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Articles | Mon 22nd Aug, 2022
Travel practitioners tend to be sunny optimists, dealing as they do with the jollier aspects of human existence; package holidays, package tours, and (more latterly) linked travel arrangements. But (readers of a nervous disposition should look away now) not everyone involved in the industry always behaves impeccably, and this week’s Roundup deals with poor behaviour and its consequences in a travel and cross border context. We hope to return to happier topics next week.
Sun, sand, and suspicious dealings: Jones v McCarthy  EWHC 2186 (Ch)
This judgment of the High Court illustrates the challenges of pleading illegality as a defence, particularly when the impugned law is foreign. It also highlights the details that an expert report on illegality should contain if a court is to find that this defence is met.
Mr. Jones and Mr. McCarthy orally agreed to exchange assets in 2008. Mr. McCarthy would obtain beneficial ownership of a yacht, in exchange for Mr. Jones acquiring a villa near Palma, Mallorca and a mooring situated in mainland Spain. There was a substantial mortgage on the yacht and the villa. It was envisaged by the parties that after the swap, the yacht and the villa would be sold to third parties.
Mr. McCarthy sold the yacht for around £1M in 2008 and retained the proceeds of sale. The villa was sold for €1.1 million in 2016. The proceeds of sale were also retained for Mr. McCarthy, which was something not envisaged at the time. Mr. Jones issued a claim in breach of contract on the basis that Mr. McCarthy did not comply with his obligations by selling the property at his direction. He claimed the €1.1 million for which it was sold. Alternatively, he brought a claim for an account of profits/constructive trust over the proceeds of sale of the villa.
In his judgment, HHJ Jarman QC held that Mr. McCarthy’s dealings with the villa amounted to a breach of his obligations under the 2008 agreement, by which it was intended that Mr. Jones, and not Mr. McCarthy, would sell the villa onto a third party.
There were two legal issues in this claim which are of relevance to travel practitioners. Namely:
Equitable Remedies and Foreign Law. The Defendant’s case was that the contractual remedies were governed by English law and that the equitable remedies were governed by Spanish law. Accordingly, HHJ Jarman QC had to determine the correct applicable law for an account of profits/constructive trust with respect to Article 4 of the Rome Convention. Namely, that a contract will be governed by the law of the country in which it is most closely connected.
HHJ Jarman QC found that equitable remedies were governed by Spanish law. The villa and the mooring were situated in Spain and the parties instructed a Spanish lawyer to draft documentation which referred to Spanish law as applicable and/or referred to Spanish law. Therefore, the country with which the 2008 agreement was most closely connected to was Spain.
Foreign Law and Illegality. The intention of the parties in making the agreement was to maximise Spanish tax efficiency. However, the Defendant took the position that a decision not to pay tax under Spanish law engages the principles of illegality, and a breach of it may be sufficiently serious such that it would be contrary to public policy to allow a person to profit from their wrongdoing. The test for whether illegality as a defence can be succeed was affirmed in Patel v Mirza  UKSC 42. Namely, that a court should:
The Defendant instructed a Spanish law expert who identified that any putative purchaser of property was required to pay ITP tax (equivalent to stamp duty) and ADJ tax. If the total amount of ITP and ADJ exceeds €120,000, then under Spanish law failure to pay amounts to a criminal offence.
Nevertheless, HHJ Jarman QC held that the defence of illegality did not apply. The report of the Spanish law expert did not give a clear understanding of questions of weight and gravity of Spanish priorities. Further, it was of relevance that Mr. McCarthy agreed to avoid payment of such taxes. Denying the claim on grounds of illegality would amount to a windfall for him.
There are two points of importance which travel practitioners should draw on from this judgment. First, the test for illegality of foreign law is different to the traditional common law test of Patel v Mirza. In Magdev v Tsvetkov  EWHC 887 (Comm), Mr. Justice Cockerill identified that under foreign law, one does not specifically invoke proportionality. This was because that “assumes an understanding of the questions of weight and gravity which may not be available in respect of a foreign court’s or foreign judicature’s priorities”. This approach was approved in Haddad v Rostamani  EWHC 1892 ((Ch)).
