCL in circumstances where SR has already had the benefit by a reduction of SR’s own liability to the bank (i.e. where an LC issued in favour of SR was reimbursed out of the proceeds of a later LC issued in favour of SR). However in the case of the first example given above, two of the LCs in respect of which the bank reimbursed itself from the proceeds of the money paid by SR to BCL had been issued in favour of other beneficiaries. It is argued that since it was “SR’s money” that discharged the reimbursement obligation of BCL in respect of non-SR LCs, the bank should give credit for the benefit to itself of that reimbursement in the calculation of its claim against SR, because SR’s payment conferred on the bank a benefit which it otherwise would not have enjoyed.

The bank’s argument

164.	The bank argues that what SR did with the money which it obtained as a result of its fraud was a matter of its own choice and is irrelevant to the calculation of bank’s loss. If the ultimate result of its dealings with other parties was to produce some benefit to the bank, this did not flow directly from the wrong for which the bank claims damages. The bank also submits that the defendants’ argument contains a fallacy in that it depends on characterising the money used to discharge liabilities of BCL to the bank as “SR’s money”, when there is no justification for doing so. When money was paid by SR to BCL, it ceased to be SR’s money. A full analysis of what was going on between SR and the other conspirators as various payments were made between their different accounts would be impossible, and it is wrong to try to use rules of tracing in such circumstances in order to attribute and quantify benefit to the bank from the defendants’ tort.

Conclusion

165.	When Lord Browne-Wilkinson said in Smith New Court Securities Limited v Citibank NA [1997] AC 254, at p 267, that the claimant in an action for deceit “must give credit for any benefits which he has received as a result of the transaction”, he was not considering  questions of remoteness. 

166.	The scope of the matters which may be taken into account as off-setting benefits is one of the most difficult areas of the law of damages. In British Transport Commission v Gourley [1956] AC 185 Lord Reid said, at p 214:
 
“I do not think that it is possible to formulate any principle by which it can be determined what is and what is not too remote.  Mayne on Damages, 11th ed., p. 151, refers to “matter completely collateral,” and for a general description of what is too remote I cannot find better words, but I do not think that every case can be solved by merely applying those words to it.”

167.	The question whether an alleged benefit should or should not be taken into account cannot be determined by mere application of the “but for” test.  Where the wrongful conduct consists of causing the victim to enter into a venture or transaction which he would not otherwise have entered into, and the wrongdoer alleges that the victim has received a subsequent benefit which he would not have received but for entering into the venture or transaction, it seems to me that the question to be asked is whether the receipt of the benefit was not merely a result of the venture or transaction, in a historical sense, but was part of the complex of obligations and benefits intrinsic, ie belonging naturally, to the venture or transaction.  Otherwise, it is hard to know where to draw the line.  Consider the case of S, who sells an original work of art to B as a result of being deceived by B into thinking that it is a copy.  If S had known the truth there would have been no sale, but by the time S discovers the truth, the work has been re-sold and his only remedy is in damages.  S must give credit for the price which he received from B, because that was a benefit which was part of the transaction.  But what S did with the purchase money is another matter.  He may have used it in some highly successful investment, but, if so, the benefit which accrued to him would the product of his independent decision.  What happened to the work of art after the sale would also be irrelevant. Suppose that there were further sales and that B, or a later seller, chose to use the proceeds of sale to settle an obligation owed to S.  That would be a benefit, of a kind, to S; but it would be not be a benefit of the original sale.  Or suppose that S was able himself to re-buy the original work for less than the price he had received from B.  S would ultimately have made a profit, but that would not be a benefit intrinsic to the original sale; it would be a benefit arising from a smart later purchase. 

168.	It is necessary in each case to identify the relevant venture or transaction.  In the present case there were a considerable number of them.  Each time the bank accepted fraudulently presented documents, it accepted liability under a separate LC; but with that liability went the benefit of a right to reimbursement by BCL.  If the bank received such reimbursement from or on behalf of BCL, that would extinguish the bank’s loss in respect of that transaction, whatever the derivation of the funds may have been.  So, if the proceeds of LC number 2 were used to reimburse the bank in respect of LC number 1, that would extinguish the bank’s loss in respect of LC number 1.  In this regard the identity of the beneficiary under the LCs is immaterial.  Conversely, if the bank did not receive such reimbursement in respect of LC number 2, its loss in respect of that LC remains.  The fact that the proceeds of LC number 2 may have been used to reimburse the bank in respect of LC number 1 (or some other obligation owed to the bank) is in my view irrelevant to the bank’s claim in respect of LC number 2. 