Second, should the defence of illegality be pleaded, practitioners must ensure that the report of the foreign lawyer is comprehensive. It should not only set out the law, but also give an opinion on the weight and gravity of the relevant foreign legal framework. This is essential for an English judge to determine whether denying the claim on the grounds of illegality would transgress any other relevant public policies.
About the Author
Anirudh Mandagere has a broad practice across all areas of chambers’ specialisms, acting for both claimants and defendants, and is an enthusiastic and valued member of the travel team. Before joining 1CL Anirudh worked as a judicial assistant at the Court of Appeal and taught law at the London School of Economics.
Trouble in Paradise: the Appeal in the Longrunning Alpha Panareti Litigation
Readers will no doubt recall the facts giving rise to the longrunning Alpha Panareti litigation, but for newcomers to the case, the facts were these:
The 280 or so claimants were individuals resident in the UK who were persuaded to put most, if not all, of their personal savings into what was for them an unusual investment. They were not sophisticated investors and did not have a detailed understanding of financial matters.
APP is a property developer in Cyprus and was the developer of the three development sites in the Paphos area in which the Claimants invested. Mr Ioannou and his father were directors of the company, and Ioannou junior was the driving force behind the company. In particular, the plan for the marketing of the properties to UK residents, which involved the recruitment of a network of salesmen, the production and supply of literature and DVDs, and a programme of training sessions for salesmen in the UK and in Cyprus, was his plan and his responsibility. He was closely involved with all aspects of marketing the properties.
The properties were marketed through contractual arrangements entered into by APP, initially with a company called Universal Vacations Realty Limited (“UVR”), and later with another company called Rosebery Overseas Property Ltd or ROPUK Ltd (“ROPUK”). These described UVR and ROPUK as the agents of APP for the purpose of selling the properties, with APP undertaking to provide all necessary promotional material, and ROPUK in particular agreeing to use its best endeavours to achieve the maximum possible sales. APP agreed to pay UVR and ROPUK a commission of 8% of the purchase price of any property sold through them. There was an incentive scheme for the individual salesmen.
UVR and ROPUK recruited the salesmen, independent financial advisers who, for the most part, had previously given financial advice to the claimants. It was this which enabled the salesmen to target potential purchasers who were likely to show interest in purchasing the properties, which gave them access to those purchasers in their homes, and which enabled the salesmen to take advantage of the relationships which they already had with potential purchasers. Thus APP was in a sense “piggy-backing” on those previous relationships of trust while carrying out what the judge described as a “hard sell”. As the judge at first inatance put it:
“It is clear to me, having heard the evidence from the Claimants that they were indeed daunted [i.e. by the proposed investment in a property in Cyprus], and that their concerns were set to rest by the salesmen, who were only selling to them the Defendants’ properties. The fact that some of them may also have previously given other advice to the Claimants in respect of mortgages and pensions was only the springboard to the hard sell of the Cyprus properties, in accordance with their training by APP and with the DVDs and brochures, armed with which they were not simply canvassers, as the Defendants suggest.”
The Claimants each purchased an investment package involving the purchase of an apartment or villa (or in some cases, more than one) as an investment, with a view to its being let to tourists in Cyprus. Apart from payment of a deposit of 15% of the price, the purchase would be funded by a loan from the Bank secured by a mortgage on the property, with money being drawn down from the Bank to pay for the construction of the property. The mortgage was described in brochures and on the APP website as the “Alpha Panareti Mortgage Scheme” (or “Alpha Panareti Housing Loan”) and was said to be “exclusive” to customers of APP, at a low cost which was made possible by borrowing the funds in Swiss francs.
The judge at first instance found that the availability of a cheap mortgage in Swiss francs was (in the words of one witness) a “big selling point” of the package offered to prospective customers. However, for UK residents to borrow money in Swiss francs involved a currency risk. This risk was summarised in a decision of the Cyprus Consumer Council dated 24th October 2016, following an investigation into the business practices of the Bank:
“In this case, the Bank granted mortgage loans in … Swiss francs, i.e. in a currency other than the currency of the country where consumers, mostly residents of Cyprus or the UK, receive their income. Loans in foreign currency involve risks stemming both from the fluctuations of the exchange rates between two currencies [and] the interest rate fluctuations. These risks may result in a significant financial charge on the borrower, due to the increased payable instalments and unexpired loan capital. This is particularly true for mortgage loans that have long repayment periods. Thus, it is significantly affecting the ability to repay the loan and thus the economic data relied upon by the consumer to decide on whether to conclude a loan agreement and under what conditions. Furthermore, the average consumer does not have the necessary technical, specialised knowledge of foreign exchange and interest rate risk assessment.”
All of this, the trial judge found, should have been obvious to APP and its salesmen. Nevertheless, none of the claimants was ever warned about these currency risks, which they did not understand.
In the event, and readers may feel with the inevitability of all Greek tragedy, there was a substantial fall in the value of both sterling and the Cypriot pound against the Swiss franc, so that the cost of the mortgages spiralled. To make matters worse the claimants never received the completed properties, so there were no rent receipts, but even if there had been, these would not have been sufficient to enable the bank’s loan to be repaid. The fall in the value of sterling led to what the judge at first stance described as “the increasing and overwhelming indebtedness of the Claimants to the Bank”.
The claimants alleged that APP had made (or was responsible for) numerous misrepresentations and negligent advice in the course of marketing the properties. These were distilled to nine heads of claim for the purpose of the trial, all but one of which were rejected by the judge. Two of them are relevant for the purposes of this article.
The first, which succeeded, was that in trumpeting the supposed benefits of the Swiss franc mortgage, APP had failed to warn the claimants of the foreign currency risks which they were undertaking by borrowing in Swiss francs when the anticipated rental income would be in Cyprus pounds or sterling. The judge found that, in marketing the mortgage as a fundamental part of their offering, APP owed a duty of care to put the claimants on notice of the currency risks, and that they were in breach of this duty. It is this decision which APP challenge on its appeal.
The second head of claim, which failed, described as the “lettability” representation, was that APP had represented that the properties were lettable to tourists on short-term lets. The claimants’ case was that this representation was untrue because the developments needed (and could not obtain) a licence from the Cyprus Tourism Organisation in order for such letting to be lawful. Having considered evidence of Cypriot law, the judge concluded that the properties could be let on short-term lets to holidaymakers from Cyprus or the European Union (then including the UK), which represented 82% of the tourist footfall in Cyprus, but they could not be let to non-EU residents for periods of a month or less. In those circumstances the judge found, applying Avon Insurance Plc v Swire Fraser Ltd  EWHC 230 (Comm), that the representation was substantially correct; and that in any event neither the claimants nor any reasonable person would have regarded the fact that they were only lettable to 82% of the potential market as a reason not to enter into the purchase contract. The claimants sought to challenge this conclusion by a Respondents’ Notice in the event that APP’s appeal on the currency risks issue succeeded.
The decision on appeal
On 19th August the Court of Appeal handed down judgment in the case (Barclay-Watt & Others v Alpha Panareti Public Limited, Ioannu  EWCA Civ 1169). Males, Phillips and Andrews LLJ dismissed both the appeal and the cross-appeal, holding that APP was liable to the claimants in damages for the failure to advise them about the currency risks of the Swiss franc mortgage, but that Mr Ioannou was not.
The Court found that APP had entered into contractual arrangements intended to maximise property sales. The agents incentivised the sales personnel by generous commission payments; they produced promotional materials emphasising the benefits of cheap borrowing, and organised training for the sales personnel. The judge had made a finding of fact that the combination of those features meant that the agents and sub-agents had had authority to make the representations complained of, and he had been entitled to make that finding. The company claimed that the failure of the sales personnel to advise the prospective purchasers about the currency risks should not be attributed to it because the sales personnel did not owe it a fiduciary duty, but whether the sales personnel had a fiduciary duty was irrelevant. What mattered was that they had been sent out by the company to maximise sales by emphasising the benefits of a cheap loan in Swiss francs and that the company had traded on the benefit of their existing relationships with the prospective purchasers. The risks had been apparent to both, not least owing to a 2006 circular from the Central Bank of Cyprus. A submission that it had been the bank’s responsibility to warn the purchasers of the currency risks was rejected. The company was therefore liable to the purchasers in damages.