169.	I believe that the results of this approach are just. 

170.	It is not possible on the material before me to determine whether SR Prague was controlled by Mr Stojevic or by Mr Alon. However, suppose for the sake of argument that SR Prague was a branch office of the defendant company and that it used money derived from the proceeds of a later LC to reimburse the bank in respect of an earlier LC issued in its favour. The defendants rightly do not seek to argue that SR’s use of the money in that way could properly be said to be a benefit to the bank which should be brought into account when calculating damages for SR’s fraud in relation to the later LC. Otherwise, as Mr Doctor observed in his closing submissions, a customer owing money to a bank which he could not repay could solve his problem by obtaining money from the bank by fraud and using it to pay his prior liability. 

171.	Consider next the position if the fraudster decides to use the proceeds of his fraud to discharge a liability owed to the bank by a third party.  I reject the argument that he would be entitled to have that matter taken into account as a relevant benefit to the bank when calculating the loss resulting from his fraud. As before, his use of the funds would be the result of his independent choice how to use the opportunity created by his fraud.  Just as it would be wrong that a customer who could not repay his overdraft should be able to pay off the overdraft with funds obtained from the bank by deceit, and then defeat the bank’s claim for deceit by saying that there had been no loss from his deceit (since the money obtained from it had been used to repay a debt that he could not have otherwise have paid), so also it would be wrong that a similar result should be achieved by a customer and an accomplice – as would be the case if the accomplice were able to obtain money from the bank by fraud, use it to discharge the customer’s indebtedness and then defeat the bank’s action in deceit by the plea that there had been no loss. 

172.	Consider also a variation of this example, which in the present case would not be hard to imagine. Suppose that SR was not BCL’s only accomplice, and that proceeds of LCs issued in favour of SR were used to reimburse the bank (in whole or in part) for matured LCs issued on BCL’s application in favour of another accomplice, X, and vice versa. The fact of such reimbursement would of itself eliminate or reduce the bank’s loss in respect of the reimbursed LC.  On the defendants’ argument, although neither SR nor X could raise as a defence that funds obtained by its fraudulent behaviour had been applied to reimburse the bank in respect of an LC issued in favour of itself, each could do so if the funds were applied to reimburse the bank in respect of an LC issued in favour of the other,  with the consequence that to that extent the liabilities of both would be cancelled.  I can see no justice in such a result. 

173.	From the defendants’ viewpoint there is certainly an element of fortuity in that if the proceeds of payments by SR to BCL were used to repay earlier LCs issued in favour of SR, SR would cease to owe a liability to the bank in respect of those earlier LCs; but if they were used to repay other LCs, SR would gain no benefit. However, that is not something about which SR is entitled to complain. A fraudster who pays proceeds of his fraud to an accomplice takes his chance what happens to them. 

174.	In the present case it is not suggested that SR directly paid off debts owed by BCL to the bank. The suggestion is that SR paid money to BCL which enabled the bank to reimburse itself in respect of earlier matured LCs. Those facts cannot make SR’s position any better than if it had directly paid off debts owed by BCL.

175.	For those reasons I conclude that it is not a matter to be taken into account in assessing the bank’s damages for the defendants’ fraud whether sums derived from the proceeds of discounting the LCs were used to discharge liabilities of BCL or connected companies to the bank.

176.	Finally, I referred earlier to the difficulty of knowing where to draw the line if a broader approach were adopted.  I believe that to embark on a trial to determine whether, and if so to what extent, sums received by SR from discounted LCs resulted in the discharge of liabilities of BCL, or connected companies, to the bank would be like entering a jungle without a route map. During this trial a spotlight was shone on certain aspects of the unsatisfactory affairs of Mr Stojevic’s and Mr Alon’s companies.  Transparency was not their characteristic. To try to fathom the extent to which the use of the proceeds of the discounted LCs led to the reduction of liabilities by BCL or connected companies to the bank would be an exercise of a different magnitude, because it would involve examining inter-company dealings in relation to LCs issued in favour of beneficiaries other than SR – and that is what I describe as entering a jungle. In referring to the lack of a route map, I have in mind the difficulty which I foresee in attempting to discern where in the jungle the exercise should begin and end.   Take the defendants’ two examples of payments to SR Prague in  August 1999.  They focus on certain events in a wider web of dealings.  It is not obvious why those events, and not other surrounding dealings between the various parties, should be taken into account as being not too remote or why the “first in, first out” approach at the suggested dates should be taken for determining the amount of the bank’s loss.  If I had been in doubt where the line of remoteness should be drawn, such considerations would have strengthened my inclination towards a narrower rather than a broader approach.

Judgment

177.	The result is that there will be judgment for the bank against both defendants for $94,470,382.28.