As regards the alleged personal liability of Mr Ioannu, it was necessary to strike a balance between two competing principles: the first, that individuals were entitled to limit their liability by incorporating a limited company to carry on their business, and the second, that tortfeasors should not escape liability for their tortious acts merely because they were company directors or officers. The Court commented that authorities from the fields of accessory liability and intellectual property law recognised that the question whether a director or senior manager should be held personally liable as an accessory to a tort was ‘elusive’ and ‘fact sensitive’. In this case Mr Ioannu had had no personal dealings with the purchasers and had not assumed any responsibility towards them. The business of developing and marketing the properties had been the company’s business. The company and Mr Ioannu had shared a common design to market the properties through the sales personnel and to promote the benefits of the Swiss franc mortgage, but the relevant act or omission which made the conduct tortious was the failure to warn of the currency risks. As there had been no conscious decision not to include such a warning, it was difficult to say that there was a common design not to do so. Furthermore, the company had been in a relationship with the purchasers, whereas Mr Ioannu had not. The judge had therefore been correct to find that he had no personal liability.
The original trial in the case had been heard over 29 days, over the course of which eight sample claims of the 280 made had been considered. The Court of Appeal reviewed the decision of Sir Michael Burton GBE and concluded that he had come to findings of fact which could not be challenged, and had applied the law correctly. As a result, the Court upheld his conclusions that APP was liable to the claimants but its managing director was not. The judgment features a useful review of the authorities on directors’ personal liability and on the balancing act to be undertaken when a claimant seeks to pierce the corporate veil – which, as this case demonstrates, will only rarely be possible.
About the Author
Called to the Bar in 1997, Sarah Prager has been listed in the legal directories as a Band 1 practitioner in travel law for many years. Together with her colleagues at 1 Chancery Lane, Matthew Chapman QC and Jack Harding, she co-writes the leading legal textbook in the area, and has been involved in most of the leading cases in the field in the last decade. Last year she was named Best Lawyers’ Travel Lawyer of the Year 2020/2021 and the Lawyer Monthly Women in Law Awards 2020: Personal Injury, and she was a member of the Consultative Group of Experts to the UNWTO Committee for the Development of an International Code for the Protection of Tourists, and is a member of the Admiralty Court Users’ Committee. She undertakes purely domestic high value personal injury work as well as cross border work and has a wealth of experience of difficult and sensitive cases.
We’ve all had the experience of going to a court where the judges and barristers seemed altogether too chummy for our liking, and wondered whether this cosiness might manifest itself in the resulting judgment. But we’ve never been witness to the judge and counsel for one party going out for drinks and dinner halfway through a case. A recent Canadian case suggests that such shenanigans are unwise. In R v Cowan 2022 ONCA 432 (CanLII) the Court of Appeal for Ontario ordered a retrial in a murder case due to reasonable apprehension of bias, after counsel for the prosecution failed to disclose the extent of his personal friendship with the judge to counsel for the Defendant prior to trial, and the judge invited him (but not counsel for the Defendant) for drinks and then to dinner after the verdict had been announced and before sentencing. The Court of Appeal found that the facts spoke for themselves; there was a reasonable apprehension that the judge was biased against the Defendant at trial:
“it is difficult to imagine how the ‘reasonable and right minded person’ would dispel the spectre of bias where the trial judge shares drinks and a meal with the prosecution team minutes after the jury entered a conviction on a very serious criminal charge.”
Successful appeals on the basis of reasonable apprehension of bias remain rare indeed; but it is worth bearing in mind that although solicitors, counsel and judges are often known to each other and sometimes close friends, particularly in niche areas of law such as travel and cross border litigation, lay clients may struggle to understand why their representatives might approach ‘the other side’ with expressions of bonhomie and solicitous references to their respective families’ health. Most clients will accept that in such fields of law it is an advantage for litigators to be on good terms with each other, but practitioners should be aware of the potential for concern if it appears that a judge is favouring one representative over another on personal grounds.